Q2 2024 Atlantic Union Bankshares Corp Earnings Call
Operator: Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Cimino, Senior Vice President, Investor Relations. Please go ahead.
Again.
Speaker Change: Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Bill <unk> Senior Vice President Investor Relations. Please go ahead.
William P. Cimino: Thank you, Gigi, and good morning, everyone. I have Atlantic Union Bank shares President and CEO John Asbury and Executive Vice President and CFO Rob Gorman with me today. We also have other members of our executive management team with us for the question and answer period. During today's call, we will comment on our financial performance using both gap metrics and non-gap financial measures. Important information about these non-gap financial measures, including reconciliations to comparable gap measures, is included in the appendix to our slide presentation and in our earnings release for the second quarter of 2024.
Bill: Thank you Gigi and good morning, everyone.
Speaker Change: Landeck Union Bankshares, President and CEO, John Asbury, and executive Vice President and CFO, Rob Gorman with me today.
Also have other members of our executive management team with us for the question and answer period.
Speaker Change: Please note that today's earnings release and the accompanying slide presentation. We are going through in this webcast are available to download on our investor website investors thought Atlantic Union Bank Dot com.
Speaker Change: During today's call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures is included in the appendix to our slide presentation and in our earnings release for the second quarter of 2024.
William P. Cimino: We will also make forward-looking statements on today's call, which are not statements of historical fact and are subject to risks and uncertainty. We undertake no obligation to publicly revise or update any forward-looking statement. Please refer to our earnings release and the slide presentation issued today and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ from those expressed or implied in a forward-looking statement. All comments made during today's call are subject to that safe harbor statement.
Speaker Change: We will also make forward looking statements on today's call, which are not statements of historical fact and are subject to risks and uncertainties.
Speaker Change: Secondly, no assurance that actual performance will not differ materially from any future expectations, our results expressed or implied by these forward looking statements.
Speaker Change: We undertake no obligation to publicly revise or update any forward looking statements. Please refer to our earnings release and the slide presentation issued today and our other SEC filings for a further discussion of the Companys risk factors and other important information regarding our forward looking statements, including factors that could cause actual results to differ from those expressed or implied.
Speaker Change: Forward looking statements all comments made during today's call are subject to that safe Harbor statement and at the end of the call. We will take questions from the research analyst community I'll now turn the call over to John Asbury.
John C. Asbury: Thank you Bill good morning, everyone and thank you for joining US today, we were excited to close our merger with American National Bancshares on April one so it made for a noisy quarterly earnings release, we completed the core systems integration over Memorial day weekend, and now operate as one brand across our footprint, we believe the combination benefits our customers and markets.
With an expanded an even more convenient network enhanced product offerings and access to more capital. We also believe that benefits our teammates with expanded career opportunities resources and capabilities and finally, we believe it will benefit our shareholders by positioning us well to deliver differentiated financial performance strategically we have.
Bill: <unk>, our density and market power and Western Virginia, and expanded our franchise into contiguous markets in southern Virginia and in North Carolina. We believe there is a lot. We can do with all of this for example, the critical mass. We now have in North Carolina serves as a new expansion platform with meaningful organic growth potential over time I'll share more on.
Speaker Change: The American National Bancshares combination later in my comments I'd like to start these calls with a recap of our operating philosophy for those new to our story and as a reminder, for those who are already familiar with AAV, we operate our company under a mantra of soundness profitability and growth in that order of priority, we make loans, we take deposits and provide fee based.
Speaker Change: Services also our customers under our brand we are a traditional diversified bank that provides financing and services that help people health businesses and help our communities. The model a straightforward and has stood the test of time in our case that would be 122 years.
Bill: At nearly $25 billion in assets. We believe we are in a good size band not too large not too small we are large enough and capable enough to be a challenge and an alternative to the big banks that still small enough and responsive enough to compete against the smaller banks too that we often have more capabilities and that the.
John C. Asbury: The operating environment remains challenging for banks of all sizes. However, in our case, we believe that the financial benefits of the American-National merger are now coming into view. When you cut through the noise of the merger-related expenses this quarter, you can see the initial evidence of a boost to both net interest margin and bottom-line profitability. Rob will comment on this and what we anticipate for the rest of the year during his section of our remarks.
Speaker Change: The operating environment remains challenging for banks of all sizes. However, in our case, we believe that the financial benefits of the American National merger are now coming into view when you cut through the noise of the merger related expenses. This quarter you can see the initial evidence of a boost to both net interest margin and Bottomline profitability, Rob will comment on this and what we anticipate for the <unk>.
Rob: Rest of the year during his section of our remarks.
Rob: I'll now comment on macroeconomic conditions in other topics. We are often asked about and then share a few thoughts on the eventful second quarter.
Robert Michael Gorman: Regarding the economic outlook for forecasting purposes, we remain cautious although it appears a soft landing is increasingly plausible. This month's positive news on inflation leaves us more optimistic than last quarter that we may see at least one rate cut later this year, regardless of the macroeconomic environment remains favorable and our footprint and we do not expect.
Speaker Change: That the change in the near term our markets continue to appear healthy and our lending pipelines imply we should expect mid single digit annualized loan growth in the second half of 2024.
Speaker Change: Virginia's last reported unemployment rate dropped to two 7% in June and as usual remains below the national average, which increased to four 1%. During the same period North Carolina came in at three 6% for the same period better than the National average I often point out that our home state of Virginia has traditionally been among the more economic.
Speaker Change: We stable and attractive in the country with our increased presence in North Carolina. We believe we operate in two of the best States to do business in the United States Cnbc's annual best State for business ranking released this month length, Virginia and number one in North Carolina and number two last year North Carolina was ranked number one in Virginia was number two.
John C. Asbury: CNBC's annual Best States for Business ranking, released this month, ranked Virginia number one and North Carolina number two. Last year, North Carolina was ranked number one, and Virginia was number two. This is the sixth time CNBC has ranked Virginia the top state for business, the most of any state, since the rankings began in 2007. This is also Virginia's third win in the past five years, following its first place results in 2019 and 2021.
Speaker Change: This is the six times CNBC is ranked Virginia, the top state for business. The most of any state since the rankings began in 2007. This is also Virginia's third one in the past five years. Following the first place results in 2019 and 2021 of note. This year the categories of economy workforce and infrastructure, where given the move.
John C. Asbury: Of note, this year, the categories of economy, workforce, and infrastructure were given the most weight in the study. These are good proof points of why we are optimistic about the economy and growth potential in our primary market. For the past few quarters, among the more frequent questions we receive are the credit outlook for non-owner-occupied office exposure and, to a lesser extent, multifamily commercial real estate. There are additional disclosures on these loan categories in our supplemental slides as of quarter end, but our current perspective has not changed from the detailed comments I provided last quarter.
Speaker Change: Late in the study. These are good proof points of why we are optimistic about the economy and growth potential in our primary markets.
Speaker Change: For the past few quarters, among the more frequent questions, we receive or the credit outlook for non owner occupied office exposure and to a lesser extent multifamily commercial real estate there are additional.
Speaker Change: Disclosures on these loan categories in our supplemental slides as of quarter end, but our current perspective has not changed from the detailed comments I provided last quarter to summarize the non owner occupied office portfolio as a modest four 8% of total loans and is performing well, while I expect we will incur some challenges in it over time.
John C. Asbury: To summarize, the non-owner-occupied office portfolio is a modest 4.8% of total loans and is performing well. While I expect we'll incur some challenges with it over time, we currently anticipate any such issues to be readily manageable, given the granularity and relative size of this portfolio. Regarding multifamily exposure, it's a modest 7.4% of the total loan portfolio, and its asset quality is among the best in the bank. We currently do not anticipate any material problems developing in our current multifamily portfolio, and should any arise, we expect them to be readily manageable.
Speaker Change: We currently anticipate any such issues to be readily manageable given the granularity and relative size of this portfolio regarding multifamily exposure. It's a modest seven 4% of the total loan portfolio and as asset quality is among the best in the bank. We currently do not anticipate any material problems to develop at our current multi.
Speaker Change: Family portfolio and should any arise we expect them to be readily manageable.
Speaker Change: We understand investors general concerns about banks office and multifamily exposure, but you can't paint all banks credit exposure with the same broad brush where not all the same our markets are not all the same our underwriting is not all the same and our borrowers are not all the same you have to dig in to understand the characteristics of each bank its credit culture clash.
John C. Asbury: You have to dig in to understand the characteristics of each bank, its credit culture, client selectivity, track record, portfolio, and more. Turning now to quarterly results, here are a few financial highlights for the second quarter, and Rob will provide more detail in his section. C&I line utilization this quarter was relatively flat with the prior quarter, but up from last year's second quarter. Loan production in the second quarter was weighted more heavily to existing clients than new bank clients, with around 60% of it being existing clients.
Speaker Change: <unk> selectivity track record portfolio in markets, turning now to quarterly results here are a few financial highlights for the second quarter and Rob will provide more detail on his section our.
Robert Michael Gorman: Our quarterly and annual comparisons are not particularly meaningful with the inclusion of American national in this quarter's results, but we continue to be on a moderate growth path at 91, 7% at the end of the quarter our loan to deposit ratio remains comfortably at the lower end of our preferred 90% to 95% range noninterest bearing deposits increased slightly to approximately.
Robert Michael Gorman: <unk>, 23% of total deposits from the prior quarter and we believe it has stabilized around that level.
Robert Michael Gorman: Assuming we add the American national portfolio on March 31, instead of April one we saw pro forma annualized loan growth of approximately three 9% during the second quarter inclusive of the fair value marks on the American National loans, we continue to expect mid single digit annualized growth for loans held for investment during the <unk>.
Speaker Change: In 2020 for C&I.
Speaker Change: C&I line utilization this quarter was relatively flat with the prior quarter, but up from last year's second quarter loan production in the second quarter was weighted more heavily to existing clients and new bank clients with around 60% of its existing clients also continued to favor C&I over commercial real estate with about 65% of the production.
Speaker Change: Coming from C&I, we did see an increase in production and construction and land development from the prior quarter, which we view as a sign of relatively healthy CRE markets in our footprint CRE.
Speaker Change: CRE payoffs increased slightly from the first quarter and from the same period in the prior year, which we also interpret as a sign that the commercial real estate market is still relatively healthy in our footprint.
Speaker Change: Credit remains stable with net charge offs of four basis points annualized during Q2 down from 13 basis points in the first quarter.
Speaker Change: All in all credit remains a good story at AED, but as I mentioned every quarter, we do not consider the negligible losses, we have seen over the past few years to be sustainable. However, we see no evidence of an inflection point coming or having occurred for.
Speaker Change: For forecasting purposes, we continue to expect between 10 and 15 basis points of net charge offs. During 2024, our net charge offs were eight basis points year to date at the end of the second quarter and while we have not identified potential charge offs in our portfolio that would cause us to reach that forecasted level by year end, we do recognize that.
Speaker Change: Oh synchronic credit losses do happen that was the case in the first quarter of 2024. It is normal and is to be expected, regardless, we remain confident and pleased with our asset quality. As a reminder, asset quality was one of the hallmarks of American National Bank shares consistent with our own existing credit risk profile.
Speaker Change: Turning now to our merger with American National as mentioned the transaction closed on April one we completed systems integration over Memorial Memorial Day weekend and now operate as one team. This was hard work for all involved and I would like to thank our teammates who completed this task and are now transitioning towards business as usual as we do with every integration with <unk>.
Speaker Change: Incorporate best practices learned from our partner Bank and we refined our merger playbook based on lessons learned for any future integration.
Speaker Change: We are bullish on our long term opportunity to leverage our new North Carolina markets as a growth platform and we intend to invest in them to drive organic growth over time, we have launched our commercial banking effort and the fast growing Wilmington, North Carolina market with a key leadership higher and plan to build out our team. There we have added to our Raleigh team and added a dedicated equipment.
Speaker Change: <unk> banker to serve North Carolina overtime, we will further develop our C&I strategy in North Carolina, just as we've done in Virginia and in our specialty lines over the past nearly eight years, we are already seeing former American national commercial customers purchasing our treasury management and interest rate hedging products demonstrating there is demand.
Speaker Change: For these services, we are winning new business based on the good work done by our new teammates aided by Aav's additional capabilities and larger balance sheet.
Speaker Change: And the converted branches, we saw the rate of new account openings nearly double in the month following conversion from the prior two months, which is a good response from our customers to our value proposition.
Speaker Change: Some we are settling in with the recent merger of the work is not done, but it's well underway starting to see the financial benefits of the combination and believe we are well positioned for the rest of 2024 and beyond.
John C. Asbury: We continue to believe we are on a reasonable growth footing and, as we have demonstrated in the past, we will not hesitate to take strategic actions to successfully navigate the challenges and capitalize on the opportunities before us in this uncertain environment. As has been the case for some time, we expect uncertainty to continue, especially given geopolitical events and the upcoming federal elections, but for the time being, we remain cautiously optimistic in our outlook.
Speaker Change: We continue to believe we are on a reasonable growth footing and as we have demonstrated in the past we will not hesitate to take strategic actions to successfully navigate the challenges and capitalize on the opportunities before us in this uncertain environment as has been the case for some time, we expect uncertainty to continue, especially given geopolitical events in the upcoming.
Speaker Change: Federal elections, but for the time being we remain cautiously optimistic in our outlook now more than ever Atlantic Union is a uniquely valuable franchise. It is dense diversified traditional we're a full service bank with a strong brand and deep client relationships and stable and attractive markets I'll now turn the call over to chief.
John C. Asbury: Now, more than ever, Atlantic Union is a uniquely valuable franchise. It is dense, diversified, and traditional. We are a full-service bank with a strong brand and deep client relationships in stable and attractive markets. I'll now turn the call over to Chief Financial Officer Rob Gorman to discuss the financial results for the quarter. Well, thank you, John.
Speaker Change: <unk> officer, Rob Gorman to cover the financial results for the quarter, Rob well.
Robert Michael Gorman: I'd now like to take a few minutes to provide you with some details of Atlantic Union's financial results for the second quarter. The fair value of liabilities was assumed to be a total of $2.7 billion and included total deposits of $2.6 billion. Also, please note that for the most part, my commentary will focus on Atlantic Union's second quarter financial results on a non-GAAP adjusted operating basis, which excludes the pre-tax loss on the sale of securities of six and a half million dollars in the second quarter, in effect, a $4.8 million valuation allowance for deferred taxes that was charged to income tax expense, and the pre-tax merger-related cost of $29.8 million in the second This equates to an impact of approximately $0.13 per common share.
Robert Michael Gorman: Well, thank you, John. And good morning, everyone.
Robert Michael Gorman: Well, thank you John and good morning, everyone.
Robert Michael Gorman: I'd now like to take a few minutes to provide you with some details of Atlantic Union's financial results for the second quarter.
Speaker Change: Here are some key data points related to the American National acquisition that should be kept in mind as we review the second quarter results.
Speaker Change: Fair value of assets acquired totaled $2 9 billion and included total loans of $2 2 billion.
Speaker Change: <unk> portfolio of fair value, Mark discount was $164 $6 million.
Speaker Change: The fair value of liabilities assumed totaled $2 7 billion and included total deposits of $2 6 billion.
Speaker Change: Core deposit intangibles and other intangibles acquired totaled $84 7 million.
Speaker Change: And preliminary goodwill arising from the transaction totaled $282 3 billion.
Speaker Change: Also please note that for the most part my commentary will focus on Atlantic Union's second quarter financial results on a non-GAAP adjusted operating basis, which excludes the pretax loss on the sale of securities of $6 $5 million in the second quarter.
Speaker Change: Effect of $48 million valuation allowance for deferred taxes that was charged to income tax expense and the pre tax merger related costs of $29 8 million.
Speaker Change: In the second quarter associated with our merger with American Nationals.
Speaker Change: Importantly, the non-GAAP adjusted operating results to be discussed have not been adjusted to exclude the $32 million negative pre tax impact of the seasonal initial provision for credit loss expense on purchase non credit deteriorated or non PCB loans acquired from American National which re.
Speaker Change: Presents the seasonal double count what the non PCB fair value credit Mark.
Speaker Change: And $1 $4 million negative pretax impact of unfunded commitments acquired from American National.
Speaker Change: This equates to an impact of approximately <unk> 30 per common share.
Robert Michael Gorman: That said, in the second quarter, reported net income available to common shareholders was $22.2 million, and earnings per common share were $0.25. Turning to credit loss reserves, at the end of the second quarter, the total allowance for credit losses was $175.7 million, which is an increase of approximately $23.9 million from the first quarter, primarily due to the addition of the American National loans acquired in the second quarter, as well as organic loan growth during the quarter and continued uncertainty in the economic outlook on certain loan portfolios. The total allowance for credit losses and the percentage of total loans held for investment remained at 96 basis points at the end of the second quarter.
Speaker Change: That said in the second quarter reported net income available to common shareholders was $22 2 million and earnings per common share were <unk> 25.
Speaker Change: Adjusted operating earnings available to common shareholders were $56 $4 million were <unk> 63 per common share for the second quarter, resulting in an adjusted operating return on tangible common equity of 58, 5% and adjusted operating return on assets of 97 basis points and adjusted operating.
Speaker Change: <unk> ratio of 52, 2% in the second quarter.
Speaker Change: Turning to credit loss reserves at the end of the second quarter. The total allowance for credit losses was $175 7 million.
Speaker Change: Which is an increase of approximately 23.
Speaker Change: $9 million from the first quarter, primarily due to the addition of the American National acquired loans in the second quarter as well as organic loan growth during the quarter and continued uncertainty in the economic outlook on certain loan portfolios.
Speaker Change: The total allowance for credit losses, as a percentage of total loans held for investment remained at 96 basis points at the end of the second quarter.
Speaker Change: The provision for credit losses of $21 8 million in the second quarter was up from $8 2 million in the prior quarter, primarily driven by the initial provision for credit losses on non PCV loans and unfunded commitments acquired from American National of $14 6 million.
Speaker Change: This was partially offset by lower net charge offs during the quarter net charge offs decreased to $1 7 million or four basis points annualized in the second quarter from $4 $9 million were 13 basis points annualized in the first quarter.
Speaker Change: Now turning to pre tax treatment.
Robert Michael Gorman: The provision for credit losses of $21.8 million in the second quarter was up from $8.2 million in the prior quarter, primarily driven by the initial provision for credit losses on non-PCD loans and unfunded commitments acquired from American National of $14.6 million. Now turning to the pre-tax, pre-provisioned components of the income statement for the second quarter, tax equivalent net interest income was $188.3 million, which was an increase of $36.8 million from the first quarter, primarily driven by the addition of American National Acquired Loans and Deposits, merger-related net interest income related to acquisition accounting, as well as organic loan growth.
Speaker Change: Now I'll turn it to pretax pre provision components of the income statement for the second quarter tax equivalent net interest income was $188 3 million.
Speaker Change: Which was an increase of $36 $8 million from the first quarter, primarily driven by the addition of American National acquired loans and deposits merger related net accretion interest income related to acquisition accounting as well as organic loan growth.
Robert Michael Gorman: Second quarter staff's equivalent net interest margin was 3.46%, which was an increase of 27 basis points from the previous quarter, primarily driven by an incremental net increase in purchase accounting adjustments for loans, deposits, and long-term borrowing. The seven basis point increase.
Speaker Change: Second quarter's tax equivalent net interest margin was 346%, which was an increase of 27 basis points from the previous quarter, primarily driven by <unk>.
Speaker Change: Incremental net accretion of purchase accounting adjustments for loans deposits and long term borrowings, earning asset yields for the second quarter increased 34 basis points to 596% compared to the first quarter of 2024 and the cost of funds increased by seven basis points to two 5% as compared to the prior quarter.
Speaker Change: The loan portfolio yield increased 31 basis points to 634% in the second quarter from six point or 3% in the first quarter, primarily driven by incremental merger related loan accretion income of $14 8 million.
Speaker Change: We added approximately 30 basis points to loan yields and 27 basis points to the net interest margin.
Speaker Change: Securities and other earning assets yields increase prices in the second quarter added five basis points to the earning asset yield primarily driven by the restructuring of American National's investment portfolio and fair value accounting adjustments arising from the equation from the acquisition.
Speaker Change: Seven basis point increase.
Speaker Change: Seven basis point increase in the second quarter's cost of funds to two 5% was due primarily to the seven basis points increase in the cost.
Speaker Change: Of deposits to 246%, which includes two basis points related to the impact of acquisition related deposit amortization accounting triggered by funding mix shifts between time to broker deposits and other funding sources.
Robert Michael Gorman: Non-interest income decreased $1.8 million to $23.8 million for the second quarter from $25.6 million in the prior quarter, primarily driven by $6.5 million of pre-tax losses incurred on the sale of available for sale securities as part of the company's restructure of the American national securities portfolio, which was partially offset by increases in several non-interest income categories due to the full quarter impact of the American national acquisition, adjusted operating non-interest expense, which excludes merger-related costs in the first and second quarters, amortization of intangible assets in both quarters, and the FDIC special assessment expense recorded in the first quarter increased $13.5 million to $114.2 million for the second quarter from $100.7 million in the prior quarter, primarily due to the impact of the American National Acquisition, which filled the majority of increases in salaries and benefits, technology and data processing, occupancy expenses, and franchise and other taxes compared to the prior quarter. The effective tax rate for the second quarter increased to 31.2% from 16.9% in the first quarter due to the establishment of a state income tax valuation allowance of $4.8 million in income taxes in the second quarter. As the company concluded, it is more likely than not that the benefit for certain state-met operating loss care boards will not be realized.
Speaker Change: Noninterest income decreased $1 8 million to $23 8 million for the second quarter from $25 6 million in the prior quarter, primarily driven by $6 5 million of pretax losses incurred on the sale of available for sale securities as part of the company's restructure of the American National Securities portfolio, which was partially offset.
Speaker Change: By increases in several noninterest income categories due to the full quarter impact of announced American National acquisition.
Speaker Change: Excluding the realized losses and gains in the securities portfolio adjusted operating noninterest income actually increased $4 8 million from the first quarter to $33 million.
Speaker Change: Primarily due to the impact of the American National acquisition, which is driving the majority of the increases in fiduciary and asset management fees interchange fees service charges on deposit accounts loan related interest rate swap fees and other service charges.
Speaker Change: In addition to the acquisition impact bully income increased $546000 compared to the prior quarter, primarily driven by a $320000 death benefit received in the second quarter and mortgage banking income increased $326000 driven by a seasonal increase in mortgage loan origination volumes.
Speaker Change: Reported noninterest expense increased $44 7 million to $150 million for the second quarter from the prior quarter, primarily driven by a $27 9 million increase in merger related costs as well as other increases in non interest expense due to the full quarter impact of the American National acquisition.
Robert Michael Gorman: Adjusted operating noninterest expense, which excludes merger related costs in the first and second quarters amortization of intangible assets in both quarters and the FDIC Special assessment expense recorded in the first quarter increased $35 million to $114 2 million for the second quarter from 107.
Robert Michael Gorman: In the prior quarter, primarily due to the effect of the American National acquisition, which drove the majority of increases in salaries and benefits technology data processing occupancy expenses in franchise and other taxes compared to the prior quarter in.
Robert Michael Gorman: In addition to the acquisition impact professional services expenses increased $1 $3 million, which was primarily due to fees associated with various various strategic projects in marketing and advertising expense increased $665000 compared to the prior quarter.
Speaker Change: The effective tax rate for the second quarter increased to 31, 2% from 69% in the first quarter due to the establishment of a state income tax valuation allowance of $4 8 million and.
Speaker Change: Income taxes in the second quarter.
As the company concluded as more than more likely than not that the benefit for certain state net operating loss carryforwards will not be realized.
Robert Michael Gorman: At the end of June, loans held for investment netted deferred fees and costs were $18.3 billion, an increase of $2.5 billion from the prior quarter primarily driven by the merger with American National. On a pro forma basis, as if the American National balances were acquired on March 31st, loans held for investment increased to $177.6 million, or approximately 3.9 percent annualized from the prior quarter, including the fair value marks loans acquired from American National of $164.6 million.
Robert Michael Gorman: At the end of June loans held for investment net of deferred fees and costs.
Robert Michael Gorman: <unk> 3 billion, an increase of $2 5 billion from the fourth from the prior quarter, primarily driven by the merger with American National on a pro forma basis as if the American National balances were acquired on March 31 loans held for investment increased to $177 6 million or.
Robert Michael Gorman: Approximately three 9% annualized from the prior quarter, including the fair value marks on loans acquired from American National of $164 6 million.
At the end of June total deposits stood at 20 billion, an increase of $2 7 billion due to increases in interest bearing customer deposits and demand deposits primarily related to the addition of American national acquired deposits as well as increases in broker deposits on a pro forma basis as if the.
Robert Michael Gorman: The American asset balances required on March 31 deposits increased $136 million or approximately two 8% annualized from the prior quarter.
Robert Michael Gorman: Broker deposits increased in the second quarter as we added medium-term, broker deposits to take advantage of the inverted yield curve during the quarter and also issued short-term broker CVs late in the quarter to manage quarter-end declines in certain large and more volatile commercial deposit or accounts. At the end of the second quarter, Atlantic Union Bank shares and its regulatory capital ratios were comfortably above well-capitalized levels. In addition, on an adjusted basis, we remain well capitalized as of the end of the second quarter if you include the negative impact of AOCI and health and maturity securities unrealized losses in the calculation of the regulatory capital ratio.
Robert Michael Gorman: Brokerage deposits were increased in the second quarter as we added medium term.
Robert Michael Gorman: Broker deposits to take advantage of the inverted yield curve during the quarter and also issued short term brokerage Cds late in the quarter to manage quarter and declines in certain large and more volatile commercial depositor accounts.
Robert Michael Gorman: At the end of the second quarter Atlantic Union, Bankshares, and Atlantic Union Bank regulatory capital ratios were comfortably above well capitalized levels. In addition on an adjusted basis, we remain well capitalized as of the end of the first quarter.
Robert Michael Gorman: The end of the second quarter. If you include the negative impact of <unk> and held to maturity securities unrealized losses in the calculation of the regulatory capital ratios.
Robert Michael Gorman: During the second quarter the company paid a common stock dividend of <unk> 32.
Speaker Change: For sure, which was an increase of six 7% from the previous year's second quarter dividend amount.
Robert Michael Gorman: As noted on slide 13, we've updated our full year 2024 financial outlook for AUB and have also provided comments related to our fourth quarter run rate revenue and expense targets to highlight the financial benefits of the acquisition, assuming we fully achieve our 40% cost saving goal on a run rate basis starting in the fourth quarter. Please note that the 2024 financial outlook includes preliminary estimates of purchase accounting adjustments that are subject to change.
Speaker Change: As noted on slide 13, we've updated our full year 2020 for financing outlook for ABB and have also provided comments related to our fourth quarter run rate revenue and expense targets to highlight the financial benefits of the acquisition, assuming we fully achieve our 40% cost.
Robert Michael Gorman: On a run rate basis, starting in the fourth quarter. Please.
Robert Michael Gorman: Please note that the 2024 financial outlook includes preliminary estimates of purchase accounting adjustments that are subject to change.
Robert Michael Gorman: We expect loan balances to end the year between $18.5 billion and $19 billion, while year-end deposit balances are projected to be between $20 billion and $20.5 billion. Fully tax-equivalent net interest income for the full year is projected to come in between $730 million and $740 million. And we are targeting the fourth quarter fully tax-equivalent net interest income loan rate to fall between $195 million and $200 million. In addition, the fully tax-equivalent net interest margin projection and target ranges include the impact of our estimate of the net increase in income for the American nationals transaction, which is subject to change. Now, let me turn it over to Bill Cimino to take questions from our panel.
Robert Michael Gorman: We expect loan balances to end the year between $18 $5 billion 19 billion, while year end deposit balances are projected to be between $20 billion 25 billion.
Robert Michael Gorman: Fully tax equivalent net interest income for the full year is projected to come in between $730 million and $740 million.
Robert Michael Gorman: And we are targeting the fourth quarter fully tax equivalent net interest income run rate to fall between $195 million and $200 million.
William P. Cimino: As a result, we are projecting that the full year fully tax equivalent net interest margin will fall in a range between three 4% and three 5% for the full year and are targeting between 355% and three 6% in the fourth quarter driven by our baseline assumption that the fifth Federal Reserve Bank will cut the fed funds rate by <unk> <unk>.
Speaker Change: Five basis points twice in 2024, beginning in September.
Robert Michael Gorman: In addition to fully tax equivalent net interest margin projection and target ranges include the effect of our estimate of net.
Speaker Change: Preceded completely American Ashwin transaction, which are subject to change.
Speaker Change: On a full year basis, adjusted operating noninterest income is expected to be between $150 million and $120 million and we are targeting fourth quarter adjusted operating noninterest income run rate to fall between 30% and $35 million.
William P. Cimino: Adjusted operating noninterest expenses for the full year are now estimated to fall in the range of $445 million to $450 million, while the fourth quarter adjusted operating noninterest expense run rate. We are targeting is expected to be between $110 million to $115 million.
William P. Cimino: Which assumes full achievement of our 40% merger related cost savings.
William P. Cimino: Savings on a run rate basis, beginning in the fourth quarter.
William P. Cimino: Based on these projections in fourth quarter run rate targets, we expect to produce financial returns that were placed us within the top quartile of our peer group and meet our objective of delivering top tier financial performance for our shareholders.
William P. Cimino: In summary, Atlantic Union delivered solid operating financial results inclusive of American national in the second quarter. Despite the challenging banking environment. We are effectively managing through we remain confident that we will achieve the financial benefits of the combination with American national assuming the cost savings are fully realized on a run rate basis, starting in the fourth quarter.
Speaker Change: As a result, we believe we are well positioned to continue to generate sustainable profitable growth to build long term value for our shareholders in 2024 and beyond.
Robert Michael Gorman: Now, let me turn it over to Bill Smith to take questions from our analysts. Thank.
William P. Cimino: Thank you, Rob. And Gigi, we're ready for our first caller, please.
William P. Cimino: Thank you, Rob and Gigi, we're ready for our first caller. Please.
Operator: Thank you. As a reminder to ask a question, please press Star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press Star-11 again.
Gigi: Thank you as a reminder to ask a question. Please press star one one on your telephone.
Gigi: Wait for your name to be announced to withdraw your question. Please press star one one again.
Gigi: Our first question comes from the line of Russell Gunther from Stephens, Inc.
Russell Elliott Teasdale Gunther: Good morning, Russell. I will discuss the repricing dynamics within the book. Thank you.
Russell: Good morning Russell.
Russell: Hey, good morning, guys.
Speaker Change: I wanted to start on the margin if we could and if you could walk us through the glide path from this quarter's results to the fourth quarter guide of $3 55 to $3 60.
Speaker Change: Kind of touch on if you could the purchase accounting assumptions within that as well as.
Speaker Change: Core NIM trends.
Russell: The repricing dynamics within the book.
Robert Michael Gorman: Yeah, Russell, in terms of that, we're projecting, as I just mentioned, $355 to $360 on the net interest margin for the fourth quarter. And we're looking at between 25 and 30 basis points of accretion income that is in that estimate. We're also looking to take accretion out of the equation, expanding our core net interest margin somewhat. As we said last quarter, between 320 and 330 is our estimate for core X accretion income.
Gigi: Thank you.
Russell Elliott Teasdale Gunther: Yes, Russell in terms of that.
Robert Michael Gorman: <unk>.
Robert Michael Gorman: Rejected.
Robert Michael Gorman: As I, just mentioned $3 55 to $3 60 on the.
Robert Michael Gorman: The net interest margin in the fourth quarter.
Robert Michael Gorman: We're looking at between 25 to 30 basis points.
Robert Michael Gorman: Accretion income.
Robert Michael Gorman: As in that that estimate and we're also looking at.
Robert Michael Gorman: Expand our.
Robert Michael Gorman: Accretion of the equation of expanding our core net interest margin somewhat as we said last quarter between $3 20, and $3 30 is our estimate for <unk>.
Robert Michael Gorman: Core ex accretion income.
Robert Michael Gorman: And we think that's going to inch up for the third and fourth quarters, primarily driven by the repricing of fixed-rate loans into higher yields, as well as if we do get the cost savings or the rate reductions from the Fed, we expect that we can start bringing down our cost of deposits, which will be, so put those two together, and you should see an expanding core margin through from today through the fourth quarter. On the deposit cost side, we've got about $2.3 billion of deposits that are indexed to Fed funds, so as soon as the Fed moves rates down, that'll be a tailwind for us on the cost of deposits.
Robert Michael Gorman: And we think that's going to inch up.
Robert Michael Gorman: Over the third and fourth quarters.
Robert Michael Gorman: Primarily driven by repricing of fixed rate loans.
Speaker Change: It's a higher yields as.
Robert Michael Gorman: As well as if we do get the cost saves.
Robert Michael Gorman: Or the.
Robert Michael Gorman: The rate.
Robert Michael Gorman: Reductions from the fed we expect that we can start bringing down our.
Robert Michael Gorman: Cost of deposits, which will be so put those two together you should see an expanding core margin through through from today through the fourth quarter.
Robert Michael Gorman: On that front on the deposit cost side.
Robert Michael Gorman: We've got about $2 billion to $3 billion.
Robert Michael Gorman: <unk>.
Robert Michael Gorman: Deposits that are indexed to fed funds. So as soon as the fed moves rates down that will be.
Robert Michael Gorman: Tailwind for us on the cost of deposits. We've also got about $2 billion or so of what we call exception price deposits.
Robert Michael Gorman: We've also got about $2 billion or so of what we call exception price deposits, where we've negotiated rates in a higher rate environment with various clients and customers. And as rates come down, we will ratchet those deposit costs down as well. So it's really between repricing the fixed-rate loan portfolio, also reinvesting cash flows out of the securities portfolio into higher rates, and then a lot of it driven by what we expect from a lower deposit rate.
Robert Michael Gorman: Where are we.
Robert Michael Gorman: Negotiated rates.
Robert Michael Gorman: Rates in the higher rate environment with various clients and customers.
Robert Michael Gorman: And as rates come down you will ratchet those deposit costs down as well so.
Robert Michael Gorman: It's really between replacing the fixed rate loan.
Robert Michael Gorman: Portfolio also reinvesting.
Robert Michael Gorman: Cash flows out of securities portfolio to higher rates and then.
Robert Michael Gorman: Lot of its driven by what we expect from the lower deposit costs.
Robert Michael Gorman: All right, Rob, thank you. And then just a quick follow-up in terms of you could quantify what the fixed repricing opportunity is in terms of maturities and the yield pickup you'd expect.
Robert Michael Gorman: Alright, Rob. Thank you and then just a quick follow up in terms of.
Rob: If you could quantify what the fixed repricing opportunity is in terms of maturities.
Speaker Change: The yield pickup you would expect.
Robert Michael Gorman: Yeah, so on the loan yield side, we're, you know, we're the portfolio is about call it 6% on a little over 6% on a core basis. We're putting new loans and repricing loans in the 750 to 8% range. So, you know, call it, you know, a couple hundred basis points of opportunity are there in our fixed rate portfolio in terms of repricing. It's about a three-year duration on a fixed-rate portfolio, so between now and then, you're probably talking about, on an annual basis, probably talking about $2.5 billion that's repricing. So between now and year-end, call it a little over $1 billion could be repriced.
Speaker Change: Yes, so on the loan yield side.
Speaker Change: The portfolios of us.
Robert Michael Gorman: Call it 6% on a little over 6% on a core basis.
Robert Michael Gorman: Putting on new loans and repricing loans in the $7, 50% to 8% range. So.
Robert Michael Gorman: Call it.
Robert Michael Gorman: A couple of hundred basis points of opportunity.
Robert Michael Gorman: There.
Robert Michael Gorman: Our fixed rate portfolio.
Robert Michael Gorman: In terms of repricing.
Robert Michael Gorman: We've got it's about a three year duration on the fixed rate portfolio. So.
Robert Michael Gorman: Between now and then you're probably talking about.
Robert Michael Gorman: Over on an annual basis, but we're talking about $2 5 billion Thats repricing. So between now and year end call with over $1 billion could be repriced.
Robert Michael Gorman: Okay, super helpful. And then just switching gears for a moment on to expenses. I hear you on 4Q representing the full synergies of the deal. How are you thinking about what the 25 growth rate would be off of that, you know, maybe the assumed annualized result? Yes.
Speaker Change: Okay Super helpful. And then just switching gears for a moment onto expenses.
Speaker Change: I hear you on <unk>, representing the full synergies of the deal how are you thinking about what the 25 growth rate would be off of that maybe assumed annualized results. Yes. So looking forward.
Robert Michael Gorman: Yeah, so, looking forward. You know, if you look at that run rate, we're probably in the four, call it four and a half percent, increase in expenses as we go forward. Obviously, we haven't gone through our full planning process, but we'll be working hard to. Douglas Woolley, Casey Whitman, Robert Gunther, William Cimino look to create operating leverage, revenue growth being higher than expense growth, and the outlook on revenue growth is probably in the high single digits, maybe in the double digits. So we should be able to produce strong, positive operating leverage on a one-rate basis.
Robert Michael Gorman: If you look at that run rate will probably in the four.
Robert Michael Gorman: At four to four 5%.
Robert Michael Gorman: Increase in expenses as we go forward.
Robert Michael Gorman: Obviously, we haven't gone through our full planning process will be.
Speaker Change: Working hard to ditch.
Robert Michael Gorman: Determined what that is but we expect it will be making some investments.
Speaker Change: As John mentioned.
Robert Michael Gorman: <unk>.
Speaker Change: In North Carolina and in some other areas in terms of.
Speaker Change: With the teams and things like that so.
Robert Michael Gorman: So I would say about four to four 5% is our is our target right now.
Robert Michael Gorman: Obviously.
Robert Michael Gorman: Look to create operating leverage revenue growth being higher than expense growth.
Robert Michael Gorman: And the outlook on revenue growth is probably in the high.
Robert Michael Gorman: High single digits, maybe into double digits, so we should be able to produce.
Robert Michael Gorman: Strong positive operating leverage on a run rate basis.
Russell Elliott Teasdale Gunther: Okay, great. Thanks, Rob. And then just last one for me, because you touched on it in terms of investments in the Carolinas, if you guys could just provide an update in terms of, you know, building out, perhaps organically from here, that geography and the path forward in terms of related loan growth.
Robert Michael Gorman: Okay.
Russell Elliott Teasdale Gunther: Great.
Russell Elliott Teasdale Gunther: Thanks, Rob and then just last one for me because you've touched on it in terms of investments in the Carolinas. If you guys could just provide an update in terms of.
Russell Elliott Teasdale Gunther: Building out perhaps organically from here that geography.
Speaker Change: The path forward in terms of related loan growth.
John C. Asbury: Hey Russell, this is John. I'll start by saying we're thrilled with the American National Team that is now a part of AUB. We like their backgrounds, we see a lot of opportunity, but we also see opportunity to add to the team, particularly as we emphasize the commercial and industrial banking opportunities down there. David Ring, who leads all of our commercial-related businesses, which we call Wholesale Lausanne. Dave, do you have any thoughts that you'd like to share, without tipping your hand too much, in terms of North Carolina?
Russell Elliott Teasdale Gunther: Yeah. Russell this is John I'll start by saying we were thrilled with the American National team that is now a part of AEP, we like their backgrounds, we see a lot of opportunity, but we also see opportunity to add to the team, particularly as we emphasize the commercial and industrial.
John C. Asbury: Industrial banking opportunity down there David ring, who leads all of our commercial related businesses, which we call wholesale as on date do you have any thoughts that you'd like to share without tipping your hand too much in terms of North Carolina.
David V. Ring: Sure, John. Can you hear me okay? OK.
David V. Ring: Sure John can you hear me okay.
David V. Ring: Yeah, we do have several opportunities to invest in the market. American National has a really good presence in the Triad and partly in the Triangle part of North Carolina, but we see opportunities in the fastest growing markets there, which would be in the greater Wilmington, New Hanover County, that area. We also don't have much of a presence in the Charlotte area, so when you look at where American National is sitting, there are great opportunities at both ends of the bar.
David V. Ring: Yes, great.
David V. Ring: Great. Yes, we do have several opportunities to invest in the market.
David V. Ring: American National had a really good presence in the triad and partly in the triangle part of North Carolina, but we see opportunities in the fastest growing markets, there, which would be in the greater Wilmington, New Hanover County.
David V. Ring: That area. We also don't have much of a presence in the Charlotte area. So when you look at where American nationalists sitting there are great opportunities at both ends of the barbell.
John C. Asbury: Yeah, and I would say we also have potential expansion opportunities in those existing markets, too. So Russell, we see North Carolina as a good organic expansion opportunity over time.
David V. Ring: Yeah, and I would say, we also have potential expansion opportunities in those existing markets too. So Russell, we see North Carolina is a good organic expansion.
Russell: Opportunity over time.
Russell Elliott Teasdale Gunther: I appreciate it, guys. Thank you for taking the time to answer my questions.
Russell: I appreciate it guys. Thank you for taking my questions. Thank.
William P. Cimino: Thank you, Russell. Thank you, Russell. And thanks, everyone, for calling today. We appreciate your time, and we will talk with you next quarter. Have a good day.
Speaker Change: Thank you Russell, Thanks, Russell and thanks, everyone for calling today. We appreciate your time and we will talk with you next quarter have a good day.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.
Operator: Thank you so much for watching this video.
Operator: Okay.
Operator: [music].