Atlantic Union Bankshares Corp (AUB) Q2 2019 Earnings Call Transcript
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Union Bankshares Corp (NASDAQ: AUB)
Q2 2019 Earnings Call
Jul 18, 2019, 9:00 a.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Atlantic Union Bankshares Second Quarter 2019 Earnings Call.
[Operator Instructions] It is now my pleasure to hand the conference over to Mr. Bill Cimino. Please go ahead, sir.
William P. Cimino -- Vice President and Director of Investor Relations
Thank you, Nicole, and good morning, everyone. I have Atlantic Union Bankshares, 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. Please note that today's earnings release is available to download on our investor website, investors.bankatunion.com.
During the call today, we will make comments 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 our earnings release for the second quarter 2019.
Before I turn the call over to John, I would like to remind everyone that on today's call, we will make forward-looking statements, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise any forward-looking statement. Please refer to our earnings release for the second quarter of 2019 and our other SEC filings for a 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. All comments made during today's call are subject to that safe harbor statement. At the end of the call, we will take questions from the research analyst community.
And now I'll turn the call over to John Asbury.
John C. Asbury -- President, Chief Executive Officer, Director
Thank you, Bill, and thanks to all for joining us today. And welcome to our first conference call as the newly rebranded Atlantic Union Bankshares Corporation. Atlantic Union followed its good start to the year with a solid second quarter. To start, we completed a seamless core systems integration of Access National Corporation rebranded the Bank to Atlantic Union Bank on May 20th and rebranded our wealth management group, to Middleburg Financial on the same day.
We launched Zelle, the person-to-person payment network received the most significant customer service award in the company's history by being named number one by J.D. Power for retail banking, customer satisfaction in the Mid Atlantic, which they define notably as Virginia to New York. Additionally, we were just named for the second year in a row the Forbes listed best in-state banks.
We delivered strong loan growth for the quarter while deposits stayed steady and showed improvements in our operating profitability metrics from the prior quarter. I won't take too much away from Rob's commentary, but for the quarter our operating ROA was 1.35% up 4 basis points from last quarter. Operating return on tangible common equity was 16.58%, which is a 21 basis point increase from the first quarter operating efficiency ratio was 52.46%, which is a 164 basis point improvement from the prior quarter. That's communicated previously, we've stepped up our financial targets. They are as follows. Operating our way between 1.4% and 1.6%, operating return on tangible common equity between 16% and 18% and an operating efficiency ratio at 50% or below. Just like in 2018, our financial results will remain noisy through the third quarter as we complete the integration of Access National Bank.
Integration efforts continue to go well and provide another proof point of our core competency and whole bank integration. Loan growth was a solid 9% annualized for the quarter, despite higher than normal levels of commercial real estate pay downs, which have been a persistent trend over the past few quarters. Commercial and industrial line utilization during the quarter ticked up slightly to approximately 43%. As a reminder, the Access acquisition closed on February 1st, 2019. On a pro forma basis, as if the Access balances were included for the full year. Our year-to-date annualized loan growth is at 6%, which is in line with our year-to-date expectations.
My pipelines are well-balanced and remain strong. Based on everything we know at this time, we continue to expect full year 2019 loan growth to be in the high single digit range of 7% to 9%. I deposit growth did slow during the second quarter at about 1% annualized. We had some seasonal reductions from some larger depositors that we expect will return on the second half of the year.
Year-to-date deposit growth of 5% is close to matching our loan growth of 6%. We continue to believe that we can deliver deposit growth in the upper single digit range for the full year and hope to match loan growth, but not necessarily in every quarter. I'll speak more on this in a moment.
Turning to our 2019 priorities, we continue to make progress against them. As I've said before, setting goals, tracking back to them and delivering results is fundamental to how we manage this company. Here are our previously communicated 2019 priorities to diversify loan portfolio and revenue streams. We continue to diversify our loan book, as evidenced by continuing growth in our commercial loan categories of C&I and owner occupied real estate, which now comprised one third of our total loan balances. We're especially encouraged by the reception we're receiving in the marketplace with our commercial banking emphasis. We did see an uptick in interest rate hedging fee income for the quarter as more clients opted to hedge interest rates, taking advantage of current -- the current flat yield curve and a historically low rate environment.
Interest rate hedging typically in the form of plain than ever swaps as an efficient risk management tool for certain clients. And we're excited to be able to introduce these products to our new customers that have joined us from the former Access National Bank franchise in the greater Washington region. While it's hard to predict how the pace of hedging activity will go in the future. We do expect our expanded franchise and the rate environment will continue to produce good results, but not necessarily at the same level of this quarter. We can compete against anyone in the small to mid-market commercial space, which covers approximately 99% of all Virginia businesses. As Virginia's regional bank we continue to build on our reputation as a capable, responsible, our unique capable, responsive local alternative to the super regional and national banks. We can say with confidence that we are now firmly entrenched as Virginia's bank. The home team in Virginia and we continue to learn how to leverage our home field advantage. At the same time, we are leveraging attractive incremental growth opportunities outside of our home state through our commercial banking offices in Baltimore, Maryland and Charlotte, Raleigh and Greensboro, North Carolina.
We've also never felt better about the fee income growth potential we have in our wealth management group given its expanded capabilities, larger scale, those combination with Middleburg and the growing power of our banking franchise. We believe that our wealth management platform can be an appealing offering to customers and a larger contributor to our non-interest income going forward. Next is growing core funding, a loan-to-deposit ratio was 97.6%, a little over our long term goal of 95%. As I mentioned in the past, we've increased our focus on deposit gathering. We can start a competitive treasury management system and built our Treasury management team. We're excited about our ability to scale and replicate a number of business deposit gathering strategies, learn from access, especially in our metropolitan markets.
We're also optimistic about our ability to grow consumer banking deposit base at a faster pace than in the past given the new leadership and new strategies under way in the consumer banking group. Next, it's managing the higher levels of performance. As I noted, the quarter was noisy with the system integration access from the rebranding cost, but we continue to improve all of our operating profitability metrics from the first quarter. We've made progress toward hitting our top tier financial goals. Next strengthen our digital capabilities. Now that the access core systems conversion is behind us, we intend to direct the freed up program management capacity against our digital strategy.
As mentioned, we launched Zelle at the end of the quarter, which we consider an essential offering and our positioning as the clear alternative to the large national banks that dominate our markets. We've also now rolled out nCino to our teams, which is a best in class end-to-end commercial banking loan origination system. The benefits of nCino are that it reduces cycle time for credit requests, by streamlining our credit underwriting processes while improving performance tracking and the control environment.
During the quarter, we also brought on Kelly Dakin from Santander is Chief Digital and Customer Experience Officer and elevated her role to our executive leadership team. Kelly is well known to us, having previously worked with Atlantic Union Bank President Maria Tedesco, and we're pleased that she chose to join our team. Atlantic Union Bank we believe digital is more than just a product, but a way of doing business to create a true omni-channel delivery system, which is our intention. We must ensure digital underpins all that we do. Having Kelly in this newly expanded role enables us to integrate the customer experience with our digital strategy. Doing digital is an enabler of customer experience, accelerates progress on our value proposition of making banking easier, which is the next priority. Make banking easier. This is both an internal rallying cry and ultimately our value proposition.
The initial thrust here will focus on the consumer banking transformation which is now moving beyond simply providing great service, being nice and taking orders which have been hallmarks of our consumer banking effort. The impressive consumer banking backgrounds and expertise of Atlantic Union Bank President Maria Tedesco, Consumer Banking Group Executive Shawn O'Brien, and head of digital strategy and customer experience, Kelly Dakin. Give me great confidence that we have the right leadership in place to move this initiative forward. We're now under way with the effort and currently focused on taking operational pass out of the branches. So our consumer teammates have capacity and skill set to deliver a higher level of needs based relationship banking.
Moving forward, we intend to segment our branch network to ensure we are properly geared toward the opportunities in each trade area. We've also completed a review of our retail branch footprint and decided to close four branches in September. As I mentioned before, Maria often notes how our consumer journey starts off in a much better place than past transformations she has led, because a cultural drive to deliver a great customer experience already existed at Atlantic Union is proven by the accolades we receive in retail banking, such as our number one ranking by J.D. Power in the Mid-Atlantic. While we're proud of the numerous customer service awards we've earned and continue to earn. We need to do much more than simply provide a pleasant banking experience and we will.
And last integrate Access National Corporation. The Access integration continues to go well. We've had a smooth core systems integration over the weekend of May 18. Having learned from the Xenith integration the teams executed impressively, having built a replicable process and change management framework. We also layered at a bank name change on this process, which added complexity to the effort. For example, we swapped out more than 400 signs, changed innumerable documents and forms, and executed a well-designed advertising campaign to promote the new brand just to name a few things.
Pulling off a rebranding of the bank in the middle of a systems integration was no small task. But we did it and we did it well. I'm proud to say the rebranding has been undramatic, well-received across our markets and feedback has been universally complimentary of the new name logo and signage. The new brand looks like us, feels like us, and it's authentic.
I'm now touched on a few other topics from the quarter before turning it over to Rob. We do have a leadership change under way in our wealth management group, which operates as Middleburg Financial. A current leader has elected turned to his hometown of Roanoke, Virginia, and joined the team at Dixon, Hubard, Feinour & Brown, which is a registered investment advisor we acquired last year. This both helps with their succession planning and provides an opportunity for us to conduct a nationwide search for a new leader for Middleburg Financial.
As with our past searches, we'll look for a leader who's been there done that and is accustomed to dealing with more complexity and what faced here at Atlantic Union Bank. Next, I want to provide a quick update on the market opportunity we're seeing with the pending combination of BB&T and SunTrust. We've hired 21 people from those companies so far this year in a variety of roles. Anecdotally, we're seeing traction in the marketplace for Atlantic Union is the alternative bank of choice as the not too large and not too small, home team alternative. We believe we're well-positioned to take advantage of this disruption and we're not simply waiting on this to come our way.
We have an organized project team leading a multifaceted strategy focused on maximizing this opportunity. We're likely to accelerate some investment in projects we had slated for 2020 into this year to expedite our positioning to capitalize on what we firmly believe will be a multi-year disruption. The single largest market share competitor operating in Virginia.
With that said, it's a good time for me to again comment on our current thinking regarding our geographic markets and expansion plans. We believe that our platform irrefutably Virginia's Regional Bank, with the potential to become the mid-Atlantic's Regional Bank, capable of competing successfully against the national and the super regional banks. We believe we have the franchise right now needed to meet our objectives. The embedded organic growth potential of Atlantic Union Bank, combined with the potential disruption caused by the BB&T-SunTrust merger, give us a unique opportunity on which we are laser focused. Further emboldening us is their home state Virginia the Commonwealth. Last week was recognized by CNBC and its annual ranking as the number one state in which to do business in the entire country. This is the fourth time Virginia achieved that status over the past decade or so. While we can't predict what other opportunities may arise to build out our franchise, our intentions at this time are to focus on organic growth, close any remaining competitive gaps, harness the power of this great franchise across our mid-Atlantic footprint, build the bank one customer at a time, and deliver on our promise of making banking easier.
Finally, credit quality remains strong. The economy and our footprint is steady, and we do not see evidence of systemic changes to our credit environment. Charge-offs declined to 14 basis points annualized. The majority of the charge-offs continue to be in our third party consumer loan portfolio. While this is a lucrative asset class force [Phonetic] give its yield, it's not a strategic focus area, and it will be wound down over time. While charge-offs are typically lumpy quarter-to-quarter, we continue to expect full year 2019 to look like 2017 and 2018 from a credit quality perspective, barring some change in the macroeconomic environment. I continue to believe that problem asset levels at Atlantic Union and across the industry for that matter, remain below the long-term trend line. Eventually, we will see a return to more normalized credit losses, but we still can't tell you when to expect that except to say we don't see it happening in 2019.
In summary, Atlantic Union has a solid 2019 under way. We're making progress against our six strategic priorities, with loan-to-deposit growth expected to reach high single digits for the full year. We're excited to have come together as one team under the Atlantic Union Bank brand. I remain highly confident in what the future holds for us and the potential we have to deliver long-term sustainable performance for our customers, communities, teammates and shareholders. I'll close by reiterating. Atlantic Union as uniquely valuable franchise, it's dense and it's compact in great markets with a story unlike any other in our region.
We have assembled the right scale, right markets and the right team to deliver high performance and a franchise that can no longer be replicated in Virginia. A combination with Access National Bank, an attractive Virginia economy and a home state that was just named the best state in which to do business. Incremental growth opportunities in our North Carolina and Maryland operations and what we believe will be a multi-year disruption. The two of our largest competitors cause us to believe we have everything we need right here and right now to accomplish our objectives organically.
I'll now turn the call over to Rob to cover the financial results for the quarter.
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Well, thank you, John. And good morning, everyone. Thank you for joining us today. I'd like to take a few minutes to provide you with some details of Atlantic Unions financial results for the second quarter, which we feel this illustrates the earnings potential of this franchise. By as in the past quarter we do have some noise in the numbers, so please note that for the most part, my commentary will focus on Atlantic Union second quarter financial results on a non-GAAP operating basis, which excludes $5.1 million in after tax merger related costs and $3.2 million in one time after tax rebranding costs. It does, however, include losses from discontinued operations of $85,000 and approximately $950,000 in after tax expenses related to the company's decision to close four branches in the third quarter. For clarity, I will specify which metrics around a reported versus non-GAAP operating basis.
In the second quarter, reported net income was $48.8 million in earnings per share were $0.59 up approximately $30 million or $0.12 per share from the first quarter. Reported return-on-equity was 7.86%, reported return-on-assets was 1.15% and reported efficiency ratio was 62.43%. And a non-GAAP operating basis, which again, as noted, excludes $8.3 million in after tax related merger related and rebranding related costs, consolidating net earnings for the second quarter were $57.1 million or $0.70 per share, up from $50.5 million or $0.66 per share in the first quarter. The non-GAAP operating return on tangible common equity was 16.58%, which is an improvement of 21 basis points from 16.37% in the first quarter. The non-GAAP operating return on assets was 1.35%, that's up 4 basis points from 1.31% in the first quarter.
And the non-GAAP operating efficiency ratio improved by 164 basis points to 52.46% from 54.1% in the first quarter. As John noted in his comments, we expect further improvements to these financial metrics through this year and next with the addition of access. As a reminder, we remain committed to achieving top tier financial performance relative to our peers. We are targeting an operating return on tangible common equity within a range of 16% to 18%, an operating return on assets in the range of 1.4% to 1.6% and an operating efficiency ratio of 50% or lower.
As noted in the first quarter earnings call, we expect to achieve these financial metric targets on a quarterly basis in the fourth quarter by 2019, on a full year basis in 2020. Once we have fully integrated access and realize the strategic and financial benefits of the combination. Please note, however, achievement of these targets in the fourth quarter could be impacted by accelerated investments in project spending designed to expedite our ability to capitalize on the multi-year disruption resulting from the SunTrust, BB&T combination as John alluded to.
Now, turning to the major components of the income statement, tax equivalent net interest income was $141.5 million, that's up $11 million [Phonetic] from the first quarter due to higher levels of average earning assets, which was driven by organic loan growth and the full quarter impact of the Access acquisition, which closed on February 1st. The current quarter's tax equivalent net interest margin was 3.78%, a decline of 2 basis points from the previous quarter.
Net accretion of purchase accounting adjustments for loans, time deposits and long-term debt added 21 basis points to the net interest margin in the second quarter, and that's up from the first quarter 16 basis point impact. Primarily due to additional loan related accretion income. The decrease in the tax equivalent net interest margin was driven by a two basis point increase in our cost of funds as earning asset yields held steady at 4.19% in the quarter. The flat quarter-to-quarter earnings after a year was driven by one basis point increase in a loan portfolio yield, which was offset by the 1 basis point negative margin impact as a result of the five basis point decline in the securities portfolio yield, which was caused by the day count difference between quarters. The one basis point quarterly net increase in the loan portfolio yield was comprised of additional loan accretion income of approximately 5 basis points, which was partially offset by 4 basis points in lower loan yields driven by lower market interest rates in the quarter and lower loan fees.
The quarterly 2 basis point increase in the cost of funds to 114 [Phonetic] basis points was primarily driven by higher deposit costs, which increased 7 basis points from the first quarter to 93 basis points. The increase in deposit costs was partially offset by lower wholesale borrowing rates and favorable changes in the overall funding mix between quarters.
Provision for loan losses for the quarter was $5.9 million or 20 basis points on an annualized basis. That's an increase of $1.9 million or 5 basis points from the first quarter. The increase in the provision for loan losses from the previous quarter was primarily driven by loan growth. For the second quarter of 2019, net charge offs were $4.3 million or 14 basis points on an annualized basis as compared to $4.2 million or 15 basis points for the prior quarter. As in previous quarters, the majority of charge-offs came from the non relationship third party consumer loan portfolio which is being run off.
Non-interest income increased $5.6 million to $30.6 million for the second quarter from $24.9 million in the prior quarter. The increase in non-interest income was primarily driven by the full quarter impact of the Access acquisition, increased levels of loan related swap transaction fees resulting from the flat interest rate curve and seasonally stronger mortgage banking income. As a reminder, beginning in the third quarter, debit card interchange revenue will be reduced by approximately $3 million per quarter as a result of complying with the Durbin Amendment.
Excluding merger related cost, rebranding cost and analyzation of intangible assets in the first and second quarters of 2019 respectively, operating non-interest expense increased $6.3 million or 7.5% to $90.3 million when compared to the prior quarter. The increase in operating non-interest expense was primarily due to the full quarter impact of the Access acquisition. In addition, second quarter operating non-interest expense included approximately $800,000 in OREO valuation adjustments driven by updated appraisals received during the quarter and $1.2 million in branch closure costs related to the decision to consolidate four branches in third quarter of 2019.
We expect to incur $200,000 to $300,000 more in additional grants closing costs in the third quarter. The four grants closures will result in an annual run rate expense savings of approximately $1.2 million beginning in the fourth quarter. Importantly, we remain firmly on track to hit our $25 million access related merger cost savings target by the end of the third quarter. As noted, second quarter expenses also included $4 million of Atlantic Union rebranding related costs. Going forward we expect to incur up to $2 million in additional rebate branding expenses over the next quarter. In addition to date, we have capitalized cost of approximately 2 million related to the installation of new Atlantic Union Bank signage across our footprint, which will be depreciated over a five year period.
The effective tax rate for the second quarter was 16%, compared to 14.9% in the first quarter. The increase in the effective tax rate was principally due to lower merger related costs. For the full year we now expect an effective tax rate in the range of 16% to 16.5% in 2019.
Now, turning to the balance sheet, period and total assets stood at $17.2 billion at June 30th, an increase of $262 million from March 31, levels, and that was driven by loan growth. At quarter end loans held for investments were $12.2 billion, an increase of $268 million or 9% on an annualized basis. On a pro forma basis Xenith [Phonetic] the access acquisition, it closed on January 1st instead of February 1st, year-to-date, loan balance has grew 6% on an annualized basis through June 30.
Looking for it, as John has mentioned, we continue to project upper single digit loan growth for 2019 with some seasonal variability between the quarter's. At June 30th total deposits stood at $12.5 billion, an increase of $26.2 million or 1% annualized from March 31 levels. On a pro forma basis as if the access acquisition had closed on January 1st deposit balances increased approximately 5% annualized in the first six months of the year, which is in line with our loan growth for the year-to-date growth. Deposit balance growth was driven by increases in demand deposits, money market and time deposit balances and that was partially offset by declines in interest checking account balances.
Turning to credit quality non-performing assets total $34 million or 28 basis points as a percentage of total loans, which is an increase of $1.8 million or 1 basis point from the prior quarter. The allowance for loan losses increased $1.6 million from March 31 to $42.5 million. The allowance as a percentage of the total loan portfolio increased 1 basis point to now at 35 basis points at quarter end. From a shareholder stewardship and capital management perspective, after the quarter ended, we announce that the Board of Directors authorized the repurchase of up to $150 million worth of the company's common stock through June 30th of 2021. We are committed to managing our capital resources prudently as a deployment of capital for the enhancement of long term shareholder value remains one of our highest priorities. So to summarize, our second quarter operating results confirm the significant earnings capacity we envision as Virginia's regional bank and the company continues to make progress toward strategic growth priorities. The access merger systems integration work is now largely behind us and we are confident that we will achieve the strategic and financial benefits from the access combination.
Finally, please note that we remain focused on leveraging the Atlantic Union franchise to generate sustainable, profitable growth and remain committed to achieving top tier financial performance in building long term value for our shareholders.
And with that, I'll turn it back over to Bill Cimino to open it up for questions from our analyst community.
William P. Cimino -- Vice President and Director of Investor Relations
Thanks, Rob. And now we have time for a few questions. Nicole, do we have anybody.
Questions and Answers:
Operator
[Operator Instructions] The first question comes from the line of Catherine Mealor.
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
Thanks. Good morning.
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Good morning, Catherine.
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
So both John and Rob you mentioned accelerated investments, and you think you'll have whether [Phonetic] this year? Is there any way to quantify the dollar amount of what you're expecting those investments or maybe where you expect expenses to trend with that in mind?
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Yes. Catherine it's Rob, we've got a number of initiatives under way. We've got a project team looking at all of the opportunities that this disruption may bring to us. At this point in time, we've modeled we've estimated that we could accelerate some investments in the $1 million to $2 million expense over the next two quarters. So think about it is adding probably a million to quarter -- to third and fourth quarter normal operating run rate. And so when you -- the operating run rate that we're looking for going into the third quarter excluding that was about $90 million so more like $91 million if we actually spend that money in third quarter and then it declines to about $89 million where you add back $1 million or so for these investments that are accelerated in the fourth quarter. So call it anywhere from $89 million to $91 million in the next two quarters.
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
Okay. And is that including or excluding amortization of intangible --
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Yes. Good question. Yes. That excludes the amortization I should say including that would be you know at the higher level at above -- $5 million to that -- those numbers.
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
Okay. Great. And then on the margin, any outlook on how you feel like the margin may be impacted if rates are cut?
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Yes, so we have -- we run the models based on the interest rate curve we're seeing today, which is much different than we talked about at the first quarter earnings call, as you recall, than we had assumed that there'd be one Fed funds rate cut in the fourth quarter. And we were guiding to about two to three basis points of compression per quarter. With the current outlook we have now is we expect the Fed to cut at the end of this month, at the end of September and then somewhat early in 2020. But for the next couple of quarters, we are now instead of two to three core compression guidance, we're talking we're in the four to five core margin compression going forward.
So it has put some more pressure on our NIM guidance going forward. Good news there is we as you recall, we have about call it 40% of our book is repricing with Fed Funds or loan book. Reprices with Fed Funds and one-month LIBOR is about 23% of our book in about 15% [Phonetic] is Fed Funds. So those will reprice fairly quickly with the Fed funds exchange. On the other side of the balance sheet, we have about a million and a half, $1.5 billion or so of deposits that are indexed to fed funds. So there's some mitigation to that on the cost of funds side. But we will continue to see more pressure on the margin that we had previously guided.
John C. Asbury -- President, Chief Executive Officer, Director
And then Bob, if you want to just clarifying again -- model exactly in terms of net rate cuts.
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
So as I mentioned, we have a Fed cut now modeled in for the end of this month. We have a Fed cut modeled in at the end of the third quarter, which will impact to fourth quarter. And then going out to 2020, we expect there will be another one earlier in the year. So we're going to see some pressure on the margin at least versus our previous guidance probably right through the first and second quarter of next year -- if that were to happen.
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
And then 4 bps to 5 bps of core compression that is in total or per quarter or per rate cut. How should I think of it?
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
It's going to be in total -- not in total -- by quarter. Yes. So some quarterly adjustment.
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
Okay. So assuming we have two which is -- could say about this year, so assuming we have a cut in July, then it kind of September you're thinking third and fourth quarter core margin basically down by 4 bps to 5 bps per quarter.
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Yeah, that will be right.
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
Okay. Great.
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Yes, we'll see what happens, it's -- if the Fed doesn't cut, we're probably talking, you know, that would improve back to the, a positive two, three basis points off that four to five basis points, we're still expecting to see some compression until we can rightsize our deposit rates based on the lower interest rate environment.
John C. Asbury -- President, Chief Executive Officer, Director
For capital, we feel like we've got a very realistic outlook and we work from that. And if it's better than that and that's good news.
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
That's good. And then to your point, is more near term. So that doesn't really factor in significant repricing on the deposit, it's quite yet?
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Yes, that's right. So we're going to be looking very hard at our deposit rates, as you know, over the past year, rates have been going up and we've been moving rates up, we've had promotional campaigns related to money market and CDs we're currently those are under review going forward. But there is a bit of a lag on some of those earlier campaigns because, for instance, money markets, we had a six month promotional rate and then it would revert down to the normal wrapped money market rate. So there is some of those higher cost deposits will reprice going into third and fourth quarter. But you got to see a bit of a lag on that.
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
Really helpful. Thank you.
John C. Asbury -- President, Chief Executive Officer, Director
Thanks, Catherine. And Nicole, we're ready for our next caller, please. Nicole. Do you know who the next caller is?
Operator
The next question is from the line of Casey Whitman.
John C. Asbury -- President, Chief Executive Officer, Director
Hi, Casey.
Casey Whitman -- Sandler O'Neill -- Analyst
Good Morning. Just in terms of the buyback you recently announced. Can you give us any indication of how aggressive you plan to be with that? And then could the buyback potentially provide some upside to the profitability targets that you've laid out or, perhaps speed up the timeline to get there? Or are you already sort of assuming some buybacks in there?
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Yeah, this could be a bit of upside, Casey, from the buyback point of view, although we have modeled some repurchases, but really depends on how quickly we get the buyback done. We're going to be fairly aggressive over the next three quarters in the buyback. Of course, it all depends on where our stock price is. What we typically look at is we have an intrinsic valuation model that we run, which values what we feel the value of the company is. And we look for a 15 plus percent return on investment. So if the stock price runs up, you're going to see less of a repurchase in terms of share buyback. But if you stay -- if we're staying where we are, we'll be pretty aggressive.
Casey Whitman -- Sandler O'Neill -- Analyst
Got it. Thanks. And so really nice growth in C&I particularly this quarter. Can you give us an idea of that -- mostly coming from the Northern Virginia market versus legacy markets? And then, I also wanted to ask just the 21 people you referenced hiring from BB&T and SunTrust, is that -- was the already in the numbers this quarter? Or is that are those recent hires?
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Yeah, those hefty were -- they are in the quarter already they're in the numbers. So those were hires already on the payroll. I mean, we're looking to do some more as we go forward.
Casey Whitman -- Sandler O'Neill -- Analyst
And I've been asked a ring to -- and that's pretty broad based, I'd say roughly half of those hires were in the commercial banking space, all C&I related. Most of the rest are going to be branch managers most typically and we had a few other supporting organizations. Interestingly, about half and half BB&T and SunTrust favoring would you comment on what we're seeing in terms of our commercial industrial growth by market?
David V. Ring -- Executive VP & Commercial Banking Group Executive
Sure. Hi Casey, 60% of the growth came from the greater Washington Baltimore market, which was part of the access market. And the other part of that 60% came from our expansion in the Carolinas. So as you know, we stood up the team in Raleigh and we also stood up a team in Greensboro recently and so our growth is going from the Carolinas market and the other market. So rest of 40% is really equally distributed between our central region, our eastern region and our southwestern region.
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
So we saw growth across the board to your point, Dave, led by greater Washington area. Now access is doing well, former access but we also where they are to is a reminder. So the old Iraq union [Phonetic] terms today's commercial team as a part of this the Baltimore loan production office. So this is nice in terms of we keep pointing to incremental growth opportunities coming out of the North Carolina operations, Maryland, the greater Washington is a tremendous economy, as you well know, our largest. So we're feeling pretty good about it. Casey.
Casey Whitman -- Sandler O'Neill -- Analyst
Great. Thanks to my questions.
John C. Asbury -- President, Chief Executive Officer, Director
Thanks, Casey. And Nicole we are ready for our next caller, please.
Operator
[Operator Instructions] Your next question is from the line of Austin Nicholas.
John C. Asbury -- President, Chief Executive Officer, Director
Hi, Austin.
Austin Nicholas -- Stephens Incorporated -- Analyst
Hey guys, good morning.
John C. Asbury -- President, Chief Executive Officer, Director
Good morning.
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Good morning.
Austin Nicholas -- Stephens Incorporated -- Analyst
Maybe just first back on the expense guidance. I appreciate that the guidance that you provided to Catherine, but maybe could you just -- maybe just repeat that? And then I guess my kind of follow on question is, does that guidance include the $2 million in additional rebranding expenses that you guided to?
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Yeah. So let me backtrack a bit, so excluding any of the spending accelerated expanding related to the opportunity with SunTrust and BB&T. We'd be looking at about -- if you include the amortization expenses, we're in the -- about the $93 million -- $94 million level for Q3 and that declines to about $90 million in Q4, which is pretty much what we had guided to in terms of run rate. Once we got all the cost saves from the access deal. But for each of those, if you had about $1 million, $1.5 million, I think in the third quarter and these numbers could move the very high level. But we're thinking that we've spent about a $1 million related to the opportunity with SunTrust and BB&T in the third quarter, maybe another $1 million, $1.5 million in the fourth quarter. So call it, you know, add that to the numbers you know, you're at 91, 92 in the next third quarter and then call a 90, 91 in the fourth quarter inclusive of that. Although add back the amortization, you're in the 95, 96 range, I should say.
Austin Nicholas -- Stephens Incorporated -- Analyst
Got it. Okay. And then that includes the rebranding expenses as well within that guidance.
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Yes, that's correct.
Austin Nicholas -- Stephens Incorporated -- Analyst
Got it. Okay. That's helpful. And then on the -- maybe just on the fee income swap fees where we're obviously really strong this quarter. Any commentary on how you'd expect those to trend throughout the year kind of based upon your current rate outlook?
John C. Asbury -- President, Chief Executive Officer, Director
Austin, this is John. I'll open this and then ask Dave Ring had a commercial to comment. We've been obviously talking about this quite -- quite frequently. We think we certainly have several things have changed. The franchise is larger. We have more larger clients. And we now have the opportunity to and have introduced this within the old access franchise. So you couple that with more market opportunity, plus a rate environment that is very favorable as it relates to interest rate hedging, very flat yield curve, meaning you don't have to pay out much to lock in longer term hedging. Historically low rates, so that all favors it. Having said that, I don't necessarily see us repeating what we saw in Q2. Dave Ring, what is your perspective?
David V. Ring -- Executive VP & Commercial Banking Group Executive
We had a really strong Q2, we part of it is from low hanging fruit existing portfolio that had an appetite for, you know, to fix their rates or -- but we would expect that just do what's right for the customer, really. And if it turns out that it works for the customer, that some interest rate derivative makes sense or interest rate swap makes sense, we'll do it. So we'll probably return closer to levels that we've done in the past and then -- in half of the year, with the exception that access clients did not have the ability to do derivatives before. So we're going to expose them to this over.
Austin Nicholas -- Stephens Incorporated -- Analyst
That's the great. And then we don't know yet, Austin, but for a sophisticated logic, clients, this is a very flexible, attractive option, and sort of the new offering there.
John C. Asbury -- President, Chief Executive Officer, Director
Our model is really to do what's right for the customer when it comes to this our bankers do not have swap goals, you just want to focus on what's doing right.
Austin Nicholas -- Stephens Incorporated -- Analyst
Got it. Okay.
John C. Asbury -- President, Chief Executive Officer, Director
We are -- we will start in Q3, I don't get into the details, but we're still seeing a lot of momentum on it. We think that it will continue.
Austin Nicholas -- Stephens Incorporated -- Analyst
Okay. That's really helpful. And then maybe while we're talking about hedging and swaps, I guess, are there any -- is there anything layered on that in terms of an interest rate or fixed or floating swaps that the bank has -- has on that may come off in the next few quarters and then I guess beyond that, is there any changes you're making to the overall asset sensitive position of the bank?
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Yeah. Austin on that case, we're not looking to unwind any swaps at this point we don't have a lot on our view borrowing base. But in terms of, yes, we'll continue to look at opportunities going for we have pulled the trigger on a couple of things in the second quarter, that will help our cost of funds mitigate the -- or reduce the cost of funds. But we'll continue to evaluate that in the third and fourth quarters as we look at the outlook for rates. But nothing right now planned in the numbers I shared with you.
Austin Nicholas -- Stephens Incorporated -- Analyst
Got it. Thanks. And then maybe just one last one. Any update on the progress on CECL and maybe when you'd expect to kind of telegraph to the market, your expectations for kind of the day one impact and kind of ongoing impact?
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
Yes. So, you know, we continue to work on that. We feel like we're in pretty good place regarding our understanding what the impacts going to be. We're running continue to run our models. We're actually validating our model with an outside third party and we're waiting to get the results of that back before we'll actually say anything publicly about it but again, as we said last quarter, you can expect to see that the allowance will increase at the very lease it will increase as a result of putting reserve on any of the purchase loans that we've -- the loans that we purchased over the last two deals for Xenith and Access. So it's going to be an increase. We'll get into more specifics. I think on the next call we'll feel more comfortable what the model is running the way we wanted to.
Austin Nicholas -- Stephens Incorporated -- Analyst
Got it. Sounds good. Thanks for taking my questions, guys.
John C. Asbury -- President, Chief Executive Officer, Director
Thanks, Austin.
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
And Austin, and thanks, everyone, for joining us today. And we look forward to talking with you next quarter. Have a good day.
Operator
[Operator Closing Remarks].
Duration: 45 minutes
Call participants:
William P. Cimino -- Vice President and Director of Investor Relations
John C. Asbury -- President, Chief Executive Officer, Director
Robert M. Gorman -- Executive Vice President and Chief Financial Officer
David V. Ring -- Executive VP & Commercial Banking Group Executive
Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst
Casey Whitman -- Sandler O'Neill -- Analyst
Austin Nicholas -- Stephens Incorporated -- Analyst
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