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Edited Transcript of UBSH earnings conference call or presentation 18-Jul-19 1:00pm GMT

Q2 2019 Atlantic Union Bankshares Corp Earnings Call

RICHMOND Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Atlantic Union Bankshares Corp earnings conference call or presentation Thursday, July 18, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David V. Ring

Atlantic Union Bankshares Corporation - Executive VP & Commercial Banking Group Executive

* John C. Asbury

Atlantic Union Bankshares Corporation - President, CEO & Director

* Robert Michael Gorman

Atlantic Union Bankshares Corporation - Executive VP & CFO

* William P. Cimino

Atlantic Union Bankshares Corporation - VP & Director of IR

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Conference Call Participants

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* Austin Lincoln Nicholas

Stephens Inc., Research Division - VP and Research Analyst

* Casey Cassiday Whitman

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Catherine Fitzhugh Summerson Mealor

Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP

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Presentation

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Operator [1]

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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.

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William P. Cimino, Atlantic Union Bankshares Corporation - VP & Director of IR [2]

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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.atlanticunionbank.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 be making 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.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [3]

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Thank you, Bill, and thanks to all for joining us today, and welcome to our first conference call as a 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 at 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 #1 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 to Forbes list of 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.

As communicated previously, we stepped up our financial targets. They are as follows: Operating ROA 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 to 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 in 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.

Our 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%.

Our 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 in 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 unnecessarily 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. Diversified 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 comprise 1/3 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 the current flat yield curve and a historically low rate environment. Interest rate hedging typically in the form of plain vanilla swaps is 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 business. As Virginia's regional bank, we continue to build on a reputation as a capable, responsible -- pardon me, capable, responsive, local alternative to the super regional and national banks. We can say with confidence that we're now firmly entranced 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; in 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 noninterest income going forward.

Next is growing core funding. Our loan-to-deposit ratio was 97.6%, a little over our long-term goal of 95%. As I've mentioned in the past, we have increased our focus on deposit gathering. We installed a competitive treasury management system and built our treasury management team. We're excited about our ability to scale and replicate our number of business deposit gathering strategies learnt 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 underway in the consumer banking group.

Next is managing the higher levels of performance. As noted, the quarter was noisy with the system integration of Access and the rebranding costs, but we continue to improve all of our operating profitability metrics from the first quarter. We made progress towards 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 in 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 per credit request 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 as 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.

At Atlantic Union Bank, we believe digital is more than just a product but a way of doing business to create a true omnichannel 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 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 underway with the effort and currently focused on taking operational paths out of the branches so our consumer teammates have the capacity and the 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 towards the opportunities in each trade area. We have also completed the review of our retail branch footprint and decided to close 4 branches in September.

As I mentioned before, Maria often notes how our consumer journey starts off in a much better place than past transformation she has led because the cultural drive to deliver a great customer experience already exists at Atlantic Union is proven by the accolades we receive in retail banking such as our #1 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 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 later did 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 of 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'll now touch on a few other topics from the quarter before turning it over to Rob. We do have a leadership change underway in our Wealth Management group, which operates as Middleburg Financial. A current leader has elected to return to his hometown of Roanoke, Virginia, and joined the team at Dixon, Hubard, Feinour, & Brown, which is a registered investment adviser 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 than we'll face 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 as 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 position and to capitalize and what we firmly believe will be a multi-year disruption as 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 a potential to become the Mid-Atlantic's regional bank who's 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 that our home state Virginia, the Commonwealth, last week was recognized by CNBC in its annual ranking as the #1 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, closing the 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 your promise of making banking easier.

Finally, credit quality remained strong. The economy in our footprint is steady, and we do not see evidence of systemic changes to our credit environment. Charge-offs declined 14 basis -- pardon me, 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 for us given 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 '18 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 underway. We're making progress against our 6 strategic priorities with loan and 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 is 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, the right markets and the right team to deliver high performance in a franchise that can no longer be replicated in Virginia. Our combination with Access National Bank and attractive Virginia economy in our 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 with 2 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.

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [4]

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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 Union's financial results for the second quarter, which we feel illustrates the earnings potential of this franchise.

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 onetime 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 4 branches in the third quarter. For clarity, I will specify which metrics were on a reported versus non-GAAP operating basis.

In the second quarter, reported net income was $48.8 million and earnings per share were $0.59, up approximately $13 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%. On a non-GAAP operating basis, which again, as noted, excludes $8.3 million in after-tax-related, merger-related and rebranding-related costs. Consolidated 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% and 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 our first quarter earnings call, we expect to achieve these financial metric targets on a quarterly basis in the fourth quarter of 2019 and 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 and 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 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 increase in the 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 2 basis point increase in our cost of funds as earning asset yields held steady at 4.92% in the quarter.

The flat quarter-to-quarter earning asset yield was driven by a 1 basis point increase in our loan portfolio yield, which was offset by the 1 basis point negative margin impact as a result of a 5 basis point decline in the securities portfolio yield, which was caused by the day count difference between quarters. The 1 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 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 40 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 charges came from the nonrelationship third-party consumer loan portfolio, which is being run off.

Noninterest income increased $5.6 million to $30.6 million for the second quarter from $24.9 million in the prior quarter. The increase in noninterest 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 the amortization of intangible assets in the first and second quarters of 2019, respectively, operating noninterest expense increased $6.3 million or 7.5% to $90.3 million when compared to the prior quarter. The increase in operating noninterest expense was primarily due to the full quarter impact of the Access acquisition. In addition, second quarter operating noninterest 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 4 branches in the third quarter of 2019.

We expect to incur $200,000 to $300,000 more in additional branch closure costs in the third quarter. The 4 branch 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 rebranding expenses over the next quarter. In addition, to date, we have capitalized costs of approximately $2 million related to the installation of new Atlantic Union Bank signage across our footprint, which will be depreciated over a 5-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 end total assets stood at $17.2 billion at June 30th, an increase of $262 million from March 31st 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, as if the Access acquisition had closed on January 1st instead of February 1st, year-to-date loan balances grew 6% on an annualized basis through June 30th.

Looking forward, as John has mentioned, we continue to project upper single-digit loan growth for 2019 with some seasonal variability between the quarters.

At June 30th, total deposits grew to $12.5 billion, an increase of $26.2 million or 1% annualized from March 31st 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 6 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. Nonperforming assets totaled $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 31st 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 announced 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 the 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 envisioned as Virginia's regional bank and the company continues to make progress towards its 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 and 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.

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William P. Cimino, Atlantic Union Bankshares Corporation - VP & Director of IR [5]

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Thanks, Rob. And now we have time for a few questions. Nicole, do we have anybody?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Catherine Mealor.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [2]

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So both, John and Rob, you mentioned accelerated investments that you think you'll have over this year. Is there any way to quantify the dollar amount of what you're expecting these investments or maybe where you expect expenses to trend with that in mind?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [3]

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Yes. Catherine, this is Rob. We've got a number of initiatives underway. 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 estimated that we could accelerate some investments in the $1 million to $2 million expense over the next 2 quarters. So think about it as adding probably $1 million per quarter to third and fourth quarter normal operating run rate. And so 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 the third quarter, and then it declines to about $89 million where add back $1 million or so for these investments that have accelerated in the fourth quarter. So call it anywhere from $89 million to $91 million in the next 2 quarters.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [4]

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Okay. And is that including or excluding amortization of intangible...

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [5]

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Yes. Good question. Yes, that excludes the amortization, I should say. Including that would be the higher level above -- kind of above $4 million -- $5 million to those numbers.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [6]

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Okay. Okay. Great. And then on the margin, any outlook on how you feel, like the margin maybe impacted if rates are cut?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [7]

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Yes. So we have -- we run the models based on the interest rate curve we're seeing today, which is much different than we talk about at the first quarter earnings call. As you recall, then, we had assumed that there will be one Fed funds rate cut in the fourth quarter and we were guiding to about 2 to 3 basis points of compression per quarter. 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 announced is that a 2 to 3 core compression guidance we are talking more in the 4 to 5 core margin compression going forward. So it has put some more pressure on our NIM guidance going forward. Good news there is, as you recall, we have about, call it, 40% of our book is repricing with Fed funds, our loan book. Reprices with Fed funds and 1 month LIBOR, 1 month LIBOR is about 23% of our book and about 15% is Fed funds. So those, we'll reprice fairly quickly with the Fed funds change. On the other side of the balance sheet, we have about $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 have previously guided.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [8]

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And then, Rob, would you mind just clarifying again what we had modeled exactly in terms of Fed rate cuts?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [9]

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Yes. 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 the fourth quarter. And then going out to 2020, we expect there will be another one rolling 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.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [10]

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In that 4 to 5 bps of core compression, that is in total or per quarter or per rate cut? How should I think of it?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [11]

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It's going to be in total -- not in total and in fact by quarter, yes. So it's a quarterly adjustment.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [12]

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Okay. So assuming we have 2 -- let's just think about this year. So assuming we have a cut in July and then a cut in September, you're thinking third and fourth quarter core margins basically down by 4 to 5 bps per quarter?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [13]

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Yes. That will be right.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [14]

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Okay. Okay. Great.

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [15]

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We'll see what happens. If it does -- if the Fed doesn't cut, we're probably talking that would improve back to the positive 2, 3 basis points of that 4 to 5 basis points. We're still expecting to see some compression until we can right size our deposit rates based on the lower interest rate environment.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [16]

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So Catherine, we feel like we've got a very realistic outlook, and we work from that. And if it's better than that, then that's good news.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [17]

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That's good. And that your point is more near term so that has been really factoring significant repricing on the deposits quite yet?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [18]

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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 where currently those are under review going forward. But there is a bit of a lag on some of those earlier campaign because, for instance, money markets we had a 6-month promotional rate and then it would revert down to the normal WACC money market rate. So there is some -- those higher cost deposits we'll reprice going into third and fourth quarter but you're going to see a bit of a lag on that.

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William P. Cimino, Atlantic Union Bankshares Corporation - VP & Director of IR [19]

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Thanks, Catherine. Nicole, we're ready for our next caller, please. Nicole, do you know who the next caller is?

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Operator [20]

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The next question is from the line of Casey Whitman.

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Casey Cassiday Whitman, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [21]

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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 time line to get there? Or you're already sort of assuming some buybacks in there?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [22]

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Yes. There could be a bit of upside, Casey, from the buyback point of view, although we had modeled some repurchases. Really, it depends on how quickly we get the buyback done. We're going to be fairly aggressive over the next 3 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 we're staying where we are, we'll be pretty aggressive.

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Casey Cassiday Whitman, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [23]

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Got it. And so really nice growth in C&I and particularly this quarter. Can you give us an idea if that's mostly coming from the Northern Virginia market versus legacy markets? And then I also wanted to ask just the 21 people you referenced hiring for BB&T and SunTrust, is that -- was that already in the numbers this quarter? Or is that -- are those recent hires?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [24]

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Yes. Those FTE were there in the quarter already, they are in the numbers. So those were hires already on the payroll. We were looking to bring some more as we go forward.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [25]

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And I'm going to ask Dave Ring to -- and that was pretty broad based, I would say roughly half of these hires were in the commercial banking space or C&I related. Most of the rest are going to be branch managers most typically and we have a few others supporting organizations. Interestingly, about half-and-half BB&T and SunTrust. Dave Ring, would you comment on what we're seeing in terms of commercial and industrial growth by market?

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David V. Ring, Atlantic Union Bankshares Corporation - Executive VP & Commercial Banking Group Executive [26]

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Sure. Casey, 60% of the growth came from the Greater Washington, Baltimore markets, which was part of the Access market. And the other part of that 60% came from our expansion in Carolinas. So as you know, we stood up a team in Raleigh, and we also stood up a team in Greensboro recently and so our growth is coming from the Carolinas market and the other markets. So rest of the 40% is really distributed between our central region, our eastern region and our southwestern region.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [27]

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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 were there too as a reminder, so the old Atlantic Union currently based commercial team is 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. And Greater Washington is a tremendous economy as you well know, our largest. So we're feeling pretty good about it, Casey.

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Operator [28]

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(Operator Instructions) Your next question is from the line of Austin Nicholas.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [29]

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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?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [30]

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Yes. So really, really backtrack a bit. So excluding any of the spending -- accelerated spending related to the opportunity with SunTrust and BB&T, we'll be looking at about a -- if you include the amortization expenses, we're in 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 add about $1 million, $1.5 million in the third quarter and these numbers could move to very high level, but we're thinking that we would spend about $1 million related to the opportunity with SunTrust and BB&T in the third quarter and maybe another $1 million, $1.5 million in the fourth quarter. So call it -- add that to the numbers, you're at $91 million, $92 million in the third quarter and then call it $90 million, $91 million in the fourth quarter inclusive of that. Add back the amortization you're in the $95 million, $96 million range, I should say.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [31]

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Got it. Okay. And then that includes the rebranding expenses as well within those -- that guidance?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [32]

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Yes. That's correct.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [33]

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Got it. Okay. That's helpful. And then on -- 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 up on your current rate outlook?

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [34]

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Yes, Austin, this is John. I'll open this and then ask Dave Ring, Head of Commercial, to comment. We've been obviously talking about this 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 older 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?

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David V. Ring, Atlantic Union Bankshares Corporation - Executive VP & Commercial Banking Group Executive [35]

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Yes. We had a really strong Q2. Part of it is from low-hanging fruit, existing portfolio that had an appetite for -- to fix their rates, but we would expect to just do what's right for the customer.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [36]

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Really.

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David V. Ring, Atlantic Union Bankshares Corporation - Executive VP & Commercial Banking Group Executive [37]

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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 will do it. So we'll probably return closer to levels that we've done in the past in the second 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 overall.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [38]

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That's great. And then we don't know yet, Austin, but for quite sophisticated larger clients, this is a very flexible attractive option and certainly a new offering there.

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David V. Ring, Atlantic Union Bankshares Corporation - Executive VP & Commercial Banking Group Executive [39]

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Our model is really to do what's right for the customer when it comes to this. Our bankers do not have to swap goals. We just want to focus on what's doing right.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [40]

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What's right to them.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [41]

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Got it. Got it.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [42]

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It would start in Q3, I won't get into the details, but we are still seeing a lot of momentum on it. We think that will continue.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [43]

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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 to floating swaps that the bank 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?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [44]

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Yes. Austin, on that case, we're not looking to unwind any swaps. At this point, we don't have a lot on our borrowing base. But in terms of -- yes, we'll continue to look at opportunities going forward. 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're continuing 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.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [45]

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Got it. And then maybe just one last one. Any update on the progress on CECL? And maybe when you would expect to kind of telegraph to the market your expectations for kind of the day 1 impact and kind of ongoing impact?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [46]

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Yes. So we continue to work on that. We feel like we're in pretty good place regarding our understanding what the impact is going to be. We're running -- continuing 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 least it will increase as a result of putting reserve on any of the purchase loans that we have -- the loans that we purchased over the last 2 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 will feel more comfortable that the model is running the way we wanted to.

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William P. Cimino, Atlantic Union Bankshares Corporation - VP & Director of IR [47]

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Thanks, Austin, and thanks, everyone, for joining us today. And we look forward to talking with you next quarter. Have a good day.

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Operator [48]

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This does conclude today's conference call. We thank you for your participation, and I ask that you please disconnect your line.