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Edited Transcript of UBSH earnings conference call or presentation 21-Jan-20 2:00pm GMT

Q4 2019 Atlantic Union Bankshares Corp Earnings Call

RICHMOND Jan 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Atlantic Union Bankshares Corp earnings conference call or presentation Tuesday, January 21, 2020 at 2:00:00pm 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

* Kelly P. Dakin

Atlantic Union Bankshares Corporation - Chief Digital and Customer Experience Officer

* Maria P. Tedesco

Atlantic Union Bank - President

* Robert Michael Gorman

Atlantic Union Bankshares Corporation - Executive VP & CFO

* Shawn E. O’Brien

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

* William P. Cimino

Atlantic Union Bankshares Corporation - SVP of IR

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Conference Call Participants

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* Broderick Dyer Preston

Stephens Inc., Research Division - VP & Analyst

* Casey Cassiday Whitman

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Catherine Fitzhugh Summerson Mealor

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

* Eugene Koysman

Barclays Bank PLC, Research Division - Research Analyst

* Laurie Katherine Havener Hunsicker

Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst

* William Jefferson Wallace

Raymond James & Associates, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. And welcome to the Atlantic Union Bankshares Fourth Quarter and Full Year 2019 Earnings Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today. Mr. Bill Cimino, you may begin.

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William P. Cimino, Atlantic Union Bankshares Corporation - SVP of IR [2]

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Thank you, Kyle, and good morning, everyone. So I hope you enjoyed the brief set of news with this program. I do want to say that we'll probably next time go with music instead of the news on the hold.

I have Atlantic Union Bankshares' President and CEO, John Asbury with me today; and Executive Vice President and CFO, Rob Gorman. 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 comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures is included in our earnings release for the fourth quarter and full year 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 facts 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 fourth quarter and full year 2019, and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ. 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. Thanks to all for joining us today, and Happy New Year from Atlantic Union Bankshares Corporation. I do want to point out, I'm fighting a cold, so I apologize in advance for the rough voice and occasional cough. We closed out on an eventful 2019 with a solid fourth quarter by continuing to execute on our strategic plan and hitting the loan and deposit growth targets we revised last quarter. As we begin 2020, we continue to believe we have a great opportunity before us to create something uniquely valuable for our shareholders and the communities we serve and remain keenly focused on reaching the full potential of this powerful franchise.

Atlantic Union accomplished much in 2019. To start, we closed the Access National Bank acquisition on February 1 and converted their core systems in May; successfully and uneventfully rebranded the company to Atlantic Union and changed the stock trading symbol to AUB; delivered 8% deposit growth, while loan growth was 6% for the year. The year-end loan-to-deposit ratio was in line with our 95% target, right where it should be. We completed the transformation of the executive leadership team with the hiring of David Zimmerman in the fourth quarter to head up our wealth management group, Middleburg Financial; approved and rolled out our new 3-year strategic plan to our teammates; added an established equipment financing team to close a commercial banking product gap; launched Zelle and added nCino to address digital product gaps; won a number of customer experience awards, including the much coveted #1 ranking for the J.D. Power Retail Banking Satisfaction survey for the Mid-Atlantic region in 2019, with the Mid-Atlantic region defined by J.D. Power as Virginia to New York State; there was none better.

Last, a focused initiative to take advantage of the coming market disruption from the Truist merger. Rob will provide more details on the financial performance in this section, but for operating metrics for the fourth quarter, our operating return on tangible common equity was 16.01%, which is a 37 basis point increase from the third quarter. For the full year, our operating ROTCE was 16.14%. Operating return on assets was 1.30%, up 1 basis point from the prior quarter. For the full year, operating ROA was 1.31%.

Operating efficiency ratio was 52.65%, which is a 247 basis point decrease from the prior quarter. In late 2018, we communicated that we had updated our top-tier financial targets to the following: operating ROTCE between 16% and 18%, operating ROA between 1.4% and 1.6% and an operating efficiency ratio at 50% or below. We made those updates then expecting to operate in the rising rate environment and stepped up our top-tier financial metrics accordingly. As the economic and geopolitical environment materially changed over the course of 2019, we shifted expectations for the federal reserve to cut rates. Even then, the rate environment was below our expectations and there was a sustained inversion of the yield curve that negatively impacted our net interest margin and revenue growth throughout the year. Despite the adverse changes in the rate environment, we did perform well against our original 2018 targets.

Given the challenging current and expected operating environment for banks, Rob will comment on our revised financial targets for 2020 and 2021 in his remarks, which reflect our continuing focus on maintaining top-tier financial performance regardless of the operating environment.

Loan growth was 10% annualized for the quarter, point-to-point, while average loans grew 3%. Q4 is predictably stronger seasonally in loan growth, and we saw significant growth materialized late in the quarter.

Headwinds to growth in Q4 were the persistent trends of commercial real estate paydowns remaining at elevated levels and our decision to run off the third-party consumer loan portfolio, C&I line utilization at approximately 40%, and total commitments both picked up from the third quarter.

As a reminder, the Access acquisition closed on February 1, 2019. On a pro forma basis, as if the Access balances were included for the full year, our year-end loan growth was approximately 6%, which is consistent with the expectations we communicated during our third quarter earnings call.

Our loan pipelines are well balanced and slightly ahead of where we were this time last year, giving us confidence in our 2020 forecast. Based on everything we know at this time, we expect full year 2020 loan growth to be in the 6% to 8% range, including the impact of further runoff of our third-party consumer loan portfolio. We expect to take advantage of the disruption caused by the Truist merger, but we do expect headwinds from the continuation of elevated paydowns in the CRE portfolio as rate expectations for the year suggests the institutional nonrecourse long-term fixed rate market will remain an attractive substitute product for CRE clients.

Our deposit growth was about 8% annualized for the quarter, point-to-point, and average growth was approximately 15%. For the full year 2019, deposit growth was approximately 9% point-to-point, which was at the higher end of our upper single-digit growth guidance. Given the current strength, we believe we'll be able to match deposit growth with loan growth for 2020 in this 6% to 8% range and maintain our loan-to-deposit ratio at our target of 95%.

Turning to credit. Credit quality remained solid in the fourth quarter. The economy in our footprint is steady. Unemployment in Virginia ticked down to 2.6%, among the lowest in the nation, and we still do not see any evidence of systemic credit deterioration in our loan portfolio. Quarterly charge-offs were 15 basis points annualized, down 10 basis points from the prior quarter. The full year net charge-off ratio was 17 basis points. As we've seen in prior quarters, a big part of charge-offs at Atlantic Union Bank, about 60% for the quarter, came from our third-party consumer loan portfolio, which, as mentioned, continues to run off. Barring some unexpected change in the macroeconomic environment, we aren't expecting a change in credit quality in 2020.

As I've consistently said over the past 3 years, I do believe problem asset levels at Atlantic Union and across the industry remain below the long-term trend line, and I still believe that to be true. Eventually, we will see a return to more normalized credit losses, but we can't tell you when to expect that because we're not yet seeing any evidence of a systemic downturn.

Moving away from the quarter's financial highlights and looking ahead, we rolled out our new 3-year strategic plan to our teammates in the second half of the year. Our plan stays true to how we like to operate Atlantic Union Bank, which is maintain forward progress, press our advantage where we can and do what we say we're going to do. For those who know us and our story, the strategic plan continues a logical progression of what we've been working on for some time. Our road map to achieving the objectives of the strategic plan are our strategic priorities, which I've outlined before. I'll provide an update to those priorities.

Diversified loan portfolio and revenue streams. We made solid progress on our commercial banking effort and the commercial loan categories of C&I and owner-occupied real estate now make up 1/3 of our total loan portfolio. We stood up an equipment finance team in the fourth quarter to close a competitive gap in our commercial offerings and the team hit the ground running, closing about $12 million in loans during the month of December. The new capability has been very well received by our commercial banking teams, and we're excited about the potential for this group over time.

Complementing our C&I strategy is a growing treasury management services annuity fees income stream. Treasury management transformed beginning in 2018 with the hiring of a new product development team, a segmentation of TM support by line of business and an ambitious undertaking to enhance our service offerings. We now have a robust TM platform comprised of inside and external sales teams, a product management team and a sales and implementation team. New TM revenue in various stages of implementation totals $1.9 million in annual run rate plus a record $1.3 million in the pipeline.

Next, grow core funding. As I mentioned earlier, our loan-to-deposit ratio is currently at our target of about 95%. We continue to believe we have opportunities to grow our deposit base and deepen our market share. For example, we piloted a Bank At Work program in our coastal region in the fourth quarter, which targets the consumer banking needs of our commercial client employees. We've taken the learnings from that pilot and are now in the process of launching this effort across our footprint. The Bank At Work program is an important product to grow consumer accounts and low-cost deposits and helps to strengthen our commercial client relationships.

Next, manage the higher levels of performance. As we mentioned earlier, we aim to stay in the top quartile of our peers as measured by ROTCE, ROA and efficiency ratio metrics. We believe we have a number of opportunities to improve the efficiency of the bank by reengineering our end-to-end processes. For example, we are focused on taking out laborious manual processes and reducing rework wherever we can with a company-wide robotic process automation initiative. Improving efficiency and scalability is an important focus for us in 2020.

Next, strengthen our digital capabilities. As I mentioned before, during 2019, we implemented table-stakes technology improvements like Zelle in the consumer bank and nCino in the commercial bank. Middleburg Financial will have a comprehensive new wealth management platform in the first half of 2020. It will improve the client and teammate experience and close an important competitive gap.

We're piloting a new digital account opening solution that simplifies the enrollment process, and that should launch in February. We're adding debit card controls and enhanced notifications and alerts for real-time updates to customers in the first quarter. We have installed or upgraded WiFi in all branches, so customers can more easily receive assistance to set up online and mobile banking, which is important for new and existing customers.

Some of the new digital capabilities address gaps with our larger competitors, bringing us closer to parity with the most frequently used functionality. While we don't intend to lead the market in digital innovation, we must be competitive and current with our digital offerings to remain in the consideration set for new customers, especially those considering leaving a larger bank.

Next is make banking easier. We launched a product called transition checking that enables customers who might not otherwise qualify for traditional checking product to establish or reestablish themselves in the banking system by offering a fee-based account that has no overdraft privileges. We successfully piloted a project to issue temporary instant debit cards at our branches, and we'll roll that out across the system starting this month. Debit card issuance time has been a pain point for our customers and this will resolve the issue.

We're also rolling out contactless debit cards to customers in the first quarter. We installed electronic signature capture pads in all branches to eliminate paper, streamline process, improve quality and create a more consistent experience for applications and forms. We revamped the consumer lending team and their approval processes to speed up home equity line of credit approvals and have already seen a 25% reduction in average cycle time.

We streamlined our treasury management services on-boarding process and simplified documentation by developing a master services agreement that allows clients to easily add new services. We further expanded our TM product set with a number of new offerings, such as integrated payables and a better purchasing card product, and finally, capitalize on strategic opportunities. Since we don't know what the future holds, we must be nimble and able to react to a changing marketplace. The greatest market opportunity we're likely to see over the next few years is the Truist merger. And during 2019, we hired 39 people from the Truist companies in a variety of roles. We are expecting considerable Truist branch closures in our Virginia trading areas, which we expect to begin in late 2021, and will be ready for the coming disruption.

As for other strategic opportunities, it should be clear from my comments, we're busy and focused on internal improvements at the moment and still have a number of projects to finish in the near term. Having said that, we still believe Atlantic Union Bank is in the best position to further consolidate Virginia and look to fill in our Mid-Atlantic trade area. Our choice of Atlantic in the Atlantic Union Bank name was intentional as we think we have the potential to become the premier Mid-Atlantic regional bank. It's my preference to focus internally for as long as possible in 2020 to gain efficiencies inside the bank to become more scalable and to improve our competitive positioning. However, we have demonstrated we're able to leverage M&A as a shareholder value-creating secondary strategy, and that remains at our playbook.

In summary, Atlantic Union had another solid quarter and a good 2019. We continue to make steady progress against our strategic priorities and delivered good financial performance despite headwinds from the adverse interest rate environment. I remain highly confident with what the future holds for us and the potential we have to deliver long-term sustainable financial performance for our customers, communities, teammates and shareholders. I can think of no better way to finish my comments in the new year, then by reiterating the Atlantic Union Bankshares is a uniquely valuable franchise. It's dense and compact in great markets with a story unlike any other in our region. We've 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. We have growth opportunities in our North Carolina and Maryland operations and what we believe will be a multiyear disruption with 1 of our largest competitors.

I'll now turn the call over to Rob to cover the financial results for the quarter and for 2019. Rob?

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

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Thank you, John, and good morning, everyone. Thanks for joining us today. I'd now like to take a few minutes to provide you with some details of Atlantic Union's financial results for the fourth quarter and for 2019. Please note that for the most part of my commentary, we'll focus on Atlantic Union's fourth quarter and full year financial results on a non-GAAP operating basis, which excludes $709,000 in after-tax merger-related costs and $713,000 in after-tax rebranding relating costs in the fourth quarter. It also excludes $22.3 million in after-tax merger-related costs and $5.1 million in after-tax rebranding costs for the full year of 2019. For clarity, I will specify which financial metrics are on a reported versus non-GAAP operating basis.

In the fourth quarter, reported net income was $55.8 million and earnings per share were $0.69, that's up approximately $2.6 million or $0.04 from the third quarter. For the year ended 2019, reported net income was $193.5 million and earnings per share were $2.41, up $47 million or $0.19 per share from 2018 levels. Reported return on equity for the fourth quarter was 8.81% and 7.89% for the full year. The reported return on assets was 1.27% for the fourth quarter and was 1.15% for 2019.

The reported efficiency ratio was 57.4% for the quarter and 62.37% for the full year.

On a non-GAAP operating basis, which as noted, excludes $1.4 million in after-tax merger-related cost and rebranding-related costs for the quarter and $27.4 million for the year. Consolidated net earnings for the fourth quarter were $57.3 million or $0.71 per share, which is up from $56.1 million or $0.69 per share in the third quarter.

For the full year 2019, operating net earnings were $221 million or $2.75 per share, which is up $43 million or $0.04 per share from 2018 levels.

The non-GAAP operating return on tangible common equity was 16.01% in the fourth quarter and was 16.14% for the full year. The non-GAAP operating return on assets was 1.3% in the fourth quarter and was 1.31% for 2019.

Non-GAAP operating efficiency ratio was 52.65% in the fourth quarter and was 53.61% for the full year of 2019.

As a reminder, we remain committed to achieving top-tier financial performance relative to our peers. Since the fall of 2018, we have been targeting the following operating financial metrics: 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. When we set these targets at the end of 2018, we expect it to operate in a rising rate environment, which will result in net interest margin expansion and solid revenue growth. However, this did not materialize as market interest rates declined materially since the beginning of 2019.

Given this challenging current and expected operating environment for banks and its impact on revenue growth caused by the intractable, lower-for-longer interest rate environment, which we now expect will persist through 2021, we are revising our operating financial metric targets accordingly to the following: return on tangible common equity within a range of 15% to 17%; return on assets in the range of 1.2% to 1.4%; and an efficiency ratio of 53% or lower.

Our financial performance targets are set to be consistently in the top quartile among our peer group, regardless of the operating environment, and we believe these new targets are reflective of the financial metrics required to achieve top-tier financial performance in the current economic environment.

Now turning to the major components of the income statement for the fourth quarter, tax equivalent net interest income was $137.8 million, down $1.6 million from the third quarter, primarily due to lower earning asset yields during the quarter, driven by lower average market rates and changes in the average earning asset mix from the third quarter.

Net accretion of purchase accounting adjustments for loans, time deposits and long-term debt added 18 basis points to the net interest margin in the fourth quarter, which is up from the third quarter's historic 13 basis point impact, primarily due to increased levels of loan-related accretion income.

The fourth quarter's tax equivalent net interest margin was 3.55%, that's a decline of 9 basis points from the previous quarter. For the full year, tax equivalent net interest margin was 3.69%, which is down 5 basis points from 2018's net interest margin of 3.74%. The 9 basis point decline in the tax equivalent net interest margin for the fourth quarter was principally due to an 18 basis point decrease in the yield on earning assets, partially offset by a 9 basis point decline in the cost of funds. The 18 basis point decrease in the quarter-to-quarter earning asset yield was primarily driven by a 17 basis point decline in the loan portfolio yield and the 3 basis point negative impact related to changes in earning asset mix in the quarter.

The decline in the loan portfolio yield of 17 basis points was driven by lower average loan yields of 22 basis points, partially offset by the 5 basis point benefit from higher loan accretion income. Average loan yields were lower, primarily due to the impact of declines in market interest rates during the quarter; notably, the significant declines in the 1-month LIBOR and prime rates.

The 3 basis point earning asset yield decline resulting from changes in the earning asset mix from the prior quarter was due to the buildup of liquidity during the quarter, resulting from the timing of deposit inflows early in the quarter and the funding of loan growth late in the quarter, which shouldn't carry over into future quarters. The quarterly 9 basis point decline in the cost of funds to 1% was primarily driven by a 28 basis point decline in wholesale borrowing costs, favorable changes in the overall funding mix between quarters and by lower interest-bearing deposit costs, which declined 6 basis points from the third quarter's 125 basis points.

The provision for loan losses for the fourth quarter was $3.1 million or 10 basis points on an annualized basis, which is a decrease of $6 million or 19 basis points from the third quarter. The decrease in the loan loss provision from the previous quarter was primarily driven by lower levels of net charge-offs. For the fourth quarter of 2019, net charge-offs were $4.6 million or 15 basis points on an annualized basis compared to $7.7 million or 25 basis points for the prior quarter. As in previous quarters, a significant amount of the net charge-offs came from non-relationship third-party consumer loans, which are in runoff mode. For the year, net charge-offs were $20.9 million or 17 basis points.

Noninterest income declined to $29.2 million for the fourth quarter from $48.1 million in the prior quarter. The decrease in noninterest income was primarily driven by life insurance proceeds of approximately $9.3 million related to the acquisition of Xenith and a gain of approximately $7.1 million due to the sale of investment securities recorded in the third quarter. Excluding these third quarter items, noninterest income declined by $2.5 million, driven by lower loan-related interest rate swap income of $2 million due to lower transaction volumes and seasonally lower mortgage banking revenue of $685,000.

Excluding merger-related costs and rebranding-related costs in both the third and fourth quarters of 2019, operating noninterest expense decreased $15.6 million or 15% to $92.5 million when compared to the prior quarter. The decrease in operating noninterest expense was primarily due to the recognition of approximately $16.4 million loss on debt extinguishment in the third quarter, resulting from the repayment of approximately $140 million in Federal Home Loan Bank advances and the termination of related cash flow hedges.

Salaries and benefits declined by $2.5 million, primarily due to lower incentive compensation expense and higher deferred costs related to new loan originations. These decreases were partially offset by increases in marketing expense of approximately $1.1 million due to increases in direct mail and sponsorships; professional fees of $955,000 related to higher consulting costs for strategic initiatives; FDIC expenses of $873,000, primarily due to a lower FDIC small bank assessment credit earned in the fourth quarter; and OREO and credit-related expense of approximately $542,000 due to OREO valuation adjustments, driven by updated appraisals received during the quarter.

As a reminder, we achieved our $25 million Access-related merger cost saves target on a run rate basis at the end of the third quarter. Also, please note that we do not expect to incur any additional merger costs or rebranding expenses in 2020.

The effective tax rate for the fourth quarter was 16.7% compared to 16.8% in the third quarter. For the full year, the effective tax rate was 16.2%. In 2020, we expect the full year effective tax rate to be in the 16.5% to 17% range.

Turning to the balance sheet. Period-end total assets stood at $17.6 billion at December 31, which is an increase of $122 million from September 30 levels and an increase of $3.8 billion from December 31, 2018 levels, primarily as a result of the Access acquisition and loan growth during the year. At quarter end, loans held for investment were $12.6 billion, an increase of $304 million or approximately 10% annualized, while average loans increased $87.4 million or 2.9% annualized from the prior quarter. On a pro forma basis, as if the Access acquisition had closed on January 1 instead of February 1, year-to-date loan balances grew approximately 6% on an annualized basis through December 31, 2019.

Looking forward, as John mentioned, we project loan growth of approximately 6% to 8% for the full year of 2020, inclusive of the expected runoff of third-party consumer loan balances.

At December 31, total deposits stood at $13.3 billion, an increase of $260.3 million or approximately 8% from September 30, while average deposits increased $491 million or 15.3% annualized from the prior quarter. Deposit balance growth during the fourth quarter was driven by increases in money market and interest checking balances, partially offset by seasonal declines in demand deposits and lower time deposit account balances. On a pro forma basis, as if the Access acquisition had closed on January 1, deposit balances increased approximately 9% for the full year. Loan-to-deposit ratio was 94.8% at year-end, which is in line with our 95% target.

For 2020, as John noted, we expect to achieve deposit growth of 6% to 8%, which will be in line with our loan growth expectations.

Now turning to credit quality. Nonperforming assets totaled $32.9 million or 26 basis points as a percentage of total loans, a decline of $3.5 million or 4 basis points from third quarter levels. The allowance for loan level -- losses decreased $1.5 million from September 30 to $42.3 million, primarily due to lower incurred losses embedded in the consumer loan portfolio as it continues to pay down and an improved economic environment, which was partially offset by loan growth during the quarter.

And now I'd like to provide further thoughts on how the adoption of the Current Expected Credit Loss model or CECL will impact Atlantic Union. As you know, under the new CECL accounting standard that went into effect on January 1, lifetime expected credit losses will now be determined using macroeconomic forecast assumptions and management judgments applicable to and through the expected life of the loan portfolios. Since our last CECL update in October, the economic outlook and portfolio characteristics have been consistent to slightly improved, and the company now estimates that the allowance for credit losses will increase to approximately $95 million or more than double the allowance reserve level as of December 31 under the former incurred loss methodology.

As previously noted, the allowance increase under CECL is primarily driven by the company's acquired loan portfolio and the consumer loan portfolio. We have completed an independent validation of our CECL model, and we plan to disclose the final allowance impact in our 10-K once we have worked through the full governance process for the day 1 recognition.

From a shareholder stewardship and capital management's perspective, 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. As such, during the fourth quarter of 2019, the company declared and paid a quarterly cash dividend of $0.25 per common share, an increase of $0.02 per share or approximately 9% compared to the prior year's quarterly dividend level.

The Board of Directors had previously authorized a share repurchase program to purchase up to $150 million of the company's common stock through June 30, 2021, in open market transactions or privately negotiated transactions. As of January 17, we have repurchased 2.4 million shares at an average price of $36.91 or $89.6 million in total. The total remaining authorized shares to repurchase is approximately $60 million.

So to summarize, Atlantic Union delivered solid financial results in the fourth quarter and in 2019, despite the headwinds of the lower interest rate environment, and the company continued to make progress towards its strategic growth priorities. We are revising our operating financial metric targets to reflect the challenging interest rate environment, which we expect will persist through 2021, but remain committed to achieving top-tier financial performance relative to our peers.

Finally, please note that we remain focused on leveraging the Atlantic Union franchise to generate sustainable, profitable growth and remain committed to 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 - SVP of IR [5]

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Thanks, Rob. And Kyle, we're ready for our first caller.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Casey Whitman from Piper Sandler.

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Casey Cassiday Whitman, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [2]

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Rob, just to be clear on the updated financial targets you just outlined, what are you assuming for further rate cuts, if any?

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

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Yes. On that front, Casey, what we're assuming is that there is no further rate cuts by the Fed in 2020 and 2021, where -- but the curve remains in line with where it is today, the flat curve. In terms of the NIM forecast that we're looking at in terms of those targets that we set, we're thinking we will be stabilizing at the level you see in the fourth quarter on a core basis, expect to be in about 3.35% to 3.40% range on a core basis. Now if the Fed were to cut, which the implied curves indicate, maybe, in the second half of this year, you could see that, that range could drop to the 3.30% to 3.35% range going forward.

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Casey Cassiday Whitman, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [4]

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Okay. Understood. Let me ask a question about expenses. So your core expense run rate is now at around $92.5 million and you've got at least the FDIC expense is likely normalizing back up in the first half of the year. So where do you think expenses shake out in 2020? I think last call, you had guided to like a 4% to 5% increase in expenses for -- in '20, is that -- does that still apply here? Or sort of what are your general thoughts about expenses in '20?

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

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Yes, exactly right, Casey. So what we -- coming out of the fourth quarter, we think we're at a run rate of about $92 million. That includes some of the impacts of the investments we made this year. We are expecting to increase that run rate approximately 4% next year as we continue to invest in various technologies, digital, product and people, et cetera. Including a wage inflation factor of about 3%. So we're looking at about a 4% increase in that run rate on a full year basis next year. Obviously, the quarters will be a little different as there's some seasonality in the first quarter, which will be a little higher than an average for each of the quarters.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [6]

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And Casey, this is John. I'd add that, to some extent, you can expect to see this front-end loaded a bit. Yes, there's the seasonal aspect, Rob points to you, but there is a surge of activity going on in the company, and we are making hay while the sunshines in terms of we are not working on a merger right now and we are very focused on completing a number of important initiatives to position the company for the future. And there are some things that will begin to drop off the schedule as we get into the second half of the year. So I'll kind of leave it at that. I would reiterate what Rob said, don't look for it to be evenly distributed, look for it to be a little more loaded toward the front-end and an improving trend in the back-end.

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Operator [7]

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Your next question comes from the line of Catherine Mealor from KBW.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [8]

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Just want to follow up on the margin guidance that you gave, Rob. As we think about loan yields, it seemed like the legacy loan yields had a pretty big decline this quarter. How are you thinking about loan yields going into next year? And maybe where new production is coming on right now versus where the legacy loan yield is currently sitting? And then on the other side of the balance sheet, maybe on deposit costs, how much further reduction do you think you can get in deposit costs if we don't see any further rate cuts?

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

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Yes. So in terms of the guidance on margin, as mentioned, we feel like we're going to be stabilizing in the range you see at the -- in the fourth quarter. Some of that is -- when you look at the detail of that, we're going to see additional loan yield, earning asset yield compression, not material, but we think we can offset that with additional reductions in our cost of funds, primarily on the cost deposits. We do have some opportunities in lowering various deposit rates. There's a bit of a tail on some of our promotional money markets that -- we have a 6-month promotional money market promotions out there, some of which will reprice as we continue into this year. So we think there's opportunity there. Actually, money markets came down about 13 basis points quarter-to-quarter. So we're expecting that would come down a little further.

We are seeing a little more pressure on the loan yields as well. But when you match up the compression on that versus lower deposit costs, we should be able to stabilize in this 3.35% to 3.40% range. Again, assuming no rate cuts coming down the pike.

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

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And then, does that also assume a level of deployment of the excess liquidity that we saw in this quarter as well?

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

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Yes. That's right. Yes. So as I mentioned, it was about 3 basis points of lower margin due to that liquidity. So that also comes into play as well in that guidance.

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

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Got it. Okay. And then I notice also the fair value accretion guidance came down. I think it was about -- I think it was about 16 million last quarter for 2020 and now it's 13.7. Is this just from -- kind of, is this from CECL? Or can you give any color around why the decline?

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

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Yes. In terms of what you see in the earnings release, we have not updated that projection for what we think CECL is. We're still working through potential for CECL. The decline there is primarily because we accelerated. You saw a little bit of acceleration in the fourth quarter, which kind of reduces the go-forward number. Our feeling is that when we recalculate under CECL, that we'll see a bit of a pickup or an acceleration, if you will, that accretion more in 2020 than what's currently showing up on that chart. So we are continuing to work through that. We'll give better guidance probably in the next quarter on that. But that's probably a conservative estimate at this point.

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Operator [14]

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Your next question comes from the line of William Wallace from Raymond James.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [15]

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Maybe just following up on the last line of questioning on CECL. How would you anticipate your reserve to trend in 2020 once you implement CECL? Should they be flat on a reserve to loan basis? Or up or continue to be down like we saw in '19?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [16]

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Yes. Well, interestingly, on that front, Wally, as you know, we will -- the day 1 impact as we've estimated would be about $95 million. You will see that coming down, primarily because of the runoff in our consumer -- third-party consumer book, where presumably, we've got the lifetime losses embedded in that day 1 projection. So we won't be replenishing that reserve for at least that book of business for any charge-offs that come through, assuming that we've estimated properly. So you can expect that, that would come down over time, just all things being equal and the portfolio mix remaining the same. The drivers of increasing that, of course, will be loan growth in the other book of business -- the other loan portfolios that we have on the books. But -- and of course, if the -- there's major changes in the economic outlook, more tendency towards a recession, that could drive the reserve up as well. But as we look forward now, I think you could expect to see the day 1 reserve level come down a bit over the year.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [17]

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Okay. And then the $95 million impact, does that include the purchased loans that the full impact...

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

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Yes. That's right, Wally. It's right, yes.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [19]

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So what's the capital impact then because of that?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [20]

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Yes, capital impact is about -- we've calculated about 20 to 25 basis points in terms of regulatory capital level that will be phased in over 3 years.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [21]

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Okay. And so -- but the TCE impact will be immediately in that.

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

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Call it -- TCE probably call it about 20 to 25 bps.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [23]

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Okay. And then -- so looking at your financial -- your revised financial targets at 15% to 17% return on tangible common, what TCE base do you assume for those targets?

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

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We expect to -- as we've mentioned, our goal is to be at about 8.5% TCE. And I think our projections call for that to be about 8.5% to 8.75% for this year, including the impact of the CECL.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [25]

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Right. Okay. John, I believe, in your prepared remarks, you mentioned the continued opportunity around Truist branch closures. Did you say that you anticipate those closures in late 2021?

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [26]

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Yes. What you're saying Wally is that because Virginia has the most overlap, including the Greater Washington area, of any of their markets in the system, they intend to go last here, presumably to get it right. And so we do not expect those closures to occur until the latter part or at least the second half of next year. In fact, as you may have read, they're saying that there will be no branch closures anywhere for a year, which doesn't surprise me, just given the scale of this combination. We've seen leadership announcements, of course, have come through. They are consolidating their commercial banking teams. For the time being, SunTrust branches and BB&T branches continue to run effectively independently. And so we have -- we are adjusting a few of our plans accordingly. Surprisingly, we do market research. You'd be surprised at how many consumers have no earthly idea these 2 companies are merging at this point, not a clue. The commercial customers certainly do. So we don't want -- we need to make sure that we synchronize some of our initiatives with the maximum disruption opportunity on the consumer side.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [27]

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Okay. So you were true to your word, and there were no announcements on any new M&A in 2019. You have continued opportunity around Truist disruption through 2021 or even into 2022, it sounds like. How does the M&A discussion change or does it change in 2020?

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [28]

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Not really, if you listen, my comments were carefully made. So what we're saying is that we have a number of initiatives, and I listed off quite a few that have been completed, and there are more underway. So our highest priority right now is to really get ahead of this Truist. As I said, I feel like we've got the opportunity. While we're not engaged in a merger transaction, conversion, integration effort, we need to make a run for it. We need to knock out and it -- get as close to competitive parity as we can during this window of opportunity. Having said that, the level of discussion that is going on out there. The level of inbound inquiry that we are receiving does lead us to believe that there will be opportunities when we -- when we decide that it's time. It is -- we are not of the mindset that we would want to do anything this year, but we have conversations continuously. We'll continue to evaluate this in real time. We look at the full spectrum of opportunities on the M&A front. And I would say that there's a very real opportunity as we get into 2021; you could see us active again. But for now, what we do not want to do is to put off or delay strategically important initiatives internally. And they aren't all just products, by the way, I hinted at this, we'll talk later on about. We have a stem-to-stern review of processes inside this organization we'll be implementing, we are implementing. That's happening now, robotic process automation. There are a number of things that do cost us some money, frankly, on the front end that will make the company more efficient, more scalable, more productive and offer higher quality. And so this is the window to do it. So that is our view.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [29]

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Okay. And this is just a ticky-tack question, Rob, but are we done with merger costs? And as a quick follow-up, when should we see the discontinued operations go away?

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

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Yes. So as I mentioned in my prepared remarks, yes, merger costs are done and rebranding costs are done. So we're basically running at an operating go forward here, operating expense base.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [31]

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And on discontinued, same thing?

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

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Yes, yes.

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Operator [33]

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Your next question comes from the line of Brody Preston from Stephens Inc.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [34]

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I just had a couple of just cleanup questions before I get into some of my other questions. So I guess, just following up on the CECL commentary. So I guess, just the 20 to 25 basis points, that would be about a $35 million capital impact, somewhere in that range. Is that fair, Rob?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [35]

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Yes. Yes, that's about right, Brody.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [36]

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Okay. And then, I guess, as I think about the reserve ratio moving forward, I understand that the consumer book is running off, but as the acquired book also runs off, I'm assuming that, that's carried at a -- if we segment the buckets for the loan loss reserve between origination and acquire -- originated and acquired, I'm assuming that, that acquired bucket is -- the reserve ratio on that is a little bit higher. And so as that runs off, does that also, I guess, add to the loan loss reserve ratio moving lower over time?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [37]

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Yes. I don't think that's going to impact it that much in terms of the acquired book, especially the good acquired book, which is what we're putting the reserve up at, which is pretty much in line with legacy unions reserving. So I wouldn't expect that, that's going to be a driver. There is, of course, the PCD, the purchase credit deteriorated, but that's not a big number for us here.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [38]

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Okay. And then on the share repurchases, just comparing the press releases, it looks like you bought back about $45 million worth of stock this quarter. Just want to know if you had the shares repurchased or the average price that you repurchased through that just for the fourth quarter.

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [39]

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Yes. I think in total, it's like $36.91 since we started. In the fourth quarter, it was -- I think it was about $37.30 or so, $37.40.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [40]

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Okay. Great. And I guess, just going back to the NIM guidance, you said you sort of expected it to stabilize in this 3.35% to 3.40% on a core basis. Is that GAAP core NIM that you're guiding to?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [41]

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What you say, GAAP?

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [42]

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Yes. I mean you provide -- yes, you provide an FTE and the GAAP margin in your press release. And so just thinking about the core margin on a GAAP and an FTE basis?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [43]

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Yes, that's FTE basis that we're talking about here.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [44]

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Okay. So it sounds like maybe just a little bit more compression in the first quarter and then sort of stabled up from there?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [45]

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Yes. That's about right.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [46]

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Okay. All right. Just wanted to touch on what percent of loans -- the loan portfolio is tied to LIBOR and how much of that is 1-month LIBOR?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [47]

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Yes, the total book, about 24%, is tied to 1-month LIBOR. So it's pretty sensitive to that LIBOR rate. And as you know, it declined quite a bit in the fourth quarter, about 38 basis points, I think. So that was a big driver of the loan yield compression you saw -- we saw this year.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [48]

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Okay. Okay. And what percent of the portfolio is tied to prime?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [49]

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About 12% -- 12% to 13%.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [50]

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Okay. And I'm assuming these loans sort of repriced throughout the quarter on a monthly basis?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [51]

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Yes, that's right. Some of it relates to a back-to-back loss, which we priced a little more. I guess about -- on a monthly basis, I think, they typically reprice.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [52]

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Okay. And then on the CD book, I guess, I was a little bit surprised to see the cost of CDs, flat to up 1 basis point, just given some of what I saw you were doing on the CD pricing front in the quarter. And so I guess, what was the driver of that? And what could we expect for time deposit cost moving forward?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [53]

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Yes. I think, well, you should be seeing those coming down. I think that's a reflection of some of the higher rate CDs that we were running as promotions during the second and third quarter that are playing out, but you can expect to see those rates coming down as we've lowered the rates over the last 2 quarters. So going into next year, you'll see those declining as you'll see money market rates start to come down as well.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [54]

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All right. And then just a couple of quick ones left. The mortgage was a little bit weaker than I was looking for. And it looks like refi volumes weren't quite as strong as I would have thought. Just wanted to better understand what drove that?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [55]

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Yes. Actually, I think in terms of what our expectations were, it came in pretty well when you consider that fourth quarter is typically a lower seasonal quarter for mortgages. So we feel pretty good about that. So we were expecting it to tick down for the quarter.

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Broderick Dyer Preston, Stephens Inc., Research Division - VP & Analyst [56]

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Okay. And then wealth management. You had a pretty good -- a pretty strong quarter in terms of AUM. I wanted to get a sense for how much of that was market related versus new inflows? And what your outlook for 2020 for that business might be, just given some of the leadership changes?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [57]

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Yes. Actually, I would say a lot of what you saw there was driven by the market, in terms of driving AUM up, less so of new business coming in, although we did have some coming in. Remains to be seen in terms of expectations in 2020. Our new leadership there is undergoing a review of the entire business unit. And we do expect to see an uptick there, but some of that's dependent on where the -- some of it's market-driven as well in terms of AUM, so we'll see where we go from there. But taking that out of the equation, we do expect to see some positive momentum in that business, but it's pretty -- it's too early to tell at this point.

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Operator [58]

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Your next question comes from the line of Laurie Hunsicker from Compass Point.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [59]

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Rob, I just wanted to go back to margin. Again, I know you've talked a lot about it. But directionally, as we look at just the accretion income piece and I'm thinking about reported margin, I just want to make sure that I have this right apples-to-apples because accretion income was so big this quarter. So if we're looking at it going forward, your reported margin -- just keeping in line with your comments on your core margin, your reported margin probably is going to track in that 3.45% to, like, high 3.40s, 3.48%, 3.49% range. Am I going up the right way?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [60]

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Yes, I've got it at 3.45% to 3.50% depending on core. That's right.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [61]

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Okay. Perfect. I just wanted to make sure I got that right. Okay. And then just a few things on expenses here. Just specifically 3 line items that looked outsized. And I wondered if you could help us think about that around your comments: the technology, the professional and the marketing, was there any onetime items that drove those higher?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [62]

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Not really, other than -- and the marketing uptick, we had some credits in the third quarter, which did not recur in the fourth quarter. So the fourth quarter was a bit more of a run rate basis for marketing. In terms of technology and processing, we're starting to see the impacts of some of the initiatives that we put in place during the year. For instance, Zelle adds to specific processing costs, et cetera. So there's an uptick related to some of those items that started to come through in the fourth quarter. And the other item, which one was that? That was...

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [63]

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So just the technology -- yes, and the professional fees for...

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [64]

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Yes, professional fees, we do have some consulting expenses we're incurring related to some of the initiatives that we're putting in place. We're putting in a new deposit pricing platform that we've spent some consulting dollars on. We've got some other projects, robotic automation, as John alluded to. So there's some consulting related to strategic initiatives that's embedded in those numbers.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [65]

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Okay. And so I guess -- and one more question, as we think about the branches that you closed, obviously, no more or at least in the near term, no more rebranding or branch closure expenses, but are the cost saves from those branch closures now fully phased? Or are we going to see...

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [66]

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Yes, yes. So we -- that's what it's about. I think we said about $400,000, $500,000 a quarter that we did see in the fourth quarter.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [67]

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Okay. And then where do you guys stand in terms of thinking about branch closures for this year? Are you feeling good about the number?

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [68]

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All right. We feel pretty good about where we are in terms of the culling that we've done, a, something that we are exploring and we're about to do one is we have an opportunity in Richmond, where we're going to go essentially close 2 branches and move them into 1 new, better location. And as we assess the franchise, and I'll ask Shawn O’Brien, Head of Consumer Banking to comment, we think we could replicate that model, end up with better located, fewer branches in metropolitan markets and lower our expense run rate. Shawn, we don't want to get into too much detail, but any perspective you'd share on that?

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Shawn E. O’Brien, Atlantic Union Bankshares Corporation - Executive VP & Consumer Banking Group Executive [69]

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Yes, all I'd add is that, through acquisition, we have some branches that aren't super consistent with our brand and not necessarily in the best shape. And so we'd like to get a little bit less of a dense franchise footprint. And I think we can do that probably by taking out 14 -- 12, 14 branches over time and consolidating them into 7 newer branches. So that's kind of what we're looking to do. But that's a bit of a long-term play as we build out those new branches.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [70]

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Okay. Okay, great. And then, John, you mentioned, through 2019, you had hired 39 people from BB&T, SunTrust. How -- are you still actively looking to hire? And then just of those 39, how many people are part of your C&I team?

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [71]

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I guess the answer is, we're always in the market for talent, and we are not going to have a big net add. A lot of -- those were not all net adds to be very clear. And so we had, I would say, a good half of that number would be various roles in the retail bank, especially Branch Managers were an outstanding alternative for really bankers coming out of these larger organizations, and I'm looking at Dave Ring on here. Maybe, best guess, maybe 40% or so of those would be commercial banking related. Everything from relationship managers...

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David V. Ring, Atlantic Union Bankshares Corporation - Executive VP & Commercial Banking Group Executive [72]

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About 15 between commercial originators and credit-oriented folks. And for this year, it probably adds in the single digits in total. But it's -- like John said, it's more of a net number because we have retirements and other things that you will replace this year.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [73]

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Right. Great. Okay. One last quick question here. Question for you, Rob. Your third-party consumer, what is the balance? And then of that, what's lending club?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [74]

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Yes, in terms of the lending club, we're about $118 million at the end of the quarter. So that was down about $22 million or $23 million. And on that front, Laurie, by the end of this year, we expect to be less than probably 15 or less as it continues to run off.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [75]

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Great. And then do you have the number for what your third-party consumer originated? I know most of it's lending club, but with the total?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [76]

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Yes. We had about another, in terms of service finance, we have about $100-and-some-odd million in that third-party program, which we'll also be running down this year as well.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [77]

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Okay. So you're still -- you're right around $200 million, $220 million?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [78]

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Yes, a little over -- yes, probably more like in the $225 million, $230 million range.

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Operator [79]

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Your next question comes from the line of Eugene Koysman from Barclays.

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Eugene Koysman, Barclays Bank PLC, Research Division - Research Analyst [80]

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I wanted to follow up on your loan growth target for 2020. Can you share how much of that 6% to 8% loan growth, are you expecting to come from the legacy Truist customers?

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [81]

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No, we cannot do that.

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Eugene Koysman, Barclays Bank PLC, Research Division - Research Analyst [82]

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That's fair. And can you help us maybe give us some color on how your initiatives to go after the Truist customers are progressing?

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [83]

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Very well. If I -- I'll ask Maria Tedesco, President of Atlantic Union Bank to provide some commentary. We have a comprehensive set of initiatives. Now the timing of some of these has changed a bit. Certain guerilla-marketing tactics for branches that are going to be consolidated doesn't really make a lot of sense at this point in time. Maria, do you want to speak, just in terms -- at high level, how project -- forgive me, I just said it, Project Sundown, for those of you who don't know it, is our formerly secret codename, but we're taking advantage of the SunTrust-BB&T disruption. I hope you see the humor in sun down?

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Maria P. Tedesco, Atlantic Union Bank - President [84]

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Well, again, we see this as a multiyear opportunity. This is -- we're planning on a marathon event with initiatives to go over the next couple of years. But much of what you see us doing now, closing the gap to our sort of competitive set is exactly what we're doing. So those are like the short-term plans, but we see this as an offensive plan. We know this disruption. We're at ground zero to this event. And we have a sense of what will happen that will be disruptive to customers that will make it opportunistic for us. So those initiatives, without getting into much detail, really set against what we believe could be the time line of disruption. And literally, every business has their plan in which to be offensive and be opportunistic.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [85]

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And recognizing that this is a public forum, we don't want to show our hand too much, but rest assured, there's a very robust action plan to Maria's point, each line of business has a very targeted set of initiatives. And I would reiterate, this is a multiyear disruption. It has begun. This will play out for years.

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Maria P. Tedesco, Atlantic Union Bank - President [86]

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Yes. And I think you'll see a lot of the initiatives that we've even talked about today on this call help us be a stronger competitive positioning in the market, but certainly, those were specific product gaps.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [87]

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And on the commercial side, we do discretely track clients that we have won coming out of BB&T or SunTrust. And trust me, there is a list, and it's growing. We're not going to get into details, but we're having pretty good success chipping away at that.

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Eugene Koysman, Barclays Bank PLC, Research Division - Research Analyst [88]

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That sounds pretty good. Given the number of technology initiatives you've talked about. Can you share with us what is your technology budget for the last year and for 2020? And maybe help us understand how much of it you're spending to run the bank versus innovate the bank?

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [89]

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Yes, I don't want to answer the former question Eugene, in terms of too much specificity on exactly what we're using for digital strategy. In some respects, there's certainly a dollar cost issue here. One of the bigger constraints for a midsized bank like us, candidly, is not so much the dollars, although that's important, is having the subject-matter experts available to work the project. And that is the single biggest reason why we don't want to do a very near-term acquisition because we would take those very same people off-line to work on a merger conversion integration. And when you've been focused on laying this out -- Rob, do you -- what, if anything, would you share in terms of how much do you think we're spending on new -- it would be a relatively small portion?

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Robert Michael Gorman, Atlantic Union Bankshares Corporation - Executive VP & CFO [90]

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Yes, I think incrementally, you're probably talking about maybe a 10% increase year-over-year from what we've normally got down on that. So incrementally, including all the digital type investments we're making, all the automation, the Zelles of the world, the nCinos of the world. So I would say, probably a good 10% increase in our budget related to technology.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [91]

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And then beyond technology budget, per se, you have to think holistically. I'm looking at Kelly Dakin now, who's Head of Digital Strategy and Customer Experience. Kelly, how many people on your team now to date?

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Kelly P. Dakin, Atlantic Union Bankshares Corporation - Chief Digital and Customer Experience Officer [92]

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There are 17 people that support digital strategy and another 3 that support customer experience.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [93]

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And when I got here, it was probably 1.5. And you've been here just under a year, and how many did you walk into?

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Kelly P. Dakin, Atlantic Union Bankshares Corporation - Chief Digital and Customer Experience Officer [94]

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I walked in, there was about 4 people.

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John C. Asbury, Atlantic Union Bankshares Corporation - President, CEO & Director [95]

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About 4, so there you go. So it's people as well who are working on these initiatives. And you could expect to see, on the digital strategy side, that the idea is to have essentially a quarterly release schedule. And so there's a plan that goes out for a long, long time in terms of a time line of things you want to do, everything from continuous upgrades to the mobile banking suite of offerings, new product initiatives. Some of this needs to be modulated. If we were in a higher-rate environment, frankly, we'll be doing more than what we're doing right now. But we're going to do the things that need to be done. I'm sorry, Eugene, that's probably about as much clarity as we're willing to share publicly.

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William P. Cimino, Atlantic Union Bankshares Corporation - SVP of IR [96]

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Thanks, Eugene. And thanks, everyone, for calling in today. As a reminder, we'll have a replay available on our investor website, investors.atlanticunionbank.com. We look forward to talking with you next month. Have a good day.

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Operator [97]

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This concludes today's conference call, you may now disconnect. Thank you for your participation.