Atlantic Union Bankshares Corporation

Good morning. My name is Kyle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Union Bank Shares first quarter earnings call. All lines will be placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, simply press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. Thank you. Mr. Bill Cimino, Vice President, Investor Relations, you may begin your conference.

Thank you, Kyle, and good morning, everyone. I have Union Bank Shares President and CEO John Asbury and Executive Vice President and CFO Rob Gorman with me today. We also have other members of our executive management team with us for the question and answer period. Please note that today's earnings release is available to download on our investor website, investors.bankatunion.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 first quarter of 2019. Before I turn the call over to John, I would like to remind everyone that on today's call, we will make forward-looking statements which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise any forward-looking statement, and please refer to our earnings release for the first quarter of 2019 and our other SEC filings for further discussion of the company's risk factors and 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.

Thank you, Bill, and thanks to all for joining us today. Union began 2019 with a solid first quarter. To start, we closed the acquisition of Access National Corporation, completing the last piece of the Virginia jigsaw puzzle by adding a strong franchise in northern Virginia. announced that we intend to rebrand the bank to Atlantic Union Bank on May 20th, concurrent with the Access Systems conversion. Delivered strong deposit growth, and loan growth was in line with our expectations given the seasonally low loan demand in the first quarter and our strong finish to the fourth quarter. We showed year-over-year improvements in our operating profitability metrics. As communicated previously with the addition of Access, we have stepped up our financial targets, which we expect to achieve in late 2019 and in 2020. They're as follows, operating ROA between 1.4 and 1.6 percent, operating return on tangible common equity between 16 and 18 percent, and an operating efficiency ratio at or below 50 percent. Just like in 2018, we expect the first three quarters of 2019 to be noisy as we complete the access integration We expect to achieve our stepped-up financial targets on an annualized basis in fourth quarter 2019 once the access cost saves are materially complete. We do have a slightly different timeline for our wealth management integration, which will not have its systems conversion complete until early 2020. 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 quarter, We had a good start with loan growth around 3% annualized for the quarter. The first quarter is traditionally a slower quarter for loan growth, particularly after such a strong finish to the fourth quarter as we had. And we saw levels of commercial real estate paydowns remain higher than historical trends, and that's been a consistent issue over the past few quarters. CNI line utilization during the quarter remained steady at approximately 41%. Having said that, the former Access franchise posted mid-single-digit growth in loans for the quarter with its loan growth outperforming Union on a pro forma basis. Access's deposit growth was slightly lower than its loan growth. The Union and Access teams are energized by the combination, and we're competing well together out in the marketplace. Our pipelines are higher now than at this point in the first quarter of 2018 and at the beginning of 2019, and they're also better balanced. We continue to expect full-year 2019 loan growth to be in the high single-digit range, which means 7% to 9%. On a pro forma basis, as if the access balances were included for the full quarter, we had 8.6% annualized growth in deposits during the quarter. We saw a good balance between consumer and commercial deposit growth during the quarter, some of which is seasonal. We continue to believe that we can deliver deposit growth in the upper single digit range for the full year to match loan growth, but not necessarily at every quarter. Turning to our 2019 priorities, we're off to a strong start for the year. As I've said since I arrived, setting goals, tracking back to them, and delivering results is fundamental to how we manage this company. Here are our previously communicated 2019 priorities. First, diversify loan portfolio and revenue streams. We continue to diversify our loan book as evidenced by continuing growth in CNI loans, owner-occupied real estate, and the addition of Access's loan book. We're especially encouraged by the reception we're receiving in the marketplace with our commercial banking emphasis. We can compete against anyone in the small to mid-sized commercial space, which covers 99% of all Virginia businesses. As Virginia's irrefutable regional bank, We're building a reputation as a capable, responsive local alternative to the super regional and national banks. It's fair to say we have now positioned ourselves as the home team in Virginia, and we continue to learn how to more effectively leverage our home field advantage. Next, growing core funding. Our loan-to-deposit ratio was approximately 95% in line with our long-term goals. As I've mentioned in the past, we've increased our focus on gathering deposits, installed a competitive treasury management system, and built out our treasury management sales teams. We're excited about the ability to scale and replicate a number of business deposit gathering strategies we've learned from Access, especially in our metropolitan markets. Next, managing to higher levels of performance. As noted, the quarter was noisy with the closing of Access, but when we look at it year over year, We improved all of our operating profitability metrics, and we've made progress toward hitting our top-tier financial goals. Next, strengthen digital capabilities. We are making steady progress in this space, and after the Access Core systems conversion, we intend to direct the freed-up program management capacity against our digital strategy. As a reminder, we view digital as a way of doing business and a way of thinking and not a collection of discrete products and projects. We will increasingly apply digital technologies throughout the company to improve the client and teammate experience. Digital will underpin all that we do to realize our value proposition of making banking easier, which is the next priority, making banking easier. We've begun with implementation of Encino, an end-to-end loan origination system for our commercial banking teams. The former access teams will implement this in conjunction with the core systems conversion. Having a paperless end-to-end loan origination system will make banking easier for both our commercial clients and our own teammates by reducing cycle times, eliminating redundant data entry, and providing better insight into status, performance, and improvement opportunity. We've demonstrated tremendous progress and focus on commercial banking over the past two years here at Union, and we've now initiated a similar transformation to our consumer banking division. I am convinced we have not yet realized our growth potential for consumer banking, and we have a lot of work to do here. With the right consumer leadership now in place, we're ready to take this on. During the quarter, Sean O'Brien joined our management team as our consumer banking executive. Sean has an impressive balance of experience between consumer operations, strategy, and digital, and like the rest of the executive management team here, Sean brings significant experience in larger scale, more complex institutions before joining unions. With the breadth, depth, and strength of consumer banking experience we now have in Sean and our president of Union Bank and Trust, Maria Tedesco, I feel we have a highly differentiated consumer banking leadership skill set compared to other mid-sized banks. This is important because we hope to mirror our great commercial banking success with our consumer banking transformation. Maria often notes how our consumer journey starts off in a much better place than past transformations she's led, because a cultural drive to deliver a great customer experience already exists here at Union. While we're proud of the numerous customer service awards we have earned and continue to earn, we need to do much more than simply provide a pleasant banking experience, and we will. Our transformation will focus on streamlining the operational demands placed on the branches so our teammates have more capacity to deliver customer needs-based relationship banking. We will segment our branch network to ensure that the branches are geared towards serving the specific opportunities of their trade areas. This is a more sophisticated approach than our historically one-size-fits-all consumer banking strategy at Union. An example is our plan to replicate the deposit-gathering branch structure of access and business-intensive metropolitan trade areas that will support it. This effort is just getting underway, and we'll continue to update you on our progress throughout the year. and last, integrate Access National Corporation. We had a smooth legal closing on February 1, and the core systems integration planning work for the weekend of May 18 is nearly complete. We held a simulated conversion over the March 23 weekend, and it went very well, so well, in fact, that we canceled our planned second simulated conversion, deeming it unnecessary. Having learned from the Zenith integration, the teams are executing well against our playbook, having built a reliable, replicable process and change management framework. I'll now touch on three other topics from the quarter before turning it over to Rob. First is our new brand, Atlantic Union Bank, which will go live on May 20th. Having a unified bank brand and a distinct wealth management brand throughout Virginia, Maryland, and North Carolina reduces brand complexity and ensures recognition and clarity in the marketplace. Atlantic Union Bank retains our 100-year union focal point while incorporating our recent geographic expansion throughout the Mid-Atlantic. Middleburg Financial creates a wealth management brand separate and distinct from the bank while building on the long-established brand equity from Middleburg Trust. We're excited about the brand possibilities these two names will create in the marketplace. Also, if approved at our shareholder meeting on May 2nd, we will change the name of the holding company to Atlantic Union Bank Shares Corporation on May 20th, matching the name of the bank. We will also change our stock trading ticker to AUB to reflect a new company name. Next, I want to comment on our current thinking regarding our geographic markets and future expansion plans. We believe that our platform, irrefutably Virginia's regional bank, with the potential to become the Mid-Atlantic's regional bank, is capable of competing successfully against the national and super-regional banks, and that we have a unique opportunity to take advantage of disruption in our marketplace. The embedded organic growth potential for Atlantic Union Bank combined with the potential disruption caused by a merger of two large competitors, gives us a unique opportunity in which we're laser-focused. While we can't predict what other opportunities may arise to build out our franchise, our intentions at this time are to focus on organic growth, close any remaining competitive gaps, harness the power of this great franchise across our mid-Atlantic footprint, build the bank one customer at a time, and deliver on our promise of making banking easier. Finally, credit quality remains strong. The economy and our footprint is steady, and we do not see evidence of systemic changes to our credit environment. Charge-offs declined to 15 basis points annualized, and we saw reductions in non-accrual loans from the fourth quarter. 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 for the bank, 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 something like 2017 and 18 from a credit quality perspective, barring some unexpected change in the macroeconomic environment. As you've heard me say each quarter since I arrived, I believe problem asset levels at Union and across the industry 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 that from this vantage point, we don't see it happening in 2019. In summary, Union started off 2019 on the right foot, making progress against our six strategic priorities with strong deposit growth and loan growth expected to reach high single digits for the year. We're excited to have the Access and Middleburg teams now a part of Union, and we look forward to our May 20th rebranding as Atlantic Union Bank. I remain highly confident in what the future holds for Union and the potential we have to deliver long-term, sustainable performance for our customers, communities, our teammates, and our shareholders. I'll close with a familiar message. Union 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. Our combination with Access National Bank an attractive Virginia economy made even more so by the implications of the coming Amazon HQ2, incremental growth opportunities in our North Carolina and Maryland operations, and what we believe will be a multi-year disruption with two of our largest competitors only further strengthens the already strong hand we hold. And we play that hand every single day. And I'll turn the call over to Rob to cover the financial results for the quarter. Rob?

Well, 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 Union's financial results for the first quarter. Please note that our first quarter results only include two months of financial results from ACCESS as we close the transaction on February 1st of this year. Before we get started, I'd like to share some data points as they relate to the ACCESS acquisition that should also be kept in mind as we review the first quarter's financial results. The fair value of assets that we acquired equaled $2,858,000,000, while the fair value of liabilities assumed equaled $2,559,000,000. Total goodwill rising from the transaction equaled $201,000,000. Total loans acquired totaled $2,217,000,000, with a fair value of $2,176,000,000. The loan mark came in at approximately 1.9% or $41.1 million. Total deposits assumed totaled $2,228,000,000, with a fair value of $2,227,000,000. Core deposit intangibles acquired totaled $41,000,000, or 2.2% of core deposit balances acquired from access. Since this is our first quarter reporting consolidated numbers with access, I don't think that it would be meaningful to discuss the year-over-year or linked quarter trends, although I will make references to trends in areas that make sense to do so. We'll have a more robust link quarter discussion for the second quarter call. Please note that, for the most part, my commentary will focus on union's first quarter financial results on a non-GAAP operating basis, which excludes $14.6 million in after-tax merger-related costs, but includes losses from discontinued operations of $85,000 and approximately $322,000 in after-tax expenses related to the company's previously announced rebranding to Atlantic Union Bank. For clarity, I will specify which metrics are on a reported versus operating basis. In the first quarter, reported net income was $35.6 million, and earnings per share came in at 47 cents. Reported return on assets was 92 basis points. Reported return on tangible common equity was 11.84%, and the reported efficiency ratio was 70%. On a non-GAAP operating basis, which as noted excludes 14.6 million in after-tax merger-related costs. Consolidated net earnings for the first quarter were $50.2 million, or 66 cents per share. Non-GAAP operating return on assets was 1.3%, up nine basis points from the first quarter of 2018. Non-GAAP operating return on tangible common equity came in at 16.27%, which is up 27 basis points compared to the prior year's first quarter. And the non-GAAP operating efficiency ratio improved by 2% to 54.4% compared to 56.4% in the first quarter of 2018. As John noted in his comments, we expect further improvements to these financial metrics throughout this year and next with the addition of access, and have raised our top-tier financial metric targets accordingly. As John mentioned, the new targets are operating ROA between 1.4% and 1.6%, operating return on tangible equity between 16% and 18%, and an operating efficiency ratio at 50% or lower. We expect to achieve these new targets on a quarterly basis in the fourth quarter of this year and on a full year basis in 2020, once we have fully integrated access and realize the strategic and financial benefits of the combination. Now turning to the major components of the income statement, Tax equivalent net interest income was $130 million, up $18.9 million from the fourth quarter, due to higher loan growth and the addition of access. The current quarter's tax equivalent net interest margin was 3.8%, an increase of 10 basis points from the previous quarter. It was up eight basis points from 2018's first quarter. Net accretion of purchase accounting adjustments for loans, time deposits, and long-term debt added 16 basis points to the net interest margin, in the first quarter, which is up from the fourth quarter's 13 basis point impact, primarily due to the additional increase in income related to the access acquisition. The increase in the tax equivalent net interest margin was principally due to an 18 basis point increase in the yield on earning assets, partially offset by an eight basis point increase in the cost of funds. The quarterly net increase in earning asset yields to 4.92% was primarily driven by higher loan portfolio yields which improved by 19 basis points to 5.27% during the quarter due to the impact of increased short-term interest rates on variable rate loan yields, which added 13 basis points to the loan yield increase, and higher increase in income, which contributed six basis points of the quarter-over-quarter loan yield increase. The quarterly eight basis point increase in the cost of funds to 112 basis points was primarily driven by higher deposit costs which increased 10 basis points from the fourth quarter to 86 basis points, as well as a day count difference between quarters. These increases to the cost of funds were partially offset by favorable changes in the overall funding mix between quarters, which lowered the cost of funds. The provision for loan losses for the first quarter was $4 million, or 15 basis points on an annualized basis. For the first quarter of 2019, net charge-offs were 4.2 million or 15 basis points on an annualized basis, compared to 5 million or 21 basis points for the prior quarter, and 1.1 million or five basis points for the same quarter last year. As John noted, the majority of the charge-offs came from non-relationship third-party consumer loan portfolio. Non-interest income increased 1.4 million to 24.9 million for the quarter, ended March 31, 2019, from $23.5 million in the prior quarter. The increase in non-interest income was primarily driven by the acquisition of access, partially offset by a decline in other operating income of $1.4 million, primarily due to life insurance proceeds of $976,000 recognized in the fourth quarter of 2018. Excluding merger-related costs and amortization of intangible assets in the first quarter of 2019, In the fourth quarter of 2018, respectively, operating noninterest expense increased $15.1 million or approximately 22% to $84.4 million when compared to the fourth quarter of 2018. The increase in operating noninterest expense was primarily related to the acquisition of access as well as salaries and benefit expenses increased primarily due to seasonal increases in payroll taxes and annual merit adjustments. Importantly, we are on track to hit our $25 million access-related merger cost savings targets over the course of the year. First quarter expenses also included $407,000 of rebranding-related costs. Going forward, we expect to incur an additional $6 million in rebranding costs over the next two quarters, the bulk of which will be spent in the second quarter. In addition, we expect a capitalized cost of approximately $6 million related to the installation of new Atlantic Union bank signage across our footprint, which will be depreciated over a five-year period. The effective tax rate for the fourth quarter came in at 14.9 percent compared to 16.5 percent in the fourth quarter. The decrease in the effective tax rate was primarily due to the increase in merger expenses related to the access acquisition. For the full year, we're expecting an effective tax rate in the range of 16.5 to 17 percent in 2019. Now turning to the balance sheet period, total assets stood at $16.9 billion at March 31st, which is an increase of $3.1 million from December 31st, primarily the result of the access acquisition. At quarter end, loans held for investment were $12 billion, an increase of $2.2 billion, while average loans increased $1.6 billion from the fourth quarter. On a pro forma basis, as if access balances were included for the full quarter, Loans held for investment increased $86 million, or 2.9 percent, annualized from December 31st levels, pro forma levels. Looking forward, as John mentioned, we continue to project upper single-digit loan growth for 2019 with some seasonal variability between each quarter. On March 31st, total deposits stood at $12.5 billion, an increase of $2.5 billion from December, while average deposits increased $1.5 billion from the prior quarter. On a pro forma basis, as if access were included for the full quarter, deposits increased $260 million or 8.6% on an annualized basis. Deposit balance growth was driven by increases in demand deposits, money market, savings, and time deposit balances. Turning to credit quality, non-performing assets totaled $32.2 million or 27 basis points as a percentage of total loans. They climbed to 1.5 million in eight basis points from fourth quarter levels. The allowance for loan losses was relatively unchanged from December 31st at $40.8 million. The allowance of the percentage of the total loan portfolio decreased eight basis points to 34 basis points at quarter end, primarily due to the acquisition of access. As a reminder, in acquisition accounting, there is no carryover of previously established allowance for loan losses from the target. So to summarize, our first quarter operating results demonstrate the significant earnings capacity we envisioned as Virginia's regional bank and the company continued to make progress toward its strategic growth objectives. The access merger integration work is on track 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 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 up the questions from our analyst community.

Thanks, Rob. And Kyle, we're ready to start taking some questions, please.

Ladies and gentlemen, at this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. Again, that would be start, then the number one on your telephone keypad. Your first question comes from the line of Catherine Miller from PBW. Your line is now open. Thanks.

Good morning. Good morning. We'll just start with the margin. Rob, I might have missed this, but can you give us an update on your outlook for the core margins? now that we're in a flat rate environment. I believe last quarter you didn't have rate hikes in your guide anyway for the margin, but if you could just confirm that and talk about your outlook there. Thanks.

Yeah, Catherine, this is Rob. In terms of the go forward, our current modeling has an assumption regarding rates is that it won't be a rate increase by the Fed this year. We actually have modeled in a rate cut in the fourth quarter. That said, we came in a bit higher than we guided to on a core margin basis, about seven basis points higher than fourth quarter at 364%. We do expect, and this is a new story, it's not affecting our guidance going forward. We still expect that the margin will be stable with a bias to compression in the one to two basis points a quarter as we go up throughout this year. So, again, the guidance is pretty much in sync with our fourth quarter guidance in terms of the compression, but it's starting with a higher base.

Now, if we don't get a rate cut in Q4, then we would have a different expectation.

Yeah, I would say if we don't have the rate cut for this year, it really doesn't affect this year because we're talking about December. But going into next year would certainly help if we didn't get that cut. But that's our modeling assumption at this point, Catherine.

Okay, great. So we're coming from a higher base, but still one to two BIPs down per quarter through the back half of the year.

That's right, yes.

Okay, great. And then on the expense side, so you said you're still on track for the $25 million of access target expense savings. How should we think about how much is in this quarter and kind of what expense run rate you're thinking about with access fully folded in?

Yeah, really not much of expense savings during this quarter. I think maybe a couple hundred thousand since we only acquired the access in February. Going forward, you can start to see that start to increase in the second quarter. Maybe a couple of million we'll get out of the second quarter, and then we'll get the full run rate towards the end of the third quarter once we do the conversion, core conversion in May. really late in the third quarter is probably when we get to a run rate of that 25 million. So going forward, if you look forward to the fourth quarter, we're talking about probably about 87, 86, 87 million run rate if you exclude amortization and maybe closer to 89 to 90 if you include the amortization, intangible amortization.

Okay. And how does the name change impact the timing of achieving cost savings. Is there any – is that changing at all? Or I guess you're changing the name in May, and that's right around the conversion is.

Yeah, no, it doesn't affect it at all other than, you know, we have increased expenses to get it done. We are working from an integration point of view. Rebranding is integrated into our conversion schedule and all the integration work we're doing, so there's really no impact on it from a delay of cost savings.

Great. All right, thanks for the quarter.

Thanks, Catherine. We're ready for our next caller, please.

Your next question comes from the line of Casey Whitman from San Leonio. Your line is now open. Hi, Casey.

Hey, good morning.

Good morning.

We touched a bit on the margin. Just wondering, you mentioned coming into the quarter, I think the guide was for it to be stable with the bias down. So just curious what you attribute the success and expansion of the margin this quarter to. Was it access, organic, or sort of how should we think about the sort of new margin here?

Yeah. Yeah, just back on the guidance that we gave in the fourth quarter call in January, we had indicated that we would see some uptick in the first quarter margin just due to the rate that the Fed moved in December, which has certainly helped our variable rate book did reprice, HELOCs, et cetera. As a reminder, we have about 48% of our loan portfolio is variable rate, of which about 40% is either prime-based or one-month flyboard-based. So we So that helped the margin. We also saw a nice favorable funding mix. We had good growth in DDAs this quarter. We were able to pay down more than we thought in federal home loan bank or wholesale borrowing. So that also contributed to the more favorable first quarter results. Again, going forward, we do expect that one to two base points of compression over the next several quarters.

Okay, great. Thank you. And then Just to be clear on how you're treating the mortgage revenues that came over from Access, do you net out the mortgage commissions?

Yeah, so there may be some confusion. Access used to gross up the mortgage revenue and put commissions in non-interest expense. Post-acquisition, we have gone to our methodology, which is to net the commissions against the revenue. So if you were expecting to see higher mortgage-related revenue coming off of access. The reason behind the lower level is because we now have commissions going against that revenue.

Okay, helpful. Thank you. And then I might have missed this in your comments, or just to be clear, you mentioned, I think, an additional $6 million left in merger charges and then another $6 million in rebranding charges probably in the second quarter. Are those the numbers?

Yeah, that sounds about right. I didn't mention the merger-related costs, but we have incurred about $18 million this quarter, about $2 million in the fourth quarter. We had modeled that we come in about $38 million, so you should see probably at that level, the $6 or $8 million level in the second quarter, and that will taper off in the third. You're right on the expenses related to rebranding. That's $6 million. I expect about $4 million or so of that. will be incurred in the second quarter. There will be some post-second quarter costs related to rebranding in the third quarter, but we should be done by the end of the third quarter.

Thank you. I'll let someone else jump on.

Thanks, Casey. And Kyle, ready for the next caller, please.

Your next question comes from the line of Austin Nicholas from Stevens. Your line is now open.

Hey, guys. Good morning.

Good morning.

Maybe just on the high single-digit loan growth confidence, maybe you can talk a little bit about what you're seeing in the pipelines and then maybe more specifically kind of how you'd see that loan growth playing out over the year given you have the increasing C&I focus. I think there's some more seasonality there. So any comments on that would be helpful.

Yeah, I'll start, and then I'm going to ask head of commercial banking, David Ring, to chime in. So we're feeling good, and you heard us reiterate guidance for high single-digit loan growth for the year. We're doing that just based on one strength of pipelines. We're clearly up compared to where we were this time last year. Last year, we did ultimately book high single-digit growth in loans. Our production is very good. As we mentioned, commercial real estate paydowns continue. It's not really worse yet. than the last couple of quarters. It is definitely worse than what we saw a year ago, but production's up as well. So we're feeling good about that, and we won't get into details, but I can tell you we're off to a very strong start in Q2 in terms of loan growth, which only reaffirms our confidence. David Ring, what would you add? Bear with me. Let me make sure that your microphone is open.

Yeah, Austin. So what John said is very accurate. We have strong pipelines going into the second quarter, better than the pipeline was at the beginning of this year after the strong fourth quarter, much better, actually. And we had some deals that we expected to close in the first quarter move into the first two, three weeks of the second quarter, and they have closed. So we're really off to a very good start, and it The trend that we see right now is the high single-digit growth. So we feel very comfortable.

Can you speak to the mix of the pipeline, Dave? Sure. Versus just in general terms.

So the pipeline is pretty equally split between both CNI and commercial real estate. commercial real estate will close a little slower than the CNI because of its, you know, you're waiting for appraisals and environmentals. So we're going to see the CNI commitments close pretty quick. But it's 53% CNI, 47% commercial real estate, which is which is significantly different than it's been in the past.

And I would remind you, Austin, we had some pretty good additions to the commercial team last year. As you'll recall, those folks are maturing as they continue to come online. Access is now operating with the balance sheet as of this moment five times, which they're accustomed to having. And Access's loan growth in Q1 actually exceeded Union's. Because several reasons, one of which is they don't have the real estate pay down phenomena that we have in the union portfolio. So bottom line, we're feeling pretty good. And we think we're set up for a high single digit loan growth year.

And I would just add that our access team has come on board very fast. And their pipelines are strong as well.

Understood. Okay, that's helpful. Maybe just on fee income. Maybe just first on mortgage, I know you touched on the kind of disintegration or reintegration of that line item with the expenses and the fees. Are there any other hedging gains or fair value adjustments in that number that was reported this quarter that we should know about?

No, no other items of that nature. I will say, though, that You did see some decline in our wealth management-related revenues, primarily because of the fourth quarter dip. The AUM was down about 30% when you look at at least the legacy union side. The good news there is we've recaptured almost all of that in the first quarter, so that bodes well for increased revenue streams coming out of the wealth management business going forward. But no other... you know, hedging gains other than what's embedded in the mortgage business.

Okay. And then maybe just one quick one, tax rate. Should we still be thinking something like a 17% tax rate as we look forward from here kind of on a core basis?

Yeah. Yeah, we're guiding to a 16.5% to 17% rate for the full year. You may see that, you know, it will increase from first quarter to second quarter, maybe not up to that 17% level, but over the course of the year. you'll see that increase in average out to about 16.5 to 17.

Okay, great. Thanks for taking my questions, guys.

Thanks, Austin.

And Kyle, ready for the next caller, please. Your next question comes from the line of Lori Huntsicker from Compass Point. Your line is now open.

Hi, thanks. Good morning. I just wanted to go back to margin here, and I love the accretion income table that you provide, but Can you give us a sense just what the quarter of June will look like in terms of accretion income? I know you give it for the full year, but that will be our first quarter with access fully reflected. Yeah.

Yeah, I think you would expect to see about what we've recorded so far in the first quarter. Remember, some of the access only had – we only had two months of access, so that will increase in a bit. So I would say, you know, I would guide you towards – you know, about where we stand in the first quarter, maybe a little higher. Of course, some of that relates to paydowns, et cetera. We could see higher levels, but that would be because we got paydowns.

Okay. That makes sense. And so then as we're thinking about just fast-forwarding to the fourth quarter, backing into your full-year guide here of accretion income of $19 million, if we're using, you know, somewhere in the neighborhood of $3.5 million, to $4 million, that's suggesting then that your margin impact on accretion income will be closer to 11 basis points, so a sharp drop off from the 17 or so basis points that kicked in. So I'm just trying to think, relative to your core margin guide of going down, your reported margin could go from a $380 down to $369, $370. Am I thinking about that the right way on the reported basis?

Yeah, that's right, Lori. You'll see the report go down more than our core. I was referring to our core when we talked about the one to two blips. But that's right. It really depends on what accretion comes through. But based on what we provided you, that's not a bad assumption.

Okay, perfect. Just wanted to make sure I was thinking about that the right way. Okay, and then just I guess a bigger question for you, John. Obviously the BB&T SunTrust merger is certainly an exciting event. Can you help us think about how you're looking at the landscape, both in terms of branch closures, people pickup, required divestitures, and then specifically give us maybe a little bit of color around what's appearing to be the largest MSAs affected that you might care about, i.e., the Virginia Beach, the Winston-Salem, and the Durham Chapel Hill. Just any color you can give us around your thoughts would be great. Thanks.

Certainly, Laurie. At the highest level, we have... what we consider to be the two most formidable large bank competitors, both of which are very good but very different organizations coming together. Currently, BB&T is number two and Depository Market Share SunTrust is number four. On a combined basis, this will become Proforma, the number one depository market share bank in Virginia. I'll speak to our primary market. And that's about a 25% depository market share. Union, by the way, now slides into the number four position. It'll be BB&T, Wells Fargo, Bank of America, Union, and then we're 2X, the next largest. So this is going to be a big deal. Now, the set expectations, we think this will be a multi-year disruption, a multi-year opportunity. And it's not as if things are going to happen instantly, although admittedly we have had a pickup in hiring out of these institutions, but it's not dramatic. at this point. And I'm going to ask President Maria Tedesco to comment on this. We do have an organized effort around it. We believe that Virginia is effectively ground zero in terms of the most overlap, where you see the most combined operations. And I'll give you a statistic. In Richmond, they have about 75 branches between them. Could they close half their branches in Richmond? That's for them to decide. But could that happen? Yes, it could. The number one pro forma market by most analysts estimates for divestiture, required divestiture under the Herfindale Index will be Virginia Beach, Norfolk. Most are estimating they'll have to divest about $400 million of deposits there. Virginia has two, pardon me, three other markets that will make the list of estimated required divestitures. There's Charlottesville, Roanoke, in two markets in which we operate, much lesser dollars, and then Martinsville, where we don't operate. To my knowledge, that's the only state, Virginia, where they have four markets that are expected to have required divestitures. Number one in the entire system is Virginia Beach and Norfolk. So we think this is going to be a great opportunity. It's going to run the board in terms of businesses who have multiple bank relationships into the middle market, where we're clearly going to be the most likely alternative is they tout that we're now the sixth largest bank in the United States of America. That plays right into our hands. We hope they play that up really, really well. So we are the home team here, and we think this will be a long-term opportunity. And Maria, I'll ask you to comment and perhaps Dave.

Okay. Thank you, John, and I agree with everything you said. We have established a working team of subject matter experts from each of the business lines to help sort of plan our strategic roadmaps to leverage the market opportunity. And obviously, we want to grab our fair share and more of that opportunity. I would say that we're planning both sort of an offensive and defensive alternative to manage the points of disruption that we believe could happen. And quite frankly, there are points in time that more disruption will happen. So we want to be ready for it. These plans include both marketing, sales. You mentioned talent acquisition. There's also an opportunity This is an opportunity that's really going to play itself sort of over time. Like John says, it's not going to just happen in 2019. We think it's multi-year. The degree of the opportunity, quite frankly, is going to largely depend on their ability to execute. If they execute well, it will reduce it, but we believe that we have the strength in our brand and our people to be really surgical at times of those opportunities of disruption and You mentioned potential branch closings. We've certainly done our view of what potentially could happen in the market, how much disruption, and we're following along with plans, depending on the timing, to be ready to seize the opportunity, as an example.

And union leadership is well represented from SunTrust and, to a lesser extent, BB&T, so we are very, very wired in there. I also want to point out, don't forget about our North Carolina operations. I acknowledge my commentary was Virginia-centric, but we have commercial teams in Charlotte, Raleigh, and a relatively new operation in Greensboro. So we're going to have an opportunity there as well as Baltimore. So we think that there are a few banks in the country that are as well positioned as Union to potentially take advantage of this. I think they'll do a good job of putting these two together, but these companies are so very different that there's going to be friction. You can't have two leaders of everything. There will not be two commercial heads in Richmond. Someone's going to win. Someone's going to lose. And we think that that's going to free up opportunity. It's beautiful timing, too, for a consumer bank transformation, just in terms of loosening up potential consumer customers and, frankly, loosening up potential retail staff. So we probably will end it there. We're a fan of the combination, to be clear.

Great, thanks. Thanks, Lori. And, Kyle, we're ready for our last caller, please.

Your next question comes from the line there, Brantley, from Brien Capital. Your line is now open.

Hi, Blair. Hey, good morning, everyone.

Good morning.

Going back to your loan growth comment about 7% to 9%, how does that third-party runoff fit into that equation? And what is the size of that portfolio today?

Yeah, the total portfolio, Blair, is about $280,000. That's going to play out over, you know, we expect that over the two-year period, it's already run off a bit. But over a two-year period, you will expect to see that that's pretty much run out the door. By the end of this year, about half of that will be down.

In some of what's happening now, we've not done a lot in terms of consumer relationship lending. Mostly what we do is home equity lines. And so I think that with the new consumer leadership that we have, Maria's own background, importantly the access in Middleburg franchises, a focus like we've never had before and an opportunity like we've never had before on private banking style lending, we'll be able to backfill it. Third-party lending goes back, the roots of that go back to Stellar One, one of our predecessors, in a time when they had surplus capital, surplus liquidity, It did its job to fill a gap, but we don't really need that anymore. So we see that tapering down and we see that being backfilled with more relationship lending. And again, the franchise is perfectly positioned now to really take advantage of this. And again, that will play out over time as we let it wind down. It's not that large in the whole scheme of things relative to the total loan portfolio. So I think of it as sort of feathering in more relationship, consumer and private banking lending, and just letting that fade away.

Okay, thanks. And then any update on CECL, kind of where you guys stand and when we should need some more detail there?

Yeah, so CECL, as you know, we've obviously had a team working on that for the last year and a half. We're in good position on that. We've built our models. We've We've run some preliminary modeling against the model we have. We're not in a position to go out publicly with what we think the impact's going to be. I will say that it will be an increase to our current allowance. As you may know, a big component of the increase, at least at our level, Increase in the allowance when CECL comes on is because if you're acquisitive, you've got to put an allowance on the good book of acquired loans. So there's a bit of a double count going to happen. If you have a credit mark, you can't move that over to the allowance. So we do expect that there will be an increase. We'll be in a better position to provide commentary probably in the third quarter earnings call. But the model has been built. We've tested it. We now are validating with a third party. We'll run a parallel. We'll do the parallel run starting in the third quarter and then be in a better position coming out of that to provide some guidance publicly.

All right, great. Thank you.

Thanks, Blair. And thanks, everyone, for joining us today, and we look forward to talking with you in three months. Good night.

This concludes today's conference call. Give me now a disconnect.