Atlantic Union Bankshares Corporation. (NYSE:AUB) Q4 2019 Results Earnings Conference Call January 21, 2020 9:00 AM ET

Company Participants

Bill Cimino - VP, IR
John Asbury - President & CEO
Rob Gorman - EVP & CFO
Maria Tedesco - President
Shawn O’Brien - Executive Vice President & Consumer Banking Group Executive
Kelly Dakin - Head of Digital Strategy and Customer Experience

Conference Call Participants

Casey Whitman - Piper Sandler
Catherine Mealor - TBW
William Wallace - Raymond James
Brody Preston - Stephens Inc
Laurie Hunsicker - Compass Point
Eugene Koysman - Barclay

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Atlantic Union Bankshares Fourth Quarter and Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Bill Cimino. You may begin.

Bill Cimino

Thank you, Carl. And good morning everyone. I hope you enjoyed the brief set of news which is programmed. 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 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 statements. 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.

John Asbury

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 down 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 began 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 1st and converted their core systems in May, successfully an uneventfully rebranded the company to Atlantic Union and changed the stock trading symbol to AUB delivering 8% deposit growth while loan growth was 6% for the year. 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 Zimmermann in the fourth quarter to head up our Wealth Management Group, Middleburg Financial. Approved and rolled out our new three year strategic plan to our teammates, added an established equipment financing team to close a commercial banking products gap, launched Zelle and added nCino to address digital products.

Won a number of customer experience awards including the coveted number one ranking for the J.D. Power for the 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 no better.

Last, a focussed initiative to take advantage of the coming market disruption from the Truist merger. Rob will provide more details on the financial performance in his 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 of 15% and below. We made those updates then expecting to operate in a 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 expected 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 our average loans grew 3%. Q4 is predictably stronger seasonally in loan growth and we saw significant growth materialized later on the quarter. Headwinds to growth in Q4 with persistent trends of commercial real estate pay downs 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 ticked up from the third quarter. As a reminder, the access acquisition closed in February 1st 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 suggest the institutional, non-recourse for 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 the 6% to 8% range and maintain our loan-to-deposit ratio at our target of 95%.

Turning to Credit. Credit quality remains 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, we just mentioned continues to run-off.

Barring some unexpected change in the macroeconomic environment, we're not expecting a change in credit quality in 2020. As I have consistently said over the past three 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 as 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 three 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 has maintained 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 roadmap 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.

Diversify 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 one-third of our total loan portfolio. We stood up in equipment finance team in the fourth quarter to close the competitive gap in our commercial offerings and the team hit the ground running closing about twelve 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 overtime. 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 a 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 initiatives. 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 from the consumer bank and nCino and the commercial bank.

Middleburg Financial will have a comprehensive new wealth management platform in the first half of 2020 that will improve the client and team mate experience in closing important competitive gap.

We’re piloting a new Digital Account opening solution that simplifies the enrolment 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 Wi-Fi in all branches so that 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.

We probably 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 a traditional checking product to establish or re-establish 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 will roll that out across the system starting this month.

Debit card issuance time has been a pain point for our customers, and this was not 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 service on-boarding process and simplified documentation by developing a master’s services agreement that allows clients to easily add new services. We further expanded our TM products set with a number of new offerings, such as integrated pay and 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 with changing market place. 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 plants 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 out our Mid-Atlantic trade area. Our choice of Atlantic and 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 of value creating secondary strategy and that remains in 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 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 than by reiterating Atlantic Union Bankshares as 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 and 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 multi-year disruption with one 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?

Rob Gorman

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 the Atlantic Union’s financial results for the fourth quarter and for 2019. Please note that for the most part my commentary will 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 cost in the fourth quarter and also excludes $22.3 million in after tax merger related costs and $5.1 million in after-tax rebranded 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. 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 costs 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. And operating return on tangible common equity within a range of 16% to 18% and operating return on assets in the range in 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 interactive or lower for longer interest rate environment which we now expect will persist till 2021 we are revising our operating financial metric targets accordingly for 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 efficiency ratio of 53% or lower. The 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 third fourth quarter, which was up from the third quarter’s -- 13 basis points 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 point 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 points decline in the cost of funds.

The 18 basis points decrease in the quarter-to-quarter earning assets yield was primarily driven by a 17 basis point decline in the loan portfolio yield and a 3 basis point negative impact related to changes in earning asset mix in the quarter. The decline in the loan portfolio yield of 70 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 a significant declines in the one month LIBOR and prime rates. The 33 basis point earning asset yield decline resulting from changes in the earning asset mix from the prior quarter was due to the build-up 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 nine basis point decline in the cost of funds to 1% was primarily driven by a 28 basis point decline in wholesale borrowing cost, favorable changes in the overall funding mix between quarters and by lower interest bearing deposit costs, which declined six 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 run-off mode. For the year, net charge-offs were $20.9 million or 17 basis points.

Non-interest income declined to $29.2 million for the fourth quarter from $48.1 million in the prior quarter. The decrease in non-interest 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 on investment securities recorded in the third quarter.

Excluding these third quarter items, non-interest 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 non-interest expense decreased $15.6 million or 15% to $92.5 million when compared to the prior quarter. The decrease in operating non-interest 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 [Ph] 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 savings 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 31st, which was 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 loans, 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 run-off 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 30th 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 lowered time deposit account balance.

On a pro forma basis, as if the Access acquisition had closed on January 1st, deposit balances increased approximately 9% for the full year. Loan deposit ratio was 94.8% at year end, which is in line with our 95%. For 2020 as John noted, we expect to achieve deposit growth of 6% to 8% which will be inline with our loan growth expectations.

Now turning to credit quality, non-performing assets totalled $32.9 million or 26 basis points. As a percentage of total loans, a decline of $3.5 million or 4 basis points from the third quarter levels. The allowance for loan losses decreased $1.5 million from September 30th 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 would 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 1st, lifetime expected credit losses will now be determined using macro-economic forecast assumptions and management judgements 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 31st 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 one recognition.

From a shareholder stewardship and capital management perspective, we are committed to managing our capital resources prudently as a deployment of capital for the enhancement of long-term shareholder value remains one of our highest priorities.

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 the share repurchase program to purchase up to $150 million of the company's common stock through June 30 of 2021 in open market transactions or privately negotiated transactions.

As of January 17th, 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 at this time.

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 continue to make progress towards a strategic growth priorities.

We are revising our operating financial metric targets to reflect the challenging interest rate environment, which we expect will persist with 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.

Bill Cimino

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Casey Whitman from Piper Sandler. The line is now open

Casey Whitman

Hi, good morning.

John Asbury

Good morning

Rob Gorman

Good morning.

Casey Whitman

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

Rob Gorman

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 levels you see in the fourth quarter on a core basis, expect to be in about 335 to 340 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 that range could drop to the 330 to 335 range going forward.

Casey Whitman

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 expenses likely normalizing backup 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, but in 2020 is that -- does that still apply here or sort of what are your general thoughts about expenses in 2020?

Rob Gorman

Yes, that’s exactly right Casey So what we -- coming out of the fourth quarter we think we're at a run rate 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 the various technologies digital product and people etcetera including you know a wage inflation factor 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 in an average for three sort of quarters.

John Asbury

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 too, but there is a surge of activity going on in the company and we are -- we are making hay while the sun shines 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. But I would reiterate as 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 then including trend at the back-end.

Casey Whitman

Very helpful. And let's some else jump on.

John Asbury

Thank Casey.

Bill Cimino

Kyle, we're ready for our next caller please.

Operator

Your next question comes from the line of Catherine Mealor from TBW. The line is now open.

Catherine Mealor

Thanks. Good morning.

Rob Gorman

Hi. Catherine.

Catherine Mealor

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

Rob Gorman

Yes. So, in the terms of guidance on margins, as mentioned we feel like we're going to be stabilizing in the range you see in the fourth quarter. Some of that is -- when you look at the detail of that, we're going to see additional loan yield, earnings asset yield compression, not material, but we can offset that with additional reductions in our cost upon primarily on the cost deposit. 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 six-month promotional money market promotions out there. Some of which we'll reprice as we continue into this year. So we think there's opportunity there. That's a money markets, its came down about 30 basis points quarter-to-quarter. So we're expecting that will 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 cost we should be able stabilizing in this 335 to 340 range, again, assuming no rate cuts coming down the pike.

Catherine Mealor

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

Rob Gorman

Yes, right. So, as I mentioned, it was about three basis points of lower margin due to that liquidity. So that also comes in the play as well in that guidance.

Catherine Mealor

Got it. Okay. And I notice also the fair value accretion guidance came down. I think it was about $60 million last quarter for 2020 and now its $37 million [ph]. Is this just from -- kind of is this from CECL or can you any color on why the decline?

Rob Gorman

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

Catherine Mealor

Okay. That makes sense. Great. Thank you very much.

Bill Cimino

Thanks Catherine. And Kyle, we're ready for our next caller please.

Operator

Your next question comes from the line of William Wallace from Raymond James. The line is now open.

John Asbury

Good morning, Wallace.

William Wallace

Thank you. Good morning. Very good, thank you. Maybe just following up on the last line of questioning CECL. How would you anticipate your reserves 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 2019?

Rob Gorman

Yes. Well, interestingly, on that from, Wally, as you know we will -- the day one impact as we've estimated it would be about $95 million. You will see that's coming down primarily because of the runoff in our consumer -- third-party consumer book where 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 remain the same. The drivers of increasing that of course will be a loan growth and the other book of business, the other loan portfolios that we have on the books. But -- and of course, if there's major changes in the economic outlook, more risk, more tendency towards a recession that could drive the reserve up as well. But as we look for now, I think you could expect to see the Day-1 reserve level come down a bit over the year.

William Wallace

Okay. Thank you. And then the $95 million impact, does that include the purchase loans that the full impact?

Rob Gorman

Yes. That's right.

William Wallace

So what's the capital impact then?

Rob Gorman

Yes. Capital impact is about -- we've calculated about 20 to 25 basis points. In terms of regulatory capital that will be phasing over three years.

William Wallace

Okay. And -- so but the TCE impact will be immediately…?

Rob Gorman

On TCE its probably about 20 to 25 bps.

William Wallace

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

Rob Gorman

We expected -- as we've mentioned, our goal is to be at about a 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.

William Wallace

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?

John Asbury

Yes. What you're saying, Wally, is that because Virginia has the most overlap, including the Greater Washington area, as any of their markets and the system the intend to go last year, presumably they get it right. And so, we do not expect those disclosures to occur until the latter part or at least the second half of next year. In fact, as you may have read there saying that there will no branch closure anywhere for a year, which doesn't surprise me, just given the scale of this combination.

We've seen leadership announcement, of course, have come through. They are consolidating their commercial banking teams for 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 two 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.

William Wallace

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 in the 2022? It sounds like how does the M&A discussion change or does it change in 2020?

John Asbury

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 had been completed and they are more underway. So our highest priority right now is to really get ahead of this Truist. As I said, I feel like we got the opportunity while we're not engaged in a merger transaction, conversion, integration effort, we need to make run for it. We need to knockout and get as close to competitive parity as we can during this window of opportunity.

Having said that, the level of discussion is going on out there. The level inbound inquiry that we are receiving does lead us to believe that there will be opportunities when we decide that it's time. It is -- we are not of the mindset that we wouldn't want to do anything this year, but we had 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 this. We'll talk later on about -- we have a stem-to-stern processes inside this organization. We'll be implementing. We are implementing. It's happening now, robotic process automation. There are 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.

William Wallace

Okay. Thanks. 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 away?

Rob Gorman

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

William Wallace

And on discontinued, same thing.

Rob Gorman

Yes.

William Wallace

Okay, great. Thanks. I'll let somebody else to ask the question there.

Rob Gorman

Thanks Wally.

Bill Cimino

Thanks Wally. And Kyle, we're ready for our next caller please.

Operator

Your next question comes from the line of Brody Preston from Stephens Inc. The line is now open.

John Asbury

Hi, Brody.

Brody Preston

Hi. Good morning everyone. How are you?

John Asbury

Good morning.

Brody Preston

I just had a couple of just clean-up questions before I get into some 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?

Rob Gorman

Yes. That's about right, Brody.

Brody Preston

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's carried at a -- if we segment the buckets for the loan loss reserve between origination and acquired -- originated and acquired, I'm assuming that acquired bucket is the reserve ratio on that is a little bit higher. And so as that run off is that also I guess add to the loan loss reserve ratio moving lower over time?

Rob Gorman

Yes. I don't think that's going to be impacted that much in terms of the acquired book, especially the good acquired book, which is what we're putting reserve, which is pretty much in line with legacy unions reserving. So I wouldn't expect 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.

Brody Preston

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

Rob Gorman

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

Brody Preston

Okay, great. Thank you. And I guess just going back to the NIM guidance, you said, you sort of expected it to stabilizing this 335 or 340 range on a core basis. Is that GAAP core NIM that you're guiding to?

Rob Gorman

Would you say GAAP.

Brody Preston

Yes. I mean, 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.

Rob Gorman

That's FTE basis that we're talking about here.

Brody Preston

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

Rob Gorman

Yes. That's right.

Brody Preston

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 one month LIBOR?

Rob Gorman

Yes. The total book about 24% is tied to one month LIBOR, so its pretty sensitive to that LIBOR rate. And as you know, it decline quite a bit in the fourth quarter, about 38 basis points I think. So that was a key driver of the loan yield compression we saw this year.

Brody Preston

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

Rob Gorman

About 12% --12%, 13%.

Brody Preston

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

Rob Gorman

Yes. That's right.

Brody Preston

Okay.

Rob Gorman

Some of it relates to back-to-back loss, which we press little more, I guess about -- on a monthly basis I think they typically reprice.

Brody Preston

Okay. And then on the CD book, I guess I was a little bit surprise to see the cost of CDs flat to up a bit at this 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 costs moving forward?

Rob Gorman

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's playing out, but you can expect to see those rates coming down as we've lowered the rates over the last two quarters. So going into next year you'll see those declining as you'll see money market rates start to come down as well.

Brody Preston

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

Rob Gorman

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 felt pretty good about that. So we were expecting it to tick down for the quarter.

Brody Preston

Okay. And then wealth management, you had a pretty good -- pretty strong quarter in terms of AUM. 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?

Rob Gorman

Yes. 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 depending on where some of its market driven as well in terms of AUM, so we'll see where we go from there. But taking that out the equation, we do expect to see some positive momentum in that business, but it's too early to tell at this point.

Brody Preston

All right. Great. Thank you very much everyone.

Rob Gorman

Thanks Brody.

Bill Cimino

And Kyle, we're ready for our next caller please.

Operator

Your next question comes from the line of Laurie Hunsicker from Compass Point. The line is now open.

John Asbury

Hi, Laurie, good morning.

Laurie Hunsicker

Hi, good morning. Rob, I just wanted to go back to margin. Again, I know you've talked a lot about it. But directional as we look at just 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 margins -- just keeping in line with your comments on your core margin, your reported margin probably is going to track in that 345 to like high 340s, 348, 359 range. Am I going up the right way?

Rob Gorman

Yes. I've got it at 345 to 350 depending on core. That's right.

Laurie Hunsicker

Okay, perfect. I just want to make sure, I've got that right. Okay. And then just a few things on expenses here. Just specifically three 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 one time that drove those higher?

Rob Gorman

Not really other than -- and the marketing uptick, we had some credits in the third quarter which the 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 impact of some the initiatives that we put in place during the year, for instance, CECL [ph] adds to [Indiscernible] cost et cetera. So there's an uptick relating to some of those items that started to come through in the fourth quarter. And the other item which one was that was…

Laurie Hunsicker

So just the technology and professional fees?

Rob Gorman

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 spend some consulting dollars on. We've got some other project, robotic automation, as John alluded to. So there's some consulting related to strategic initiatives that's embedded in those numbers.

Laurie Hunsicker

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…?

Rob Gorman

Yes.

Laurie Hunsicker

Okay.

Rob Gorman

I think we said about 400,000, 500,000 a quarter that we did see in the fourth quarter.

Laurie Hunsicker

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

Rob Gorman

Well, we feel pretty good about where we are in terms of the culling that we've done, something that we are exploring and we're about to do one is we have a opportunity in Richmond, where we're going to go essentially close two branches and move them into one new better location. And as we asses 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 that you'd share on that?

Shawn O'Brien

Yes, all I'll 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 little bit less of dense franchise footprint. And I think we can do that probably by taking 12, 14 branches over time and consolidating them into seven newer branches. So that's kind of we're looking to do. But that's a bit of a long-term play as we build up those new branches.

Laurie Hunsicker

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

Rob Gorman

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 numbers would be and various roles in the retail bank especially branch managers who had outstanding alternative for really bankers coming out of these larger organizations that I'm looking at Dave Ring on here, maybe best guess, maybe 40% or so those would be commercial banking related. And we think the relationship managers, and they were 15 [ph] between commercial originators and credit oriented folks. And for this year probably add in the single digits in total, but its like John said it's more of a net number because we have retirements and other things that we will replace this year.

Laurie Hunsicker

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?

Rob Gorman

Yes. In terms on the lending club, we're about $180 million at the end of those quarter. So that was down about $22 million or $23 million. And on that front, Laurie, by the end of this year we'd expect to be less than probably 15 or less as it continues to run off.

Laurie Hunsicker

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

Rob Gorman

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

Laurie Hunsicker

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

Rob Gorman

Yes, little over, yes, probably more like 225, 230 range.

Laurie Hunsicker

Okay, great. Thanks. I'll leave it there.

Bill Cimino

Thank you, Laurie. And Kyle, we have time for one last caller please.

Operator

Your next question comes from the line of Eugene Koysman from Barclay. The line is now open.

John Asbury

Good morning, Eugene.

Eugene Koysman

Good morning. Thank you. 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?

John Asbury

No. We cannot do that.

Eugene Koysman

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?

John Asbury

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 gorilla-marketing tactics for branches that are going to be consolidated doesn't really make a lot of sense at this point in time. Maroa, do you want to speak just in terms of high level, how project -- forgive me, Project Sundown, for those of you who don't know it, is our formerly secret code name for taking advantage of the SunTrust BB&T disruption. I hope you see the humor and sun down.

Maria Tedesco

Well, we see this as a multiyear opportunity. This is -- we're planning on a marathon event with initiative 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. Those are 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 would be disruptive to customers that will make opportunistic for us. So those initiatives without getting into much detail is really set against what we believe is the time line of disruption. And literally every business has their plans in which to be offensive and be opportunistic.

Rob Gorman

And recognizing that this a public forum, we don't want to show our hand to much. Rest assure 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 that has began. This will play out for years.

Maria Tedesco

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

John Asbury

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

Eugene Koysman

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 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?

John Asbury

I don't want to answer the former question, Eugene, in terms of too much specificity on exactly what we were using for digital strategy. In some respects there's certainly a dollar cost issue here. One of the bigger constraints for midsize 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 as very near-term acquisition, because we will take those very same people off-line to work on the merger conversion integration. And when you've been focused on laying this out. Rob, do you -- what if anything would you share on in terms of how much do you think we're spending on new. It will be relatively small portion.

Rob Gorman

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

John Asbury

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

Kelly Dakin

There are 17 people that supports digital strategy and another three that supports customer experience.

John Asbury

And when I got here, it was probably one and a half and you been here just under a year and half as you walk into?

Kelly Dakin

I walked in, there was about four people.

John Asbury

So there you go. So its 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 quarterly release schedule. And so there's a plan that there's out for a long, long time in terms of a timeline of things you want to do everything from continuous upgrades to mobile banking suite of offerings, new product initiatives, some of these needs to modulated. If we are in higher-rate environment, frankly we were doing more than we're doing right now, but going to do the things that need to be done. I'm sorry, Eugene, probably about as much clarity as we're willing to share publicly.

Eugene Koysman

This is actually very helpful. Thank you very much.

John Asbury

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

Operator

This concludes today’s conference call. You may now disconnect. Thank you for your participation.