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 Bankshares First Quarter Earnings Call. All lines will be placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Bill Cimino, Vice President of Investor Relations, you may begin your conference.

Thank you, Kyle, and good morning, everyone. I have Union Bankshares' President and CEO John Asbury and Executive Vice President and CFO Rob Gorman with me today. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release is available to download on our investor website, investors.bankatunion.com. During the call today, we will 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 20 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%, operating return on tangible common equity between 16% and 18% and an operating efficiency ratio at or below 50%. Just like in 2018, we expect the first 3 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 the fourth quarter 2019 once the Access cost saves are materially complete. We do have a slightly different time line 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 1, 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 levers,…

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 2 months of financial results from Access as we closed the transaction on February 1 of this year. Before we get started, I would like to share some data points as they relate to the Access acquisition. It 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 billion, $2.858 billion, while the fair value of liabilities assumed equaled $2.559 billion. Total goodwill arising from the transaction equaled $201 million. Total loans acquired totaled $2.217 billion with a fair value of $2.176 billion. The loan mark came in at approximately 1.9% or $41.1 million. Total deposits assumed totaled $2.228 billion with a fair value of $2.227 billion. Core deposit intangibles acquired totaled $41 million 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 linked 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…

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

[Operator Instructions] Your first question comes from the line of Catherine Mealor from KBW.

I wanted to start with the margin, Rob. I might have missed it. So can you give us an update on your outlook for the core margin 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 you could just confirm that and talk about your outlook there.

Yes, Catherine. This is Rob. In terms of the go forward, our current modeling has, assumption regarding rates is that pretty, 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 of 7 basis points higher than the fourth quarter at 3.64%. We do expect, and this isn't 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 1 to 2 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 is starting with a higher base.

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

Yes. 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, it would certainly help if we didn't get that cut. But that's our modeling assumption at this point, Catherine.

Okay. Great. So just, we're coming from a higher base, but still 1 to 2 bps down per quarter to the back half of the year?

That's right. Yes.

Okay. Great. And then on the expense side, 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 of with Access fully folded in?

Yes. Really not much of expense savings during this quarter, I think maybe a couple of hundred thousand since we only acquired Access in February. Going forward, you can start to see that, that starts to increase in the second quarter, maybe a couple of million we'll get out of the second quarter and then we'll get to full run rate towards the end of the third quarter once we do the conversion, core conversion in May. Really in the, 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 million, $87 million run rate, if you exclude amortization, and maybe closer to $89 million to $90 million, if you include the amortization, intangible amortization.

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

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

Your next question comes from the line of Casey Whitman from Sandler O'Neill.

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 a bias down. So just curious what you attribute the success in expansion of the margin this quarter to. Was it Access or organic or sort of how should we think about the sort of new margin here?

Yes. Just about 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, the fed move in December, which has certainly helped the variable rate, look, did re-price, 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 1-month LIBOR-based. So that helped, it 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 1 to 2 basis points of compression over the next several quarters.

Okay. Great. 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?

Yes. 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 are 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. 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?

Yes. 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 at about $38 million. So you should see probably at that level, in the $6 million 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 cost related to rebranding in the third quarter, but we should be done by the end of the third quarter.

Your next question comes from the line of Austin Nicholas from Stephens.

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 see that loan growth playing out over the year, given you have kind of increasing C&I focus. I think there's some more seasonality there. So any comments on that would be helpful.

Yes. I'll start and then I want to ask 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. We are, production is very good. As we mentioned, commercial real estate pay downs continue. It's not really worse than the last couple of quarter. It is definitely worse than what we saw a year ago. But production is 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 while we make sure that your microphone is open.

Yes, 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 2, 3 weeks of the second quarter, and they have closed. So we're really off to a very good start, and 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, commercial versus, just in general terms...

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

I would remind you, Austin, we had some pretty good additions to the commercial team last year, as you recall. Those folks are maturing as they continue to come online. Access is now operating with the balance sheet as of this moment, 5x which they're accustomed to having. And Access' loan growth in Q1 actually exceeded Union's because of 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 here.

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. And maybe just on fee income. Maybe just first on mortgage. I know you touched on the kind of 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, that 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 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 17% tax rate as we look forward from here kind of on a core basis?

Yes. We're guiding to a 16.5% to 17% rate for the full year. You may see that 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 up to about 16.5% to 17%.

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

Just wanted to go back to margin here. And I love the accretion income table that you provided. 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 your first quarter with Access fully reflected?

Yes. Yes, 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 2 months of Access, so that will increase in good time. So I would say I would guide you towards about where we stand in the first quarter, maybe a little higher. Of course, some of that relates to pay downs, et cetera. We could see higher levels, but that would be because we got pay downs.

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, you have accretion income of $19 million. If we're using 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 3.80% down to 3.69%, 3.70%. Am I thinking about that the right way on a reported basis?

Yes. That's right, Laurie. You will see the reported go down more than our core. I was referring to our core when we talked about 1 to 2 bps. But that's right, it really depends on what accretion comes through. But based on what we've 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, bigger question for you, John. Obviously, the BB&T-SunTrust merger is certainly an exciting event. Can you help us think about how you are 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 Durham-Chapel Hill. Just any color you can give us around your thoughts would be great.

Certainly, Laurie. At the highest level, we have what we consider to be the 2 most formidable large bank competitors, both of which are very good, but very different organizations coming together. Currently BB&T is number 2 in depository market share. SunTrust is number 4. On a combined basis, this will become pro forma the number 1 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 4 position. It will 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 with those 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 literally, 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 1 pro forma market, by most analyst estimates for divestiture, required divestiture under the Herfindahl Index will be Virginia Beach-Norfolk. Most are estimating they'll have to divest about $400 million of deposits there. Virginia has 2, pardon me, 3 other markets that will make the list of estimated required divestitures. They're Charlottesville, Roanoke in the 2 markets in which we operate much lesser dollars, and in Martinsville, where we don't operate. To my knowledge, that's the only state, Virginia, where they have 4 markets that are expected to have required divestitures. Number one in the entire system is Virginia Beach-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 and to the middle market where we're clearly going to be the most likely alternative. It is a tout that we're now the sixth largest bank in the United States of America. That plays right into our hands. We hope to 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, David.

Okay. I, thank you, John. I agree with everything you said. We have established a working team of subject matter experts from each of the business lines to help plan our strategic road map to leverage the market opportunity and, obviously, we want to grab a fair share and more of that opportunity. I would say that we're planning for both sort of an offensive and defensive alternative to manage the point 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 and sales. You mentioned talent acquisition. That's also an opportunity, this is an opportunity that surely going to play itself sort of over time. As John said, 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. They execute well it will reduce it, but we believe that we have the strength in our brand, in our people to be really surgical at times of those opportunities of disruption. You mentioned potential branch closings. We've certainly got our view of what potentially could happen in the market, how much disruption, and we are following along with plans depending on the timing to be ready to seize the opportunity as it stands.

And Union leadership is well represented from SunTrust and, to a lesser extent, BB&T. So we are very, very wired in there. 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 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 2 together, but these companies are so very different that there's going to be friction. You can't have 2 leaders of everything. There will not be 2 commercial heads in Richmond. Someone is going to win, someone is going to lose. And we think that, that's going to free up opportunity. It's beautiful timing too for our 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 are a fan of the combination. Clear.

Your next question comes from the line of Blair Brantley from Brean Capital.

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?

Yes. The total portfolio, Blair, is about $280 million. That's going to play out, we expect it over the 2-year period, sorry, runoff a bit. But over 2-year period, you'll, we'll 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.

And some of what's happening now, we've not done a lot. In terms of consumer relationship lending, mostly what we do is from equity lines. And so I think that with the new consumer leadership that we have, Maria is in background, importantly, the Access and Middleburg franchises, a focus like we've never had before and an opportunity like we've never had before on private banking, SAL lending will be able to backfill. Third-party lending goes back to, the roots of that go back to StellarOne, 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 want to, 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 tethering loan more a relationship in consumer and private banking lending and just letting that fade away.

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

Yes. 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 run some preliminary modeling against the model we have. We're not in a position to go up publicly with what we think the impact is 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 in, at least at our level, increase in the allowance when CECL comes on is because of, if you're acquisitive, you've got to put an allowance on the good book of acquired loans. So a bit of a double count is going to happen, if you have a credit mark, you can't move that over to the allowance. So we do expect it 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 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.

And thanks, everyone, for joining us today, and we look forward to talking with you in 3 months. Goodnight.

This concludes today's conference call. You may now disconnect.