Good morning. My name is Nicole, and I'll be your conference operator. At this time, I would like to welcome everyone to the Atlantic Union Bankshares Second Quarter 2019 Earnings Call. [Operator Instructions] It is now my pleasure to hand the conference over to Mr. Bill Cimino. Please go ahead sir.

Thank you, Nicole. And good morning everyone. I have Atlantic Union Bankshares’ President and CEO, John Asbury; and Executive Vice President and CFO, Rob Gorman, with me today. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release is available to download on our investor website, investors.atlanticunionbank.com. During the call today, we will make comments on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in our earnings release for the second quarter of 2019. Before I turn the call over to John, I would like to remind everyone that on today's call, we will be making forward-looking statements, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise any forward-looking statements. Please refer to our earnings release for the second quarter of 2019 and our other SEC filings for a further discussion of the Company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ. All comments made during today's call are subject to that Safe Harbor statement. At the end of the call, we will take questions from the research analyst community. And now I'll turn the call over to John Asbury.

Thank you, Bill, and thanks to all for joining us today. And welcome to our first conference call as the newly rebranded Atlantic Union Bankshares Corporation. Atlantic Union followed its good start to the year with a solid second quarter. To start, we completed a seamless core systems integration at Access National Corporation rebranded the bank to Atlantic Union Bank on May 20, and rebranded our wealth management group, to Middleburg Financial on the same day. We launched Zelle, the person-to-person payment network received the most significant customer service award in the company's history by being named number one by J.D. Power for retail banking, customer satisfaction in the Mid-Atlantic, which they define notably as Virginia to New York. Additionally, we were just named for the second year in a row the Forbes listed best in-state banks. We delivered strong loan growth for the quarter while deposits stayed steady and showed improvements in our operating profitability metrics from the prior quarter. I won't take too much away from Rob's commentary, but for the quarter our operating ROA was 1.35% up four basis points from last quarter. Operating return on tangible common equity was 16.58%, which is a 21 basis point increase from the first quarter. Operating efficiency ratio was 52.46%, which is a 164 basis point improvement from the prior quarter. As communicated previously, we've stepped up our financial targets. They are as follows. Operating ROA between 1.4% and 1.6%, operating return on tangible common equity between 16% and 18% and an operating efficiency ratio at 50% or below. Just like in 2018, our financial results will remain noisy through the third quarter as we complete the integration of Access National Bank. Integration efforts continue to go well and provide another proof point of our core competency and whole bank…

Well, thank you, John. And good morning, everyone. Thank you for joining us today. I’d like to take a few minutes to provide you with some details of Atlantic Unions financial results for the second quarter, which we feel illustrates the earnings potential of this franchise. By as in the past quarter we do have some noise in the numbers, so please note that for the most part, my commentary will focus on Atlantic Union second quarter financial results on a non-GAAP operating basis, which excludes $5.1 million in after-tax merger related costs and $3.2 million in onetime after-tax rebranding costs. It does, however, include losses from discontinued operations of $85,000 and approximately $950,000 in after-tax expenses related to the Company’s decision to close four branches in the third quarter. For clarity, I will specify which metrics around a reported versus non-GAAP operating basis. In the second quarter, reported net income was $48.8 million in earnings per share were $0.59 up approximately $30 million or $0.12 per share from the first quarter. Reported return-on-equity was 7.86%, reported return-on-assets was 1.15% and reported efficiency ratio was 62.43%. And a non-GAAP operating basis, which again, as noted, excludes $8.3 million in after-tax related merger related and rebranding related costs, consolidating net earnings for the second quarter were $57.1 million or $0.70 per share, up from $50.5 million or $0.66 per share in the first quarter. The non-GAAP operating return on tangible common equity was 16.58%, which is an improvement of 21 basis points from 16.37% in the first quarter. The non-GAAP operating return on assets was 1.35%, that’s up 4 basis points from 1.31% in the first quarter. And the non-GAAP operating efficiency ratio improved by 164 basis points to 52.46% from 54.1% in the first quarter. As John noted in his…

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

[Operator Instructions] The first question comes from the line of Catherine Mealor [Keefe, Bruyette, & Woods, Inc.].

Thanks. Good morning.

Good morning, Catherine.

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

Yes. Catherine, it’s Rob. we’ve got a number of initiatives underway. We’ve got a project team looking at all of the opportunities that this disruption may bring to us. At this point in time, we’ve modeled; we’ve estimated that we could accelerate some investments in the $1 million to $2 million expense over the next two quarters. So, think about it is adding probably $1 million to quarter – to third and fourth quarter normal operating run rate. And so when you – the operating run rate that we’re looking for going into the third quarter excluding that, was about $90 million, so more like $91 million if we actually spend that money in third quarter and then it declines to about $89 million, where you add back $1 million or so for these investments that are accelerated in the fourth quarter. So, call it anywhere from $89 million to $91 million in the next two quarters.

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

Yes, yes. Good question. Yes. That excludes the amortization I should say including that would be at the higher level at above – $5 million to that – those numbers.

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

Yes, so we have – we run the models based on the interest rate curve we’re seeing today, which is much different than we talked about at the first quarter earnings call, as you recall, than we had assumed that there’d be one fed funds rate cut in the fourth quarter. And we were guiding to about two to three basis points of compression per quarter. With the current outlook we have now is we expect the fed to cut at the end of this month, at the end of September and then somewhat early in 2020. But for the next couple of quarters, we are now instead of two to three core compression guidance, we’re talking we’re in the four to five core margin compression going forward. So it has put some more pressure on our NIM guidance going forward. Good news there is we as you recall, we have about call it 40% of our book is repricing with fed funds or loan book. Reprices with fed funds and one-month LIBOR is about 23% of our book and about 15% is fed funds. So those will reprice fairly quickly with the fed funds exchange. On the other side of the balance sheet, we have about $1.5 million – $1.5 billion or so of deposits that are indexed to fed funds. So there’s some mitigation to that on the cost of funds side. But we will continue to see more pressure on the margin that we had previously guided.

And then Bob, if you want to just clarifying again – model exactly in terms of net rate cuts.

Yes. So as I mentioned, we have a fed cut now modeled in for the end of this month. We have a fed cut modeled in at the end of the third quarter, which will impact to fourth quarter. And then going out to 2020, we expect there will be another one earlier in the year. So we’re going to see some pressure on the margin at least versus our previous guidance probably right through the first and second quarter of next year and that depend if that were to happen.

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

It’s going to be in total – not in total – by quarter. Yes. So some quarterly adjustment.

Okay. So assuming we have two which is – could say about this year, so assuming we have a cut in July, then it kind of September you’re thinking third and fourth quarter core margin basically down by 4 bps to 5 bps per quarter.

Yes, that will be right.

Okay. Great.

Yes, we’ll see what happens, it’s – if the fed doesn’t cut, we’re probably talking, that would improve back to the, a positive 2, 3 basis points off that 4 to 5 basis points. So still we’re expecting to see some compression until we can rightsize our deposit rates based on the lower interest rate environment.

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

That’s good. And then to your point, is more near term. So that doesn’t really factor in significant repricing on the deposit, it’s quite yet?

Yes, that’s right. So we’re going to be looking very hard at our deposit rates, as you know, over the past year, rates have been going up and we’ve been moving rates up, we’ve had promotional campaigns related to money market and CDs we’re currently those are under review going forward. But there is a bit of a lag on some of those earlier campaigns, because for instance, money markets, we had a six month promotional rate and then it would revert down to the normal wrapped money market rate. So there is some of those higher cost deposits will reprice going into third and fourth quarter. But you got to see a bit of a lag on that.

Really helpful. Thank you.

Thanks, Cather. And Nicole, we’re ready for our next caller, please. Nicole. Do you know who the next caller is?

The next question is from the line of Casey Whitman [Sandler O'Neill + Partners, L.P.].

Hi, Casey.

Good Morning. Just in terms of the buyback you recently announced. Can you give us any indication of how aggressive you plan to be with that? And then could the buyback potentially provide some upside to the profitability targets that you’ve laid out or, perhaps speed up the timeline to get there? Or are you already sort of assuming some buybacks in there?

Yes, that could be a bit of upside, Casey, from the buyback point of view, although we have modeled some repurchases, but really depends on how quickly we get the buyback done. We’re going to be fairly aggressive over the next three quarters in the buyback. Of course, it all depends on where our stock price is. What we typically look at is we have an intrinsic valuation model that we run, which values what we feel the value of the company is. And we look for a 15% plus return on investment. So if the stock price runs up, you’re going to see less of a repurchase in terms of share buyback. But if you stay – if we’re staying where we are, we’ll be pretty aggressive.

Got it. Thanks. And so really nice growth in C&I particularly this quarter. Can you give us an idea of that, mostly coming from the Northern Virginia market versus legacy markets? And then, I also wanted to ask just the 21 people you referenced hiring from BB&T and SunTrust, is that – was the already in the numbers this quarter? Or is that are those recent hires?

Yes, those hefty were – they are in the quarter already they’re in the numbers. So those were hires already on the payroll. I mean, we’re looking to do some more as we go forward.

And I’ve been asked a ring to – and that’s pretty broad based, I’d say roughly half of those hires were in the commercial banking space, all C&I related. Most of the rest are going to be branch managers most typically and we had a few other supporting organizations, interestingly, about half and half BB&T and SunTrust. Dave Ring, would you comment on what we’re seeing in terms of our commercial industrial growth by market?

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

So we saw growth across the board to your point, Dave, led by greater Washington area. Now access is doing well, former access but we also where they are two is a reminder. So the old Iraq union terms today’s commercial team as a part of this the Baltimore loan production office. So this is nice in terms of we keep pointing to incremental growth opportunities coming out of the North Carolina operations, Maryland, the greater Washington is a tremendous economy, as you well know, our largest. So we’re feeling pretty good about it. Casey.

Great. Thanks for taking my questions.

Thanks, Casey. And Nicole, we are ready for our next caller, please.

[Operator Instructions] Your next question is from the line of Austin Nicholas [Stephens Inc.].

Hi, Austin.

Hey guys, good morning.

Good morning.

Good morning.

Maybe just first back on the expense guidance. I appreciate that the guidance that you provided to Catherine, but maybe could you just – maybe just repeat that? And then I guess my kind of follow-on question is, does that guidance include the $2 million in additional rebranding expenses that you guided to?

Yes. So let me backtrack a bit, so excluding any of the spending accelerated expanding related to the opportunity with SunTrust and BB&T. We’d be looking at about – if you include the amortization expenses, we’re in the – about the $93 million – $94 million level for Q3 and that declines to about $90 million in Q4, which is pretty much what we had guided to in terms of run rate. Once we got all the cost saves from the access deal. But for each of those, if you had about $1 million, $1.5 million, I think in the third quarter and these numbers could move the very high level. But we’re thinking that we’ve spent about a $1 million related to the opportunity with SunTrust and BB&T in the third quarter, maybe another $1 million, $1.5 million in the fourth quarter. So call it, add that to the numbers, you’re at $91 million, $92 million in the next third quarter and then call $90 million, $91 million in the fourth quarter inclusive of that. Although add back the amortization, you’re in the $95 million, $96 million range, I should say.

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

Yes, that’s correct.

Got it. Okay. That’s helpful. And then on the – maybe just on the fee income swap fees where we’re obviously really strong this quarter. Any commentary on how you’d expect those to trend throughout the year kind of based upon your current rate outlook?

Austin, this is John. I’ll open this and then ask Dave Ring had a commercial to comment. We’ve been obviously talking about this quite – quite frequently. We think we certainly have several things have changed. The franchise is larger. We have more larger clients. And we now have the opportunity to and have introduced this within the old access franchise. So you couple that with more market opportunity, plus a rate environment that is very favorable as it relates to interest rate hedging, very flat yield curve, meaning you don’t have to pay out much to lock in longer term hedging, historically low rates, so that all favors it. Having said that, I don’t necessarily see us repeating what we saw in Q2. Dave Ring, what is your perspective?

We had a really strong Q2, we part of it is from low hanging fruit existing portfolio that had an appetite for, to fix their rates or – but we would expect that just do what’s right for the customer, really. And if it turns out that it works for the customer, that some interest rate derivative makes sense or interest rate swap makes sense, we’ll do it. So, we’ll probably return closer to levels that we’ve done in the past and then in second half of the year, with the exception that access clients did not have the ability to do derivatives before. So we’re going to expose them to this overall.

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

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

Got it. Okay.

We are – we will start in Q3, I don’t get into the details, but we’re still seeing a lot of momentum on it. We think that it will continue.

Okay. That’s really helpful. And then maybe while we’re talking about hedging and swaps, I guess, are there any – is there anything layered on that in terms of an interest rate or fixed or floating swaps that the bank has – has on that may come off in the next few quarters and then I guess beyond that, is there any changes you’re making to the overall asset sensitive position of the bank?

Yes. Austin on that case, we’re not looking to unwind any swaps at this point. We don’t have a lot on our borrowing base. But in terms of, yes, we’ll continue to look at opportunities going forward. We have pulled the trigger on a couple of things in the second quarter, that will help our cost of funds mitigate the – or reduce the cost of funds. But we’ll continue to evaluate that in the third and fourth quarters as we look at the outlook for rates. But nothing right now planned in the numbers I shared with you.

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

Yes. So, we continue to work on that. We feel like we’re in pretty good place regarding our understanding what the impacts going to be. We’re running – continue to run our models. We’re actually validating our model with an outside third party and we’re waiting to get the results of that back before we’ll actually say anything publicly about it but again, as we said last quarter, you can expect to see that the allowance will increase at the very lease it will increase as a result of putting reserve on any of the purchase loans that we’ve – the loans that we purchased over the last two deals for Xenith and Access. So it’s going to be an increase. We’ll get into more specifics I think on the next call, we’ll feel more comfortable what the model is running the way we wanted to.

Got it. Sounds good. Thanks for taking my questions, guys.

Thanks, Austin.

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

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