Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for standing ball and welcome to the Atlantic Union Bankshares fourth quarter and full year 2019 earnings call.
This time all participants are in listen only note. After the speakers presentation. There will get question and answer session. So asked a question. During the session you will need to press star one on the telephone I would now like to hand, the conference over to your speaker today, let's start Belsito you may begin.
Thank you call and good morning, everyone.
Well I hope you enjoy the degree of news because program I do want to say that will probably next time go with music instead of the news on the whole.
I have Atlantic Union, Bankshares, President and CEO , John Asbury with me today, and executive Vice President and CFO , Rob formal.
Some other members of our man executive management team with Us for the question and answer period.
Please note that today's earnings release is available for download on our Investor website investors that Atlantic Union Bank Dot com.
During the call today, we will comment on our financial performance you can 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 will make forward looking statements, which are not statements of historical fact and are subject to risks and uncertainties.
No assurance that actual performance will not differ materially from any future results expressed or implied by these forward looking statements.
Undertake no obligation of public revise any forward looking statements. Please refer to our earnings release for the fourth quarter and full year 2019, or other FCC filings for further discussion other companies risk factors and other important information regarding our forward looking statements, including factors that could cause actual results to differ.
Our comments made during today's call are subject to that safe Harbor statement.
At the end of the call, we'll take questions from the research analyst community and now I'll turn the call over to 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 costs.
We closed out 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.
We began 2020, we continue to believe we have a great opportunity before us to create something uniquely valuable for our shareholders.
And that communities, we serve and remain keenly focused on reaching the full potential of this powerful franchise wedeking an accomplished much in 2019 to start we closed the access National Bank acquisition on February Onest and converted their core systems in may so.
Successfully and Uneventfully rebranded the company to Atlantic Union and change the stock trading symbol to a.
Delivered 8% deposit growth, while loan growth was 6% for the year.
Your end loan to deposit ratio was in line with their 95% target right, where it should be.
We completed the transformation of the executive leadership team with the hiring of David Zimmerman in the fourth quarter to head up our wealth management group Middleburg financial approved and rolled out our new three year strategic plan to our teammates added and established equipment financing team to close a commercial banking product gap washed xcel, an additive to see no to address digital product.
Gaps won a number of a customer experience awards, including the much coveted number one ranking for the JD power retail banking satisfaction survey for the mid Atlantic region in 2019 with mid Atlantic region defined by JD power as Virginia to New York State there wasn't on better.
Last a focused initiative to take advantage of the coming market disruption from the truest merger.
Rob will provide more details on the financial performance in his section, but for operating metrics for the fourth quarter operating return on tangible common equity was 16.01%, which is a 37 basis point increase from the third quarter for the full year operating ROTC he was 16.14%.
Operating return on assets was 1.30% up one basis points in the prior quarter for the full year operating Norway 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 updated our top tier financial targets to the following operating ROTC E between 16, and 18% operating Aro, a between 1.4, and 1.6% and and operating efficiency ratio at 50% or below.
We made those updates then expecting to operate in that rising rate environment and stepped up our top tier financial metrics accordingly, as the economic and geopolitical environment materially changed over the course of 2019, we shifted expectations for the federal reserve to cut rates even than the rate environment was below our expectations and there was a sustained and verse.
Some of the yield curve it negatively impacted our net interest margin 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 in 2021 and his.
Remarks, which reflect our continuing focus on maintaining top tier financial performance, regardless of the operating environment.
Loan growth was 10% annualized for the quarter point to point, while average loans grew 3% Q4's, predictably, a stronger seasonally and loan growth and we saw significant growth materialized late in the quarter.
Headwinds to growth in Q4 with persistent trends its commercial real estate paydowns remaining at elevated levels and our decision to run off a third party consumer loan portfolio, She and I line utilization at approximately 40% and total commitments that picked up from the third quarter.
As a reminder, excess acquisition closed in February Onest 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 at 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 run off of our third party consumer loan portfolio, we expect to take advantage of the disruption caused by the tourist merger, but we do expect headwinds from the continue.
Relation that elevated pay downs and the C or eat portfolio as rate expectations for the year, suggesting institutional nonrecourse long term fixed rate market will remain an attractive substitute product for siri clients.
Deposit growth was about 8% annualized for the quarter point to point in 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 95%.
Turning to credit credit quality remained solid in the fourth quarter the economy in our footprint of steady unemployment of 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.
Prior quarter, the full year net charge off ratio was 17 basis points as we've seen in prior quarters, a big part of charge offs at Atlantic Union Bank about 60% for the quarter came from our third party consumer loan portfolio, which has mentioned continues to run off barring some unexpected change in the macroeconomic environment we aren't.
Expecting a change in credit quality in 2020.
As I've consistently said over the past 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 now formalized credit losses, but we can't tell you went 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 plans stays true to how we like to operate Atlantic Union Bank, which is maintained forward progress Presser advantage, where we can and do what we say we're going to do.
But as you know us in our story the strategic plan continues a logical progression of what we've been working one for some time, our roadmap to achieving the objectives of the strategic plan, 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 see Eni and owner occupied real estate now make up one third of our total loan portfolio, we stood up and equipment finance team in the fourth quarter to close a competitive gap in our commercial offerings and the team hit the ground running closing about 12 million in loans during the month of December the new capability, it's been very well received by our commercial bank.
In teams and we're excited about the potential for this group over time.
Complementing our CFO strategy as a growing treasury management services annuity fees income stream.
Measuring management transform beginning in 2018 with the hiring of a new product development team of 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 king new tier.
Revenue in various stages of implementation totals $1.9 million, an annual run rate plus a record 1.3 million and the pipeline.
Next to grow core funding as I mentioned earlier, a loan to deposit ratio is currently at our target of about 95%. We continue to believe we have opportunities to grow our deposit base and deepen our market share. For example, we piloted a bank at work program at 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 are now in the process of launching this effort across our footprint.
The bank at work program.
Is it important product to grow consumer accounts in low cost deposits and helps to strengthen our commercial client relationships.
Next managed to higher levels performance.
As we've mentioned earlier, we aim to stay on the top quartile of our peers as measured by ROTC are a and efficiency ratio metrics. We believe we have a number of opportunities to improve the efficiency. The bank by reengineering. Our end to end processes. For example, we're 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.
The next strengthen our digital capabilities as I mentioned before during 2019, we implemented table Stakes technology improvements like shell and the consumer bank and Encino from the commercial bank Middle part financial will have a comprehensive new wealth management platform in the first half of 2020, it will improve the client and teammate experience includes an important.
Thank God.
We're piloting piloting a new digital account opening solution that simplifies the enrollment process and that should launch in February .
We're adding debit card controls and enhance notifications and alerts for real time updates to customers in the first quarter, we have installed or upgraded Wi Fi and all branches. So customers can more easily receive assistance to set up online and mobile banking, which is important for new and existing customers. Some of the new digital capabilities address gaps with a larger compare.
Critters, bringing us closer to parity with the most frequently used functionality, while we don't intend to lead the market and digital innovation, we must be competitive concurrent 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 choice.
Looking at enables customers, who might not otherwise qualify for traditional checking product to establish or re establish themselves in the banking system by offering a fee based accounts that has no overdraft privileges.
We successfully piloted a project issue temporary instant debit cards that are branches and we'll roll that out across the system starting this month.
Debit card issuance time has been a pain point for our customers and this will resolve the issue.
We're also rolling out contactless debit cards to customers in the first quarter, we installed electronic signature capture pads and all branches to eliminate paper streamline process improved quality and create a more consistent experience for applications and forms we revamped the consumer lending team on their approval processes to speed up home equity line of credit approvals and have already.
And the 25% reduction in average cycle time.
We streamlined our Treasury management services Onboarding process and simplified documentation by developing a master services agreement that allows clients to easily add new services. We further expanded our TM product set with a number of new offerings, such as integrated payables on a better purchasing card product and finally capitalize on strategic opportunities.
Since we don't know what the future holds we must be nimble unable to react to a changing marketplace. The greatest market opportunity, we're likely to see over the next few years is the truest merger and during 2019, we hired 39 people from the trust companies in a variety of roles. We are expecting considerable through his branch closures and our Virginia trade areas.
We expect that began in late 2021, and we'll be ready for the coming disruption as for other strategic opportunities should be clear from my comments were 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 positioned to further consent.
They 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 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 them to improve our compare.
It is positioning however, we have demonstrated we're able to leverage M&A as a shareholder value, creating secondary strategy and that remains at our playbook.
In summary, Atlantic Union had another solid quarter and a good 2019, we continued to make steady progress against our strategic priorities and delivered good financial performance despite headwinds from the adverse interest rate environment.
Remain highly confident with a future holds for us in the potential we have to deliver long term sustainable financial performance for our customers communities teammates and shareholders.
Yes, I have no better way to finish my comments in the new year than by reiterating the Atlantic Union Bankshares as a uniquely valuable franchise, its dance and compact and great markets with a story. Unlike any other in our region. We've assembled the rightskill the right markets in the right team to deliver high performance in a franchise that can no longer be replicated in Virginia, yes.
Growth opportunities in our North Carolina, and Maryland operations, and what we believe will be a multiyear 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 2018, Rob.
Thank you John and good morning, everyone. Thanks for joining us today.
I'd now like to take a few minutes to provide you with some details of Atlantic units financial results for the fourth quarter and for 2019.
Please note that for the most part of my commentary will focus on Atlantic units fourth quarter and full year financial results on a non-GAAP operating basis, which excludes $709000 an after tax merger related costs and $713000 an after tax rebranding related costs in the fourth quarter and also excludes 22.
Point $3 million and after tax merger related costs and $5.1 million, an after tax rebranding costs for the full year of 29 key.
For clarity I will specify which financial metrics on a reported versus non-GAAP operating basis.
In the fourth quarter reported net income was $55.8 million in earnings per share were 69 cents thats up approximately $2.6 million were four cents from the third quarter.
For the year ended 2019 reported net income was $193.5 million in earnings per share were $2.41 up $47 million or 19 cents per share from 2018 levels.
Reported return on equity for the fourth quarter was 8.81% in 7.89% for the full year.
The reported return on assets was 1.27% for the fourth quarter and was 1.15% for 2090.
The reported efficiency ratio was 57.4% for the quarter and 62.37% for the full year.
On a non-GAAP operating basis, which is noted excludes $1.4 million an after tax merger related costs and rebranding related costs for the quarter in 27.4 million for the year consolidated net earnings for the fourth quarter were $57.3 million were 71 cents per share.
Which is up from $56.1 billion or 69 cents 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 four cents per share from 2018 levels.
The non-GAAP operating return on tangible common equity was 16.1% 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 in was 1.31% for 2019.
non-GAAP operating efficiency ratio was 52.65% in the fourth quarter.
It was 53.61% for the full year of 29 team.
As a reminder, route we remain committed to achieving top tier financial performance relative to our peers.
The fall of 2018, we have been targeting the following operating financial metrics.
And operating return on tangible tangible common equity within a range of 16% to 18%.
Operating return on assets in the range of 1.4% to 1.6% in an operating efficiency ratio of 50% were lower.
When we set these targets at the end of 2018, we expected 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 2090.
Given this challenging current and expected operating environment for banks and its impact on revenue growth caused by the intractable lower for longer interest rate environment, which we now expect will persist through 2021, we're revising our operating financial metric targets accordingly to the followed.
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.
And an efficiency ratio of 53% or lower.
Our financial performance targets are set to be consistently in the top quartile among our peer group regardless of the operating environment.
And we believe these new targets are reflective of the financial metrics required to achieve top tier financial performance in the current economic environment.
Now turning to the major components of the income statement for the fourth quarter tax equivalent net interest income was 137.
$8 million down $1.6 million from the third quarter, primarily due to lower earning asset yields during the quarter driven by lower average market rates and changes in the average earning asset mix from the third quarter.
Net accretion of purchase accounting adjustments for loans time deposits and long term debt added 18 basis points to the net interest margin in the fourth quarter.
Which is up from the third quarter Stuart 13 basis point impact primarily due to increased levels of loan related accretion income.
The fourth quarters tax equivalent net interest margin was 3.55% that's a decline of nine basis points from the previous quarter.
For the full year tax equivalent net interest margin was 3.69%, which is down five basis points from 20, Eightys net interest margin of 3.74%.
Nine 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 nine basis point decline in the cost of funds.
The 18 basis point decrease in the quarter to quarter, earning asset yield was primary due primarily driven by 17 basis point decline in the loan were fully fulvio yield and the three basis point negative impact related to changes in earning asset mix in the quarter.
Declined in 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 five basis point benefit from higher loan accretion income.
Bridge loan yields were lower primarily due to the impact of declines in market interest rates during the quarter, notably the significant declines in the one month LIBOR and prime rates.
With three basis point, earning asset yield declined resulting from changes in the earning asset mix from the prior quarter was due to the buildup of liquidity during the quarter, resulting from the timing of deposit inflows early in the quarter and the funding of loan growth late in the quarter, which shouldn't carry over into future quarters.
The quarterly nine basis point decline in the cost of funds to 1% was primarily driven by 28 basis point decline in wholesale borrowing cost.
Rule changes in the overall funding mix between quarters and by lower interest bearing deposit costs, which declined six basis points from the third quarters 125 basis points.
The provision for loan losses for the fourth quarter was $3.1 million were 10 basis points on an annualized basis, which is a decrease decrease of $6 million were 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 were 15 basis points on an annualized basis compared to $7.7 million were 25 basis points for the prior quarter.
As in previous quarters, a significant amount of the net charge offs came from non relationship third party consumer loans, which are in runoff mode.
For the year net charge offs were $20.9 million were 17 basis points.
Noninterest income declined to $29.2 million for the fourth quarter from 48.1 million in the prior quarter.
The decrease in noninterest income was primarily driven by life insurance proceeds of approximately $9.3 million related to the acquisition of zenith and a gain of approximately $7.1 million due to the sale in investment securities recorded in third quarter.
Excluding these third quarter items non interest income declined by two and a half million dollars driven by lower loan related interest rate swap income of $2 million due to lower transaction volumes and seasonally lower mortgage banking revenue of $685000.
Excluding merger related costs and rebranding related costs in both a 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 dollar loss on debt extinguishment in the third quarter, resulting from the repayment of approximately $140 million in federal home loan bank advances in the termination of related cash flow hedges.
Salaries and benefits declined by two and a half million dollars, 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 $955000 related to higher consulting cost for strategic initiatives.
FDIC expenses of $873000, primarily due to a lower FDIC small bank assessment credit earned in the fourth quarter in Oreo in credit related expense of approximately $542000 due to Oreo valuation adjustments driven by updated appraisals received during the quarter.
As a reminder, we achieved our $25 million actions related to merger cost saves target on a run rate basis at the end of the third quarter.
Also please note that we do not expected to incur any additional merger cost or rebranding expenses in 2020.
The effective tax rate for the fourth quarter was 16.7% compared to 60.8% in third quarter for the full year the effective tax rate was 60.2%.
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 31st 2018 levels, primarily as a result of acts of the excess acquisition and loan growth during the year.
At quarter end loans held for investment were $12.6 billion, an increase of $304 million were approximately 10% annualized while average loans increased 87.4 million were 2.9% annualized from the prior quarter.
On a pro forma basis as if the access acquisition that closed on January Onest. Instead of February Onest. Your day loan balances grew approximately 6% on an annualized basis through December 31 of 2019.
Looking forward as John mentioned, we project loan growth of approximately 6% to 8% for the full year 2020 inclusive of the expected run off of third party consumer loan balances.
At December 30, Onest total deposits stood at $13.3 billion, an increase of $260.3 million or approximately 8% from September Thirtyth will average deposits increased $491 million were 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 balances.
On a pro forma basis as if the access acquisition that closed on January onest.
Deposit balances increased approximately 9% for the full year.
Loan deposit ratio was 94.8% at year end, which is aligned with our 95% target for 2020 as John noted, we expect to achieve deposit growth of 6% to 8%, which will be in line with our loan growth expectations.
Now turning to credit quality nonperforming assets totaled $32.9 million were 26 basis points as a percentage of total loans a decline of $3.5 million were four basis points from third quarter levels.
The allowance for loan level loan losses decreased one and a half million dollars from September Thirtyth 242.3 million.
Dollars, primarily due to lower incurred losses embedded in the consumer loan portfolio as it continues to pay down and an improved economic environment, which was partially offset by loan growth during the quarter.
And now I'd like to provide further thoughts on how the adoption of the current expected credit loss model or shiso will impact that ran at union.
As you know under the new seasonal accounting standard that went into effect on January Onest lifetime expected credit losses will now be determined using macro economic forecast assumptions and management judgments applicable to and through the expected life of loan portfolios since our last Cecil update in October economic outlook and portfolio.
No characteristics have been consistent just slightly improved in the company now estimates that the allowance for credit losses will increase to approximately $95 million for more than double the allowance reserve level as of December 30, Onest under the former incurred loss methodology.
As previously noted the allowance increase under Cecil is primarily driven by the companies acquired loan portfolio and the consumer loan portfolio.
We have completed an independent validation of our seasonal model and we plan to disclose the final allowance impact in our 10-K. Once we have worked through the full governance process for for the day one recognition.
From a shareholder stewardship and capital management's perspective.
We are committed to managing our capital resources prudently as the deployment of capital for the at 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 20 cents per say 25 cents per common share an increase of two cents per share.
Or approximately 9% compared to the prior years quarterly dividend level.
The board of Directors had previously authorized authorized share repurchase program to purchase up to $150 million of the company's common stock through June Thirtyth 2021 in open market transactions were privately negotiated transactions.
As of January 17th we have repurchased 2.4 million shares at an average price of 36.9, $36, a 91 cents or $89.6 million until the total remaining authorized shares the repurchase is approximately $60 million.
So to summarize Atlantic Union delivered solid financial results in the fourth quarter and in 2019, despite the headwinds of the lower interest rate environment and accompany continued to make progress towards the strategic growth priorities.
We are revising our operating financial metric targets to reflect the challenging interest rate environment, which we expect will persist through 2021, but remain committed to achieving top tier financial performance relative to our peers.
Finally, please note that we remain focused on leveraging the Atlantic Union franchise to generate sustainable profitable growth.
We remain committed to building long term value for our shareholders.
With that ill turn it back over to Bill. Some you know to open it up for questions from our analyst community.
Thanks, Rob and Kyle we're ready for our first caller.
Ladies and gentleman that this time I would like to remind everyone in order to ask the question. Please press star one on your telephone keypad.
We will pause for a moment to compound the culinary roster.
Your first question comes from the line of Casey Whitman from Piper Sandler, Let's now open.
Hi, good morning, good morning Worksite.
Morning.
Hi, Rob just to be clear on the updated financial targets. He just outlined what are you assuming for fat further rate cuts if any.
Yeah on that front.
Casey what we are assuming is that.
There was no further rate cuts.
By the fed in 2020, and 2021 with what 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 with thinking we will be stabilizing at the levels you see in the fourth quarter on a core basis.
I expect to be in about 335 to 340 range on a core basis now if the fed were to cut.
Which implied curves indicate maybe in the second half of this year.
You could see that that.
That range could drop to the three three to 335 range.
Going forward.
Okay understood.
Let me ask question about expenses. So your core expense run rate is now at around 92 and half 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, or I think last call you guided to like a 4% to 5% increase and expenses for in 20 is that does that still apply here are sort of what are your general thoughts about expenses in 20.
Yes, exactly right Casey So we are coming out of the fourth quarter. We think we're at a run rate about $92 million.
Inclusive of some of the impacts of the investments we made this year.
We are expecting to increase that run rate approximately 4% next year as we continue to invest in.
Various technologies digital products and people et cetera, including wage inflation factor about 3% so.
We're looking at about a 4%.
Priests 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.
The net than an average.
Please for the quarters in Casey. This is John I'd add that to some extent you can expect to see this front end loaded up to that.
Yes, there is the seasonal aspect Rob points, Steve, 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.
There are some things that will begin to drop off the schedule once we get into the second half of Europe . So I'll kind of leave it at that but I would reiterate what Rob said don't look for it to be evenly distributed.
Look for it to be a little more loaded towards the front end up.
Moving trend in the back end.
Very helpful. Thanks, guys I'll, let someone else jump on.
Thanks, Casey and power ready for our next caller. Please.
Okay.
Your next question comes from the lineups Catherine Mealor from KBW. Your line is now open.
Thanks, Good morning.
Okay and Kathryn.
A follow up on the on the margin guidance that you gave Rob as we think about loan yield it seemed like the legacy millennials had a pretty big decline. This quarter. How are you thinking about loan yields going into next year end.
You may be where new production is coming on right now versus where the the legacy loan yield. It is currently setting.
And then on the other is that the balance sheet, maybe on deposit cost how much further.
Reduction do you think you can get and deposit costs, if we don't see any further rate.
Yes, so in terms of the guidance on margin is as mentioned, we feel like we're going to be stabilizing in the range you see it the.
In the fourth quarter some of that.
Is.
When you look at the the feel of that we're going to see it.
Additional.
A loan yield earning asset yield compression not material, but we think we can offset that with additional.
Reductions in our in our costs cost of funds primarily on the cost deposits, we do have some opportunities.
In lowering.
Various deposit rates.
There's a bit of a tail on some of our promotional money markets that we have a six month promotional money market.
Promotions out there some of which will reprice as we continue into this year.
So we think there's opportunity there next in money markets came down about 30 basis points quarter over quarter. So we're expecting that will.
Come down a little further we are seeing a little more pressure on the on the loan yields as well, but when you match up to the compression on that versus lower deposit costs. We should you should be able to stabilize in this 335 to 340 range again, assuming no rate cuts coming down the pike.
And then in that does that also as Tim.
Our level of deployment of the excess liquidity that we signed this quarter as well, yes, that's right yet and so as I mentioned, there was about three basis points of.
Of.
Lower margin due to that liquidity. So that also comes into play as well in that guidance.
Okay and then it's also the fair value.
Accretion guidance came down it was about.
I think about 16 million last quarter for 2020 announced Thirteenseven is this just from.
Is it from feasible or can you give any color on why that high yes in terms of of what you see in the earnings release, the we have not updated that.
Projection for what we think Cecil as we're still working through with potential for seasonal.
The decline the enterprise is primarily because we accelerated you saw a little bit of acceleration in fourth quarter, which kind of.
Reduces the go forward number.
Our feeling is that when we when we read.
Calculate undersea so that we will see a bit of a pick up where an acceleration. If you will have that accretion more in 2020 than which currently showing up on that chart.
So we continue to work through that will give will give better guidance probably in the next quarter.
But.
That's probably a conservative estimate at this point.
Okay that makes sense great. Thank you very much.
Thanks, Lisa in Colorado for our next caller please.
Your next question comes from the line the for William Wallace from Raymond James The line. This now open.
Good morning, Thank you good morning.
Hey, good thank you.
Maybe just following up on the last line of questioning on Cecil How would you anticipate your reserve.
Trend in 2020, once you implement Cecil should should they be flat on a reserve to loan basis or.
Upper continue to be down like we saw 19.
Yes, well interesting.
That front Wally.
You know as you know we will the day one impact.
As we as we've estimated to be about $95 million.
You will see that coming down primarily because of the runoff in our consumer third party consumer book, where.
Presumably that we've got the lifetime losses embedded in that day, one projection so we won't be re.
Well, we see replenishing that reserve for police that book of business for any charges to come through assuming that.
We've estimated properly. So you can expect that that would come down.
Over time, just all things being equal in the.
The portfolio mix remaining the same.
The drivers of increasing the of course will be a loan growth in the other book of business.
The other loan portfolios that we have on the books.
But.
And and of course, if the there's major changes in the economic outlook, you know 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, one reserve level come down a bit over the year.
Okay. Thank you.
And then the 95 million dollar impact does that include the.
Once.
That the full impact yes, yes, yes.
Well it so what's the cadence going back then.
Because.
Yes capital impact is a about we've calculated about 20 to 25 basis points.
In terms of regulatory capital that will be phased in over three years.
Okay and on somebody the T. impact will be will be immediately following the.
Call that Tc if I go about 20 to 25 Bips.
Okay.
And then so looking at your your financial your revised financial targets that 15% to 17% return on tangible common what what TC base do you.
Assume for those targets.
We expect to you know as we've mentioned.
And we used our goal is to be at about 8.5% TCV and I think our projections call for that to be about even half the some five for for this year.
Including the impact to see show.
Okay.
John I believe in your prepared remarks, you mentioned the continued opportunity.
Around Truest branch closures did you say that you anticipate those closures in late 2021, yes, what they're saying Wally is that applies Virginia has the most overlap, including the greater Washington area any of their markets in the system. They intend to go last year, presumably to get it right and so we.
We do not expect those closures to occur until.
The latter part or at least the second half of next year. In fact, as you may have read there, saying that there will be no branch closures anywhere for a year, which doesn't surprise me just given the scale.
This combination we've seen a leadership announcements of course of come through.
They are consolidating their commercial banking teams for the time deem centrus branches and BBSI branches continue to run effectively independently.
And so we have we are adjusting a few of our plans accordingly.
Yes, surprisingly, we do market research you'd be surprised at how many consumers have no earthly idea. These two companies are emerging at this point not a clue.
Commercial customers certainly did so we don't while we need to make sure that we synchronize some of our initiatives with the maximum disruption opportunity on the consumers.
Okay. So so you were truly a word and there were no announcements on any new M&A in 2019.
You have continued opportunity around.
Truest disruption.
Through 2021 or even into 2022, it sounds like how does the M&A.
Discussion change or does it change.
In 2020.
Not really if you listen I'm not my comments were carefully made.
So what we're saying is that we have a number of initiatives and I listed off quite a few.
That have been completed and they're more underway. So our highest priority right now is to really get ahead of this through us as I said I feel like we've got the opportunity while we're not engaged and a merger transaction conversion integration effort, we need to make a run for 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 discussions going on out there at the level of inbound inquiry that we're receiving does lead us to believe that there will be opportunities when we when we decide that that it's time.
It is.
We are not of the mindset that we would want to do anything this year, but we have conversations continuously.
We'll continue to evaluate this in real time, we look at the full spectrum of opportunities on the M&A front.
And I would say that.
There is a very real opportunity as we get into 2021, you could see as active again.
For now what we do not want to do this to put off or delay.
Strategically important initiatives internally and they are all just products by the way I hinted at this will talk later on about we have a stem to stern review of processes inside this organization will be implemented we are implementing its happening now robotic process automation there a number of things that do cost us some money frankly on the front end that will make the company more.
Efficient more scalable more productive and offer higher quality and so this is the window to do it so.
That is our view.
Okay. Thanks, and this is just the Ticky tack question, Rob, but are we done with merger costs and as a quick follow up when when should we see the discontinued operation.
Okay.
Yes so.
As I mentioned that.
Prepared remarks, you have merger costs are done and rebranding costs you've done so we're basically.
Running at an operating.
All forward here operating expense base.
And on discontinued same thing.
Yes, okay, great. Thanks, I'll, let somebody else ask question.
Thanks, Wally things falling tolerating for our next caller please.
Your next question comes from the line of Brody Preston from Stephens, Inc. The line is now open.
Right.
Hi, Good morning, everyone are you.
Morning.
I have said.
A couple this clean up questions are far get into some of my other question. So I guess just following up on the C. So commentary. So I guess, just the 20 to 25 basis points I'd be about a $35 million capital impact somewhere in that range as a is that fair Rob.
Yep Yep, that's about right Brodie.
Okay.
And then I guess as I think about as I think about you know the reserve ratio moving forward you know I understand that the consumer book is running off but as the acquired book also runs off I'm, assuming that that's carried out a you know if we step if we segment the buckets for the loan loss reserve between origination and acquire originated and acquired.
I'm, assuming that that acquired bucket is the the reserve ratio on that as a little bit higher as and so as that runs off does that also I guess add to the to the loan loss reserve ratio moving lower overtime.
Yeah, I don't I don't think thats going to impacted.
Not much in terms of the acquired required books received the good acquire book, which is what we're putting the reserve.
Which is pretty much in line with.
Legacy unions reserving so I wouldn't expect that that's going to be a driver.
There is of course, the PCB to purchase credit to created but that's not a big number.
For us here.
Okay, and then on the share repurchases just comparing the press releases it looks like you bought back about $45 million worth of stock.
This quarter I'm, just wondering if you had the shares repurchased or the average price that you repurchase that just for the fourth quarter.
Yeah I think.
Total it's like 36.91 since we started in the fourth quarter was a big it was about 37.
The recent $1 in 30 cents or so 30 740.
Okay.
Great. Thank you and I guess and just going back the NIM guidance, you said you sort of expected it to stabilize in this 335 to 340 range on a core basis is that does that.
GAAP core NIM that you're guiding to.
When you see.
Would you say gap.
I mean, you provide you provided you yeah, you provide an F.D. and a gap Martin in your press release, and so just thinking out there the core margin on a gap in an ft basis, just yet that's ft basis that we're talking about here.
Okay. So it sounds like maybe just a little bit more compression in the first quarter, and then sort of stable to up from there.
Yes, that's okay.
All right.
On the touch on what percent of loans the loan portfolio is tied to LIBOR and how much of that as one month LIBOR.
Yes, the total book about 24% is tied to one month LIBOR suits.
Pretty sensitive to that LIBOR.
Right and as you know it declined quite a bit in the fourth quarter about 30 basis points I think so there was a big driver of.
The loan yield compression so.
We saw okay.
Okay, and then what percent of the portfolio is tied to prime.
About 12% 12, 13%.
Okay.
And I'm, assuming these loans sort of reprice throughout the quarter.
On a monthly basis.
Yes, that's right.
Okay similar relates to you know at BEC backed backs, which we press a little more I guess about monthly basis I think they typically reprice.
Okay, and then on the CD book, I guess I was a little bit surprised to see the this the cost to see these you know flat to up a basis point just given some of what I saw you were doing on the the CD.
Pricing front in the quarter and so I guess what was the what was the driver of that and what could we expect for a time deposit costs moving forward.
Okay.
Yeah, I think well you 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.
That.
Are playing out but you can expect to see those rates coming down as weve. This we've lowered the.
The rates over the last two quarters.
So going into next year, you'll see those declining as as as you'll see money market rates start to come down as well.
All right and then just a couple left a couple of quick ones left the mortgage was a little bit weaker than I was looking for and it looks like refi volumes weren't quite as strong as though as I would've thought I'm just want to done better understand what drove that.
Yeah actually I think in terms of what our expectations will it came in pretty well when you consider that fourth quarter is is typically a lower seasonal.
Quarter for mortgages, so we feel pretty good about that.
So we were expecting that to tick down for the quarter.
Okay.
And then wealth management, you had a pretty good pretty strong quarter in terms at U.M. wanted to get a sense or 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.
Yes, I would say a lot of what you saw there was driven by the market.
In terms of the driving a U.M. club.
Less so of new business coming in although we did have some coming in.
Remains to be seen in terms of expectations in 2020.
Our new leadership, there is undergoing a review of the entire.
Business unit, and we do expect to see an uptick there, but some of that's dependent on where the.
Some of its market driven as well in terms of a them. So we'll see where we go from there but.
Taking that out equation, we do expect to see some.
Positive momentum in that business, but pretty it's too early to tell at this point.
All right great. Thank you very much everyone.
Thanks, Barry hurting in Colorado for next caller. Please.
Your next question comes from the lineups Laurie Hunsicker from Compass point the line this notion.
I want to thanks, Hi, good morning, Rob I just wanted to go back.
Tim margin again, I know you've talked a lot about at that and you know Directionally. It's me look at just the accretion income piece and I'm thinking about reported margin I just trying to make sure that I have this trade apples to apples because that Christian income as well is back this quarter. So if we're looking at it going forward your reported margin.
You know keeping in line with your comments on your core margin you reported margin probably is going to track in that 345 sound like high 340, 340 349 range.
Yeah, absolutely, yes, I've got it a 345 to 350 dependent on core that's right. Okay. Perfect I, just I make sure I got the right. Okay, and then just a few things on expenses here.
Just specifically three line items that lift outsized and I wondered if you could help us think about that around share your comments on the technology that professional and the marketing.
Was there any onetime items that Toronto those higher.
Up.
Not really other than on the marketing uptick we had some credits in the third quarter, which.
Did not recur in the fourth quarter. So the fourth quarter was a bit more of a run rate basis.
For for marketing.
In terms of technology and processing, we're starting to see the effects of somebody initiatives that we put in place during the year for instance, no adds to a processing costs et cetera. So.
There is enough to related to some of those items.
That started to come through.
In the fourth quarter.
In the other item, which one was that there was a.
So just to touch propel a yeah, yeah. The professional fees for professional fees, we do have some consulting.
<unk> expenses were incurring related to.
Some of the initiatives that we're putting in place so we're putting in a new.
Deposit pricing.
Platform.
The so weve been some consulting dollars on we've got some other projects robotic automation. This is.
John alluded to so there's some up.
Consulting related to strategic initiatives the accident embedded in those numbers.
Okay, and so I guess and one more question here as we think about the branches that you're close obviously now more or at least in the near term memoir, [noise] rebranding or branch closure expenses, but are the cost saves from those branch closure is now fully fast or are we gonna see yes, yes.
So we definitely.
I think we sit above 400000 500000.
Quarter that we we did see in the fourth quarter, Okay, and then where do you guys stand in terms of thinking about branch closures. This year are you feeling good about the number.
Well, we feel pretty good about where we are in terms of the the calling that we've done a something that we are exploring them. We're about that do wind as we have an opportunity in Richmond, what we're going to go.
Essentially closed two branches and move them into one new better location.
And as we assess the franchise and I'll ask kind of Brian had a consumer banking to comment we think we could replicate that model end up with better located fewer branches in metropolitan markets and lower expense run rate, China, we don't want to get into too much detail, but any perspective each year on that you all I'd add is that.
Through acquisition, we have some branches that aren't super consistent with our brand and not necessarily in the best shape and so.
We'd like to get a little bit less of a debt dense franchise.
Right.
Think we can do that probably by.
Taking a 14.
All 14 branches over time and consolidating them into seven newer branches. So that's kind of what we're looking to do but that's that's a bit of a long term play as we build up as new branches.
Okay. Okay, Great and then John you mentioned to 2019, you had higher 39 people from PBM teeth Suntrust how.
Are you still actively looking to hire and then just as those 39, how many people that part of your 19.
I guess the answer is we're always in the market for talent.
And we're not going to have a big net add a lot of those were not all net adds to be very clear.
And so we had I would say a good half of that number would be and various roles in the retail bank, especially branch managers were outstanding alternative for really.
Bankers coming out of these larger organizations that I'm looking at Dave Rang on here maybe.
Best guess, maybe 40% or so those would be commercial banking related we think for relationship manager you about 15 between commercial originators and credit oriented folks and greater this year you know.
Notably in ads in the single digits, yes in total, but it's like John said, it's more of a net number because we you know so you know we have retirements and other things that you will.
Replace this year right great. Okay. One last quick question here.
Question, If you wrap your third party consumer what what is the balance and then as that lets lending pop. Thanks.
Oh, yes terms of the lending club, we were about 118 million at the end of the quarter. So that was down about 22 or $3 million.
And on that front Lori by the end of this year, we expect to be less than probably 15, who are less.
As it continues to run off.
Great and then do you have the number for what your your third party consumer Richie does that get most of that funding.
What the telco, 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 will also be running down this year as well.
Okay figure, so you're right around 210, or 20 million yeah, a little over the yes, probably more like in the 225 to 30 range. Okay, great. Thanks, I'll leave it there.
Thank you Laurie.
And Oh, we have time for one last caller. Please.
Your next question comes from the line a fugitives Queensland from Barclays. Your line is now open.
Good morning Eugene.
Good morning, Thank you.
I wanted to follow up on your loan growth target for 2020, I can you share how much of that 6% to 8% loan growth are you expecting to come from the legacy truest customers.
No we we cannot do that.
Oh, that's the fair and.
Can you help us maybe give us some color on how your initiatives.
To.
Go after the truth customers are progressing.
Very well I'll ask Maria Tesco, President Atlantic and you back to provide some commentary we have a comprehensive set of initiatives now the timing of some of these has changed a bit certain guerilla marketing tactics for branches that are going to be consolidated.
Doug doesn't really make a lot of sense at this point in time or do you want to speak just in terms or high level. How project forgive me I just said it projects sundown for those of you don't know it is our formally secret codename for taking advantage of this year.
Of the Suntrust Deviancy disruption I hope you seem to humor and sun down well.
We see this the multi year opportunity.
Oh, Yeah, we're planning on a marathon event.
Oh with initiatives to go over the next couple of years.
Right.
Yes, okay.
Closing the gap.
Our competitive that.
Exactly.
[laughter].
Term plan.
[laughter].
We know that disruption were at ground zero.
And.
We have a sense.
What will happen that will be disruptive to customers.
So those initiatives without getting too.
Really set again.
Timeline disruption.
Literally every business has their plan.
Yeah Yeah.
And recognizing that this is a or a public forum, we don't want to show or hand, too much but rest assured there's a very robust action plan to Maria's point each line of business has a very targeted.
Set of initiatives and I would reiterate this is a multiyear disruption. It has begun this will play out for years.
Yeah, and I think you'll see a lot of initiatives.
You talked about.
Oh, Oh Hello.
Okay.
Turning in the market, that's certainly those specific product.
And on the commercial side, we do discreetly track clients that we have one coming out of BB, a tier Suntrust and Trust me there as a list and it's growing we're not going to get into details, but I'm, we're having pretty good success chipping away at that.
That sounds pretty good given the number of technology initiatives, you've talked about the can you share with us or what is your technology budget for the last year and for 2020, and maybe help us understand how much of it you're spending to run the bank versus innovate the bank.
Yes, I don't want to answer the former question Eugene in terms of too much specificity on exactly what we're using for digital strategy.
In some respects, there's certainly a dollar cost issue here the one of the bigger constraints for a midsized bank like US candidly is not so much the dollars. Although that's important is having the subject matter experts available to work the project and that is the single biggest reason why we don't want to.
He was very near term.
Acquisition, because we would take those very same people offline to work on a merger conversion integration and we need them focused on on laying this out Rob what if anything would you share Armstrong said.
How much do you think we're spending on new would be a relatively small portion.
Yes, I think incremental you're probably talking about you know maybe a 10% increase.
Year over year from what we view on what we spent on on that so incrementally, including all the digital type investments from racking all the automation Zelzal world and Cnos a world. So.
I would say probably a good 10% increase in our budget related and then the on allergy budget for say you have to think Holistically I'm looking at Kelly break and now he's had of digital strategy and customer experience, telling how many people on your team now today, there's 17 people that support digital strategy on another three that support.
Variant and when I got here.
It was probably one and a half and you've been here just under a year and how did you walk into I loved them. There is about four people out for us. So there you guys. So it's it's people as well we're working on these initiatives and you can expect seat on the digital strategy side that the idea is to have essentially according to schedule. So there's a problem that goes out.
On a long long time in terms of.
Timeline of things, we want to do everything from continuous upgrades to the mobile walking suite of offerings you product initiatives. Some of this needs to be modulating.
Hi, Brian frankly, the doing more.
Right now but.
Don.
Sorry, Eugene that's probably that's much qualities, we're willing to share publicly.
This is actually very helpful. Thank you very much.
Thank you Jane and thanks, everyone for calling in today as a reminder, will have a replay available at our investor website investors that Atlantic Union Bank Dotcom will afford to talking with you next month I feel good day.
This concludes todays conference call you may now disconnect. Thank you for your participation.
Wilson.
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