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Union Bankshares Corp  (NASDAQ:AUB)
Q1 2019 Earnings Call
April 24, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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, Investor Relations, you may begin your conference.

Bill Cimino -- Vice President and Director of Investor Relations

Thank you, Kyle, and good morning, everyone. I've 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, http://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 facts 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 and analyst community. And now, I'll turn the call over to John Asbury.

John Asbury -- President and Chief Executive Officer

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 at Access National Corporation, completing the last piece of the Virginia jigsaw puzzle by adding a strong franchise in Northern Virginia; announced that we intend to rebrand the bank to Atlantic Union Bank on May 20th, concurrent with the Access systems conversion; delivered strong deposit growth and loan growth was in line with our expectations, given the seasonally low loan demand in the first quarter and our strong finish to the fourth quarter. We showed year-over-year improvements in our operating profitability metrics.

As communicated previously, with the addition of Access we have stepped up our financial targets, which we expect to achieve in late 2019 and in 2020. They're as follows; operating ROA between 1.4% and 1.6%, 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 three quarters of 2019 to be noisy as we complete the Access integration. We expect to achieve our stepped-up financial targets on an annualized basis in fourth quarter 2019, once the Access cost saves are materially complete. We do have a slightly different timeline for our wealth management integration, which will not have its systems conversion complete until early 2020.

As a reminder, the Access acquisition closed on February 1st, 2019. On a pro forma basis, as if the Access balances were included for the full quarter, we had a good start with loan growth around 3% annualized for the quarter. The first quarter is traditionally a slower quarter for loan growth, particularly after such a strong finish to the fourth quarter as we had and we saw levers -- levels of commercial real estate paydowns remain higher than historical trends. And that's been a consistent issue over the past few quarters.

C&I line utilization during the quarter remained steady at approximately 41%. Having said that, the former Access franchise posted mid-single digit growth in loans for the quarter, with its loan growth outperforming Union on a pro forma basis. Access' deposit growth was slightly lower than its loan growth. The Union and Access teams are energized by the combination and we are competing well together out in the marketplace.

Our pipelines are higher now than at this point in the first quarter of 2018 and at the beginning of 2019, and also better balanced. We continue to expect full year 2019 loan growth to be in the high single-digit range, which means 7% to 9%. On a pro forma basis, as if the Access balances were included for the full quarter, we had 8.6% annualized growth in deposits during the quarter.

We saw a good balance between consumer and commercial deposit growth during the quarter, some of which is seasonal. We continue to believe that we can deliver deposit growth in the upper single-digit range for the full year to match loan growth, but not necessarily in every quarter.

Turning to our 2019 priorities, we're off to a strong start for the year. As I've said since I arrived, setting goals, tracking back to them and delivering results is fundamental to how we manage this Company. Here are our previously communicated 2019 priorities. First, diversify our loan portfolio and revenue streams. We continue to diversify our loan book, as evidenced by continuing growth in C&I loans, owner-occupied real estate and the addition of Access' loan book. We're especially encouraged by the reception we're receiving in the marketplace with our commercial banking emphasis.

We can compete against anyone in the small to mid-sized commercial space, which covers 99% of all Virginia businesses. As Virginia's irrefutable regional bank, we're building a reputation as a capable, responsible -- pardon me, responsive, local alternative to the super regional and national banks. It's fair to say we now -- we have now positioned ourselves as the home team in Virginia and we continue to learn how to more effectively leverage our home-field advantage.

Next, growing core funding; our loan to deposit ratio was approximately 95%, in line with our long-term goal. As I've mentioned in the past, we've increased our focus on gathering deposits, installed a competitive treasury management system and built out our treasury management sales teams. We're excited about the ability to scale and replicate a number of business deposit gathering strategies we've learned from Access, especially in our metropolitan markets.

Next, managing the higher levels of performance. As noted, the quarter was noisy with the closing of Access, but when we look at it year-over-year, we improved all of our operating profitability metrics and we've made progress toward hitting our top-tier financial goals.

Next, strengthen digital capabilities. We are making steady progress in this space and after the Access core systems conversion, we intend to direct the freed up program management capacity against our digital strategy. As a reminder, we view digital as a way of doing business and a way of thinking, and not a collection of discrete products and projects. We will increasingly apply digital technologies throughout the Company to improve the client and teammate experience. Digital will underpin all that we do to realize our value proposition of making banking easier, which is the next priority, making banking easier.

We'd begun with implementation of Encino (ph), an end-to-end loan origination system for our Commercial Banking teams. The former Access teams will implement this in conjunction with the core systems conversion. Having a paperless end-to-end loan origination system will make banking easier for both our commercial clients and our own teammates, by reducing cycle times, eliminating redundant data entry and providing better insight into status, performance and improvement opportunity.

We've demonstrated tremendous progress and focus on commercial banking over the past two years here at Union and we've now initiated a similar transformation to our Consumer Banking Division. I am convinced we have not yet realized our growth potential for consumer banking, and we have lot of work to do here. With the right consumer leadership now in place, we're ready to take this on.

During the quarter, Shawn O'Brien joined our management team as our Consumer Banking executive. Shawn has an impressive balance of experience between consumer operations, strategy and digital, and like the rest of the executive management team here, Shawn brings significant experience in larger scale, more complex institutions before joining Union. With the breadth, depth and strength of consumer banking experience we now have in Shawn and our President of Union Bank and Trust, Maria Tedesco, I feel we have a highly differentiated Consumer Banking leadership skill set compared to other mid-size banks, because we hope to mirror our great Commercial Banking success with our Consumer Banking transformation.

Maria often notes how our Consumer journey starts off in a much better place than past transformations she has led because the cultural drive to deliver a great customer experience already exists here at Union. While we're proud of the numerous customer service awards we have earned and continue to earn, we need to do much more than simply provide a pleasant banking experience, and we will.

Our transformation will focus on streamlining the operational demands placed on the branches, so our teammates have more capacity to deliver customer needs-based relationship banking. We will segment our branch network to ensure that the branches are geared toward serving the specific opportunities of their trade areas. This is a more sophisticated approach than our historically one-size-fits-all Consumer Banking strategy at Union. An example is our plan to replicate the deposit gathering branch structure of Access in business intensive metropolitan trade areas that were supported. This effort is just getting under way and we'll continue to update you on our progress throughout the year.

And last, integrate Access National Corporation. We had a smooth legal closing on February 1 and the core systems integration planning work for the weekend of May 18 is nearly complete. We held a simulated conversion over the March 23rd weekend that went very well, so well in fact that we canceled our planned second simulated conversion deeming it unnecessary. Having learned from the Xenith integration, the teams are executing well against our playbook having built a reliable, replicable process and change in management framework.

I'll now touch on three other topics from the quarter before turning it over to Rob. First is our new brand, Atlantic Union Bank, which will go live on May 20th. Having a unified bank brand and a distinct wealth management brand throughout Virginia, Maryland and North Carolina reduces brand complexity and ensures recognition, clarity in the marketplace. Atlantic Union Bank retains our 100-year Union focal point while incorporating our recent geographic expansion throughout the Mid-Atlantic.

Middleburg Financial creates a wealth management brand separate and distinct from the bank while building on the long-established brand equity from Middleburg Trust. We're excited about the brand possibilities these two names will create in the marketplace. Also if approved at our shareholder meeting on May 2nd, we will also (ph) change the name of the holding company to Atlantic Union Bankshares Corporation on May 20th, matching the name of the bank. We will also change our stock trading ticker to ANB to reflect the new company name.

Next, I want to comment on our current thinking regarding our geographic markets and future expansion plans. We believe that our platform, irrefutably Virginia' s regional bank, with the potential to become the Mid-Atlantic' s regional bank, is capable of competing successfully against the national and super regional banks and that we have a unique opportunity to take advantage of disruptions in our marketplace. The embedded organic growth potential for Atlantic Union Bank combined with the potential disruption caused by merger of two large competitors gives us a unique opportunity in which we are laser focused.

While we can' t predict what other opportunities may arise to build out our franchise, our intentions at this time are to focus on organic growth, close any remaining competitive gaps, harness the power of this great franchise across our Mid-Atlantic footprint, build the bank one customer at a time and deliver on our promise of making banking easier.

Finally, credit quality remains strong. The economy in our footprint is steady and we do not see evidence of systemic changes to our credit environment. Charge-offs declined to 15 basis points annualized and we saw reductions in non-accrual loans in the fourth quarter. The majority of the charge-offs continue to be our third-party consumer loan portfolio. While this is a lucrative asset class for us given its yield, it' s not a strategic focus area for the bank and it will be wound down over time.

While charge-offs are typically lumpy quarter-to-quarter, we continue to expect full-year 2019 to look something like 2017 and '18 from a credit quality perspective, barring some unexpected change in the macroeconomic environment. As you have heard me say each quarter since I arrived, I believe problem asset levels at Union and across the industry remain below the long-term trendline. Eventually, we will see a return to more normalized credit losses but we still can' t tell you when to expect that except to say that from this vantage point we don' t see it happening in 2019.

In summary, Union started off 2019 on the right foot making progress against our six strategic priorities with strong deposit growth and loan growth expected to reach high-single digits for the year. We are excited to have the Access and Middleburg teams now a part of Union, and we look forward to our May 20th rebranding as Atlantic Union Bank. I remain highly confident of what the future holds for Union and the potential we have to deliver long-term sustainable performance for our customers, communities, our teammates and our shareholders.

I will close with a familiar message. Union is a uniquely valuable franchise. It' s dense and compact in great markets with a story unlike any other in our region. We have assembled the right scale, the right markets and the right team to deliver high performance in a franchise that can no longer be replicated in Virginia. Our combination with Access National Bank and attractive Virginia economy, made even more so by the implications of the coming Amazon HQ2, incremental growth opportunities in our North Carolina and Maryland operations, and what we believe will be a multi-year disruption for two of our largest competitors only further strengthens the already strong hand we hold and we play that hand every single day.

I'll now turn the call over to Rob to cover the financial results for the quarter. Rob?

Rob Gorman -- Chief Financial Officer

Thank you, John, and good morning, everyone. Thanks for joining us today. I'd now like to take a few minutes to provide you with some details of Union's financial results for the first quarter. Please note that our first quarter results only include two months of financial results from Access, as we closed the transaction on February 1st of this year.

Before we get started, I'd like to share some data points as it 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 to $2 billion 858 million while the fair value of liabilities assumed equaled $2 billion 559 million.

Total goodwill rising from the transaction equaled $201 million. Total loans acquired totaled $2 billion 217 million with a fair value of $2 billion 176 million. The (inaudible) came in at approximately 1.9% or $41.1 million. Total deposits assumed totaled $2 billion 228 million with a fair value of $2 billion 227 million. 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 makes 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 of my commentary will focus on Union's first quarter financial results on a non-GAAP operating basis, which excludes $14.6 million in after-tax merger-related costs, but includes losses from discontinued operations of $85,000 and approximately $322,000 in after-tax expenses related to the Company's previously announced rebranding to Atlantic Union Bank. For clarity, I will specify which metrics are on a reported versus operating basis.

In the first quarter, reported net income was $35.6 million and earnings per share came in at $0.47. Reported return on assets was 92 basis points, reported return on tangible common equity was 11.84% and the reported efficiency ratio was 70%. On a non-GAAP operating basis, which as noted excludes $14.6 million in after-tax merger-related costs.

Consolidated net earnings for the first quarter were $50.2 million or $0.66 per share. Non-GAAP operating return on assets was 1.3%, up 90 basis points from the first quarter of 2018. Non-GAAP operating return on tangible common equity came in at 16.27%, which was up 27 basis points compared to the prior year's first quarter. And the non-GAAP operating efficiency ratio improved by 2% to 54.4% compared to 56.4% in the first quarter of 2018.

As John noted in his comments, we expect further improvements to these financial metrics throughout this year and next, with the addition of Access and have raised our top-tier financial metric targets accordingly. As John mentioned, the new targets are operating ROA between 1.4% and 1.6%, operating return on tangible common equity between 16% and 18%, and an operating efficiency ratio at 50% or lower. We expect to achieve these new targets on a quarterly basis in the fourth quarter of this year and on a full year basis in 2020 once we have fully integrated access to realize the strategic and financial benefits of the combination.

Now turning to the major components of the income statement, tax equivalent net interest income was $130 million, up $18.9 million from the fourth quarter, due to higher loan growth and the addition of Access. The current quarter's tax equivalent net interest margin was 3.8%, an increase of 10 basis points from the previous quarter and was up 8 basis points from 2018's first quarter.

Net increase in the purchase accounting adjustments for loans, time deposits and long-term debt added 16 basis points to the net interest margin in the first quarter, which was up from the fourth quarter's 13-basis point impact, primarily due to the additional increase in income related to the Access acquisition. The increase in the tax equivalent net interest margin was principally due to an 18-basis point increase in the yield on earning assets, partially offset by an 8-basis point increase in the cost of funds.

The quarterly net increase in earning asset yield to 4.92% was primarily driven by higher loan portfolio yields, which improved by 90 basis points to 5.27% during the quarter due to the impact of increased short-term interest rates on variable-rate loan yields which added 30 basis points to the loan yield increase and higher accretion income which contributed 6 basis points of the quarter-over-quarter loan yield increase.

The quarterly 8-basis point increase in the cost of funds to 112 basis points was primarily driven by higher deposit costs, which increased 10 basis points from the fourth quarter to 86 basis points, as well as the day count difference between quarters. These increases to the cost of funds were partially offset by favorable changes in the overall funding mix between quarters, which lowered the cost of funds.

The provision for loan losses for the first quarter was $4 million or 15 basis points on an annualized basis. For the first quarter of 2019, net charge-offs were $4.2 million or 15 basis points on an annualized basis compared to $5 million or 21 basis points for the prior quarter and $1.1 billion or 5 basis points for the same quarter last year. As John noted, the majority of the charge-offs came from non-relationship third-party consumer loan portfolio.

Non-interest income increased $1.4 million to $24.9 million for the quarter ended March 31st, 2019 from $23.5 million in the prior quarter. The increase in non-interest income was primarily driven by the acquisition of Access, partially offset by a decline in other operating income of $1.4 million, primarily due to life insurance proceeds of $976,000 recognized in the fourth quarter of 2018.

Excluding merger related costs and amortization of intangible assets in the first quarter of 2019 and the fourth quarter of 2018 respectively, operating, non-interest expense increased $15.1 million or approximately 22% to $84.4 million when compared to the fourth quarter of 2018. The increase in operating non-interest expense was primarily related to the acquisition of Access as well as salaries and benefit expenses increase, primarily due to seasonal increases in payroll taxes and annual merit adjustments. Importantly, we are on track to hit our $25 million Access related merger cost savings targets over the course of the year.

First quarter expenses also included $407,000 of rebranding related cost. Going forward, we expect to incur an additional $6 million in rebranding costs over the next two quarters, the bulk of which will be spent in the second quarter. In addition, we expect to capitalize cost of approximately $6 million related to the installation of new Atlantic Union Bank signage across our footprint, which will be depreciated over a 5-year period.

The effective tax rate for the fourth quarter came in at 14.9% compared to 16.5% in the fourth quarter. The decrease in the effective tax rate was primarily due to the increase in merger expenses related to the Access acquisition. For the full year, we're expecting an effective tax rate in the range of 16.5% to 17% in 2019.

Now turning to the balance sheet, period end total assets stood at $16.9 billion at March 31st, which is an increase of $3.1 million from December 31st, primarily as a result of the Access acquisition. At quarter end, loans held for investment were $12 billion, an increase of $2.2 billion, while average loans increased $1.6 billion from the fourth quarter. Pro format basis, as if Access balances were included for the full quarter, loans held for investment increased $86 million or 2.9% annualized from December 31st levels -- pro forma levels. Looking forward, as John mentioned, we continue to project upper single digit loan growth for 2019 with some seasonal variability between each quarter.

At March 31st, total deposits stood at $12.5 billion, an increase of $2.5 billion from December, while average deposits increased $1.5 billion from the prior quarter. On a pro forma basis, as if Access were included for the full quarter, deposits increased $260 million or 8.6% on an annualized basis. Deposit balance growth was driven by increases in demand deposits, money market savings and time deposit balances.

Turning to credit quality, non-performing assets totaled $32.2 million or 27 basis points as a percentage of total loans, a decline to $1.5 million and 8 basis points from fourth quarter levels. The allowance for loan losses was relatively unchanged from December 31st at $40.8 million. The allowance as a percentage of the total loan portfolio increased 8 basis -- decreased, I should say, 8 basis points to 34 basis points at quarter-end, primarily due to the acquisition of Access. As a reminder, in acquisition accounting there is no carryover of the previously established allowance for loan losses from the target.

So to summarize, our first quarter operating results demonstrate the significant earnings capacity we've envisioned as Virginia's regional bank and the Company continue to make progress toward strategic growth objectives. The Access merger integration work is on track, and we are confident that we will achieve the strategic and financial benefits from the Access combination. Finally, please note that we remain focused on leveraging the Union franchise to generate sustainable, profitable growth and remain committed to achieving top tier financial performance and building long-term value for our shareholders.

And with that, I'll turn it back over to Bill Cimino to open it up for questions from our analysts community.

Bill Cimino -- Vice President and Director of Investor Relations

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

Questions and Answers:

Operator

(Operator Instructions). Your first question comes from the line of Catherine Mealor from KBW. Your line is now open.

Catherine Mealor -- KBW -- Analyst

Thanks, good morning. I want to start with the margin, Rob, I might have missed this. 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 if you could just confirm that and talk about your outlook there. Thanks.

Rob Gorman -- Chief Financial Officer

Yeah, Catherine, this is Rob. In terms of the go-forward, our current modeling has as -- 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, 7 basis points higher than fourth quarter at 364% (ph). 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 basis points to 2 basis points a quarter as we go throughout this year. So again, the guidance is pretty much in sync with our fourth quarter guidance in terms of the compression, but it's starting with a higher base.

John Asbury -- President and Chief Executive Officer

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

Rob Gorman -- Chief Financial Officer

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

Catherine Mealor -- KBW -- Analyst

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

Rob Gorman -- Chief Financial Officer

That's right, yes.

Catherine Mealor -- KBW -- Analyst

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

Rob Gorman -- Chief Financial Officer

Yeah, 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 start to increase in the second quarter. Maybe a couple of million we'll get out of the second quarter and then we'll get the full run rate toward 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 are talking about -- probably about $87 -- $86 million, $87 million run rate if you exclude the amortization and maybe closer to $89 million to $90 million if you include the amortization intangible -- intangible amortization.

Catherine Mealor -- KBW -- Analyst

Okay. And how does the name change impact the timing of achieving cost savings? Is there any -- is that changing at all or I guess you're changing the name in May and that's around where (ph) the conversion is?

Rob Gorman -- Chief Financial Officer

Yeah, no, it doesn't affect it at all other than we have increased expenses to get it done. We are working out -- from an integration point of view, rebranding it and integrating 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.

Catherine Mealor -- KBW -- Analyst

Great, thanks. (inaudible).

Bill Cimino -- Vice President and Director of Investor Relations

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

Operator

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

John Asbury -- President and Chief Executive Officer

Hi, Casey.

Casey Whitman -- Sandler O'Neill -- Analyst

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

John Asbury -- President and Chief Executive Officer

Yeah, just back on the guidance that we gave in 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 our variable rate book, did reprice HELOCs, et cetera. As reminder, we have -- about 48% of our loan portfolio is variable rate of which about 40% is either prime-based or one month LIBOR-based. So we -- so that helped the margin.

We also saw a nice favorable funding mix. We had good growth in DDAs this quarter. We were able to pay down more than we thought in federal home loan bank or wholesale borrowing. So, that also contributed to the more favorable first quarter results. Again going forward, we do expect that 1 basis point to 2 basis points of compression over the next several quarters.

Casey Whitman -- Sandler O'Neill -- Analyst

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

John Asbury -- President and Chief Executive Officer

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

Casey Whitman -- Sandler O'Neill -- Analyst

Okay, helpful. Thank you. And then I might have missed this in your comments or just be -- 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?

John Asbury -- President and Chief Executive Officer

Yeah, that sounds about right. I didn't mention the merger-related cost, but we have incurred about $18 million this quarter, about $2 million in the fourth quarter. We had modeled that we come in about $38 million. So you should see probably at that level, 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 costs related to rebranding in the third quarter, but we should be done by the end of the third quarter.

Casey Whitman -- Sandler O'Neill -- Analyst

Thank you. I will let someone else jump on.

Bill Cimino -- Vice President and Director of Investor Relations

Okay. Thank you, Casey, and Kyle, we're ready for the next caller please.

Operator

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

Austin Nicholas -- Stephens Inc. -- Analyst

Hey guys, good morning. Maybe just on the high-single digit loan growth confidence, maybe you can talk a little bit about what you're seeing in the pipelines and then maybe more specifically, 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 would be helpful.

John Asbury -- President and Chief Executive Officer

Yeah, I'll start and I then I'll ask Head of Commercial Banking, David Ring, to chime in. So we're feeling good and you heard us reiterate guidance for high single-digit loan growth for the year, we're doing that just based on one strength of pipelines. We're clearly up compared to where we were this time last year. Last year we did ultimately book high single-digit growth in loans. We -- our production is very good. As we mentioned, commercial real estate paydowns continue. It's not really worse than the last couple of quarters, 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. Let me make sure that your microphone is open, yeah.

David V. Ring -- Commercial Banking Group Executive

Yeah, Austin, so what John said is very accurate. We have strong pipelines going in 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 and move into the first two weeks, three weeks of the second quarter and they have closed. So, we're really off to a very good start. And it -- the trend that we see right now is very high-single digit growth. So, we feel very comfortable.

Austin Nicholas -- Stephens Inc. -- Analyst

Can you speak to the mix of the pipeline days (ph)?

John Asbury -- President and Chief Executive Officer

Just in general terms...

David V. Ring -- Commercial Banking Group Executive

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 environmentals. 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.

John Asbury -- President and Chief Executive Officer

I would remind you, Austin, we had some pretty good additions to the commercial team last year. As you'll recall, this folks are maturing as they continue to come online. Access is now operating with the balance sheet as of this moment 5 (ph) times which we'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 paydown phenomenon that we have in the Union portfolio. So bottom line, we're feeling pretty good and we think we're set out for a high-single digit loan growth here.

David V. Ring -- Commercial Banking Group Executive

Just to add that, our Access team has come onboard very fast and their pipelines are strong as well.

Austin Nicholas -- Stephens Inc. -- Analyst

Understood. Okay, that's helpful. And maybe just on fee income, maybe just first on mortgage, I know you touched on the kind of disintegrate -- 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?

Rob Gorman -- Chief Financial Officer

No, no other items of that nature. I will say though that we did see some decline in our wealth management related revenues, primarily because of the fourth quarter dip. The AUM was down about 30% when you look at 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.

Austin Nicholas -- Stephens Inc. -- Analyst

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

Rob Gorman -- Chief Financial Officer

Yeah, we are guiding to a 16.5% to 17% rate for that 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 an average out to about 16.5% to 17%.

Austin Nicholas -- Stephens Inc. -- Analyst

Okay, great. Thanks for taking my questions guys.

Bill Cimino -- Vice President and Director of Investor Relations

Yeah, thanks, Austin. And Kyle, we're ready for the next caller please.

Operator

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

Bill Cimino -- Vice President and Director of Investor Relations

Hi Laurie, good morning.

Laurie Havener Hunsicker -- Compass Point -- Analyst

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

Rob Gorman -- Chief Financial Officer

Yeah, I think you'd expect to see about what we've recorded so far in the first quarter. Remember, some of the Access -- we only had two months Access, so that will increase in a bit. So I would say -- I would guide it toward 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.

Laurie Havener Hunsicker -- Compass Point -- Analyst

Okay, that makes sense. And so, then as we're thinking about just fast-forwarding to the fourth quarter backing into your full year guide here of accretion income of $19 (ph) million, if we're using somewhere in the neighborhood of $3.5 million the $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 some basis points that kicked in. So I'm just trying to think, relative to your core margin guide of going down your reported margin could go from a 380 down to 369, 370, am I thinking about that the right way on a reported basis?

Rob Gorman -- Chief Financial Officer

Yeah, 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 bps to 2 bps. But that's right, it really depends on what accretion comes through. But based on what we provided you, that's not a bad assumption.

Laurie Havener Hunsicker -- Compass Point -- Analyst

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're looking at the landscape, both in terms of branch closures, people pickup, required divestitures and then specifically give us maybe a little bit of color around what's appearing to be the largest MSAs affected that you might care about, i.e., the Virginia Beach, the Winston-Salem, and the Durham-Chapel Hill, just any color you can give us around your thoughts would be great. Thanks.

John Asbury -- President and Chief Executive Officer

Certainly, Laurie. At the highest level, we have what we consider to be the two most formidable large bank competitors, both of which are very good but very different organizations coming together. Currently, BB&T is number two in depository market share, SunTrust is number four. On a combined basis, this will become pro forma the number one depository market share bank in Virginia. I'll speak to our primary market. And that's about a 25% depository market share. Union by the way now slides into the number four position. It'll be BB&T, Wells Fargo, Bank of America, Union and number 2x, the next largest. So, this is going to be a big deal.

Now to set expectation, we think this will be a multi-year disruption, a multi-year opportunity and it's not as if things are going to happen instantly although admittedly we have had a pickup in hiring out of these institutions but it's not dramatic at this point. And I'm going ask our 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 the decide. But could that happen? Yes, it could.

The number one pro forma market by most analyst estimates for divestiture -- required divestiture under the Herfindahl index will be Virginia Beach and Norfolk (ph). Most are estimating they'll have to divest about $400 million of deposits there. Virginia has two -- pardon me, three other markets that will make the list of estimated required divestitures, they're Charlottesville, Roanoke and two markets in which we operate much lesser dollars and then Martinsville where we don't operate.

My knowledge is that's the only state, Virginia, where they have four markets that are expected to have a required divestitures, number one in the entire system is Virginia Beach and Norfolk. So, we think this is going to be a great opportunity. It's going to run the board in terms of businesses who have multiple bank relationships into the middle market where we're clearly going to be the most likely alternative, (inaudible) we are now the sixth largest bank in the United States of America, that plays right into our hands. We hope they play that up really, really well. So, we are the home team here and we think this will be a long-term opportunity.

And Maria, I'll ask you to comment for (inaudible).

Maria Tedesco -- President

Okay. I -- thank you, John, and I agree with everything you said. We have established a working team of subject matter experts from each of the business lines to help sort of plan our strategic road map to leverage the market opportunity. Obviously, we want to grab our fair share and more of that opportunity. I would say that we're planning both sort of an offensive and defensive alternative to manage the point of disruption that we believe could happen. And quite frankly, there are points in time that more disruption will happen, we want to be ready for it. These plans include those marketing sales, you mentioned some of the acquisitions. There is also an opportunity -- this is an opportunity -- it's really going to play itself sort of over time. John says it's not going to happen in 2019, 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 those disruptions.

You mentioned potential branch closings, we've certainly done our review of what potentially could happen in the market at the time of disruption and we're following along the plan depending on the timing to be ready to seize the opportunity, as an example.

John Asbury -- President and Chief Executive Officer

And Union leadership is well represented from SunTrust and to a lesser extent BB&T, so we are very, very wired in there. Also I 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 a few banks in the country that are as well positioned as Union to potentially take advantage of this. I think they'll do a good job of putting these two together but these companies are so very different that there is going to be friction. You can't have two leaders of everything. There will not be two commercial heads in Richmond. Someone's going to win, someone's going to lose, and we think that, that's going to free up opportunities.

It's beautiful timing too for our Consumer Banking transformation just in terms of loosening up potential consumer customers and frankly the loosening up potential retail staff. So, we probably will end it there. We're a fan of the combination, to be clear.

Laurie Havener Hunsicker -- Compass Point -- Analyst

Okay, thanks.

Bill Cimino -- Vice President and Director of Investor Relations

Thanks, Laurie. And Kyle, we're ready for our last caller please.

Operator

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

John Asbury -- President and Chief Executive Officer

Hi, Blair.

Blair Brantley -- Brean Capital -- Analyst

Hi, good morning everyone.

John Asbury -- President and Chief Executive Officer

Good morning.

Blair Brantley -- Brean Capital -- Analyst

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

Rob Gorman -- Chief Financial Officer

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

John Asbury -- President and Chief Executive Officer

And some of what's happening now, we've not done a lot in terms of consumer relationship lending. Mostly what we do is home equity lines. And so, I think that with the new consumer leadership that we have, Maria is same background, importantly the access in Middleburg franchises, a focus like we've never had before and an opportunity like we've never had before on Private Banking style lending that we'll 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, 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 that 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 one, more relationship-consumer and private banking lending and just letting that fade away.

Blair Brantley -- Brean Capital -- Analyst

Okay, thanks. And then, any update on see/saw, kind of where you guys stand and when we should -- I need some more detail there.

John Asbury -- President and Chief Executive Officer

Yes. So see/saw, as you know, we've obviously had a team working on that for the last year and a half. We're in a 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 out 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 in -- at our level, increase in the allowance when see/saw comes on is because of -- if you're acquisitive, you've got to put an allowance on the acquired -- a good book of acquired loans. So, it's a bit of a double-count going to happen. If you have a credit mark, you can't move that over to the allowance.

So, we do expect it will be an increase. We'll be in a better position to provide commentary probably at the -- in the third quarter earnings call. But the model has been built. We've tested it. We now are validating with a third party. We'll run a parallel -- we'll do the parallel run starting in the third quarter and then be in a better position coming out of that to provide some guidance publicly.

Blair Brantley -- Brean Capital -- Analyst

All right, great. Thank you.

Bill Cimino -- Vice President and Director of Investor Relations

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

Operator

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

Duration: 51 minutes

Call participants:

Bill Cimino -- Vice President and Director of Investor Relations

John Asbury -- President and Chief Executive Officer

Rob Gorman -- Chief Financial Officer

Catherine Mealor -- KBW -- Analyst

Casey Whitman -- Sandler O'Neill -- Analyst

Austin Nicholas -- Stephens Inc. -- Analyst

David V. Ring -- Commercial Banking Group Executive

Laurie Havener Hunsicker -- Compass Point -- Analyst

Maria Tedesco -- President

Blair Brantley -- Brean Capital -- Analyst

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