Atlantic Union Bankshares Corporation

Ladies and gentlemen, thank you for standing by, and welcome to Atlantic Union Bank Share Corporation's first quarter earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker for today, Bill Foligno. You may begin.

Thank you, Shawanda, and good morning, everyone. I hope you all are safe. I have Atlantic Union Bank Shares 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 dialed in for the question and answer period. Please note that today's earnings release and webcasts Any company slide presentation we're going to go through are available to download on our investor website, investors.bank.union.com. During the call today, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. The important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is including in our earnings release and in the earnings supplement for the first quarter of 2020. Before I turn the call over to John, I would like to remind everyone that on today's calls, we will make forward-looking statements which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise any forward-looking statement. Please refer to the earnings released for the first quarter and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ. All comments made during today's call are subject to that safe harbor statement. At the end of the call, we will take questions from the research analyst community. And now I'll turn the call over to John Asbury. Thank you, Bill.

Thanks to all for joining us today, and I hope everyone listening is safe and well. We began 2020 with momentum and had an ambitious set of work ahead of us. We continue to believe that our strategic plan is the right one and that we have a great opportunity before us to create something uniquely valuable for our shareholders and the communities we serve and remain keenly focused on reaching the full potential of this powerful franchise. But what a difference a pandemic makes. And as COVID-19 unfolded, we quickly adjusted both our near-term and mid-range plans to Since mid-March, we have had 90% of our non-branch personnel working from home in order to distribute our workforce and reduce the risk of COVID-19 contagion. That we were able to pivot quickly and effectively is a proof point that we built a resilient organization that can react to unexpected circumstances and innovate. Rob will cover the financial details for the quarter, including a deep dive into CECL. Instead of tracking back to our progress on our strategic priorities, as I typically do during these calls, I'll cover our COVID-19 response, its implications in the near term, and its implications for our future as we realign our company's expense base to the new reality of a much lower, for much longer than expected, interest rate environment. We do believe the current pandemic is transitory, and we'll manage through it, but we must position ourselves for the new reality that comes afterward. In crisis, it's good to play to fundamental strengths. One of our strengths, I believe, is consistency. We have and will continue to operate under the mantra of soundness, profitability, and growth in that order of priority. As some of you know, I began my career at the old Wachovia Bank and Trust in Winston-Salem in 1987, where I was trained as a commercial credit officer. I learned the mantra of soundness, profitability, and growth in that order of priority from John Medlin, whom I still consider among the best-known CEOs of all time. Never more than now, over the course of my nearly 33-year career, I look back on what I learned from Mr. Medlin, and I believe he was right. A sound bank is our first priority. A prudent credit culture served our company well during the Great Recession, and it will serve us well during the coronavirus pandemic. I'll get into more details about our credit over the course of my remarks. Turning to our pandemic response, we started our first awareness campaign with teammates in late January and continue to monitor the situation and make preparations through February. As it became clear the pandemic was imminent, we activated our formal incident response team on March 4th. We restricted travel and in-person meetings on March 6th. Our first customer update went out on March 13th. We did a max test of our virtual private network, which is remote work capacity, on March 12th to prepare for a working-from-home model. On March 16th, we restricted non-essential vendors and teammates from offices and shifted to a work-from-home model. 90% of all non-branch teammates are currently working remotely, including 90% of our call center teammates. On March 19th, we were one of the first Virginia banks to move our branches to a drive-through model with branch lobbies accessed by appointment only. We limited Saturday branch hours on March 21. On March 23rd, we notified our clients about our customer hardship program and how we can help during this crisis. We started preparing for the SBA Paycheck Protection Program on March 27th upon its being signed into law and were in position to accept applications through our online application portal, On the day the program began, Friday, April 3rd, we mobilized, and in five days we developed the application portal and an automated workflow system in preparation for what we correctly expected to be an onslaught of applications since so many of our small to mid-sized customers appeared to be eligible. Our teammates recognized the importance of this program and worked tirelessly, and still are, to establish high levels of customer service even through the exceptionally strong initial demand. We've had over 400 teammates or 25% of our workforce working on this full-time since it started, and over 1,000 employees or half our workforce working on it in some capacity. To date, we've processed approximately 9,670 applications for $1.8 billion, and the SBA approved 6,500 of them for $1.4 billion in the first round of funding. The SBA-approved funding supports nearly 130,000 employees of our clients across this great franchise. We offered this program to all existing eligible customers of Atlantic Union, not just borrowers, not just a select few. After the first round of funding ended, we left our application portal open, continuing to process existing applications and invited new clients to apply in preparation for round two of funding, which we're working on now. We've revisited our charitable contribution strategy to support COVID-19 relief. Since March 16th, the leadership team has started and ended each day together on video conference, allowing better communication, real-time decision-making, and teamwork than ever before, despite our working remotely. From the beginning, our priorities have been to make the right decisions to protect our teammates, customers, and the bank. For our teammates, the pivot and working environment has been surprisingly effective. While we had the resilience plans in place and had conducted tabletop business continuity exercises, nothing could have prepared us for the reality of a pandemic. Some of the planning we found effective and used it, and some went out the window. More important, we made decisions quickly in the face of uncertainty, found a way to do what needed to be done, and continue to do so today. We've learned to work differently, and our customers have learned to bank differently. For example, we've seen usage of our digital channels increase 46%. Our call center volume has doubled, and the average call time is a little more than a minute longer than before. Wait time averages are hovering around four to five minutes compared to about a minute before the crisis, yet call center customer satisfaction is above our historic highs based on our measurement. For most of our customers, the storm has arrived. We've battened down the hatches from a credit risk mitigation standpoint. We feel confident about weathering the storm. We don't have outsized exposure to the industries most directly impacted by social distancing measures put in place, such as hotels, restaurants, and retail. Let me talk for a moment about the steps we've taken to solidify our credit position. We, of course, reached out immediately, proactively, to our business customers to assess the COVID-19 impact on them and implement payment modifications where necessary, verified collateral, reviewed in detail our loan books with a focus on the highest-risk borrowers and industries. Since the start of the crisis until February, April 24th, we've modified approximately 4,000 commercial loans with a total balance of $1.9 billion, which is approximately 15% of our total loan portfolio. The modifications run the range of options that are tailored for each borrower. The majority of them, about 75%, are payment deferrals with a total balance of $1.4 billion, which is about 11% of the loan portfolio. Our goal is to help as many of our clients through this time as possible. As the quarter ended, commercial line utilization remained steady at around 35%. Since quarter end, we've seen line usage decrease slightly. We're not seeing any broad drawdowns. We are aware of the press regarding excessive line of credit drawdowns, but believe that to be mostly a large corporate phenomenon, and that's not a major factor for us. Exposures to the most in-focus industries are limited and are outlined on slide 9 of our accompanying presentation. Our hotel portfolio comprises $650 million, or 5%, of our total loan portfolio. It consists primarily of non-resort hotels, flagged by brand name, that don't rely on conventions or conferences. The hotel portfolio's debt service coverage ratio and the loan-to-value is the best among all of our commercial real estate property types. Portfolio debt service coverage is 1.9 times, and the median loan-to-value is 60%. providing a good equity buffer to ride out this shock and accommodate deferred payments. Our restaurant exposure is $226 million, or less than 2% of total loans. It's granular, and it's 85% secured by real estate collateral. Our retail trade exposure is less than 4% of total loan exposure. About half of this is to local gas station with convenience store operators and auto dealers, and 80% of the exposure is secured by real estate collateral. Regarding senior living facilities, we finance independent living, assisted living, and continuing care communities. These represent $280 million, about 2% of the loan portfolio. They're managed by good operators with established track records. Thankfully, so far, none have been a hotspot for the pandemic. Our healthcare segment is also granular and heavily secured by real estate. We have no meaningful exposure to aviation, cruise industries, or energy. And as you may recall, our third-party consumer portfolio has been winding down for some time. Our perspective is that we're simultaneously managing three significant events. First, the COVID-19 pandemic. Second, the Paycheck Protection Program, which has been an enormous undertaking like nothing we've ever seen before. And third, the recognition that we must align the company's expense base to the coming reality of a much lower for longer rate environment than expected. We will manage through the pandemic, which we consider a limited duration event, but as it ends, we'll have positioned ourselves for the lower for longer rate environment and the macroeconomic reality afterward. I've told our teammates that the current normal is not the new normal, but that we think the post-COVID-19 normal will be different still, and we have to prepare for that reality. We are realigning the expense structure to match revised revenue expectations to maintain our goal of top-tier financial performance. We'll have more to say about this as our plans are finalized in the coming weeks, but rest assured we remain focused on the long term and on continuing to deliver top-tier financial performance. We remain committed to our previously discussed top-tier financial metric targets beginning in 2021. Although it seems like ancient history by now, Rob will take you through the financial results for Q1, and I'll speak to key accomplishments during the quarter. As I mentioned before, we had good momentum heading into 2020 and started off the year with strong deposit growth with loan production tracking to our plan. Atlantic Union accomplished a lot in the first quarter, particularly in digital. To start, we rolled out our new online account opening platform, which was perfect timing given what has happened, implemented card controls so customers can turn off their debit card on their own, improved our chat and secure message functionality for customers, improved fraud detection for online bill pay and Zelle transfers, rolled out a start card to provide a temporary debit card at account opening, and identified a number of process improvements to make our company more efficient and scalable. And we also launched in the commercial bank treasury management group a healthcare lockbox service, which supports accounts receivable collection for the unique needs of healthcare organizations. In the second quarter, we plan to further improve our digital experience by rolling out an interactive chat function for online account opening, upgrading alerts to near real time for a better customer experience and better fraud detection, and launching an appointment scheduler to allow customers to book appointments in the branch from our website and our mobile app. Our financial metrics were heavily impacted by the elevated provision for credit losses due to the worsening economic outlook related to COVID-19. Rob will walk you through all of those details today. I will say that given the challenging current and expected operating environment for banks, our full-year outlook will ultimately depend on the duration of COVID-19 and consequently the length and depth of the recession in our markets, but our goal remains to achieve and maintain top-tier financial performance regardless of the operating environment. We face great uncertainty at this point, but we do believe we are in a U-shaped recession and expect recovery before the year is out. The question remains as to how long we'll be at the bottom of the U. At this time, we simply don't know. The economy in our footprint was steady heading into the crisis, with unemployment in Virginia at 2.6% in February and ticking up to 3.3% in March. We continue to see higher unemployment claims as April progressed. The Virginia economy is fairly unique as about 20% of the economy is anchored by the federal government. The federal government spending in Virginia is mainly for agencies in the Department of Defense, with only a small fraction going to income assistance programs, education, and transportation. I've consistently said since I arrived that I believe problem asset levels at Atlantic Union and across the industry were below the long-term trend line. We are now experiencing an unexpected change in the macroeconomic environment that I mentioned could impact credit quality, and we're now in a systemic downturn. We expect a return to more normalized levels of credit losses after the impact of the pandemic works its way through the economy. Moving away from the quarterly results, we continue to believe that our three-year strategic plan will create a company with differentiated financial performance, but the path to finish the work of this plan is going to take longer than we had planned. I'll have more to say about the changing timeline and our progress against our strategic plan in future calls. Looking down the road in regards to other strategic opportunities, it should be clear from my comments that we are busy and focused on the near-term pandemic response and credit management. For now, we'll do what we need to do to fight another day. And chaos flies opportunity. I believe we'll emerge from the crisis stronger, better, more efficient than before. I believe we will demonstrate that we made the tough choices we needed to make, that we were nimble, we were resilient, and innovative in response to a most unexpected operating environment. We'll manage through the crisis while positioning for future opportunity and success. In summary, we're focused on weathering the storm, taking care of our teammates and customers, and protecting this bank. We will realign our expense structure to match the lower for longer rate environment for lives ahead. We'll continue to work our strategic plan, but we'll shift our timelines to adjust for the new reality. I'm incredibly proud of our teammates and all they've done and their ability to rapidly adjust to a new way of working in the midst of all of this uncertainty. I'm grateful for their grit, their willingness and ability to deliver a great personal sacrifice, $1.4 billion of the Paycheck Protection Program funding for our clients, their employees, and our communities during the first round of the program. And we are hard at work on round two, even as I speak. I remain confident in what the future holds for us and the potential we have to deliver long-term, sustainable financial performance for our customers, communities, teammates, and shareholders. I'll conclude my remarks with a familiar refrain. Atlantic Union Bank Shares is uniquely valuable. It's dense and compact in great markets with a story unlike any other in our region. Now more than ever before, I believe we've assembled the right scale, the right markets, and the right team to deliver high performance even in uncertain macroeconomic environments. I'll now turn the call over to Rob to cover the financial results for the quarter. Rob?

Well, thank you, John, and good morning, everyone. Thanks for joining us today. I hope you, your families, and friends are all safe and are staying healthy. Before I get into the details of Atlantic Union's financial results for the first quarter, I think it's important to reinforce John's comments on Atlantic Union's governing philosophy of soundness, profitability, and growth in that order of priority. This core philosophy is serving us well as we manage the company through the current COVID-19 pandemic crisis. We are currently facing an unprecedented crisis management event that requires us to be laser-focused on the safety, soundness, and profitability of the company. As we will discuss further, Atlantic Union enters this time of uncertainty in a very strong financial position as we deal with the impact of COVID-19 on the bank's financial results. We have a well-fortified balance sheet, a strong capital base, and ample amounts of liquidity, which will allow us to weather the current storm and come out even stronger once this crisis has passed. As a matter of sound enterprise risk management practice, we periodically conduct capital, credit, and liquidity stress tests for scenarios such as the operating environment we now find ourselves in. Results from these stress tests give us confidence that throughout the crisis, the company will remain well capitalized and has the necessary liquidity and access to multiple funding sources to meet the challenges of COVID-19. By effectively managing through this crisis, we will become a stronger company It is well-positioned to take advantage of growth opportunities if economic activity resumes aided by government support and stimulus. Now let's turn to the company's financial results for the first quarter of 2020. Gap net income for the first quarter was $7.1 million, or nine cents per share, which was down significantly from the prior quarter due to the $57 million increase in the provision for credit losses compared to the previous quarter. This increase is primarily due to projected credit weakness as a result of the deteriorating economic outlook related to the COVID-19 coronavirus pandemic, which required the company to materially increase its allowance for credit losses during the quarter. Non-GAAP pre-tax pre-provision operating earnings were $68.3 million, or 86 cents per share, which was down slightly from the prior quarter, primarily due to seasonally higher personnel-related costs. I will now discuss the impact of the company's adoption of CECL on January 1st and the subsequent impact of the worsening economic forecast related to COVID-19, which resulted in the material increase in the allowance for credit losses and the quarterly provision for credit losses. Atlantic Union adopted the CECL accounting standard on January 1st. As you know, under CECL accounting, lifetime expected credit losses are now estimated using macroeconomic forecast assumptions and management judgments applicable to and through the expected life of the loan portfolios. On March 31, 2020, the allowance for credit losses was $150 million, or 1.17% of total loans, inclusive of the allowance for loan and lease losses of $141 million and a reserve for unfunded loan commitments of $9 million. The allowance for credit losses increased $107 million from December 31st, of which $52 million was due to the adoption of CECL, so-called CECL Day 1 impact, and $55 million was driven by the deteriorating economic outlook related to COVID-19, subsequent to the adoption of CECL, the so-called CECL Day 2 impact. The allowance for loan and lease losses increased. increased $99 million from December 31st due to the CECL Day 1 impact of $48 million and the CECL Day 2 impact of $51 million. The allowance for loan and lease losses as a percentage of the total loan portfolio was 1.1% at March 31st, which was up from 34 basis points at December 31st. The ratio of the allowance for loan and lease losses to non-accrual loans was 320% at the end of the first quarter compared to 150% at the end of the prior quarter. The reserve for unfunded loan commitments increased $8.1 million from the prior quarter due to the CECL day one impact of $4.2 million and the CECL day two impact of $3.9 million. The $55.2 million CECL day two increase to the company's allowance for credit losses took into consideration the COVID-19 pandemic impact on credit losses both through the two-year reasonable and supportable macroeconomic forecast utilizing the company's quantitative CECL model and through management's qualitative adjustments. Beyond the two-year reasonable and supportable forecast period, the CECL quantitative model estimates expected credit losses using a reversion to the mean of the company's historic loss rates on a straight-line basis over two years. In estimating expected credit losses within its loan portfolio at quarter end, the company utilized Moody's macroeconomic forecast as of March 27th for the two-year reasonable and supportable forecast period. The Moody's economic forecast assumed that, on a national level, GDP would decline by 18% in the second quarter and that the national unemployment rate would peak at approximately 9%. Moody's forecast for Virginia, which covers the majority of our footprint, assumed a peak unemployment rate in the state of about 6.5%, remaining at about 5% throughout the forecast period. In addition to the quantitative modeling, the company also made qualitative adjustments for certain industries viewed as being highly impacted by COVID-19, including hotels, retail trade, restaurants, and health care, as discussed by John earlier. The qualitative factors also considered the potential favorable impact on estimated credit losses of the massive U.S. government stimulus support funding, including the small business paycheck protection program. As a result of the both expected credit loss modeling assumptions, as mentioned earlier, the first quarter's provision for credit losses was $60 million, and the allowance for credit losses increased by $55 million to $150 million, or 1.17% of total loans, up from 34 basis points at the end of last year. For context, the 1.17% allowance level represents approximately 60% of Atlantic Union's peak two-year loss rate rates in the Great Recession and approximately 63% of the projected nine-quarter losses in a company's most recent internal stress testing scenarios. From a regulatory capital perspective, the company is phasing in the capital impact of adopting CECL over a five-year period as allowed under the interim final rules issued by the regulatory banking agencies in March. Under this rule, the company is allowed to include the capital impact of the CECL transition which is defined as a CECL day one impact to capital, plus 25% of the company's provision for credit losses recorded during 2020 in regulatory capital through 2021. Beginning in 2022, the CECL transition capital amount will begin to be excluded from regulatory capital over a three-year phase and period ending in 2024. For the first quarter of 2020, net chargeouts for $5 million were 16 basis points of total average loans on an annualized basis as compared to 4.6 million or 15 basis points for the prior quarter and 15 basis points for the first quarter last year. As in previous quarters, a significant amount of the net charge us, approximately 55%, came from non-relationship third-party consumer loans, which are in runoff mode. Now turning to the pre-tax, pre-provision components of the income statement for the first quarter, Tax-equivalent net interest income was $137.8 million, which was in line with the fourth quarter's net interest income level. Net accretion of purchase accounting adjustment for loans, time deposits, and long-term debt added 24 basis points to the net interest margin in the first quarter, which was up from the fourth quarter's 18 basis point impact, primarily due to increased levels of loan-related accretion income. The first quarter's tax equivalent net interest margin was 3.56%, which is an increase of one basis point from the prior quarter. The one basis point increase in the tax equivalent net interest margin for the first quarter was principally due to the six basis point cost of funds decline, partially offset by a five basis point decline in the yield on earning assets. The five basis point decrease in the quarter-to-quarter earning asset yield was primarily driven by the net seven basis point decline in the loan portfolio yield. The decline in the loan portfolio yield of seven basis points to 4.83% was driven by lower average loan yields of 16 basis points, resulting from lower loan fees and the impact of declines in market interest rates during the quarter, most notably the significant declines in the one-month libel rate and the prime rate. This impact was partially offset by the nine basis points positive impact from higher loan accretion income. The quarterly six basis point decrease in the cost of funds to 94 basis points was driven by a six basis point decline in the cost of deposits to 86 basis points, as interest-bearing deposit costs declined nine basis points from the fourth quarter to 110 basis points due to aggressive repricing of deposits during the quarter as market rates declined. Also contributing to the first quarter's lower cost of funds was the 20 basis point decline in wholesale borrowing costs driven by lower market rates. Non-interest income decreased by approximately $300,000 to $28.9 million in the first quarter from $29.2 million in the prior quarter. Mortgage banking income of $2 million was lowered by $667,000, primarily due to net losses on derivative instruments more than offsetting the impact of higher loan origination volumes. Reduciary asset management fees of $6 million declined $547,000 from the prior quarter, primarily due to lower investment advisory fees resulting from the equity market-driven decline in assets under management during the quarter. Service charges on deposit accounts declined $293,000, primarily due to lower overdraft fees, and interchange fees declined $229,000 from the prior quarter on lower transaction volumes. Increases in insurance related revenue of $836,000, and loan-related interest rate swap income of $478,000, partially offset the overall decline in non-interest income. In addition, during the quarter, the company recorded a $1.8 million loss to unwind an interest rate swap related to short-term federal home loan bank advances, which was offset by gains on security sales of $1.9 million. This net balance statement This net balance sheet restructuring transaction improved net interest income by approximately $2 million annually and adds one basis point to the net interest margin. Non-interest expense increased $1.3 million to $95.6 million in the first quarter from the prior quarter. As expected, salaries and benefits increased $2.9 million, primarily related to seasonal increases in payroll taxes, group insurance, and annual merit adjustments. FDIC expense increased $1.6 million due to the FDIC small bank assessment credit received in the fourth quarter of 2019. Other expenses in the first quarter of 2020 included a $1 million expense in support of a community development initiative and approximately $380,000 of expenses incurred related to the company's response to COVID-19. These increases were partially offset by declines in marketing and advertising expense of approximately $936,000, as well as lower OREO and credit expense of approximately $859,000 due to lower OREO valuation adjustments. Additionally, there were no merger related or rebranding costs recognized in the first quarter of 2020 compared to $896,000 and $902,000 respectively in the fourth quarter of 2019. The effective tax rate for the first quarter declined to 12.2% from 16.7% in the fourth quarter, primarily due to excess tax benefits related to share-based compensation recorded in the first quarter. For the full year, we expect the effective tax rate to be in the 16.5% to 17% range. Now turning to the balance sheet period and total assets stood at $17.8 billion, an increase of $284 million from December 31st. The quarter end total loans held for investment were $12.8 billion, an increase of $158 million, or approximately 5% annualized, while average loans increased $266 million, or 8.7% annualized from the prior quarter. Overall loan growth was driven by commercial loan balance increases of 8.3% on an annualized basis, led by strong growth across multiple commercial categories. Consumer loans declined approximately 10% annualized in the quarter, driven by mortgage and third-party consumer balance runoff, partially offset by growth in indirect auto balances of 8.7%. On March 31st, total deposits stood at $13.6 billion, an increase of $250 million, or approximately 7.5% from the prior quarter. The first quarter's deposit growth was driven by material increases in transaction account balances, partially offset by declines in money market deposit balances. Low-cost transaction accounts now comprise 46% of total deposit balances at the end of the first quarter, which is up from 44% at December 31st. The loans-to-deposit ratio was approximately 94% at quarter end, which is in line with the company's 95% target level. As noted earlier, we feel good about our current liquidity position with multiple sources that can be tapped if needed, although to date we haven't seen any unusual client behavior that would require us to draw on these resources. We expect to fund the approximately $1.4 billion and counting Paycheck Protection Program loans approved by the SBA using the Federal Reserve's liquidity facility that had been set up for this purpose. From a capital perspective, the company is well positioned to manage through the COVID-19 pandemic and its impact on the bank's financial results. At the end of the first quarter, Atlantic Union Bank shares and Atlantic Union Bank's regulatory capital ratios were well above regulatory well-capitalized levels. From a shareholder stewardship and capital management perspective, we are committed to managing our capital resources prudently as the deployment of capital for the enhancement of long-term shareholder value remains one of our highest priorities. As such, during the first quarter of 2020, the company paid a dividend of 25 cents per common share, repurchased approximately 1.5 million shares at an average price of $33.37 per share, and suspended its share repurchase program with approximately $20 million remaining under its $150 million share repurchase authorization. Overall, the company repurchased approximately 3.7 million shares at an average price of $35.48 per share since August of 2019. Regarding the dividend, the company has no intention of cutting it at this time, but management and the board of directors will continue to monitor the business environment and will be prudent in managing capital levels going forward. So to summarize, Atlantic Union delivered solid pre-tax, pre-provisioned financial results in the first quarter, despite the onset and unprecedented business disruption associated with the COVID-19 pandemic and the headwinds of a lower interest rate environment. As John noted, the company is taking significant and immediate actions to reduce its expense run rate to align with the lower to longer interest rate environment that would strive to meet top-tier financial performance regardless of the operating environment. Finally, please note that while we are proactively managing through this unique and unpredictable pandemic crisis and are taking the proper steps to weather the economic downturn to ensure the safety, soundness, and profitability of the company, we also remain focused on leveraging the Atlantic Union franchise to generate sustainable, profitable growth and remain committed to building long-term value for our shareholders. And with that, I'll turn it back over to Bill to open it up for questions.

Thank you, Rob. And Tawanda, we're ready for our first caller, please.

Ladies and gentlemen, as a reminder, to ask a question, you will need to press star then 1 on your telephone. To withdraw your question, press the pound key. Again, that's star 1 to ask the question. Our first question comes from the line of Eugene Kozman. The Barclays, your line is open.

Good morning, Eugene. Good morning.

Good morning. Good morning, and thank you for taking my question. In terms of credit, we appreciate the detail you provided on the loan segments affected by COVID-19, but can you give us a bit more color on what percentage of clients in these impacted categories, such as retail, restaurants, hotels, have asked for payment forbearance? And also, what are your specific loss expectations in these loss categories?

Eugene, I'll start. In terms of your question on what percentage of the impacted portfolios are under payment deferral, if you refer to page nine of our accompanying slide presentation, you'll see that on the far right-hand side, modifications. So retail trade is 30%, restaurant 52%, senior living 5%, hotels 67%, and healthcare 34%. In terms of what our expected losses are on this, we have no idea. Rob, do you have any better answer than that?

Well, Eugene, as I mentioned in our prepared remarks, we have provided qualitative adjustments to those impacted portfolios and have increased those reserves against those particular portfolios significantly. up to three times, four times what the model would have told us our historical loss model would tell us. So we do have a material reserve against that portfolio at this point in time.

And, Eugene, I would add, I should clarify that if you look at it, we feel good about the nature of these businesses. Things like restaurant and retail, you know, you would expect to have some of the most challenging, problems as this works through. Having said that, this is mostly real estate secured exposure. It is virtually all in our local markets, people that we know, guarantor support, et cetera. So while we will have impacts on it, we feel very good about the provision that we've made. We feel good about the nature of the exposure, and we think it will be manageable. But quite candidly, You know, ultimately what the loss rates are going to be is going to clearly be driven by the duration of the COVID-19 pandemic, how long the recession runs, et cetera. But we feel quite confident in the overall creditworthiness of the portfolio and our ability to take some hits out of this loss-sensitive portfolio as well.

Thank you. I really appreciate the detail. And now I just wanted to ask a question maybe on the revenue side. What are your puts and takes for net interest margin and net interest income going into the second quarter in terms of impact from the rate-driven balance sheet repricing, maybe accelerating the accretion, and impact of PPP loan funding?

Yeah, Eugene, I'll take that one. Yeah, in terms of our expectations for the second quarter from a – From a net interest margin perspective, we do expect that that's going to come in lower than what we recorded in the first quarter. One of the drivers of that would be we expect lower accretion income, as you saw, about 24 basis points of our reported margin related to accretion income, which was up about six basis points from the prior quarter. We do expect that to come down. We do have a schedule within our earnings release that that shows how we think accretion income will flow in over the next several quarters and even into the out years. Now, I would caveat that a bit, that that's based on contractual payment schedules. And as we saw this quarter, you could see an acceleration of that recognition of that accretion income if there are pay downs related to those books of business. In terms of the overall poor margin, we're also expecting that to compress based on the lower for longer rate environment, as we mentioned, but the recent market rate declines with the Fed, you know, cutting down to zero. Prime rate has come down with that. LIBOR has also come down in market rates quarter to quarter and has continued to come down in the current quarter. So we are expecting that the margin based on that will probably stabilize over time in the 315 to 320 range. We also, just to give you some flavor on that, about 27% of our book loan book is priced off of one month LIBOR, another 13% is prime, priced off prime, the index. We do have about 11% of the portfolio at floors, so it's not quite as, the 40% is actually lower. So we are sensitive to lower rates, both prime and one month LIBOR, and those have come down quite a bit. So, again, looking forward, we expect our The core margin of about $332,000 probably will come in over the next few quarters. This is not including any impact from the PPP program, probably in the $315,000 to $320,000 range over the next several quarters.

Thank you.

Great. Thank you, Eugene. And, Tawanda, we're ready for our next caller, please.

Thank you. Our next question comes from Milan. William Wallace with Raymond James. Your line is open.

Good morning, Wally. Good morning. Hope you guys are well. I have a few questions. I think the primary one I have is I'm just a little bit confused on CECL. And I apologize if this is in the relief. I just didn't see it if it was. But last quarter there was roughly $50 million in remaining mark on CECL. purchase loans. What happened to that?

In terms of the CECL day one adoption, the reserve related to purchase credit impaired now purchase credit deteriorated loans was moved over into the allowance for loan loss. That was a relatively small amount of the total purchase mark. I want to say less than $5 million or $6 million got moved over related to the PCI, PCB portfolio. The remainder is what you see accreting through income that's on the page in the earnings release. That did not get moved directly over from the credit mark perspective. Also, liquidity marks in there. That's the so-called double count, Wally, that we talked about. So we have the accretion, the purchase mark still out there and accreting into income, but at the same time we have to provide a reserve for non-purchase credit deteriorated loans, the so-called good book of our acquired book.

So do you give the total balance of the remaining mark? Yes. Do I have to add up all of those years of accretion?

Yeah, that accretion, that will come through over a period of time. Again, we've estimated that in the earnings release. But, again, it really depends on how quickly that comes back to us, which it will over time. But it could be accelerated depending on if there's payoffs, et cetera. which we saw in the first quarter, which is why we had an outsized accretion income number.

Okay. So theoretically, there's no credit expectation in that number. It's all interest rate now.

Well, yeah, it's basically a treating. The credit we actually did on the day one adoption, about half of the increase in the day one CECL, increase in the allowance for credit losses related to your good book acquired portfolio, the double contact.

Yeah. Okay. All right. So, okay, so now it's, yeah, so it's like bond accounting now where obviously it accelerates at the long pace, but there's no credit loss impacting that number. Okay. All right. That's helpful. Okay. On the PPP Part 2, John, you mentioned that you guys are actively applying for funding, I guess. I don't know if you're actually funding them yet, but can you kind of give us a sense of maybe the pipeline of Part 2 and if you have an idea of what the average fees might look like on those?

Yes, sure, Wally. I'm going to ask Atlantic Union Bank President Maria Tedesco to chime in because she will have the most current information available. Please bear in mind we're working virtually here, so we're not seeing each other. Wally, what I would say as Maria comes on is that, as a reminder, we left the application portal open when funding expired Thursday a week ago or whatever it was. We invited new customers in at that point in time. And I can tell you that when the SBA opened for business yesterday, we had 3,000 applications ready to drop in. Maria, can you take it from here, please, in terms of I think we had 400 new applications yesterday. Tell us where we are on this, please.

Yeah, absolutely. Again, we had 3,000 going into yesterday. We did manage to get 900 approved yesterday for an average loan amount of about 100,000. We're hoping to continue that effort today and for the next couple of days until we get through the 300-plus. We're continuing to get new applications at a clip of a little over 400 yesterday. So it's an incredible effort.

And Maria, my recollection is that of the 3,000, you know, completely vetted and internally approved applications ready to drop into the SBA e-trans system, I think that was some total of something like $300 million. Does that sound about right in terms of summer borrowings?

Yes.

Okay. And then any idea, I know you gave the average size of what was approved, but It's hard to get the average fees because of the – you know, some of the big ones that are in there at the 1%. Do you have an idea of that $300 million, what the average fee was sitting in the pipeline?

Rob, I'm thinking that – Yeah, it's going to be – you know, the average is going to be less than $350, so think about a 5% fee on those.

Yeah, most of those should be – I don't know of any individually large ones, so I would agree most of those would be the 5% range. So while we – What this ultimately does will be a function of how long there's money remaining available and, quite candidly, the speed with which we can get the approvals through the SBA system. Theoretically, we believe we could get 3,000 applications through in about six hours. The problem is because of all the glitchiness of it that was so well reported yesterday. Having said that, to Maria's point, I can tell you, when I woke up this morning, the last update I saw said we had approved something like 1,024. And as Maria indicated, we were up late last night. We got well over 900 yesterday, which is very good. So I would expect that if we did a billion-four, which we did in SBA approvals at round one in dollars, we know we had 300 million yesterday ready to drop in. Plus, you know, we're probably going to settle in at somewhere between, conservatively, I bet you we're approaching at least $1.8 billion, maybe north of that, depending upon how long the funding remains available.

Yeah, that's right, John. That's about what's in our pipeline. And our process is very smooth and very efficient, but it's really, quite frankly, dependent upon eTRAN and its ability to allow us to process data in the manner that we would like, which is at a much faster pace.

And Wally, I can't help but point out, as a reminder, Atlanta Community Bank was 15%, 1.5% of all round one PPP approvals in Virginia by count and by dollar. We calculate our depository market share at about 7%. So we think we punched 2X above our weight. I am so proud of this team. That's a billion four, 90% of that billion four went into Virginia. That's good for our economy. It's good for our clients. It's good for everybody.

Yeah, I agree. Thank you. What was the dollar amount of the hedge loss in the first quarter? Mortgage?

Around there, it was about a million dollars.

Really? Okay. And then I'll just ask one last small question, unless somebody else has one. In the wealth business, due to the nature of the kind of timing of fees, would we kind of be starting at a down 10% to 15% level in the second quarter?

Yes. We're looking at the revenue stream that's going to be down, yes, beginning of the second quarter, as you saw. Of course, it really does depend on where the market, what happens to the market. But, yes, we're anticipating that fees will be down in probably about, a million dollars or so range on a quarterly basis. Okay.

Great. Thanks, Wally. I'll let somebody else ask. Appreciate it.

Thanks, Wally.

So, Wanda, we're ready for our next caller, please.

Our next question comes from the line of Lori Hunsicker with Compass Point. Your line is open.

Good morning, Lori.

Hi. Good morning. I just wanted to go back to Margin for a moment. I just wanted to make sure that I put all these comments together the right way. So, you know, again, to your point of core margin guide of, you know, 315 to 320, and it looks like 16 basis points or so just comes out of accretion income just going March to the June schedule, and I love the detail you present on that. So we're thinking about probably an all unreported margin that's going to be tracking somewhere maybe 327, 328, 329 on a reported basis relative to your 356 that you reported this quarter. by thinking about that the right way?

That's right, Laurie. I would say, yeah, kind of add about 10 to 12 basis points from increasing income. Okay.

That's helpful. Okay. Love all the detail you provided, so thank you for that. Just wondered if we could go back to slide nine, just a couple things I want to touch on. First, what is your leverage lending exposure, and then second, how much of slide nine is How much of that $2.2 billion is leveraged lending?

I'm going to ask Doug Woolley or Dave Ring to verify this. I would say it's darn near zero. So when I think about leveraged lending in these categories, I would mostly be thinking about franchise, restaurant, finance. I'm very familiar with that business. I was involved with it previously. We don't do that. So we are not doing large-scale franchise operators, syndicated restaurants. These are all local business people. Some do have franchises, but you're talking about a handful of them. And, Doug, do you and or David Ring have anything you would add to that, any leveraged lending exposure in this category on slide nine?

Yeah, Laurie, this is Doug. Good morning. There's no levered lending exposure. exposure in this category. We have a little over 300 million in that. It's not in these categories. Got it. Okay. That's helpful.

Okay. And then just keeping on slide nine, in terms of hotels, you had mentioned that, you know, of the 650 million, it was done at a 60% LTV, which is helpful. But of your 651 million, how much how much of that is CNI versus CRE? What percentage of that is real estate or is it all real estate?

That should be all real estate that you're looking at. Doug Willey, do you want to comment on that?

Yes. It's all loans to the hotels themselves with the limited service flag that John described.

Great. And do you have any hotel CNI exposure?

There's a few dollars in that that would be not secured by real estate, but everything else we have to a hotel, and every hotel is secured by real estate. Is that your question, Laurie?

Yes, that answers it. That's helpful, very helpful. Thanks. And then just to confirm, I'm pretty sure the answer is no, but just to confirm, you have no oil exposure, correct?

I'm sorry, did you say oil? Oil, oil. Yes.

Just to confirm, you have no oil exposure, is that correct?

Zero. Zero. Anything you would see coded as energy would be a natural gas, you know, like local distribution gas company, et cetera. Zero for oil. Zero for coal. Perfect.

Okay. And then, Rob, can you just update us on the third-party consumer loan book, just where those balances stand?

Oh, sure. Yeah. So we brought the total third parties probably in the 250 to 220 range. Lending Club was, as you know, approximately 120 million at the end of the year. It's down to under 100. Now it's about $98 million of that total. But that's been running off pretty significantly. Okay. Okay. That's great. And then

Categories that I'm way less worried about, but I just wanted to get an update. If you have them, if not, I'll follow up with you afterwards. But residential and home equity, do you have what your LTV is and your FICO is for both of those books? And if not, I can follow up with you separately.

Yeah, don't have that in front of us here, Laurie, so we can follow up on that.

Everything we do would be prime, of course, but we'll have to get the details on that for you.

Okay, perfect. I will catch up with you later. I'll leave it there. Thanks so much.

Thanks, Lori. Thanks, Lori. Come on. We're waiting for our next caller, please.

Our next question comes from the line of Stuart Lotz with KBW. Your line is open.

Hi, Stuart. Good morning. Good morning. Hey, guys. Appreciate all the color on the margin. Maybe circling back to your non-interest expense. Rob, I don't think you guys gave any specific guidance, but you mentioned that you were looking at peeling back given the revenue headwinds. Just curious how you're thinking about a run rate from this quarter's, you know, $95.5 million and how you guys are kind of thinking about expense cuts this year.

Yeah, thanks, Stuart. Yeah, so as we came into the year, we were projecting that we would take fourth quarter run rate, which is around, I guess, about $94 million and add 4% to that for the full year. Basically, that 4% is being taken out as we speak through management expense reduction actions. The way to look at that is the run rate is going to drop from the first quarter probably in the $2 million to $3 million range in the second quarter, come down a bit more in the third quarter, and then another couple million in the fourth quarter. So I think we're going to end the year based on the details of the expense management actions we're taking to be in around the $89 to $90 million range coming out of the fourth quarter. So material adjustment to what we had originally expected to spend this year.

And in terms of geography, is a lot of that coming out of, you know, kind of discretionary spending like marketing? Or is it, you know, you're looking at the branch network, any, you know, kind of optimization there? I'm just trying to kind of.

Yeah, it's pretty much across the board. We're looking at everything. Actually, we have looked at everything. We've approved everything, and we're executing on it now. But all the items that you just mentioned and, you know, in the buckets, you know, it's called, you know, salary. and benefits and then other discretionary items, travel, marketing, vendor, we're looking at all vendor management, outside consulting costs, et cetera. So, it'll be across the board.

Got it. I guess maybe just one more for me on the credit side and kind of looking at additional provisioning next quarter. I really appreciate the breakout where, you know, 60%, you know, of the allowance currently is, you know, compared to last cycle total losses. Just kind of curious how you guys are thinking about provisioning going into 2Q given we've seen further economic deterioration. You know, kind of how are you guys, you know, inputting that in your model and could we expect maybe not, you know, a $60 million provision but something, you know, kind of, along the line of the increase this quarter.

Yeah, in terms of that, Stuart, as you noted, we have seen the economic forecast worsening, which on its face, if we were to end the second quarter today, we would be looking at probably provisioning some elevated level compared to prior quarters. We don't expected. We've kind of run some of the numbers. We don't expect it would be near the first quarter provisioning we'd have to do, although we would see additional reserve bill. Now, we don't know that. Things can change. We'll see where we are as we go through the quarter and where we end up and what the outlook looks like coming out of the second quarter. But again, to your point, likely we would add to our reserves a bit if we were to close the books today and run them the wrong way.

Ironically, we aren't really pointing toward the origination fee income off of PPP, but I have to say that it is not lost on us that that effectively could pre-fund, so to speak, any incremental reserves that could be necessary. That's so beneficial in so many respects. It's a bridge. for clients and businesses, and obviously, you know, there is some income associated with it, too.

Yeah, that's true, John, and in terms of when we talk about the margin and net interest income, my comments excluded anything related to PPP in terms of the net revenue stream, which will be booked through net interest income, which will affect both the dollars and that interest margin itself.

Awesome. Yeah, John, maybe one more to me. You know, Virginia, the stay-at-home order is kind of through, I think, early June, which is a little bit more conservative than what, you know, we're seeing in other states. I'm just curious if you're hearing anything else there with regards to, you know, some of your local markets and how, you know, consumer behavior is kind of thinking about that or if, you know, The governor ultimately decides to lift that sooner than June 10th. Any comment there?

The fact that the governor of Virginia happens to be a physician is probably related to our relatively conservative approach. Everything has been pretty manageable so far. Interestingly, the headline this morning as I looked at the Richmond Times Dispatch is the governor is at least showing a receptivity now to thinking about a regional reopening of Virginia. That's something that was off the table as recently as a few days ago. And so it would not surprise me if in certain of the markets who've had relatively little incidents of this, we begin to see them reopen sooner. But I think bottom line, they'll take a thoughtful approach. You know, we are in a different place from certain other states who've been more liberal. And quite candidly, I think that the governor is doing the right thing. So I think that we'll be at the relatively conservative end. But, you know, I got an email from my dentist yesterday telling me they're reopening early May. The way this works, technically, certain businesses are going to begin to open in early May, and we'll see.

So I expect it will be phased back in. Great. Thanks, Stuart. And, Shwanda, we're ready. We have time for one more caller, please.

Our next question comes from the line of Brody Preston with Stevens. Your line is open.

Hi, Brody.

Good morning, everyone.

I just wanted, you know, Rob, just maybe ask a more pointed question on the provision. So, you know, another regional bank this morning, granted in a different geography, said the difference between using Moody's March forecast and the April forecast resulted in a 35% increase. in their provision. So I guess if we sort of looked at that difference, is that similar to the numbers that you've run for 2Q so far?

To be 35% of the Q1 numbers? Yeah. Yeah, so that's, you know, you have to put a fine point on it, but that's not out of the question.

Okay. Okay. And I just wanted to, I know we talked about the margin ad nauseum, but just wanted to circle back. 11% of the loans have floors, you know, per the deck. Is that the amount that is at floors, or what's the percentage that is already at floors?

That's about 8% of that 11%. Okay.

Okay. And the borrowings, could you remind me, the flipper advances that you have, the majority will flip in 2Q, right? And could you, you know, let us know what the difference between the funding costs in the most recent quarter for those flipper advances was versus what they will be when they flip?

Yeah, that's a good question. I'd have to look at that again. Let me get back to you. I can't remember exactly what that number is. but maybe on our call after this we can talk about that and get the info.

Okay, great. On the PPP loans, it looks like just based on what you did so far, it looks like the mix fits out about a 3% fee. Is that in the ballpark?

Yes, that is.

Okay, great. And then you obviously had an outsized impact relative to your deposit market share across your footprint. Just wanted to better understand the breakdown. I think, John, you mentioned that you had some to existing borrowers, some to new borrowers. I just wanted to better understand the breakdown there of what was to existing borrowers versus new.

Brody, I'll ask Maria Tedesco to comment on this. I will say that our position on the first round of funding is we were focused on the existing client base. We knew we were going to be overwhelmed. That was obvious. And so we were very much focused on serving the existing client base first. Having said that, we had a long line at our door of prospective relationships trying to come in. And so as we gained confidence late in the process of round one, you know, we began to change our thinking, and then we immediately opened up for round two to accept new customers. Maria, do you have any current stats in terms of what percentage do we think based on what we're seeing, really more, it's more of a round two issue, our new customers?

Yes, that's right, the round two. But if you look in total of all applications, obviously the new customers coming on in the second round, we have very close to 17.5% new customers.

And I think that what's happening is we've been fortunate to receive good press based on the good results we had in round one. So it's been, frankly, we never viewed this as a business development opportunity, but it's at our doorstep. So we have absolutely been able to welcome new relationships into the bank now.

All right, great. And then just a couple more quick ones for me. The healthcare portion of the book, is that mostly dentists and small practitioners?

Yeah. Yeah, it's going to be exactly what you think of, you know, smaller medical practices, lots of dentists, that sort of thing.

Okay. Okay, and then, you know, obviously, you know, you mentioned, John, that you're continuing to invest in digital, which... just given the current state of things, has become more and more important. So do you have any, I guess, maybe data around mobile adoption and usage since social distancing began?

Yeah, Kelly Dakin, who's had a digital and customer experience, is on the line. Kelly, are you able to comment? I think we stated that we've seen a 46% increase in digital usage. By the way, I want to compliment you. The digital team under Kelly Bacon, the technology teams under Chief Information Officer and Head of Bank Operations, Dean Brown, they are among the many heroes of the whole PPP. We could not have done what we just did a year ago. So, Kelly, could you comment on what's going on with digital adoption?

Sure, absolutely. So, of our current customer base, we saw a 46% jump in customers activating online and mobile applications. So that was an increase of customers who had already enrolled but may not have become active. For the non-online active customers, these are the newer enrollments, we saw a 25% increase in enrollments. We are seeing quite an uptick in usage. Mobile deposit obviously is seeing the biggest uptick based on the fact that customers aren't going into the branches anymore. So we're seeing an overall uptick there, as well as our digital sales channels have seen quite a large increase in the amount of new-to-bank digital sales.

Okay, great. Thank you very much for that, Kelly. And then I guess maybe one last one on the expense base. You know, obviously the brand's transformation, just given most branches are sort of effectively closed right now, you know, I'm assuming that, Just given the new revenue environment, is some of that going to slow down even if we're opened up in the back half of the year, or how should we think about the investment in the branches?

Well, I think that it is very clear to us that we have learned to work differently, customers have learned to bank differently, and it is causing us to rethink some of the traditional notions of the role of the branch, We're still committed to the physical branch presence, but I think what you're going to see is we'll be more aggressive in terms of rationalization of the branch network, mainly because we're seeing our customers begin to bank differently. So we're not yet – Sean O'Brien, head of consumers on. Sean, I don't know if you have anything you want to add, but we are definitely studying some of these changes in consumer behavior with an eye toward ways to better rationalize the branch network. Anything you would like to add to that comment?

No, I would just, I would remind that, yes, the branches lobbies are largely closed, but because we have drive-thrus at nearly all our branches, they are very busy. So the branches are open and functioning, and we're fortunate to have all those drive-thrus. And then to John's point, we are looking at rationalizing the branches given some of these changes, and I think we'll announce that here in the near future.

All right, great. Thank you, Sean. Thank you, everyone, for taking my questions. I appreciate it.

Thanks, Brody. And thanks for everyone for dialing in today. We hope you stay safe and be well.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. We may now disconnect. Everyone have a wonderful day.