Atlantic Union Bankshares Corporation

Thank you. Thank you. Thank you. I'd now like to hand the conference over to your host today, Mr. Bill Cimino, Investor Relations. Please go ahead, sir.

Thank you, Liz, and good morning, everyone. I have Atlantic Union Bank chairs, President and CEO John Asbury, Executive Vice President CFO Rob Gorman, and Chief Credit Officer Doug Woolley all with me socially distant 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 and the accompanying slide presentation we are going through on the webcast are available to download on our investor website, investors.atlanticunionbank.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 second quarter of 2020 and in the back of the earnings supplemental slides. Before I turn the call over to John, I would like to remind everyone that on today's call we will make forward-looking statements which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise any forward-looking statement. Please refer to our earnings release for the second quarter of 2020 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 today 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. I'll now 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. Since early March, we have consistently said we are managing through two significant and distinct challenges. First, the COVID-19 pandemic and everything associated with it, and second, a much lower than expected interest rate environment for years to come with all of its implications for the company's profitability. Having said that, so far, so good, and we believe we're managing quite well. Looking ahead, 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, customers, teammates, and the communities we serve. We remain keenly focused on reaching the full potential of this powerful franchise despite the present challenges. Now more than ever, we continue to operate under our mantra of soundness, profitability, and growth in that order of priority. A sound bank is and will remain our highest priority. A prudent and conservative credit culture served our company well during the Great Recession, and it will serve us well during the economic challenges brought about by the pandemic. But soundness isn't just about credit. It's also about capital. During the quarter, we issued $166 million in preferred equity net of issuance costs, which fortified our Tier 1 capital levels and better positions us to ride out this storm. Rob will have more to say about the strength of our capital position in his remarks. Our second priority is profitability, and we've taken action to align our expense run rate to the new revenue reality of the lower rate environment, and we'll also outline that in our commentary. As for growth, well, that will be a conversation for a later quarter. Let me begin by updating you briefly on our pandemic response. On March 16, we pivoted to a new operating model with 90% of non-branch personnel working from home, still are, and having branch lobbies closed except for appointments, and that continues to go smoothly and effectively. I'm proud of our team for having pulled together and worked well throughout this time. The best proof point I can think of is our team's performance with the Paycheck Protection Program. I won't take you through all the details on that again, but I will remind you that our team set up our online application portal and automated workflow system in about five days, and at peak, we had nearly half the company mobilized on the program because we recognized how important it was for our customers and our communities. We think that PPP has been a brand builder for Atlantic Union, and the numbers and our share of loans processed in Virginia support that statement. Speaking of our Paycheck Protection Program performance, here's a look at our numbers through June 30 per SBA data. Atlantic Union Bank generated approximately $1.7 billion in PPP loans that were approved and funded by the SBA, which represents a PPP loan market share of 11.1% in Virginia. which compares favorably to our depository market share of 7%. More than 11,000 total applications were approved and funded. More than 3,000 of the approved loans were made new to bank customers. And when you look at the total PPP loans made in Virginia, we rank number two behind Truist, but strikingly, we had only six fewer loans than the biggest bank operating in the Commonwealth. Bear in mind, Truist, of course, means two banks, SunTrust plus BB&T, and has 25% depository market share in Virginia compared to our 7%, so they're over three times our size here. In Virginia, we rank number one in the number of PPP loans in 22 counties or cities, and top three in 50 counties or cities. More broadly, we were number one by this measure in the Richmond Metropolitan Statistical Area, the Charlottesville MSA, and impressively, in all of Northern Virginia. We also nearly doubled the amount of approvals since the next closest Virginia-headquartered bank. The average approved loan size was 141,000, and the median loan size was 36,000. Eighty-two percent of our PPP loans by count are under $150,000. And while it's difficult to measure precisely, our analysis indicates that PPP clients still had cash equal to approximately 50 percent of their PPP funds from Atlantic Union in a deposit account at the bank, as of the end of the quarter. Moving beyond the Paycheck Protection Program, not only have we learned to work differently, but our customers have learned to bank differently. Our branch lobbies remain by appointment only, and we continue to evaluate the right time to fully reopen them. We rolled out a new mobile and online appointment scheduling system for our branches, and that has been well received by our customers. We're currently seeing more than 1,100 appointments scheduled per week through this application. We've seen usage of our digital channels increase substantially from the prior year. For example, mobile users are up 17%, mobile check deposit utilization is up 58%, Zelle utilization is up 52% since the end of 2019, and online account opening is more than doubled since the first quarter, with an average of 35% of accounts opened online in the second quarter. Our call center volume has decreased from its peak, and it's now about 25% higher than February. The average call time has dropped back to nearly the same level as February. Wait time averages have decreased from four to five minutes at peak to around two minutes, which compares to about a minute before the crisis, yet call center customer satisfaction remains consistently above our previously recorded highs. All the while, 90% of call center personnel work from home. We've begun mass reissuing contactless debit cards to give customers a no-touch form of payment and one that is also more secure against fraud. This will be staggered over the remaining second half of the year. We further improved our online account opening by launching a chat feature, and we improved our alerts to near real-time for better fraud detection and customer experience. We continue to work on new projects and improve the omnichannel customer experience with quarterly releases and upgrades to our product offerings. During the second half of the year, we expect to roll out an online appointment scheduler for our mortgage and wealth management business, enhance the mobile check deposit and bill pay products, Allow customers to select the account level rather than customer level, which should improve e-statement penetration and reduce our expenses. Improve the online platform for small businesses and build a small business account opening product for the web. Kick off a new project to improve the wealth client relationship management platform and roll out a new credit monitoring tool, Credit Savvy, for our customers. Now, importantly, turning to credit. For most of our customers, the storm is still here, but it is abating to some degree. 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 speak to the steps we've taken to solidify our credit position. Our goal is to help as many of our clients through this time as possible, while at the same time mitigating our risk of loss. We've reached out proactively to our business customers to assess the COVID-19 impact on them and implemented payment modifications where appropriate. While these conversations are continuous, we did complete our latest client survey last week. As for payment deferrals, in the last part of the second quarter and in the first two weeks of July, we had a number of loans roll off of their modifications. The total modification balances as of Friday, July 17th, were approximately 3,500 loans under modification with a balance of $1.6 billion, or 11% of our total portfolio. If you exclude the PPP loans, it would be about 12% of our total portfolio. This is down from 1.9 billion and 4,000 loans as of April 24, which was then approximately 15% of the portfolio under deferral. The modifications, however, peaked in May at around 17%. Most modifications were originally granted in April, not March, so we're still in the middle of processing the first round of 90-day modifications. As a reminder, we placed most hotel loans, not all, but most, on 180-day deferrals. So far, of all of the loans with an initial modification, only 11 commercial loans with a balance of $5 million have gone under a second modification, with about $350 million of loans becoming current and making the next payment. We do have approximately $130 million of loans that could go under another modification as they are in the middle of their July billing cycle, and we're discussing the need, if any, with the borrower for a second modification. The modifications run the range of options that are tailored for each borrower. The majority of them, though, about 78% are principal and interest deferrals, mostly for 90 days, with a total balance of $1.2 billion as of last Friday, and that's about 9.5% of the total loan portfolio after adjusting out the PPP loans. As the quarter ended, Commercial line utilization decreased from 40% to 27%, a historic low for the company. Line paydowns accelerated in June, which caused loans for the quarter outside of PPP to decrease by about 2%, which brought year-to-date loan growth to 1.6%, excluding PPP. It's still too early to project what loan and deposits will be for 2020, the end of year, until we get more clarity on the macroeconomic conditions for the second half of the year. Our exposures to the most in-focus industries are limited, and they're outlined on slides 9 and 10 of our accompanying presentation. The amount of loans under a modification in these segments decreased from 755 loans for $914 million on April 24th to 577 loans for $706 million as of July 17th. As a reminder, Our hotel portfolio is entirely within our footprint and comprises $680 million, or about 5% of our total loan portfolio, and it consists primarily of limited service, non-resort hotels flagged by name brand that don't rely on conventions and conferences. The hotel's portfolio debt service coverage ratio and the loan-to-value is the best among any of our commercial real estate property types. Going into the crisis, portfolio debt service coverage was 1.9 times and the median loan-to-value was 60%, providing a good equity buffer to ride out this shock and accommodate deferred payments. During the recent survey, we've seen that occupancy rates are climbing across the footprint and with about half of our hotel operators expecting more normalized operations before the end of the year. Our restaurant balance is $229 million, or less than 2% of total loans. It's granular, and it's 85% secured by real estate collateral. 25% of them are under the PPP. Restaurants in Virginia have been open for indoor and outdoor dining since early June at 50% occupancy, a cap that was released on July 1. The primary constraints on restaurants today in Virginia are social distancing requirements, closed bar seating, and, of course, customer demand. Our retail trade exposure is less than 4% of total loan exposure. About half of this is to local convenience stores with gas and to auto dealers. And 80% of the retail trade exposure is secured by real estate collateral with 20% in PPP. Regarding senior living facilities, we finance independent living, assisted living, and continuing care communities. These represent $285 million and 2% of the total loan portfolio. They're managed by good operators with established track records. Our healthcare segment is also granular, heavily secured by real estate, and they've been opened with social distancing and PPE rules since May. 26% of healthcare clients are in the PPP. We have no meaningful exposure to passenger airlines, cruise lines, or energy. As you may recall, our third-party consumer portfolio has been winding down for some time. The quarter in balance for our lending club exposure was $81 million, and it continues to run off. Payment deferrals in the Lending Club portfolio declined by 55% to less than $5 million during the quarter, and those accounts went off of modification and became current. Our quarterly financial metrics were impacted by the elevated provision for credit losses due to the continuing weak economic outlook related to COVID-19, and Rob will walk you through all those details. Overall, we continue to proactively work through this event with our clients while mitigating credit risks wherever we can. We think that the Paycheck Protection Program was a great benefit to the businesses during the lockdown and has helped to bridge them while the economy slowly reopens. Since the vast majority of our exposure is here in Virginia, we're grateful to the Virginia state government that they chose a responsible and relatively conservative approach to reopening, despite us having received some criticism for having not taken a more aggressive approach The benefit of the strategy is that so far, Virginia has been described by some observers as relatively successful in flattening the curve on COVID-19, and we sure hope it continues to be that way. Moving on to our expense reduction actions, I've told our team that the current normal is not the new normal. However, we think the next normal, post-COVID-19, will be different still, and we must adjust now for that coming reality and not wait for it to arrive. In March, we developed and started executing on initiatives to reduce the company's expense run rate to match lower revenue expectations due to COVID-19 and the lower for longer interest rate environment. These expense reduction efforts include the consolidation of 14 branches, and that's about 10% of our branch network, that we expect to close in mid-September. In addition to moving some projects to next year and eliminating others, we put a hiring freeze in place in March, which has reduced FTEs by 38 since the end of the first quarter. In addition, we eliminated a number of positions in June, and including branch consolidation personnel, we will reduce total headcount by 6.2% by the end of the third quarter as compared to FTE levels at the end of March. In addition to these actions, we're executing on other cost reduction initiatives, such as tighter management to reduce overtime, contract labor and outside consultant spending, requesting pricing concessions from third-party vendors, and renegotiating contracts to include leases. We're improving teammate productivity through process reengineering and robotic process automation. These expense reduction actions will reduce the company's expense run rate by approximately $6 million versus the first quarter run rate and $24 million on an annualized basis. Our goal remains to achieve and maintain top-tier financial performance regardless of the operating environment. Our full-year outlook will ultimately depend on the continued success against additional flare-ups of COVID-19 in our main operating areas, which will be one of the primary factors that determine the length and depth of the recession in our markets. We continue to face great uncertainty at this point, mostly the duration of COVID-19, but we believe we're in a swoosh-shaped recession. Think of the Nike logo and expect recovery before the year is out. We do believe we've hit the bottom of the swoosh and are in an upward swing, but we don't expect the upward curve to be smooth. There'll probably be some dips along the way, but we do believe the overall trend should be upward. At this time, we simply don't know, but the signs are pointing toward a stronger economic performance in our footprint than what is seen overall in the national economic model projections. The economy in our footprint is faring relatively better than most other areas of the country, as we would expect. So far, unemployment in Virginia peaked at 11.1% in April, that was an all-time high, dropped to 9.4% in May, and continued down to 8.4% in June. The Virginia economy is fairly unique with a broadly diverse set of regional economies and with about 20% of it anchored in some fashion by the federal government. The federal government spending in Virginia is mainly for government agencies and Department of Defense with only a small fraction going to income assistance programs, education, and transportation. Clearly, we've had a sea change in the economy brought on by the pandemic resulting in a systemic downturn that we think we're slowly climbing out of now. Credit losses were minimal during Q2, but of course the real impact is yet to be seen. We expect Q3 to be a transitional quarter and credit losses, whatever they may be, begin to materialize, rise in Q4, and spill over into the early quarters of 2021. We expect to return to more normalized levels of credit losses after the impact of the pandemic works its way through the economy, hopefully sooner versus later in 2021. Having said all of the above, We see nothing at this time that causes us to think we are anything but well positioned and readily able to absorb the delayed impact of COVID-19 on credit losses at Atlantic Union. Moving away from the quarterly results, we continue to work towards the objectives of our three-year strategic plan, which we believe will create a company with differentiated performance, but the path to finish the work in this plan will take longer than we had expected. Also, recent expense reduction actions aside, we'll continue to work on ways to make the company more efficient, more scalable, while improving the customer experience. As you can tell from my earlier remarks about upcoming projects, we're not standing by waiting for things to happen. We continue to push the organization forward. Looking down the road toward other strategic opportunities, it should be clear from my comments that we're busy. We're focused on credit risk mitigation, incident response, and aligning our expenses for the new reality. As I said last quarter, for now, we will do what we need to do to fight another day. I continue to believe we'll emerge from this crisis stronger, better, more efficient than we were before. We're making the tough choices we need to make, and we're demonstrating not only that the company is resilient, but that it's also become more agile and innovative in response to a most unexpected operating environment. If there is such a thing as a silver lining to COVID-19, this is it. To that point, we don't want to go back to the way things were, but rather we want to leverage these learnings and capabilities and ingrain our newfound agility and innovation into the company's culture from now on. This bodes well for our future. In summary, I believe in chaos lies opportunity. We remain focused on weathering the storm, taking care of our teammates and customers, and protecting this bank. We've taken actions to reduce the expense structure to match the lower for longer rate environment and maintain top tier financial performance. We'll continue to work on our strategic plan, but we'll shift our timelines as needed to adjust to the new reality. I'm incredibly proud of our teammates and all they've done and their ability to adjust to a new way of working in the midst of all of this uncertainty. 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. And I will end by saying one thing COVID-19 has not changed is this. Atlantic Union Bank Shares is a uniquely valuable franchise, dense and compact and great markets with a story unlike any other in our region. Now more than ever before, I believe we have assembled the right scale, the right markets and the right team to deliver high performance even in the most trying of times. I'll now turn the call over to Chief Financial Officer Rob Gorman to cover the financial results of the quarter. Rob.

Thank you, John, and good morning, everyone. Thanks for joining us today. I hope you, your families, and friends are all safe and staying healthy. Before I get into the details of Atlantic Union's financial results for the second quarter, I think it's important to once again 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 and preparing us for what comes next. Atlantic Union continues to be in a strong financial position with a well-fortified balance sheet, ample liquidity, and a strong capital base made even stronger through the issuance of preferred stock during the quarter, which will allow us to weather the current storm and come out stronger once the crisis has passed. During the quarter, the company also added to its loan loss reserves to cover additional expected credit losses as a result of further deterioration in the economic outlook related to COVID-19 since the first quarter. As John noted, we also took action to reduce the company's expense rate, including the decision to consolidate 14 branches in September to more closely align expenses with declining revenue levels resulting from the protracted lower for longer interest rate environment. As a matter of some 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 help inform our decision-making as we manage through the current crisis, and gives us confidence the company will remain well capitalized and has the necessary liquidity and access to multiple funding sources to meet the challenges of COVID-19. Now let's turn to the company's financial results for the second quarter of 2020. Gap net income for the second quarter was $30.7 million, or 39 cents per share, up significantly from $7.1 million, or 9 cents per share in the first quarter. Non-GAAP pre-tax pre-provision operating earnings increased $2.2 million to $70.4 million or 89 cents per share, up from 68.3 million or 86 cents per share in the first quarter. Please note that the second quarter reported GAAP financial results and non-GAAP pre-tax pre-provision operating earnings include the following financial impacts of the strategic actions taken in the second quarter to reposition the balance sheet and to reduce the company's expense run rate in light of the current and expected operating and interest rate environment. The company repaid $200 million in long-term federal home loan bank advances, which resulted in a debt extinguishment loss of approximately $10.3 million recorded in non-interest expense. By repaying these high-cost fixed rate advances, we were able to improve the go-forward net interest margin by approximately three basis points and increased annual earnings by $3.2 million, or about 4 cents per share. In addition, the company sold approximately $77 million of securities and recorded a gain on the sale of investments of approximately $10.3 million during the quarter. Second quarter non-interest expenses also includes $1.8 million in severance expense and $1.6 million in real estate-related write-downs related to the company's expense reduction initiatives, including the elimination of several positions across the bank, and the consolidation of 14 branches expected to occur in September. Of the $24 million in annualized savings John mentioned earlier, the action taken in the second quarter to reduce headcount, including the impact of the company's hiring freeze, and to further rationalize our branch network, will result in an annual run rate savings of approximately $12 million, or about half of which will be realized in the third quarter. Slide 13. is turning to credit loss reserves at the end of the second quarter. The allowance for credit losses was $181 million, comprised of the allowance for loan and lease losses of $170 million, and the reserve for unfunded commitments of $11 million. In the second quarter, the allowance for credit losses increased $31 million, as the allowance for loan and lease losses increased by $29 million, and the reserve for unfunded commitments increased $2 million. from the first quarter, primarily due to the worsening economic forecast related to COVID-19 since March. Excluding PPP loans, which are SBA guaranteed, the allowance for loan and lease losses as a percentage of adjusted loans increased 24 basis points to 1.34% from the prior quarter, and the allowance for credit losses as a percentage of adjusted loans increased 24 basis points to 1.42% from the prior quarter. The coverage ratio of the allowance for loan and lease losses to non-accrual loans was now at 429 percent compared to 320 percent at March 31st. The 1.34 percent allowance for loan and lease losses represents approximately 70 percent of Atlantic Union's peak two-year loss rates in the Great Recession and approximately 75 percent of the projected nine-quarter losses in the company's most recent internal stress testing scenarios. The $31 million increase to the company's allowance for the credit losses took into consideration the COVID-19 pandemic impact on credit losses, both through the two-year reasonable and supportable macroeconomic forecast utilized in a 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 historical 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 June baseline macroeconomic forecast for the two-year reasonable and supportable forecast period. Moody's June economic forecast worsened considerably since March and now assumes that on a national level, GDP will decline by 33% versus 18% in the March forecast in the second quarter and that the national unemployment rate would peak at approximately 14% versus 9% in March in the second quarter. Moody's June forecast for Virginia, which covers the majority of our footprint, assumed a peak unemployment rate in the state of about 10.4% versus 6.5% in March in the second quarter and remaining at about 7% versus 5% in the March forecast 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, 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. The provision for credit losses for the second quarter was $30.4 $34.2 million, which is a decline of $26 million compared to the prior quarter. The provision for credit losses in the second quarter consisted of $32 million in the provision for loan losses, which was 1.02% of average loans, excluding PPP loans on an annualized basis, down from 1.8% in the first quarter. It also included $2 million in the provision for unfunded commitments. In the second quarter, net charge-offs were 3.3 million or nine basis points of total average loans on an annualized basis, compared to 5 million or 16 basis points for the prior quarter, and 4.3 million or 14 basis points for the second quarter last year. Excluding the impact of PPP loans, net charge-offs were 10 basis points on an annualized basis. As in previous quarters, a significant amount of the net charge-offs, approximately 57%, 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 second quarter, tax equivalent net interest income was $140.1 million, which was up from $137.8 million in the first quarter. Net accretion of purchase accounting adjustments added 14 basis points to the net interest margin in the second quarter, which was down 10 basis points from the 24 basis point impact in the first quarter, primarily due to lower levels of loan-related accretion income. The second quarter's tax Its equivalent net interest margin was 3.29%, which was a decrease of 27 basis points from the prior quarter. The 27 basis point decline from the prior quarter was principally due to the 60 basis point decline in the yield on earning assets, partially offset by a 33 basis point decline in the cost of funds. The quarter-to-quarter earning asset yield decline was primarily driven by the 70 basis point decline in loan portfolio yields. as well as the impact of excess liquidity held in low yielding cash equivalents. The decline in the loan portfolio yield from 4.83% to 4.13% was driven by lower average core loan yields of 53 basis points, resulting from declines in market interest rates during the quarter, most notably the significant declines in the average one month LIBOR rate, which was down 106 basis points, and the average prime rate, which was lowered by 117 basis points. Loan yields were down an additional six basis points due to the net impact of lower yielded PPP loans, which was partially offset by the net increase in loan fees. In addition, loan decrease in income reduced loan yields by 11 basis points from the prior quarter. The quarterly 33 basis point decrease in the cost of funds to 61 basis points was driven by a 33 basis point decline on the cost of deposits down to 53 basis points. Interest-bearing deposit costs decreased 37 basis points from the prior quarter to 73 basis points due to the aggressive repricing of deposits as market interest rates declined. Also contributing to the first quarter's lower cost of funds was a 48 basis point decline in wholesale borrowing costs and the positive impact from changes in the overall funding mix between quarters. Non-interest income increased $7 million to $35.9 million in the prior quarter, primarily driven by the $10.3 million gain on the sale of investment securities recorded during the quarter and an increase of $1.5 million in loan-related interest rate swap income. In addition, mortgage banking income was higher by $3.8 million, primarily due to increased mortgage loan refinance volumes due to the current low interest rate environment. Partially offsetting these increases was a decline in service charges on deposit accounts of $2.6 million primarily due to lower overdraft incidence volumes, $2.5 million in unrealized losses related to FDIC fund investments due to the current economic environment related to COVID-19, as well as a decline of approximately $500,000 in wealth management fees from the prior quarter. Non-interest expense increased $7.2 million to $102.8 million from $95.6 million in the first quarter, primarily driven by the $10.3 million loss in debt extinguishment resulting from the prepayment of long-term FHLB advances. The quarterly increase also includes $3.4 million in severance expense and real estate-related write-downs related to the company's expense reduction initiatives, as well as approximately $620,000 in COVID-19 response expenses, which is up from $379,000 spent in the first quarter. The increases were partially offset by declines in most expense categories, including lower marketing expenses of approximately $700,000 and lower business travel-related costs of approximately $700,000. Please note we expect to incur an additional $3.2 million in branch closure costs primarily related to lease terminations in the third quarter. The effective tax rate for the first quarter increased to 15.2 percent from 12.2 percent in the first quarter, primarily due to excess tax benefits related to share-based compensation recorded in the first quarter. For the full year, we now expect the effective tax rate to be in the 15.5 percent to 16 percent range. Now, turning to the balance sheet, period end total assets stood at $19.8 billion at June 30th, an increase of $2 billion from March 31st, primarily due to PPP loan balances and the buildup of excess liquidity. The quarter end loans held for investments were $14.3 billion, which was an increase of $1.5 billion, or approximately 48% annualized from the prior quarter. Overall loan growth in the second quarter was driven by PPP loans of $1.6 billion. Excluding the impact of PPP loans, loan balances actually declined by approximately two basis points on the annualized basis in the second quarter, As consumer loans declined approximately 10% annualized during the quarter, driven by mortgage and HELOC balance declines and third-party consumer balance runoff partially offset by growth in our indirect auto portfolio. Commercial loans, excluding PPP loans, were relatively flat in the first quarter balances, primarily due to revolving line of credit paydowns offset by growth in equipment finance and commercial real estate loans during the quarter. As noted, the average loan portfolio yield dropped 70 basis points to 4.13% in the quarter. At the end of June, total deposits stood at $15.6 billion, an increase of $2.1 billion, or approximately 60% from the prior quarter. The increase in deposits in the second quarter was primarily due to the impact of government stimulus programs, including the Paycheck Protection Program, economic stimulus checks, and enhanced unemployment benefits. The deferral of tax payment deadlines and changes in customer spending and saving habits in response to the pandemic. As a result, transaction account demand, which are demand deposits and now accounts, balances grew significantly during the quarter, partially offset by declines in our retail time deposit balances. Low-cost transaction accounts comprised 51% of total deposit balances at the end of the second quarter, up from 46% at March 31st. The average cost of deposits declined by 33 basis points to 53 basis points in the second quarter as previously discussed. Turning to liquidity, we continue to feel good about our liquidity position at the bank and holding company level with multiple sources that can be tapped if needed. To date, we have only borrowed $190 million from the Federal Reserve's Paycheck Protection Program liquidity facility that the PP loan-related deposits remain at elevated levels as of June 30th. From shareholder stewardship, In capital management perspective, we remain committed to managing our capital resources prudently as a deployment of capital for the enhancement of long-term shareholder value remains one of our highest priorities. From a capital perspective, the company is well positioned to manage through the COVID-19 pandemic and its impact on the company's financial results. At the end of the second quarter, Atlantic Union Bank shares and Atlantic Union Bank's regulatory capital ratios were above regulatory wealth capital levels. In June, The company opportunistically raised $166.4 million in additional Tier 1 capital through the issuance of preferred stock. The goal of the transaction was to rebalance and diversify the company's Tier 1 capital stack while opportunistically fortifying the company's capital base for the uncertainties of COVID-19. During the second quarter of 2020, the company paid a common stock dividend of $0.25 per share. Regarding the common stock dividend, the company has no current intention of reducing it at this time, but management and the board of directors will continue to monitor the business environment that would be prudent in managing capital levels going forward. So in summary, Atlantic Union again delivered solid pre-tax, pre-provision financial results in the second quarter, despite the continuing business disruption associated with the COVID-19 pandemic and the headwinds of the lower interest rate environment. The company took significant actions to reduce its expense run rate to align with the lower for longer interest rate environment as we strive to maintain top-tier financial performance regardless of the operating environment. Finally, please note that while we are proactively managing through this unique and unpredictable pandemic and are taking the first steps to weather the economic downturns to ensure the safety, soundness, and profitability of the company, we also remain focused on leveraging the Atlantic Union 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 up for questions. Thank you, Rob.

And Liz, you're ready for our first caller, please.

Our first question comes from William Wallace with Freeman James. Your line is now open.

Hello? Hello?

This question will come from Eugene Koisman with Barclays. Your line is now open.

Morning and thank you for taking my question.

Liz, are you there?

Morning.

Yes, Mr. Koisman, your line is open.

Hi, good morning. Thank you for taking my question. Can you hear me? Good morning.

Hey, Eugene, how are you?

Hi, morning. uh... though i had a question on the matter just margin uh... looked like uh... cornered interest margin execution was closer to about three in this quarter which was actually at the bottom of the uh... range that uh... uh... the three fifteen thirty twenty range that you expected to get over the next several quarters can you help us gauge how much more downward repricing pressure you expect to be on the corner of going forward and what the trajectory from here yeah uh...

Thank you for that question, Eugene. We expect to pretty much stabilize at this 315 to 320% core margin level. As mentioned, we did have some pressure from excess liquidity, which we expect will dissipate over the next couple of quarters, which should help us. We've also done some additional balance sheet restructuring, and as I mentioned, we'll improve margin a bit going forward. We do expect to have some continuing challenges with our loan yields. As you know, LIBOR came down over 100 basis points during the quarter to, on average, 35 basis points, and that's declined to less than 20 now. So we'll see some pressure in some of that repricing. But overall, we also have opportunities. We continue to be aggressive on down-pricing our deposit base. We took some more actions in the last week or two and expect that to come down as well. So all in all, we do expect – I don't think our guidance has changed materially from the 315 to 320 percent on a core basis going forward.

Thank you. That's actually really helpful. And I actually have another question on expenses, if I may. When I look at the second quarter core expense run rate, I get to about $89 million, excluding the impact of severance, real estate charges, and debt extension costs, which is already about $6 million below the first quarter run rate of $95 million. Are there any moving parts there? I know that your advertising expenses are lower. Can you help us reconcile that with your comment that you expect to realize about half the sales just through the third quarter?

Yes, you're right, Eugene. It's about $89 or so million on a run rate basis when you exclude the one times. We do expect that we have some additional expenses will climb back. As you know, we did have some, related to PPP loans, we had some additional FAS91 deferred costs that shouldn't recur, so that'll add back a bit to that run rate. We also have, as John mentioned, some investments we're making in contactless cards, as well as we've got some costs related to, as we go into the forgiveness phase of PPP, we are outsourcing some of that processing to the SBA that will add expenses. So all in all, we do expect that it's a bit higher than what we're showing here in the third and fourth quarters, but then you back out the cost savings, and we're probably in the $88 million or so range coming out of the third and fourth quarters is the way we're looking at it.

Thank you.

Great. Thank you, Gene. And Liz, are we ready for our next caller, please?

Our next question comes from Catherine Mueller with KBW. Your line is now open. Good morning, Catherine.

Thanks. Good morning. Hey, just a clarification on the expense question. So you're saying you get to the third and fourth quarter and you're at about $88 million. And at that point, is that only about half of the savings are realized? Or does that include the full realization of savings, right? No.

No, well, there's a bit. Yeah, what's not included in the third quarter is the branch closures. We'll pick that up starting the fourth quarter once the branch is closed. So pretty much we'll be at that level going into the fourth quarter. We have already achieved some of those savings, as Eugene mentioned. Our run rate is down significantly from the first quarter. We've achieved quite a bit of the overall cost savings And we will add to those from actions we took in reducing positions in June, which will be effective in July, as well as the branch closures. And then, again, we do have some add-backs, as I mentioned, that would go against that level, which, you know, gives you about an $88 million run rate, give or take.

Okay. And then, but, I'm sorry, so off of the 88, as we go into the fourth quarter and we get the the branch savings, is that, will we see another, is that a $6 million quarterly reduction in the fourth quarter? So we're more around like 82 in the fourth quarter?

Oh, no. Yeah. The $12 million is an annualized number. So we're talking about $3 million a quarter, about half of which, $1.5 million would be if realized in third quarter, and another one and a half would be in fourth quarter for a total of three quarterly run rate impact.

Got it. Okay. I'm sorry. I don't mean to be confusing, but how does that compare to the $24 million that you originally talked about? Or is some of that already in this reduction that we saw this quarter?

It's already in the reduction. If you look across All of our line items, including salaries and benefits, occupancy, et cetera, we've made some good progress on achieving the $24 million run rate, annualized run rate. And with some add-backs, we expect that, you know, we'll be down to about the $88 million. Now, remember, the first quarter run rate was around $96 million. So some of that included some... increased payroll taxes, et cetera, that decline over the year. So when we come out of the year, more than the $88 million mark.

Okay, got it. So maybe we think about it as maybe just annually kind of thinking about 2019 expenses, and that was 368, and so then if we look at kind of the Well, I guess you're run rating different quarters. Yeah. I was just kind of trying to think about that, the total reduction. So maybe on the year we're near kind of 358 for 2020, and then you're kind of going in from a mid-80s run rate in 21.

Yes. That's the way I think about it. Remember, you know, yeah, last year we also, you know, had merit and some inflationary cost adjustments in the first quarter, which added to that run rate coming out of 19. And then we're bringing it back more in line with more of a flat year. And hopefully that will continue to look lower in 2021.

Okay, that's really helpful. Thanks for the clarification. And then do you have the dollar amount of PPP fees that came through this quarter?

In terms of the revenue that came through, it was about $10.5 million.

Okay. And is that inclusive of the fees and the interest?

Yeah. So it's about $3 million of interest, you know, the 1% loan yield, and then about $7.5 million, a little over $7.5 million was related to the fees amortizing through income.

Okay, great. And you don't have any deferred costs coming out of the expense line?

I'll say that again. Sorry.

Any kind of costs are coming out of the expense line versus being netted out in NIR?

Oh, any additional expenses related to that? No. As I mentioned, we do expect to incur a bit more expenses as we outsource the forgiveness process. So that will add you know, call it about $400,000 or $500,000 to a run rate over the next two quarters. That's the way we're looking at it. Now, that depends, of course, on what happens to the congressional bill that is suggesting that loans less than $150,000 would be forgiven in an auto manner. We would have to process those. So, we're still trying to figure that out. We'll see what happens through the Congress and That would save us, as mentioned in the deck, I don't know if you saw that, but we had about 9,600 loans of the 11,000 plus loans were less than 150,000, which is a lot of processing if we don't have to do it.

Yeah, for sure. Fingers crossed that goes through. Molly, thank you so much for all the commentary. Appreciate it.

Thank you, Catherine. And those who are ready for our next caller, please. Our next question comes from Brody Preston with Stevens. Your line is now open.

Hi, Brody. Good morning, everyone. How are you?

Good, Brody.

So I guess I just want to do circle back on the core NIM. There was a four basis point drag from PPP that was within the headline NIM, right?

That's correct, yep.

All right, so I guess backing that out, you kind of get to the middle of that 315 to 320, and I understand that there's going to be some loan yield pressure moving forward. I just wanted to key in on any yield floors that you have within the portfolio and if any of those have kicked in.

Yes. We've got about 11% of our total loan portfolio has floors in I think six or seven percent or so have kicked in already. So that's helpful going forward. We're not expecting that we will see further declines in rates, but that's what's currently the current position.

Okay. And so I guess maybe switching over to deferrals. So If I go back to the 1Q deck and I take out the hotel loans that you had, understanding that there's some that weren't 180-day, but I think you note that most of the deferrals in the hotel portfolio were 180-day deferrals. So that leaves about $1.45 billion in non-hotel deferrals last quarter. And so I guess, like, of that book, you know, as of 7-17, how much of that book had you sort of processed and gone through? I guess I'm just trying to gauge some of the stats that you give on, you know, the roll-on, roll-off in that portfolio and what's taken a second modification. I'm just trying to better gauge the cure rate on the deferred book.

Hey, Grady. This is Doug. Thanks for that question. Let me point to the slide before. and I'll share for hotels because those are the remaining mods. Those are the still live mods on there for hotels. The total hotel mods that we approved were 142, so we now have 108 active. And the total dollars was about 67% of aggregate mods over the mod approval process period.

Okay. But I guess maybe focusing on the rest of the deferred book, you know, I think on slide eight you mentioned, you know, $485 million rolled off their initial modification, $350 million made next payment, and $5 million have rolled into a second modification. And so I'm just trying to better understand, I guess, what percentage of the book, you know, I guess like what portion of this one, the 1.558 billion has yet to, I guess, be examined in terms of like they're still on their first modification and when should we expect those to roll off?

Okay, those figures on that slide are the current figures. modifications, meaning active live, which reflects, which is after that footnote, the second footnote. So in other words, they haven't matured since... Right, they have not. Now, a lot of them, of course, since two-thirds or so of the dollars and numbers of loans that went under a mod had a 90-day mod. And just as we all know, just because of the timing of the calendar and earnings release and COVID hit, they are happening in large volumes every day. So these figures are, let's say, the first three weeks of mod expirations. That's that second footnote. So, you know, we're cautiously optimistic. You know, a second modification request is need-based. The first round, of course, as we all know, was accommodative. so it's need-based, and many of these customers that are no longer on a mod that made their payment didn't even bother contacting us to chat about whether a mod was necessary because they received a bill, so payments resumed once a 30-day mod, I'm sorry, a three-month mod expired. So these are all very early good indicators, but obviously very early.

And Brody, this is John. I just want to reiterate a point we made earlier. I've heard a few people make comments that they seem to think that most modifications were made in March. That's not true at all. Modifications were being made in April into May. Our mods actually peaked in May at 17% of the total portfolio. Now we're down to about 12%. But the point is, remember what was happening in early April, PPP. So we had mobilized the company, and so we were being overwhelmed with PPP and simultaneously managing the whole deferral conversation where necessary. So there was a lot going on. So you'll see that those deferrals were kind of skewed toward the back end of April into May, which means that what you're looking at here, this $5 billion, The 90-day ones aren't going to come due until, I guess there'll be a big slug of them, Doug, come August 1. And then there'll be some that'll even continue into September 1, and then we're kind of done with the first round.

Okay, so I guess if the current sort of, you know, rate of, you know, needing a second modification were to hold, you know, I guess... This sort of indicates that we should see a significant portion of these roll off the modification and be behind us come the third quarter.

It's like watching election returns. The early returns look good, but they are the early returns. Now, obviously, we're in continuous conversations with the client base. Of course we are, to be clear. And we'll see how things play out, but the early returns look pretty good.

And, Brody, if we offer a mod... after doing the underwriting, because it's a much higher bar to receive a second 90-day mod. It is need-based. The preference and the encouragement is that it go off a full deferment to an interest only, so that it's a sign of returning to health. If you need a mod, you get a full payment deferment.

Okay. All right. No, I appreciate that. I guess just sticking on this discussion with the modifications, you know, some of the regulator guidance that we've seen over the last couple of days, you know, sort of indicates that, you know, loans modified before the year ends, you know, if you give those like a full sort of TDR kind of re-underwrite they don't need to be booked as TDRs for the life of the loan. I guess, are you guys interpreting that sort of OCC guidance similarly? And, you know, I guess maybe does this give banks some added flexibility to modify some of their weaker borrowers through 2021? And I guess, could that help with loss rates moving forward?

Yeah, Brody, this is Rob. Yeah, in reading that, interpreting that, we think that that will be the case, but we're unsure as to how it would be implemented. We also need to look at whether the SEC slash FASB through GAAP accounting will also concur with what the OCC is saying or the regulators are saying on that. Certainly, if the CARES Act or Congress suggests that again, like they did in the CARES Act, I think that will happen. But there's still some uncertainty around that at this point in time. So we need to get more guidance on that, both from our regulators as well as our external auditors.

This is Doug. Let me jump in on that, too. Because the regulators and FASB gave banks an up-to-six-month, I guess you'd call it a hall pass, way back on PDRs, For our second set of mods, we aren't offering anything beyond 90 days so that the whole book stays within and up to 180 days worth of mods until we get better direction on that. We didn't want to end up in October with a bunch of TDRs that we didn't anticipate could be TDRs. And that guidance that you're talking about is fascinating. We certainly hope it becomes... you know, certified so that banks can rely on it. Okay.

All right. And then I guess just wanted to gauge, I guess, maybe the health of borrowers. Are you seeing any difference, I guess, in the performance between your smaller borrowers versus your larger borrowers just in terms of deferral needs? And, you know, I guess for the ones that you've sort of seen their new business plans, is there any bifurcation there?

Brothers, Doug again, I'd say not yet. Obviously, smaller borrowers, fewer cushions of financial protection and whatnot, but we haven't yet seen that. The incidence doesn't have anything other than a distribution across dollar size, the best way to determine or to designate client size. So not yet on weakness. Certainly we would expect when all is said and done and, you know, whenever it starts that there would be more losses on smaller loans than on larger loans simply because smaller borrowers have less flexibility in financial cushions than larger ones, generally speaking.

Great. And thanks, Brody. And we need to get to our next caller, please.

Our next question comes from Laurie Hunsaker with Compass Point. Your line is now open. How are you?

Hey, good morning. Just going over your slide here, and I really appreciate the color you provided again this quarter on slide 10. I just wondered a couple things. If you could help us think about the retail exposure. Just to remind us, small exposure, big box exposure, where you stand on that, just of the $553 million, and then also what your LTV is on the retail?

Yeah, Laurie, this is Doug. Thanks for that question. We don't finance big box, never have, so there really is nothing there in that. It's smaller retails, either standalone, and then certainly in CRE retail, neighborhood shopping centers, and whatnot. So the incidents of, I'm sorry, what was the last, the specific question was what? The LTVs are, I mean, not nearly as strong as the hotel. I'd say 65 to 70%. Our focus, of course, not in the retail trade, in the CRE retail trade, The focus is on, you know, on tenants paying the landlord, our client. So we're spending time understanding that, too, on the CRE retail. But that's different from retail trade. Obviously, those are the direct retailers.

Right, sure. And so on the retail, you said half of it is service retail, the, you know, gas, convenience, et cetera. So what is the other half?

It's everything else. There's no, let's say, sub-concentration in that. It's small stores, local stores. There aren't any national chains in there. It's just the local community stores, anywhere from a $50,000 loan to a $2 million loan.

You'll have, Laurie, home builder supply. One of the things I've been looking for as we dug into the data, the incidence of the things you would most, I most worry about, little boutique-type shops, jewelry stores, menswear, ladies' dress shops, things like that. It's a single-digit percentage of this category that you're looking at here. So it's pretty broadly distributed. Sporting goods, home building supplies, nursery-type operations, And look at the percentage that's under modification. Yeah, that's a pretty good indicator that that's actually doing, you know, not so bad.

And, Laurie, another perspective on that. So it says 16%. That's remaining under mod, right? The total dollars aggregate that had a mod is 26%.

So that's a peak. Right. So at the peak, you're saying that 16.4% was 26%, okay.

Right, right. So we're down that approximate 10 percentage points after the initial wave of mods are coming off.

Now that, I mean, there are going to be impacts in this portfolio, to be clear, but we're greatly comforted by the, first of all, the real estate collateral, everything is overall 80% real estate secured. The convenience stores with gas, Yeah, they're doing okay. The auto dealers are actually, you know, really picking up, and this is financing showrooms, you know, not floor plan, et cetera.

Okay. Okay, and sorry, so just one last question then. If I'm thinking about this book, then additionally, in other words, half convenience stores, gas stations, you probably have another slew that's not included in that 50% number that would be grocery anchored, drugstore, that type of thing, liquor store, is that correct, that kind of would fall into that more service category since you said single digit on the retail stores? Am I hearing that right?

That would be outside of that category. That would be investment, real estate, shopping centers, drugstores and stuff.

Okay, perfect. That's very helpful. Okay, and then restaurant, did you have, I know you're 85% secured here, did you have an LTV on that?

It's, you know, it'd be 75 to 80%. It is often part of the collateral. You know, for the smaller ones, they're second on owner's house. There's all kinds of collateral there. But invariably, it is the location of the restaurant itself. But there are various ways to structure such a loan.

Okay. Okay. That's helpful. And then you gave the Lending Club balance, but did you have what the third-party consumer dollar number is?

Yeah, so are you talking about the balances, Lori?

Yeah, the third-party originating consumer. It was $215 million last quarter.

Yeah, it's just a bit below $200 million now in total. The Lending Club is about $81 million. That's come down.

Great. Thanks, Lori. And Liz, I think we have time for one more caller. I know we're running a little bit long.

Yeah, we're in overtime now, but that's okay. We had longer than usual comments, even for us.

This question comes from William Wallace with Raymond James. Your line is now open.

Thank you. This time I hit the mute instead of the hang-up button. There you go. Hi, Wally. Hi, guys. One big picture question, John, you gave a lot of information and you're prepared. remarks around the utilization of the digital channel of delivery.

Yes.

I would like to see if you would speculate or talk about how that has changed your thinking on the branch network outside of obviously the 10% of the branches that you're consolidating now. How does that change your thoughts as an organization on the network, say, over the coming year or two? And on top of that, how has the increased use of the digital channel changed for better or worse a lot of the efforts that you guys had undertaken as a management team on Project Sundown?

Yeah, I would say this has emboldened us. I'm going to invite Maria Tedesco, who's president, to step in and help comment on this. Actual experience has definitely emboldened us, Wally, in terms of being more aggressive For example, the decision to consolidate 10% of the branch network and round numbers, the best analytics I've ever seen in my career surrounded that. True statement. This closed September 15, which means notifications to customers of those branches went out June 15. It's been almost dead quiet. Why? Because we're not asking people to drive more than, say, two miles or so. So all measures of digital adoption and utilization have gone up. Maria, do you want to just share what is your perspective in terms of actual experience, the increased capabilities of the bank around digital? How does that change your view of the future of the retail branch network?

Yeah, I, you know, it's, I don't really want to comment on how many more branches we might in fact close. I think it's something we have to assess every single year, take a look at our customers behavior. Certainly, COVID and this incident has helped find multiple ways in which to bank and using digital, which John outlines the incredible usage and usage that we've seen on digital channels from our customers. So, again, we will assess this every year and watch our consumer behavior. But, of course, you know, it's apparent that we will likely have more opportunity in the future in terms of our network. I'd also say that we also remain bold about what Project Sundown will do for us in the future because within this period, we have introduced several new initiatives, as John mentioned earlier, in the digital space, which I think just makes it easier for customers to bank where, when, and how they want to bank. And obviously, they're getting used to digital channels. So I'm not, you know, I would also say that because of our appointment setting capabilities, we've been able to keep both our customers safe and our teammates by not opening our branch lobbies and doing our appointment setting either by Zoom or in a branch with a banker, which helped us keep the number of customers coming and going out of our branches in time. And I would just say, you know, we feel really good about our ability through the branch network to serve our clients any way they want, whether it's digital or in person.

And Wally, we don't expect, based on recent comments, Truist to actually convert their brand in Virginia until 2022. And the truth is that that's actually giving us time to continue to close gaps. The reason why I went to such specificity spelling out what we've done in digital and what's coming is I simply want to demonstrate that Even with all of this craziness going on, we are very focused, and we're making steady progress. We have a quarterly release schedule. Kelly Bacon, leading the digital team, has done a fantastic job for us. So we keep chipping away at this, and it does change the nature of the business.

It does. In the interest of time, I'll step up.

Okay. Thank you, Alton.

Thanks, Wally, and thanks for everyone for joining us today. Replay will be available on the website, investors.atlanticunionbank.com, and we look forward to talking with you in October. Have a good day. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.