Ladies and gentlemen, thank you for standing by, and welcome to the second quarter Atlantic Union Bankshares' Conference Call. [Operator Instructions]. 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 Bankshares' President and CEO, John Asbury; Executive Vice President and 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 to run 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 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 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 2 significant and distinct challenges: First, 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 the 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…

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 reserve 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…

Thank you, Rob. And Liz, we are waiting for our first caller, please.

[Operator Instructions]. Our first question comes from William Wallace with Raymond James.

Hello?

This question will come from Eugene Koysman with Barclays.

Liz, are you there?

Yes, Mr. Koysman, your line is open.

Can you hear me? So I had a question on net interest margin. It looked like core net interest margin ex-accretion was closer to about 3.50% in this quarter, which was actually at the bottom of the range that -- the 3.15%, 3.20% 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 see on the core NIM going forward? And what's the trajectory from here?

Yes. Thank you for that question, Eugene. We expect to pretty much stabilize at this 3.15% to 3.20% 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, as I mentioned, which will 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 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 price -- 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 3.15% to 3.20% on a core basis going forward.

That's actually really helpful. And I actually have another question on expenses, if I may. So 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 extinguishment cost, 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 saves just through the third quarter?

Yes. So yes, you're right, Eugene, it's about, call it, $89-or-so million on a run rate basis when you exclude the 1x. We do expect that -- we had -- some additional expenses will climb back. As you know, we did have some -- related to PPP loans, we had some additional [indiscernible] deferred costs that shouldn't recur. So that 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 saves, 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.

Our next question comes from Catherine Mealor with KBW.

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 that -- is that only about half of the savings are realized? Or does that include the -- that doesn't include full realization of savings, right?

No. Well, there's a bit -- yes, the branch-- what's not included in the third quarter is the branch closures. We'll pick that up in the fourth -- starting the fourth quarter once the branches closed. So pretty much will 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 saves, 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 gives you about an $88 million run rate, give or take.

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

No. Yes, the run -- recall, 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 realized in the third quarter and another $1.5 million would be in fourth quarter for a total of $3 million quarterly run rate impact.

Got it. Okay, okay. I'm sorry, I just -- I don't mean to be confusing, but so then, 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?

Yes. It's already in the reduction. And we -- 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 will be down to about the $88 million. Now remember, the first quarter run rate was around $96 million. So -- but some of that included some increased payroll taxes, et cetera, that declined over the year. So when we come out of the year, we're in the $88 million mark.

Okay. Got it. So maybe we think about it maybe just annually, kind of thinking about 2019 expenses, and that was $368 million. And so then if we look at kind of -- well, I guess, your run rate in different quarters?

Yes.

So I was just trying to -- kind of trying to think about that, it's the total reduction. So maybe on the year, we're kind of -- on the year, we're near kind of $358 million for 2020, and then you're kind of going in from the mid-80s run rate in '21?

Yes. That's the way to think about it. Remember -- yes, last year, we also had made 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 lower in 2021.

Okay. That's really helpful. And then give us 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 that -- is that inclusive of the fees and the interest?

Yes. So it's about $3 million of interest, 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?

Say, again, sorry?

Yes. Any kind of costs are coming out of the expense line versus being netted out in NII?

Any additional expenses related? No. We do it -- as I mentioned, we do expect to incur a bit more expenses as we outsource the forgiveness process. So that will add, call it, about $400,000, $500,000 to a run rate over the next 2 quarters is 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. I mean we don't have to process those. So we're still trying to figure that up. We'll see what happens through the Congress. And that would save us -- as mentioned in the back, 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.

Your next question comes from Brody Preston with Stephens.

So I guess, I just want to circle back on the core NIM. There was a 4 basis point drag from PPP that was within the headline NIM, right?

That's correct. Yes.

All right. So I guess, backing that out, you kind of get to the middle of that 3.15% to 3.20%. And I understand that there's going to be some loan yield pressure moving forward. Just wanted to key in on any loan -- 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. And I think 6% or 7% 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 know 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, 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 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.

Brody, this is Doug. Thanks for that question. Let me point you to Slide 10, 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. I think on Slide 8, you mentioned $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 -- I guess, like what portion of this -- 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 modifications, meaning active live, which reflects -- which is after that footnote -- the second footnote.

So in other words, they haven't matured?

Right. They have not. Now a lot of them, of course, since 2/3 or so of the dollars and numbers of loans that are -- that went under a mod were 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 the, let's say, the first 3 weeks of mod expirations, that's that second footnote. So we were cautiously optimistic. 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 but made their payment, didn't even bother contacting us to chat about whether a mod was necessary because they received the bill. So payments resumed once the 30-day -- I'm sorry, a 3-month mod expired. So these are 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're 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 $1.5 billion, the 90-day ones are going come due until, I guess, there'll be a big slug of them, Doug, come August 1. And then there'll be some that will 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 rate of needing a second modification were to hold, I guess, this sort of indicates that we should see a significant portion of these roll the modification and be behind us come the third quarter.

It's like watching election returns. The early returns look good. But the other returns -- now we are in -- 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'd be -- it go off a full deferment to an interest only, so that it's a sign of returning to health. So it's not -- if you need a mod, you get a full payment deferment.

Okay. All right. And I appreciate that. I guess just sticking on this discussion with the modifications, some of the regulator guidance that we've seen over the last couple of days, sort of indicates that loans modified before the year-end, 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 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?

Yes. Brody, this is Rob. Yes, in reading that -- interpreting that, we think that, that will be the case, but we're unsure as how it would be implemented. We also need to look at whether the SEC/FASB through GAAP accounting will also concur with what the OCC is saying or the regulators are saying on that. Certainly, the CARES Act or Congress suggest that. Again, like they did in the CARES, 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 regulators as well as our external auditors.

And Brody, this is Doug. Let me jump in on that, too. Because the regulators and FASB gave banks an up to 6 month, I guess, you call it a haul pass way back on TDRs. For a 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. So in that guidance that you're talking about is fascinating. We certainly hope it becomes 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 I guess, for the ones that you've sort of seen their new business plans, is there any bifurcation there?

Brody, this is Doug again. I'd say not yet. Obviously, smaller borrowers, fewer cushions of financial protection and whatnot. We haven't yet seen that. The incidence doesn't have anything other than a distribution across dollar size, 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 whenever it starts, there'd be more losses on smaller loans than on larger loans simply because smaller borrowers have less flexibility and financial cushions than larger ones, generally speaking.

We need to get to our next caller, please.

Our next question comes from Laurie Hunsicker with Compass Point.

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 of things. If you can 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?

Yes. 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 small retails, either stand-alone and then certainly in CRE retail, neighborhood shopping centers and whatnot. So the incidence of -- I'm sorry, what was the last -- the specific question was what?

Loan to value, the LTV.

Yes. The LTVs are, I mean, not nearly strong as the hotel, I'd say, 65% to 70%. Our focus, of course, is not in the retail trade and the CRE retail. The focus is 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, sir. And so on the retail, you said half of it is service retail to 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 or 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 it back. Laurie, homebuilder 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, men's wear, 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, homebuilding supplies, nursery type operations. And if you look at the percentage that's under modification, that's a pretty good indicator that that's actually doing 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 at the peak...

Right. At the peak.

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.

No -- 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, they're doing okay. The auto dealers are actually really picking up, and this is financing showrooms, not floor plan, et cetera.

Okay. Okay. I'm sorry, so just one last question then. If I'm thinking about this book, then additionally, in other words, half convenience stores at gas stations, you probably have another floor that's not included in that 50% number that would be grocery-anchored drug store, 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 just -- am I hearing that right?

That would be outside of that category. That would be investment real estate, shopping centers, drug stores 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'd be 75% to 80%. It is often part of the collateral for the smaller ones. They're second owners houses. 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?

Yes. So are you talking about the balances, Laurie? Or is it...

Yes. The third-party originated consumer was $215 million last quarter.

Yes. It's just a bit below $200 million now in total. The lending club is about $81 million. That's come down.

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

Yes, 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.

One big picture question, John. You gave a lot of information in your prepared remarks around the utilization of the digital channel of delivery. 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 has that changed your thoughts as an organization on the network say over the coming year or 2? And on top of that, how has the increased use of the digital channel changed for better or worse, the -- a lot of the efforts that you guys had undertaken as a management team on Project Sundown?

Yes. 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 around numbers. That's the analytics I've ever seen in my career surrounded that. True statement. This closed September 15, which means notifications to customers those branches went out, what July -- no, June 15. It's been almost dead quiet. Why? Because we're not asking people to drive more than, say, 2 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 to the bank around digital. How does that change your view of the future of the retail branch network?

Yes. 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 the bank and using digital, which John mentioned in outlook, the incredible usage that we've seen digital channels from our customers. So again, we will assess this every year and watch our consumer behavior. But of course, 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 -- 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 up 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 [indiscernible]. And I would just say, 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, 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 Dakin, leading the digital team. He's done a fantastic job for us. So we keep chipping away at this. And it does change the nature of the business.

Thanks for everyone for joining us today. A 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.