Atlantic Union Bankshares Corp (AUB) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Atlantic Union Bankshares Corporation First Quarter Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker for today, Bill Cimino, you may begin.

Thank you, Towanda, and good morning, everyone. I hope you all are safe. I have Atlantic Union Bankshares' President and CEO, John Asbury; and Executive Vice President and CFO, Rob Gorman with me today. We also have other members of our executive management team dialed in for the question-and-answer period.

Please note that today's earnings release and webcast and the company's slide presentation we are going to go through 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. The important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures is including in our earnings release and in the earnings supplement for the first quarter 2020.

Before I turn the call over to John, I would like to remind everyone that on today's call we'll make forward-looking statements, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future results expressed or implied by these forward-looking statements.

We undertake no obligation to publicly revise any forward-looking statement. Please refer to the earnings release for the first quarter and our other SEC filings for a further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ.

All comments made during today's call are subject to that safe harbor statement. At the end of the call, we will take questions from the research analyst community.

And now I'll turn the call over to John Asbury

Thank you, Bill. Thanks to all for joining us today, and I hope everyone listening is safe and well. We began 2020 with momentum and had an ambitious set of work ahead of us. We continue to believe that our strategic plan is the right one, and that we have a great opportunity before us to create something uniquely valuable for our shareholders and the communities we serve and remain keenly focused on reaching the full potential of this powerful franchise.

But what a difference a pandemic makes? And this COVID-19 unfolded, we quickly adjusted both our near-term and mid-range plans. Since mid-March, we have had 90% of our non-branch personnel working from home in order to distribute our workforce and reduce the risk of COVID-19 contagion. That we were able to pivot quickly and effectively is a proof point that we built a resilient organization that can react to unexpected circumstances and innovate.

Rob will cover the financial details for the quarter, including a deep dive into CECL. Instead of tracking back to our progress on our strategic priorities, as I typically do during these calls, I'll cover our COVID-19 response, it's implications in the near-term and its implications for our future as we realign our company's expense base to the new reality of a much lower, for much longer-than-expected interest rate environment.

We do believe the current pandemic is transitory, and we'll manage through it, but we must position ourselves for the new reality that comes afterward. In crisis, it's good to play the fundamental strengths. One of our strengths, I believe is consistency. We have and will continue to operate under the mantra of "Soundness, Profitability and Growth - in that order of priority." As some of you know, I began my career at the old Wachovia Bank & Trust in Winston-Salem in 1987, where I was trained as a Commercial Credit Officer. I learned the mantra of "Soundness, Profitability and Growth - in that order of priority" from John Medlin, whom I still consider among the best bank CEOs of all-time. Never more than now, over the course of my nearly 33-year career, I look back on what I learned from Mr. Medlin, and I believe he was right, a sound bank is our first priority.

A prudent credit culture served our company well during the great recession, and it will serve us well during the coronavirus pandemic. I'll get into more details about our credit over the course of my remarks.

Turning to our pandemic response. We started our first awareness campaign with teammates in late January and continue to monitor the situation and make preparations through February. As it became clear the pandemic was imminent, we activated our formal incident response team on March 4. We restricted travel of in-person meetings on March 6. Our first customer update went out on March 13. We did a max test of our virtual private network, which is a remote work capacity on March 12 to prepare for a working-from-home model.

On March 16, we restricted nonessential vendors and teammates from offices and shifted to our work-from-home model. 90% of all non-branch teammates are currently working remotely, including 90% of our call center teammates.

On March 19, we were one of the first Virginia banks to move our branches to a drive-through model with branch lobbies access-by-appointment only. We limited Saturday branch hours on March 21. On March 23, we notified our clients about our customer hardship program and how we can help during this crisis. We started preparing for the SBA Paycheck Protection Program on March 27, upon its being signed into law, and we're in position to accept applications through our online application portal on the day the program began, Friday, April 3. We mobilized, and in 5 days, we developed the application portal and an automated workflow system in preparation for what we correctly expected to be an onslaught of applications since so many of our small to mid-size customers appeared to be eligible.

Our teammates recognized the importance of this program, and have worked tirelessly, and still are, to establish high levels of customer service, even through the exceptionally strong initial demand. We've had over 400 teammates or 25% of our workforce working on this full-time since it started. And over 1,000 employees or half our workforce working on it in some capacity. To date, we processed approximately 9,670 applications for $1.8 billion, and the SBA approved 6,500 of them for $1.4 billion in the first round of funding.

The SBA-approved funding supports nearly 130,000 employees of our clients across this great franchise. We offered this program to all existing eligible customers of Atlantic Union, not just borrowers, not just a select few. After the first round of funding ended, we left our application portal open continuing to process existing applications and invited new clients to apply in preparation for round 2 of funding, which we're working on now.

We revisited our charitable contribution strategy to support COVID-19 relief. Since March 16, the leadership team has started and ended each day together on video conference, allowing better communication, real-time decision-making and teamwork than ever before, despite of working remotely. From the beginning, our priorities have been to make the right decisions to protect our teammates, customers and the bank.

For our teammates, the pivot in working environment has been surprisingly effective. While we had the resilience plans in place and had conducted tabletop business continuity exercises, nothing could have prepared us for the reality of a pandemic. Some of the planning we found effective and used it and some went out the window. More important, we made decisions quickly in the face of uncertainty, found a way to do what needed to be done and continue to do so today.

We've learned to work differently, and our customers have learned to bank differently. For example, we've seen usage of our digital channels increase 46%. Our call center volume has doubled, and the average call time is a little more than a minute longer than before. Wait time averages are hovering around 4 to 5 minutes compared to about a minute before the crisis, yet call center customer satisfaction is above our historic highs based on our measurement.

For most of our customers, the storm has arrived. We've batten down the hatches from a credit risk mitigation standpoint. We feel confident about weathering the storm. We don't have outsized exposure to the industries most directly impacted by social distancing measures put in place, such as hotels, restaurants and retail.

Let me talk for a moment about the steps we've taken to solidify our credit position. We, of course, reached out immediately, proactively to our business customers to assess the COVID-19 impact on them and implement payment modifications where necessary, verified collateral, reviewed in detail our loan books with a focus on the highest risk borrowers and industries.

Since the start of the crisis until February, April 24, we've modified approximately 4,000 commercial loans with a total balance of $1.9 billion, which is approximately 15% of our total loan portfolio.

The modifications run the range of options that are tailored for each borrower. The majority of them, about 75%, are payment deferrals with a total balance of $1.4 billion, which is about 11% of the loan portfolio. Our goal is to help as many of our clients at this time as possible. As the quarter ended, commercial line utilization remained steady at around 35%. Since quarter end, we've seen line usage decrease slightly, we're not seeing any broad drawdowns. We are aware of the press regarding excessive line of credit drawdowns, but believe that to be mostly a large corporate phenomenon and that's not a major factor for us.

Our exposures to the most in-focus industries are limited and are outlined on Slide 9 of our accompanying presentation. Our hotel portfolio comprises $650 million or 5% of our total loan portfolio and consists primarily of non-resort hotels flagged by brand name that don't rely on conventions or conferences. The hotel portfolio's debt service coverage ratio and the loan-to-value is the best among all of our commercial real estate property types. Portfolio, debt service coverage is 1.9x, and the median loan-to-value is 60%, providing a good equity buffer to ride out this shock and accommodate deferred payments.

Our restaurant exposure is $226 million or less than 2% of total loans. It's granular, and it's 85% secured by real estate collateral.

Our retail trade exposure is less than 4% of total loan exposure. About half of this is to local gas station with convenience store operators and auto dealers, and 80% of the exposure is secured by real estate collateral.

Regarding senior living facilities, we finance independent living, assisted living and continuing care communities. These represent $280 million, about 2% of the loan portfolio. They're managed by good operators with established track records. Thankfully, so far, none have been a hotspot for the pandemic.

Our health care segment is also granular and heavily secured by real estate. We have no meaningful exposure to aviation, cruise industries or energy. And as you may recall, our third-party consumer portfolio has been winding down for some time.

Our perspective is that we're simultaneously managing 3 significant events: first, the COVID-19 pandemic; second, the Paycheck Protection Program, which has been an enormous undertaking, like nothing we've ever seen before; and third, the recognition that we must align the company's expense base to become a reality of a much lower-for-longer rate environment than expected. We will manage through the pandemic, which we consider a limited duration of that. But as it ends, we'll have positioned ourselves for the lower-for-longer rate environment and the macroeconomic reality afterward.

I told our teammates that the current normal is not the new normal, but that we think the post COVID-19 normal will be different still. And we have to prepare for that reality. We are realigning the expense structure to match revised revenue expectations to maintain a goal of top-tier financial performance. We'll have more to say about this as our plans are finalized in the coming weeks. But rest assured, we remain focused on the long-term and are continuing to deliver top-tier financial performance. We remain committed to our previously discussed top-tier financial metric targets beginning in 2021.

Although it seems like ancient history by now, Rob will take you through the financial results for Q1, and I'll speak to key accomplishments during the quarter.

As I mentioned before, we had good momentum heading into 2020 and started off the year with strong deposit growth, with loan production tracking to our plan. Atlantic Union accomplished a lot in the first quarter, particularly, in digital.

To start, we rolled out our new online account opening platform, which was perfect timing, given what had just happened; implemented card controls, so customers can turn off their debit card on their own; improved our chat and secure message functionality for customers; improved fraud detection for online bill pay and Zelle transfers; rolled out a start card to provide a temporary debit card at account opening; and identified a number of process improvements to make our company more efficient and scalable. And we also launched in the commercial bank treasury management group, a health care log box service, which supports accounts receivable collection for the unique needs of health care organizations.

In the second quarter, we plan to further improve our digital experience by rolling out an interactive chat function for online account opening, upgrading alerts to near real-time for a better customer experience and better fraud detection and launching an appointment schedule to allow customers to book appointments in the branch from a website and/or mobile app.

Our financial metrics were heavily impacted by the elevated provision for credit losses due to the worsening economic outlook related to COVID-19, and Rob will walk you through all of those details.

I will say that given the challenging current and expected operating environment for banks, our full year outlook will ultimately depend on the duration of COVID-19 and consequently, the length and depth of the recession in our markets, but our goal remains to achieve and maintain top-tier financial performance, regardless of the operating environment.

We face great uncertainty at this point, but we do believe we are in a UCH -- pardon me, we believe we are in a U-shaped recession and expect recovery before the year is out. The question remains as to how long we'll be at the bottom of the U. At this time, we simply don't know.

The economy and our footprint were steady heading into the crisis, with unemployment in Virginia at 2.6% in February and picking up to 3.3% in March. We continue to see higher unemployment claims as April progressed.

The Virginia economy is fairly unique, as about 20% of the economy is anchored by the federal government. The federal government spending in Virginia is mainly for agencies in the Department of Defense, with only a small fraction going to income assistance programs, education and transportation.

I've consistently said since I arrived, that I believe problem asset levels at Atlantic Union and across the industry were below the long-term trend line. We are now experiencing an unexpected change in the macroeconomic environment that I mentioned, could impact credit quality, and we're now in a systemic downturn. We expect to return to more normalized levels of credit losses after the impact of the pandemic works its way through the economy.

Moving away from the quarterly results, we continue to believe that our 3-year strategic plan will create a company with differentiated financial performance, but the path to finish the work of this plan is going to take longer than we had planned. I'll have more to say about the changing timeline and our progress against our strategic plan in future calls.

Looking down the road, in regards to other strategic opportunities, it should be clear from my comments that we are busy and focused on the near-term pandemic response and credit management. For now, we'll do what we need to do to fight another day. In chaos lies opportunity. I believe, we'll emerge from the crisis stronger, better, more efficient than before. I believe we will demonstrate that we made the tough choices we needed to make, that we were nimble, we were resilient and innovative in response to a most unexpected operating environment. We'll manage through the crisis, while positioning for future opportunity and success.

In summary, we're focused on weathering the storm, taking care of our teammates and customers and protecting this bank. We will realign our expense structure to match the lower-for-longer rate environment that lies ahead. We'll continue to work our strategic plan, but we'll shift our timelines to adjust for the new reality.

I'm incredibly proud of our teammates and all they've done and their ability to rapidly adjust to a new way of working in amidst of all of this uncertainty. I'm grateful for their grit, their willingness and ability to deliver a great personal sacrifice, $1.4 billion of the Paycheck Protection Program funding for our clients, their employees and our communities during the first round of the program. And we are hard at work on round 2, even as I speak.

I remain confident in what the future holds for us and the potential we have to deliver a long-term, stainable financial performance for our customers, communities, teammates and shareholders.

I'll conclude my remarks with a familiar refrain, that Atlantic Union Bankshares is uniquely valuable, dense and compact in great markets with a story unlike any other in our region, now more than ever before, I believe we've assembled the right scale, the right markets and the right team to deliver high-performance, even in uncertain macroeconomic environments.

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

Well, thank you, John, and good morning, everyone. Thanks for joining us today. I hope you, your families and friends are all safe and are staying healthy. Before I get into the details of Atlantic Union's financial results for the first quarter, I think it's important to reinforce John's comments on Atlantic Union's governing philosophy of "Soundness, Profitability and Growth - in that order of priority." This core philosophy is serving us well as we manage the company through the current COVID-19 pandemic crisis.

We are currently facing an unprecedented crisis management event that requires us to be laser focused on the safety, soundness and profitability of the company. As we will discuss further, Atlantic Union enters this time of uncertainty in a very strong financial position as we deal with the impact of COVID-19 on the bank's financial results. We have a well-fortified balance sheet, a strong capital base and ample amounts of liquidity, which will allow us to weather the current storm and come out even stronger once this crisis has passed.

As a matter of sound enterprise risk management practice, we periodically conduct capital, credit and liquidity stress tests for scenarios such as the operating environment we now find ourselves in.

Results from these stress tests give us confidence that throughout the crisis, the company will remain well-capitalized and has the necessary liquidity and access to multiple funding sources to meet the challenges of COVID-19. By effectively managing through this crisis, we will become a stronger company that is well positioned to take advantage of growth opportunities as economic activity resumes, aided by government support and stimulus.

Now let's turn to the company's financial results for the first quarter of 2020. GAAP net income for the first quarter was $7.1 million or $0.09 per share, which was down significantly from the prior quarter due to the $57 million increase in the provision for credit losses compared to the previous quarter. This increase is primarily due to projected credit weakness as a result of the deteriorating economic outlook related to the COVID-19 coronavirus pandemic, which require the company to materially increase its allowance for credit losses during the quarter.

Non-GAAP pretax, preprovision operating earnings were $68.3 million or $0.86 per share, which was down slightly from the prior quarter, primarily due to seasonally higher personnel-related costs.

I will now discuss the impact of the company's adoption of CECL on January 1 and the subsequent impact of the worsening economic forecast related to COVID-19, which resulted in a material increase in the allowance for credit losses and the quarterly provision for credit losses.

Atlantic Union adopted the CECL accounting standard on January 1. As you know, under CECL accounting, lifetime expected credit losses are now estimated using macroeconomic forecast assumptions and management judgments applicable to and through the expected life of the loan portfolios.

At March 31, 2020, the allowance for credit losses was $150 million or 1.17% of total loans, inclusive of the allowance for loan and lease losses of $141 million and a reserve for unfunded loan commitments of $9 million. The allowance for credit losses increased to $107 million from December 31, of which $52 million was due to the adoption of CECL, the so-called CECL day 1 impact, and $55 million was driven by the deteriorating economic outlook related to COVID-19 subsequent to the adoption of CECL, the so-called CECL day 2 impact.

The allowance for loan and lease losses increased $99 million from December 31 due to the CECL day 1 impact of $48 million and a CECL day 2 impact of $51 million. The allowance for loan and lease losses as a percentage of that total loan portfolio was 1.1% at March 31, which was up from 34 basis points at December 31. The ratio of the allowance for loan and lease losses to nonaccrual loans was 320% at the end of the first quarter compared to 150% at the end of the prior quarter.

The reserve for unfunded loan commitments increased $8.1 million from the prior quarter due to the CECL day 1 impact of $4. 2 million and the CECL day 2 impact of $3.9 million. The $55.2 million CECL day 2 increase to the company's allowance for credit losses took into consideration the COVID-19 pandemic impact on credit losses, both through the 2-year reasonable and supportable macroeconomic forecast, utilizing the company's quantitative CECL model and through management's qualitative adjustments. Beyond the 2-year reasonable and supportable forecast period, the CECL quantitative model estimates expected credit losses using a reversion to the mean of the company's historic loss rates on a straight-line basis over 2 years.

In estimating the expected credit losses within its loan portfolio at quarter end, the company utilized Moody's macroeconomic forecast as of March 27 for the 2-year reasonable and supportable forecast period. The Moody's economic forecast assume that, on a national level, GDP would decline by 18% in the second quarter and that the national unemployment rate would peak at approximately 9%.

Moody's forecast for Virginia, which covers the majority of our footprint, assumed the peak unemployment rate in the state of about 6.5%, remaining at above 5% throughout the forecast period.

In addition to the quantitative modeling, the company also made qualitative adjustments for certain industries viewed as being highly impacted by COVID-19, included hotels, retail trade, restaurants and health care, as discussed by John earlier. The qualitative factors also considered the potential favorable impact on estimated credit losses of the massive U.S. government stimulus support funding, including the small business Paycheck Protection Program.

As a result of the above expected credit loss modeling assumptions, as mentioned earlier, the first quarter's provision for credit losses was $60 million and the allowance for credit losses increased by $55 million to $150 million or 1.17% of total loans, up from 34 basis points at the end of last year. For context, the 1.17% allowance level represents approximately 60% of Atlantic Union's peak 2-year loss rates in the great recession and approximately 63% of the projected 9 quarter losses in the company's most recent internal stress testing scenarios.

From a regulatory capital perspective, the company is phasing in the capital impact of adopting CECL over a 5-year period as allowed under the interim final rule issued by the regulatory banking agencies in March. Under this rule, the company is allowed to include the capital impact of the CECL transition, which is defined as a CECL day 1 impact to capital, plus 25% of the company's provision for credit losses recorded during 2020 and regulatory capital through 2021. Beginning in 2022, the CECL transition capital amount will begin to be excluded from regulatory capital over a 3-year phase-in period ending in 2024.

For the first quarter of 2020, net charge-offs were $5 million or 16 basis points of total average loans on an annualized basis as compared to $4.6 million or 15 basis points for the prior quarter and 15 basis points for the first quarter last year.

As in previous quarters, a significant amount of the net charge-offs, approximately 55%, came from nonrelationship third-party consumer loans, which are in runoff mode.

Now turning to the pretax, pre-provision components of the income statement for the first quarter. Tax equivalent net interest income was $137.8 million, which was in line with the fourth quarter's net interest income level. Net accretion of purchase accounting adjustments for loans, time deposits and long-term debt added 24 basis points to the net interest margin in the first quarter, which was up from the fourth quarter's 18 basis point impact, primarily due to increased levels of loan-related accretion income.

The first quarter's tax equivalent net interest margin was 3.56%, which is an increase of 1 basis point from the prior quarter. The 1 basis point increase in the tax equivalent net interest margin for the first quarter was principally due to the 6 basis point cost of funds decline, partially offset by a 5 basis point decline in the yield on earning assets. The 5 basis point decrease in the quarter-to-quarter earnings asset yield was primarily driven by the net 7 basis point decline in the loan portfolio yield. The decline in the loan portfolio yield of 7 basis points to 4.83% was driven by lower average loan yields of 16 basis points resulting from lower loan fees and the impact of declines in market interest rates during the quarter, was notably the significant declines in the 1-month LIBOR rate and the prime rate. This impact was partially offset by the 9 basis points positive impact from higher loan accretion income. The quarterly 6 basis point decrease in the cost of funds to 94 basis points was driven by a 6 basis point decline in the cost of deposits to 86 basis points as interest-bearing deposit costs declined 9 basis points from the fourth quarter to 110 basis points due to aggressive repricing of deposits during the quarter, as market rates declined.

Also contributing to the first quarter's lower cost of funds was a 20 basis point decline in wholesale borrowing cost driven by lower market rates. Noninterest income decreased by approximately $300,000 to $28.9 million in the first quarter from $29.2 million in the prior quarter. Mortgage banking income of $2 million was lower by $667,000, primarily due to the net losses on derivative instruments more than offsetting the impact of higher loan origination volumes.

Fiduciary asset management fees of $6 million declined $547,000 from the prior quarter, primarily due to lower investment advisory fees resulting from the equity market-driven decline in assets under management during the quarter.

Service charges on deposit accounts declined $293,000, primarily due to lower overdraft fees and interchange fees declined $229,000 from the prior quarter on lower transaction volumes. Increases in insurance-related revenue of $836,000 and loan-related interest rate swap income of $478,000, partially offset the overall decline in noninterest income.

In addition, during the quarter, the company recorded a $1.8 million loss to unwind an interest rate swap related to short-term federal home loan bank advances, which was offset by gains on security sales of $1.9 million. This net balance sheet restructuring transaction improved net interest income by approximately $2 million annually and adds 1 basis points to the net interest margin.

Noninterest expense increased $1.3 million to $95.6 million in the first quarter from the prior quarter. As expected, salaries and benefits increased $2.9 million, primarily related to seasonal increases in payroll taxes, group insurance and annual merit adjustments.

FDIC expense increased $1.6 million due to the FDIC small bank assessment credit received in the fourth quarter of 2019.

Other expenses in the first quarter of 2020 included a $1 million expense in support of a community development initiative and approximately $380,000 of expenses incurred related to the company's response to COVID 19. These increases were partially offset by declines in marketing and advertising expense of approximately $936,000 as well as lower OREO and credit expense of approximately $859,000 due to lower OREO valuation adjustments.

Additionally, there were no merger-related or rebranding costs recognized in the first quarter of 2020 compared to $896,000 and $902,000, respectively in the fourth quarter of 2019.

The effective tax rate for the first quarter declined to 12.2% from 16.7% in the fourth quarter, primarily due to excess tax benefits related to share-based compensation recorded in the first quarter. For the full year, we expect the effective tax rate to be in the 16.5% to 17% range.

Now turning to the balance sheet. Period end total assets stood at $17.8 billion, an increase of $284 million from December 31. At quarter end, total loans held for investment were $12.8 billion, an increase of $158 million or approximately 5% annualized, while average loans increased $266 million or 8.7% annualized from the prior quarter.

Overall loan growth was driven by commercial loan balance increases of 8.3% on an annualized basis, led by strong growth across multiple commercial categories. Consumer loans declined approximately 10% annualized in the quarter, driven by mortgage and third-party consumer balance runoff, partially offset by growth in indirect auto balances of 8.7%.

At March 31, total deposits stood at $13.6 billion, an increase of $250 million or approximately 7.5% from the prior quarter. The first quarter's deposit growth was driven by material increases in transaction account balances, partially offset by declines in money market deposit balances. Low-cost transaction accounts now comprise 46% of total deposit balances at the end of the first quarter, which is up from 44% at December 31.

The loans to deposit ratio was approximately 94% at quarter end, which is in line with the company's 95% target level. As noted earlier, we feel good about our current liquidity position with multiple sources that can be tapped, if needed. Although to date, we haven't seen any unusual client behavior that would require us to draw on these resources. We expect to fund the approximately $1.4 billion and counting Paycheck Protection Program loans approved by the SBA, using the Federal Reserve's liquidity facility that had been set up for this purpose.

From a capital perspective, the company is well positioned to [withstand] the COVID-19 pandemic and its impact on the bank's financial results.

At the end of the first quarter, Atlantic Union Bankshares and Atlantic Union Bank's regulatory capital ratios were well above regulatory well capitalized levels.

From a shareholder stewardship and capital management perspective, we are committed to managing our capital resources prudently as the deployment of capital for the enhancement of long-term shareholder value remains 1 of our highest priorities.

As such, during the first quarter of 2020, the company paid a dividend of $0.25 per common share, repurchased approximately 1.5 million shares at an average price of $33.37 per share. And suspended its share repurchase program with approximately $20 million remaining under its $150 million share repurchase authorization.

Overall, the company repurchased approximately 3.7 million shares at an average price of $35.48 per share since August of 2019.

Regarding the dividend, the company has no intention of cutting it at this time, but management and the Board of Directors will continue to monitor the business environment and will be prudent in managing capital levels going forward.

So to summarize, Atlantic Union delivered solid pretax, pre-provision financial results in the first quarter, despite the onset and unprecedented business disruption associated with the COVID-19 pandemic and the headwinds of a lower interest rate environment.

As John noted, the company is taking significant and immediate actions to reduce its expense run rate to align with the lower-for-longer interest rate environment as we strive to meet top-tier financial performance, regardless of the operating environment.

Finally, please note that while we are proactively managing through this unique and unpredictable pandemic crisis and are taking the proper steps to weather the economic downturn to ensure the safety, soundness and profitability of the company, we also remain focused on leveraging the Atlantic Union franchise to generate sustainable, profitable growth and remain committed to building long-term value for our shareholders.

And with that, I'll turn it back over to Bill to open it up for questions.

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

(Operator Instructions) Our first question comes from the line of Eugene Koysman from Barclays.

In terms of the credit, we appreciate the detail you provided on the loan segments impacted by COVID-19. But can you give us a bit more color on what percentage of clients in these impacted categories such as retail, restaurants, hotels have asked for payment forbearance?

And also, what are your specific loss expectations in these loss categories?

Eugene, I'll start. In terms of your question on what percentage of the impacted portfolios are under payment deferral, if you refer to Page 9 of our accompanying slide presentation, you'll see that on the far right-hand side, modifications, so retail trade is 30%; restaurant, 52%; senior living, 5%; hotels, 67%; and health care, 34%.

In terms of what our expected losses are on this, we have no idea. Rob, do you have any better answer than that?

Well, Eugene, as I mentioned in our prepared remarks, we have provided qualitative adjustments to those impacted portfolios and have increased those reserves against those particular portfolios, significantly up to 3x, 4x what the model would have hold us -- our historical loss model would tell us. So we do have a material reserve against those debt portfolio at this point in time.

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

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

Yes, Eugene, I'll take that one. Yes, in terms of our expectations for the second quarter from a net interest margin perspective, we do expect that, that's going to come in lower than what we recorded in the first quarter. One of the drivers of that would be, we expect lower accretion income. As you saw, about 24 basis points of our reported margin related to accretion income, which was up about 6 basis points from the prior quarter.

We do expect that to come down. We do have a schedule within our earnings release that shows how we think accretion income will flow in over the next several quarters and even into the out years.

Now I would caveat that a bit that, that's based on contractual payment schedules. And as we saw this quarter, you could see an acceleration of that -- recognition of that accretion income, if there are pay downs related to that -- those books of business.

In terms of the overall core margin, we're also expecting that to compress based on the lower-for-longer rate environment, as we mentioned. But the recent market rate declines with the Fed cutting down to 0, prime rate has come down, with that, LIBOR has also come down. The market rates quarter-to-quarter have continued to come down in the current quarter, so we are expecting that at the margin. Based on that, we'll probably stabilize in the -- over time in the 3.15 to 3.20 range. We also -- just to give you some flavor on that, about 27% of our book -- loan book is priced off of 1-month LIBOR, another 13% is prime -- priced to our prime index. We do have about 11% of the portfolio at floors. So it's not quite as that 40% is actually lower. So we are sensitive to lower rates, both prime and 1-month LIBOR, and those have come down quite a bit. So again, looking forward, we expect our -- the core margin about 3.32 probably will come in over the next few quarters. This is not including any impact from the PPP program, probably, the 3.15 to 3.20 range over the next several quarters.

Our next question comes from the line of William Wallace with Raymond James.

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

That's still part -- while it was -- in terms of the CECL day 1 adoption, the reserve related to purchase credit impaired note purchase credit deteriorated loans, was moved over into the allowance for loan loss. That was relatively small amount of the total purchase mark. I want to say, less than $5 million or $6 million, got moved over related to the PCI, PCB portfolio. The remainder is what you see accreting through income that's on the page in the earnings release. That is not -- that did not get moved directly over from the credit mark perspective, also liquidity mark's in there. That's the so-called double count, Wally that we talk about. So we have the accretion, the purchase mark is still out there and accreting into income. But at the same time, we have to provide reserve for nonpurchase credit deteriorated loans, the so-called good book of our acquired book.

So do you give the total balance of the remaining marked, do you have to add up all of those years of accretion because that -- will that give...

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

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

Well -- yes. It's basically accreting the credit, we actually did on the day 1 adoption, about half of the increase in the day 1 CECL increase in the allowance for credit losses related to good book acquired portfolio, the double count.

Okay. All right. So okay. So it's -- yes. So it's like bond accounting now where obviously, it accelerates at the loan pace, but there's no credit loss impact in that number. Okay. All right. That's helpful.

On the PPP Part 2, John, you mentioned that you guys are actively applying and funding -- or applying for funding, I guess, I don't know if you're actually funding them yet, but can you kind of give us a sense of maybe the pipeline of Part 2? And if you have an idea of what the average fees might look like on those?

Yes. Sure, Wally. I'm going to ask Atlantic Union Bank President, Maria Tedesco to chime in because she will have the most current information available. Please bear in mind, we're working virtually here. So we're not seeing each other. Wally, what I would say as Maria comes on, is that, as a reminder, we left the application portal open when funding expired [Tuesday] a week ago or whatever it was, we invited new customers in at that point in time. And I can tell you that when the SBA opened for business yesterday, we had 3,000 applications ready to drop in.

Maria, can you take it from here, please, in terms of -- I think we had 400 new applications yesterday. Tell us where we are on this, please.

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

And Maria, my recollection is that of the 3,000 completely vetted and internally approved applications ready to drop into the SBA E-Tran system, I think that was sum total of -- something like $300 million, does that sound out right in terms of sum of borrowings?

Yes.

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

Rob, I'm thinking that...

Yes. It's going to be -- the average is going to be less than 350. So think about a 5% fee on those.

Yes. Most of those should be -- I don't know, if any individually large ones. So I'd agree most of those would be the 5% range. So Wally, what this ultimately does will be a function of how long there's money remaining available, and quite candidly, the speed with which we can get the approvals through the SBA system. Theoretically, we believe, we could get 3,000 applications through in about 6 hours. The problem is because of all the glitchiness of it, that was so well reported yesterday. Having said that, to Maria's point, I can tell you, when I woke up this morning, the last update I saw, said we had approved something like 1,024. As Maria indicated, we were up late last night. We got well over 900 yesterday, which is very good. So I would expect that, if we did $1.4 billion, which we did in SBA approvals around $1, we know we have $300 million yesterday ready to drop in, plus, we're probably going to settle in at somewhere between -- conservatively, I bet you were approaching at least $1.8 billion, maybe north of that, depending upon how long the funding remains available.

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

And Wally I can't help but point out, as a reminder, Atlantic Union Bank was 15%, 15% of all round 1 PPP approvals in Virginia by count and by dollar. If we calculate our depository market share at about 7%, so we think we punched 2x above our weight. I am so proud of this team. That's $1.4 billion, 90% of that $1.4 billion went into Virginia. That's good for our economy. It's good for our clients. It's good for everybody.

Yes. I agree. What was the dollar amount of the hedge loss in the first quarter mortgage?

Rounded, it was about $1 million, Wally.

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

Yes. Right, We're looking at the -- revenue stream is going to be down, yes, beginning of second quarter, as you saw. Of course, it really does depend on where the market -- what happens to the market. But yes, we are anticipating that fees will be down in probably about the $1 million or so range on a quarterly basis.

The next question comes from the line of Laurie Hunsicker with Compass Point.

I just wanted to go back to margin for a moment. I just wanted to make sure that I've put all these comments together the right way. So again, to your point of core margin guidance at 3.15 to 3.20, and it looks like 16 basis points or so, just comes out of accretion income, just going March to the June schedule, and I love the detail you presented on that. So we're thinking about probably an all-in reported margin, that's going to be tracking somewhere maybe 3.27, 3.28, 3.29 on a reported basis relative to your 3.56 that you reported this quarter. I thinking about that the right way?

That's right, Laurie. I would say, yes, it's kind of at about 10 to 12 basis points from accretion income.

Okay. That's helpful. Okay. Love all the detail you provided. Just wondered if we can go back to Slide 9, just a couple of things I want to touch on. First, what is your leverage lending exposure? And then second, how much of Slide 9, how much of that $2.2 billion is leverage lending?

I'm going to ask Doug Woolley or Dave Ring to verify this. I would say it's darn near 0. So what I think about -- when I think about leverage lending in these categories, I would mostly be thinking about franchise restaurant finance. I'm very familiar with that business. I was involved with it previously. We don't do that. So we are not doing large-scale franchise operators, syndicated restaurant. These are all local business people. Some do have franchises, but you're talking about a handful of them. And Doug, do you and/or David Ring, have anything you would add to that? Any leverage lending exposure in this category on Slide 9?

Yes. Laurie, this is Doug. There is no levered lending exposure in this category. We have a little over $300 million in that. It's not in these categories.

Got it. Okay. That's helpful. Okay. And then just keeping on Slide 9, in terms of hotels, you had mentioned that of the $650 million, it was done at a 60% LTV, which is helpful. But of your $651 million, how much of that is C&I versus CRE? Or what percentage of that is real estate or is it all real estate?

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

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

Great. And do you have any hotel C&I exposure?

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

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

I'm sorry, did you say oil?

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

0. 0. Anything you would see quoted as energy would be natural gas, like local distribution gas company, et cetera, 0 for oil. 0 for coal.

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

Sure. Yes. So we brought -- total third-party is probably in the [2.15] to [2.20] range. Lending club was, as you know, approximately a $120 million at the end of the year, it's down to under $100 million. Now it's about $98 million of that total. But that's been running off pretty significantly.

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

Yes. Don't have that in front of us here, Laurie. So we can follow-up on that.

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

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

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

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

And in terms of geographies, there's a lot of that coming out of kind of discretionary spending like marketing? Or is it -- are you looking at your branch network, any kind of optimization there? I'm just trying to kind of...

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

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

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

Yes. Ironically, the -- pointing toward the origination fee income of a PPP, but I have to say that it has not lost on us, if that effectively could prefund so to speak, any incremental reserves that could be necessary. That's beneficial on so many respects. So it's a bridge for clients and businesses and obviously, there is some income associated with it too.

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

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

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

Our next question comes from the line of Brody Preston with Stephens.

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

To be 35% of the Q1 numbers?

Yes.

Yes. That's -- you have to put a fine point on it, but that's not out of the question.

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

That's about 8% of that 11%.

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

Yes. That's a good question, Brody. I have to look at that again. Let me get back to you. I can't remember exactly what that number is. But maybe, on our call after this we can talk about that. I'll give the info.

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

Yes, that is.

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

Sure. Brody, I'll ask Maria Tedesco to comment on this. I will say that, our position on the first round of funding as we were focused on the existing client base, we knew we were going to be overwhelmed. That was obvious. And so we were very much focused on serving the existing client base first. Having said that, we had a long line at our door of prospective relationships, trying to come in. And so as we gained confidence late into the process of round 1, we begin to change our thinking, and then we immediately opened up for round 2 to accept new customers. Maria, do you have any current stats in terms of what percentage do we think based on what we're seeing, really more -- it's more of a round 2 issue, our new customers?

Yes, that's right. The round 2. But if you look in total of all applications of obviously, the new customers coming on in the second round, we have a very close to 17.5% new customers.

And I think that what's happening is we've been fortunate to receive good press based on the good results we had in round 1. So we've -- it's been, frankly, we never viewed this as a business development opportunity, but it's at our doorstep. So we have absolutely been able to welcome new relationships into the bank now.

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

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

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

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

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

Okay. Great. And then I guess maybe one last one on the expense base. Obviously, the branch transformation, just given most branches are sort of effectively closed right now. I'm assuming that just given the new revenue environment, as maybe -- some of that going to slow down, even if we're opened up in the back half of the year? How should we think about the investment in the branches?

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

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

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

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