Q2 2020 Atlantic Union Bankshares Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the second quarter Atlantic Union Bankshares Conference call.
At this time all participant lines are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press Star then one on your telephone keypad.
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I'd now like to hand, the conference over to your hosts today Mr. Bill for me to Investor Relations. Please go ahead Sir.
Thank you as and good morning, everyone.
Midlantic Union Bankshares, President and CEO, John Asbury Executive Vice President CFO, Rob for men and Chief Credit Officer Duck, Willie all with me socially distant today.
We all sort of other members of our executive management team with us for the question and answer period.
Please note that todays earnings release any accompanying slide presentation, we are going to run the webcast are available to download on our investor website investors start Atlantic Union Bank Dot com.
During the call today will comment on our financial performance using both GAAP metrics to 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 to the earnings supplemental slides.
Before I turn the call over to John I would like to remind everyone. On today's call. We will make forward looking statements, which are not statements of historical facts can are subject to risks and uncertainties.
There could 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 it publicly revise any forward looking statement. Please refer to our earnings release for the second quarter, 2020, and or 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.
Comments made today during today's call are subject to that Safe Harbor statement.
At the end of a call we'll 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 as safe and well.
Since early March we've consistently said, we are managing through two significant and distinct challenges first cobot 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 has 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 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. It sounds like 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.
Soundness isn't just about credit it's also about capital during the quarter, we issued $166 million in preferred equity net issuance costs, which fortified our tier one capital levels and better positions us to write off 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 will also outlined that in our commentary as for growth well that will be a conversation for later quarter.
Let me begin by up getting 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 I'd go smoothly and effectively.
I'm proud of our team for having pulled together and worked well throughout this time the best Proofpoint I can think of as our team's performance with a paycheck protection program I will 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 workflows system and about five days and at peak, we had nearly half the company.
Mobilized on the program because we recognize how important it was for our customers and our communities.
We think the Triple Pete has been a brand builder for Atlantic Union, and the numbers and our share of one's processed in Virginia support that statement speaking of our Paycheck protection program performance, Here's a look at our numbers through June 30 per SBK data.
And it can you bank generated approximately $1.7 billion and PPP loans that were approved and funded by the FDA, which represents a ppt loan market share of 11.1% in Virginia, which compares favorably to our depository market share up 7%.
More than 11000 total applications were approved and funded more than 3000 or the approve loans were made to new tobacco customers.
And when you look at the total PTP loans made in Virginia, We ranked number two behind truest, but strikingly we had only six fewer loans the biggest bank operating in the Commonwealth.
Bear in mind Truest of course means to banks Suntrust, plus Bbmg and has 25% depository market share in Virginia compared to our 7% so they're over three times our size here in Virginia, We ranked number one and a number of PPP loans, and 22 counties, where cities and top three and 50 counties are cities more broadly we were number one by this measure.
Richmond Metropolitan Statistical area, the Charlottesville, MSC and impressively in all of Northern Virginia.
We also nearly doubled the amount of approvals since the next closest Virginia headquartered bank.
The average approve loan size was 141000 and the medium size was 36082% of our PDP loans by account for under $150000.
And while it's difficult to measure precisely our analysis indicates that PPP clients still had cash equal to approximately 50% of their PDP funds from Atlantic Union ended deposit accounts at the bank as of the ended the quarter.
Moving beyond the paycheck production program, but only if we learned to work differently, but our customers have learned to bank differently. Our branch lobbies remained by appointment only and we continue to evaluate the right time to fully reopener.
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 1100 appointments scheduled per week through this application.
We've seen usage of our digital channels increased substantially from the prior year. For example, mobile users are up 17% mobile check deposit utilization is up 58% Xcel 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.
5% of accounts opened online in the second quarter.
Our call Center volume has decreased from its peak and is now about 25% higher than February. The average call time has dropped back to nearly the same level is February we time averages of 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.
We recorded highs, although while 90% of call center personnel work from home.
We've begun mass reissuing contact was debit cards to give customers and no touch form of payment and one that has also more secure against fraud. This will be staggered over the remaining second half of the year. We further improve their 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 omni channel customer experience with quarterly releases and upgrades to our product offerings. During the second half of the year, we expect to rollout an online appointment scheduler for our mortgage and wealth management business.
Enhanced the mobile check deposit and built a products allow customers to select the.
The account level, rather than customer level, which should improve you stated penetration and reduce our expenses.
Approved 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 rollout of 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 industry's most directly impacted by social distancing measures put in place such as hotels restaurants in retail.
Let me speak to the steps we've taken to solidify our credit position. Our goal is to help us 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 cobot 19 impact on them and implemented payment modifications, where appropriate while these conversations or continuous we did complete or latest client survey last week.
As for payments deferrals in the last part of the second quarter and on the first two weeks of July we added a number of loans roll off of their modifications.
The total modification balances as of Friday July 17 were approximately 3500 loans under modification with the 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 4000.
Jason loans as of April 24, which was down approximately 15% of the portfolio under deferral. The modifications. However peaked in may at around 17%.
Most modifications were originally granted an 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 millions not all but most on 180 day deferrals.
So far of all the loans with initial modification only 11 commercial loans with the 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. They could go under another modification as they are in the middle of their July Bill.
In cycle and we are discussing the need if any with the bar where for a second modification.
Patients run the range of options that are tailored for each borrower. The majority of them, though about 80 pardon me about 78% our principal and interest deferrals, mostly for 90 days with a total balance of $1.2 billion as of last Friday, and Thats about 9.5% the total loan portfolio after adjusting.
Yeah, the Pvp loans.
As the quarter ended commercial line utilization decreased from 40% to 27% historic low for the company.
Lined paydowns accelerated in June which caused loans for the quarter outside of ERP decreased by about 2%, which bought year to date loan growth the 1.6%, excluding PPP still too early to project with loan and deposits will be for 2020, the end of year until we get more clarity on the macroeconomic.
That conditions for the second half of the year.
Our exposures to the most Infocus industries are limited and are outlined on slide nine 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 24 to 577 loans for 706 million dollar.
As of July 17.
As a reminder, our hotel portfolio is entirely within our footprint and comprised of $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 that tells portfolio debt service coverage ratio in the lending.
Who is the best among any of our commercial real estate property types going into the crisis portfolio debt service coverage was 1.9 times in the median loan to value was 60%, providing a good equity buffer to ride out the 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 year.
Our restaurant balances $229 million for less than 2% of total loans its granular and its 85% secured by real estate collateral 25% of them are under the PTP.
Restaurants in Virginia that open for indoor and outdoor dining since early June at 50% occupancy a cap that was released on July one the primary constraints on restaurants today in Virginia, or social distancing requirements closed bar seeding 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 into auto dealers and 80% of the retail trade exposure is secured by real estate collateral with 20% PTP.
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. There are managed by good operators with established track Records, our health care segment, and salsa granular heavily secured by real estate and they've been opened with social distance.
Being in PE 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 portfolios been winding down for some time to quarter end 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 impact metrics were impacted by the elevated provision for credit losses due to the continuing weak economic outlook related to kind of 19, Rob will walk you through all those details overall, we continue to proactively worked 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 in this helped the 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 strategies that so far Virginia has been described by some observers is relatively successful in flattening the curve on cobot 19, and we sure hope it continues to be that way.
Moving onto our expense reduction actions have told our team that the current normals not the new normal. However, we think the next normal post overnight team will be different still must adjust now for that coming reality 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 cope with 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 close in mid September and if.
Listen to moving some projects to next year and eliminating others, we put a hiring freeze in place in March which has reduced ft used by 38 since the end of the first quarter. In addition, we eliminated a number of physicians in June and including branch consolidation personnel will reduce total head count by 6.2% by the into the third quarter as compared to Ft. Eli.
Sales at the end of March.
Addition to these actions were 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 are 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 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 code 19, our main operating areas, which will be one of the primary factors that determine the linked in depth the recession in our markets.
We continue to face great uncertainty at this point, mostly the duration of covert 19, but we believe we're in a solution seat shake recession think of the Nike logo and expect recovery before the year is out we do believe we've hit the bottom of the solution and earn an upward swing, but we don't expect the upward curve to be smooth there'll probably be some dips along the way that we.
I do believe the overall trend should the upward.
At this time, we simply don't know, but the signs are pointing toward a stronger economic performance in our footprint that would have seen overall in the national economic model projections.
The economy, our footprint is fairing relatively better than most other areas. 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 results.
Anomalies and with about 20% of anchored in some fashion by the federal government.
Federal government spending in Virginia is mainly for government agencies and department of defense with only a small fraction going to as 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.
Sure and spillover 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 the above we see nothing at this time that causes us to thank you or anything, but well positioned in readily able to absorb the delayed impact of coven 19 on credit losses at Atlantic Union.
Moving away from the quarterly results, we continue to work towards the objectives over three year strategic plan, which we believe will create accompanied 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 to side, we will 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 should be clear from my comments that were 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 and other day.
Could you need to believe will 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 to that it's also become more agile and innovative in response to our most unexpected operating environment. If there is such a thing is a silver lining decoded 19. This is it to that.
We don't want to go back to the way things were but rather we want to leverage these learnings and capabilities in grain, our new found 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 in 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 will continue to work on our strategic plan, but we will shift our timelines as needed to adjust to the new reality.
Incredibly proud of our teammates at all they have done and their ability to adjust to a new way of working in the midst of all of this uncertainty I remain confident with the future holds for us in 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 coated 19 has not changed as this.
Atlantic Union Bankshares is a uniquely valuable franchise denson compact and great markets with the story. Unlike any other in a region now more than ever before I believe loose have assembled the rightskill the right markets in 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 form and cover the financial results for 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 units financial results for the second quarter I think it's important.
Once again reinforce John's comments on Atlantic units governing philosophy of Sonus profitability and growth in that order of priority. This core philosophy is serving us well as we manage the company through the current coven Nike pandemic crisis in preparing us for what comes next.
The Atlantic unit continues to be in a strong financial position with a well fortified balance sheet ample liquidity and a strong balance capital base, maybe even stronger through the issuance of preferred stock during the quarter, which will allow us to whether the current storm and come out stronger once the crisis has passed.
During the quarter. The company also added switch loan loss reserves to cover additional expected credit losses as a result.
Further deterioration in economic outlook related to covert 90 since the first quarter.
As John noted, we also took action that reduced the company's expense rate, including the decision to consolidate 40 branches in September to more closely aligned expenses with declining revenue.
Levels, resulting from the protracted lower for longer interest rate environment.
As a matter so enterprise risk management practice, we periodically conduct capital credit 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 to the current crisis. It 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 cold in 19.
Now, let's turn to the Companys financial results for the second quarter of 2020.
GAAP net income for the second quarter was $30.7 million or 39 cents per share up significantly from $7.1 million or nine cents per share in the first quarter.
Non-GAAP pretax pre provision operating earnings increased $2.2 million to $70.4 million or 89 cents per share.
Up from 60.3 million or 86 cents per share in the first quarter.
Please note that the second quarter reported GAAP financial results and non-GAAP pretax 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 later, the current and expected operating entities 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 in non interest expense by repaying beside cost fixed rate advances, we were able to improve the go forward net interest margin by approximately three basis points.
And the increased annual your annual earnings by 3.2 million or about four cents per share.
In addition, the company sold approximately $77 million of Securities recorded a gain on the sale of investments of approximately 10.3 million during the quarter.
Second quarter non 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 40 branches expected to occur in September.
Of the $24 million, an annualized savings John mentioned earlier, we actually taken in the second quarter to reduce headcount, including the impact of the company's hiring freeze into further rationalized. Our branch network. We will result in an annual run rate savings of approximately 12 million or about about half of which will be realized in the third quarter.
Slide 13 is turning to the credit loss reserves.
At the end of the second quarter the allowance for credit losses was $181 million comprises the allowance for loan and lease losses of $170 million and the reserve for unfunded funded commitments of $11 million.
In the second quarter, the allowance for credit losses increased $31 million, because the allowance for loan and lease losses increased by $29 million in the reserve for unfunded commitments increased $2 million from the first quarter, primarily due to the worsening economic forecasts related to covert 19 since March.
Excluding PPP loans, which are SP 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.
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%.
Compared to 320% at March 30 Onest.
The 1.34% allowance for loan and lease losses represents approximately 70% of Atlantic unions peak two year loss rates in the great recession at approximately 75% of the projected non quarterly losses in the company's most recent internal stress testing scenarios.
The 31 million dollar increase to the company's allowance for credit losses took into consideration the kogan Nike pandemic impact on credit losses, both through the two year reasonable unsupportable macro economic forecast utilized the company's quantitative Cecil model that through management's qualitative adjustments beyond the two year reasonable insupportable forecast period.
Cecil quantitative model estimates expected credit losses, using a reversion to the meaning of the company's historical loss rates on a straight line basis over two years.
It estimating expected credit losses within its loan portfolio at quarter end the company utilized Moody's to baseline macro economic forecasts for the two year reasonable and supportable forecast period.
Moody's duty economic forecasts worsened considerably since March and now assumes that on national level, GDP will declined by 33% versus 80% in the March forecast.
The second quarter ended the national unemployment rate would peak at approximately 40% versus 9% in March in the second quarter.
We're just to forecast of Virginia, which covers the majority of our footprint assumed at peak unemployment rate in the state of about 10.4% versus 6.5 soon and works in the second quarter and remaining at about 7% versus five person in the March forecast throughout the forecast period.
In addition to the quantitative modeling the company also make qualitative adjustments for certain industries viewed as being highly impacted by coven 19 as discussed by John earlier.
The qualitative factors also considered the potential favorable impact on estimated credit losses of a massive U.S. government stimulus support funding, including small business Paycheck protection program.
The provision for credit losses for the second quarter was 30 point.
$34.2 million, which is a decline of $26 million compared to the prior quarter to 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. The also included $2 million in the provision for unfunded commitments.
In the second quarter net charge offs were $3.3 billion or nine basis points of total average loans on an annualized basis compared to $5 million or 60 basis points for the prior quarter and $4.3 million, a 40 basis points for the second quarter last year.
Excluding the impact of PPP loans net charge offs for 10 basis points on an annualized basis.
As in previous quarters, a significant amount of net charge offs approximately 57% came from non relationship third party consumer loans, which are in runoff mode.
Now turning to the pretax 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 40 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 set so 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 33 basis point decline and across the 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 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 interest rates during the quarter, most notably the significant declines of the average one month LIBOR rate, which was down 106 basis points and the average primary.
Which was lower by 117 basis points.
Loan yields were down an additional six basis points due to the net impact of lower yielding TPP loans, which was partially offset by the net increase in loan yield loan fees. In addition, moat loan accretion income reduce 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 33 basis point decline of the cost of deposits down to 53 basis points interest bearing deposit costs decreased decreased 37 basis points from the prior quarter to 73 basis point due to the aggressive repricing of deposits.
As market interest rates declined.
Also contributing to the first quarters lower cost of funds was at 48 basis point decline in wholesale borrowing cost and the positive impact from changes in the overall funding mix between quarters.
Noninterest 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 through 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.
Two and a half million in Unreal lies losses related to SPX see fund investments through to the current economic environment related to covert 19.
As well as a decline of approximately $500000 in wealth management fees from the prior quarter.
Noninterest 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 on debt extinguishment, resulting from the prepayment of long term FHLB advances the quarterly increase also includes $3.4 million and severance severance expense.
Okay, and real estate related write downs.
Related to the company's expense reductions initiatives LSW as well as approximately $620000 included 19 response expenses, which is up from $379000 spent in the first quarter.
The increases were partially offset by declines in most expense categories, including lower marketing expenses of approximately $700000 and lower business travel related costs of approximately 700000.
Please note, we expect to incur an additional $3.2 million in branch closure costs, primarily related to lease terminations in third quarter.
The effective tax rate for the first quarter increase of 50.2% from 12.2% 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 50.5% to 60% range.
Now turning to the balance sheet period end total assets stood at $90.8 billion at June Thirtyth, an increase of 2 billion.
From March 31, primarily due to PPP loan balances in the buildup of excess liquidity.
At quarter end loans held for investments were $40.3 billion, which was an increase of $1.5 billion were approximately 48% annualized from the prior quarter.
Overall loan growth in the second quarter was driven by pp key loans of $1.6 billion.
Excluding the impact of PPP loans loan balances actually declined by approximately two basis points on annualized basis in the second quarter, but similar loans declined approximately 10% annualized during the quarter driven by mortgage and he luck balanced declines and third party consumer balance went off partially offset by growth in our indirect auto.
Portfolio.
Commercial loans, excluding PPP loans were relatively flat to the first quarter balances primarily due to revolving line of credit paydowns offset by growth in equipment finance in commercial real estate loans during the quarter.
As noted the average loan portfolio yields were up 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 were approximately 60% from the prior quarter.
The increase in deposits in the second quarter was primarily due to the effective government stimulus programs, including the feature protection program.
Economic stimulus checks and enhance unemployment benefits.
The deferral of tax payment deadlines and changes in customer spending and saving comments in the rich in response to the pandemic.
As a result transaction account demand, which are demand deposits now accounts.
This is grew significantly during the quarter, partially offset by declines in our retail time deposit.
Balances.
Low cost transaction accounts comprised 51% total deposit balances at the end of the second quarter up from 46% at March 30, Onest. 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, there can be tap if needed.
Today, we have only borrowed $190 million from the federal reserves Paycheck protection program liquidity facility that the pp loan related deposits remain at elevated levels as of June thirtyth.
From shareholders stewardship, and 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 Kogan Nike endemic and its impact on the Companys financial results at the end of the second quarter Atlantic Union Bankshares Atlantic you, New banks regulatory capital ratios were above regulatory low capital levels.
In June the company Opportunistically raised $166.4 million, an additional tier one capital through the issuance of preferred stock.
The goal of the transaction was to rebalance and diversify the company's tier one capital staff, while Opportunistically fortifying the company's capital base for the uncertainties of code 90.
During second quarter of 2020 of the company paid a common dividend common stock dividend of 25 cents 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 to the business environment that would be prudent and managing capital levels going forward.
So in summary, Atlantic Union again delivered solid pretax pre provision financial results in the second quarter. Despite the continuing business disruption associated with the coven Nike endemic in the headwinds of the lower interest rate environment.
The company took significant actions to reduces its expense run rate aligned with the lower for longer interest rate environment does restrike from a top tier meaty top tier financial performance, regardless of the operating environment.
Finally, please note that while we are proactively managing through this unique and unpredictable pandemic undertaken the prop for steps to weather the economic downturns and 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 up for questions. Thank you, Rob and which are ready for our first caller. Please.
Our first question comes from William Wallace with Raymond James Your line is open.
Okay.
Hello.
This question will come from Eugene placement with Barclays. Your line is now open.
Good morning, Thank you for taking my question.
This are you there.
Good morning.
Yes, Mr. questioning your line is open.
Hi, Good morning, Thank you for taking my question.
Can you hear me.
Good morning day, Jane how are you.
Hi, good morning.
So I had a question on net interest margin looked like core net interest margin ex accretion was closer to about 315, this quarter, which is actually of the bottom of the range that.
Fifteenthree 20 range that you expect that 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 I was the trajectory from here.
Yes.
Thank you could ask questions to team up we expect to pretty much stabilized at this 350 in the 320% core margin.
The level as 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 will improve margin a bit going forward.
We do expect to have of some continuing.
Challenges with.
Our loan yields is.
As you know LIBOR came down.
Over 100 basis points during the quarter of two on it averaged 35 basis points and Thats the clients, who less than 20 now so we'll see some pressure in some of the 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.
Aspect that the come down.
As well so all in all we do expect.
We'll take our guidance has changed.
Materially from the 350% to 320% on a core basis going forward.
Thank you.
Actually really helpful and I actually have another question on expenses if I may.
When I look of the second quarter core expense run rate I get to about $89 million, excluding the effect of several of real estate charges and debt extinguishment costs, which has already about $6 million below the first quarter run rate of 95 million.
Are there any moving parts there I know that Youre advertising expenses are lower and can you help us reconcile that with your comment that you expect to realize about half the safe.
Through the third quarter.
Yes, so yes, you're right.
It's about call it 89, or so million dollars on a.
Run rate base, when you exclude the one times.
We do expect though we had some.
Some additional expenses will will climb back as you know we did have.
Some related to Pvp loans, we had some additional Fas 91.
Deferred costs that shouldn't recur recur, so that back a bit to that run rate.
We also have as John mentioned, some investments, we're making in contact list.
Cards.
As well as we've got some cost related to as we go into the forgiveness fees of PPP, we are outsourcing.
Some of that processing to the FDA 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 in would probably ended the $88 million are so range.
Coming.
Out of the third and fourth quarters is we were looking at.
Thank you.
Great. Thank you gene and lives and ready for our next caller. Please.
Your next question comes from Catherine Mealor with KBW. Your line is now.
Good morning. Thanks, Good morning, Hey, just a clarification on the expense question, Dave Your sand you get to the third and fourth quarter and you're at about 88 million in that point that is that only had about half of the savings are realized.
Or does that include the.
No I think about full realization that savings right now there well, there's a bit Brant, what's not included in the third quarter.
Quarter is the branch closures will keep will 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 gene 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 the actions, we took in reducing positions in June which will be effective in July as was the branch closures and then again, we do have some add backs as I mentioned that Doug.
Go against that level, which.
Gives you about an $88 million run rate give or take.
Okay, and then but.
I'm sorry to all from 88 as they go into the fourth quarter and we get that branch saving is that where we see another.
Fixed million dollar quarterly reduction.
In the fourth quarter.
We're kind of where more around like 82 in the fourth quarter.
Yes the room.
The call the $12 million as an annualized number so we're talking about.
3 million a quarter about half of which one and half millions would be.
Realized in third quarter. Another one of the half would be fourth quarters for total of three quarterly run rate impact.
Got it.
I'm, sorry, I just want me to be confusing, but then what how does that compare the 24 million you originally talked about.
Yes, some of that already into significant reduction already thought yes, it's already it's already in the reduction that 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 24 million dollar run rate annualized run rate.
And with some add backs.
We expect that.
We 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 some.
Increased.
Payroll taxes et cetera that.
Decline over the year so.
And the commodity or more in the $8 million.
Okay got it so let me think about as Amy annually kind of thinking about 2019 expenses.
And that was 368 and so then if we look at kind of.
Mark I see your run rate in different quite yet.
Sure I think about that is the total reduction to maybe on the year.
We are.
We're kind of.
On the year where were near.
Okay and 58 for 2020, and then you're kind of going from the mid eights run rate in 21.
Yes, that's the way I think about it remember last year, we also.
Okay.
Myriad and so inflationary cost adjustments in the first quarter, which added to that run rate coming out of 19 and that would bring it back.
More in line with more of a flat year on and hopefully that will continue lowering the.
In 2021.
Okay Thats really helpful. Thanks for the classification and then.
Dollar amount of PPP fees.
And that came through this quarter.
In terms of the revenue that came through is about 10.5 million.
Okay.
And that is that inclusive piece.
Fees and the intent.
Yes, so it's about $3 million of interest the 1%.
Loan yield at about 7.5 million little over 7.5 million was related to the.
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The fees amortizing through income.
Okay, Great and and you don't have any deferred cost coming out thats, all coming out of expense line.
Let's say it again sorry.
Yes, yes, any kind of costs are coming out of the expense line versus being netted out.
And I am just any additional expenses related to 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 the boat four or 500000 to a run rate over the next two quarters. This way we're looking at now that depends of course on what happens to.
The congressional bill that suggesting that.
Less than $150000 would be for given.
Auto manner on when we would have the process those.
Yeah.
We're still under.
We'll try to figure that out we'll see what happens through the Congress and.
That would save US as mentioned in the deck. It on a we saw that you saw that but we had about 9600 loans over 11000, plus loans were less than 150000, which is a lot of processing. If we don't have to do it.
Yes for sure fingers crossed I guess [laughter].
All right. Thank you so much for all the commentary present.
Thanks catheter and lives are ready for our next caller. Please.
Next question comes from Brody Preston with Stephens. Your line is now open.
I've already good morning, everyone.
Yes.
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So I guess I just wanted to circle back on.
On the core NIM there was a there was a four basis point drag from PPP that was within the headline NIM right.
That's correct.
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 for slowing of the.
Key in on any loan for 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 big six or 7% or so have kicked in already so thats helpful going forward.
We're not expecting that we will see further declines in rates, but.
But thats whats currently to the current position.
Okay.
And so I guess, maybe switching over to.
Deferrals, so if I go back to the one Q deck and I take out the hotel loans that you had understanding that there's some that weren't 180, David I think you note that most of the deferrals in the hotel portfolio were 100 aviate referrals. So.
So that leaves about 1.4 or 5 billion in non hotel deferrals.
Last quarter, and so I guess leg of that book.
717, how much of that book could you sort of process 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 whats taken a second modification I'm just trying to better gauge the cure rate on the deferred book.
Great.
Doug Thanks for that question.
Let me.
Point to the slide Han and ill share for hotels.
Because those are the remaining model those of the still alive mods on their for hotels.
The total hotel models that we approved were 142.
So we now have a 108 active.
And the total dollars it was about 67% of aggregate mods over the model approval process period.
Okay.
But I guess, maybe focusing on the rest of the deferred book I think on slide eight you mentioned 485 million rolled off their initial modification 350 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 one the 1.558 billion.
Has yet to.
Hi, guys be examined in terms of like they're still on their first modification and when should we expect those to roll off.
Okay does those figures on that slide or the current.
Modifications, meaning active lives, which reflects which is after that footnote the second footnote.
So in other words, they havent mature so they have not now lot of them of course since two thirds or so of the dollars and numbers of loans that are that went under amod were at a 90 day model.
And just as we all know just because of the timing of the calendar and earnings release and hoping hit.
They are happening in in large volumes.
Every day.
So these figures are the let's say the first three weeks.
Of Mod explorations that second footnote.
So we're cautiously optimistic.
Second modification request is need based first round the courses, we all know was accommodative.
So its need based and.
Many of these customers.
That are no longer on a model that made their payment didnt, even bother contacting us to chat about whether amod was necessary because they they.
They received a bill.
So payments resumed once a 30 day Mark Im sorry, three month Mod expired.
So these are okay very early.
Good indicators, but obviously very early.
And ready 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 what was happening and early April PPP. So we get mobilize the company and so we are 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, we're kind of that skewed toward the back end of April.
Into nay, which means that.
Which you're looking at here. This billions five the 90 day when talking to come due until I.
I guess would be a big slug of them Doug come August one.
And then there'll be some that old even continue into September one and then we're kind of done with the first round.
Okay. So I guess, if if the current sort of low rate of us.
Needing a second modification work to hold.
Yes. This sorta 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. There early returns look good but they are that right targets 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 if we offer amod after doing the underwriting because it's a much higher.
Bar.
Steve a second 90 day might it is need base.
The the preference and the encouragement is that it 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 unit, if you need a model to get up full payment deferment.
Okay, all right and I appreciate that I guess, just sticking on this discussion on the modifications.
Some of the regulator guidance that we've seen over the last couple of days.
Sorta indicates that loans modified before the year ends.
If you if you give those like a full sorta TBR kind of re underwrite they don't need to be booked as TV ours for the life of the alone I guess are you guys interpreting that sort of RCC guidance. Similarly, and I guess, maybe does this give bank some added flexibility to modify some of their weaker borrowers through too.
2021.
I guess could that help with loss rates moving forward.
Yes, No news is Rob yes.
Really that interpreting that so.
We think that that will be the case, but so we're unsure as to how it would be implemented.
We also need to look at whether the FCC slash Fas be through GAAP accounting will also concur with with the Ulccs, saying, where the regulators are saying on that.
Certainly the cures Act or Congress, so suggest that again like they did in the Cures Act I think that will happen, but if there's still some uncertainty around that at this point in time.
So we need to get worked.
It's on that both from.
Regulators as well as.
Our external auditors imbroglio it was Doug let me jump in on that too.
Because the regulation regulators and fads fee.
Gave banks and up to six month, I guess, you call Hall pass way back on on PD ours for our second set of mods, we are offering anything beyond 90 days, so that the whole books stays within an up 280 days worth of models.
Until we get better direction on that we didn't want to end up in October with a bunch of TD ours that we didnt anticipate could BTD ours, so in that guidance.
Good.
That you're talking about is fascinating, we certainly hope it becomes.
Certified said that banks can rely on it.
Okay.
Alright, and then I guess.
Just.
Just wanted to gauge I guess, maybe the health of borrowers. These are you seeing any difference I guess in the performance between your smaller borrowers versus your larger bar is just in terms of deferral needs and.
I guess it for the ones that you sort of seen their new business plans as is there any bifurcation there.
Gross 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 best way to determine.
Designate.
Client size.
So not yet on weakness certainly we would expect when all said and done and whenever it starts.
There'd be more losses on smaller loans than on larger loans since those smaller borrowers have let's let less flexibility and financial cushions than larger ones generally speaking.
Great and thanks, Birdie and we need to get to our next caller. Please.
Our next question comes from Laurie Hunsicker with Compass point. Your line is now open.
Yes.
Hi, good morning.
Okay going over your your slide here and I really appreciate the color you provided again this quarter on slide 10.
Just wondered a couple of things if you can help us think about the retail.
Just to remind us knowledge those are big box exposure, where you stand on on that at the.
Andrew.
And 53 million and then also what's your LTV is on the retail.
Yes largest doug.
Thanks for that question, we don't finance Big box never have so there really is nothing there.
In that it's a smaller retails.
Their stand alone.
And then certainly NCR retail neighborhood shopping centers and whatnot.
So the.
The.
The incidence of I'm, sorry, what was the last the specific question with what loan so I have yet TV yet the ltvs are I mean, not not nearly as strong as the hotel.
I'd say, 65% to 70%.
Focus our focus of course not in the retail trade in the CRT retail.
The focus is on.
You know on tenants paying.
The landlord our client.
So we're we're spending time understanding that too on the theory retail.
But thats different from retail trade either so those are the direct retailers.
Right and so on on the retail you said half of that is service retail that you know DAF.
Convenience et cetera, what's the 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 during national chains in there.
It's just the local community stores anywhere from $50000 loan to a $2 million Alon, you'll have been Lori homebuilder supplied one of the things up and looking for as we dug into the data the incidence of the things you had most I most worried about little boutique type shops jewelry stores men's aware.
Ladies dress shops things like that it's a single digit percentage of this category that you're looking out here.
So it's pretty broadly distributed sporting goods homebuilding supplies.
First three.
Type operations and if you look at the percentage that's under modification, yes, thats a pretty good indicator.
That thats actually doing you know not so bad Lori another aspect is on that so said 16 during 16% that's remaining under mob.
The total.
The total dollars aggregate that had amod, 26%.
So exiting.
Right.
You're saying that 16.4% with 26%, Okay. All right right. So were down that approximate 10 percentage points.
Okay. 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 are greatly comforted by the first of all the real estate collateral everything is overall, 80% real estate secured the convenience stores with gas.
Yes, they're doing okay. The auto dealers are actually really picking up and this is financing showrooms not floorplan et cetera.
Okay. Okay, sorry, just one last question that when thinking about about that back then additionally, another half convenience sorry gas station you probably have another study that's not included in that 50% number that would be grocery anchored.
Drug store that type of thing liquor stores that crack that kind of would fall into that more service category. Since you said single digit on the retail stores and I just missed hearing that right that would be outside of that category that would be investment real estate sharp drug stores and stuff.
Okay. That's very helpful. Okay, and then restaurants is you have I know your 85% security or did you have announced will be on that.
It it's it'd be 75% to 80% it it is often part of the collateral.
You know there from a smaller ones that are second on owners how's that 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 alone.
Okay. Okay. That's helpful. And then you you gave the Lendingclub out but did you have what the third party similar dollar number now.
Yes.
About the balances Loreal or yeah, that's third party everyday kind of come out with 215 million last quarter.
Yes, just a bit below 200 now in total.
Let me close about 81 million.
Okay, that's come down great.
Thanks, Laurie and and lives I think we have time for one more color I know, we're running a little bit long, we're and overtime now, but thats, okay, we had longer than usual comments even for us.
This question comes from William Wallace with Raymond James Your line is now open source.
Thank you at this time I hit the mute instead of the hang up button area I would like well hi, guys.
One Big Picture question. John You gave you gave a lot of information your prepared remarks around the utilization of the digital.
Channel of delivery, yes, I would like to to see if you. If you would speculate or talk about how that has changed your thinking on the branch network outside of obviously, the 10% up the branch 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 is that.
How has the increase use of the digital channel.
Changed for better or worse, the a lot of the efforts that you gold guys had undertaken as a management team on project Sundown.
Yes, I would say this has an bold enough I'm going to invite Maria to Descoings present at to step in to help comment on this actual experience has definitely emboldened thus wally in terms of thing more aggressive.
For example, the the decision to consolidate 10% of the branch network in round numbers, just analytics I've ever seen in my career surrounded that true statement.
This closed September 15, which means notifications to customers those branches one out.
July No 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 she just your what is your perspective in terms of actual experience the increase capabilities. The bank around digital how does that change your view of the future of the retail branch network.
Yeah, Hi, 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.
KOL data. This incident has helped to find multiple ways in which the bank.
And using digital which after an outlook the incredible.
Usage.
And 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 it's apparent that we will likely have more opportunity in the future in terms than our network.
I also say that we also remain.
Both the bullied about what.
Projects Sundown will do for us in the future because within that period, we have introduced several new initiative 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 a band.
And obviously there are getting used to digital channels.
So.
I would also say that because of our appointment setting capability, we've been able to keep that both our customers.
And our teammates by not opening our brands lobby.
Our our appointment setting either.
By Doom or in a brands with the banker, which helped us keep the number of customers coming and going out about branches and.
Great and I would just say, we feel really good about our ability through the branch network to serve our client any way what whether its digital earn Kirsten and Wally We don't expect based on recent comments truest 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 set specificity spelling out what we've done in digital and whats coming its have simply want to demonstrate we even with all of this this does craziness going on we're very focused and we're making steady progress we have a quarterly release schedule.
Okay Daikon, 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.
Hey, guys that any interest the time I'll step up.
Okay. Thank you well.
Thanks, Wally between thanks for everyone for joining us today.
I will be available on the website investors that Atlantic Union Bank that calm 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.
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