Atlantic Union Bankshares Corporation
Q2 2020 Earnings Call Transcript

Published: 23 Jul 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter Atlantic Union Bankshares' Conference Call. [Operator Instructions]. I'd now like to hand the conference over to your host today, Mr. Bill Cimino, Investor Relations. Please go ahead, sir.

[William Cimino:]

Thank you, Liz, and good morning, everyone. I have Atlantic Union Bankshares' President and CEO, John Asbury; Executive Vice President and CFO, Rob Gorman; and Chief Credit Officer, Doug Woolley, all with me socially distant today. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release and the accompanying slide presentation we are going to run on the webcast are available to download on our investor website, investors.atlanticunionbank.com. During the call today, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures is included in our earnings release for the second quarter 2020 and in the back of the earnings supplemental slides. Before I turn the call over to John, I would like to remind everyone that on today's call, we will make forward-looking statements, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise any forward-looking statement. Please refer to our earnings release for the second quarter 2020 and our other SEC filings for further discussion of the company's risk factors and important information regarding our forward-looking statements, including factors that could cause actual results to differ. All comments made today during today's call are subject to that safe harbor statement. At the end of the call, we will take questions from the research analyst community. I'll now turn the call over to John Asbury.

[John Asbury:]

Thank you, Bill. Thanks to all for joining us today, and I hope everyone listening is safe and well. Since early March, we have consistently said we are managing through 2 significant and distinct challenges

[Robert Gorman:]

Thank you, John, and good morning, everyone. Thanks for joining us today. I hope you, your families and friends are all safe and staying healthy. Before I get into the details of Atlantic Union's financial results for the second quarter, I think it's important to once again reinforce John's comments on Atlantic Union's governing philosophy of soundness, profitability and growth - in that order of priority. This core philosophy is serving us well as we manage the company through the current COVID-19 pandemic crisis and preparing us for what comes next. Atlantic Union continues to be in a strong financial position with a well-fortified balance sheet, ample liquidity and a strong capital base, made even stronger through the issuance of preferred stock during the quarter, which will allow us to weather the current storm and come out stronger once the crisis has passed. During the quarter, the company also added to its loan loss reserve to cover additional expected credit losses as a result of further deterioration in the economic outlook related to COVID-19 since the first quarter. As John noted, we also took action to reduce the company's expense rate, including the decision to consolidate 14 branches in September, to more closely align expenses with declining revenue levels resulting from the protracted lower-for-longer interest rate environment. As a matter of some enterprise risk management practice, we periodically conduct capital, credit and liquidity stress tests for scenarios such as the operating environment we now find ourselves in. Results from these stress tests help inform our decision-making as we manage through the current crisis and gives us confidence the company will remain well capitalized and has the necessary liquidity and access to multiple funding sources to meet the challenges of COVID-19. Now let's turn to the company's financial results for the second quarter of 2020. GAAP net income for the second quarter was $30.7 million or $0.39 per share, up significantly from $7.1 million or $0.09 per share in the first quarter. Non-GAAP pretax pre-provision operating earnings increased $2.2 million to $70.4 million or $0.89 per share, up from $68.3 million or $0.86 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 light of the current and expected operating and interest rate environment. The company repaid $200 million in long-term Federal Home Loan Bank advances, which resulted in a debt extinguishment loss of approximately $10.3 million recorded in noninterest expense. By repaying these high-cost fixed rate advances, we are able to improve the go-forward net interest margin by approximately 3 basis points and increased annual earnings by $3.2 million or about $0.04 per share. In addition, the company sold approximately $77 million of securities and recorded a gain on the sale of investments of approximately $10.3 million during the quarter. Second quarter noninterest expenses also includes $1.8 million in severance expense and $1.6 million in real estate-related write-downs related to the company's expense reduction initiatives, including the elimination of several positions across the bank and the consolidation of 14 branches expected to occur in September. Of the $24 million in annualized savings, John mentioned earlier, the action taken in the second quarter to reduce headcount, including the impact of the company's hiring freeze and to further rationalize our branch network will result in an annual run rate savings of approximately $12 million or about -- about half of which will be realized in the third quarter. Slide 13, turning to the credit loss reserves. At the end of the second quarter, the allowance for credit losses was $181 million, comprised of the allowance for loan and lease losses of $170 million and the reserve for unfunded commitments of $11 million. In the second quarter, the allowance for credit losses increased $31 million as the allowance for loan and lease losses increased by $29 million, and the reserve for unfunded commitments increased $2 million from the first quarter, primarily due to the worsening economic forecast related to COVID-19 since March. Excluding PPP loans, which are SBA guaranteed, the allowance for loan and lease losses as a percentage of adjusted loans increased 24 basis points to 1.34% from the prior quarter and the allowance for credit losses as a percentage of adjusted loans increased 24 basis points to 1.42% from the prior quarter. The coverage ratio of the allowance for loan and lease losses to nonaccrual loans was now at 429%. And compared to 320% at March 31. The 1.34% allowance for loan and lease losses represents approximately 70% of Atlantic Union's peak 2-year loss rates in the Great Recession and approximately 75% of the projected 9-quarter losses in the company's most recent internal stress testing scenarios. The $31 million increase to the company's allowance for the credit losses took into consideration the COVID-19 pandemic impact on credit losses both through the 2-year reasonable and supportable macroeconomic forecast utilized in 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 historical loss rates on a straight-line basis over 2 years. And estimating expected credit losses within its loan portfolio at quarter end, the company utilized Moody's June baseline macroeconomic forecast for the 2-year reasonable and supportable forecast period. Moody's June economic forecast worsened considerably since March and now, assumes that on a national level, GDP will decline by 33% versus 18% in the March forecast in the second quarter and that the national unemployment rate would peak at approximately 14% versus 9% in March in the second quarter. Moody's June forecast for Virginia, which covers the majority of our footprint, assumed a peak unemployment rate in the state of about 10.4% versus 6.5% in March in the second quarter and remaining at about 7% versus 5% in the March forecast throughout the forecast period. In addition to the quantitative modeling, the company also made qualitative adjustments for certain industries, U.S. being highly impacted by COVID-19 as discussed by John earlier. The qualitative factors also consider the potential favorable impact on estimated credit losses of the massive U.S. government stimulus support funding, including the Small Business Paycheck Protection Program. The provision for credit losses for the second quarter was $34.2 million, which is a decline of $26 million compared to the prior quarter. The provision for credit losses in the second quarter consisted of $32 million in the provision for loan losses, which was 1.02% of average loans, excluding PPP loans on an annualized basis, down from 1.8% in the first quarter. It also included $2 million in the provision for unfunded commitments. In the second quarter, net charge-offs were $3.3 million or 9 basis points of total average loans on an annualized basis compared to $5 million or 16 basis points for the prior quarter and $4.3 million or 14 basis points for the second quarter last year. Excluding the impact of PPP loans, net charge-offs were 10 basis points on an annualized basis. As in previous quarters, a significant amount of net charge-offs, approximately 57%, came from nonrelationship third-party consumer loans, which are in run-off move. Now turning to the pretax pre-provision components of the income statement from the second quarter, tax equivalent net interest income was $140.1 million, which was up from $137.8 million in the first quarter. Net accretion of purchase accounting adjustments added 14 basis points to the net interest margin in the second quarter, which was down 10 basis points from the 24 basis point impact in the first quarter, primarily due to lower levels of loan-related accretion income. The second quarter's tax equivalent net interest margin was 3.29%, which was a decrease of 27 basis points from the prior quarter. The 27 basis point decline from the prior quarter was principally due to the 60 basis point decline in the yield on earning assets, partially offset by a 33 basis point decline in the cost of funds. Quarter-to-quarter earning asset yield decline was primarily driven by the 70 basis point decline in loan portfolio yields as well as the impact of excess liquidity held in low-yielding cash equivalents. The decline in the loan portfolio yield from 4.83% to 4.13% was driven by lower average core loan yields of 53 basis points, resulting from declines in market interest rates during the quarter, most notably, the significant declines in the average 1-month LIBOR rate, which was down 106 basis points and the average prime rate, which was lower by 117 basis points. Loan yields were down an additional 6 basis points due to the net impact of lower yielding PPP loans, which was partially offset by the net increase in loan yield -- loan fees. In addition, loan accretion income reduced loan yields by 11 basis points from the prior quarter. The quarterly 33 basis point decrease in the cost of funds to 61 basis points was driven by 33 basis point decline in the cost of deposits down to 53 basis points. Interest-bearing deposit costs decreased 37 basis points from the prior quarter to 73 basis points due to the aggressive repricing of deposits as market interest rates declined. Also contributing to the first quarter's lower cost of funds was 48 basis point decline in wholesale borrowing costs 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 due to the current low interest rate environment. Partially offsetting these increases was a decline in service charges on deposit accounts of $2.6 million, primarily due to lower overdraft incidence volumes, $2.5 million in unrealized losses related to FDIC fund investments due to the current economic environment related to COVID-19 as well as a decline of approximately $500,000 in wealth management fees from the prior quarter. Noninterest expense increased $7.2 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 in severance expense and real estate-related write-downs related to the company's expense reduction initiatives as well as approximately $620,000 in COVID-19 response expenses, which is up from $379,000 spent in the first quarter. The increase was partially offset by declines in most expense categories, including lower marketing expenses of approximately $700,000 and lower business travel-related costs of approximately $700,000. Please note, we expect to incur an additional $3.2 million in branch closure costs, primarily related to lease terminations in the third quarter. The effective tax rate for the first quarter increased to 15.2% 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 15.5% to 16% range. Now turning to the balance sheet. Period end total assets stood at $19.8 billion at June 30, an increase of $2 billion from March 31, primarily due to PPP loan balances and the buildup of excess liquidity. The quarter end loans held for investments were $14.3 billion, which was an increase of $1.5 billion or approximately 48% annualized from the prior quarter. Overall loan growth in the second quarter was driven by PPP loans of $1.6 billion. Excluding the impact of PPP loans, loan balances actually declined by approximately 2 basis points on an annualized basis in the second quarter as consumer loans declined approximately 10% annualized during the quarter, driven by mortgage and HELOC balance declines and third-party consumer balance runoff partially offset by growth in our indirect auto portfolio. Commercial loans, excluding PPP loans, were relatively flat to the first quarter balances, primarily due to revolving line of credit paydowns, offset by growth in equipment finance and commercial real estate loans during the quarter. As noted, the average loan portfolio yield dropped 70 basis points to 4.13% in the quarter. At the end of June, total deposits stood at $15.6 billion, an increase of $2.1 billion or approximately 60% from the prior quarter. The increase in deposits in the second quarter was primarily due to the impact of government stimulus programs, including the Paycheck Protection Program, economic stimulus checks and enhanced unemployment benefits, the deferral of tax payment deadlines, and changes in customer spending and saving habits in response to the pandemic. As a result, transaction account demand, which are demand deposits and NOW accounts, balances grew significantly during the quarter, partially offset by declines in our retail time deposit balances. Low-cost transaction accounts comprised 51% of total deposit balances at the end of the second quarter, up from 46% at March 31. The average cost of deposits declined by 33 basis points to 53 basis points in the second quarter as previously discussed. Turning to liquidity. We continue to feel good about our liquidity position at the bank and holding company level with multiple sources that can be tapped if needed. To date, we have only borrowed $190 million from the Federal Reserve's Paycheck Protection Program liquidity facility that the PP loan-related deposits remain at elevated levels as of June 30. From a shareholder stewardship and capital management perspective, we remain committed to managing our capital resources prudently as the deployment of capital for the enhancement of long-term shareholder value remains one of our highest priorities. From a capital perspective, the company is well-positioned to manage through the COVID-19 pandemic and its impact on the company's financial results. At the end of the second quarter, Atlantic Union Bankshares and Atlantic Union Bank's regulatory capital ratios were above regulatory well capital levels. In June, the company opportunistically raised $166.4 million in additional Tier 1 capital through the issuance of preferred stock. The goal of the transaction was to rebalance and diversify the company's Tier 1 capital stack, while opportunistically fortifying the company's capital base for the uncertainties of COVID-19. During the second quarter of 2020, the company paid a common dividend -- common stock dividend of $0.25 per share. Regarding the common stock dividend, the company has no current intention of reducing it at this time. But management and the Board of Directors will continue to monitor the business environment and would be prudent in 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 COVID-19 pandemic and the headwinds of the lower interest rate environment. The company took significant actions to reduce its expense run rate to align with the lower-for-longer interest rate environment as we strive to maintain top-tier financial performance regardless of the operating environment. Finally, please note that while we are proactively managing through this unique and unpredictable pandemic, and are taking the first steps to weather the economic 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.

[William Cimino:]

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

[Operator:]

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

[John Asbury:]

Hello?

[Operator:]

This question will come from Eugene Koysman with Barclays.

[John Asbury:]

Liz, are you there?

[Operator:]

Yes, Mr. Koysman, your line is open.

[Eugene Koysman:]

Can you hear me? So I had a question on net interest margin. It looked like core net interest margin ex-accretion was closer to about 3.50% in this quarter, which was actually at the bottom of the range that -- the 3.15%, 3.20% range that you expected to get over the next several quarters. Can you help us gauge how much more downward repricing pressure you expect to see on the core NIM going forward? And what's the trajectory from here?

[Robert Gorman:]

Yes. Thank you for that question, Eugene. We expect to pretty much stabilize at this 3.15% to 3.20% core margin level. As mentioned, we did have some pressure from excess liquidity, which we expect will dissipate over the next couple of quarters, which should help us. We've also done some additional balance sheet restructuring, as I mentioned, which will improve margin a bit going forward. We do expect to have some continuing challenges with our loan yields. As you know, LIBOR came down over 100 basis points during the quarter to, on average, 35 basis points, and that declined to less than 20 now. So we'll see some pressure in some of that repricing. But overall, we also have opportunities. We continue to be aggressive on price -- down pricing our deposit base. We took some more actions in the last week or two and expect that to come down as well. So all in all, we do expect -- I don't think our guidance has changed materially from the 3.15% to 3.20% on a core basis going forward.

[Eugene Koysman:]

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

[Robert Gorman:]

Yes. So yes, you're right, Eugene, it's about, call it, $89-or-so million on a run rate basis when you exclude the 1x. We do expect that -- we had -- some additional expenses will climb back. As you know, we did have some -- related to PPP loans, we had some additional [indiscernible] deferred costs that shouldn't recur. So that add back a bit to that run rate. We also have, as John mentioned, some investments we're making in contactless cards as well as we've got some costs related to -- as we go into the forgiveness phase of PPP, we are outsourcing some of that processing to the SBA that will add expenses. So all in all, we do expect that it's a bit higher than what we're showing here in the third and fourth quarters, but then you back out the cost saves, and we're probably in the $88 million or so range coming out of the third and fourth quarters is the way we're looking at it.

[Operator:]

Our next question comes from Catherine Mealor with KBW.

[Catherine Mealor:]

Just a clarification on the expense question. So you're saying you get to the third and fourth quarter and you're at about $88 million. And at that point that -- is that only about half of the savings are realized? Or does that include the -- that doesn't include full realization of savings, right?

[Robert Gorman:]

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

[Catherine Mealor:]

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

[Robert Gorman:]

No. Yes, the run -- recall, the $12 million is an annualized number. So we're talking about $3 million a quarter, about half of which, $1.5 million, would be realized in the third quarter and another $1.5 million would be in fourth quarter for a total of $3 million quarterly run rate impact.

[Catherine Mealor:]

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

[Robert Gorman:]

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

[Catherine Mealor:]

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

[Robert Gorman:]

Yes.

[Catherine Mealor:]

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

[Robert Gorman:]

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

[Catherine Mealor:]

Okay. That's really helpful. And then give us the dollar amount of PPP fees that came through this quarter?

[Robert Gorman:]

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

[Catherine Mealor:]

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

[Robert Gorman:]

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

[Catherine Mealor:]

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

[Robert Gorman:]

Say, again, sorry?

[Catherine Mealor:]

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

[Robert Gorman:]

Any additional expenses related? No. We do it -- as I mentioned, we do expect to incur a bit more expenses as we outsource the forgiveness process. So that will add, call it, about $400,000, $500,000 to a run rate over the next 2 quarters is the way we're looking at it. Now that depends, of course, on what happens to the congressional bill that is suggesting that loans less than $150,000 would be forgiven in an auto manner. I mean we don't have to process those. So we're still trying to figure that up. We'll see what happens through the Congress. And that would save us -- as mentioned in the back, I don't know if you saw that, but we had about 9,600 loans of the 11,000 plus loans were less than $150,000, which is a lot of processing if we don't have to do it.

[Operator:]

Your next question comes from Brody Preston with Stephens.

[Broderick Preston:]

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

[Robert Gorman:]

That's correct. Yes.

[Broderick Preston:]

All right. So I guess, backing that out, you kind of get to the middle of that 3.15% to 3.20%. And I understand that there's going to be some loan yield pressure moving forward. Just wanted to key in on any loan -- any yield floors that you have within the portfolio? And if any of those have kicked in?

[Robert Gorman:]

Yes. We've got about 11% of our total loan portfolio has floors. And I think 6% or 7% or so have kicked in already. So that's helpful going forward. We're not expecting that we will see further declines in rates, but that's what's currently the current position.

[Broderick Preston:]

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

[Douglas Woolley:]

Brody, this is Doug. Thanks for that question. Let me point you to Slide 10, and I'll share for hotels because those are the remaining mods. Those are the still live mods on there for hotels. The total hotel mods that we approved were 142. So we now have 108 active. And the total dollars was about 67% of aggregate mods over the mod approval process period.

[Broderick Preston:]

Okay. But I guess maybe focusing on the rest of the deferred book. I think on Slide 8, you mentioned $485 million rolled off their initial modification, $350 million made next payment and $5 million have rolled into a second modification. And so I'm just trying to better understand, I guess, what percentage of the book -- I guess, like what portion of this -- the $1.558 billion has yet to, I guess, be examined in terms of like they're still on their first modification? And when should we expect those to roll off?

[Douglas Woolley:]

Okay. Those figures on that slide are the current modifications, meaning active live, which reflects -- which is after that footnote -- the second footnote.

[Broderick Preston:]

So in other words, they haven't matured?

[Douglas Woolley:]

Right. They have not. Now a lot of them, of course, since 2/3 or so of the dollars and numbers of loans that are -- that went under a mod were had a 90-day mod. And just -- as we all know, just because of the timing of the calendar and earnings release and COVID hit, they are happening in large volumes every day. So these figures are the, let's say, the first 3 weeks of mod expirations, that's that second footnote. So we were cautiously optimistic. A second modification request is need based. The first round, of course, as we all know, was accommodative. So it's need based. And many of these customers that are no longer on a mod but made their payment, didn't even bother contacting us to chat about whether a mod was necessary because they received the bill. So payments resumed once the 30-day -- I'm sorry, a 3-month mod expired. So these are very early good indicators, but obviously, very early.

[John Asbury:]

And Brody, this is John. I just want to reiterate a point we made earlier. I've heard a few people make comments that they seem to think that most modifications were made in March. That's not true at all. Modifications were being made in April into May. Our mods actually peaked in May at 17% of the total portfolio. Now we're down to about 12%. But the point is, remember, what was happening in early April, PPP. So we had mobilized the company, and so we're being overwhelmed with PPP and simultaneously managing the whole deferral conversation where necessary. So there was a lot going on. So you'll see that those deferrals were kind of skewed toward the back end of April into May, which means that what you're looking at here, this $1.5 billion, the 90-day ones are going come due until, I guess, there'll be a big slug of them, Doug, come August 1. And then there'll be some that will even continue into September 1, and then we're kind of done with the first round.

[Broderick Preston:]

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

[John Asbury:]

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

[Douglas Woolley:]

And Brody, if we offer a mod after doing the underwriting because it's a much higher bar to receive a second 90-day mod, it is need based. The preference and the encouragement is that it'd be -- it go off a full deferment to an interest only, so that it's a sign of returning to health. So it's not -- if you need a mod, you get a full payment deferment.

[Broderick Preston:]

Okay. All right. And I appreciate that. I guess just sticking on this discussion with the modifications, some of the regulator guidance that we've seen over the last couple of days, sort of indicates that loans modified before the year-end, if you give those like a full sort of TDR kind of re-underwrite, they don't need to be booked as TDRs for the life of the loan. I guess, are you guys interpreting that sort of OCC guidance similarly? And I guess, maybe does this give banks some added flexibility to modify some of their weaker borrowers through 2021? And I guess, could that help with loss rates moving forward?

[Robert Gorman:]

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

[Douglas Woolley:]

And Brody, this is Doug. Let me jump in on that, too. Because the regulators and FASB gave banks an up to 6 month, I guess, you call it a haul pass way back on TDRs. For a second set of mods, we aren't offering anything beyond 90 days so that the whole book stays within and up to 180 days' worth of mods until we get better direction on that. We didn't want to end up in October with a bunch of TDRs that we didn't anticipate could be TDRs. So in that guidance that you're talking about is fascinating. We certainly hope it becomes certified so that banks can rely on it.

[Broderick Preston:]

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

[Douglas Woolley:]

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

[William Cimino:]

We need to get to our next caller, please.

[Operator:]

Our next question comes from Laurie Hunsicker with Compass Point.

[Laurie Hunsicker:]

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

[Douglas Woolley:]

Yes. Laurie, this is Doug. Thanks for that question. We don't finance big box, never have. So there really is nothing there in that. It's small retails, either stand-alone and then certainly in CRE retail, neighborhood shopping centers and whatnot. So the incidence of -- I'm sorry, what was the last -- the specific question was what?

[Robert Gorman:]

Loan to value, the LTV.

[Douglas Woolley:]

Yes. The LTVs are, I mean, not nearly strong as the hotel, I'd say, 65% to 70%. Our focus, of course, is not in the retail trade and the CRE retail. The focus is on tenants paying the landlord, our client. So we're spending time understanding that too on the CRE retail. But that's different from retail trade. Obviously, those are the direct retailers.

[Laurie Hunsicker:]

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

[Douglas Woolley:]

It's everything else. There's no, let's say, sub-concentration in that. It's small stores, local stores or any national chains in there. It's just the local community stores, anywhere from a $50,000 loan to a $2 million loan.

[John Asbury:]

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

[Douglas Woolley:]

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

[Laurie Hunsicker:]

So at the peak...

[Douglas Woolley:]

Right. At the peak.

[Laurie Hunsicker:]

So at the peak, you're saying that 16.4% was 26%, okay?

[Douglas Woolley:]

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

[John Asbury:]

No -- that -- I mean, there are going to be impacts in this portfolio, to be clear, but we're greatly comforted by the -- first of all, the real estate collateral, everything is overall 80% real estate secured. The convenience stores with gas, they're doing okay. The auto dealers are actually really picking up, and this is financing showrooms, not floor plan, et cetera.

[Laurie Hunsicker:]

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

[John Asbury:]

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

[Laurie Hunsicker:]

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

[John Asbury:]

It'd be 75% to 80%. It is often part of the collateral for the smaller ones. They're second owners houses. There's all kinds of collateral there. But invariably, it is the location of the restaurant itself. But there are various ways to structure such a loan.

[Laurie Hunsicker:]

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

[Robert Gorman:]

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

[Laurie Hunsicker:]

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

[Robert Gorman:]

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

[William Cimino:]

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

[John Asbury:]

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

[Operator:]

This question comes from William Wallace with Raymond James.

[William Wallace:]

One big picture question, John. You gave a lot of information in your prepared remarks around the utilization of the digital channel of delivery. I would like to see if you would speculate or talk about how that has changed your thinking on the branch network outside of, obviously, the 10% of the branches that you're consolidating now. How has that changed your thoughts as an organization on the network say over the coming year or 2? And on top of that, how has the increased use of the digital channel changed for better or worse, the -- a lot of the efforts that you guys had undertaken as a management team on Project Sundown?

[John Asbury:]

Yes. I would say this has emboldened us. I'm going to invite Maria Tedesco, who's President, to step in and help comment on this. Actual experience has definitely emboldened us, Wally, in terms of being more aggressive. For example, the decision to consolidate 10% of the branch network and around numbers. That's the analytics I've ever seen in my career surrounded that. True statement. This closed September 15, which means notifications to customers those branches went out, what July -- no, June 15. It's been almost dead quiet. Why? Because we're not asking people to drive more than, say, 2 miles or so. So all measures of digital adoption and utilization have gone up. Maria, do you want to just share what is your perspective in terms of actual experience, the increased capabilities to the bank around digital. How does that change your view of the future of the retail branch network?

[Maria Tedesco:]

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

[John Asbury:]

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

[William Cimino:]

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

[John Asbury:]

Thank you.

[Operator:]

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