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spk03: Ladies and gentlemen, thank you for standing by, and welcome to the Atlantic Union Bank Shares Fourth Quarter Fiscal Year 2020 Earnings Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Bill Cimino, Investor Relations. Thank you. Please go ahead, sir.
spk12: Thank you, Gigi, and good morning, everyone. I have Atlantic Union Bank shares president and CEO John Asbury and executive vice president and CFO Rob Gorman with me today. We also have other members of our executive management team with us remotely for the question and answer period. Please note that today's earnings release and accompanying slide presentation we are going through on the webcast are available to download on our investor website, investors.AtlanticUnionBank.com. During today's call, 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 fourth quarter and full year of 2020. Before I turn the call over to John, I would like to remind everyone that on today's calls 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 or update any forward-looking statement. Please refer to our earnings release for the fourth quarter and full year 2020 and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that cause actual results to differ from those expressed or implied in any forward-looking statement. All comments made during today's call are subject to that safe harbor statement. At the end of the call, we will take questions from the research analyst community. And with that, I'll turn the call over to John Asbury.
spk02: Thank you, Bill. Thanks to all for joining us today and I hope everyone listening is safe and well in this new year. We think consistent in our commentary that we are managing through two significant and distinct challenges. First, the continuing COVID-19 pandemic and everything associated with it. And second, a much lower than expected interest rate environment for years to come with all of its implications for the company's profitability. Our results for the quarter and for the full year of 2020 show that the actions we've taken so far to address these two distinct challenges are having a positive impact in positioning Atlantic Union for future success. We continue to believe that our strategic plan with our long-term goal to become the premier mid-Atlantic bank is the right one, and that we have a great opportunity before us to create something uniquely valuable for our shareholders and the communities we serve, and remain keenly focused on reaching the full potential of this powerful franchise despite the present challenges. Now more than ever, our mantra of soundness, profitability, and growth in that order of priority informs how we run our company. A sound bank is and will remain our highest priority. A prudent and conservative credit culture served our company well during the Great Recession, and it's serving us well through the economic shock of the pandemic. Our loan modifications have helped our clients weather the storm, having peaked at about 17% of the non-PPP loan portfolio in May and dropped to a minimal 1% at year end. During the second quarter of 2020, we fortified our capital position with a preferred equity issuance. Our second priority is profitability. And while Q4 was a noisy quarter, you can see the impact of our actions to align our expense run rate to the new revenue reality of the lower rate environment. At year end, we closed one further branch that was primarily a commercial branch in our Herndon, Virginia location. That was a part of our consolidation of the former Herndon commercial office into our Reston, Virginia offices. Rob will walk you through the noisy fourth quarter expenses in his comments, but I will note we had approximately $7.4 million in incremental performance-based variable incentive compensation and profit-sharing expenses, which included a $1.2 million contribution to the company's ESOP during the fourth quarter. Incentive compensation plans are a variable cost, and the pool is funded based on achievement of corporate targets that align with our shareholders. The metrics are net income, return on assets, efficiency ratio, and return on tangible common equity. Our team's hard work and agile response to the numerous challenges of 2020 were outstanding and delivered on our 2020 targeted results, so we accrued per the quantitative formula in order to reward their accomplishments. Setting aside the incentive and profit-sharing accruals and the federal home loan bank advanced prepayment costs, our expense run rate for Q4 was otherwise in line with prior guidance. As for growth, On the other side of the current economic challenges, we do believe we have a long runway ahead of us to grow organically and through takeaway from our larger competitors that dominate market share in our home state of Virginia, supplemented by our operations in Maryland and North Carolina. We are especially focused on and benefiting from the disruption occurring at two of our largest competitors, We do believe the pressures of a long-term near-zero rate environment coupled with the rising tide of customer expectations for digital product offerings is going to motivate further bank consolidation. We believe we are well positioned for this, and we'll continue to evaluate opportunities to complement our organic growth strategy through M&A. Let me provide a quick review of our pandemic response. About 90% of our non-branch personnel continue to work from home. We reopened branch lobbies to customer walk-in traffic on October 14th. Corporate offices remain closed to all but essential personnel and will remain that way through at least the first half of the year, possibly longer. Work from home continues to go well, and we're not going to rush to bring people back, given the safety and social distancing challenges involved. As we're seeing across the nation, the short-term COVID-19 trends in our markets have not been good recently, and we want to be prudent in ensuring the safety of our teammates and customers. We are hopeful this trend will improve in the coming months as vaccination rates rise with better distribution. I'll now turn to PPP forgiveness in round two of the program. The first round of the Paycheck Protection Program was a brand builder for Atlantic Union, and our results support that statement. We remain focused on converting as many as possible of the more than 3,000 new-to-bank PPP clients from the first round to full relationships. It's clear to us that there's a great opportunity here from the negative experiences many of them had with larger banks that caused them to come our way seeking help. We've taken our successful round one PPP plan and improved it for round two. We started taking applications for round two as soon as the Small Business Administration opened to banks our size on January 19th, and we received applications for approximately 2,500 loans totaling around $475 million so far. It's difficult to project demand for round two but the application flow certainly seems more spread out than what we saw last year when it was more of a panicked rush to apply. Round two PPP first and second draw loans are important in that they'll help businesses through this phase of the pandemic. This is both a boost for our clients which should help mitigate credit losses from the pandemic and it's also an unplanned fee income opportunity for us. We began to submit applications for round one PPP loan forgiveness to the SBA during the fourth quarter And 3,100 clients received forgiveness totaling $429 million during the fourth quarter. We're pleased that the Congress passed a bipartisan proposal to streamline forgiveness of PPP loans under $150,000 as they represent about 85% of our round one PPP loans by count. This greatly simplifies the forgiveness process both for our clients and for us. And we're about to start processing under these streamlined requirements. Since year end through January 21, clients have received a further amount of forgiveness totaling $82 million serving 999 loans. As I've said before, our customers have learned to bank differently. While branch lobbies are now reopened, we rolled out a digital appointment scheduling option to customers and we've had more than 33,000 appointments set since June 1. We've seen usage of our digital channels increase substantially from the prior year. For example, digital logins are up 38% since the start of the year. Mobile check deposit utilization was up 37% over the course of 2020. Zelle utilization up 162% year over year. And card control users are up about 180% since April when that was launched. Our call center volume has decreased from its peak and the fourth quarter was about 10% lower than the first quarter. We continued to work on new projects and improve the omni-channel customer experience with quarterly releases and upgrades to our product offerings. During the fourth quarter of the year, we rolled out a Zoom video chat option to our current branch appointment options. We launched the ability for our trust in private banking businesses to digitally sign new account origination documentation to onboard new customers, began to pilot and enhance client relationship management platform using Black Diamond technology within the Wealth Group, completed the integration of the mortgage digital lending platform with Blend software that will enable an end-to-end digital closing experience in Q1, and we implemented DocuSign for treasury management services documents, greatly simplifying the onboarding process for treasury management products. Using these new solutions, such as the appointment scheduler, Zoom, DocuSign, and branch access together with the bank's online account opening platform, we opened more than 1,100 personal checking accounts in the fourth quarter, through our Solutions Banking Group. That's our Bank at Work program we launched in the first quarter of 2020. We also had a number of additional customer experience improvements coming in the first quarter of 2021. As I've said before, we're not standing by waiting to return to the office, but we are making steady progress against our strategic plan. Our pivot to work from home has been smooth, and it is one of the great success stories of 2020 for us. Turning to credit, surprisingly, the COVID-19 credit storm has not materialized as we initially forecast. While the outlook is still murky, we are more confident on credit than we have been since the pandemic began, and we don't expect credit issues to be nearly as severe as what we initially feared. Having said that, we are expecting a tough winter of COVID-19 infection, and if there's one thing we learned last year, it's that anything could still happen. I will say that the resiliency and diverse nature of our markets, coupled with additional government stimulus and accommodative Federal Reserve, these are all having a positive impact as we've seen the unemployment rate in our markets improve much faster than expected. Here in our home state of Virginia, November unemployment came in at 4.9%, which was nearly 200 basis points better than the national average. And by the way, that's typical for Virginia. The December numbers will be released at the top of the hour today. Our loan book also helps as we don't have outsized exposure to the industries most directly impacted by the social distancing measures put in place, such as hotels, restaurants, and retail. Rob will talk you through the provision for credit losses in our CECL modeling, but by all indications and metrics, credit remains solid. Charge-offs in Q4 remained at very low levels, and excluding PPP loans, they were six basis points annualized versus four basis points annualized in Q3. Our total modification balances as of Monday, January 18th, were approximately 430 loans under mods with balances totaling 132 million or nine-tenths of 1% of our total portfolio. If you exclude the PPP loans, it would be approximately 1% of our total portfolio. This is down from $1.9 billion and 4,000 loans as of April 24th, which was approximately 15% of the portfolio at that time. As I've mentioned earlier, modifications peaked in May at around 17%. Of the remaining loan modifications, 60% of them are $79 million or accounted for by 11 hotel loans. The remaining modifications are tailored for each borrower, and about 63% of them are currently interest-only. We work through these modifications on a client-by-client basis to address their specific circumstances. Our exposures to the most in-focus COVID-sensitive industries are limited and are outlined on slides 6 and 7 of our accompanying presentation. The amount of loans under a modification in these segments decreased from 111 loans for $199 million on October 16th to 16 loans for $83 million as of January 18th, the majority of which, of course, pertain to hotels. As you may recall, our third-party consumer portfolio has been winding down for some time. The quarter end balance for our lending club exposure was about $52 million and continues to run off. Payment deferrals in the lending club portfolio declined approximately $1 million during the quarter, or pardon me, declined to approximately $1 million during the quarter. His accounts went off modifications and became current. The remaining portfolio is performing in line with our expectations. Overall, we continue to proactively work through this event with our clients while mitigating credit risk wherever we can. Moving on to expense reduction actions, we developed our initiatives to reduce the company's expense run rate to match lower revenue expectations due to COVID-19 and the lower for longer interest rate environment back in March. We began to take action on them in the second quarter and into the third quarter. We took additional action in the fourth quarter with the decision to close an additional six branches, including the five that will be consolidated in February. After these branches close, we'll operate 129 branches across our footprint That's a reduction of 20 from last year at this time, which is about a 13% reduction out of the branch network. Our goal remains to achieve and maintain top tier financial performance, regardless of the operating environment. Our financial outlook will ultimately depend in part on the continued success against additional flare-ups of COVID-19 in our main operating areas and the vaccine rollout. This will be one of the primary factors that determine the length of disruption in our markets. We continue to face near-term uncertainty, mostly the duration of COVID-19, but as I mentioned before, the economic outlook has improved and our optimism is rising. We still expect some dips along the way to a full recovery, but we believe the overall trend should be upward and we think the improving trends should accelerate in the back half of 2021. We still don't know when we may return to pre-pandemic macroeconomic levels, but the data continues to demonstrate better economic performance in our footprint and would have seen overall and the national economic model projections. As we pointed out many times, the Virginia economy is fairly unique with a broadly diverse set of regional economies and with about 20% of it anchored in some fashion by the federal government. The changes underway in Washington should be a net positive for the federal government's contribution to the Virginia economy. Our full-year loan growth was about 1.8%, excluding PPP loans. Commercial loan categories of all types on a combined basis grew about 4%, offset by declines in consumer categories of HELOC third-party lending and residential mortgages held on balance sheet. Although it increased by 1.8 percentage points in the fourth quarter, commercial line utilization remains very low at about 26%, well below our normal utilization of around 40%. While it's anyone's guess what exactly 2021 will bring at this point, we do believe that the second half of the year will be better than the first half and that we could see a return to high single-digit loan growth in 2022. Our franchise and our market dynamics certainly support that opportunity. As we continue to climb out of the systemic downturn, our credit losses were minimal in 2020, and the real impact remains to be seen. We still expect an eventual rise in credit losses, and we thought we would have already begun a transition toward that, but it simply hasn't yet happened. With the prospect of more stimulus, the second round of PPP underway, and the rollout of the vaccine, it's really hard to point to a specific time where the increase in credit losses will start to materialize. To what extent the additional stimulus, PPP round two, and the vaccine mitigate credit losses remains to be seen, but we believe these actions will have a positive impact on the ultimate level of credit losses we incur. Stepping back, we believe that we are well positioned and readily able to absorb any delayed credit losses from COVID-19. And looking ahead, we expect normalized levels of credit losses after the impact of the pandemic works its way through the economy. Moving beyond credit, our goal remains creating a company that's able to consistently deliver differentiated performance. We'll continue to work on ways to make the company more efficient and scalable while improving the customer experience, and we could see further improvements to our expense base as a result. As I've said before, we continue to push the organization forward and not simply wait for things to happen. We remain focused on credit risk mitigation and positioning for success while we busily work to improve our company, its efficiency and scalability, and provide a better customer experience. At the same time, we always try to think a few steps ahead, and we do see strategic opportunities on our horizon. As I said last quarter, I am convinced we will emerge from the crisis stronger, better, and more efficient than before, which will give us opportunities, both organic and inorganic. We're leveraging our learnings and ingraining our newfound capabilities, agility, and innovation into the company's culture so that we have the flexibility to adapt to the lower for longer rate environment and the coming next normal, whatever that may be, while delivering a differentiated customer experience. We continue to see opportunity in all of this chaos, and we're weathering the storm better than I could have hoped taking care of our teammates and customers and protecting this bank. While 2020 was the most challenging year of my career, I've never been more proud of our teammates and all they accomplished while adjusting to a new way of working in the midst of all of this uncertainty. I remain confident in what the future holds for us and the potential we have to deliver long-term, sustainable financial performance for our customers, communities, teammates, and shareholders. Despite all that happened in 2020, or perhaps because of it, As we enter 2021, I feel stronger than ever that Atlantic Union Bank Shares remains a uniquely valuable franchise, dense and compact in great markets, with a story unlike any other in our region. We are scalable with the right capabilities, the right markets, and the right team to deliver high performance, even in the most drying of times. I'll now turn the call over to Rob to cover the financial results for the quarter.
spk05: Rob? Thank you, John, and good morning, everyone. Thanks for joining us today. Before I get into the details of Atlantic Union's financial results for the fourth quarter and the full year 2020, 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, which is allowing us to weather the current storm and come out stronger once this crisis has passed. As a matter of sound enterprise risk management practice, we periodically conduct capital, credit, and liquidity stress tests for scenarios such as the operating environment we now find ourselves in, or occasionally even worse scenarios. 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 the current economic environment. Now let's turn to the company's financial results. Please note that for the most part, my commentary will focus on Atlantic Union's fourth quarter and full year financial results on a non-GAAP operating basis which excludes an after-tax debt extinguishment loss of $16.4 million resulting from the prepayment of long-term federal home loan bank advances in the fourth quarter and excludes $26 million in after-tax debt extinguishment losses and $9.7 million in after-tax security gains for the full year of 2020. For clarity, I will specify which financial metrics are on a reported versus non-GAAP operating basis. In the fourth quarter, reported net income available to common shareholders was $56.5 million, and earnings per share per common share was 72 cents, down approximately $1.8 million or two cents per common share from the third quarter. For the full year 2020, reported net income available to common shareholders was $152.6 million, and earnings per common share was $1.93 compared to $193.5 million or $2.41 per common share in 2019. The reported return on equity for the fourth quarter was 8.82% and 6.14% for the full year. The reported non-GAAP return on tangible common equity was 15.6% in the fourth quarter and was 11.18% for the year. Reported return on assets was 1.19% for the fourth quarter and was 83 basis points for the full year 2020. Reported efficiency ratio was 68.4% for the quarter and 60.2% for the full year. On a non-GAAP operating basis, net adjusted operating earnings available to common shareholders in the fourth quarter was $72.9 million and earnings per common share were 93 cents, which was up approximately $15 million or 19 cents per common share from the third quarter. Non-GAAP pre-tax pre-provisioned adjusted earnings were $77 million compared to $78.5 million in the third quarter. For the year ended 2020, non-GAAP adjusted operating net income available to common shareholders was $168.8 million and adjusted operating earnings per share, per common share was $2.14 as compared to $227.8 million or $2.84 per common share in the prior year. Non-GAAP pre-tax pre-provision adjusted operating earnings were $294 million in 2020 compared to $295.2 million in 2019. Non-GAAP adjusted operating return on tangible common equity was 19.91% in the fourth quarter and was 12.28% for the year. The non-GAAP adjusted operating return on assets was .52% in the fourth quarter and was 91 basis points for the full year of 2020. Non-GAAP adjusted operating efficiency ratio was 53.6% in the fourth quarter and was 53.2% for the full year 2020. Turning to credit loss reserves, as of the end of the fourth quarter, the total allowance for credit losses was $170.5 million comprised of the allowance for loan and lease losses of $160.5 million and a reserve for unfunded commitments of $10 million. In the fourth quarter, the total allowance for credit losses declined by $15.6 million, primarily due to lower expected losses than previously estimated as a result of improvement in Virginia's unemployment rate, benign credit quality metrics to date, and an improved economic outlook over the forecast period due to the rollout of COVID-19 vaccines and additional government stimulus inclusive of more PPP loan funding. The allowance for loan and lease losses as a percentage of the total loan portfolio was 1.14% at December 31st, which was down seven basis points from 1.21% at the end of the third quarter. And the total allowance for credit losses as a percentage of total loans was 1.22% at the end of December, which is down from 1.29 percent in the prior quarter. Excluding the SBA guaranteed PPP loans, the allowance for loan and lease losses as a percentage of adjusted loans decreased 11 basis points to 1.25 percent from the third quarter. And the total allowance for credit losses as a percentage of adjusted loans decreased 13 basis points to 1.33 percent from the prior quarter. The coverage ratio of the allowance for loan and lease losses to non-accrual loans was 3.8 times at December 31st compared to 4.5 times at September 30th. The $15.6 million decline to the company's total allowance for credit losses took into consideration the COVID-19 pandemic impact on credit losses both through the two-year reasonable and supportable macroeconomic forecast utilizing the company's quantitative CECL model and through management's qualitative adjustments. Beyond the two-year reasonable and supportable affordable forecast period, the CECL quantitative model estimates expected credit losses using a reversion to the mean of the company's historical loss rates on a straight line basis over two years. In estimating expected credit losses within the loan portfolio at quarter end, the company utilized Moody's December baseline macroeconomic forecast for the two-year reasonable and supportable forecast period. Moody's December economic forecast improved since September. It is now assumed that on a national level, GDP will recover to pre-pandemic levels by this summer compared to early 2022 in the September forecast. Moody's forecast for Virginia, which covers the majority of our footprint, had previously assumed that the unemployment rate in the state would average nearly 6.5 percent during the two-year forecast period but the December forecast now assumes a two-year average of 5%. In addition to the quantitative modeling, the company also made qualitative adjustments for certain industries viewed as being highly impacted by COVID-19, as discussed by John earlier. Additional qualitative factors were included this quarter to take into consideration the uncertainties pertaining to the future path of the virus and concerns around vaccination distribution efforts. The provisions for total credit losses for the fourth quarter declined by $20.4 million as compared to the third quarter due to the aforementioned reduction in credit loss reserves, which drove a negative provision for credit losses of approximately $14 million in the fourth quarter. In the fourth quarter, next year, our drops were $1.8 million or five basis points of total average loans on an annualized basis compared to $1.4 million or four basis points for the prior quarter into 4.6 million or 15 basis points for the fourth quarter of last year. As in previous quarters, the majority of net charge-offs, approximately 63 percent in Q4, came from non-relationship third-party consumer loans, which are in runoff mode. Now turning to the pre-tax, pre-provision components of the income statement for the fourth quarter, tax equivalent net interest income was $148.7 million, which was up $8.4 million from the third quarter. Net accretion of purchase accounting adjustments added nine basis points to the net interest margin in the fourth quarter, up from the eight basis point impact in the third quarter, primarily due to an increase in loan-related accretion income of approximately $700,000. The fourth quarter's tax equivalent net interest margin was 3.32%, which was an increase of 18 basis points from the previous quarter due to a 10 basis point increase in the yield on earning assets from accelerated PPP fee income and an eight basis point decline in the cost of funds. The quarter to quarter earning asset yield increase was driven by the 15 basis point increase in the loan portfolio yield, partially offset by the impact of lower yields on securities of 11 basis points. The loan portfolio yield increased to 3.99% from 3.84% in the third quarter, driven by the impact of higher levels of PPP Loan fee accretion resulting from the SBA forgiveness of approximately $430 million in PPP loans during the quarter. Reduction in the securities portfolio yield to 2.8% from 2.91% was a result of the deployment of excess liquidity during the past two quarters into new investments at yields lower than the existing portfolio yield. In addition, cash proceeds from higher yielding securities that have matured or were repaid or prepaid are being reinvested at today's lower market interest rates. The quarterly eight basis point decrease in the cost of funds to 37 basis points was primarily driven by a nine basis point decline in the cost of deposits to 30 basis points. Interest bearing deposit costs declined by 13 basis points from the third quarter to 42 basis points in the fourth quarter due to the continued aggressive repricing of deposits as market interest rates declined. Non-interest income declined by $2.2 million to $32.2 million from the prior quarter. The decrease was driven by $1.4 million in BOLI benefit proceeds received in the third quarter, lower insurance-related income of $530,000, reduced levels of unrealized gains of $550,000 related to the company's SBIC investments, and lower loan-related interest rate swap fees of $460,000. These revenue declines are partially offset by an increase in service charges on deposit accounts of $661,000, primarily due to higher overdraft fees. Non-interest expense increased $28.5 million to $121.7 million from $93.2 million in the prior quarter, primarily driven by the previously announced $20.8 million debt extinguishment loss resulting from the pre-payment of long-term federal home loan bank advances in the fourth quarter, and an increase of $7.4 million in performance-based variable incentive compensation and profit-sharing expenses, including a contribution of $1.2 million to the company's employee stock ownership plan, as John had noted. Fourth quarter expenses also included approximately $790,000 in costs related to the company's decision to close five additional branches next month, $716,000 in third-party expenses incurred during the quarter to process PPP loans for SBA forgiveness, $447,000 in costs related to the company's response to COVID-19, increased project-related consulting and professional fees of $883,000, and an increase of $582,000 in FDIC premiums due to the impact of lower levels of PPP loans on the company's assessment rate. The effective tax rate for the fourth quarter decreased slightly to 15.1% from 15.3% in the third quarter. For the full year, the effective tax rate was 15.1 percent. For 2021, we expect the full year effective tax rate to be in the 16.5 to 17 percent range. Turning to the balance sheet, period-end total assets stood at $19.6 billion at December 31st, a decrease of $302 million from September 30th levels, primarily due to the SBA forgiveness of PPP loans. At period end, loans held for investment of $14 billion, a decline of $362 million or approximately 10% annualized from the prior quarter, driven by the SBA forgiveness of approximately $430 million of PPP loans. Excluding PPP loans, loan growth in the fourth quarter was 1.8% annualized, driven by increases in commercial loans of $102 million or approximately 4% annualized, partially offset by reductions in consumer loan balances of 43 million or 8% on an annualized basis. Commercial loan growth was primarily driven by growth in equipment finance loan balances and an increase in revolving lines of credit outstandings as the line utilization rate ticked up 1.8% from the prior quarter to a still historically low level of 25.6%. The overall decline in consumer loan balances during the quarter was driven by continued pay downs in mortgage and HELOC balances as well as the runoff of third-party consumer loan balances, which was partially offset by annualized growth in indirect auto balances of 14%. As noted, average loan yields increased 15 basis points during the quarter, primarily due to increased PPP fee accretion income, resulting from the forgiveness of PPP loans during the quarter. At the end of December, total deposits stood at $15.7 billion, which is an increase of $147 million, or 3.7% annualized from the prior quarter. With the exception of money market deposits, which declined slightly, all interest-bearing deposit categories increased during the quarter. Demand deposit balances declined approximately 5% annualized from the third quarter as a result of seasonal factors. Low-cost transaction accounts comprised 51% of total deposit balances at the end of the fourth quarter, which is in line with the third quarter levels. As mentioned, the average cost of deposits declined by nine basis points to 30 basis points, while interest-bearing deposit costs declined by 13 basis points in the fourth quarter. The company's liquidity position remains strong at both the bank and holding company levels with multiple sources that can be tapped if needed. From a shareholder stewardship and capital management perspective, we remain committed to managing our capital resources provenly 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 continues to be well-positioned to manage through the pandemic and its impact on the company's financial results. At the end of the fourth quarter, Atlantic Union Bank shares and Atlantic Union Bank's capital ratios were well above regulatory, well-capitalized levels. During the fourth quarter of 2020, the company paid a common stock dividend of 25 cents per share and also paid a quarterly dividend of $171.88 on each outstanding share of Series A preferred stock. In summary, Atlantic Union delivered solid financial results in the fourth quarter and for the full year despite ongoing business disruption associated with COVID-19 and the headwinds of the lower interest rate environment. Also, please note that while we are proactively managing through this unique and unpredictable pandemic, and are taking the proper steps to weather the economic downturn to ensure the safety, soundness, and profitability of the company, we also remain focused on leveraging the Atlantic Union franchise to generate sustainable, profitable growth and remain committed to building long-term value for our shareholders. And with that, let me turn it back over to Bill Cimino to open it up for questions from our analyst community.
spk12: Thanks, Rob. And Gigi, we're ready for our first caller, please.
spk03: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Casey Whitman from Piper Sandler. Your line is now open.
spk02: Good morning, Casey. Hey, good morning.
spk03: Good morning.
spk04: I thought I'd start. John, you made the comment that in 2021, we could see loan growth maybe return to the high single-digit range. I just wanted to clarify, is that how you're thinking about just the commercial book or the overall book? And then I was thinking maybe you could walk us through what you're seeing for demand across the different areas of footprint and where you're seeing commercial line utilization pick up, or maybe that's been footprint-wide.
spk02: Yes. For the record, I said that we would expect the opportunity to return to high single-digit loan growth in 2022, and that for 2021, we think it will start slower and then pick up. Our expectation for 2021, you know, all in overall is probably more in the mid-single-digit growth rate, Rob.
spk05: Yeah, if you exclude the third-party loan runoff, we expect to be in the 4% to 6% on a full-year basis. You know, on commercial side, it's probably, you know, at the higher level, 6%, and consumers probably going about 3% or so on average.
spk02: And so I think that, Casey, as you well know, the company does have a track record of pretty consistently being able to deliver high single-digit growth rate. We continue to believe, as I said, the markets, the franchise, the opportunity. We have a bit of a tailwind with what's going on at some of our larger competitors who shall not be named, where there's a lot of disruption. We're benefiting from that. So we're feeling pretty good. At the moment, we still see commercial business borrowers awash in liquidity. We see it in deposits. You see it in the low-line utilization. They've been cautious, but activity is picking up. We continue to fight headwinds of refinances on the commercial real estate book into the long-term institutional markets. But nevertheless, we continue to feel like we are positioned for overall high single-digit loan growth. But that's a 2022 opportunity. But I think that, again, you'll see it kind of slow as this year begins and that'll pick up. We do have Dave Ring had a commercial banking on. Dave, I'm going to ask you if you can give us just some summary comments in terms of the areas of strength geographically across the franchise from a commercial standpoint.
spk10: Sure. And, John, just to piggyback off what you said, loan demand is steady. We continue to see the benefit from disruption at other banks and the goodwill that we've created during PPP. Like John said, we expect the second half to be better than the first half, and we look for mid-single-digit growth. The regions that are doing well within commercial would be, number one, equipment finance. We just started that business at the end of December in 2019. That business is doing very well, serving our footprint. Central Virginia, our home court, is continuing to grow in the fourth quarter at double-digit annualized pace. The coastal region, which is Virginia Beach, that whole area, is next in line. And Greater Washington-Baltimore is had a lot of paydowns on their revolvers, but overall production is very strong there. And in North Carolina, in all our markets in North Carolina, we're doing very well. But in that order would be the growth. Thank you, Dave.
spk02: Casey, did that answer your questions?
spk04: It did. And thank you for clarifying the 2021 and 22 growth outlook. Makes sense. I think I'll just turn to maybe bigger picture, John. You mentioned that you see strategic opportunities on the horizon. Maybe can you elaborate on that a little bit and provide us with more color on your M&A thoughts, maybe with what sort of targets you might be interested in and in what geographies?
spk02: Sure. I think that, Casey, environmentally, we're seeing what I believe is a perfect setup for further bank consolidation. Clearly, it's already begun. So from where we sit, we continue to like the density of the franchise, the contiguous nature of the franchise, the fact that we have clearly established ourselves as not only the home team here in our home state of Virginia, but the clear alternative to the large competitors in Virginia. There's no question that there are things that could make financial and strategic sense for us, and we wouldn't do anything. And I think we have the track record to prove it that didn't make financial and strategic sense for the company. I think there are going to be options. We go about this very thoughtfully. There's nothing new about this conversation, the analysis that we do. We're still in a disrupted environment, and we're still first and foremost focused on taking care of the franchise, navigating through COVID, credit management, and just kind of going about our business. But we do feel like we are positioning for other opportunities. We continue to look at the spectrum. It is true that one thing that feels perhaps different from a year or two ago is we do think about things that are relatively larger than we used to think about. That's just a math exercise in terms of smaller scale acquisitions. While individually can be very accretive, make a lot of sense, tuck-ins, et cetera, they don't actually move the needle as much. It doesn't mean we would not do that. To be clear, it simply means that we think about We have a consolidating market. We have a near zero interest rate, pardon me, a consolidating industry, near zero interest rate environment for at least three years in our opinion. I think that the argument for scale is very real. So we kind of look thoughtfully across the spectrum of opportunities. If we were able to continue to kind of double down in our home markets, that would be our first choice and further strengthen our hand here. We do look around, contiguous to us. We're not gonna announce something in Montana. So from our standpoint, not a whole lot has changed in terms of our strategic intentionality. I would also say to sort of anticipate the question of well when might this happen, don't look for us to announce something next week. If we have our druthers, or I'll be clear, if I have my druthers, it'll be later versus sooner this year. We don't always have the opportunity to control timing But I would really like to see us get through the winter. I'd like to see what goes on with COVID. We are always busy inside the company. And if you think about my comments, I intentionally made several references to improving scalability. And so there are some things going on in the organization that a little more time would be very helpful in terms of being able to plug something else into it. And that's how we think about it. So I hope that's at least relatively clear. And let me also say, we may do nothing, but I'm simply saying that we do see opportunity out there.
spk04: Understood. Thank you. I'll let someone else jump on.
spk12: Thanks, Casey. Gigi, we're ready for our next caller, please.
spk03: Thank you. Our next question comes from the line of Eugene Koisman from Barclays. Your line is now open.
spk02: Good morning, Eugene.
spk06: Good morning. Can you talk to the puts and takes of the net interest margin this quarter? What's the right starting point for the first quarter of 21, given the lift from debt prepayment and the impact of PPP forgiveness on the new originations, as well as slowing accretion? Thanks.
spk05: Yeah, in terms of the margin for first quarter, I think you're going to see a you know, fairly stable margin, inclusive of accretion income and PPP forgiveness. As you know, we've forgiven through the end of December about $400 million of the $1.7 billion of PPP loans we made. So we're expecting to see that continue to come through in the first quarter. Actually, I think through today we've received another $185 I guess about $85 million of additional forgiveness through the first portion of January and expect that will continue. So the impact of PPP loan forgiveness on deferred fee income coming through is probably similar to what we see in the fourth quarter. Accretion is going to be fairly similar, a bit down. And then on the core basis, when you back out all of that, our core Net interest margin came in about 305 this quarter, which is fairly consistent with what the Q3 was. And we are expecting that that will stabilize at that level through the first quarter and actually throughout next year. We feel good about that we bottomed out, at least from the core side. We've got opportunities in terms of we think earning asset yields will continue to compress a bit. But, the cost of funds will also decline as well and will offset that, depending on the yield compression that we expect. So, I guess in the first quarter, kind of what you see in Q4 is what you'll see in Q1, and then as PPP declines, and I'm excluding any commentary around P2 because we don't know exactly what that is. But excluding that, you'll see the reported margin decline because PPP fee income will be exhausted by the second quarter of this year.
spk06: I just wanted to follow up. What levers do you have remaining to help support the gap NIM? You mentioned the deposit repricing. liability management?
spk05: Yeah, so we continue to see opportunity in reducing our overall cost of funds, primarily through reducing our cost of deposits. As you see, we made significant progress over the last several quarters, actually, in reducing our cost of deposits. I think we're down to 30 base points. If you looked at it in December, we were actually down to 27 base points. We feel that that's going to probably, toward the second half of the year, drop in the very low 20s, if not 20 basis points. We've got a number, about a billion dollars of high-cost CDs that will be maturing over the next six months. The average interest rate on those CDs is in the 150 range. over the next two months. So we've got some CDs that are maturing in the 170s. So those are repricing down significantly. Our current CD offering is one year, no penalty CD is priced at 15 basis points. So we've been seeing a significant repricing of the CD book, and that will continue, which will continue to allow us to reduce our cost of funds, our cost of deposits.
spk06: Got it. That's really helpful. And I wanted to jump to a different topic on the capital management. What are your thoughts on restarting share repurchases given relatively sluggish loan growth expectations for this year and improving credit outlook that should hopefully drive more releases?
spk05: Yeah. Yeah, so in terms of how we look at excess liquidity and deployment options, First and foremost, we calculate excess capital at anything above an 8.5% tangible common equity ratio. You'll see that we're reporting for this quarter 8.3%. Now that's down a bit because PPP loans are in the asset base. tangible asset base. If you exclude PPP loans, we're probably in the 8.8% range. So we are building excess liquidity. We expect that will continue throughout the year, knock on wood, that the credit continues to improve as we saw this quarter. So we will be looking at all options to deploy that excess capital as we build it up throughout the year. but certainly share repurchase would be on the table. We previously had $150 million share repurchase authorization from the board of which we had 20 million remaining that was suspended in March of last year when the pandemic hit. We will continue to evaluate increasing that authorization with the board. Always like to have that arrow in the quiver The other thought is we will, as John mentioned, consider acquisitions to deploy that excess capital as it builds up as well. So stay tuned on that, but I would expect that you'll see some opportunities for deploying excess capital, whether in repurchases or acquisitions as we go throughout the year.
spk12: Thank you. Thanks, Eugene. And Gigi, we're ready for our next caller, please.
spk03: Thank you. Our next question comes from the line of Stuart lots from KBW. Your line is now open.
spk02: Hi, Stuart. Good morning, Stuart.
spk09: Hey, guys. Good morning. Can you hear me? Okay. We can. Awesome. Rob, if we could kind of dive into the expenses this quarter. I know there was a lot of noise with some of the one time kind of year end accrual. And I think your guidance last quarter was for your core operating uh run rate to be around 88 million you know if we back out that's 7.4 as well as some of the the covid related expenses i can get closer to 91. how are you guys thinking about that run rate uh going in the first quarter of this year yeah thanks stewart yeah so um you know the way i look at uh the run rate you know we had some as you mentioned some incremental
spk05: uh incentive uh expenses uh in some other uh items so i get close you know kind of where you are 90 to 91 million on a kind of normalized run rate this quarter uh we've just completed uh our 2021 uh financial plan um and i've uh looked at uh what the expense base looks like in terms of the overall profitability of the company as we project forward. Our thoughts now are, as we looked into this year and looked at some of the investments we need to make and want to make, which should be beneficial down the line, down the road here in terms of efficiency, scalability, et cetera, we're going to be guiding up a bit from what we mentioned. We had mentioned about 88 to 90 was kind of a run rate we were looking for. As we've gone through the planning process, it looks like it would be more in the 90 to $92 million range on a quarterly basis, probably on the higher end in the first quarter as seasonally they're a bit higher as payroll taxes kick in again, et cetera. So that's how we're looking at it, but that includes a number of investments we're making in digital cybersecurity. and some projects that we feel will be beneficial from an efficiency point of view as we go through the year and into 2022.
spk02: Yeah, Rob, also I'd point out that presumes that we hit our financial goals for 2021 and have a fully funded incentive plan. That's right. I know that's one question that will likely come. The other thing I'll point out It is true when we began the financial planning work, we were not contemplating there would be another round of PPP. So we do have some degree as yet undetermined amount of income that is a bit of a positive thing that we weren't counting on. We think about that in the context of being able to slip a few projects and have it pay for it. that potentially would not have happened in the absence of that if it makes sense. We do have things going on in the company to improve efficiency, to improve scalability, technology-oriented. The way they work, they tend to have some front-end loaded expenses. It can be consulting, various other things. So you do need to make investment up front in order to realize a return or expense save on the back end of it. And so we feel like this is a pretty good setup to move a few of those things in that possibly wouldn't have been there otherwise.
spk05: Yeah, there are other projects, you know, such as looking at our flexible work plan going forward in a normalized environment where we're investing some money. But we do expect that that could lead to reductions in occupancy expenses as we go through that. So there's some of those sorts of things going on. Also investing in our businesses and our wealth management's business, which should drive revenue, and a commercial business, you know, teeing up NFX opportunities and small business lending opportunities that could help with the revenue side. And on that front, you know, just to continue from a run rate point of view, we're also looking at, you know, non-interest income kind of being in the $30 to $32 million range.
spk09: uh quarterly run rate as well which is a bit higher than we had anticipated coming in coming out of the third quarter i appreciate all that detail uh john rob um and rob you know turning to um the reserve release this quarter um you guys do a great job in slide 10 of kind of kind of diving into some of the assumptions but i was hoping you could provide a little bit more detail on the qualitative adjustments you guys had mentioned, including the vaccination rollout and kind of how that impacts your reserve levels and maybe just kind of any outlook for further reserve releases in one queue, given the January forecast for Moody's was incrementally better than what we saw in December. Yeah, thanks.
spk05: Yeah, thanks. So in terms of where we are at the end of the fourth quarter, As we mentioned, our CISO modeling is very sensitive to the Virginia unemployment rate, and that improved quite a bit, as well as to our credit quality metrics, which continue to do very well. We haven't seen an uptick in that. And then, of course, risk rating. downgrades, et cetera, which we had a bit of that, but not materially this quarter. So things look good from that point of view. In terms of the, so the modeling, quantitative modeling suggested that we would bring the reserve down. Offsetting that is we continue to add qualitative factors, as mentioned. To give you a flavor, for where we are at year end, of the $160 million of the allowance for loan losses, about 50 some odd million dollars is inclusive of qualitative factors. So think about the quantitative model being overlaid with qualitative factors. So about a third of that. In terms of looking forward, yeah, we just received the January Moody's and it's improved again, as you noted. So we are feeling like there's continued improvement here. We still haven't seen any metrics deteriorate from a credit point of view. Charge-offs continue to be low. So we could see some additional release of reserves as we move forward. We'll see how things play out. But in terms of kind of our overall modeling, we're thinking charge-offs, again, probably in the 50 basis points range for the full year. But we expect that we'll start to see that more in the second and third quarters peaking. Of course, that's all an assumption at this point. We haven't seen anything that's come through, but that's what our model would say. And then providing for... there'll be some release related as those charge-offs come through throughout the year. So we do expect that our reserves would, you know, all things remaining where they are today and what the outlook looks like that you could see further releases going forward.
spk09: Okay. I guess just kind of one follow-up on that. Would you expect to match charge-offs with provision and then some
spk05: kind of further level of release as you know as your consumer book runs completely off and if we do see the credit outlook really improve throughout the year yeah my view is that you we won't be matching charge us but basically charge us we're kind of already reserved for and we'd be providing for what's coming down the pipe based on the portfolio at the time. So my expectation is that there will be net releases, even though we may have charge-offs, there still could be net releases because provision will not offset one-for-one on the charge-off level. But again, that depends on the outcome, the outlook continuing to be positive as we've seen so far.
spk09: Great. Thanks for taking my questions, guys.
spk12: Thanks, Stuart. Thank you. Gigi, we're ready for our next caller, please.
spk03: Thank you. Our next question comes from the line of Laurie Hunsaker from Compass Point. Your line is now open.
spk02: Hi, Laurie. Good morning.
spk01: Hi, thanks. Good morning. So just staying with credit, Rob, can you give us an update on where we are with total criticized?
spk05: I don't have that percentage right in front of me here, but it's in our release, but it's pretty low in terms of... Oh, I didn't...
spk01: I didn't see it. I will go back and look for it. Okay. And then on the hotel book, I mean, your deferral return to payment trends are amazing, and obviously hotels is the standout. Can you just give us a little bit more color around that book? I mean, I have in my notes that it was primarily flagged non-resort hotels, round numbers at a 60% LTV. Just wondered if you had more color and if you had more color in terms of what you detail on page 17. Just those 11 loans sitting on deferral for $79 million.
spk02: Thanks. Yeah, Laurie, we have Doug Lilley, Chief Credit Officer on. Doug, do you want to give us your perspective on the hotel portfolio?
spk07: Yep. Good morning, Laurie. The hotels are spread around the Virginia footprint. And as the slide deck says, the majority of them, two-thirds, are interest-only. That's part of our restabilization process in support of our hoteliers. And as you also see, it's almost 90% of the hotels are off mod and resuming payments. So we feel very comfortable with that. The overall hotel book has got an average occupancy of 55%. And of course, there's a bit of a standard deviation there, but that's a pretty strong performance. The hoteliers, as we know, are operating under much lower break-even operation. percentages. So for the most part, that 55% shows them operating as comfortably as you can. And, you know, like most other banks, our hotels that are extended stay are almost completely full all the time. So we feel comfortable with the hotel book right now.
spk02: And Laurie, as you know, just as a reminder, or I guess for those who aren't as familiar, when you think about our hotel portfolio, Doug said it's in footprint. What we don't do is we're not doing big convention, big conference hotels, no airport hotels. We have personal guarantees. We deal with professional hoteliers who are both owners and operators. And so we've got our arms around this portfolio, and we'll work with them as they get through this.
spk01: Okay, and then sorry, just one more question. LTD, do you have a tighter number than the approximately 60% or is that what I should be using?
spk07: Yeah, Lori, we don't reappraise hotels. We did not reappraise hotels because of COVID. So, you know, that number is as good as any number. Obviously, hotel values have weakened significantly. But again, as John was saying, we don't do non-recourse hotel lending. We have guarantor support, and the guarantors have supported to the extent they needed to, property by property. So I think that's a comfortable LTV. There's a good equity buffer there. Absolutely.
spk05: Okay, great. Lori, just to get back to your earlier question, our past dues are about 39 basis points at the end of the fourth quarter, which is down from about 61 from last year.
spk01: Okay, yeah, I guess I was looking for your actual criticized. I think your criticized was about $1.2 billion at September.
spk05: We will detail that in the 10-K. Yeah, that's right. That actually is not in the earnings release, but we have that.
spk02: We'll be following the K. The increases and special mention substandard had been modest. We've seen some, but nothing alarming.
spk01: Okay, great. One last question, Rob, for you. I want to make sure I have this number right. The PPP fees received that flowed into net interest income this quarter were $15 million versus $9.9 million last quarter. Is that correct?
spk05: Yeah, that's the fee income component, right. Okay. The automatic recapture.
spk01: Okay. I guess if I'm looking at that, then if I just take that off of your 332 margin, you know, forget loan accretion. I'm just looking at PPP. That's a 34 basis point impact into margin. So we're down at 288. I mean, and I get this number will be noisy, but I guess what I'm getting at is, you know, we fast forward to when we don't have prepay fees coming back through. You know, how should we be thinking about core margins? Or am I doing something wrong with my math? Thanks.
spk05: Yeah, what you need to do is you've got to back out the PPP loans from your denominator because those are going away as well. So that's how we get to the core. And then that's PPP is 305. Loans, meta PPP loans, we saw an average for the quarter. We reported earning assets of 17.8. PPP loans average was 1.4. It's 16.4, so back out the income, but you also got to back out the denominator as well with it.
spk01: Okay, and then one last question on that. How much is actually remaining of PPP fees?
spk05: Say that again?
spk12: Yeah, how much actually remains?
spk05: We've got about $17.5 million left.
spk02: That's for round one to be clear. We're not talking about the current round.
spk05: We haven't got our hands around PPP2 yet, but there should be some deferred fees coming out of that, as you know. Great.
spk01: Thank you. I'll leave it there.
spk12: Thanks, Laurie. And we're going to try to get in at least one more caller here, Gigi.
spk03: Our next question comes from the line of William Wallace from Raymond James. Your line is now open.
spk08: Hi, Wally. Good morning. Good morning. Thanks for taking my call. I would like to maybe dig into the expense questioning a little bit more. That 7.4 million of incentive comp accrual was very high. I mean, that's three or four times what I think we've seen in past fourth quarters when we have adjustments. Did you all reverse accruals through the year? I mean, it's not like you had a stellar loan growth year or something like that. So just kind of help me think about why that accrual was so high.
spk05: Yeah, well, one point, Wally, is we typically make a contribution to our ESOP, Employee Stock Option Plan, each year, and that is accrued for over four quarters. We were choosing not to make that contribution this year due to the pandemic. And as we went through the fourth quarter, we reassessed that. So 1.2 million is kind of a full year impact for that, which would normally be accrued over four quarters. The other component is as we came out of third quarter, we were accruing for a full year instead of payout and profit share that was lower than what we ended up doing. And we basically had a pickup in the fourth quarter to make that whole. So think about it as our projection was too low in terms of what we accrued for. in the first three quarters and as the numbers came through in the fourth quarter, we had to adjust accordingly.
spk02: But I think that I would point out that is a variable expense. Variable means variable. It may or may not be paid depending upon how we did. And so in terms of what we were able to accomplish over the course of the year versus our targets, we ended up doing better than what we thought was going to happen. And so we wanted to accrue according to our formulation.
spk08: So did you adjust the accruals then in March when the pandemic started? Because I would imagine you're below your prior budget pre-pandemic.
spk05: Yeah, we did reduce the accruals back, and then as the year went on, as things looked better, we increased that. And it had for a quarter. Yeah. Okay. It even looked better than what we had originally thought coming out of the third quarter, so we had to adjust.
spk02: And if we hadn't finished as well as we did – it would have been lower for nothing. There's no guarantee. It's variable.
spk08: No, I understand. And then you guided 88 to 90, and then you ended up at 90 to 91 when you make adjustments for a lot of the stuff, the kind of non-recurring stuff. What caused the creep there in the quarter?
spk05: Yeah, there are various things that came through. Some of the, you know, as we would like to, we've been investing in some Some of the consulting fees were higher. We decided to move forward on a number of projects. LIBOR transition expenses came through. We've had some external consulting help on that. We are evaluating, as I mentioned, one project is a flexible workforce project that we've got some outside help helping us with, and we accrue for things like that. It's kind of a combination of a number of different things, Wally, on that front.
spk08: Okay. And then obviously you're now guiding for a higher range in 2021. Is that to assume that you've decided to move forward with some other projects that were kind of on the table in consideration? Yeah. That's right.
spk02: Yes. Wally, again, we have several things. We'll talk to you later in more detail. We have some technology projects. enabled initiatives and things like the fraud unit, other operational functions of the bank that do cost money up front but will result in savings, have a return. And again, we get a little bit of a tailwind, admittedly, as we now have this previously unexpected PPP income coming from round two. We'd like to invest to some degree that in the company. So you'll see some things that don't necessarily add to the ongoing run rate of expenses, but we're going to incur them, be a little more front-end loaded in the year versus back-end loaded, and then we actually think we'll have savings later on. We're very focused on improving scalability. We're very focused on implementing automation. All of these things are good investments with returns for the bank.
spk08: Okay. All right. I appreciate all that color. I don't know if we have time, but if so... Any chance you could update us on any anecdotal or data metrics that you're measuring as it relates to Project Sundown? You referenced it multiple times throughout the Q&A and prepared remarks. Any updates?
spk02: Yeah, we've sort of broadened that in the sense that we don't just think about the truest merger. We also think about Wells Fargo. And I may ask Dave Ring and or Bank President Maria Tedesco to comment on this. Truist has moved very slowly in terms of the rebranding. We don't expect to see Truist signs up until early 2022, although they're now moving along with branch consolidation. I think that consumer customers of Truist haven't felt too much impact yet. On the commercial side, they absolutely have. And because they're now largely integrated and they've made the changes that they've made. Dave, let me ask you just in terms of commentary, things that we see going on at these larger competitors, what is your take? I mean, we are built to take market share from these guys for small to mid-sized businesses. We're kind of quiet about our hiring, but we have been hiring out of those organizations. What do you have to say about that neighboring industry?
spk10: Sure. That's right, John. We've really spent a lot of time focused on companies' experience, banks experiencing some sort of disruption and using our PPP effort to support those companies that those banks having disruption are not serving very well. So as a result, we've been able to drive pipeline in business We focus on companies really between $1 million in revenue to $250 million in revenue. We don't focus very much on any companies larger than that. And we also look at what their reorganizations, how they impact people in those organizations. And we've been able to grab top talent from not only Truist, but also Wells Fargo and a few other banks. So we've been able to find pockets in our market where there's a lot of opportunity and hire into those markets and hire into specialties. We hired two strong, very strong bankers, one from Truist and one from Wells Fargo in our GovCon group, for instance. And that really helps us as we move that strategy forward. We've also been able to hire in our equipment finance practice. But overall, this year we've hired, you know, 29 producers and to bolster where we are, but also to replace where we had kind of vacancies that we've managed. And so we think the upgraded, you know, producer group plus our strategy to focus on banks that are having disruption and using our PPP customer acquisition as another lever, we're able to continue to show growth into 2021 and 2022. Great. Thanks for the time.
spk08: Appreciate it.
spk02: It's your thing, Wally. Thanks, Wally. Can we just put in one more? Yeah, we can put in one more, and that'll be it.
spk03: Thank you, Arne. Our next question comes from the line of Brody Preston from Stevens Inc. Your line is now open.
spk11: Hey, good morning, everyone. Can you hear me? We can. Good morning, Brody. All right, great. Hey, so I just wanted to touch base on the loan pipeline. I'm sorry if you already talked about it. I just wanted to get a sense for how they compared to last year and more broadly in the middle of 2020 and during the pandemic.
spk02: Dave Ring, do you want to speak to that? how the pipeline looks, how we've seen it trend?
spk10: Sure. That's a layup, Brody. Thank you. The pipeline has been consistent all year. Our throughput is better in our pipeline. So I guess you could say if you were to compare the pipeline going into 2021 with the pipeline going into 2020, it's roughly 10 percent lower. However, the quality is better, so our throughput is actually very good, and we're spending less time with things that we don't ultimately close. So we have a strong pipeline when it comes to equipment finance. Our CNI pipeline is strong. The one area where we have focused to reduce our pipeline a little bit is the construction and development pipelines. just because we're being a little more careful in focusing on our existing clients in that asset class, per se. And so overall, pipeline is what we expected it to be going into the year, and I feel very optimistic about it.
spk11: Okay, great. And so I guess it sounds like you still feel like the pipelines and then sort of the throughput are supportive of you know, maybe mid to high single-digit kind of core XPPP loan growth moving forward? Well, I would say high for this year.
spk00: Right.
spk10: We're driving for middle single-digit, and we'd be very happy to be at the end of the year. Again, more towards the second half of the year than the first half of the year, simply because it takes a while for these things to kind of matriculate their way through to closing.
spk11: And last one for me, just on the margin, you know, the core margin was down just a little bit, but the NII growth was nice to see, and it looked like you had some positive or I guess maybe some stabilization really in the core loan yield. So do you feel like we're kind of nearing, you know, a real stabilization point in that core loan yield? And I guess what are new core, what are new loan originations coming on at for yield? And then similarly on the opposite side for CDs, what's the roll-on, roll-off look like there for costs?
spk05: Yeah, Brody, it's Rob. Yeah, we think we're at a stable level of core net interest margin. We exclude any PPP impacts or accretion income. We think we'll stabilize in the We came in about 305 on a core margin this quarter. We expect it to kind of stabilize on that level, give or take a few base points. In terms of what we're pricing on loans on the commercial book, you know, new originations, the average across, you know, various pricing variable and fixed, We came in about 340 pricing of loans this quarter. That's down a bit from last quarter, which was around 347, so it has declined a bit. Our mix of new originations between LIBOR, prime-based, and fixed, LIBOR is about 38%, 20% on prime, and the rest 42% fixed. We haven't really seen too much of a decline there, but we do expect that we will continue to see both loan yield compression, although, you know, stabilizing a bit as we go forward and loans reprice and new loans come on. But also, we do expect the investment security portfolio to also have some compression in that as... as we invest cash proceeds into lower than portfolio yields in the current market. In terms of the deposit side, though, we think there's a good offset there that our cost of funds and our cost of deposits will continue to come down. The cost of deposits is about 30 basis points. We think we'll get that down to closer to 20 basis points as we go through the year. The big ticket item there in terms of continuing to bring that down is, as I mentioned earlier, you may not have been on the call yet, but about $1 billion of CDs are running off over the next six months. Average cost is 1.5%. So those are repricing to the extent that we're retaining those balances, which has been pretty good, actually, about 70%. as we're pricing down to 15 basis points on our one-year no-penalty CD product. So that should provide an offset to continue earning asset yields and keep core margin in that stable 3 to 305 range going forward.
spk11: Okay, great. Well, thank you for all the time this morning, everyone, and for making time to take my questions. I really appreciate it.
spk12: Thank you, Brody. Thanks, Brody. Thanks, everyone, for joining us today. We look forward to seeing you all soon and talking to you again next quarter. Take care.
spk03: Ladies and gentlemen, this concludes today's conference call. Thanks for participating. You may now disconnect.
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