Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares fourth quarter and full year 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star, then zero. I would now like to hand the conference over to your host today, Bill Cimino, Investor Relations. Please go ahead.
Thank you, Michelle, and good morning, everyone. I have Atlantic Union Bankshares President and CEO, John Asbury, and Executive Vice President and CFO, Rob Gorman, with me today. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release and the accompanying slide presentation we are going through on this 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 the earnings release for the fourth quarter and fiscal year 2021, which is also available on the investor website.
Before I turn the call over to John, I would like to remind everyone that on today's call, we will be making 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 fiscal year 2021, 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 could 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 research, questions from the research analyst community. Now, I'll turn the call over to John Asbury.
Thank you, Bill. Good morning, and thanks to all for joining us today. I'll begin with some high-level thoughts on our performance environment, some changes we have made, and how we're thinking about our growth strategies. Looking back at 2021, it was a challenging but successful year for Atlantic Union Bankshares. While there were ups and downs with the continuing pandemic, Atlantic Union had a strong finish to 2021, and we're optimistic as we enter 2022. Our operating philosophy of soundness, profitability, and growth served us well this year as we continued to navigate the ongoing challenges of operating in a pandemic. While we're mindful of the current Omicron surge, we don't see it derailing the fundamental positive trends of a growing economy, declining unemployment, and the most benign credit environment I've witnessed in my 34-year career.
Further, that the Federal Reserve has signaled multiple short-term rate hikes in 2022 is good for us, as we remain fairly asset sensitive heading into what appears to be the beginning of a rising rate cycle. There are still headwinds as supply chain disruptions continued. They also appear to be on an improving trend, and business clients are still challenged to fill open positions. We think all of this will improve as the year goes on. On the revenue front, last quarter, I mentioned we believe we had a coiling spring for loan growth and that we expected solid growth in the fourth quarter. I think we can say we finished better than solid with 11.7% annualized loan growth during the quarter, exclusive of PPP. This is the best we've seen since the pandemic started.
Loan growth was so strong, we returned point-to-point low single-digit growth for the full year, exclusive of PPP. While we'd rather see consistent growth each quarter, we are pleased to see evidence that some of the factors muting loan growth earlier in the year now appear to be fading. Fourth quarter loan production was the best since the pandemic started, and this was true for our two major segments of commercial lending and commercial real estate lending. Our strong production more than offset an even higher level of run-off and pay downs than we saw during the third quarter. Construction lending balances declined slightly at quarter-end as projects completed and were recoded to commercial mortgage categories. New construction loan originations remain strong, and based on our unfunded construction loan commitments and funding schedules, this should be a tailwind for balances this year.
We were also encouraged to see C&I line utilization tick up in each month of the quarter, ending the period at 28%, which is still well below our pre-pandemic levels. It's good to see this inflect, and we do have a lot of upside here as sales and working capital needs increase among our client base. As we enter the new year, our pipelines are solid and they're significantly higher than they were coming into 2021. We are encouraged by our competitive positioning, the market dynamics and economic strength across our footprint. All of that, plus our expanded lending capabilities, lead us to expect upper single-digit loan growth for 2022. While some quarters may be better than others, January has started off strong, and we feel upper single-digit loan growth is achievable for the full year.
Additionally, we believe we have a long runway ahead to grow both organically and through takeaway from our larger competitors that dominate market share in our home state of Virginia, supplemented by our operations in Maryland, North Carolina, and our specialized lending capabilities in government contract finance and equipment finance. We are focused on and believe we're benefiting from the disruption occurring at two of our largest competitors. Our asset quality continued to impress, and once again, the credit headline for the quarter was the absence of credit problems. Net charge-offs for the quarter came in at $511,000, or 2 basis points annualized. That's a negligible increase from an effectively zero base in Q3 and Q2 of 2021.
Full year 2021 net charge-offs were one basis point, a level I would have previously thought unimaginable. At some point, credit losses will have to normalize, but given all the liquidity that remains in the system, continued declining unemployment and a strengthening economy, we see no sign of a systemic inflection point, and all of that continues to feel very distant to us. To that point, the economic outlook remains positive, and we're optimistic. Here in our home state of Virginia, November unemployment came in at 3.4%, down from 3.8% in September, and that was better than the national average of 4.2% from the same time period. We're still waiting on December unemployment numbers for Virginia.
While that's all good news, the employment challenge in our markets continues to be the ability of businesses to fill their open jobs, and this will likely not resolve itself until we see more people return to the workplace. Rob will talk through the provision for credit losses and our CECL modeling, but by all indications and metrics, credit appears to have never been better. Turning to expenses, it was a noisy fourth quarter for one-time charges as we took further action to align our expense structure to the operating environment, something we signaled was coming in our last earnings call comments. In early December, we announced we were closing 16 branches in the first quarter of this year, which is 12% of the current branch network. We've been among the more aggressive branch consolidators in the industry.
With this action since the start of the pandemic, we will have reduced our retail branch network by approximately 25% or 35 branches. This reflects our recognition of changing consumer behaviors, ever-better analytics on customer usage of the branch network and alternative delivery channels, and our need to continue to invest in our digital products and respond to wage inflation pressure. We also announced a rationalization of our office space with the pending closure of our Ruther Glen, Virginia, operations site, which is north of Richmond, as we consolidate all Richmond area corporate office personnel into existing facilities on the west end of town. This is made feasible by our shift to a hybrid work schedule for most corporate office roles and full-time remote work for select positions such as our call center. As a result, we simply don't need as much office space as before.
Regarding expenses, Rob will take you deeper into the details in his comments, but we continue to expect that we will hold non-interest expense growth to no more than 2% in 2022. Our expense management actions, combined with our asset sensitivity and that we believe we are on a solid growth footing, all give us confidence in our ability to maintain differentiated financial performance and meet our top-tier financial targets for 2022. In terms of how we run the bank, we recently announced that Bank President Maria Tedesco has also been named Chief Operating Officer, and we've added key support units to her responsibilities in addition to all revenue generation activities that she currently leads.
This moves the center of gravity of the organization even closer to the customer and better organizes the bank around customer needs and experience, improves internal accountabilities and coordination, and better positions us to respond to our changing environment in an agile manner. This also enables me to focus even more on the bigger picture and long-term strategies, including the potential disruption from financial technology and the digital asset ecosystem. I'll speak more to that momentarily. As we think about the future of our company and our industry, we want to more rapidly diversify our income streams, both in terms of net interest income and all-important non-interest income. To be clear, we will protect, invest in, and grow our core franchise as we look for new value-added ways to serve our clients to generate both forms of revenue.
Examples of core franchise growth initiatives include the build-out of our foreign exchange solutions, loan certifications, and ongoing enhancement of treasury management services, in addition to specialty finance operations. While we will say more about that as our plans develop, I'll call out that we want to expand our asset-based lending unit, scale our SBA 7(a) program, and enhance our existing not-for-profit and public finance capabilities. Beyond our core banking operations, you'll also see us become more active in the digital asset ecosystem. We began investing in fintech funds a few years ago. We're adding to our position this year, and we're using those to build relationships with potential fintech partners, gain insights, and find new opportunities. This has informed our digital offerings and enabled us to vet and identify opportunities to enhance them.
Moving forward, we're also interested in positioning for new and emergent opportunities such as in blockchain, which we think could prove disruptive to existing payment systems and back-end processes. As we prepare the company for the future, we'll dedicate more time to this than ever before. To summarize our growth strategies at the highest level, they are, in order of priority. One, driving the organic growth and performance of our core banking franchise. Two, leveraging financial technology and fintech partnerships to generate new sources of income and new capabilities. Three, selectively considering M&A as a supplemental tertiary strategy. This is an option we will preserve and may use under the right circumstances. As I've said before, we've come out on the other side of the pandemic as a stronger and more capable organization. We've learned to work differently, and our customers have learned to bank differently.
We've seen usage of our digital channels increase substantially. For example, in the fourth quarter, we continued to see a shift in the origination channels for checking and savings accounts. While we're not permitted to share our benchmarking data, we believe we are outperforming for banks our size in this area, and we expect to further drive up these numbers as we continue to refine our digital offerings. Mobile check deposit utilization accounts for 20% of our deposit transactions, and while I think we've done a very good job with our digital usage as compared to what we see at much larger banks, it seems very clear we have a lot of upside potential here. We also continue to work on new projects and improve the omni-channel customer experience with quarterly releases and upgrades to our product offerings.
We'll continue to align our resources with these opportunities and respond to evolving customer behavior, which we are watching very carefully. Looking ahead, our goal remains to achieve and maintain top-tier financial performance regardless of the operating environment. We continue to work on the ways to make the company more efficient and scalable while improving and automating processes and the customer experience. We should see operating leverage improvements as a result. As we close out 2021 and begin the new year, I remain confident in what the future holds for us and the potential we have to deliver long-term sustainable performance for our customers, communities, teammates, and shareholders. I'll end, of course, with my usual reminder that Atlantic Union Bankshares remains a uniquely valuable franchise. It's dense and it's compact in great markets with a story unlike any other in our region.
We're scalable with the right capabilities, the right markets, and the right team to deliver high performance even in the most trying of times. I'll now turn the call over to Chief Financial Officer, Rob Gorman, to cover the financial results for the quarter. Rob?
Thank you, John, and good morning, everyone. Thanks for joining us today. Now let's turn to the company's financial results for the fourth quarter. Please note that for the most part, my commentary will focus on Atlantic Union's fourth quarter results on a non-GAAP adjusted operating basis, which excludes the financial impacts of the strategic actions taken in the fourth quarter. Specifically, adjusted operating earnings excludes pre-tax restructuring costs of $16.5 million or thirteen point one million dollars in after-tax expenses related to the decisions to close the company's operations center to reduce excess office capacity and to close 16 branches, or approximately 12% of the branch network, both of which will be completed in the first quarter of 2022. As a result, the company expects to lower its annual expense run rate by approximately $8 million beginning in the second quarter.
Adjusted operating earnings for the fourth quarter also excludes the pre-tax gain of $5.1 million, or $4.1 million on an after-tax basis related to the sale of Visa Inc. Class B common stock in December. For clarity, I will specify which financial metrics are on a reported versus non-GAAP adjusted operating basis. In the fourth quarter, reported net income available to common shareholders was $44.8 million, and earnings per common share were $0.59, down approximately $26.8 million, or $0.35 per common share from the third quarter. The reported return on equity for the fourth quarter was 6.98%. The reported non-GAAP return on tangible common equity was 11.98%.
The reported return on assets was 94 basis points, and the reported efficiency ratio was 68.6% for the quarter. Non-GAAP adjusted operating earnings available to common shareholders in the fourth quarter were $53.8 million, and adjusted operating earnings per common share were $0.71, which is down approximately $17.8 million, or $0.23 per common share from the third quarter. The non-GAAP adjusted operating return on tangible common equity was 14.25% in the fourth quarter. The non-GAAP adjusted operating return on assets was 1.11%, and the non-GAAP adjusted operating efficiency ratio came in at 58% in the fourth quarter.
Turning to credit loss reserves as of the end of the fourth quarter, the total allowance for credit losses was $107.8 million, which was comprised of the allowance for loan and lease losses of approximately $100 million and the reserve for unfunded commitments of $8 million. In the fourth quarter, the total allowance for credit losses decreased approximately $1.5 million, primarily due to lower expected losses than previously estimated as a result of ongoing economic improvements in our footprint, the nine credit quality metrics to date, risk rating upgrades during the quarter, and a positive macroeconomic outlook over the forecast period. The total allowance for credit losses as a percentage of total loans was 82 basis points at the end of December, down slightly from 83 basis points in the prior quarter.
As a reminder, our day one CECL reserve was 75 basis points of total loans. In estimating expected credit losses within the loan portfolio at year-end, the company utilized Moody's December baseline macroeconomic forecast for the two-year reasonable and supportable forecast period. Moody's December baseline economic forecast for Virginia, which covers the majority of our footprint, is relatively consistent with September's baseline forecast, as it assumes that the Virginia unemployment rate will average 2.6% over the two-year forecast period, which is a slight improvement from the 2.7% two-year average state unemployment rate assumed in the September baseline forecast. On a national level, the December baseline forecast assumes GDP will increase by 4.4% in 2022 and 2.9% in 2023.
In addition to the quantitative modeling, the company has also made qualitative adjustments for certain industries viewed as being highly impacted by COVID-19. Additional economic scenarios were considered as part of the qualitative framework in order to capture the economic uncertainty and concerns related to the future path of the virus and the potential for other, more unfavorable economic developments.
The negative provision for credit losses of $1 million in the fourth quarter decreased materially from the prior quarter's negative provision for credit losses of $18.8 million and a negative provision for credit losses of $13.8 million recorded in the fourth quarter of 2020 as the allowance for credit losses has normalized to pre-pandemic CECL day one reserve levels, as a significant COVID-19 driven spike in loan losses initially projected and reserved for have not materialized to date. In the fourth quarter, net charge-offs remained negligible at approximately $511,000 or 2 basis points annualized compared to $133,000 for the prior quarter at $1.8 million or 5 basis points for the fourth quarter last year.
As John mentioned, net charge-offs for the full year 2021 were approximately 1 basis point as credit quality has remained pristine. Now turning to the pre-tax, pre-provision components of the income statement for the quarter. Tax equivalent net interest income was $141.6 million, which was up approximately $900,000 from the third quarter, driven by higher investment income as a result of growth in the investment portfolio and marginally higher interest in fees on loans, including PPP loan interest and fees, partially offset by the acceleration of the unamortized discount related to subordinated debt that was redeemed in December. Net accretion of purchase accounting adjustments of $4.2 million added 10 basis points to the net interest margin in the fourth quarter, up slightly from the 9 basis point impact in the third quarter.
Fourth quarter's tax equivalent net interest margin was 3.10%, a decline of 2 basis points from the previous quarter due to the decline of 1 basis point in the yield on earning assets and a 1 basis point uptick in the cost of funds. The slight decline in the quarter-to-quarter earning asset yield was driven by an 11 basis point increase in the loan portfolio yield, which was offset by the impact of lower investment portfolio yields of 12 basis points and the impact of increased levels of excess liquidity held in low yielding cash equivalents.
The loan portfolio yield increased to 3.81% from 3.70% in the fourth quarter, primarily driven by a 10% increase in the yield on average PPP loans to approximately 16% from the prior quarter, which is reflective of an increase of $1.3 million-$10.7 million in PPP loan fee accretion included in interest income. The PPP loan yield increase impact on the earning asset yield was partially offset by core loan yield compression of two basis points due to continued pay downs of higher yielding loans and lower loan yields on loan renewals and new production.
Reduction in investment portfolio yield to 2.44% from 2.56% resulted from the reinvestment of portfolio cash flows and the deployment of excess liquidity into investment securities portfolio at lower market interest rates. The quarterly increase in the cost of funds to 20 basis points from 19 basis points was driven by higher borrowing costs as a result of the $1 million acceleration of the unamortized discount related to the subordinated debt that was repaid in December. This impact was partially offset by a 2 basis point decline in the cost of deposits to 12 basis points in the fourth quarter, primarily due to the maturity and repricing of high-cost time deposits.
Non-interest income increased $6.5 million to $36.4 million in the fourth quarter, up from $29.9 million in the prior quarter, primarily driven by the gain on sale of Visa Class B stock of $5.1 million and increases in several non-interest income categories, which was partially offset by a $1.5 million decline in mortgage banking income, reflecting the seasonal drop in mortgage loan origination volumes in the fourth quarter.
Other non-interest income increases of note in the fourth quarter include an increase of $937 ,000 in unrealized gains on equity method investments, a seasonal increase of $610 ,000 in deposit service charges, a $559 ,000 increase in BOLI revenue from death benefit proceeds, an increase of $341 ,000 in loan interest rate swap fee income, and additional asset management fees of $210 ,000 due to growth in assets under management, which stand at $6.7 billion at the end of 2021. Reported non-interest expense increased $24.6 million to $119.9 million in the fourth quarter, from $95.3 million in the prior quarter.
This is primarily driven by restructuring expenses of $16.5 million related to the announced closure of the company's operations center and a consolidation of 16 branches in March 2022. Please note we expect to incur an additional $5.7 million in branch closure costs, primarily related to lease terminations in the first quarter of 2022. As noted earlier, these strategic actions will result in approximately $8 million in annualized run rate savings, which will begin in the second quarter. During the fourth quarter, the company also incurred expenses for items not expected to persist into the future, including $1.4 million in expenses associated with strategic projects, approximately $1.2 million in severance costs unrelated to branch closures, and approximately $900,000 in technology and data processing costs related to the termination of a software contract.
In addition, expenses in the fourth quarter were elevated over normal run rate levels due to incremental performance-based variable incentive compensation and profit sharing expenses of approximately $4 million, including a $500,000 contribution to the company's employee stock ownership plan. The effective tax rate for the fourth quarter decreased to 14.4% from 18% in the third quarter, reflecting the impact of changes in the proportion of tax-exempt income to pre-tax income. For 2021, the full year effective tax rate was 17.2%.
In 2022, we expect the full year effective tax rate to be in the 17%-18% range. Now turning to the balance sheet period, the total deposits stood at $20.1 billion at December 31st, which was an increase of $129 million, or 2.6% annualized from September 30th levels due to net growth in the investment portfolio as well as growth in the loan portfolio, which was partially offset by PPP loan forgiveness. At period end, loans held for investment were $13.2 billion, inclusive of $150 million in PPP loans, an increase of $56 million from the prior quarter, primarily driven by increases of loan balances of $373 million, partially offset by $315 million in PPP loans that were forgiven during the fourth quarter.
Excluding PPP loans, loan balances in the fourth quarter increased 11.7% annualized, driven by increases in commercial loan balances of $345 million, or 12.8% linked-quarter annualized. Consumer loan balances grew $27 million, or 5.4% annualized, driven by a 33% annualized growth rate in indirect auto balances, partially offset by the strategic runoff of third-party consumer loan balances, which are down to $73.5 million at the end of 2021. PPP loan forgiveness during the fourth quarter was steady. Approximately 2,700 clients from both round one and round two received forgiveness totaling approximately $315 million during the quarter, bringing the total amount forgiven to date to approximately $2 billion. PPP loan balances were approximately $150 million, net of $4.4 million in deferred loan fees at the end of the quarter.
Overall, the PPP loan forgiveness process is running smoothly. It should largely wrap up by mid-2022. At the end of December, total deposits stood at $16.6 billion, a slight decrease of $11 million, or approximately 0.3% annualized from the prior quarter, as a decline of $187 million in high-cost time deposits was mostly offset by growth in low-cost deposits. At December 31st, low-cost transaction accounts comprised 56% of total deposit balances, which is consistent with third quarter levels. 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. At the end of the fourth quarter, Atlantic Union Bankshares shares and Atlantic Union Bank's capital ratios were well above regulatory well-capitalized levels.
In December, the company raised Tier two regulatory capital by issuing $250 million of 2.875% fixed-to-floating-rate subordinated notes with a maturity date of December 15th, 2031. The company used a portion of the net proceeds from the new issuance to repay its outstanding 5%, $150 million fixed-to-floating-rate subordinated notes that were due to mature in 2026. During the fourth quarter, the company paid a common stock dividend of $0.28 per share, consistent with the prior quarter, and also paid a quarterly dividend of $1.7188 on each outstanding share of Series A preferred stock. Also in December, the company's board of directors authorized a share repurchase program to purchase up to $100 million of the company's common stock.
This repurchase program replaced the prior $125 million repurchase program that was fully utilized as of September 30th. With the financial impact of a PPP loan program winding down, the pandemic-driven volatility related to expected credit losses and credit loss reserve levels subsiding, and the expectation that interest rates will begin increasing this year, we are reaffirming our top-tier financial metric targets to be return on tangible common equity within the range of 13%-15%, return on assets in the range of 1.1%-1.3%, and an efficiency ratio of 53% or lower.
Regarding the efficiency ratio target, I'd like to point out that it is difficult to compare our efficiency ratio to banks that don't have significant operations in Virginia, since Virginia banks do not pay state income taxes, but instead pay a franchise tax that flows through non-interest expenses and not the in-income tax line. The franchise tax expense impact adds approximately 2.5% to our efficiency ratio. Setting our efficiency ratio target at 53% or lower is akin to a 50% efficiency ratio target for peer banks not headquartered in Virginia. As a reminder, our financial performance targets are dynamic and are set to be consistently in the top tier or the top quartile among our peer group, regardless of the operating environment.
At this time, we believe these targets are reflective of the financial metrics required to achieve top-tier financial performance in the current economic environment. We do expect to achieve these targets in 2022. In summary, Atlantic Union delivered solid financial results in the fourth quarter and for the full year and is well positioned to generate sustainable, profitable growth and to build long-term value for our shareholders in 2022 and beyond. With that, let me turn it back over to Bill Cimino to open it up for questions from our analysts.
Thank you, Rob. Michelle, we're ready for our first caller, please.
Thank you. If you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Casey Whitman with Piper Sandler. Your line is open. Please go ahead.
Good morning, Casey.
Good morning. Morning.
I guess first I'd ask, so some really nice loan growth towards the end of the quarter. Can you, give us an idea for where new loan yields were coming on compared to the rest of the book?
I'm sorry. Was that yields? I had trouble hearing.
Yeah. Sorry, the new production that you guys put on towards the end of the quarter, what were the average yields on that production versus the rest of the book?
Yeah, Casey, the average yields on commercial growth that we saw was, you know, in the range of about 3% or so. That's versus about 3.20% of the portfolio, existing portfolio. We're seeing some declines there.
Okay. Maybe can you walk us through sort of how you're feeling about rate hikes and where you're positioned from an ALCO perspective and sort of what sort of deposit betas you're assuming to get there?
Yeah. In terms of the margin, going forward here, as we now expect that we'll see the Fed, the Federal Reserve move on increasing fed funds rates, could be as early as March, as some of the markets are indicating. Our baseline view for 2022 is that we'll see three rate hikes from the Fed, one in May, one in July, and another one in November. That said, we would expect from a deposit beta perspective, we don't expect to be moving rates higher, you know, initially. Probably won't see real movement on non-indexed deposit clients until we see going into the fourth and the fifth hike is our belief.
We won't see a lot of increase in terms of the deposit costs going forward, at least for this year. We do expect the margin will, on a core basis, will improve fairly significantly in the new year in 2022. We came out of the fourth quarter on a core basis. Now, this is ex PPP and accretion at 2.8%. That includes about 11 basis points of excess liquidity impacts. We think we're putting that excess liquidity to work. We did a good job by the end of the quarter. You'll see that in the first quarter. We're looking at core margin to increase 7 basis points or 8 basis points in the first quarter.
Then ticking up as short-term rates increase, starting in May and throughout the year that we'll end the year at around 3.10% or so core margin, again, not including the impacts of PPP, which are really coming down fairly significantly as we, you know, enter the new year. We only have $4 million or so of deferred fees related to PPP. So that's not gonna be any big impact at all this year. In terms of, you know, what's driving that is, I think if you look in the deck, we do say that we've got about 45% of our loan book is tied to one-month LIBOR and prime rates.
Those will move fairly immediately to any hikes from the Fed funds perspective and assuming LIBOR follows suit, which we expect that will happen.
Okay. Thank you. Helpful. I'll just ask one on expenses. Kind of hard. You've got a lot of moving parts this quarter, I know. I mean, what's sort of the starting run rate that we should work the 2% guide that you guys just gave for 2022? I'm assuming it's a little bit higher than the $95 million-$96 million that you were running at just as a starting point.
Yeah.
That would be helpful.
Yeah, Casey. If you look at our quarter, you know, obviously the reported number is quite high. We had the restructuring charges, but we also had a number of fairly unusual items that we would back out and not consider in our core run rate. Some of the commentary that I mentioned, if you back those out plus, you know, an elevated incentive accrual this quarter, if you back those out, we think we're at around, my feeling is we're at about a $96 million or so run rate coming out of the quarter. We are still guiding to be in about 2% growth off of that run rate.
Full year, we are looking for anywhere between $385 million-$390 million is what we're looking at in terms of full year expense going forward.
Hey, Rob, can you speak to what will happen in Q1? There's still some residual expenses and timing issues on the branch consolidation and the operations center.
Yeah. As I mentioned in my prepared comments, we're gonna have about $5.7 million of additional restructuring costs related to the branch closures, the 16 branch closures that will take place in March. Then, of course, if you look at it on a quarterly basis, we do have upticks in the first quarter, primarily due to you know, payroll tax resets, et cetera. So that would be the highest, you know, a higher quarter, and then it will come down. We're also, as you go into the second quarter, third and fourth, you'll see the impacts of those actions we've taken on the cost savings of about $2 million a quarter going forward.
Casey, we acknowledge it's hard from the outside looking in to get clear line of sight to the run rate of expenses. We were very busy in December. We admittedly, purposefully cleared the decks to take care of some things that needed to be taken care of. We do think that the run rate is $96 million for the quarter on sort of a clean basis around or about. When we talk about 2% growth rate on that baseline, that does assume the incentive plan is fully funded.
Mm-hmm.
Right.
The $385 million-$390 million guide does not include, I would assume, the $5.7 million.
Yeah, that's right, Casey. Yeah, excludes that.
It would include everything else, including like the amortization of tangible assets.
It could. Yeah, includes the amortization and, yep, everything else except that $5.7 million.
Okay. Helpful. I'll let someone else jump on. Thank you.
Thank you.
Thanks, Casey. Michelle, we're ready for our next caller, please.
Our next question comes from the line of Catherine Mealor with KBW. Your line is open. Please go ahead.
Hi. Hi, Catherine. Good morning.
Good morning. I remember last quarter you gave a core NII ex PPP guide of about 5%-6% for this year. How are you thinking about that number now that we've got some rate hikes in your assumption?
Yeah. If you exclude the PPP and accretion, well, just PPP, we're looking at about a 7.5%-8% growth rate on the net interest income line this year, primarily related to putting that excess liquidity to work in higher rates and the rate increases I just mentioned.
Okay, great. Then the 7 basis points-8 basis points in lower NIM that you're thinking about for next quarter, are you thinking there's a big change in your excess liquidity, or is that generally on a fairly similar balance sheet, although with some better loan growth?
Say that again, Catherine. We're basically on a core basis. Core basis, we're noting that it'll be an uptick from what this quarter is. About $287 is what we're looking at in Q1 2022 versus $280-
Oh, good.
Yeah. It's a positive.
I thought you were going down. That, okay. That
No, we're going up. Yeah.
Okay, great. That's what I was trying to figure out. Okay. Reported maybe is going down. But.
Yeah, reported will go down because, yeah, PPP will be out of the equation to the level we had in the fourth quarter.
Got it. Okay, that makes a lot more sense. You would assume within that some of the excess cash you had this quarter comes off as we move into next quarter.
Yeah, that's right. A lot of that excess cash did come off in December. You can't see it in the averages, but you'll see that coming off, as we had strong fundings of loans in December. We also put some of that money to work in the investment security portfolio as well. Yeah, that's gonna come down in a fairly large manner. We still think we're gonna have four or five basis points of impact from excess liquidity, but that's down from the 11 basis points we see in the current quarter.
Okay, great. One more if I could on fees. I was surprised to see service charges up, which is there's been a lot of conversations in the industry about that having, you know, weaknesses with overdraft changes. Any thoughts on what drove the service charges and, you know, any headwinds we might see in that line going forward?
Yeah. In terms of the uptick in the quarter, we did see, you know, that's typically, you know, a seasonal uptick on volumes, you know, from the holiday season. That, that's not unusual. I'll ask John to comment on, you know, I think your question is what where we're going with potential adjustments to policies relating to overdrafts, et cetera.
That's right. Yeah.
Yeah. Kathryn, I would say that really for the last year or two, we have made various changes related to overdraft charges, you know, to make them more consumer friendly. We are obviously very carefully watching the dynamic going on in the industry. There will be more changes. We do have a plan. We are not ready to share that yet as we go through the final decision-making process. You can expect there will be pressure on overdraft charges. Atlantic Union Bank, as a reminder, has won the J.D. Power Retail Banking Customer Satisfaction Award in the Mid-Atlantic for two out of the last three years. We do a good job for our retail customers.
We're very customer-focused, and we do understand the changing value proposition of consumer checking, and we'll be making some changes. There will be pressure that we'll apply there, and we'll have more to say about that shortly.
Okay, great. Thank you, John.
Thanks, Catherine.
Michelle, we're ready for our next caller, please.
Thank you. Our next question comes from the line of Brody Preston with Stephens Inc. Your line is open. Please go ahead.
Good morning.
Morning.
Brody, how are you?
Great. Doing well. I hope you're doing well too. Hey, I guess I just wanted to just real quick circle back on expenses. Rob, you know, I've got you at about like $18.6 million or so in one-time expenses this quarter between the branch closure stuff, the severance stuff, and the
The vendor termination. I've got your operating expense inclusive of amortization of intangibles at about $101 million. The higher end of the guidance that you put out for the 390 implies about $97.5 million. If we're building off of a base of $101 million into the first quarter with some higher payroll tax stuff, and then you've got the branch closures that come in, you know, in the second quarter, taking $2 million out, I can get you down to, like, back to $99 million-$100 million pretty easily. Where's the rest of the $2 million-$3 million delta coming that gets you down to that kind of $97.5 million quarterly run rate on average?
Yeah. Brody, As I mentioned, our view is that the run rate is the adjusted core run rate that we'd be looking at is about 96 for the quarter. I think if you look at the $120 million we reported, and you back out the $16.5 million, you're down to about a $103 million. You take out the various items I ticked off in my comments just that we don't feel like will persist. Those would be related to the contract termination severance and some costs related to strategic projects that won't recur. The other component is bringing that down would be the incentive accruals that we put through. Those were inflated by about $3.9 million or so.
Back that out, and you get close to that number that I'm then referring to. Now that performance incentive, you know, will have to find its way back into the run rate, because it basically was a pickup. Coming out of the third quarter, we thought we wouldn't have that level of incentive payout, but we had a strong fourth quarter.
Yeah. We had to catch up. Interestingly, Brodie, if you look at salary and benefit, excluding the incentive topping off, if you wanna call it that, it was pretty much even quarter-over-quarter. That's ahead of, you know, the actions that are coming with branch consolidation, et cetera. You know, we feel that we have a clear line of sight to be able to manage to 2% expense growth off of that $96 million-ish base, assuming incentives are fully funded.
Got it. Okay. Thank you for that. Thank you for clarifying some of it for me. On the growth front, I just wanted to circle back maybe to core C&I and other commercial. They were both extremely strong this quarter. I wanted to ask if some of that was utilization rate ticking higher or, you know, was it purely new client acquisition? In the other commercial, you know, could you speak to maybe the strength you saw on equipment finance this quarter?
Sure. David Ring, head of commercial banking, is here with me, wholesale banking, as we now call it. I'll ask him to comment on this, but I'll set it up. You did see, encouragingly, commercial line utilization tick up in every single month of Q4, but the reality is it was still pretty minimal. 2 8% is still about as low as you can imagine. It was not on the back. We weren't fighting declining utilization for a change. That's good, but that's not really what lifted the boat. I think that we had really good performance. Production in Q4 was the best that I've seen. Production, it was back-end loaded. December production was thunderous, and it was really a busy month for us. Equipment finance is performing well.
Leasing shows up in the other commercial category, which you'll see on the balance sheet reporting. We were really strong across all categories. Certainly C&I was the headliner. David Ring, do you wish to comment on what we saw happen in Q4?
Sure, John. Like you said, we had a record production for the quarter. We had higher paydowns, but you know, we clearly more than offset it with C&I and equipment finance. Real estate was pretty flat for the quarter, so most, if not all of the growth came out of the C&I and equipment finance groups.
When I think about the coiling spring, as we've referred to it a few times, it's, they're waiting. Commercial line utilization, you know, presumably has nowhere to go but up from here. I think we're off the bottom and have inflected. That'll grow with working capital needs and sales. Watch construction lending. Even though you saw that tick down a little bit, that's simply because projects completed rolled into permanent mortgage categories. We can see the construction funding commitments. We can see the funding schedules. That should be a headwind for the year. We look at our pipelines. They're far better than they were this time next year. Despite the tremendous production in Q4, they're actually in quite good shape right now. I feel like we should be on a growth footing, a solid growth footing at this point in time.
You couple that with our asset sensitivity, and I think that, and our expense reduction actions, we're in a good position. We're exactly where we need to be. We just need to execute.
Got it. On the securities portfolio, if I could just ask for two stats from you. Do you happen to have what the duration of the portfolio is? Do you have what % of the portfolio is floating rate?
Yeah. Brody, the duration is approximately five years. I don't have exactly what the loading rate component is, so I'll have to come back to you on that, but it's relatively low. I just don't have the number in front of me here.
Got it. Okay. If I could sneak one more in. The reserve for unfunded commitments, you know, it looked like it stayed pretty flatish, and so there was like a 7% increase maybe in the dollar amount, but it was flatish as a percent of loans. Is it fair to assume that the unfunded commitments increased about 7% as well quarter-over-quarter?
Yeah. That's right. Actually, I think it increased about $0.5 million to $7.5 million. I think it's at $8 million now.
Yeah.
Yeah.
All right. Thank you very much.
Thanks, Brody.
Michelle, we're ready for our next caller, please.
Thank you. Our next question comes from the line of David Bishop with Seaport Research. Your line is open. Please go ahead.
Good morning, David.
Good morning, gentlemen. Most of my questions have been asked and answered. Just curious, your view of excess liquidity and cash. I saw you put some to work there at the end of the quarter, the cash about $800 million. Just where you see that potentially settling into, over the course of the year.
Yeah. For the most part, we're looking at that excess liquidity put into the loan book and the loan growth. We have increased our investment portfolio over the quarter. I think we were up about $300 million quarter-over-quarter in terms of investment portfolio. We're about 21% of total assets in investment portfolio and putting that at work in mortgage-backed securities and municipals in a 60-40 kind of a percentage of 60% mortgage backs, 40% munis. We're putting those on at a blended rate of about 2.2%. I don't think you'll be seeing that security portfolio continue to increase.
It'll probably come down over time through maturities, but we wanna use that excess liquidity into the loan growth that we're envisioning occurring well throughout the year, basically.
Got it. One final question, maybe on a dollar basis. Just curious if you have the dollar amount of the loan pipeline at year-end versus last quarter. Thanks.
Yeah, at the end of the year, the pipeline was around $2.2 billion, which was up fairly compared to last year co-
Which was up roughly $650 million. Not everything is gonna close, and we can get into the details behind that, but we're consistent in terms of how we view it. This is part of why we're bullish and feeling confident about our ability to deliver on high single-digit loan growth.
Great. Thank you.
Thanks, David. Michelle, we're ready for our next caller, please.
Our next question comes from the line of Laurie Hunsicker with Compass Point. Your line is open. Please go ahead.
Hi, Laurie. Good morning.
Hey. Good morning. Just wanted to go back on expenses. On slide 12, you break it out really nicely. Just wanna make sure I'm understanding this right. The $4.4 million increase in salary and benefits, obviously you broke that out $3.9 million, plus the $500,000 contribution to ESOP. Are you suggesting the $3.9 million is non-recurring?
No. What I'm suggesting, Laurie, is that gets fed back over a quarterly basis as opposed to, you know, the hit, the increase in the quarter. So, typically, we'd be accruing for incentives evenly throughout the year, depending on what our look is for the year. Through third quarter, we did not think, you know, the performance was gonna end the year at what it did. We had not accrued as much that was needed by the end of the year based on the performance in the fourth quarter.
Yeah. If I think about my five years here, we generally have done a pretty good job in terms of estimating incentives so that we aren't really subjected to these year-end top offs. The fact is, we have not done as good a job last year and this year just due to the environment. It's been very difficult to predict, you know. We're pretty conservative. I think what Rob is saying is we'll simply have it spread out more evenly this year because I think we're gonna be able to forecast with more confidence.
Yeah. That's right, Laurie.
Okay. Just to clarify, your $96 million run rate, because I think I'm like Brodie, my math somehow is higher. Your $96 million run rate includes the incentive accrual fully baked into it. Is that correct?
Yes, that's right. Now that $96 million, as I mentioned, we were expecting a couple% growth rate on that. That's fully baked in that number. But you're right.
Got it. Okay. When we think about $96 million, obviously first quarter is elevated by the $5.67 million of branch closures, plus you have the FICO that hits in that first quarter. When we think about sort of the June quarter starting run rate, we're $96 million plus the 2% growth rate annualized as we go forward into 2022. Is that right?
Yeah, you know, it's again, it's not evenly this first quarter is going to be much higher than you'll see in the second, third, and fourth quarter. Yeah, that's basically right.
Yeah. First quarter is always seasonally high for tax purposes, as you know, Laurie. Again, as a reminder, not all we have $8 million of costs identified that are coming out of the system as a result of branch restructuring, the closure of the Ruther Glen Center. That kicks in. Really, it takes into Q2.
Okay. Right. The $2 million run rate savings. Okay. Just remind me, your payroll taxes are about $2 million, or do you have a better number on that?
Should I get, Laurie, just that one?
The payroll taxes, the FICO, how much is that?
Payroll FICO tax, $2 million. Is that your question, Laurie?
Yeah.
How much is it? How much is FICO tax?
How much is FICO for this quarter?
I can follow up with you offline because that's
Yeah. Thanks, Laurie. I have that number. I just wanted to-
Yeah.
It's going to adjust up.
Okay. Two more questions. As we think about 2023 expenses, because I think most of us are modeling our price targets off of 2023, how should we be thinking about expense growth in 2023?
Yeah, you know, as we project forward, in our three-year forecast, we're looking at about 4% growth rate in expenses. Of course, that could change depending on the environment, where revenue is going, et cetera.
Right.
As we see a rising rate environment, in you know where we are here with inflation, et cetera, we're looking at about 4%. Now, you know, if you look at the 2022 numbers, I think we'd be in the 4% or so increase, if not for the cost actions, reduction actions we took. Fairly consistent going forward as well.
Yeah, I agree. Again, we should be in an improving revenue growth environment. You know, at long last, we will be a beneficiary of a rising rate environment, and I think we're well set up for that. It's all about operating leverage, Laurie. We'll continue to manage expenses to do what needs to be done.
Okay, great. One last question, just looking for clarity on the BOLI. I know it increased $559,000. Was that the death benefit, or do you have the total of the death benefit? I think I missed that in your comments. Thanks.
Yeah. The BOLI benefit there was about $500, a little over $500 for the quarter. Back that out and that will get you the normal run rate.
Great. Thanks for taking my questions.
Thank you, Laurie.
Thanks, Laurie.
Michelle, we're ready for our last caller, please.
Thank you. Our last question comes from the line of William Wallace with Raymond James. Your line is open. Please go ahead.
Hi, Wally. Good morning.
Thank you. Good morning to you. Maybe just real quick for David, we talked about line utilization. What was line utilization pre-COVID? Are you guys modeling for increases in your high single digit guide for the year?
Well, it's a little hard to say because of the growth of the banks and its changing complexion, but low forties is-
Yeah, I think the fourth quarter before COVID was at 38%. Does that sound right, Dave?
That's right. It was 38%, and now it's 28%. We thought that was a little low back then.
Right. Kind of 40%-ish.
Right.
Low 40%s.
I do predict that businesses, as we've seen after various shocks before, will run with more liquidity. So maybe line utilization will be lower structurally than it used to be, but it's not going to be 28%. I mean, that's sitting there waiting on inventory, the ability to fill jobs, to grow sales, et cetera, et cetera. So there's upside there. You know, there's about $25 million of upside for every percentage point.
Yeah.
Okay. Are you guys modeling for increased utilization in 2022 for your guide?
No, we're not.
That'll be upside.
Great. John, in your prepared remarks, you gave three kind of longer term goals, and the third one was, I believe you said M&A, as a tertiary strategy. And then I think you said under the right circumstances. Could you provide some commentary on what the right circumstances for M&A.
For sure. I think, Wally, thanks. If you look, I've been here over five years now, and if you look at you know, the two that we've done, which were really instrumental to the creation of the bank as we know it today, and arguably on a combined basis were transformational. What did they have in common? There was no question about their strategic fit. There was no question about the financial aspects of the deal. They made perfect sense, and they were clearly signaled. How do we think about this? You know, we don't even think about anything that does not make strategic sense and that financially would make sense. You really get into kind of four big issues. One, execution risk. How confident are we that we can pull it off well?
Two, what is the opportunity cost? Exactly what is not going to happen if we put the resources on that type of opportunity? Cultural fit. One that we've really come to better understand is what I'll call differences in strategy. We can be more accommodating where we don't have perfect alignment on these issues for smaller deals. You can't really accommodate differences if you thought about something larger. Wally, I think, you know, what's changed in our mindset is we're on a strong organic footing, and we will be a beneficiary of rising rates. We're watching what is happening in the industry with the rise of, you know, financial technology, and we do intend to participate in that. From our standpoint, it's an option. We want to preserve it.
I'm not saying we won't do it. It is more likely than not that if we pursued it would be something smaller. I will tell you, we did give thoughtful consideration to a larger-scale accommodation last year, and we concluded it did not make sense for us. It just didn't pass the test of execution risk, opportunity cost, cultural fit, and differences in strategy. You notice we haven't done anything. Quite candidly, a year ago, when we thought we would be in a zero rate environment for many years to come, that seemed more compelling than it does now. That's how we think about it. Not saying we will, I'm not saying we won't. Anything we did, if we did anything, wouldn't surprise you. I think we've got the track record to back that up.
Okay. Thank you for that, John. Just two quick follow-up questions. I believe David, it might have been you or John, said that the pipeline was $2.2 billion at the end of the year from $650 million. Was that $650 million at the third quarter or at the end of last year?
That'd be, compared to year-over-year.
Okay. Okay.
Yeah.
Okay. Rob, just go ahead.
No, I was gonna say, yes, going into 2021 versus going into 2022 is what Dave was referring to.
Rob, just you know, I appreciate all the commentary around your net interest margin and your timing of rate hikes, but just so I don't have to do the mental gymnastics of figuring out what the timing difference in our models might be around when we're modeling hikes, can you just kind of boil it all down and give what your expectation of margin expansion would be per 25 basis point Fed hike?
Yeah. For 25 basis points, we're looking at about 8-9 basis points of margin expansion.
Okay. Okay, great. I don't know if we're out of time or not, but if we're not, John, I'd love if you could talk about any fintech partnerships, like how close you might be or how you're kind of thinking about building those partnerships to drive fee income. Thanks.
Yes. Well, we intend to do an investor day in May, and we'll take you into a deep dive, you know, on that and really the rest of our various strategies. As a reminder, we were one of the initial investors in the Canopy Fund, and that, Rob, going from memory, would have been 2019 timeframe.
Yeah, that's right.
We have been leveraging that, and other mechanisms to really vet financial technology partnerships. Thus far, I would generally characterize the types of financial technology partnerships that we've engaged in as providing services and products that complement the existing lines of business, product base, et cetera. Think of it as features and functionality for mobile banking, online banking, and then back-end processes as well. We can give you lots of examples of that. Blend would be an example, which we use in our mortgage company. We learned about that through the seat we have at the table. When we talk about these funds, I wanna be clear, these, we don't think of these as financial investments per se. Yes, they're financial investments, and yes, they've been successful.
The real reason why we're interested in it is it allows us to build relationships, as I said in my comments, to look at a carefully screened and vetted set and to really gain insight, so it informs our strategy. What will happen next is that we are really interested in the opportunity to build what I would call new business lines potentially. We see blockchain as something that is potentially very disruptive to existing payment mechanisms. There are coming real-time payment networks that could potentially and underscore potentially render ACH, Fedwire, Zelle, things like that, obsolete. We do not wanna be a late adopter on it. We're interested categorically, especially in payment networks and what I would call back-office applications.
You know, the ability to, you know, go from start to finish on a home equity line in five days, could be a possibility. We don't wanna get ahead of ourselves on this, Wally, but what we're saying is we're now moving this to the next level, and we've invested in other funds to expand our network of partnerships. We're not gonna do anything, I think, that would surprise you. We don't have any current intentions at this moment for engaging in what I would call stored value concepts, which is, you know, like be a gateway to Bitcoin. I'm not saying we will not do that, but I'm simply saying that we are especially focused on emerging payment networks and blockchain as a technology to, vastly improve back-end processes. We'll see where it goes from here.
Okay, great. Thank you so much. Appreciate your time, guys.
Sure thing. Thanks, Walt. Thanks, Wally. Thanks everyone for joining us today. We look forward to talking with you next quarter. Have a good day.
Thank you.
This concludes today's conference. Thank you for participating. You may now disconnect.