AUB (2020 - Q4)

Ladies and gentlemen, thank you for standing by, and welcome to the Atlantic Union Bankshares Fourth Quarter Fiscal Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Cimino, Investor Relations. Thank you. Please go ahead, sir. Bill Cim

Thank you, Gigi, 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 remotely for the question-and-answer period. Please note that today's earnings release and accompanying slide presentation we're 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 2020. Before I turn the call over to John, I would like to remind everyone that on today's call, we will make forward-looking statements which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise 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 a further discussion of the Company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ 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.

Thank you, Bill. Thanks to all for joining us today, and I hope everyone listening is safe and well on 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.

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 $0.72, down approximately $1.8 million or $0.02 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 $0.93, which was up approximately $15 million or $0.19 per common share from the third quarter. Non-GAAP pre-tax pre-provision 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 pretax 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 1.52% 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 31, which was down 7 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% 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% from the third quarter, and the total allowance for credit losses as a percentage of adjusted loans decreased 13 basis points to 1.33% 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 31 compared to 4.5 times at September 30. 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 forecast period, the CECL quantitative model estimates expected credit losses using -- estimate from the 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, and 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% 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, net charge-offs were $1.8 million or 5 basis points of total average loans on an annualized basis compared to $1.4 million or 4 basis points for the prior quarter and to $4.6 million or 15 basis points for the fourth quarter of last year. As in previous quarters, the majority of net charge-off, approximately 63% in Q4, came from non-relationship third-party consumer loans, which are in runoff mode. Now turning to the pretax pre-provision components of the income statement for the 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 9 basis points to the net interest margin in the fourth quarter, up from the 8 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 8 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. The 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 8 basis point decrease in the cost of funds to 37 basis points was primarily driven by a 9 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 were 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 prepayment 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 the 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%. For 2021, we expect the full year effective tax rate to be in the 16.5% to 17% range. Turning to the balance sheet. Period end total assets stood at $19.6 billion at December 31, a decrease of $302 million from September 30. This level is primarily due to the SBA forgiveness of PPP loans. At period end, loans held for investment were $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 paydowns 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 9 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 prudently as the deployment of capital for the enhancement of long-term shareholder value remains one of our highest priorities. From a capital perspective, the Company 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 Bankshares 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 $0.25 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 the 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.

Thanks, Rob. And Gigi, we're ready for our first caller, please.

Our first question comes from the line of Casey Whitman from Piper Sandler. Your line is now open.

So 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 different areas of footprint and where you're seeing commercial line utilization pick up or maybe that's been purport wide.

Yes. For the record, I said that we could expect to -- we would expect to see 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, all in, overall is probably more in the mid-single-digit growth rate, Rob?

Yes. If you exclude the third-party loan runoff, we expect to be in the 4% to 6% on a full year basis. On commercial side, it's probably at the higher level, 6%. And consumer is probably growing about 3% or so on average.

Yes. 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 a 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 it will pick up. We do have Dave Ring, Head of Commercial Banking, on. Dave, I want 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.

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. If you recall, we just started that business at the end of December last -- in 2019. That business is doing very well, serving our footprint. Central Virginia, our home court, is also -- 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, had a lot of paydowns on the 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. Casey, did that answer your questions?

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?

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 and 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. That 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, probably 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 going to announce something in Montana. So from our standpoint, yes, it's -- 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, yes, 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 will 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 that's -- 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.

Our next question comes from the line of Eugene Koysman from Barclays.

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 and the new originations as well as slowing accretion?

Yes. In terms of the margin for first quarter, I think you're going to see a 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 180 -- 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 you've seen in the fourth quarter. Accretion is going to be fairly similar, a bit down. And then on a core basis, when you back out all of that, we -- our core net interest margin came in about 3.05% this quarter, which is fairly consistent with what 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 bottom 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 earning asset 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 PPP two 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.

Got it. And just wanted to follow up, what levers do you have remaining to help support the GAAP NIM? You mentioned deposit repricing or liability management.

Yes. 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 30 basis points. If you looked at it in December, we were actually down to 27 basis 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 $1 billion of high-cost CDs that will be maturing over the next six months. The average interest rate on those CDs is in the 1.50% range. Actually, over the next two months, we've got some CDs that are maturing in the 1.70%. 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.

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?

Yes. Yes. 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, 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 beon the table. We've previously had a $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. I 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.

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

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 onetime kind of year-end accrual. I think your guidance last quarter was for your core operating run rate to be around $88 million. If we back out that $7.4 million as well as some of the COVID-related expenses, I can get closer to $91 million. How are you guys thinking about that run rate going into the first quarter of this year?

Yes. Thanks, Stuart. Yes, so the way I look at the run rate, we had some, as you mentioned, some incremental incentive expenses and some other items. So I get close to kind of where you are, $90 million to $91 million, on a kind of normalized run rate this quarter. We've just completed our 2021 financial plan and have looked at 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 million to $90 million 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 million to $92 million range on a quarterly basis, probably on the higher end of 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.

Yes. 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 baked in. That's run rate, and 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 upfront 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 and that possibly wouldn't have been there otherwise.

Yes. There are other projects 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, in our wealth management business, which should drive revenue, and our commercial business, teeing up an FX opportunities and small business lending opportunities that could help with the revenue side, and on that front, just to continue from a run rate point of view, we're also looking at non-interest income kind of being in the $30 million to $32 million 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, John and Rob. And Rob, turning to the reserve release this quarter, you guys did a great job on Slide 10 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 1Q, given the January forecast for Moody's, yes, was incrementally better than what we saw in December.

Yes. Exactly. Yes, thanks, Stuart. So in terms of where we are at the end of the fourth quarter, as we mentioned, our loan -- our CECL 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 be -- do very well, we haven't seen an uptick in that, and then, of course, risk rating downgrades, et cetera, which we have 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 is inclusive of qualitative factors. So think about the quantitative model being overlaid with qualitative factors, so about 1/3 of that. In terms of looking forward, yes, we just received the January Moody's outlook, and it's improved, again, as you noted, so we are feeling like this continued improvement here, we still haven't seen any metrics deteriorating 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. So -- 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'd be some release related as those charge-offs come through throughout the year. So we do expect that our reserves would -- all things remaining where they are today and what the outlook looks like, that we could see further releases going forward.

Okay. I guess just kind of one follow-up on that. Would you -- I mean, do you expect to match charge-offs with provision and then some kind of further level of release as your consumer book runs completely off and if we do see the credit outlook really improved throughout the year?

Yes. My view is that you -- we won't be matching charge-offs. Basically, charge-offs were kind of already reserved for, that we'd be providing for what's coming down the pike 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's still going to 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 see so far.

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

So just staying with credit, Rob, can you give us an update on where we are with total criticized?

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...

I didn't see it. I will go back and look for it. Okay.

Yes.

And then on the hotel book, I mean, your deferral return to payment trends are amazing. And obviously, hotels is to stand out. 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, that is 60% LTV. Just wondered if you had more color. And if you had more color in terms of what you detailed on Page 7, just those 11 loans sitting on conferral for $79 million.

Yes. Laurie, we have Doug Woolley, Chief Credit Officer, on. Doug, do you want to give us your perspective on the hotel portfolio?

Yes. The hotels are spread around the Virginia footprint and, as the slide deck says, the majority of them, two-third, are interest only. That's a part of our restabilization process in support of our hoteliers. And as you also see, it's -- almost 90% of the hotels are off non-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 of hoteliers. As we know, are operating under much lower breakeven operation percentages. So for the most part, that 55% shows them operating as comfortably as you can. And 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.

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, 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 it's -- we've got our arms around this portfolio, and we'll work with them as they get through this.

Okay. And then -- sorry, just one more question. LTV, do you have a tighter number than the approximately 60%? Or is that what I should be using?

Yes. Laurie, we don't reappraise hotels. We did not reappraise hotels because of COVID. So that number is as good as any number. Obviously, hotel values have weakened. 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.

It's a good equity buffer there.

Yes. Hey, Laurie, just to get back to your earlier question, our past dues are -- is about 39 basis points at the end of the fourth quarter, which is down from about 61 from last year's time frame. So...

Okay. Yes. I guess I was looking for your actual credit size. I think your credit size was about $1.2 billion at September.

We will detail that in the 10-K. I can...

Yes. That's right. That actually is not in the earnings release, but we have that -- we'll be filing the K.

The increases and special mention substandard had been modest, but we've seen some, but nothing alarming.

Okay. Great. One last question, Rob, for you. Just -- I want to make sure I have this number right. The PPP fees received that slowed into net interest income this quarter were $15 million versus $9.9 million last quarter. Is that correct?

Yes. That's the fee income component, right.

Okay. The automatic recapture, so -- I guess, if I'm looking at that then, if I just take that off of your 3.32% margin, forget loan accretion, I'm just looking at PPP, that's a 34 basis point impact into margin, so we're down at 2.88%. I mean -- and I get that this number will be noisy, but I guess, what I'm getting at is, we fast forward to when we don't have prepay fees coming back through, how should we be thinking about core margin testing that out? Or am I doing something wrong with my math?

Yes. 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...

1%...

That's how we get to the core NIM, ex PPP, as 3.05%, loans, net of PPP loans, at least on average, for the quarter. We reported earning assets of $17.8 million. PPP loans average was $1.4 million, so $16.4 million. So back out the income, but you also got to back out the denominator as well with it.

Okay. Okay. And then one last question on that, how much is actually remaining of PPP fees?

Say it again, Laurie? You kind of...

How much more is remaining on the PPP?

Yes. How much actually remains of the PPP fees?

The fees, we've got about $17.5 million left.

Correct. That's for round one, to be clear.

Yes. Yes.

We're not talking about -- this is current round.

We haven't got our knees around PPP two yet, but there should be some fees -- deferring fees coming out of that, as you imagine, as you know.

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

I would like to maybe dig into the expense questioning a little bit more. That -- I think it was $7.4 million of incentive comp accrual, was very high. I mean it's 3 times or 4 times what I think we've -- what 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 I'm just kind of -- help me think about why that accrual was so high.

Yes. 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 4 quarters. We -- we're 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 incentive 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.

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.

Yes.

So did you adjust the accruals then in March when the pandemic started? Because I would imagine you're below your prior budget prepandemic.

Yes. We did reduce the accruals aback. And then as the year went on, as things looked better, we increased that fourth quarter.

Yes.

It even looked better than what we had originally thought coming out of the third quarter so we ought to adjust.

And if we hadn't finished as well as we did, it would have been lower or not, but there is no guarantee. It's variable.

No. I understand. And then you've guided $88 million to $90 million, and then you ended up at $90 million to $91 million when you make adjustments for a lot of the stuff, the kind of non-recurring stuff. What caused the creep there in the quarter?

Yes. There were various things that came through. Some of them -- as we've relayed too, we've been investing in some projects. 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. So it's kind of a combination of a number of different things, Wally, on that front.

Okay. 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?

Yes. Yes.

That's right.

Yes. It's -- Wally, we've got -- again, we have several things. We can talk -- we'll talk to you later in more detail. We have some technology-enabled initiatives and things like the fraud unit, other operational functions of the bank that do cost money upfront but will result as 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.

Okay. All right, I appreciate all that color. I don't know if you -- 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 update?

Yes. We've sort of broadened that in the sense that we don't just think about the Truist 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 have -- we're kind of quiet about our hiring, but we had been hiring out of those organizations. What do you have to say about that, Dave Ring?

Sure. That's right, John. We've really spent a lot of time focused on companies -- 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 and business 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 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 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.

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

Can you hear me?

We can.

All right. Great. 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.

Dave Ring, do you want to speak to that, how the pipeline looks, how we've seen it trend?

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% 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 C&I 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.

Okay. Great. And I guess it sounds like you still feel like the pipelines and the sort of the throughput is supportive of maybe mid- to high single-digit kind of core, ex PPP, loan growth moving forward?

Well, I wouldn't say high...

Yes, for this year, right. We're driving 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.

Understood. And last one for me. Just on the margin, the core margin was -- it was down just a little bit, but the NII growth was -- the NII 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 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?

Yes. Brody, it's Rob. Yes, 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 -- at the -- we came in about 3.05% on a core margin this quarter. We expect it to kind of stabilize in that level, give or take a few basis points. In terms of what we're pricing on loans on the commercial book, new originations, they average across 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. So 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 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 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 deposit is about 30 basis points. We think we'll come -- 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, I mentioned earlier, you may not have been on the call yet, but about $1 billion of CDs are running off over the next 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% is repricing down to 15 basis points on our one-year, no-penalty CD product. So that should provide an offset some continued earning asset yields and keep core margin in that stable 3% to 3.05% range going forward.

Thanks, everyone, for joining us today. We look forward to seeing and/or -- in seeing you all soon and talking to you again next quarter. Take care.

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