Q1 2021 Atlantic Union Bankshares Corp Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the Atlantic Union.
Thanks, sure as first quarter 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 here on the session you will need to press star one of your telephone. Please be advised that today's conference is being recorded if you were quiet Union further assistance.
Please press Star Zero I would now like to turn the conference over to Bill for me now. Thank you. Please go ahead.
Thanks, Felicia and good morning, everyone.
I have Atlantic Union Bankshares apart from here.
Uh huh.
Price.
If you get from Iraq with me today.
I also have other members from our executive management team with us virtually for the question and answer period.
Please note that today's earnings release and accompanying slide presentation, we are going through I'm.
Available to download on our Investor website investors started Atlantic Union Bank Dot Com. The slide presentation is also available to those on the webcast today.
During today's call, we will comment on our.
On their performance using both GAAP metrics and non-GAAP financial measures important information about these non-GAAP financial metrics is included.
Reconciliations to comparable.
GAAP measure, which is included in our earnings release from the first quarter swing from one.
And in the appendix of our slide presentation.
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 first quarter.
2021, and our other SEC filings for further discussion on the company's risk factors.
Information regarding our forward looking statements, including factors that cause actual results to differ from those expressed or implied in any forward looking statements.
All comments made today on this call are subject to that Safe Harbor statement.
At the end of the call. We can take questions from the research analyst community and now I'll turn the call over to John Asbury.
Thank you bill thanks to all for joining us today and I do hope everyone listening is safe and well for those who follow US closely you'll note that for the last year, we've been consistent in our commentary that we are managing through two significant and distinct challenges first the continuing COVID-19 pandemic, which we certainly hope is on its latter stages and second on near zero short term rate environment that we.
Beliefs are still has years to run with all of its applications for the company's profitability we.
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 we remain keenly focused on reaching the full potential of this powerful franchise. Despite the present challenges our mantra of soundness profitability and.
Growth in that order of priority informs how we run our company. It sound Bank is and will remain our highest priority a prudent and conservative credit culture served our company well during the great recession, and it's serving us well on the current economic environment. Our loan modifications have helped our clients whether the storm having peaked at about 17% of other non PPP loan.
Folio in May of 2020, and the remainder is a minimal one half of 1% assets people 15th our capital position has been strengthened and we have ample liquidity. Our second priority is profitability. Despite the noise on the Q1 expense line you can see the impact of our actions to align our expense run rate to the new revenue reality of the lower rate.
Environment, we closed five branches in the quarter, bringing down the total number of branches by 'twenty or 13%. Since this time last year, Rob will walk you through the expense details in his comments, but we continue to guide to a quarterly core expense run rate of about $92 million per quarter.
While we could further reduce this expense run rate, we are choosing to invest over the short and medium term to make our company more competitive more efficient more scalable for growth over the long term. Some of the spending is for projects that we did push out doing our initial expense reduction actions early last year and we feel now is the right time to get them done ahead of what we believe is going to be quite.
A strong economy a number of these initiatives are front end loaded expenses, such as third party consultants, but they will result in lower annual expense growth rates on operating leverage improvements overtime. After they've completed as they will make our operations more efficient and more scalable all must pass our internal business case hurdles in order to obtain approval.
As for growth, we are bullish on our economic outlook and believe we have a long runway ahead of us 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 will.
Main focused on and believe we are benefiting from the disruption occurring at two of our largest competitors. We do believe the pressures of a long term near zero rate environment, coupled with the rising tide of customer expectations for digital product offerings is going to motivate for other bank consolidation, we're well positioned for this and we will thoughtfully evaluate opportunities to copper.
<unk> organic growth through disciplined M&A consistent with the strategy we've previously articulated.
Let me provide a quick review of our pandemic response about 90% of our non branch personnel continue to work from home all branch lobbies have been open to customer walk in traffic since last fall corporate offices remain closed to all but essential personnel and will remain that way through at least the first half of the year worked from home continues to go well and we're certainly not go on to rush.
Bringing people back on given continued safety and social distancing challenges. The short term COVID-19 trends in our footprint have been good recently and the vaccination programs are gaining speed, but we want to be prudent and ensuring the safety of our teammates on our customers. We are hopeful these positive trends will hold over the coming months as vaccination levels continue to rise.
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I'll now turn to PPP forgiveness in round two of the program. The first rounds of the Paycheck protection program once a brand builder for Atlantic Union and our results support that statement, we remain focused on converting as many as possible of the more than 3000, new to bank PPP clients from the first rounds of full relationships. It is clear to us that there's a great opportunity here.
From the negative experiences many of them had with larger banks that caused them to come to us seeking help we took our successful round one PPP plan and we improved on two we started taking applications for round two as soon as the small business administration open to banks our size on January 19th and we received SBA approvals for APA.
Proximately 5500 loans totaling around $542 million. So far we estimate this will ultimately represent about $25 million of additional net fee income for us it's difficult to predict how much continued demand there'll be for round two but the application flow has certainly slowed.
Round, two PPP first and second draw loans are important and that they will help businesses through the enphase and the pandemic. This is both a boost for our clients, which should help mitigate credit losses from the pandemic and its also on unplanned revenue opportunity for us.
The SBA past round, one PPP loan forgiveness during the quarter for about two months before reopening on at the end of the period approximately 5600 clients receive forgiveness totaling approximately $600 million to the first quarter of this year, we do expect that to increase significantly in the second quarter for example, since the first.
Ended we've now had approximately 2300 clients having received forgiveness for $222 million.
As I've said before our customers have learned to bank differently.
We've seen the usage of our digital channels increased substantially from the prior year. For example, digital logins are up 50% since this time last year and up 21% since the beginning of the year mobile check deposit utilization is up 33% year over year Zelle utilization is up 158% year over year.
Hard control users are up around 241% year over year and commercial mobile deposit dollar volume is up 48% year over year.
We continue to work on new projects and improve the omni channel customer experience with quarterly releases and upgrades to our product offerings. During the first quarter of the year, we launched our on demand, which provides new deposit account customers with prequalified credit and lending offers at the time to open new accounts, we announced a newly hired dedicated leader of business banking is it.
One of our increased focus on this opportunity we rebranded Middleburg financial to Atlantic Union Bank wealth management to better leverage on a bank brand and continue to make progress on the rollout be enhanced wealth platform using black Diamond technology.
And we enhanced our call center technology to reduce time needed to authenticate our callers.
We also have a number of additional customer experience improvements that we expect to implement later in 2021, including the use of zoom and <unk> signed for lending applications and closings as well as having a completely digital client experience from application to closing in our mortgage business as I've said before we're not standing by waiting to return to the office, but we're making step.
Progress against our strategic plan.
Now turning to credit we remained pleasantly surprised that the COVID-19 credit impact has not materialized as we initially forecast and feared while the outlook is still in flux. We are more confident on credit than we have been since the pandemic began even more so than at the end of the fourth quarter and we don't expect credit issues to be problematic barring some unexpected.
<unk> negative development with the COVID-19 outlook, it's clear to us that the resiliency and diverse nature of our markets coupled with additional government stimulus and an accommodated federal reserve have had a positive impact and we have seen the unemployment rate in our markets improve faster than expected here.
Here in our home state of Virginia March unemployment came in at five 1% that's down from five 6% in December and it's also 90 basis points better than the National average our loan book also helps our credit performance. Since we don't have outsized exposure to the industries most directly impacted by the social distancing measures put in place such as home.
Sales restaurants had retail.
As we continue to climb out of the systemic downturn on our credit losses have been minimal so far charge offs. In Q1 remained at very low levels of only three basis points annualized core if you exclude PPP loans at four basis points annualized at some point credit losses are expected to normalize, but given all of the stimulus PPP round two on it.
Strengthening economy, it's very hard to point to a specific time when that may be looking ahead, we do expect normalized levels of credit losses. After the impact of the pandemic works its way through the economy.
Rob will talk you through the provision for credit losses on our seasonal modeling, but by all indications and metrics credit remains solid.
Our total modification balances as of Thursday April 15th were approximately 185 loans under modification with balances totaling approximately $64 million and thats, 4% of our total portfolio. This was down from $1 $9 billion in 4000 loans as of April 24 2020.
Which was down approximately 15 per cent of the portfolio as I mentioned earlier modifications peaked in may of 2020 at around 17%.
Other remaining loan modifications approximately 70% over $44 million accounted for by seven hotel loans.
Our exposures to the most in focus Covid sensitive industries are limited and are outlined on slides six and seven of our accompanying presentation. The amount of loans under a modification in these segments decreased from 16 loans for $83 million on January 18th 211 loans for 48 million as of April 15.
The majority of which do pertained to hotels as.
As you May recall, our third party consumer portfolio has been winding down for some time the quarter end balance for our lending club exposure was about $40 million from continues to run off payment deferrals in the lending club portfolio declined to approximately $363000 during the quarter as accounts, a one off modification and became current.
The remaining portfolio for lending club is performing well and it's in line or better than our expectations.
Overall, we continue to proactively work through this pandemic event with our clients, while mitigating credit risk wherever we can.
Our goal remains to achieve and maintain top tier financial performance, regardless of the operating environment, our financial outlook will ultimately depend in part on the continued success against additional flare ups of COVID-19, and other main operating areas and the vaccine rollout.
This will be one of the primary factors that determine the length of the disruption in our markets, but we believe we are in the late innings of this now we continue to face near term uncertainty, but as I mentioned before the economic outlook has improved and we are optimistic while there may be some dips along the way to a full recovery. We believe the overall trend will remain upward and accelerate from the back half of 'twenty.
'twenty one the data continues to demonstrate better economic performance in our footprint and would've seen overall on the national economic model projections and this gives us confidence in our outlook on Google again point out that the Virginia economy is fairly unique with a broadly diverse set of regional economies and about 20% of it is anchored in some fashion by the federal.
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The additional stimulus should be a net positive for the federal government's contribution to the Virginia economy.
While overall loans declined by two 6% annualized excluding PPP, our Q1 commercial loan growth was relatively flat, excluding PPP loans as we expected our commercial loan categories of all types on a combined basis declined about 0.6% annualized commercial line utilization dropped one percentage points over.
The quarter to 25% and that's well below our normal line utilization of about 40%. This evidence of state ample liquidity among our business borrowers looking ahead, we are optimistic about the leading indicators for loan growth currently our loan pipelines are back to pre pandemic levels in our Q1 commercial production was strong.
In fact, it was better than what we experienced in either Q1 2020. Our Q1 2019, we do believe we are now on an improving growth trend line and we expect that loan growth in the second half of the year will be better than the first half and that we could hit 4% to 5% loan growth for the full year, excluding our third party consumer runoff in PPP loan activity.
We see no reason at this time, while we have not returned to high single digit loan growth from 2022, our franchise our market dynamics on our economic outlook certainly support that opportunity.
Our goal remains creating a company that's able to consistently deliver differentiated performance as I mentioned before we are working on ways to make the company more efficient more scalable, while improving the customer experience and should see operating leverage improvements as a result, once we get through all of the noise of PPP, we would expect to publicly reestablish our top tier financial.
<unk> targets.
So we remain focused on credit risk mitigation and positioning for success, while we busily work to improve our company its efficiency and scalability and provide a better customer experience at the same time, we always try to think of a few steps ahead, and we do see strategic opportunities on our horizon.
I am convinced will emerge from this crisis stronger better more efficient than before and that will give us opportunities organic and potentially through a day.
We are leveraging our learnings on granting a newfound capabilities agility and innovation and to the company's culture. So that we have the flexibility to adapt to the lower for longer rate environment in the coming next normal whatever that may be while delivering a differentiated customer experience.
We continue to see opportunity on all of this chaos and we've weathered the storm better than I could have hoped by taking care of our teammates and our customers and protecting this bank.
I remain confident in what the future holds for us and the potential we have to deliver long term sustainable financial performance for our customers our communities our teammates and our shareholders.
And I'll end with my usual comments, Noah well on Atlantic Union Bankshares remains a uniquely valuable franchise, it's dense and compact in great markets with a story. Unlike any other in our region. We are scalable with the right capabilities, the right markets and the right team to deliver high performance even on the most trying of times I'll now turn the call over to Rob to cover the.
<unk> financial results for the quarter.
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 first quarter of 2021, I think it is 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 continue to manage the company through the current COVID-19 pandemic, we're preparing us for what comes next.
<unk> 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 income.
Stronger once the pandemic has passed.
Now, let's turn to the company's financial results for the first quarter. Please note that for the first for the most part my commentary will focus on Atlantic Union's first quarter financial results on a non-GAAP operating basis, which excludes an after tax debt extinguishment loss of $11 $6 million, resulting from the prepayment of long term federal home loan Bank advance.
As in the first quarter and also excludes $64 million in after tax debt extinguishment losses in the fourth quarter of 2020 for clarity I will specify which financial metrics are on a reported versus non-GAAP operating basis.
In the first quarter reported net income available to common shareholders was $53 2 million and earnings per share.
Per common share was <unk> 67 down approximately $3 $2 million per five per common share from the fourth quarter.
The reported return on equity for the first quarter was eight 4%, which was down from eight 8% on the prior quarter.
The reported non-GAAP return on tangible common equity on the first quarter was 14, 6%.
Down from 15, 6% in the fourth quarter.
We reported first quarter return on assets was one 6% down slightly from the one 9% in the fourth quarter.
And finally, the reported first quarter efficiency ratio was 67, 5%, which was down from 68, 4% for the fourth quarter.
On a non-GAAP operating basis net adjusted operating earnings available to common shareholders holders in the first quarter was $64 8 million and earnings per common share were <unk> 82.
This was down approximately $8 $1 million or 11 cents per common share from the fourth quarter.
Non-GAAP pre tax pre provision adjusted earnings were $68 6 million compared to $77 million in the fourth quarter.
For non-GAAP adjusted operating return on tangible common equity was 17, 6% in the first quarter compared to 19, 9% in the fourth quarter first quarter non-GAAP adjusted operating return on assets was one 4% down from 152% in the fourth quarter non.
Non-GAAP adjusted operating efficiency ratio was 55, 4% in the first quarter as compared to 53, 6% in the fourth quarter.
Turning to credit loss reserves as.
At the end of the first quarter, the total allowance for credit losses was $155 $7 million.
Comprised of the allowance for loan and lease losses of $142 $9 million on the reserve for unfunded commitments of $12 $8 million.
In the first quarter, the total allowance for credit losses.
Increased $14 $8 million, primarily due to lower expected losses than previously estimated as a result of improvements in Virginia as unemployment rate, but.
Non 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% at March 31, which was down 14 basis points from the end of the fourth quarter and the total allowance for credit losses as a percentage of total loans was one point on 9% at the end of March which was down from one point to 2% in the prior quarter.
Excluding SBA guaranteed PPP loans, the allowance for loan and lease losses as a percentage of adjusted loans.
<unk> declined 13 basis points to 112% from the fourth quarter and the total allowance for credit losses as a percentage of adjusted loans decreased 11 basis points to 122% from the prior quarter.
The coverage ratio of the allowance for loan and lease losses to non accrual loans was three four times at March 31, as compared to three eight times at December 31.
The $15 million decline in the company's total allowance for credit losses took into consideration. The COVID-19 pandemic impact on credit losses flow through the two year reasonable and supportable macroeconomic forecast utilizing the company's quantitative peaceful model and through management's qualitative adjustments.
On the two year reasonable and supportable forecast period, the sea so quantitative model estimates.
The credit losses, using a reversion to the mean of the company's historic 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 March baseline macroeconomic forecast for the two year reasonable and supportable forecast period.
Moody's March economic forecast improved since December and is now assumed debt on a national level GDP will increased five 7% in 2021 and 2022 as compared to GDP increases of four 1% in 2021 and four 4% in 2022 in the December forecast moving.
Forecast from Virginia, which covers the majority of our footprint had previously assumed that the unemployment rate in the state would average around 5% during the two year forecast period.
But the March forecast now assumes a two year average of 4% in.
In addition to the quantitative modeling the company also made qualitative adjustments for certain industries viewed as being highly impacted by COVID-19 as noted by John.
Additional economic soon narrows were considered as part of the qualitative framework in order to capture the economic uncertainty and concerns related to the path of the virus vaccination distribution efforts and the potential for other unfavorable net unfavorable economic developments.
The negative provision for credit losses of $13 6 million in the first quarter of 2021 was consistent with a negative provision for credit losses in the previous quarter.
It was a decline of $73 $8 million compared to the first quarter in 2020.
The provision for credit losses for the first quarter 2021 reflected a negative provision of $60 5 million in the provision for loan losses.
And $2 8 million in the provision for unfunded commitments.
The material decrease from the provision for credit losses as compared to the same quarter in 2020 was driven by the better than anticipated credit impacts since the pandemic began the significant recovery in the economy since last year as well as the improvement in the economic forecast utilized and estimating the allowance for credit losses as of March 31.
Yeah.
In the first quarter net charge offs were $1 $2 million or three basis points of total average loans on an annualized basis as compared to $1 8 million or five basis points for the prior quarter and $5 million or 16 basis points for the first quarter last year.
As in previous quarters, the majority of the net charge offs approximately 63.
63% in Q1 came from non relationship third party consumer loans, which are in run off mode.
Now turning to the pretax pre provision components of the income statement from the first quarter tax equivalent net interest income was $138 million, which was down $10 $7 million from the fourth quarter, primarily driven by the lower day count in the first quarter and a $7 2 million decline in PPP loan fee.
The accretion interest income due to lower levels of PPP loans process for forgiveness during the current quarter versus the prior quarter.
Net accretion of purchase accounting adjustments added nine basis points to the net interest margin in the first quarter, which was in line with the 90 basis point impact in the fourth quarter.
The first quarter's tax equivalent net interest margin was three 6%, which was a decrease of 16 basis points from the previous quarter. As a result of a 23 basis point decrease on the yield on earning assets.
Firstly offset by a seven basis point decline in the cost of funds.
Quarter to quarter, earning asset yield decrease was driven by the 30 basis point decline in the loan portfolio folio yield.
The loan portfolio yield decreased to $3 six 9% from 399% in the fourth quarter, primarily driven by the impact of lower levels of PPP loan fee accretion, resulting from low level lower levels of PPP round, one loans were given by the SBA in the first quarter on.
Also a core loan yield compression due to lower market interest rates as well as lower levels of non PPP loan fees.
The quarterly decrease in the cost of funds to 30 basis points from 37 basis points was primarily driven by a seven basis point decline in the cost of deposits to 23 basis points from the first quarter.
Interest bearing deposit cost declined by 10 basis points from the fourth quarter to 32 basis points in the first quarter due to continued aggressive repricing deposits and the maturity of high cost time deposits in the quarter.
Noninterest income decreased $1 2 million or $30 million to $31 million in the first quarter, primarily driven by the $1 2 million decline in service charges on deposit accounts due to lower levels of overdraft fees.
A decrease in mortgage banking income of $858000 driven by lower mortgage origination volumes in the first quarter.
And lower loan related interest rate swap income of $950000 due to lower transaction volumes. These.
These quarterly declines were partially offset by increases in several other noninterest income categories, including an increase in wealth management fees of $368000 an increase in share in insurance related income of $481000 and an increase in unrealized gains on equity method investments of approximately 700.
Dogs.
Noninterest expense.
Declined $9 8 million to $111 9 million in the first quarter from $121 $7 million in the prior quarter.
The decline in non interest expense related to the.
The decrease in debt extinguishment costs of $14 $7 million during the quarter ended March 31, compared to $28 million in the prior quarter.
In addition, noninterest expenses decreased by approximately $5 million in salaries and benefits, which was driven by lower performance based variable incentive compensation and profit sharing expenses in the first quarter of 2021.
Partially offset by seasonal increases in payroll related taxes, and 401 K contribution expense.
In addition, Oreo and related credit expenses declined from the fourth quarter by approximately $625000.
Driven by $575000 in gains on the sale of closed branches.
These net reductions were offset by an increase of $1 $2 million in professional fees professional service costs, driven by an uptick in legal and audit fees and costs related to strategic projects.
Noninterest expense for the first quarter of 2021 also included approximately $1 1 million in costs related to the company's closure of five branches in February.
Seasonal snow removal cost of approximately $370000.
Mm 300000 in costs related to the company's response to the COVID-19 pandemic.
And approximately $500000 from expenses related to PPP round, one loan forgiveness processing and PPP round two loan setup costs incurred during the quarter.
The effective tax rate for the first quarter increased to 16, 8% from 15, 1% in the fourth quarter.
For 2021, we continue to expect the full year effective tax rate to be in the 16, 5% to 17% range.
Now turning to the balance sheet period end total assets stood at $19 9 billion at March 31st that's an increase of $226 million from.
From December 31, primarily due to an increase in pp P loan balances at period end loans held for investment were $14 3 billion.
Which was an increase of $251 million or approximately seven 3% annualized from the prior quarter driven by the addition of $512 million of round two PPP loans, partially offset by a $165 million in round, one PPP loans that were forgiven during the first quarter.
Excluding the PPP loans loan balances in the first quarter decline.
From two 6% on an annualized basis, driven by declines in commercial loan balances.
Of $16 million or <unk>.
6% annualized and reductions in consumer loan growth of six <unk>.
Balances of $66 million was from 15% on an annual gross basis.
The overall decline in consumer loan balances during the quarter was driven by continued paydowns on the HELOC and residential mortgage loan portfolios as well as the continued runoff of non relationship third party consumer loan balances.
Which was partially offset by five 1% annualized growth in the indirect auto.
Our balance balances for the quarter.
Excluding PPP loans loan yields declined by approximately 14 basis points to 372% from the fourth quarter.
At the end of March total deposits stood at $16 3 billion, that's an increase of $575 million or approximately 15% annualized from the prior quarter driven by an increase of $698 million in demand deposits as a result of PPP round two loan related deposits and government.
<unk>.
And an increase of $87 million and savings account balances.
These deposit account balance increases were partially offset by time deposit balance one off of $196 million.
At March 31, low cost transaction accounts comprised 53% of total deposit balances, which was up from 51% in the fourth quarter as.
As mentioned the average total cost of deposits declined by seven basis points to 23 basis points, while interest bearing deposit costs declined by 10 basis points in the first quarter.
The Companys liquidity position remains strong at both the bank and holding company levels with multiple sources, there can be tapped if needed.
From a shareholder stewardship and capital management perspective, we remain committed to managing our cash resources prudently as the day.
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 as it continues to manage through the uncertainties of the pandemic and.
And its potential impact on the company's financial results.
At the end of the first quarter Atlantic Union, Bankshares, and Atlantic Union Bank capital ratios were well below regulatory capitalized levels.
During the first quarter of 2021, the company paid a common stock dividend of <unk> 25 per share and also paid a quarterly dividend of 170, 180, and 88 <unk> on each outstanding share of series a preferred stock.
In summary, Atlantic Union delivered solid financial results from the first quarter while.
While positioning yourself for a stronger profitability and growth as the year progresses, and the pandemic impact on the economy subsides.
Please note that while we continue to proactively manage the company through the uncertainties of the pandemic. 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 now turn it back over to Bill Cimino to open it up for questions.
Thanks, Rob and partnership we have time for a few questions on lowering of our first caller.
Yes.
And as a reminder to ask a question you will need to press star one.
And your first question comes from the line of Eugene <unk> of Barclays.
Good morning, Jim.
Good morning, Thanks for taking my questions.
Zero in on the expense it looks like you raised your <unk>.
So from a run rate outlook higher.
From a recent quarters from high 81 from the 92.
$2 million range and now the upper end of that.
That said I believe appreciate the key drivers.
Corporate costs and also investing on the project.
We'll share with our work on a refinery you expect.
No.
And so we're going to start with.
Serialized low firm of higher revenue as a low.
Yes, Eugene this is Rob I think you were asking what we expect we've got a number of projects that are working on as we mentioned, we we look at this on a.
Business return perspective, so all of our major projects go through a process.
You know both financially and strategically are evaluated and we look for approximately 15%.
We have a 15% hurdle rate for all major projects, meaning we may make.
John mentioned in his comments.
We'll make some investments upfront and reap the benefits.
Down the road, but.
The internal rate of return needs to be at least 15%.
Eugene you broke up a little bit in your commentary. So if we're not fully answering your question just repeat the question. Please.
What I was asking is low now looks like the annual run rate.
Other expenses went up maybe.
Like millions of dollars from less over the last few quarter.
What kind of returns that are exciting and wham.
The return on that $10 million on annual expenses.
Yeah. So in terms of the returns you can start to expect to see some of those coming in the second half of the year, but most likely.
Which of these would be paybacks.
In 2022.
The way we look at this.
<unk> is.
It may not lead to declines in overall expense levels, but it will mitigate the growth in expenses year to year.
We look at it too.
Keep our expense base growth levels lower to improve operating leverage and increased operating leverages.
Eventually we expect net revenue.
Revenue growth will improve yes, we've been trying to attack manual processes for a long time.
Candidly, we had expected in the absence of Covid that last year would have been a year or to take some of this on and that obviously the timeline changed as we dealt with all of the disruption.
So from our standpoint, we're focused on the scalability of the franchise driving operating efficiency, improving operating leverage to Rob's point.
Got it thank you and if I may I wanted to switch over to NII.
So looking at the asset side on the balance sheet, how much more re pricing headwinds.
Do you think is left on the loan and securities books and on the funding side.
Book runoff, you're only remaining lever.
Yes, so yes.
A couple of points on that Eugene yes in terms of the.
Earning asset side, we do expect.
That will continue to see some compression over the next several quarters just due to.
The low interest rate environment compared to what our portfolios are earning today.
The good news there is we do.
Yep.
At it from the fourth quarter to where we sit today there has been a steepening of the curve as you know on the long end.
And that is helpful for us as you know.
From a fixed rate loan.
Pricing perspective, and also from Reinvestments.
And investments in our investment portfolio. So for instance.
I think we said last quarter, we were reinvesting in the investment portfolio and adding to the investment portfolio on about one five.
5%.
<unk>.
Today, we're actually seeing that reinvestment rate closer to 2%. So that's a nice.
Lift so that will kind of mitigate some of the.
Compression.
Net interest on.
On the earning asset yield, although we do expect to continue to tick down.
<unk> points.
Okay.
Yes, so thats, 2% reinvestment rate, where the securities coming due on what.
Yeah, Yeah. So.
The overall securities portfolio, if you will.
Look at this quarter was earning $2, 79% so.
So what are you investing you're still reinvesting at a low rate over time.
With current period. So that's why you'll continue to see some compression on the earning asset yields on the deposit side, we continue to have.
Yeah opportunities.
As we reprice Cds I think we've talked about this in prior calls that we've got.
Over $1 billion of Cds that are maturing over the next few quarters.
And we've seen that in the first quarter. So our deposit costs came down 70 bps on average quarter to quarter. If you look at it from an F. 'twenty three basis points. If you look at it in March if you look at it in just the month of March were 21 basis points, we expect to see over the next two quarters to be in the mid <unk>.
Mid teens there on net.
Cost of funds side.
For other levers.
Really we payback all we don't have any federal home loan bank advances anymore. We paid all of those off as you know.
We have added.
Couple of swaps were received fixed.
Received fixed swaps.
Debt have will be reducing some of our.
Our asset sensitivity.
Which will allow for some pickup on margin for instance, we're picking on them at Butler.
You have a couple of hundred million dollars of swaps, we put on in the first quarter and we're picking up about 100 basis points on those swaps as we speak.
So those are kind of we continue to look at all levers there.
But.
Those are the ones that are currently will.
Playing out over the next few quarters, probably just restate NIM guidance. Please.
Yes, so if you take out PPP, which is going to fluctuate with forgiveness as we go through the next couple of quarters.
And accretion income our core are.
Our core NIM.
Call is remaining pretty much the same.
305.
Our core NIM level again.
Kind of a combination of earning asset yields coming down, but being offset by some of the some of the swaps that I'm talking about but also.
Most importantly, as the cost of deposits cost of funds coming down as well to offset the earning asset yield compression. So we haven't really come off that guidance at all it's about $33 five will continue to see that as we go forward unless theres a.
What changed in the interest rate environment.
We're steepening would help you forget.
Short rates move, we're not expecting that to happen, but if they did that would be positive.
<unk> for us.
Thank you that's very helpful. I appreciate it.
Thanks Gigi.
And Felicia we're ready for our next caller. Please. Your next question comes from the line of Brody Preston with Stephens, Inc.
Good morning.
Hey, good morning, everybody how are you.
Okay.
Hey, Rob I, just want to circle back on expenses I didn't hear if you if you gave a.
On a quarterly guide for next quarter.
But I guess with the with.
With the amortization included I have about $95 million in core for this quarter and about 92 X almonds. So just wanted to get a sense from what you expect the run rate to look like for the rest of the year.
Yeah, So we're not coming off guidance.
We don't think it will be in the 92 ish quarterly run rate going forward here.
We had a few outsized expenses that won't reoccur return in the out quarters biggest one being.
We.
Seasonal increases in payroll taxes, four one K, that's primarily driven by.
Incentive payouts and a big chunk of that relates to investing.
Of stock restricted stock. So you should see those numbers coming down fairly materially in the second quarter and beyond.
So, we're sticking with $92 million or so give or take.
On that.
So is that is that.
That's inclusive of the amortization of intangibles.
Yes. It is it is a protein that's right.
Okay great.
Great and then.
I wanted to ask you.
Core C&I actually held up and expanded a little bit this quarter. When you back out PPP and so I wanted to ask what was there any specific drivers of that or I guess did you make any headway in.
With borrowers end market.
Brody I'll start and I'm going to ask Dave ring to comment here, if you look at.
Key areas of strength, probably the single best performing region within the franchise would've been central Virginia, which means a greater Richmond area, which is doing quite well.
Lacking in equipment finance, we continue to be very pleased with and proud of if you look at everything thats going on out there. There is a very good reason to believe we're going to see more capital investment anything around transportation logistics wholesaling industrial is white.
And that is a good business to begin for US right now as a reminder, when we talk about equipment fans. We're talking about small dollar we're talking about things that are a minimum of $1 million.
Just basic secured equipment finance and leasing capabilities as well Dave.
<unk> do you want to comment on kind of what we're seeing from a commercial standpoint also I'll reiterate my comments I said this intentionally if you look at our pipeline right now it's a pre pandemic levels collapsed on a solid pipeline. This large was Q3 of 2019, which was I think one of our best quarters ever in Q1 production, even though it's not evident in outstanding.
And yet because we're still seeing suppress line utilization was higher than Q1, 'twenty or Q1 19. So these are all things that are giving us confidence that we should be on an improving trend. Dave do you have any comments you can give us as headliners, what youre seeing from a commercial or wholesale banking standpoint.
Sure John and then Brody what we've done over the last few years is we've put a sales process in place, which kind of takes us.
Our sales cycle reduces the timeframe of our sales cycle and so we're able to build pipeline quicker we've never stopped cold calling during the pandemic. So we continue to knock on doors waiting for the opportunities to talk to companies as they saw.
Some sunshine coming into their businesses, we have been hiring people from other banks.
Over the last.
16 months, we've hired 65, new people in the commercial some of which were in support roles. Other in new business rules and so we've constantly tried to add talent into the growth markets like greater Washington, Baltimore coastal.
Regions and into equipment finance, where we continue to grow so we've constantly invested in the business and we've also put in a sales culture, where we're constantly calling even if the opportunities aren't quite there yet but to form relationships with companies that we think would be good long term. So we've done a lot of those things over the last.
Three years, and we're continuing to do on now and what we've seen in our pipeline.
The real estate market has kind of ticked down a little bit our pipeline is more over weighted towards C&I business for.
For the first time really in the last five quarters, it's more C&I business.
And over the last five quarters. It is our largest pipeline right.
Right now that we have going into Q2. So we're in we're in pretty good shape.
Understood and I did just have one last one.
John for you.
You know with the.
With the stimulus, obviously NSF fees on overdraft fees have gone down across the industry and I think you guys called that out as one of the other things that weighed on service charges. This quarter, but we've seen a couple of banks specifically this quarter you know PNC one of the larger ones on Cullen Frost down in Texas announced specific initiatives to occur.
Overdraft fees for their clients and it seems like this is a trend that the industry is kind of following him. So I guess is this something that you expect to maybe kind of pursue it at Atlantic Union and I guess, how do you expect that to impact the industry overall.
We're certainly paying attention to it we have never had overdraft fees as any sort of designed strategy for the bank and we're not outsized in terms of the amount of overdraft fees that we have we do think debt when a bank pays on overdraft is providing an unsecured short term loan.
And yes, it should be compensated for that so we don't have any.
Paul.
And at this very moment to make any substantial changes, but we will continue to watch it Maria Tedesco as President Maria do you have any comments on that.
No not anything additional I think youre right on and we will continue to monitor and watch what's happening in the industry and where we are always evaluating how we go to market with these types of things.
I think that banks are over weighted over relied on overdrafts youre going to be on a different position.
Yes got it great. Thank you very much guys I appreciate it thanks Felicia.
Felicia we're ready for the next caller. Please your next question comes from the line of Casey Whitman of Piper Sandler casing.
Hey, good morning.
Morning.
Good morning, I'll, just John maybe ask you one high level question, you always seen M&A pick up across the industry can you give us the latest on your thoughts on Atlantic Union M&A appetite, maybe in terms of the what excites you. Most in terms of geography size range et cetera on that'd be helpful. Thanks, sure. Thanks, Casey well.
It's no surprise to us that we've seen an uptick in M&A, we've been talking about this coming for some time and I continue to believe that it's first and foremost a function of the long term pressure on net interest margin across the industry based on the expectation of a near zero short term interest rate environment for years.
One there is no question that scale helps in terms of the ability to invest in technology and digital product offerings, specifically as you can spread out over a larger base.
I think that.
So none of that surprises us from our standpoint, Casey nothing has fundamentally changed its kind of the same story for years, we like to contiguous compact dense franchise, we think about the brand power. We think about the scarcity value of the franchise. We continue to believe that fundamentally this is in the organic.
Growth strategy that could be supplemented by select M&A, but we would not do anything that doesn't make strategic and financial sense strategic sense means that kind of fits with the general philosophy that we have consistently outlined for years and years and financial means that it has to be a value creation opportunity on a risk.
Weighted basis for the shareholder we've been very clear and have recently been reiterating your acquisition parameters. So are.
Are there going to be more opportunities in this environment, Yes, I think there are.
We said last quarter that this is something that we recognize.
It likely is an opportunity for us, there's certainly more chatter and more conversation going on out there do we have to do something no might we do something perhaps.
And we do look at the full range of opportunities in terms of from smaller smaller for US means what we've been doing like $3 billion tack on <unk> by $1 billion Bank.
Yes on.
Two things that are larger there aren't that many larger scale things that would actually make sense, but that doesn't mean zero as you think about something larger scale you got to make sure that debt. That's more of a partnership you have to make sure that you are cultural aligned it ought to be a very special case. The other strategies are complementary and that it creates value in.
Just sort of adds to the strength that we believe we have so we will look at it we'll be thoughtful will be disciplined we won't surprise anybody I think in terms of you're not going to see a show up in Iowa.
We like it.
Kind of like what we're doing right now, but I will do there is a reason why we're talking about improving the scalability of the franchise with the sort of investments that we're making I think it's a scalable franchise I absolutely believe in my heart, It's a scalable leadership team and I think they're going to be opportunities. One word we don't like to use around here is opportune.
Mystic I don't like using the word opportunistic as it relates to M&A because to me that suggests that you're just sort of taking what might come we're very plan full.
We have a view towards this and we try to think two and three steps ahead. If we do X then Y. So you've got to think a few steps ahead and thats our philosophy on it and so I guess I'll just leave it at that.
Helpful. Thank you.
Great.
Anything else Casey or are you good.
But I'll, let some non stop on thanks, Okay. Thanks, Krish, we're ready for our next caller. Please. Your next question comes from the line of Kathryn Miller of K B W.
Morning, Kathryn Hi, Kathryn good morning.
I have a quick follow up on expenses just to clarify the $92 million. Rob that you are talking about to confirm that includes the amortization of intangibles, so thats kind of relative.
On the 97 million that we used on this quarter excluding the.
Get extinguished.
Yes, yes. It does include that yes.
Great guys when they came from and then.
Just wanted to go.
I think about big picture, how much reserve release he think.
He's got ahead of you I guess the day one.
Reserve was about 90 or excuse me that 71 basis points do you think we add back to kind of the day, one seasonal level or do you think we still kind of hang on at a level above that as we move through the next year on year. So.
Yeah in terms of that Catherine you know of course it depends on.
Things continue to.
Okay.
Play out the way we've.
Currently playing out in the forecast remains.
Favorable.
Don't get any hiccups, along the way here, yes, youre going to continue to see.
Releases of the allowance for credit losses.
<unk>, making their way back to that day one.
C suite level.
Our view is debt.
That could be.
As soon as the end of the fourth quarter.
Uh huh.
First quarter of next year.
Just based on what we're seeing currently.
Really no.
Deteriorating metrics risk ratings are pretty stable.
So we don't see any.
Negatives going forward, but we'll continue to monitor that but.
Yes, that's the way, we're thinking about it as essentially it'll get back to that.
Call it 70% to 75 basis points Cecil day, one reserve.
And this flexibility do you really have.
And maintaining their reserve.
Growth is really going to start to end trades on the back half of the year.
Can you.
Flexibility within the seasonal model that you can maybe release.
Little bit less just to kind of give yourself a cushion to provide for some of that graph.
Yes.
Right. So we're not going on.
You'll go quickly in terms of.
Reducing that reserve, we're going to monitor it closely.
Thank you.
Steps down if you will.
Because you can there is the opportunity to provide.
These qualitative factors as an overlay to your quantitative model, which may suggest a lower reserve there at all.
There's going to be uncertainty out there so.
There always will be some.
<unk> ability to properly.
These factors.
But I think we're going to kind of.
You'll be conservative here on stair step this stuff down.
<unk>.
Based on what we're seeing on the ground.
Future outlook and see how that plays out but as.
As you saw on kind of.
Took a step in the fourth quarter, we've taken another step comparable step in in the first quarter.
And I think it can continue.
If it plays out you'll continue to see that right now if you look at our.
The allowance for credit losses of approximately 35%.
The $156 million in reserve.
Of course, we have out there on qualitative and quantitative factors that have been added back into our quantitative model.
Because of the uncertainty on us not seen.
There's always going to some uncertainty there so long so if some of that but.
That's where we stand today on will continue to evaluate debt.
Yes.
Great Super helpful. Thank you. Thank you Catherine Catherine and Felicia, we're ready for our next caller. Please. Your next question comes from the line of William Wallace from Raymond James.
Hi.
Hi, Thank you good morning.
Rob.
John in your prepared remarks, you gave the utilization rates on your lines of credit could you repeat what that rate was what it was down from and then could you opine on.
How you might anticipate the borrowers spending spending the cash on their balance sheet and having a need for those share accessing those lines again, yes commercial line utilization now when I say commercial line utilization I'm not talking about construction lending forget that I'm talking about revolving credits to commercial and industrial business.
<unk>, which generally support working capital on sometimes general corporate purposes utilization for C&I lines was 25% at the end of Q1 versus 26% at the end of Q4 of 2020.
Normal for us would be low 40, low forties. So that's a substantial difference and we saw it ticked down which is simply the buildup of liquidity I think theres a burn rate concept here, while I've said it before I think businesses had been flushed with cash and typically what you would see as sales pick up they begin to carry it.
Tiny differences its working capital needs its classic commercial and industrial banking, so they'll carry receivables they'll build inventory and.
To some extent may capital expenditures as well that may or may not ultimately be financed over the term. So I think just improving business conditions, improving sales activity as you get into things like the government contractor space Youre clearly financing contracts.
We are seeing more M&A go on in that space and so that will impact. It. So we do think that companies will continue to.
Burn through or absorb some of this excess liquidity.
Having been on the commercial industrial banker by background, having been on the business for 33 years I predicted businesses will carry a little more liquidity on a go forward basis used to be that they would effectively carry zero cash and they would always pay down lines of credit with excess cash I don't think we will see as much of that.
But I do think.
She is the rising economic tide will look this boat.
I think that youre going to see more line utilization, obviously, new client acquisition is impactful too, but all indications to us lead us to believe that companies are investing businesses improving there are lots of things that are scarce right now.
It's difficult to get to if you're going to ship something good luck theres very little capacity, among the freight lines and the railroads.
The.
I know from being on the board of reported Virginia I was on.
Total debt, there's one on a half orders for every one slot on container ships worldwide right now and so I think that will this will pick up these are historic lows. This historic level of liquidity.
On the rising tide is going to lift that vote. So I think that will be on a gradual improving trend.
And I mean, obviously there is.
That could be a potentially significant driver.
Of growth in the portfolio next year, maybe even late this year is that something that you think would be.
A key benefit to your kind of high single digits target or do you think you'd need debt, increasing utilization to kind of get back to that high single digit rate.
Think that we're going to need some improvement in line utilization in order to hit those objectives, but that'll be a combination of new client acquisition existing clients engaged in capital expenditures. If you look at the outlook talk to our guys over in equipment Finance I mean, there is a very good reason to believe we're going to see substantial capital investment across most industries.
And so on.
I don't want to be overly overly bullish year, Huawei, but I do think that theres, a very bold real bull case, and I think that I don't know exactly what the timing is going to be but I think that theres going to be an improving trend line. So I'll repeat what I said on my opening comments, we see no reason right now to not believe that we should get back to where we've been for as long as I've been here.
Pushes the ability to generate high single digit growth on an organic basis, I think thats a next year issue to be clear that we should be on an improving trend.
It should be for the remainder of this year.
Okay, Thanks, and on the expense John.
You are saying that year.
Made the decision to I guess increase your investment levels.
And you measure these on a return basis are we should we anticipate that we would see the returns in the form of slower expense growth in out years or accelerating revenue growth due to.
Productivity enhancements and you make a good point I do want to point out. Some of these projects are revenue related foreign exchange business would be a good example, so there are some things that we're doing in terms of.
Making investment.
In order to build revenue generation capabilities, it's not it's not the big ticket items are absolutely about better automation process improvement some of them are in some of our compliance activities, whether it's BSA AML.
Fraud mitigation, which had reduced volume.
Et cetera. In addition to kind of the blocking and tackling and loan and deposit operations, Rob do you want to answer that question.
Yes, I agree with what you just said John but yes.
The primary.
Benefit is going to be a slower loan slower expense growth going forward because of the lot of other stuff is.
Your back office efficiency scalability.
Taking manual processes on the equation not having to put.
FTE in place as we grow the company so.
Thank you.
We will see it manifests manifests itself mostly in <unk>.
Subdued annual growth rate going forward on the expense on better operating leverage and I will say also is not lost on US debt. We have we are sitting on an embedded $25 million of fee income from PPP round, two which we did not plan on that was not lost on us as we thought about is now the time to pull forward a couple of.
These things and try to knock them out obviously, we're not spending much of that but.
That was not a bad thing to take into consideration.
Thanks for the time guys appreciate it.
Thanks volatile three share we have time for one last caller.
Our final question comes from the line of Laurie Hunsicker from Compass point.
Alright.
Hi, Thanks, good morning.
I wondered if we could go back to sort of a little bit to expenses interest.
How you're thinking about branch closures I know you had 149, you're now at 120 929 with circle are there more branches to go here how are you thinking about that and then.
So with three loan production offices.
Could you maybe set are those.
In light of what we're seeing now with rates or how you're thinking about that.
Regarding the branch network as you know Laurie we've closed 20 branches over the last year that was 13% of the network.
A annual process, we do formally review the entire branch network.
Don't think youre going to see us turnaround on closing other 'twenty and short term, but this never ends in terms of the look toward optimizing the branch distribution network.
There are some repositioning opportunities, perhaps we have one going on right now here in Richmond were effectively closing to opening one new one in a better location.
Of a design that is what we want from.
On a modern banking requirement and it's certainly less expensive. So you may see some more of that yes. That's built we're building a new brand across a couple of years. So you may see US did a cl<expletive>ic way of doing other seem close branch, a and move that business to branch be the other way to do it is to close branch and branch.
And build.
<unk> C, which is a better location and so thats a different way of thinking you're starting to see a little bit of that go on on the system. So we'll continue to evaluate this on a disciplined basis, you mentioned that the loan production offices, you're talking about Charlotte and our Columbia, Maryland on operation.
Dennis.
Three of them is that right.
Well I would say we have two really yeah. We have we have Columbia, Maryland, which is Baltimore area and we have Charlotte technically we have a small office in Greensboro, as well and flow equipment finance and equipment finance and some of it isn't but that's not on El Cubo.
Theyre doing well we're investing.
And those Charlotte is principally a commercial real estate play, whereas Columbia has not and we're very happy with those markets. We certainly are not thinking about closing them.
Okay. Okay, and then Rob do you have numbers in terms of what your balances are on third party consumer and lending club as of March 31.
Yes, sorry, I'll get them offline.
The numbers are it's about $123 million total $40 million about as lending club and then service finance is about $85 million.
Okay.
Yes.
Theyre paying down pretty quickly.
To the tune of $20 million to $25 million.
That's great that's great and then John last question do you just kind of going back there.
Casey was asking on on M&A, you are very well positioned on M&A you have very strong stock currency can you just help us fine tune a little bit in terms of how small when you go on assets, how big would you though on assets would you consider an MLA.
Thanks for taking my I'm sure thing Lorie on this we debate constantly this question very good question of how small would you go to make sense.
Yes, I don't want to say something I try to never say never but I would say that it's difficult to imagine we would do something much below say three 3 billion.
I cannot conceive of any scenario whatsoever, we would go below a $1 billion.
So it just it just doesn't move the needle enough you have to think about debt.
Work that goes on there are smaller deals arent, particularly risky they're relatively low risk, but how impactful are they in terms of the value creation opportunity. That's what it's really about how much does that add to the scarcity value of the franchise. How good is this it.
So our preference is you've seen us day at least in my time here would be no lower than roughly the $3 billion range could be a little lower but that's not a $1 billion.
And then on the upper end.
Slightly different message that we delivered intentionally last quarter is that sure.
We recognize as a $20 billion bank debt, even at $3 billion acquisition is not as incrementally impactful in terms of value creation as what it used to be when we were a smaller company.
So.
We do think about the full set of opportunities from kind of that low end that ive been discussing up to something that some might call on MRO and different people have different interpretations of what that means but that just means something that's starting to get close to your own size plus or minus whatever the line maybe.
Would we consider that yes, we would consider that.
But I would reiterate execution risk is way up and so.
So then you have to think about that as more of a partnership that is not a straight acquisition.
What are the benefits how much value could be created.
And how do you compare that against the the risks involved et cetera, and you do you or do you not have a complementary culture business strategy in all important for Atlantic Union Bank, what does it do to the power and the scarcity value of this franchise you do not want to do anything that day.
Lutz debt.
The power of the franchise the scarcity value of the franchise the opportunity that we have because we're very focused so that's how we think about it truth is there just arent that many things that would screen as being sensible from our standpoint, but it doesn't mean zero it simply means not that many.
So we try to be open minded we have lots of good relationships, we have lots of friends out there.
There are conversations that have been going on from my four and a half years that I've been here.
These things don't just happen overnight you don't just get a phone call and it's something that we think it's important to maintain optionality. It's all about Optionality and then you have to think about what's your optionality. After you do something smaller or larger do you have more options or do you have fewer options. So.
It's all about value creations, all about thinking two and three steps ahead, it's about being strategic and it's not about being opportunistic because your findings that's my view.
Alright. Thanks.
Thanks, Laura and thanks, John and thanks, everybody for calling in today. We appreciate your time and we look forward to talking with you in July take care. Thank you.
And this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.