Q1 2022 Atlantic Union Bankshares Corp Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the Atlantic Union Bankshares third quarter 2022 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. Please be advised that today's.
The conference is being recorded you ask a question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to the Speaker for today's call are bill the Nemo senior VP of Investor Relations you may begin.
Thank you Tania 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 and in person for the question and answer period.
Please note that today's earnings release and accompanying slide presentation, we are going through on the webcast are available to download on our investor website investors thought Atlantic Union Bank Dot 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 first quarter of 2022.
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 expectations. Our results expressed or implied by these forward looking statements.
We undertake no obligation to publicly revise or update any forward looking statements. Please refer to our earnings release for the first quarter of 2022, and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward looking statements, including factors that could cause actual results to differ from those expressed or implied.
And our forward looking statements.
All comments made today on 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.
Finally, before we begin I would like to remind everyone of our upcoming Investor day on May nine where.
Youll hear members of our management team go into greater detail on what we've accomplished and what we what the next three years should look like for Atlantic Union Bankshares.
Registration and further details can be found on the advisory posted this past Monday on our Investor website, I will now turn the call over to John Asbury.
Thank you Bill and thanks to all for joining US today Atlantic Union Bankshares is off to a strong start in 2022 on the last quarterly earnings call. I noted that we were set up to start the year better than at any point in my five plus years at the company and that we did tipping into low double digit annualized loan growth, excluding PPP and what has traditionally been a slow growth quarter for.
US disciplined shows we have momentum and points to the organic growth potential of our franchise as I have consistently stated our operating philosophy of soundness profitability and growth in that order of priority serves us well as we navigate the challenges of operating not just through a pandemic, but now just through generationally high inflation rising interest rates and geopolitical.
Certainty, while we recognize the pandemic is not yet over restrictions in our markets of the Houston, We're all becoming accustomed to the new normal of living with COVID-19.
Our office based teams have returned to our buildings and while some roles are now completely virtual most work on a hybrid arrangement, while our team succeeded in arguably excelled over the course of this disruption we are even better when we're physically together, what we do and how we do it is really all about our culture and our people and we're committed to workplace flexibility as an opportunity to attract.
And retain talent will continue to take a progressive view towards the changing nature of workplace expectations and will adjust based on our actual experiences.
And scanning the horizon, we're incrementally more cautious about the implications of surprisingly high inflation rapidly rising interest rates and geopolitical uncertainties, such as the tragedy and Ukraine, while this will likely mute economic growth to some extent as seen in the changes in the Moody's forecast since last quarter for the time being we still don't see it.
The fundamental positive trends, so the growing economy, low unemployment and a benign credit environment. We continue to believe that the federal reserve, having already raised short term rates and signaling multiple short term rate hikes to follow throughout 2022 is a positive for us as we remained fairly asset sensitive as a result, our net interest.
And should expand from here in.
In addition to inflation and the consequences of the war and Ukraine, we still face headwinds from supply chain disruption and business clients challenge to fill open positions. While we said before we expected that to improve as the year goes on now we're not so sure. Despite all of this from our vantage point, we think American businesses have proven their resiliency and then.
All of this is manageable.
Despite the headwinds and uncertainties Atlantic Union has now had two consecutive quarters of low double digit loan growth with the first quarter coming and point to point at approximately 10, 8% annualized excluding PPP average loans on a linked quarter annualized basis grew 12, 8%, excluding PPP first quarter loan production.
Is typically our seasonal low point, but this year's first quarter was different production, while not as high as the traditionally peak of fourth quarter was still higher than every other quarter over the last two years.
Runoff was down from Q4, it was still higher than the first quarter of last year. So loan growth remains mostly a production story for Atlantic Union Bank.
New construction loan originations remained strong and based on our unfunded construction loan commitments and funding schedules. This should be a tailwind for balances. This year just as it was for Q1.
We're also encouraged to see C&I line utilization tick up each month of the quarter ending the period at 30%, which is still well below our pre pandemic levels. It is good to see this trend and commitment levels growth.
We feel we have a lot of upside here of sales and working capital needs among our client base increased.
Our pipelines remain strong solid well balanced between CRE and C&I there are significantly higher than they were at this point in 2021 and there are also higher than at the end of the fourth quarter, which means that our strong Q1 growth did not drained the pipeline. We are encouraged by our competitive positioning the market dynamics and economic strength.
Our footprint.
All of that plus our expanded lending capabilities continue to lead us to expect upper single digit loan growth for 2022, while some quarters may be better than others, one quarter does not a year make and with so much uncertainty remaining we will want to see more calendar behind us in 2022 before we consider moving off of our full year expectation of.
Upper single digit loan growth.
<unk> said that I would note. We continue to believe we have a long runway ahead of us to grow both organically and through takeaway from our larger competitors that dominate market share here in our home state of Virginia, and this is supplemented by our operations in Maryland, North Carolina, and our specialized lending capabilities in government contract finance and equipment for.
Yes.
Asset quality continued to impress once again the credit headlines for the quarter was the absence of credit problems charge offs net of recoveries for the quarter came in at plus $4000, a net recovery or zero basis points annualized that's a slight improvement from last quarters two basis points of net charge offs, but back in line with the effective.
<unk> zero base in last year's Q3, and Q2 quarter. After quarter. These are levels I have never seen in my nearly 35 year career at some point credit losses are going to normalize to given all the liquidity that remains in the system. The low unemployment rate and are still fundamentally strong economy, we have yet to see any sign of a systemic <unk>.
Collection point.
<unk> will come we just don't know when.
In the meantime, I do enjoy the absence of heads up phone calls from our Chief credit Officer.
Back to macro economics, while the outlook may not be quite as good as last year, it's still good and overall, we remain optimistic at this time here at our home State of Virginia March unemployment came in at 3% down from three 4% in November .
And that was the latest number that we had shared when we announced Q4 earnings and this is better than the national average of three 6% for the same time period, having just again looked at the unemployment data for the country. There is no more populous state in America than Virginia, with such a low unemployment rate.
It has not changed is the challenge of businesses to fill their open jobs and this will likely not resolved until we see more people return to the workforce.
One would think that higher costs due to inflation and improve COVID-19 conditions may motivate more people to return to work.
Rob will talk through the provision for credit losses in our seasonal modeling as we posted an increase in the provision instead of releasing for the first time in a few quarters.
Rob will explain this was due to strong loan growth incrementally lower economic growth expectations in the geopolitical and economic outlook uncertainties I mentioned before.
Turning to expenses, we did still have some noise from onetime charges remaining from December as expense actions, but less so than last quarter. We closed 16 branches at the beginning of March and that was 12% of our current branch network. Since the start of the pandemic, we will have reduced our retail branch network by approximately 25% 35 branches.
This reflects a recognition of changing consumer behaviors never better analytics on customer usage of the branch network and alternative delivery channels and our need to continue to invest in our digital products and technology in order to respond to wage inflation pressures as well.
Regarding expenses, Rob will take you deeper into the details in his comments, but we continue to expect that we will hold operating noninterest expense growth to 2% in 2020, following our usual seasonally higher expenses in Q1.
Our expense management actions combined with upper single digit loan growth expectations, and our asset sensitivity do give us confidence in our ability to generate positive operating leverage and differentiated financial performance, while meeting our top tier financial targets for 2022 from my perspective, with all of the uncertainties and challenges acknowledged.
We are looking at a recipe for what could be the best organic growth footing I've seen in my five five years at the company.
The powerful combination of our growth footing plus asset sensitivity in a rising rate environment plus expense actions already taken plus benign credit should equal top tier financial performance.
As we think about the future of our company and our industry, we want to more rapidly diversify our income streams. Both in terms of net interest income and noninterest income.
While it's never been a large component of our noninterest income as I mentioned in the last call, we are making consumer friendly changes to our non sufficient funds and overdraft policies in Q3 that we expect to reduce our non interest income by approximately $4 five to $6 $5 million on an annualized run rate basis.
Examples of coming actions include the elimination of non sufficient fund fees for consumer accounts fee free overdraft transfers lower overdraft caps the establishment of a new overdraft bank on certified checking product and two day advanced direct deposit payroll for ACTH credits allowed.
Our customers to get paid two days early.
With the rising rate environment, we expect to more than offset these loss fees with increases in net interest income we are investing in new value added ways to serve our clients to generate additional noninterest revenue over time.
We will say more about those plans as they develop at our upcoming Investor day one.
One area beyond our core banking operations that we are focusing on is the digital asset ecosystem as I mentioned in the last call. We began investing in Fintech funds a few years ago, we've added to our position this year and we're using those to inform our digital offerings and to vet and identify opportunities to enhance those offerings. We're also interested in new and <unk>.
Merchant opportunities such as blockchain, which we think could prove disruptive to existing payment systems and infrastructure.
To reiterate our growth strategies at a very high level. They are in order of priority one driving the organic growth and performance of our core banking franchise to leveraging financial technology and Fintech partnerships to drive transformation generate new sources of income of new capabilities in three selectively considering M&A as a supplemental.
Tertiary strategy. This is an option, we will preserve and consider under the right circumstances.
As I've said before we've come out on the other side of the pandemic as a stronger and more capable organization, we've learned to work differently and our customers have learned to bank differently and this has enabled us to consolidate 25% of our branches since the pandemic began with better than expected customer experience acceptance.
Despite the branch consolidations, we continued to grow our net consumer households.
We continue to work on new projects and improve the omnichannel customer experience with quarterly releases and upgrades to our product offerings. We look forward to sharing what we've accomplished when we provide additional details at our upcoming Investor day.
Our goal remains to achieve and maintain top tier financial performance, regardless of the operating environment. We continue to work on ways to make the company more efficient and scalable, while improving and automating processes and the customer experience. All of this provides room for operating leverage improvements.
As we turn the page on the first quarter I remain confident in what the future holds for us and the potential we have to deliver long term sustainable performance for our customers communities teammates and shareholders I will now close as I always do by reminding you that Atlantic Union Bankshares remains a uniquely valuable franchise dense and compact in great markets.
<unk> with a story unlike any other in our region, where scalable with the right capabilities, the right markets and the right team to deliver high performance even in the most trying of times.
I'll now turn the call over to Rob to cover the financial results for the quarter.
Thanks, John and good morning, everyone. Thank you all for joining us today.
Now, let's turn to the company's financial results for the first quarter. Please note that for the most part my commentary will focus on Atlantic Union's first quarter results on a non-GAAP adjusted operating basis, which excludes pre tax restructuring costs of $5 5 million.
Or $4 4 million after tax expenses in the first quarter and the prior quarter's pretax restructuring costs of $16 5 million or $13 1 million in after tax expenses, which was related to the closure of 16 branches and the Companys Operation Center during March of this year.
As a reminder, the company expects to lower its annual expense run rate by $8 million or $2 million on a quarterly basis, beginning in the second quarter as a result of these strategic actions.
In addition, fourth quarter non-GAAP adjusted operating earnings excludes the pretax gain of $5 1 million or $4 1 million on an after tax basis related to the sale of Visa Inc. Class B common stock.
In December 2021.
In the first quarter reported net income available to common shareholders was $40 7 million and earnings per common share were <unk> 54, which was down approximately $4 1 million or <unk> <unk> per common share from the fourth quarter.
non-GAAP adjusted operating earnings available to common shareholders in the first quarter were $45 1 million and adjusted operating earnings per common share were <unk> 60.
Which was down approximately $8 $7 million or <unk> 11 per common share from the prior quarter.
non-GAAP adjusted operating return on tangible common equity was $12 six 9% in the first quarter. The non-GAAP adjusted operating return on assets was <unk>, 98%.
And the non-GAAP adjusted operating efficiency ratio reported in the first quarter is $58 eight 6%.
Turning to credit loss reserves as of the end of the first quarter. The total allowance for credit losses was approximately $111 million comprised of the allowance for loan and lease losses of $103 million and the reserve for unfunded commitments of $8 million.
The total allowance for credit losses increased approximately $2 8 million in the first quarter, primarily due to net loan growth during the quarter and increased uncertainty in the macroeconomic outlook due to high inflation tightening monetary policy and geopolitical risks.
The total allowance for credit losses, as a percentage of total loans was <unk> 82 basis points at the end of March unchanged from the prior quarter.
As a reminder, our day one <unk> reserve was 75 basis points of total loans.
The provision for credit losses of $2 8 million in the first quarter increased from the prior quarter's negative provision for credit losses of $1 million and a negative provision for credit losses of $13 6 million recorded in the first quarter of 2021 as the allowance for credit losses has normalized toward.
Pre pandemic seasonal day, one reserve levels.
Shawn noted net charge offs remained negative political in the first quarter.
Now turning to pretax pre provision components of the income statement for the first quarter tax equivalent net interest income was $134 three.
$3 million, which was down approximately $7 3 million from the fourth quarter, driven by lower PPP loan related interest and fees of $8 4 million as well as lower net accretion of purchase accounting adjustments of $2 $2 million. These declines were partially offset by higher interest income due to average balance.
Growth in the securities and loan portfolios from the prior quarter as excess cash was redeployed into these higher earning assets.
In addition, other borrowing costs were lowered by $1 2 million in the first quarter.
Driven primarily due to the acceleration of the unamortized discount related to the redemption of the company.
Coordinated debt incurred in the prior quarter.
The first quarter's tax equivalent net interest margin was three 4%, which is a decline of six basis points from the previous quarter.
<unk> comprised of a decline of eight basis points and the yield on earning assets, partially offset by a two basis point decline in the cost of funds.
The decline in the first quarter as earning asset yields was driven by the 23 basis point impact of lower loan portfolio yields partially offset by an increase of four basis points due to higher securities yields and the 10 basis point benefit from a more favorable earning asset mix as excess liquidity was deployed into higher yielding loans and securities during.
The quarter.
The loan portfolio yield decreased to 349% in the first quarter from $3 eight 1% in the fourth quarter.
Due to the $8 $4 million decline in PPP loan related interest and fees.
Negatively impacted the first quarter loan yields by 20 basis points, and the earning asset yield by 15 basis points.
Also the decline of $2 2 million in net accretion of purchase accounting adjustments, which negatively impacted the first quarter loan yields by seven basis points, and the earning asset yield by five basis points from the prior quarter.
Core loan yields excluding PPP in purchase accounting loan accretion income decreased slightly which had a three basis point negative impact on first quarter margin.
The reduction in core loan yields is due to the continued paydowns of higher yielding loans and lower loan yields on loan renewals and new production during the quarter.
The two basis point decline of across the funds is principally due to the four basis point decline in time deposit rates.
As well as a decrease in borrowing costs related to the $1 million acceleration of unamortized discount mentioned earlier.
Noninterest income declined $6 2 million to $30 2 million in first quarter from $36 4 million in the prior quarter and that was due to primarily due to the 5 million to $5 $1 million gain from the sale of visa class B common stock recorded in the fourth quarter also lower unrealized gains on equity method.
Estimates of $1 four from the prior quarter.
Bank owned life insurance revenues declined approximately $589000 due to death proceeds received from the prior quarter.
A decrease of 270000 interchange fees due to seasonally lower transaction volumes.
As well as lower mortgage banking income of 230000, which is reflective of the seasonal decline in mortgage mortgage origination volumes and increases in mortgage rates during the quarter.
In addition deposit account service charges declined approximately $212.
Primarily as a result.
The seasonal decline in transaction volumes.
These noninterest income category declines were partially offset by an increase in loan interest rate swap fee income of $2 $4 million due to higher transaction volumes in the quarter.
Turning to non interest expense reported noninterest expense decreased $14 $6 million to $105 $3 million in the first quarter, primarily driven by lower restructuring expenses of $11 million as the prior quarter reflected $65 million related to the closure of the company's up center and the consolidation of <unk>.
<unk> branches that was completed in March of this year compared to $5 5 million in restructuring charges associated with the closings in the first quarter.
In addition, noninterest expenses declined several expense categories from the prior quarter, including lower Tech and data processing expenses of $747000 driven by a software contract termination cost and occurred in the prior quarter. There was a reduction of $590000 and professional services expenses associated with our strategic.
<unk>.
434000 decrease in equipment expenses, and lower marketing and advertising expenses of 382000.
In the current quarter versus the prior quarter.
Partially offsetting these expense reductions salaries and benefits increased by $328000. During the first quarter is seasonally seasonal increases in payroll related taxes, and 401K contribution expenses in the first quarter.
Clearly offset by a decline in the performance based variable incentive comp and profit sharing expenses.
The effective tax rate for the first quarter increased to 17, 5% from 14, 4% in the fourth quarter, reflecting the impact of changes in the proportion of tax exempt income to pre tax income.
In 2022, we expect the full year effective tax rate to be in the 17% to 18% range.
Turning to the balance sheet total assets were $19 8 billion at March 31.
Decrease of approximately five 7% from December 31 levels due to a decline in cash and cash equivalents equivalents of $406 million.
Liquidity was redeployed to fund loan growth of $264 million and net deposit runoff of $127 million.
The investment securities portfolio declined by approximately $160 million, primarily due to the impact of market interest rate increases on the market value of the available for sale securities portfolio.
The period.
Held for investment were $13 5 billion.
Which included $67 $4 million in PPP loans net of deferred fees, which was an increase of $264 million from the prior quarter.
Driven by non PPP loan balance growth of $346 million.
Partially offset by $76 million of Pp P loans that were forgiving during the first quarter.
Excluding PPP loans loan balances in the first quarter increased 10, 8% annualized driven by increases in commercial loan portfolio of $297 million or 10, 9% linked quarter annualized and consumer loan balance growth of $48 9 million.
Or nine 8% linked quarter annualized.
At the end of March total deposits stood at $16 5 billion.
The decline of $127 million or approximately 3% annualized from the prior quarter as a decline of $182 million in high cost time deposits was partially offset by growth in low cost deposits.
31.
Low cost transaction accounts comprised 58% of the total deposit balances, which is slightly higher than the fourth quarter levels of 56%.
From a shareholder steward chip and capital management perspective, we remain committed to managing our capital resources prudently as the deployment of capital for the enhancement of long term shareholder value remains one of our highest priorities.
At the end of the first quarter Atlantic Union, Bankshares, and Atlantic Union Bank regulatory capital ratios were well above well capitalized levels. The company's tangible common equity to tangible asset capital ratio declined from the prior quarter, which was primarily driven by unrealized losses on the <unk>.
We are available for sale securities portfolio recorded in other comprehensive income due to market interest rate increases in the quarter.
During the first quarter the company paid a common stock dividend of <unk> 28 per share consistent with the prior quarter and also paid a quarterly dividend of $171 88.
Since on.
Each outstanding share of series a preferred stock in.
In addition, the company repurchased approximately 630000 shares.
Common shares for $25 million during the first quarter and currently has $75 million remaining on its $100 million share repurchase authorization.
With the financial impact of the PPP loan program winding down the pandemic driven volatility related to expected credit losses, and credit loss reserve levels subsiding and the expectation that interest rates would begin increasing this year. We noted in our fourth quarter 2021 earnings conference call in January that we set.
Our top tier financial metrics to be the following return on tangible common equity within a range of 13% to 15% return on assets in the range of one 1% to one 3% and an efficiency ratio of 53% or lower.
As an update we are now projecting that the company will achieve the top end of these previously published top tier financial metric target ranges for the full year of 2022 as a result of the company's asset sensitivity and updated financial modeling assumptions, including that the fed funds rate will move much higher to two 5% by the end.
2022, and increased on a more accelerated basis.
50 basis point hikes in May and June followed by 25 basis point increases in the.
Remaining meetings fitting needs in <unk>.
<unk> 2022.
But these are much higher than previously assumed in our modeling.
As a reminder, our financial performance targets are dynamic and are set to be consistently in the top quartile among our peer group regardless of the operating environment.
As such given the current economic environment, and our expectation that the fed will materially increase the fed funds rate in 2022, we are currently reevaluating.
Reevaluating these targets to ensure they are reflective of the financial metrics required to achieve top tier financial performance and the current economic environment, we expect to be in a position to discuss any revisions to our targets at our upcoming Investor day.
So in summary, Atlantic Union delivered solid financial results in the first quarter and continues to be well positioned to generate sustainable profitable growth and to build long term value for our shareholders.
With that let me turn it back over to Bill to open it up for questions from our analyst community.
Thanks.
Mark.
As a reminder to ask a question. Please press star one on your telephone and to withdraw your question. Please press the pound key please standby.
Our first question comes from Casey Whitman of pipe.
Sandler Your line is open.
Casey.
Morning, how are you.
Maybe I'll start with capital.
With the TCE ratio down.
207% can you continue to be as aggressive with buybacks here or is there a level set.
Comfortable running that AD can you go lower.
Give us a sense for sort of how youre thinking about capital again with the with the <unk>.
This quarter.
Yes cases.
Handle that question, yes, so as you do recall.
As we've noted here that the.
<unk> impact in a fairly material impact on our tangible common equity ratio.
That does not affect any of our regulatory capitals capital ratios.
So we are.
<unk>.
Our capital management actions beyond.
Ensuring that we have capital for <unk>.
Loan growth and a sustainable dividend going forward.
We are evaluating that we do expect that.
The impact the.
A negative impact will earn that back over the next several quarters, obviously, we're very asset sensitive as noted.
We don't view that as any economic issue for us This morning.
On the accounting.
Entry in terms of the.
Fair market value, we have no intention of.
Liquidating our available for sale.
The portfolio.
So with that.
We do expect to start learning that back, but we will be evaluating.
Primarily.
The level of share buybacks going forward.
Not necessarily taking any share buybacks off the table at this point, but we will.
Evaluate that as we go forward here.
Okay.
And Rob maybe sticking with you can you just walk us through sort of what each rate hike does to your margin and then.
What kind of deposit betas, you're assuming in that analysis and sort of how quickly.
You need to move deposit rates, assuming you haven't had to move them yet.
Yes.
So Casey mentioned, we're going to have.
No.
As I've mentioned, we are modeling that the fed funds rate will increase throughout the year and at the end of the year.
We're modeling that it will be at above $2 50 level.
From the current 50, so several hikes those types will come faster as I mentioned, we expect May and June to see 50 basis point hikes, followed by <unk>.
Either the meetings at 25 basis points.
Just to give you kind of.
Estimate of what that means to us so for every 25 basis points.
Fed fund moves in LIBOR Falls Sofa falls and Prime falls, that's about five basis points on our core margin approximately about $8 million and net interest income.
So we're projecting that the core net interest margin, which.
You do the calculation for the first quarter kicking PPP in purchase accounting out of the equation.
Came in at $2, 95, which was up 50 basis points from the prior quarter due to the.
Redeploying that excess liquidity I mentioned.
We'll have a fairly significant increase in the margin.
Projecting that that 295.
And if the fed moves the way, we're suggesting we're thinking that we could be in the $3 45 to $3 50 by the end of the year so fairly material.
In terms of the deposit beta is implied in that.
We.
We do expect that deposit betas will move.
Probably after the.
Ne 50 basis points, we've been thinking that.
You'd have to see the fed funds rate move to about 100 basis points and then you start to see deposit rates maybe the competition.
Moving deposit rates, so we're projecting that that will start.
In May June overall through.
Through the cycle, we're suggesting and modeling that we will have like the 25%.
Deposit beta.
Total deposits that will be more in the 30 little over 30% on interest bearing deposits as we go through the cycle. So it will ramp up throughout the year.
I would think about it.
Okay.
Ill, let someone else jump on.
Thanks Casey.
Tanya we're ready.
Our next caller please.
Certainly your next question comes from Katherine Miller of K VW. Your line is open.
Hi, Catherine.
Hi, good morning.
Maybe just one follow up.
On the on the NIM guidance, how should we think about kind of the size of the balance sheet is your margin explorer, there's significant room I guess a lot of that excess cash is deployed this quarter and so does it feel like that is much of a lever, but just can help us think through.
Maybe how much you're expecting to grow that securities book throughout the next year. Thanks.
Yeah, Katherine in terms of the Securities book will most likely.
Likely not be adding to the book we've increased it over the <unk>.
Pandemic with the excess liquidity that we had.
Throughout the pandemic, we've been we've been investing.
Putting that cash to work.
Since the third quarter 2020.
Typically we've run about 15% of total assets in the Securities book pre pandemic, we're now about 20% to 21%. So we are expecting that.
We won't be adding to that.
The Securities book, we ought to be using the cash flows that come off of that kind of bring it down over a period of time.
Much of the <unk>.
Back to the 50% of that will take a bit of time.
But using the cash flows that are coming off the portfolio to fund loan growth.
Going forward, so that will be.
Liquidity source for us as we expect as John mentioned.
High single digit loan growth going forward.
Okay, great that helps.
And then on expenses I remember last quarter, you gave a range of 385 million to $3 90.
And this quarters expenses were just a little bit higher than that kind of run rate does that 385 to 390 million extend.
Range for the full year is still a target or are we a little bit about that now.
Yes.
We're going to confirm that the guidance 385, the initial guidance, we had 385% to $3 90.
Remember in the first quarter, you really can't take them take the extrapolate that run rate throughout the year.
Seasonal.
Increases there.
Related to payroll taxes.
400, K contributions that related to.
We pay incentives during the quarter. So it kind of get ratcheted. It up and then of course, there's a reset of payroll taxes for the higher.
Higher salary.
Teammates. So if you look at the numbers so.
Kind of just give you.
Kind of a calculation that we're looking at sort of normal.
After you take out the one times this quarter.
We had about a 99 eight.
Million dollar expense space.
To that <unk> got a back out this.
Seasonal payroll tax and foreign K that's about.
$3 million or so.
Offsetting that we do.
Increased merits in March so we have one month of 4% Merit increase for teammates.
The add back of $1 million offset that and then don't forget $2 million is coming out starting really April 1st.
On a quarterly basis due to the branch closures and the op sooner. So again, if you look forward, we're probably looking at $96 $97 million in the out quarters combine that with the first quarter. We're still in a 385 to $3 90 on a full year basis.
Okay.
That number is going to come down quite a bit Katherine in the second quarter.
Got it that makes a lot of that alright, great. Thanks, I'll hop out thank.
Thanks Catherine.
Latanya, we are ready for our next caller please.
And our next question comes from William Wallace from Raymond James William Your line is open.
<unk>.
Hey, good morning.
Let's go back to NIM.
First I believe in the text of the release, you said that the purchase accounting accretion was down due to lower prepayments.
With rates rising is it safe to assume that your prepayments will remain low and therefore this kind of this amount that you got in the second quarter or is this kind of a more likely.
Run rate.
Type level.
Usually we take your table and add a little bit for kind of accelerated purchase accounting accretion.
Yes, yes, the purchase account accretion is going to be down this year call. It four or five basis points for the full year compared to higher levels. We had last year that's right. So.
Quarter, Wally I think purchase accounting was about four basis points on the reported margin PPP was about five basis points.
Purchase accounting should kind of remain in that range three to four basis points going forward PPP will basically go away pretty much this quarter or second quarter.
And then again as I mentioned the core margin was 295.
At PPP, that's three three.
<unk>, 3% and four basis points for purchase accounting, but the way we're looking at it is if you look at our core margin.
That was up 50 basis points due to the excess liquidity and growth in the portfolio loan portfolio.
And that's where you'll see some significant.
Improvement or expansion in the margin.
Boost going forward here based on our assumptions.
Okay and last quarter I wrote down that you said that you anticipated eight to nine basis points for every 25 basis point hike I'm curious what you changed in the modeling you get more aggressive with deposit betas are.
Yeah, a couple of things.
Yes, I guess a couple of things there.
One is that we only had three rate hikes during the year. So basically we thought we wouldn't see any.
Deposit moves.
For the balance of year, so that was part of it now.
Aggressive rate hikes, we'll see.
We have ratchet that up a bit and then move to it earlier in the year. So.
Two problems there.
Do you think that do you anticipate I know this is.
It's guesswork to a degree but do you anticipate that.
It'll be kind of a linear move or do you think that you can get a little bit more benefit upfront and then and then youll start to see more kind of noise from your deposit customers asking for cost as the fed continues to hike and youll start to see a little bit less of that.
Spansion as we get further along with fed tightening.
That's it.
Exactly how we're modeling it.
So.
Very limited.
Moves, but moves nonetheless up.
Over the next.
Call. It 100 basis point moves if you go through May and June you start to see that ratchet up.
In terms of the betas implications as you get out probably the <unk>.
Second half fleet late in the year.
Coming out to about that 25 basis.
25% beta as I've mentioned for total deposits.
But it will definitely move slowly to that level.
Okay. Some let's say competition is going to have something to say about it right.
So we'll see.
I would imagine on the loan pricing side as well so yes, that's true.
Sure.
Circling back to the question about that.
It sounds like you said you thought you'd get it back in the next three or four quarters that thought that your securities portfolio was maybe kind of a little bit longer.
Data two to three years, what are you, saying that you would anticipate getting that capital back because youll be earning it back or are you, saying you would anticipate recovering 100 or so million dollars OCI hit.
Yes Securities sure over the next four quarters.
Yes, what I meant to say there.
While he was that will ratchet that up over the next several quarters.
Closer to.
775 closer to eight, but we will recapture that and thats three or four quarters, but it will take some time now, we'll see where rates go from here.
But that's.
That's our working assumption at this point, we think they will take to get back to the <unk> will take a little longer than that okay. Okay. Thanks.
And then John just last question on your prepared.
Remarks.
Im not sure if I heard you correctly did you say.
Four five to $6 5 million dollar fee reduction due to policy changes around overdraft NSF or was it four five to $5 5 million.
Can you tell us.
When do you anticipate we will start to see those and can you give us an update on any communications you've had with CFM TV, yes, I don't have any anything to add on.
In terms of any regulatory communications related to overdraft practices to answer your question, Yes, four 5% to six five is the band. This is an estimate in terms of the income loss from these customer friendly changes, we expect them to begin in Q3.
Of this year of course.
Does it mean, we're not sure where we will be within this band because it's such a terrible it depends upon what's going on with balances and customer behaviors, but I think that's a good conservative band.
Terms of where we're going to be from our standpoint Wally.
It seems clear to us where the puck is headed and we don't want to wait and we don't want to.
Be sort of a late adopter we've been the hallmark of this company is the client experience and we have been making consumer friendly changes, we would rather get ahead and be among the leading pack we've never been a big overdrafts shock not that reliant on it and we feel like from a.
<unk> proposition offering this is a good thing to do so it's actually I think will be a good message and well received by the customer base.
I think what's implied is someone compelled us to do this we haven't heard the first question about it.
This is our choosing and we recognize that we are in the kind of earlier pack at least among the midsized banks, but Mark My words. This is where it's going so let's do with let's deal with it now.
John I thought you disclosed in your K that you received a notice from the CFPB around a potential lawsuit regarding your.
No.
Im totally mistaken you're referencing was call it north which is a notice an opportunity to respond to the advisers, which is a mechanism. The CFPB uses to make inquiries.
Thanks <unk>.
<unk> is broadly, making inquiries across the industry around overdraft practices and not.
Obviously, we there's really that's basically a set of questions and issues that they outlined we then respond to them.
And writing we choose we chose to disclose that because we are transparent and we thought it was the right thing to do.
That has nothing to do with pricing issues and I'll just leave it at that and is this overdraft related and <unk>.
The timing of that was also after the first quarter call or the last quarter call as well when we receive that Noah.
Yes, right. Okay. So so youre, saying that the changes in policies that you are.
<unk> around NSF and overdraft.
Underway because you did mention it during the fourth quarter call in January before you got this notification and the notification it doesn't have anything to do with whatever policies and changes that youre, making it something else I would say this is simply an acceleration of a series of consumer friendly moves that we've been making for quite a while.
We did not want to jump the gun, we've been interested to watch what's happening you can look upstream of us and see changes that are happening.
And you can see some of the mid sized banks, having made changes as well, but from our standpoint, we think about this is really part of the value proposition of the bank.
It's.
We think it's we think this is where it's going.
And.
This is not any new idea.
Yeah I agree okay. Thank you for that clarification I appreciate it sure. Thanks.
Wally and Tanya we're ready for our next caller. Please.
Certainly our next question comes from Hawaii Hunsinger of comfort point. Your line is open line.
Hey, Thanks, good morning.
Just to stay with where while it was on the on the NSF I just wanted to.
Turning to further further dive down so.
Think that was running at about $17 million or so a year how much was in this quarter.
Now, let's be clear, what we're talking about youre looking at the sum total of NSF and overdraft charges.
Africa.
Yes, so were talking about the elimination of non sufficient funds, which is when we return to an item without paying it.
That's what's being eliminated we are not eliminating overdraft fees, when we actually create an overdraft.
A customer.
Oh, I'm, sorry, I thought I heard you say in your remarks free overdrafts.
I missed there I don't know what you missed as I said free I said no charges for non sufficient funds.
The proverbial bounced checks. So if we return to the item without sufficient funds, we will not charge for that item that is different from paying an item, which creates an overdraft.
And but you would make comments around overdraft what were those just to verify and that we have we have a series of changes that we're making across all of these categories. Laurie. So examples of things that we're doing on overdrafts would be reducing the caps not charging fees whenever drafts are covered by transfer.
Either from overdraft lines of credit or accounts, which are linked such as a savings account, which is drawn on to cover an overdraft and we have some other things going on as well.
Today advanced credit for an AC H payroll.
Payroll deposits has nothing to do with overdraft per se, but that's simply an additional service that we have the technology is there we have the capability to give people today early access to their direct deposit of payroll. So we decided to do that because we can and we think that's part of our customer friendly value proposition. So.
The $4 five to $6 5 million estimate speaks to a a basket.
Various changes.
Most of which are in.
Related to either the NSF fee waiver.
Other overdraft related practices.
Got it got it Okay and then Rob maybe you can just help.
To help put this together so as we look in the back half of 2020 tail.
We look obviously to a drop in NSF the drop in mortgage banking, how should we be thinking about that quarterly run rate on noninterest income obviously, you've got some other lines that are moving higher.
How should we be thinking about that.
Yes.
Laurie.
Looking at it is.
We came into the year.
Knowing rates.
Rates would spike as much an impact the mortgage business as much as.
It is.
We'll be as we go forward here.
We had we had said we'd be growing noninterest income about eight or 9%.
What kind of backing off on that obviously, we didn't.
Necessary project.
Woodruff tissue as well.
So we're really looking at about a 2% to 3% growth rate over.
2021 full year.
Last year was about $120 million and we're looking at.
A couple of million dollars more than that this year give or take so kind of flattish.
We're dialing that back due to.
The mortgage pullback, which we had.
You had said it would pullback probably above 40%.
About 40%.
Maybe more in the 50% 60% range.
So thats going back from last year, Overdressed is coming down a bit we are looking at.
Additional resources or sources of income some of which as you saw in the first quarter loan swap fees were up materially.
On a quarterly basis versus last year's quarter run rate. So we expect that some of that will continue and we've also got other sources.
Our new sources of revenue.
Could make up for some of the other reductions that I'm talking about here FX Foreign exchange for example, SBA 70.
Gains those sorts of things so.
Kind of sticking with.
With that at this point.
Okay, Great. That's helpful. And then just wanted to clarify the PPP forgiveness income add back.
Back into this number just wanted an X well back into it at $2 $8 million is that a right number for the quarter.
Say that again PPP.
The <unk> fee income and net income.
Yes, the absolute income, yes, it was about $3 million that's right.
Okay. So that leaves you with round numbers about 1 million and a half or do you have.
Yes, theres only $1 $6 million left there.
Should come into the income stream.
So we expect the tail.
Second quarter that should.
It should be done by that by the end of the second quarter.
Great. Thanks, I'll leave it there.
Thanks, Lori and Latanya, we are ready for our last caller. Please.
Certainly and our last question comes from Brody Preston of Stephens incorporated your line is open.
Hey, Hey, good morning, everyone. How are you.
Thank you.
Hey, Rob So I wanted to circle back just on the margin comment you made real quick I think you said $3 45 to $3 50 by the back end of the year with the updated.
And beta assumptions.
I just wanted to ask was that core or was that headline.
Yes.
Yes that was that was core protein so add another.
Three to four basis points.
Such as accounting and their PPP as you know it goes away by then.
Okay. Okay, yeah, because I was maybe on the headline there just what I had modeled.
So.
Because I was wondering what the what the other leverage points where to get.
You said you expect to be for the full year at the high end.
Of those ranges.
So I just wanted to make sure I was thinking about that margin.
Yes correctly.
Okay.
And then I did want to ask just on the on the loan portfolio pricing.
I think it's 4% you said are at their floor is 12% of the 16 are above Florida, So that 12% should reprice, if we get this may.
Yes.
In the 4% how many rate hikes that we need to get those off the floors.
Yes so.
The next 50 basis points.
Presumably see in May we will bring in about 75% of that so we'd be down to 1% would still be at floored.
And then another 25 basis points or so kind of bring it all into the variable rate.
Bucket.
Okay and within your modeling.
And I know this is fluid but are you assuming you get the full kind of repricing benefit.
From the floating rate loans going forward on a static basis or is there any assumption of.
Floating rate.
Becoming fixed rate over time, or just any degradation that floating rate mix.
Yes, we don't have any degradation going back.
Florida levels, just as rates rise will be kind of call. It in the money if you will.
You go out farther.
Into 'twenty four we do think rates.
You may see those rates coming down and that could impact.
Here's there, but at this point in time.
We're thinking it's tight.
All the way through 'twenty, three and then you might see some pullback from the fed.
Got it and what are new origination yields coming on that currently.
But I think.
On a blended basis about 20, or so I think on the commercial side.
That includes floating and fixed rate.
Weighted.
Sure.
Got it and then my last one would just be.
I thought the mortgage banking, although it was down it held up a bit better than I expected. So could you just remind us what the.
What the what the portion of the <unk>.
Purchase versus refi mixes within that portfolio this quarter, what it was this quarter and what it typically is.
Yes, so this quarter actually it kind of held up.
<unk>, 35% to 36% range that was down a bit from fourth quarter, which was I think around 40%. We do think that that's going to kind of come back down because late in the quarter, you saw mortgage rates by 5% up to 5% or a little higher.
So thats expected to come down we think on a normal basis.
You see 20% to 25% of the origination book.
Regardless of the rates.
You have a 75% purchase of the 25, 20% to 25% refi. So we think thats going to be coming back down to that those lower levels <unk> already as you know this is really the old access National Bank mortgage shop under the leadership to the fine leadership of Dean hacker or its never been a big refi shop.
It also doesn't really do the accordion that you. So often see Dean would tell you that we don't add a lot of people to mortgage when times are good only the turnaround in and eliminate them when times are not so good what that means is it somewhat limits the.
The capacity during boom times, but at the same time it doesn't fall as much. So they do a really good job of managing that business for profitability, regardless of the environment, which is a bit on comments.
Got it. Thank you very much for taking my questions I appreciate it. Thank you.
Thanks, <unk> and thanks, everyone for joining us today, we look forward to speaking with you in a few weeks at NASDAQ have a good day.
This concludes today's conference. Thank you for participating you may now disconnect.
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