Q4 2022 Atlantic Union Bankshares Corp Earnings Call
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].
Good day and thank you for standing by welcome to the Atlantic Union Bankshares fourth 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 to ask a question. During the session you will need a press star one on your telephone.
Well he didn't hear the automated message advising your hand is raised to withdraw your question. Please press star one one again. Please be advised today's conference is being recorded I would now like to hand, the conference over to your Speaker today, Bill <unk> Senior Vice President Investor Relations. Please go ahead.
Thank you Michelle and good morning, everyone.
I have Atlantic Union, Bankshares, President and CEO , John Asbury, and executive Vice President and CFO , Rob Gorman.
Today, we also have other members of the executive management team with us for the question and answer period.
Please note that today's earnings release and the accompanying slide presentation. We are going to run. This 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 the appendix to our slide presentation and in our earnings release for the fourth quarter and fiscal year 2022.
To make forward looking statements on today's call, which are not statements of historical fact and are subject to risks and uncertainties there.
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 issued today and our other SEC filings for further discussion of the company's risk factors and other important information.
<unk> regarding our forward looking statements, including factors that could cause actual results to differ from those expressed or implied in any forward looking statements and.
All comments made during today's call are subject to that safe Harbor statement.
End of the call we will take questions from the research analyst community.
Before I turn the call over to John Asbury wanted to remind everyone that Atlantic Union Bankshares common stock and depository shares each representing one 400 interest in a sure up our preferred stock are both now trading on the New York Stock exchange are.
Our common stock symbol remains at <unk>, while our depository shares trading under <unk> Dot PRA to conform with the NYSE nomenclature for our preferred stock.
Now I'll turn the call over to Jonathan.
Thank you Bill good morning, everyone and thank you for joining us today.
<unk> Bancshares delivered a strong quarter to close out 2022 importantly, we hit our top tier financial targets during the fourth quarter. As we said we would we recorded low double digit annualized loan growth our net interest margin expanded meaningfully.
Asset quality remained strong we kept expenses in line and generated significant positive operating leverage as in prior quarters I would like to begin by commenting on the macroeconomic environment and our primary operating footprint before I delve more deeply into details on our results for.
For perspective, traditionally Virginia has been a stable economic area and not one kind of big swings in either direction. The federal government access, but a significant catalyst in shock absorber to the Commonwealth's economic engine and the economic base here is diverse given how Virginia has fared in the past. We currently expect the effects of any potential recession to be somewhat muted here.
Although we believe we are well positioned should economic conditions worsen from historical trends.
Virginia's last reported unemployment rate of two 8% in November notched up slightly from two 6% at the end of last quarter, but it remains below the national average of three 6%. During the same time period. This is relatively in line with where it was before the pandemic.
I like to do I've been out meeting with our clients, the Virginia business community and our teams and I can report that anecdotally, we still do not believe dreary economic headlines nationally reflect what we see going on in our footprint our markets appear to be healthy and our lending pipelines, while down about 5% lower than the same time last year are strong we saw.
Don't anticipate any near term shift away from the positive trends of low unemployment and a benign credit environment, but we will continue to monitor conditions in our markets.
While we do expect the federal reserve to further raise short term rates in the first half of 2023 since we are fairly asset sensitive additional short term rate hikes over the next few quarters should support our operating results and helped to offset increases the cost of funds in a rising rate environment and accelerating deposit rate competition.
As usual, we remain focused on generating positive operating leverage that is growing our revenue faster than our expenses our numbers have been noisy for the past few years with pandemic related loan loss provisioning swings the revenue impact of the paycheck protection program and various expense reduction items, such as branch and facility rationalization, but if you drill down.
And then adjust for those factors, which were not as material. This quarter you can see the strength of the core franchise over time and to that point.
PPP adjusted revenue growth was approximately 11% year over year and was 7% on a linked quarter basis from the third quarter of 2022.
As a result of prior expense management actions, our adjusted operating non interest expense run rate increased 4% year over year and was flat quarter over quarter.
The company generated positive pre Pvp adjusted operating leverage of approximately 7% on a year over year basis, and 7% quarter over quarter I'd also like to point out that excluding PPP pre tax pre provision adjusted operating earnings increased 23% year over year and 17% from the prior quarter.
Now, let me turn to some of the high points for the quarter and 2022.
Posted annualized loan growth of approximately 15% point to point in the seasonally high fourth quarter and for the full year, we recorded point to point loan growth of approximately 11%. Excluding PPP. This was our fifth consecutive quarter of high single digit annualized loan growth or better excluding PPP we.
We believe that we are well positioned to deliver 6% to 8% loan growth for 2023, given the strength of our current pipeline our competitive positioning the market dynamics and fundamentals in the markets that we serve we do recognize that the economic environment and our footprint could change as persistent inflation higher interest rates and the threat of a recession.
But currently we expect to remain in a moderate growth mode in 2023.
C&I line utilization ticked up at the end of the quarter to 35% and that's still below our pre pandemic levels of over 40%, but better than at this time last year, which was approximately 28%. We believe we have further upside here is working capital needs continued to normalize among our clients over time.
Our loan production in the fourth quarter of 2022, nearly equaled our record production in the fourth quarter of 'twenty one about.
About 43% of production in the fourth quarter came from new to bank clients and 57% came from existing clients.
CRE payoffs continued to slow year over year and are well off the peaks we saw in the second through fourth quarters of 2021.
As I've said for the last two quarters rising term rates have suppressed both refinance activity into the long term institutional markets on commercial real estate.
And too good to refuse offers on commercial real estate properties.
In the fourth quarter, we saw a notable acceleration in deposit rate competition, while deposits averaged up 3% quarter over quarter. We did experience one off at the end of the year largely in transaction accounts impacting our point to point growth comparisons and more than offsetting the $418 million deposit increase we experienced in the.
Third quarter.
Nearly all of the third quarter increase was also in transaction accounts for the full year point to point deposits declined four 1% and that was actually consistent with our original expectations for the year.
There were a number of factors behind the late December transaction account runoff. These include a relatively small set of larger commercial clients and affluent consumer clients with excess liquidity moving funds to higher yielding alternatives normal seasonality outflows and some spending increases due to inflationary factors.
And our loan to deposit ratio was 97%, which is at the lower bound of our targeted range of 90% to 95% as of yesterday at the loan to deposit ratio was approximately 88% with the improvement coming from deposit growth, we posted month to date in January .
Deposit rate competition intensified in the fourth quarter, along with the rapid and unprecedented rise short term rates and we have made further rate adjustments to seek to maintain competitiveness and defend the deposit base.
Since our deposit base overall, it's pretty granular and comprised of 57% transaction accounts, we do expect deposit betas throughout the remainder of the rising rate cycle to increase but still be manageable.
Our latest modeling shows that our net interest margin is likely now at or approaching an equilibrium point.
I mean, we expect NIM to hold steady from here and further rate actions by the fed will allow us to offset higher rates paid on funding with higher yields on our loan portfolio half of which is variable rate it's difficult to forecast exactly what will happen, but we believe this is the most likely outcome Rob will provide additional perspective on this during his comments.
<unk>.
I do want to touch on a few new fee based activities I mentioned last quarter we.
We retooled our SBA 700 program in June and executed our first 700 <unk> loan sale during the fourth quarter. Additionally, one syndications originations were active and we are building a run rate with our foreign exchange program. The combination of these three new capabilities resulted in $1 $3 million of fee based net revenue for the quarter and we.
Spec them to generate around $6 million of net revenue over the course of 2023 worth noting is that these new revenue streams should largely offset fee income declines from the various customer friendly NSF o'dea changes, we made last year.
Asset quality remained strong with annualized net charge offs of two basis points for the fourth quarter for the full year net charge offs were also two basis points.
Losses will eventually normalize to historical norms and one offs can come at any time, the given the continued low unemployment rate and still solid fundamentals in our markets and client base, we have yet to see any sign of a systemic inflection point in our asset quality metrics.
Economic uncertainty and the threat of recession could negatively impact our markets.
Current economic situation and the footprint appears to remain steady and as noted we expect the impact of any macroeconomic slowdown to be somewhat tempered here in our home state of Virginia.
Because we believe we are in the late stages of a NIM expansion cycle. We also took additional expense actions during the quarter.
On the other efficiency initiatives, we decided to consolidate five additional branches set for closure in March since the pandemic began we have consolidated 27% of our branch network gets still posted net positive consumer household growth for the year.
Some 2022 was not only a good year for Atlantic Union, but also a good demonstration of the value and earnings power of the franchise, we have all built.
Looking back at my now six years at the company, we have been clear consistent and intentional in our strategy. We've made great progress in successfully diversifying our product lines and capabilities, while building our core franchise, our culture and our brand we're.
We're far from done with these efforts and in fact, we'll never be done since we view our transformation is continuous and not an event but.
But we have come a long way, a very long way and for that I'd like to express my gratitude to our teammates since they are the ones who make this all possible delivering each and every day for our customers shareholders and the communities we serve.
Looking ahead I remain confident that we're well positioned to manage our way through the challenges that lie before us while the operating environment may be uncertain. What is certain is that Atlantic Union Bankshares remains a uniquely valuable franchise. It is dense it is compact in great markets with a story. Unlike any other in our region, where scalable and we're growing our.
<unk> operating in the right markets with the right team to deliver top tier financial performance, even in the most trying of times.
I'll now turn the call over to Chief Financial Officer, Rob Gorman to cover the financial results for the quarter.
Well, thank you John and good morning, everyone. Thanks for joining us today.
Now, let's turn to the company's financial results for the fourth quarter.
In the fourth quarter reported net income available to common shareholders was $67 6 million.
And earnings per common share was <unk> 90, <unk>. This was up approximately $12 5 million or <unk> 16 per common share from the third quarter's reported net income available to common shareholders.
Return on tangible common equity was 22, 9% in the fourth quarter up from 17, 2% in the third quarter.
Return on assets was 139% in the fourth quarter up from the 115% reported in the prior quarter.
And on an operating basis, the efficiency ratio was 56% in the fourth quarter down from 54, 1% in the third quarter.
Also during the fourth quarter. The company continued to generate positive operating leverage as total revenue grew approximately 7% and operating expenses were flat on a linked quarter basis.
Importantly, as John previously mentioned, we hit all of the top tier financial targets, we set on a run rate basis in the fourth quarter.
Turning to credit loss reserves as of the end of the fourth quarter. The total allowance for credit losses was $124 4 million, which was an increase of approximately $5 4 million from the third quarter, primarily due to net loan growth during the quarter and increased uncertainty in the macroeconomic outlook.
The total allowance for credit losses, as a percentage of total loans remained at 86 basis points at the end of December .
The provision for credit losses of $6 $3 million in the fourth quarter was relatively flat from the prior quarter's $6 4 million provision for credit losses.
Net charge offs remained muted at $810000 or two basis points annualized in the fourth quarter and for the year. The net charge off ratio came in at two basis points as well.
Now turning to pretax pre provision components of the income statement for the fourth quarter tax equivalent net interest income was $168 million, which was up approximately $13 4 million or eight 7% from third quarter driven by higher interest income due to increases in loan yields on the companies.
Variable rate loans due to rising market interest rates and average loan growth as well as increases in investment income primarily due to increased yields on taxable securities.
<unk> increases were partially offset by higher interest expense due to higher cost of funds, primarily reflecting the impact of increases in short term interest rates on borrowings and deposits increased use of short term funding and higher average deposits from the prior quarter.
The fourth quarter's tax equivalent net interest margin was three 7% Thats an increase a net increase of 27 basis points from the previous quarter due to an increase of 66 basis points in the yield on earning assets, partially offset by a 39 basis point increase in our cost of funds.
The increase in the fourth quarter's earning asset yield was primarily due to the 70 basis point increase in the loan portfolio loan yield, which had a 62 basis points positive impact on the fourth quarter's net interest margin.
In addition, higher investment securities yields in the fourth quarter drove a three basis point increase.
<unk> net interest margin.
The loan portfolio yield increased to four 9% in the fourth quarter from four 2% in the third quarter, primarily due to the impact of rising short term interest rates on variable rate loan yields.
The 39 basis point increase in the fourth quarters cost of funds is due primarily to the 32 basis points increase in the cost of deposits driven by increases in interest checking money market and time deposit rates as well as increased wholesale borrowing rates due to rising market interest rates.
Noninterest income decreased $1 1 million to $24 $5 million, primarily primarily due to declines in equity method investment income.
Partially offset by increases in loan syndication SBA <unk> and foreign exchange revenues. Each included within other operating income line item.
In addition, mortgage banking income decreased one point.
Zero $1 million from the prior quarter due to lower mortgage origination volumes and gain on sale margins.
And bank owned life insurance declined $796000 reflective of the impact of prior quarters mortality benefit received.
These noninterest income category decreases were partially offset by increases in loan related interest rate swap fees of $1 $6 million due to an increase in average deal size amongst swaps executed in the quarter.
900, noninterest expense decreased $130000 to $99 8 million.
For the fourth quarter.
Versus $99 9 million in the prior quarter notable expense activity in the fourth quarter of 2022 included a gain related to the sale and leaseback of an office building refunds of prior period FDIC assessment expenses.
Costs related to the closure of five branches is expected to close in the first quarter of 2023 as well as other restructuring expenses the write off of obsolete software during the quarter and increased variable incentive comp and profit sharing expenses as well as professional services fee increases related to St.
T J projects incurred during the quarter.
Our effective tax rate for the fourth quarter declined to 14, 3% from 17% in the third quarter due to changes in the proportion of tax exempt income to pre tax income in.
In 2022 or the full year tax rate came in at 16, 2% in 2023, we expect our full year effective tax rate to be in the 17% to 17, 5% range.
Now turning to the balance sheet total assets were <unk> 25 billion at December 31.
And that's an increase of $511 million or approximately 10% annualized from September 30 levels.
The increase was primarily due to loan growth during the quarter.
At period end loans held for investment net of deferred fees and costs were $14 4 billion.
Inclusive of $7 3 million remaining in PPP loans net of deferred fees, an increase of approximately $530 million or 15, 1% annualized from the prior quarter.
We exclude PPP loans adjusted loans held for investments in the fourth quarter actually increased 15, 3% annualized from September 30, driven by increases in commercial loan balances of $478 million or 16, 2% linked quarter annualized.
And consumer loan balance growth of $57 1 million or.
Or 10, 2% annualized.
Excluding the effects of PPP loans adjusted loans held for investment in the fourth quarter increased $1 4 billion or 10, 7% from the same period in the prior year.
At the end of December total deposits stood at $58 9 billion and Thats a decrease of $650 million were approximately 14, 7% annualized from the prior quarter, while average deposits were actually up $123 5 million or 3% annualized for the quarter.
At December 31, this transaction related deposit accounts comprised 57% of total deposit balances, which is down a bit a basis point from third quarter levels and as John mentioned the loan to deposit ratio is now at the lower bound of our targeted range of 90% to 95% at year end.
From a shareholder stewardship and capital management perspective, we remain committed to managing our capital resources prudently as the deployment of capital for the enhancement of long term shareholder value remains one of our highest priorities.
Regarding the company's capital management strategy capital ratio targets are set to seek to maintain the company's designation as a well capitalized financial institution.
And to ensure that capital levels are commensurate with the company's risk profile capital stress test projections and strategic plan.
Growth objectives.
At the end of the fourth 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 increase from the prior quarter, primarily due to the increase in the value of the available for sale securities portfolio as long term rates decrease somewhat during the fourth quarter.
Again, we believe that the GAAP accounting versus regular regulatory accounting and capital impacts of unrealized mark to Mark losses from rising interest rates and the available for sale securities portfolio will be recouped over time.
Therefore, we also tracked tangible common equity ratio and tangible book value. Excluding this noncash GAAP accounting requirement.
During the fourth quarter the company paid a common stock dividend of <unk> 30 per share, which was consistent with the prior quarter and also paid a quarterly dividend of 170 188.
Each outstanding share of series a preferred stock the company did not repurchase any shares during the quarter in order to preserve capital for organic loan growth and to position the company for any adverse developments arising from the current macroeconomic environment.
We made it to the following top tier financial targets and as noted achieved them during the quarter return on tangible common equity within a range of 18% to 20% return on assets in the range of one 3% to one 5% and an efficiency ratio of 51% of low or lower.
Regarding the efficiency ratio target I'd again like to point out that it is difficult to compare our efficiency ratio to banks that don't have significant operations in Virginia, since Virginia banks do not pay state income taxes, but instead I would pay a franchise tax that flows through noninterest.
Expenses and income taxes.
This franchise tax quarterly noninterest expense run rate of approximately $4 5 million added approximately two 4% of the company's fourth quarter efficiency ratio.
So setting the efficiency ratio target of 51% or lower is akin to a 49% or lower efficiency ratio target for peer banks not headquartered in Virginia.
As a reminder, our top tier financial targets are dynamic and are set to be consistently in the top quartile among our proxy peer group regardless of the operating environment.
As such we reset these targets periodically to ensure they are reflective of the financial metrics required to achieve top tier financial performance versus peers in the prevailing economic environment.
We do expect to achieve our financial targets for the full year based on the following key assumptions.
We expect to produce 6% to 8% loan growth in 2023.
We expect our net interest margin to stabilize in the three 7% to 375% range in 2023.
As a result of the company's asset sensitive position and the assumption that the federal Reserve Bank will increase the fed funds rate to 5%.
And maintain it at 5% throughout 2000 through 2023.
As a result of loan growth and a stable net interest margin. We expect net interest income to grow by 13% to 15% in 2023 from full year 2022 levels.
We also expect that the company will generate meaningful positive adjusted operating leverage in 2023 due to low teen revenue growth outpacing mid single digit expense growth in 2023.
On the credit front, while we have not seen any systemic credit quality issues to date.
Due to expectations for a mild recession to begin sometime in 2023 for modeling purposes, we are assuming an uptick in our net charge off ratio to 10 basis points in 2023 from two basis points in 2022.
I would iterate reiterate that we do not see evidence of a return to the credit return into credit environment. At this point, but one offs are bounded pop up every now and then.
The allowance for credit losses to loan balances is also projected to remain within the range of 85 to 90 basis points in 2023.
In summary, Atlantic Union delivered strong financial results in the fourth quarter of 2022, as evidenced by hitting each of our top tier financial targets.
So we believe we are well positioned to generate sustainable profitable growth and to build long term value for our shareholders in 2023 and beyond.
And with that I'll turn it back over to Bill <unk>, who will open it up for questions from our analyst community Bill. Thanks.
Thanks, Rob and Michelle we're ready for our first caller. Please.
You as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
And our first question comes from the line of Casey Whitman with Piper Sandler. Your line is open. Please go ahead, yes.
Good morning Casey.
Good morning.
I guess first.
Bigger picture John can you just remind us your views and sort of how youre thinking about bank M&A for Atlantic Union This year.
I would say nothing has changed Casey from what you've heard for a while we view that as a possible supplemental strategy. We believe we can accomplish what we intend to accomplish without that.
Which does not mean that we wouldn't consider it we would but it would be a supplemental strategy.
Big picture the.
Preferred approach if we were to look at it would be to do something with that.
Let me back up clearly you would have to meet makeup.
Make a strategic and financial sense and meet our acquisition parameters et cetera are we wouldn't consider it the ideal scenario would be something that is.
On the smaller side.
And it would be more likely than not an infill within our existing markets, where we can continue to increase density across Virginia, which would be the first choice and really drive brand power.
Extract cost and use that for investment everywhere, we love continuing to densify in Virginia. We think we have a long way to go we're not about to run out of room.
Would consider contiguous markets the most logical ones for us would be Maryland, and North Carolina that becomes much fewer and further between so.
A secondary strategy not a primary strategy. It is a tough environment to do it you have to think about the rate marks and so I think that one of the bigger constraints could potentially be.
Just having to come to grips with.
Whether it's going to pencil out in terms of the financial metrics anything to add to that Rob.
No I think you've.
Good.
The objectives that we would have from an M&A point of view.
And.
We'll see where we go from here.
But it is in secondary strategy as you know, there's a lot of organic opportunities that we want to work on in this environment. A good good core depository franchise becomes more attractive than ever and I would add that as well. It goes without saying, we would have to have great confidence in asset quality.
And.
The due diligence so that's our thinking about it Casey.
Great I appreciate.
Great and then just looking at the loan production this quarter, Rob can you give us a sense for where new loan yields are coming on.
During the quarter or where that's coming out now.
Yes during the quarter.
As we said we had really strong production.
This quarter and if you look at.
The various originations.
<unk>.
About 65% of the new production came on it from a variable rate actually it's a bit more than that call. It 75%. When you include prime loans and those are coming in in the six 5% to 7% range in terms of yields.
And then we've got the remainder is fixed and those both have been coming in five.
Coke Copa to lower five five to $5 50.
So overall, it's a bit above 6% when you blend it all together in terms of new yields coming on.
Of course.
The spreads over indexes as LIBOR has increased in price increase.
Have remained fairly constant.
As rates have been rising.
Those would be to use that we're seeing right now in terms of the new book.
Got it.
I appreciate the update that I guess I'm wondering what kind of position you will be and if the fed does begin to pivot like have you taken some of your asset sensitivity off the table at year end from where you were at 930 or maybe just walk us through how expectations might have to shift and that sort of environment.
Yeah as I noted.
My comments, we do expect that the fed will.
Yeah, that's around 5%, maybe a little higher kind of stay there for a while.
Likely in our minds in 2024 before they start.
Thinking about lowering rates back down certainly won't we don't expect that they would go back to zero rate environment, but.
But we have taken some asset sensitivity off the table, we've entered into a <unk>.
A few swaps in terms of.
Protecting ourselves on the downside.
We are.
We're capped out on us.
We're sofa goes for for example.
Put about $500 million on the books.
We're in the money so for drops below I think about 360 or 375. So there is some some of that going on.
Of course that doesn't take the full asset sensitivity off the table.
For us so there would be some.
The compression if you will.
Net of debt.
Those strategies, we put on.
Yes.
Yes.
Ill, let someone else jump on thank you.
Thank you Casey.
Michelle we're ready we're ready for our next caller. Please all right one moment for our next question.
Our next question comes from the line of David Bishop with Hep B Group. Your line is open. Please go ahead.
David Good morning by the way it's good to have you back and thank you for picking us up at hobby.
Thank you it's good to be back much appreciate that.
Looking forward to continuation of coverage here.
Hey, John just curious from a maybe a backlog perspective.
As you look out depending on how the Virginia economy holds up.
In your experience of the market and the market do you expect anything different if we do enter recession in terms of how the state is positioned to respond and then the debt how you're positioned relative to maybe the.
The financial crisis in 2008 2009.
Well I don't expect anything different which does not mean that we couldn't experience something different.
It's actually was not here in 2008 and nine at the time.
I was I was in the southeast, but I can tell you.
And you know this David because you live in the area.
Virginia would have been one of the more resilient areas the greater Washington, DC. The reason, we keep pointing back to you which is you just have the stabilizing fact force of the U S government.
The U S military etc. The economy has only become more diversified since that.
You look at.
Yeah all of it has happened across the state we feel quite confident one of the things that keep looking at is the unemployment rate and so the unemployment rate right now.
Two points.
Thank you very much it ticked up two basis points to 8% U S averages somewhere like 30 seconds.
And it's just it's really hard to see it falling off a cliff Cliff I think our seasonal modeling Rob assumes we go on that.
Unemployment standpoint.
At that point of view very conservative in our seasonal modeling assuming there's a recession.
It averages about 6% over the two years that is a long way away from where we are currently so David I would just say bottom line if anything the fundamentals should have only gotten better in.
In Virginia in terms of the diversity of the economy.
So yes, I would fully expect that we will do much better than average anything could happen, but that's our view of it we're ready for anything but we should as we have traditionally done for good reason fare better than most and David just another data point on that during the height of the unemployment and during the great recession.
Virginia is unemployment peaked at seven 6%. So if you look at that relative to where we've got our sea. Some modeling at 6% you can see we're pretty conservative in that.
Yes, that's sort of my next question regarding the CSO model I don't know if you have this offhand, but like.
Like you said, yes.
Virginia unemployment rate forecast at three 1% under Moody's you guys used at 6%.
If you are able to say to tamp that down to 5% just curious maybe what that would have an impact maybe from a frigid provisioning perspective, if thats the proper way to look at it.
Yes.
So David you're talking about if I could.
If the rate gets up to around 5% or so.
Yes, we would be.
What percent it really be dependent on what losses were actually coming through.
The model will be very sensitive to that unemployment rate and we would be increasing.
The allowance for.
The additional potential of losses.
The result of.
Unemployment, which.
Would indicate that it's a fairly significant recession going on.
So we would we would definitely be recently.
The allowance for credit losses Accordingly.
Got it got it.
Got it approved.
I appreciate the guidance with this 8% just curious where you see the best prospects for growth either by loan segment or maybe geographic regions in 2023.
Well actually David Ray do you want to it's going to come out of the commercial bank.
Dave do you want to speak to where you see opportunity I think we've done a good job of diversifying the bank, we have our new business lines as well, which provides supplemental growth I'm feeling pretty good across the board. What do you think David David Ring as head of wholesale banking, which is what we call commercial hi, David.
We actually grew in every vertical and in every region in 2022. So each region currently has pretty strong momentum. So there isn't anywhere in Virginia, we don't feel pretty comfortable journey.
Generating growth in 2023.
We'll say several things the greater Washington region is to us like Atlanta is to the deep South banks, that's kind of the big market. So we've got plenty of room to run up there.
Asset based lending definitely has upside that's something we've been working on for several years, we have additional capabilities. There. So I think it'll be a pretty good diversified play.
But generally speaking it's fair to say the larger markets tend to do better than the smaller markets. That's just a fact of the size of the economies.
Alright.
And one more for me for a drop off.
Operating expenses I know there was some noise in other expenses just maybe I don't know if you can quantify quantify the dollar amount this quarter, maybe we'll rethink a good run rate in the first quarter might be.
Expenses reset.
Yes, so from that point of view, David Yes, you would expect to see.
Seasonally increase in.
In the expense base.
<unk>.
Kind of the run rate coming out of the year with fourth quarter was $99 million probably looking in.
$4 $5 million on top of that.
The first quarter due to FICA resets and the like and then merit start kicking in at the end of the in March so.
That's our thought.
Resets and unemployment reset start to dissipate.
The remainder of the year so.
You see it kind of a spike up and then it will start coming down in second third and fourth quarter.
Great. Thank you.
Thank you David Thanks, David Michelle we're ready for our next caller. Please all right one moment please.
And our next question comes from the line of Catherine Mealor with <unk>. Your line is open. Please go ahead hi.
Kathryn good morning.
I wanted to go back to fees talked a little bit about some of the initiatives that.
Our increasing fees for this year, but it looks like your guide is a little bit more conservative today than it was last quarter can you just talk a little bit about what.
Thats coming from.
Yes, actually Catherine it's kind of an apples and.
Orange kind of thing we changed up how we've looked at it.
If you look at the previous guidance, we said.
We will grow after we excluded the impacts of the sale of.
A business.
This time around what we basically said is we took that out of the equation and said okay.
We are about 100 $910 million of noninterest income.
In.
2022.
That's going to come down mid single digits as we say so.
Basically just took that out of the equation if you take that.
It would actually have grown if you if you.
Just for the <unk>.
Hey.
The reduction due to the sale.
Kerry Street partners or the investment we made in carrier Street partners.
So it's really it's really apples and apples when you come down to the absolute number but the way we.
We described that we changed out of that.
How that cut.
Put in the deck.
That makes sense. Okay. Thank you so much for that clarification.
And then on deposit cost can you give us just a sense as to where deposit costs were maybe towards the end of the quarter were aware new deposit costs are coming on.
And as you think about deposit growth over the next year.
Is it you think is coming more in Cds or money market and maybe what kind of wherever the rates are today.
Yes, certainly from a growth point of view going into <unk>.
'twenty three.
Look we're projecting kind of low single digit overall deposit growth.
But to your point most of that is coming into the higher cost categories.
Money market and Cds.
Sure.
We've been increasing our rates.
We have some promotions and specials on those.
And that's where we're seeing some growth as John mentioned, we have seen some deposits come back from from the fourth quarter and year end in terms of the rates going on.
So if you look at our December rates.
Sure.
The.
Total deposits coming in at 80.
Five basis points is what we reported.
In December so that that's ticked up.
And then interest bearing.
In particular is now up to 100.
123%. So if you look at that versus what we reported on average for the quarter.
The cost of deposits was <unk> 72 in the quarter.
Average going up Thats 85, if you look at on a spot basis.
And the 105 on interest bearing deposits now 123, now we do expect that those will continue to increase.
In 2023.
Sure.
<unk>.
As deposit betas actually increase we've seen a lag in deposit betas, we now see more competition.
And the higher in these categories the competition for deposits.
So we are expecting that.
On average you start to see it.
Just bearing deposits kind of landing in the call it.
One <unk> to 2% next year.
In total deposits.
And the one in the quarter to one.
135 area so again.
If you look at our betas to date, we are about 25.
<unk> non interest bearing.
Deposits, 17% total deposits through the fourth quarter during the cycle, that's up from 18% to 12%.
As we go forward, we're now looking through the entire cycle through to the end of 'twenty three we think interest bearing deposits will.
We will cycle out at 37% beta.
And total deposits of about 27 28 basis percent, so youre going to see those start to pick up.
Yes.
A fairly accelerated basis.
Some of which we saw in the fourth quarter than we expected.
The first few quarters.
2023, and Catherine let's face it we I think as an industry. We saw a change happened in December in terms of deposit rate behaviors.
Increasing rate competition, not just from other banks that U S Treasury bills.
Money market mutual funds et cetera, and so we've had to respond to that our strategy is not to pay the highest depository rates. This is where I think we're in an environment now where I hope, we'll be able to demonstrate the strength of the great deposit base with which I've referred to for six years is the crown jewel of the franchise I am impressed.
And that despite having closed 27% of our branches. We actually grew net consumer households last year I've heard through the years questions of why do you even have a retail bank at this point. This is why so granular diversified deposit base I am glad that we have a diversified deposit base across these.
These markets and it isn't concentrated in any one given the metropolitan area. For example, so we're not immune from deposit.
Beta will feel it but I think we'll be able to weather. The storm. It's another reason why I am so grateful that the strategy of this company has been not to make.
Long term fixed rate real estate lines is not a good place to be right now so having half the deposit base and variable pardon me the loan book and variable rate is why we said what we did which is we may be at an equilibrium point right al that we should be able to on the NIM, we should be able to use additional asset data to help cover <unk>.
Greasing deposit basis, So, we'll see where it goes from here.
Okay.
And certainly it looks from the new loans are coming on you've got a lot of upside from that that current quarter loan yield.
As you look out do you think that kind of quarterly data is probably.
Continue at this pace rod on the loan side.
Yes, yes, definitely Catherine definitely on the loan side, we'll see that pace continue.
It's really about.
On the deposit beta isn't going to react.
Both the fund.
Digital banks, having to fund their loan growth, but also the competition.
What rates look like in terms of what date is end of it.
B.
It will be.
Definitely competitive on that front.
Maybe just one more on the margin on just on borrowings.
<unk> borrowings were up a little bit how you're thinking about overall borrowing levels into this year.
Yes sure.
As we said we had.
Lee.
Late quarter runoff in deposits. So we have.
The pull in some funding.
Loans continue to.
To find out which we wanted to make sure that we book those loans that had funding accordingly, we ended up.
Borrowing from the federal home loan bank.
We will have we will continue to.
To see some of that kind of is.
The play between what deposit growth is and what loan growth is but we'll be pretty disciplined around.
Using wholesale funding mechanisms weather.
Brokered Cds.
Federal home loan bank.
We've we've.
We typically run.
The higher levels through the pandemic, we didn't need to.
But we've got run off late in the quarter, we had to call on those resources and we did.
But.
We've got a number of.
Leverage to pull on that front.
Way, we look at it.
The lowest cost.
The battle, if we need to correct. This are good levers to have as they are important but from a diversification standpoint, ideally you wouldn't use them at all it services <unk> in particular I think it was a swing line, meaning we were able to tap that as we needed at year end well.
We will see how things continue from here, but we've had a good month in January in terms of deposit growth I hope that means Rob will be paying it down it will go yes, thats, where it will be.
Obviously, we'd rather have core deposits.
On the books regardless.
Not have to draw down on wholesale because it's obviously a little more expensive funding.
But I think we'll always have some of that.
Having been here in the US here is the only time I've never seen us not use the <unk> line at all whereas during the pandemic.
Some amount of it is typical for us great.
Great Great very helpful. All right. Thank you so much great quarter. Thank you Catherine and thanks, Catherine we appreciate you letting other analysts joining our call. This time.
And by the way, yes, sorry, thank you for sticking with us and Rob on the question.
Okay.
I'll go back.
Okay.
Okay.
Thanks, and Michelle we're ready for our last caller. Please.
Alright, one moment for our last question.
And our last question comes from the line of Laurie Hunsicker with Compass point. Your line is open. Please go ahead.
Hi, Laurie.
Hi, John Robin Doug Good morning, just wanted to stay where Kathryn was on the funding side and I'm just trying to understand that you had a significant jump in the short term borrowings and they are.
On a percentage basis is one of the highest we've seen in Europe that $1 billion and I just wanted to make sure alright.
I've heard that you're going to likely rewind that back down or.
And just looking at the average balances it looks like most of that came on late in the quarter. So.
Not rolled into obviously, a full quarter impact.
Just trying to connect all the dots there and then.
Just one more question two around that do you have a spot margin at Jos.
Number 31.
Or maybe even current how we should be thankful.
Yes, it's spot margin at December 31 was $3 74.
Sorry.
For the month of December that's where you're looking for.
Yes, so as I mentioned.
We did use the federal home loan bank and Thats kind of.
Outsized.
Borrowings at the end of the quarter.
Not all of that was short term I think it was about $1 billion of short term ladder in.
Federal home loan bank.
We also have some long term borrowings, but those are trucks and other.
Non <unk> borrowings if you will.
That roll into that line item.
We do expect it.
As deposits come in we will be paying those down again.
I don't think we'll be staying at this level unless we see more more deposit outflows than we're expecting.
But remains to be seen at this point Larry correct. One thing I will point out is that if you step back point to point for the full year deposits declined just over 4% truth as we had forecast when we did our budgeting a little more than that so that's better than the original expectation. It is also true that we saw an unexpectedly large run up.
In deposits in Q3, so far over $400 million, so part of what Youre seeing is that delta.
The absolute value of the service between Big increase in Q3, yes, we saw a larger decrease in Q4 and it all came pretty quick.
In the month of December and thankfully runoff.
Pretty good footing as indicated loan to deposit ratio yesterday was 88% we will see what happens to the euro is early but.
But.
We will go in and out of the <unk> line as needed.
Yes.
Got it got it Okay, and then can you comment specifically on the demand deposit drop linked quarter going from.
In round numbers, three down to $4 9 billion.
Yes, but remember go back and look at Q3, so youre going to see the increase over $400 million go up in Q3, you are right is the rise in Q3 and the drop in Q4 was largely in transaction accounts.
I'm, calling for us to have some degree of drop late in the year due to some of the larger clients show, particularly see this in the government contractor space.
But it was more than we expected I mean, that's not just seasonality. We did in fact see money began to go looking for higher yielding assets. There is no question about it mostly on the business account side Laurie.
If you look at.
On the consumer side, we had some of that with more affluent clients, but yes. The reality is we're just looking at our consumer deposit base by quartile and it's down a little bit in terms of average balances, but it has held better than you might think.
Fundamentally there's some element of year end seasonality is probably explaining in part part of why we're seeing deposits rise again right now because we can see some more volatile depositors with some of the larger ones.
Some money going in and looking for higher yield.
And then just some unusual year end activities a small business for example, maybe on cash basis of accounting like a professional practice will payout profits right at year end to minimize tax purpose of tax obligations.
But I've hit the main drivers of it.
Okay, Okay, Great and then I guess.
Switching over to expenses.
Just a couple questions there that the onetime expenses that you had this quarter.
Help us think about that in other words, the branch cost branch closure costs.
The gain on the sale leaseback of the Apis.
The write down on the software and maybe the refund that you got back on the FDIC and then along those same lines. What are what are the costs going to be on the branch closures and of course, the first quarter of 'twenty three.
And do you have a benefit there quantified.
But yes, we do.
Yes in terms of the fourth quarter notable items.
Can deem as is.
Onetime nonrecurring basically the positives or negatives basically come out to zero. So we didn't think it was necessary to kind of dissect and report each individual component.
So if you think about the total expense that you see reported is kind of a run rate because all this other stuff netted out.
Yes.
In terms of the.
What was the other question there.
What expenses.
Next year, Yes, maybe Q1, yes, yes.
Maybe if you could just yes, yes.
Most of the branch closures are and then yes. It does look like in the first quarter.
Yes.
Sorry.
Yes, so from a branch closure point of view five branches will close.
In March of 'twenty three.
Annualized savings is going to be about 1 million $5. Starting then.
And we are going to incur a few more one time costs associated there.
Due to due to getting out of some leases that we have.
That's probably in the tune of about 400000 in the first quarter.
And then.
Okay.
Overall, we're looking at mid single digit expense growth off of the.
The run rate that we have so.
That's kind of a way to think about it again.
Knowing.
So modeling, yes, there's an uptick in the first quarter due to seasonality and then but overall for the year, we should be up mid single digits.
Got it and then and then on your on your expense Guide what is your base.
$398 million or is it going for you guys.
Alright.
I'm sorry, Yes, 398 was the baseline that we've been using.
Okay, and then just one one more question on expenses.
The total cost of the branch closure, so 400000 in the first quarter of 'twenty three.
What's your total.
Yes, it's about 700000 in total.
Split between Q4 and Q1.
Got it perfect. Okay got it got it Okay and then.
And just quickly Rob or maybe this is David the jump in the commercial real estate non performers being the owner occupied and clearly your asset quality is looking great but that the.
The jump that we saw there was that one loan or are there several loans. The art can you share with us maybe even the type of loans.
Doug Woolley, Chief credit officers here I'll, let him answer that hey, Lori any gallon.
Hey, there.
It's just a handful of small loans.
Okay.
Any particular type or.
No no pattern.
No pattern, okay, great and John last question to you.
Can you talk a little bit about.
Buybacks why you're not being active we're seeing other banks start to ramp up on that.
Can you help us think about how you're approaching that.
So that's a capital management decision, Rob you touched on it earlier just given the.
The uncertainty out there we like the idea of buybacks to be clear do you want to pick it up from there yes.
Yes, certainly we've been active in buybacks over the years, we just felt that at this point in time with especially that you saw loan growth come in 15% annualized we want to make sure we preserve our capital and keep that dry powder for for growth as well as really not knowing if we've got a recession comment Ryan how deep that might be.
So it's really.
Call it more of a short term pause.
Until we can see some clarity around.
Potential recession.
Loan growth goes from I like that characterization as we get more clarity, we will revisit that decision because as you know Laurie as Rob says, we do have a history of using buybacks as we accumulate surplus capital obviously, we want to grow the bank, but we're not a hyper growth bank under really any scenario.
Great. Thank you gentlemen.
Thank you so much already by the way also want to thank you for being one of our two diehard analysts UN Catherine Mealor with <unk>.
Two survivors I hope you both go ask your bosses for raises.
And we are delighted to have the new analysts were expecting one more to initiate that will be on next quarter. We hope. So thank you all very much. It was a good year for Atlantic Union Bank. It was a good quarter for Atlantic Union Bank, and we are cautiously optimistic about where we go from here. Thank you.
Thanks, everybody and as a reminder, this call will be available on our Investor website investors thought Atlantic can you bank Dot com. Thanks, and we look forward to talking with you next quarter Goodbye.
This concludes today's conference call. Thank you for participating you may now disconnect.
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