Earnings Call Transcript
Atlantic Union Bankshares Corp (AUB)
Earnings Call Transcript - AUB Q4 2020
Operator, Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Atlantic Union Bankshares Fourth Quarter Fiscal Year 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Cimino, Investor Relations. Thank you. Please go ahead, sir.
Bill Cimino, Investor Relations
Thank you, Gigi, and good morning, everyone. I have Atlantic Union Bankshares' President and CEO, John Asbury; and Executive Vice President and CFO, Rob Gorman, with me today. We also have other members of our executive management team with us remotely for the question-and-answer period. Please note that today's earnings release and accompanying slide presentation we're going through on the webcast are available to download on our investor website, investors.atlanticunionbank.com. During today's call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in our earnings release for the fourth quarter and full year 2020. Before I turn the call over to John, I would like to remind everyone that on today's call, we will make forward-looking statements which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement. Please refer to our earnings release for the fourth quarter and full year 2020 and our other SEC filings for a further discussion of the Company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ from those expressed or implied in any forward-looking statement. All comments made during today's call are subject to that Safe Harbor statement. At the end of the call, we will take questions from the research analyst community. And with that, I'll turn the call over to John Asbury.
John Asbury, CEO
Thank you, Bill. Thanks to all for joining us today, and I hope everyone listening is safe and well on this New Year. We think, consistent in our commentary, that we are managing through two significant and distinct challenges: first, the continuing COVID-19 pandemic and everything associated with it; and second, a much lower-than-expected interest rate environment for years to come, with all of its implications for the Company's profitability. Our results for the quarter and for the full year of 2020 show that the actions we've taken so far to address these two distinct challenges are having a positive impact in positioning Atlantic Union for future success. We continue to believe that our strategic plan, with our long-term goal to become the premier mid-Atlantic bank, is the right one and that we have a great opportunity before us to create something uniquely valuable for our shareholders and the communities we serve, and remain keenly focused on reaching the full potential of this powerful franchise despite the present challenges.
Rob Gorman, CFO
Thank you, John, and good morning, everyone. Thanks for joining us today. Before I get into the details of Atlantic Union's financial results for the fourth quarter and the full year 2020, I think it's important to once again reinforce John's comments on Atlantic Union's governing philosophy of soundness, profitability, and growth in that order of priority. This core philosophy is serving us well as we manage the Company through the current COVID-19 pandemic crisis and preparing us for what comes next. Atlantic Union continues to be in a strong financial position with a well-fortified balance sheet, ample liquidity, and a strong capital base, which is allowing us to weather the current storm and come out stronger once this crisis has passed. As a matter of sound enterprise risk management practice, we periodically conduct capital, credit, and liquidity stress tests for scenarios such as the operating environment we now find ourselves in or occasionally even worse scenarios. Results from these stress tests help inform our decision-making as we manage through the current crisis and give us confidence the Company will remain well capitalized and has the necessary liquidity and access to multiple funding sources to meet the challenges of the current economic environment. Now let's turn to the Company's financial results. Please note that for the most part, my commentary will focus on Atlantic Union's fourth quarter and full year financial results on a non-GAAP operating basis, which excludes an after-tax debt extinguishment loss of $16.4 million resulting from the prepayment of long-term Federal Home Loan Bank advances in the fourth quarter and excludes $26 million in after-tax debt extinguishment losses and $9.7 million in after-tax security gains for the full year of 2020. For clarity, I will specify which financial metrics are on a reported versus non-GAAP operating basis. In the fourth quarter, reported net income available to common shareholders was $56.5 million, and earnings per common share was $0.72, down approximately $1.8 million or $0.02 per common share from the third quarter. For the full year 2020, reported net income available to common shareholders was $152.6 million, and earnings per common share was $1.93 compared to $193.5 million or $2.41 per common share in 2019. The reported return on equity for the fourth quarter was 8.82% and 6.14% for the full year. The reported non-GAAP return on tangible common equity was 15.6% in the fourth quarter and was 11.18% for the year. Reported return on assets was 1.19% for the fourth quarter and was 83 basis points for the full year 2020. Reported efficiency ratio was 68.4% for the quarter and 60.2% for the full year. On a non-GAAP operating basis, net adjusted operating earnings available to common shareholders in the fourth quarter was $72.9 million, and earnings per common share was $0.93, which was up approximately $15 million or $0.19 per common share from the third quarter. Non-GAAP pre-tax pre-provision adjusted earnings were $77 million compared to $78.5 million in the third quarter. For the year ended 2020, non-GAAP adjusted operating net income available to common shareholders was $168.8 million, and adjusted operating earnings per share was $2.14 as compared to $227.8 million or $2.84 per common share in the prior year. Non-GAAP pretax pre-provision adjusted operating earnings were $294 million in 2020 compared to $295.2 million in 2019. Non-GAAP adjusted operating return on tangible common equity was 19.91% in the fourth quarter and was 12.28% for the year. The non-GAAP adjusted operating return on assets was 1.52% in the fourth quarter and was 91 basis points for the full year of 2020. Non-GAAP adjusted operating efficiency ratio was 53.6% in the fourth quarter and was 53.2% for the full year 2020. Turning to credit loss reserves. As of the end of the fourth quarter, the total allowance for credit losses was $170.5 million, comprised of the allowance for loan and lease losses of $160.5 million and a reserve for unfunded commitments of $10 million. In the fourth quarter, the total allowance for credit losses declined by $15.6 million, primarily due to lower expected losses than previously estimated as a result of improvement in Virginia's unemployment rate, benign credit quality metrics to date, and an improved economic outlook over the forecast period due to the rollout of COVID-19 vaccines and additional government stimulus inclusive of more PPP loan funding. The allowance for loan and lease losses as a percentage of the total loan portfolio was 1.14% at December 31, which was down 7 basis points from 1.21% at the end of the third quarter, and the total allowance for credit losses as a percentage of total loans was 1.22% at the end of December, which is down from 1.29% in the prior quarter. Excluding the SBA-guaranteed PPP loans, the allowance for loan and lease losses as a percentage of adjusted loans decreased by 11 basis points to 1.25% from the third quarter, and the total allowance for credit losses as a percentage of adjusted loans decreased by 13 basis points to 1.33% from the prior quarter. The coverage ratio of the allowance for loan and lease losses to non-accrual loans was 3.8 times at December 31 compared to 4.5 times at September 30. The $15.6 million decline to the Company's total allowance for credit losses took into consideration the COVID-19 pandemic impact on credit losses, both through the two-year reasonable and supportable macroeconomic forecast, utilizing the Company's quantitative CECL model and through management's qualitative adjustments. Beyond the two-year reasonable and supportable forecast period, the CECL quantitative model estimates expected credit losses using a reversion to the mean of the Company's historical loss rates on a straight-line basis over two years. In estimating expected credit losses within the loan portfolio at quarter end, the Company utilized Moody's December baseline macroeconomic forecast for the two-year reasonable and supportable forecast period. Moody's December economic forecast improved since September, and it is now assumed that on a national level, GDP will recover to pre-pandemic levels by this summer compared to early 2022 in the September forecast. Moody's forecast for Virginia, which covers the majority of our footprint, had previously assumed that the unemployment rate in the state would average nearly 6.5% during the two-year forecast period, but the December forecast now assumes a two-year average of 5%. In addition to the quantitative modeling, the Company also made qualitative adjustments for certain industries viewed as being highly impacted by COVID-19, as discussed by John earlier. Additional qualitative factors were included this quarter to take into consideration the uncertainties pertaining to the future path of the virus and concerns around vaccination distribution efforts. The provisions for total credit losses for the fourth quarter declined by $20.4 million as compared to the third quarter due to the aforementioned reduction in credit loss reserves, which drove a negative provision for credit losses of approximately $14 million in the fourth quarter. In the fourth quarter, net charge-offs were $1.8 million or 5 basis points of total average loans on an annualized basis compared to $1.4 million or 4 basis points for the prior quarter and to $4.6 million or 15 basis points for the fourth quarter of last year. As in previous quarters, the majority of net charge-off, approximately 63% in Q4, came from non-relationship third-party consumer loans, which are in runoff mode. Now turning to the pretax pre-provision components of the income statement for the fourth quarter, tax equivalent net interest income was $148.7 million, which was up $8.4 million from the third quarter. Net accretion of purchase accounting adjustments added 9 basis points to the net interest margin in the fourth quarter, up from the 8 basis point impact in the third quarter, primarily due to an increase in loan-related accretion income of approximately $700,000. The fourth quarter's tax equivalent net interest margin was 3.32%, which was an increase of 18 basis points from the previous quarter due to a 10 basis point increase in the yield on earning assets from accelerated PPP fee income and an 8 basis point decline in the cost of funds. The quarter-to-quarter earning asset yield increase was driven by the 15 basis point increase in the loan portfolio yield partially offset by the impact of lower yields on securities of 11 basis points. The loan portfolio yield increased to 3.99% from 3.84% in the third quarter driven by the impact of higher levels of PPP loan fee accretion resulting from the SBA forgiveness of approximately $430 million in PPP loans during the quarter. The reduction in the securities portfolio yield to 2.8% from 2.91% was a result of the deployment of excess liquidity during the past two quarters into new investments at yields lower than the existing portfolio yield. In addition, cash proceeds from higher-yielding securities that have matured or were repaid or prepaid are being reinvested at today's lower market interest rates. The quarterly 8 basis point decrease in the cost of funds to 37 basis points was primarily driven by a 9 basis point decline in the cost of deposits to 30 basis points. Interest-bearing deposit costs declined by 13 basis points from the third quarter to 42 basis points in the fourth quarter due to the continued aggressive repricing of deposits as market interest rates declined. Non-interest income declined by $2.2 million to $32.2 million from the prior quarter, the decrease was driven by $1.4 million in BOLI benefit proceeds received in the third quarter, lower insurance-related income of $530,000, reduced levels of unrealized gains of $550,000 related to the Company's SBIC investments and lower loan-related interest rate swap fees of $460,000. These revenue declines were partially offset by an increase in service charges on deposit accounts of $661,000 primarily due to higher overdraft fees. Non-interest expense increased $28.5 million to $121.7 million from $93.2 million in the prior quarter, primarily driven by the previously announced $20.8 million debt extinguishment loss resulting from the prepayment of long-term Federal Home Loan Bank advances in the fourth quarter and an increase of $7.4 million in performance-based variable incentive compensation and profit-sharing expenses, including a contribution of $1.2 million to the Company's employee stock ownership plan, as John had noted. Fourth quarter expenses also included approximately $790,000 in costs related to the Company's decision to close five additional branches next month, $716,000 in the third-party expenses incurred during the quarter to process PPP loans for SBA forgiveness, $447,000 in costs related to the Company's response to COVID-19, increased project-related consulting and professional fees of $883,000, and an increase of $582,000 in FDIC premiums due to the impact of lower levels of PPP loans on the Company's assessment rate. The effective tax rate for the fourth quarter decreased slightly to 15.1% from 15.3% in the third quarter. For the full year, the effective tax rate was 15.1%. For 2021, we expect the full year effective tax rate to be in the 16.5% to 17% range. Turning to the balance sheet. Period-end total assets stood at $19.6 billion at December 31, a decrease of $302 million from September 30. This level is primarily due to the SBA forgiveness of PPP loans. At period end, loans held for investment were $14 billion, a decline of $362 million or approximately 10% annualized from the prior quarter, driven by the SBA forgiveness of approximately $430 million of PPP loans. Excluding PPP loans, loan growth in the fourth quarter was 1.8% annualized, driven by increases in commercial loans of $102 million or approximately 4% annualized, partially offset by reductions in consumer loan balances of $43 million or 8% on an annualized basis. Commercial loan growth was primarily driven by growth in equipment finance loan balances and an increase in revolving lines of credit outstandings as the line utilization rate ticked up 1.8% from the prior quarter to a still historically low level of 25.6%. The overall decline in consumer loan balances during the quarter was driven by continued paydowns in mortgage and HELOC balances as well as the runoff of third-party consumer loan balances, which was partially offset by annualized growth in indirect auto balances of 14%. As noted, average loan yields increased by 15 basis points during the quarter, primarily due to increased PPP fee accretion income resulting from the forgiveness of PPP loans during the quarter. At the end of December, total deposits stood at $15.7 billion, which is an increase of $147 million or 3.7% annualized from the prior quarter. With the exception of money market deposits, which declined slightly, all interest-bearing deposit categories increased during the quarter. Demand deposit balances declined approximately 5% annualized from the third quarter as a result of seasonal factors. Low-cost transaction accounts comprised 51% of total deposit balances at the end of the fourth quarter, which is in line with the third-quarter levels. As mentioned, the average cost of deposits declined by 9 basis points to 30 basis points, while interest-bearing deposit costs declined by 13 basis points in the fourth quarter. The Company's liquidity position remains strong at both the bank and holding company levels with multiple sources that can be tapped if needed. From a shareholder stewardship and capital management perspective, we remain committed to managing our capital resources prudently as the deployment of capital for the enhancement of long-term shareholder value remains one of our highest priorities. From a capital perspective, the Company continues to be well positioned to manage through the pandemic and its impact on the Company's financial results. At the end of the fourth quarter, Atlantic Union Bankshares and Atlantic Union Bank's capital ratios were well above regulatory well-capitalized levels. During the fourth quarter of 2020, the Company paid a common stock dividend of $0.25 per share and also paid a quarterly dividend of $171.88 on each outstanding share of Series A preferred stock. In summary, Atlantic Union delivered solid financial results in the fourth quarter and for the full year, despite the ongoing business disruption associated with COVID-19 and the headwinds of the lower interest rate environment. Also, please note that while we are proactively managing through this unique and unpredictable pandemic and are taking the proper steps to weather the economic downturn to ensure the safety, soundness, and profitability of the Company, we also remain focused on leveraging the Atlantic Union franchise to generate sustainable, profitable growth and remain committed to building long-term value for our shareholders. And with that, let me turn it back over to Bill Cimino to open it up for questions from our analyst community.
Bill Cimino, Investor Relations
Thanks, Rob. And Gigi, we're ready for our first caller, please.
Operator, Operator
Our first question comes from the line of Casey Whitman from Piper Sandler. Your line is now open.
Casey Whitman, Analyst
So I thought I'd start, John, you made the comment that in 2021, we could see loan growth maybe return to the high single-digit range. I just wanted to clarify, is that how you're thinking about just the commercial book or the overall book? And then I was thinking maybe you could walk us through what you're seeing for demand across different areas of the footprint and where you're seeing commercial line utilization pick up or maybe that's been widespread.
John Asbury, CEO
Yes. For the record, I mentioned that we could expect to see an opportunity for high single-digit loan growth in 2022, and for 2021, we anticipate a slower start that will then improve. Our overall expectation for 2021 is likely more aligned with a mid-single-digit growth rate.
Rob Gorman, CFO
Yes. If you exclude the third-party loan runoff, we expect to be in the 4% to 6% on a full year basis. On the commercial side, it's probably at the higher level, 6%. And consumer is probably growing about 3% or so on average.
John Asbury, CEO
Yes. And so I think that, Casey, as you well know, the Company does have a track record of pretty consistently being able to deliver high single-digit growth rates. We continue to believe, as I said, the markets, the franchise, the opportunity. We have a bit of a tailwind with what's going on at some of our larger competitors who shall not be named where there's a lot of disruption. We're benefiting from that, so we're feeling pretty good. At the moment, we still see commercial business borrowers awash in liquidity. We see it in deposits. You see it in a low line utilization. They've been cautious, but activity is picking up. We continue to fight headwinds of refinances on the commercial real estate book into the long-term institutional markets. But nevertheless, we continue to feel like we are positioned for overall high single-digit loan growth, but that's a 2022 opportunity. But I think that, again, you'll see it kind of slow as this year begins, and it will pick up. We do have Dave Ring, Head of Commercial Banking, on. Dave, I want to ask you if you can give us just some summary comments in terms of the areas of strength geographically across the franchise from a commercial standpoint.
Dave Ring, Head of Commercial Banking
Sure. And John, just to piggyback off what you said, loan demand is steady. We continue to see the benefit from disruption at other banks and the goodwill that we've created during PPP. Like John said, we expect the second half to be better than the first half, and we look for mid-single-digit growth. The regions that are doing well within commercial would be, number one, equipment finance. If you recall, we just started that business at the end of December last year. That business is doing very well, serving our footprint. Central Virginia, our home court, is continuing to grow in the fourth quarter at double-digit annualized pace. The coastal region, which is Virginia Beach, that whole area, is next in line. And Greater Washington, Baltimore, had a lot of paydowns on the revolvers, but overall production is very strong there. And in North Carolina, in all our markets in North Carolina, we're doing very well. But in that order would be the growth.
John Asbury, CEO
Thank you, Dave. Casey, did that answer your questions?
Casey Whitman, Analyst
It did. And thank you for clarifying the 2021 and '22 growth outlook. Makes sense. I think I'll just turn to maybe bigger picture, John, you mentioned that you see strategic opportunities on the horizon. Maybe can you elaborate on that a little bit and provide us with more color on your M&A thoughts? Maybe with what sort of targets you might be interested in and in what geographies?
John Asbury, CEO
I believe we are in an ideal situation for further bank consolidation, which is already underway. We remain optimistic about the density and interconnected nature of our franchise. We have established ourselves as a key player in Virginia, providing a solid alternative to larger competitors. There are certainly opportunities that could align with our financial and strategic goals, and we would only pursue actions that make sense for the company. We approach this with careful consideration. This conversation is not new, and we maintain our focus on managing our franchise amidst the ongoing disruptions caused by COVID and credit management. While we are preparing for potential opportunities, we are also exploring larger-scale options compared to the past. Smaller acquisitions can be beneficial but may not have a significant impact. However, we won't dismiss them entirely. We view the current market as consolidating, coupled with a near-zero interest rate environment expected for the next few years, which strengthens the case for scaling. Our preference would be to deepen our presence in our primary markets, and we focus on opportunities that are geographically adjacent. We don't plan to expand into areas like Montana. Regarding timing for any announcements, we are not looking to make any moves next week. Ideally, I would prefer to wait until later this year, as I'd like to see how things develop through the winter and with COVID. We are consistently working on improving our scalability within the company, and additional time would be valuable for integrating new opportunities. While we do see potential out there, it is also possible that we may decide not to pursue anything at all.
Operator, Operator
Our next question comes from the line of Eugene Koysman from Barclays.
Eugene Koysman, Analyst
Can you talk to the puts and takes of the net interest margin this quarter? What's the right starting point for the first quarter of '21, given the lift from debt prepayment and the impact of PPP forgiveness and the new originations as well as slowing accretion?
Rob Gorman, CFO
Yes. For the first quarter, we expect a fairly stable margin that includes accretion income and PPP forgiveness. Up to the end of December, we have forgiven about $400 million of the $1.7 billion in PPP loans issued, and we anticipate this will continue into the first quarter. So far in January, we've seen an additional forgiveness of approximately $85 million. The effect of PPP loan forgiveness on deferred fee income should be similar to what we observed in the fourth quarter. Accretion will remain fairly consistent, though it may be slightly lower. On a core basis, excluding these factors, our core net interest margin is around 3.05% this quarter, which aligns with Q3. We expect it to stabilize at this level through the first quarter and into next year. We believe we've reached a bottom on the core side. Although earning asset yields may compress slightly, the cost of funds will also decrease, balancing out the compression we're anticipating. Essentially, the first quarter will resemble the fourth quarter. As PPP declines, excluding any discussions around a second PPP, the reported margin will decrease because PPP fee income will be fully utilized by the second quarter of this year.
Eugene Koysman, Analyst
Got it. And just wanted to follow up, what levers do you have remaining to help support the GAAP NIM? You mentioned deposit repricing or liability management.
Rob Gorman, CFO
We see ongoing opportunities to lower our overall cost of funds by decreasing our cost of deposits. We have made notable progress in reducing our deposit costs over the past few quarters, down by 30 basis points, with a decrease to 27 basis points noted in December. We anticipate this will likely fall to the very low 20s, possibly even 20 basis points, in the second half of the year. We have around $1 billion in high-cost CDs maturing in the next six months, with average interest rates around 1.50%. Additionally, some CDs maturing in the next two months have rates of about 1.70%, which will be repriced significantly lower. Our current one-year no-penalty CD offers a rate of 15 basis points. This repricing of our CD book will continue, enabling us to further reduce our cost of funds and deposits.
Eugene Koysman, Analyst
Got it. That's really helpful. And I wanted to jump to a different topic on the capital management. What are your thoughts on restarting share repurchases given relatively sluggish loan growth expectations for this year and improving credit outlook that should hopefully drive more releases?
Rob Gorman, CFO
Yes. In terms of assessing excess liquidity and deployment options, we calculate excess capital at anything above an 8.5% tangible common equity ratio. For this quarter, we reported 8.3%. This decrease is partly due to PPP loans included in our tangible asset base. If we exclude these loans, our ratio is likely around 8.8%. We are accumulating excess liquidity and anticipate this trend will continue throughout the year. As long as credit conditions improve, as we have observed this quarter, we are considering all options to deploy that excess capital. Share repurchase is certainly a possibility. We previously had a $150 million share repurchase authorization from the Board, with $20 million remaining that was paused in March of last year due to the pandemic. We will assess the possibility of increasing that authorization with the Board. Additionally, as John mentioned, we will also consider acquisitions to use that excess capital as it grows. Look out for opportunities to deploy excess capital through either repurchases or acquisitions as the year progresses.
Operator, Operator
Our next question comes from the line of Stuart Lotz from KBW.
Stuart Lotz, Analyst
Can you hear me okay?
John Asbury, CEO
We can.
Stuart Lotz, Analyst
Awesome. Rob, if we could kind of dive into the expenses this quarter, I know there was a lot of noise with some of the one-time kind of year-end accrual. I think your guidance last quarter was for your core operating run rate to be around $88 million. If we back out that $7.4 million as well as some of the COVID-related expenses, I can get closer to $91 million. How are you guys thinking about that run rate going into the first quarter of this year?
Rob Gorman, CFO
Thank you, Stuart. Regarding the run rate, I understand there were some additional incentive expenses and other factors. I estimate the normalized run rate for this quarter to be between $90 million and $91 million. We have just finished our financial plan for 2021 and assessed the expense structure in relation to the overall profitability of the Company as we look ahead. As we consider this year and the investments we need and want to make, which should enhance our efficiency and scalability, we will adjust our guidance slightly. Previously, we anticipated a run rate of about $88 million to $90 million, but after our planning, it now appears we will be in the $90 million to $92 million range on a quarterly basis, likely at the higher end for the first quarter due to seasonal factors, including the recurrence of payroll taxes. This outlook incorporates various investments we are making in digital initiatives, cybersecurity, and projects aimed at improving efficiency as we progress through the year and into 2022.
John Asbury, CEO
Yes. Rob, also I'd point out, that presumes that we hit our financial goals for 2021 and have a fully funded incentive plan. That's baked in. That's run rate, and that's one question that will likely come. The other thing I'll point out, it is true when we began the financial planning work, we were not contemplating there would be another round of PPP. So we do have some degree, as yet undetermined amount of income that is a bit of a positive thing that we weren't counting on. We think about that in the context of being able to slip a few projects and have it pay for that potentially would not have happened in the absence of that, if it makes sense. We do have things going on in the Company to improve efficiency and to improve scalability, technology-oriented. The way they work, they tend to have some front-end loaded expenses. It can be consulting various other things, so you do need to make investment upfront in order to realize a return or expense save on the back end of it. And so we feel like this is a pretty good setup to move a few of those things that possibly wouldn't have been there otherwise.
Rob Gorman, CFO
Yes. We have various projects in progress, such as developing our flexible work plan for a normalized environment, which involves some investment but could ultimately reduce occupancy costs. Additionally, we are investing in our wealth management business to drive revenue, and in our commercial sector to explore foreign exchange and small business lending opportunities that could also bolster revenue. From a revenue perspective, we anticipate non-interest income to reach a quarterly run rate of $30 million to $32 million, which is slightly higher than our initial expectations following the third quarter.
Stuart Lotz, Analyst
I appreciate all that detail, John and Rob. And Rob, turning to the reserve release this quarter, you guys did a great job on Slide 10 of kind of diving into some of the assumptions. But I was hoping you could provide a little bit more detail on the qualitative adjustments you guys had mentioned, including the vaccination rollout and kind of how that impacts your reserve levels. And maybe just kind of any outlook for further reserve releases in 1Q, given the January forecast for Moody's, yes, was incrementally better than what we saw in December.
Rob Gorman, CFO
Thank you, Stuart. At the end of the fourth quarter, our CECL modeling is notably influenced by the Virginia unemployment rate, which has improved significantly, along with our credit quality metrics that remain strong with no noticeable increase in risk ratings or downgrades this quarter. Overall, things look positive from that perspective. The quantitative modeling indicated a need to reduce the reserve, but we are also factoring in qualitative aspects. As of year-end, out of the $160 million allowance for loan losses, around $50 million reflects these qualitative factors, making it roughly a third of the total. Looking ahead, we've just received the January Moody's outlook, which has also improved, reinforcing our expectations as we have not observed any concerning credit metrics. Charge-offs remain low, suggesting we may release more reserves as time goes on, especially towards the second and third quarters, based on our model that anticipates charge-offs in the 50 basis points range for the full year. While this is currently an assumption without any definitive evidence, it implies potential reserve releases throughout the year if conditions remain stable.
Stuart Lotz, Analyst
I have a follow-up question. Do you anticipate that charge-offs will align with the provision, and will there be an additional level of release as your consumer portfolio decreases and if the credit outlook significantly improves during the year?
Rob Gorman, CFO
Yes. I believe we will not be matching charge-offs. Charge-offs were already accounted for, and we had made provisions based on the portfolio at that time. Therefore, I expect there will be net releases. Even though we may incur charge-offs, we will still see net releases because the provisions will not directly offset the charge-offs. However, this is contingent on the outlook remaining positive, as it appears so far.
Operator, Operator
Our next question comes from the line of Laurie Hunsicker from Compass Point.
Laurie Hunsicker, Analyst
So just staying with credit, Rob, can you give us an update on where we are with total criticized?
Rob Gorman, CFO
I don't have that percentage right in front of me here, but it's in our release, but it's pretty low in terms of...
Laurie Hunsicker, Analyst
I didn't see it. I will go back and look for it. Okay.
Rob Gorman, CFO
Yes.
Laurie Hunsicker, Analyst
And then on the hotel book, I mean, your deferral return to payment trends are amazing. And obviously, hotels is to stand out. Can you just give us a little bit more color around that book? I mean I have in my notes that it was primarily flagged non-resort hotels. Round numbers, that is 60% LTV. Just wondered if you had more color. And if you had more color in terms of what you detailed on Page 7, just those 11 loans sitting on deferral for $79 million.
John Asbury, CEO
Yes. Laurie, we have Doug Woolley, Chief Credit Officer, on. Doug, do you want to give us your perspective on the hotel portfolio?
Doug Woolley, Chief Credit Officer
Yes. The hotels are spread around the Virginia footprint and, as the slide deck says, the majority of them, two-thirds, are interest-only. That's a part of our restabilization process in support of our hoteliers. And as you also see, it's almost 90% of the hotels are off non-resuming payments. So we feel very comfortable with that. The overall hotel book has got an average occupancy of 55%. And of course, there's a bit of a standard deviation there, but that's a pretty strong performance of hoteliers. As we know, are operating under much lower breakeven operation percentages. So for the most part, that 55% shows them operating as comfortably as you can. And like most other banks, our hotels that are extended stay are almost completely full all the time. So we feel comfortable with the hotel book right now.
John Asbury, CEO
And Laurie, just to remind everyone, for those who may not be familiar, when considering our hotel portfolio, it's in areas we focus on. We don't operate large convention or conference hotels, nor do we have airport hotels. We have personal guarantees and work with professional hoteliers who are both owners and operators. We have a good handle on this portfolio, and we'll assist them as they navigate through this.
Laurie Hunsicker, Analyst
Okay, just one more question. Do you have a more precise number for LTV than the approximately 60%, or should I continue using that figure?
Rob Gorman, CFO
Yes. Laurie, we don't reappraise hotels. We did not reappraise hotels because of COVID. So that number is as good as any number. Obviously, hotel values have weakened. But again, as John was saying, we don't do non-recourse hotel lending. We have guarantor support, and the guarantors have supported to the extent they needed to, property by property. So I think that's a comfortable LTV.
John Asbury, CEO
It's a good equity buffer there.
Rob Gorman, CFO
Yes. Hey, Laurie, to follow up on your earlier question, our past dues are about 39 basis points at the end of the fourth quarter, which is down from approximately 61 from the previous year. So...
Laurie Hunsicker, Analyst
Okay. Yes. I guess I was looking for your actual credit size. I think your credit size was about $1.2 billion at September.
John Asbury, CEO
We will detail that in the 10-K. I can...
Rob Gorman, CFO
Yes, that's correct. While that information isn't included in the earnings release, we will be filing the K.
John Asbury, CEO
The increases and special mention substandard had been modest, but we've seen some, but nothing alarming.
Laurie Hunsicker, Analyst
Okay. Great. One last question for you, Rob. I want to confirm the number. The PPP fees received that contributed to net interest income this quarter were $15 million compared to $9.9 million last quarter. Is that correct?
Rob Gorman, CFO
Yes. That's the fee income component, right.
Laurie Hunsicker, Analyst
Okay. The automatic recapture, if I look at that and take it off your 3.32% margin, excluding loan accretion and focusing solely on PPP, that results in a 34 basis point impact on the margin, bringing us down to 2.88%. I understand this number will fluctuate, but I want to clarify how we should consider core margin when we no longer have prepay fees influencing it. Am I making an error in my calculations?
Rob Gorman, CFO
Yes. What you need to do is you've got to back out the PPP loans from your denominator because those are going away as well. So...
John Asbury, CEO
1%...
Rob Gorman, CFO
That's how we get to the core NIM, ex PPP, as 3.05%, loans, net of PPP loans, at least on average, for the quarter. We reported earning assets of $17.8 million. PPP loans average was $1.4 million, so $16.4 million. So back out the income, but you also got to back out the denominator as well with it.
Laurie Hunsicker, Analyst
Okay. Okay. And then one last question on that, how much is actually remaining of PPP fees?
Rob Gorman, CFO
The fees, we've got about $17.5 million left.
John Asbury, CEO
Correct. That's for round one, to be clear.
Rob Gorman, CFO
Yes. Yes.
Operator, Operator
Our next question comes from the line of William Wallace from Raymond James.
William Wallace, Analyst
I would like to explore the expense question a bit further. The $7.4 million in incentive compensation accrual seemed very high. It is three to four times what we've observed in previous fourth quarters when we had adjustments. Did you reverse any accruals throughout the year? It’s not as if you had outstanding loan growth this year, so I’m trying to understand why that accrual was so elevated.
Rob Gorman, CFO
Yes. One point to note is that we usually contribute to our employee stock option plan each year, which we accrue over four quarters. This year, we have decided not to make that contribution due to the pandemic. As we approached the fourth quarter, we reassessed this situation, resulting in a total impact of $1.2 million for the year, which would typically be spread across four quarters. Additionally, coming out of the third quarter, we had accrued for a full-year incentive payout and profit share that ended up being lower than what we ultimately delivered. Therefore, we had to adjust in the fourth quarter to account for this difference. Essentially, our initial projections for the first three quarters were too low based on the actual results in the fourth quarter.
John Asbury, CEO
But I think that I would point out, that is a variable expense. Variable means variable. It may or may not be paid depending upon how we did. And so in terms of what we were able to accomplish over the course of the year versus our targets, we ended up doing better than what we thought was going to happen. And so we wanted to accrue according to our formulation.
Rob Gorman, CFO
Yes.
William Wallace, Analyst
So did you adjust the accruals then in March when the pandemic started? Because I would imagine you're below your prior budget prepandemic.
Rob Gorman, CFO
Yes. We did reduce the accruals aback. And then as the year went on, as things looked better, we increased that fourth-quarter.
John Asbury, CEO
Yes.
Rob Gorman, CFO
It even looked better than what we had originally thought coming out of the third quarter so we ought to adjust.
John Asbury, CEO
And if we hadn't finished as well as we did, it would have been lower or not, but there is no guarantee. It's variable.
William Wallace, Analyst
No. I understand. And then you've guided $88 million to $90 million, and then you ended up at $90 million to $91 million when you make adjustments for a lot of the stuff, the kind of non-recurring stuff. What caused the creep there in the quarter?
Rob Gorman, CFO
Yes, there were several factors involved. We've been investing in various projects, and some of the consulting fees were higher. We chose to proceed with multiple initiatives, including expenses related to the LIBOR transition. We received external consulting support for that. Additionally, we are currently assessing a flexible workforce initiative with outside assistance, and we account for these types of expenses. So there are multiple elements that contributed to this situation, Wally.
William Wallace, Analyst
Okay. Okay. And then obviously, you're now guiding for a higher range in 2021. Is that to assume that you've decided to move forward with some other projects that were kind of on the table in consideration?
John Asbury, CEO
Yes. Yes.
Rob Gorman, CFO
That's right.
John Asbury, CEO
Yes, we have several initiatives to discuss in more detail later. We're focusing on technology-driven projects like the fraud unit and other operational aspects of the bank, which do require initial investment but are expected to yield savings in the future. Additionally, we're benefiting from unexpected PPP income from the second round, which we would like to reinvest in the company. Therefore, while some of our expenses may appear higher upfront this year, we anticipate future savings. Our primary goal is to enhance scalability and implement automation, as these are beneficial investments that will provide returns for the bank.
William Wallace, Analyst
I appreciate all the insights. If we have time, could you provide any updates on the anecdotal or data metrics you're using for Project Sundown? You've mentioned it several times during the Q&A and in your prepared remarks. Any updates would be helpful.
John Asbury, CEO
Yes, we've expanded our perspective beyond just the Truist merger to include Wells Fargo as well. I may ask Dave Ring or Bank President Maria Tedesco to provide their insights on this. Truist has been slow in its rebranding efforts, and we don't anticipate seeing Truist signs until early 2022, though they are progressing with branch consolidation. Consumer customers of Truist haven't experienced much impact so far, but the commercial side has definitely felt the changes. Since they are now largely integrated and have made various adjustments, Dave, I’d like to hear your thoughts on what we’re observing with these larger competitors. We are positioned to capture market share from them, especially in the small to mid-sized business sector. While we haven't made a lot of noise about it, we've been hiring from those organizations. What do you think, Dave Ring?
Dave Ring, Head of Commercial Banking
Sure. That's right, John. We've spent considerable time focusing on companies and banks that are experiencing some form of disruption, leveraging our PPP efforts to support those companies that are not being served effectively by those banks. This has allowed us to create a pipeline and generate business from companies with revenues between $1 million and $250 million, as we do not typically target larger companies. Additionally, we assess the impact of reorganizations on individuals within those organizations. We have successfully attracted top talent not only from Truist and Wells Fargo but from other banks as well. We've identified opportunities in our market and have made targeted hires in those areas. For example, we brought on two highly skilled bankers from Truist and Wells Fargo in our GovCon group, which strengthens our strategy moving forward. We've also expanded our equipment finance practice. This year, we have hired 29 producers to enhance our team and fill vacancies we've had. Our upgraded producer group, combined with our strategy of focusing on banks facing disruption and utilizing our PPP customer acquisition efforts, positions us well for continued growth into 2021 and 2022.
Operator, Operator
Our next question comes from the line of Brody Preston from Stephens Inc.
Brody Preston, Analyst
Can you hear me?
John Asbury, CEO
We can.
Brody Preston, Analyst
All right. Great. So I just wanted to touch base on the loan pipeline. I'm sorry if you already talked about it, I just wanted to get a sense for how they compared to last year and more broadly in the middle of 2020 and during the pandemic.
John Asbury, CEO
Dave Ring, do you want to speak to that, how the pipeline looks, how we've seen it trend?
Dave Ring, Head of Commercial Banking
Sure. That's a layup, Brody. Thank you. The pipeline has been consistent all year. Our throughput is better in our pipeline. So I guess you could say, if you were to compare the pipeline going into 2021 with the pipeline going into 2020, it's roughly 10% lower. However, the quality is better so our throughput is actually very good. And we're spending less time with things that we don't ultimately close. So we have a strong pipeline when it comes to equipment finance. Our C&I pipeline is strong. The one area where we have focused to reduce our pipeline a little bit is the construction and development pipelines just because we're being a little more careful in focusing on our existing clients in that asset class per se. And so overall, the pipeline is what we expected it to be going into the year, and I feel very optimistic about it.
Brody Preston, Analyst
Okay. Great. And I guess it sounds like you still feel like the pipelines and the sort of the throughput is supportive of maybe mid- to high single-digit kind of core, ex PPP, loan growth moving forward?
John Asbury, CEO
Well, I wouldn't say high...
Dave Ring, Head of Commercial Banking
Yes, for this year, right. We're driving middle-single-digit, and we'd be very happy to be at the end of the year. Again, more towards the second half of the year than the first half of the year, simply because it takes a while for these things to kind of matriculate their way through to closing.
Brody Preston, Analyst
Understood. Lastly, regarding the margin, it decreased slightly, but the growth in net interest income was encouraging, and there seems to be some stabilization in the core loan yield. Do you think we are approaching a stabilization point for that core loan yield? Additionally, what yields are new loan originations being made at? On the other hand, how are the costs looking for CDs in terms of roll-on and roll-off?
Rob Gorman, CFO
Yes, we believe we are at a stable level of core net interest margin, excluding any impacts from PPP or accretion income. We recorded a core margin of about 3.05% this quarter and expect it to stabilize around that level, with some fluctuation of a few basis points. Regarding our commercial loan pricing for new originations, we averaged about 340 this quarter, which is a slight decrease from the previous quarter's 347. Our new originations consist of approximately 38% LIBOR, 20% prime-based, and 42% fixed. While we haven't observed a significant decline in those ratios, we anticipate gradual loan yield compression moving forward as loans reprice and new loans are issued. Additionally, we expect compression in our investment security portfolio as we reinvest cash into lower-yielding assets in the current market. On the deposit side, we foresee a favorable offset with our cost of funds and deposits continuing to decrease. Our current cost of deposits is around 30 basis points, which we aim to reduce to about 20 basis points over the year. A key factor in achieving this reduction is the approximately $1 billion of CDs maturing in the coming months, which have an average cost of 1.5%. As these mature, we are retaining many of those balances, with about 70% repricing down to 15 basis points on our one-year, no-penalty CD product. This should help counterbalance continued earning asset yields and maintain the core margin within the stable range of 3% to 3.05%.
Bill Cimino, Investor Relations
Thanks, everyone, for joining us today. We look forward to seeing and/or talking to you again next quarter. Take care.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.