Earnings Call Transcript
Atlantic Union Bankshares Corp (AUB)
Earnings Call Transcript - AUB Q4 2021
Operator, Operator
Good day and thank you for being here. Welcome to the Atlantic Union Bankshares Fourth Quarter and Full Year 2021 Earnings Conference Call. All participants are currently in a listen-only mode. After the presentations, there will be a question-and-answer session. I will now turn the conference over to your host today, Bill Cimino, from Investor Relations. Please proceed.
William P. Cimino, Investor Relations
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 with me today. We also have other members of our 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 through on this webcast are available to download on our investor website at 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 fiscal year 2021 which is also available on the Investor website. Before I turn the call over to John, I would like to remind everyone that on today’s call, we will be making forward-looking statements which are not statements of historical facts 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 statements. Please refer to our earnings release for the fourth quarter of 2021 and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ from those expressed or implied 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 now I'll turn the call over to John Asbury.
John C. Asbury, CEO
Thank you, Bill. Good morning and thanks to everyone for joining us today. I will start with an overview of our performance environment, the changes we've implemented, and our growth strategies. Reflecting on 2021, it was a challenging but successful year for Atlantic Union Bankshares. Despite the ups and downs caused by the ongoing pandemic, we had a strong finish to 2021 and are optimistic as we move into 2022. Our operating philosophy of soundness, profitability, and growth served us well this year as we continued to face the challenges of operating during a pandemic. While we are aware of the current Omicron surge, it does not appear to be impacting the fundamental positive trends in the growing economy, decreasing unemployment, and a remarkably stable credit environment that I have witnessed in my 34-year career. Additionally, the Federal Reserve's indication of multiple short-term rate hikes in 2022 is favorable for us as we remain relatively asset sensitive as we enter what looks to be the beginning of a rising rate cycle. Although we continue to face challenges from supply chain disruptions, we see positive trends emerging, and our business clients are working to fill open positions, which we believe will progressively improve throughout the year. Concerning revenue, last quarter I noted that we anticipated solid growth in loans, and I am pleased to report that we saw an annualized loan growth of 11.7% during the quarter, excluding PPP, marking our best performance since the pandemic began. Loan growth was so robust that we finished the full year with low single-digit growth, exclusive of PPP. While we prefer consistent quarterly growth, we are encouraged to see that some factors hindering loan growth earlier in the year have begun to diminish. The fourth quarter demonstrated the best loan production since the pandemic for both commercial lending and commercial real estate lending. Strong production outweighed significant one-off pay downs compared to the third quarter. While construction lending balances dipped slightly at quarter-end due to completed projects transitioning to commercial mortgage categories, new construction loan originations remained strong. Based on our unfunded commitments and funding schedules, we expect this to support balance growth moving forward. We were also pleased to see an increase in C&I line utilization throughout the quarter, ending at 28%, although this remains below pre-pandemic levels. This growth indicates an upside potential as our clients' sales and working capital needs increase. Looking ahead, our pipelines are solid and significantly improved from the beginning of 2021. We feel confident in our competitive position, market dynamics, and economic strength across our footprint. Together with our enhanced lending capabilities, we anticipate upper single-digit loan growth for 2022. While there may be fluctuations between quarters, January has started strong, and we believe that this growth target is attainable for the full year. Moreover, we see a considerable opportunity for growth organically and by capturing market share from larger competitors, particularly in our home state of Virginia, complemented by our operations in Maryland, North Carolina, and our specialized lending in government contract finance and equipment finance. We are focused on and believe we are benefitting from the disruptions at two of our largest competitors. Our asset quality remains strong, and this quarter, we faced no significant credit issues. Net charge-offs were $511,000 or two basis points annualized, a marginal increase from zero in Q3 and Q2 of 2021. For the full year 2021, net charge-offs were just one basis point—an unimaginable level for me in the past. We do expect credit losses to normalize eventually, but given the liquidity in the system, declining unemployment, and an improving economy, we do not currently foresee a systemic inflection point. Consequently, we maintain a positive economic outlook and optimism. In Virginia, November's unemployment rate was 3.4%, down from 3.8% in September, outpacing the national average of 4.2% for the same period. We are still awaiting December's unemployment numbers for Virginia. While this is encouraging, the challenge in our markets remains the struggle of businesses to fill open positions, which may continue until more people return to work. Rob will address the provision for credit losses and our CECL modeling, but all signals point to improved credit conditions. Addressing expenses, the fourth quarter was active for one-time charges as we adjusted our expense structure to the operating environment, which we had flagged in our prior earnings call. In early December, we announced the closure of 16 branches in the first quarter of this year, accounting for 12% of our current network. Since the pandemic's onset, we have reduced our retail branch network by approximately 25% or 35 branches, reflecting changing consumer behaviors, better analytics on branch usage, and our need to invest in digital products while addressing wage inflation pressures. We also announced plans to rationalize our office space with the closure of our Ruther Glen operations site north of Richmond, consolidating our Richmond area corporate offices into existing facilities on the West End. This consolidation was made possible by our shift to a hybrid work schedule for most employees and full-time remote work for select positions, such as our call center, leading to reduced office space requirements. Rob will delve deeper into our expense details, but we anticipate holding non-interest expense growth to no more than 2% in 2022. Our expense management, combined with our asset sensitivity and solid growth outlook, instills confidence in our ability to achieve strong financial performance and meet our top-tier financial targets for 2022. Recently, we announced that bank President Maria Tedesco has also been appointed Chief Operating Officer, adding key responsibilities to her existing role managing revenue generation activities. This organizational shift brings us closer to our customers and enhances our ability to respond to their needs, allowing me to focus more on overarching strategies, including addressing potential disruptions from financial technology. As we consider the future of our company and industry, we aim to diversify our income streams in net interest income and non-interest income. We will prioritize protecting investor interests and growing our core franchises while exploring new value-added ways to serve clients. Core growth initiatives include building out foreign exchange solutions, loan syndications, and enhancing treasury management services alongside specialty finance operations. We also plan to expand our asset-based lending units, scale our SBA 7a program, and strengthen our nonprofit and public finance capabilities. Beyond traditional banking operations, we will become more active in the digital asset ecosystem, continuing to invest in fintech partnerships to build relationships, gain insights, and identify new opportunities. We are particularly interested in emerging opportunities like blockchain, which we believe could disrupt existing payment systems and backend processes. As we ready the company for the future, we will dedicate more resources to these initiatives than ever before. In summary, our growth strategy prioritizes driving organic growth in our core banking franchise, leveraging financial technology and partnerships for new income sources, and selectively considering M&A opportunities. We've emerged from the pandemic as a stronger organization, adapting to new ways of working and banking. The usage of our digital channels has surged; for example, mobile check deposits accounted for 20% of our deposit transactions. While we excel in digital usage compared to larger banks, we see significant potential for further growth. We will continue refining our digital offerings and improving the customer experience through ongoing project work. Looking forward, our goal remains to achieve and maintain top-tier financial performance in all environments. We are continuously seeking efficiencies and scalability while automating processes and enhancing customer experiences. We expect to see improvements in operating leverage as a result. As we close out 2021 and welcome the new year, I remain confident in our future prospects and our ability to deliver sustainable long-term performance for our customers, communities, colleagues, and shareholders. To conclude, Atlantic Union Bankshares is a uniquely valuable franchise with a compact presence in prime markets and a compelling story. We possess the right capabilities, markets, and team to achieve high performance, even in challenging times. I will now pass the call over to Chief Financial Officer Rob Gorman to discuss our financial results for the quarter.
Robert M. Gorman, CFO
Thank you, John, and good morning, everyone. I appreciate you joining us today. Let's discuss the company's financial results for the fourth quarter. My comments will mainly focus on Atlantic Union's fourth quarter results on a non-GAAP adjusted operating basis, which excludes the financial impacts of the strategic actions taken during the quarter. Adjusted operating earnings exclude pre-tax restructuring costs of $16.5 million or after-tax expenses of $13.1 million related to the decision to close the company's operations center, reduce excess office capacity, and close 16 branches, approximately 12% of the branch network, all to be completed in the first quarter of 2022. Consequently, the company expects to reduce its annual expense run rate by about $8 million starting in the second quarter. Adjusted operating earnings for the fourth quarter also exclude a pre-tax gain of $5.1 million or $4.1 million after tax from the sale of Visa, Inc. Class B common stock in December. I will clarify which financial metrics are reported versus those on a non-GAAP adjusted operating basis. For the fourth quarter, reported net income available to common shareholders was $44.8 million, with earnings per common share at $0.59, down about $26.8 million or $0.35 per common share from the third quarter. The reported return on equity was 6.98%, and the reported non-GAAP return on tangible common equity was 11.98%. The reported return on assets stood at 94 basis points, while the reported efficiency ratio for the quarter was 68.6%. Non-GAAP adjusted operating earnings available to common shareholders in the fourth quarter were $53.8 million, and adjusted operating earnings per common share was $0.71, reflecting a decrease of approximately $17.8 million or $0.23 per common share from the third quarter. The non-GAAP adjusted operating return on tangible common equity was 14.25% for the fourth quarter, with a non-GAAP adjusted operating return on assets of 1.1% and a non-GAAP adjusted operating efficiency ratio of 58%. Looking at credit loss reserves at the end of the fourth quarter, the total allowance for credit losses was $107.8 million, made up of approximately $100 million for loan and lease losses and $8 million for unfunded commitments. This allowance decreased by around $1.5 million in the fourth quarter, primarily due to lower expected losses resulting from ongoing economic improvements in our area, stable credit quality metrics, risk rating upgrades during the quarter, and a positive macroeconomic outlook. The total allowance for credit losses as a percentage of total loans was 82 basis points at the end of December, slightly down from 83 basis points the previous quarter. The Day One CECL reserve was 75 basis points of total loans. In estimating expected credit losses in the loan portfolio at year-end, the company used Moody’s December baseline macroeconomic forecast covering a reasonable two-year period. Moody’s December forecast for Virginia indicates an unemployment rate averaging 2.6% over the two-year period, a marginal improvement from the 2.7% forecasted previously. At a national level, this forecast predicts a GDP increase of 4.4% in 2022 and 2.9% in 2023. The company also made qualitative adjustments for certain industries particularly affected by COVID-19 and other economic uncertainties. The negative provision for credit losses of $1 million in the fourth quarter was a significant decrease from the prior quarter's negative provision of $18.8 million and from the negative provision of $13.8 million in the fourth quarter of 2020. The allowance for credit losses has returned to pre-pandemic CECL reserve levels as the projected loan losses triggered by COVID-19 have not occurred. Net charge-offs in the fourth quarter remained minimal at approximately $511,000 or two basis points annualized, compared to $133,000 in the prior quarter and $1.8 million or five basis points in the fourth quarter of the previous year. For the entire year 2021, net charge-offs approximated one basis point, reflecting strong credit quality. Regarding the pre-tax, pre-provision components of the income statement for the quarter, tax equivalent net interest income was $141.6 million, up about $900,000 from the third quarter, primarily driven by higher investment income from a growing investment portfolio and slightly increased interest and fees on loans, including from PPP loans, partially offset by the accelerated unamortized discount related to subordinated debt redeemed in December. Net accretion from purchase accounting adjustments of $4.2 million contributed ten basis points to the net interest margin in the fourth quarter, up from nine basis points in the previous quarter. The tax equivalent net interest margin in the fourth quarter was 3.10%, down two basis points from the previous quarter due to a decline in the yield on earning assets and a slight rise in the cost of funds. The mild drop in earning asset yield was influenced by an 11 basis point increase in loan portfolio yield, offset by lower investment portfolio yields and increased levels of low-yield cash equivalents. The loan portfolio yield rose to 3.81% from 3.70% in the fourth quarter, led by a 10% increase in PPP loan yields reflecting additional PPP loan fee accretion. This increase was somewhat countered by core loan yield compression due to pay downs of higher-yielding loans and lower yields on renewals. The decrease in investment portfolio yield to 2.44% stemmed from reinvesting portfolio cash flows at lower market rates. The increase in the cost of funds to 20 basis points from 19 basis points was caused by higher borrowing costs linked to the accelerated unamortized discount on subordinated debt, partially mitigated by a decline in deposit costs. Non-interest income increased by $6.5 million to $36.4 million in the fourth quarter from $29.9 million the prior quarter, mainly due to the gain on the sale of Visa Class B stock and increased revenues across several non-interest income categories, though partially negated by declining mortgage banking income reflecting seasonal decreases in mortgage loan origination volumes. Other notable increases in non-interest income included unrealized gains on equity investments, seasonal rises in deposit service charges, borrowing revenue from debt benefit proceeds, loan interest rate swap fee income, and additional asset management fees driven by growth in assets under management totaling $6.7 billion at the end of 2021. Reported non-interest expenses rose by $24.6 million to $119.9 million in the fourth quarter compared to $95.3 million in the previous quarter, mainly due to restructuring costs associated with the closure of the operations center and consolidation of branches. We anticipate an additional $5.7 million in branch closure costs mainly for lease terminations in the first quarter of 2022. These strategic actions will yield about $8 million in annualized savings starting in the second quarter. During the fourth quarter, there were also non-recurring expenses, including costs linked to strategic projects and severance, as well as elevated performance-based variable incentive compensation. The effective tax rate for the fourth quarter decreased to 14.4% from 18% in the third quarter, driven by changes in the proportion of tax-exempt income to pre-tax income. For 2021, the effective tax rate was 17.2%, and we expect it to be in the 17% to 18% range for 2022. Now regarding the balance sheet, total deposits were $20.1 billion at December 31st, an increase of $129 million or 2.6% annualized since September 30th, fueled by growth in the investment and loan portfolios, despite a decline from PPP loan forgiveness. Loans held for investment totaled $13.2 billion, including $150 million in PPP loans, marking an increase of $56 million from the prior quarter, primarily due to an increase in loan balances despite the impact of forgiven PPP loans. Excluding PPP loans, loan balances rose 11.7% annualized, particularly in commercial lending. Consumer loan balances also saw growth, driven by a notable rise in indirect auto loans, although this was tempered by strategic reductions in other consumer loan balances. PPP loan forgiveness processes have gone smoothly, with approximately $315 million forgiven in the fourth quarter. Total deposits were $16.6 billion, reflecting a slight decrease from the previous quarter, largely from a drop in high-cost term deposits balanced by growth in low-cost deposits. Low-cost transaction accounts made up 56% of total deposits at the end of the period, similar to previous figures. In terms of shareholder stewardship and capital management, we are focused on managing our capital prudently to enhance long-term shareholder value. At the end of the fourth quarter, Atlantic Union Bankshares and Atlantic Union Bank's capital ratios significantly exceeded regulatory well-capitalized levels. In December, the company raised tier two capital by issuing $250 million of subordinated notes. A portion of the proceeds was used to repay outstanding subordinated notes due in 2026. The company declared a common stock dividend of $0.28 per share for the fourth quarter, unchanged from the previous quarter, and also paid a dividend on Series 80 preferred stock. A $100 million share repurchase program was authorized by the Board, replacing the prior program that was fully utilized. As the financial impact of the PPP loan program diminishes and the pandemic-related volatility eases, we are affirming our top-tier financial targets for 2022. We aim for a return on tangible common equity of 13% to 15%, a return on assets of 1.1% to 1.3%, and an efficiency ratio of 53% or lower. Note that comparing our efficiency ratio with banks lacking significant Virginia operations can be tricky due to tax differences. Our equity ratio target being at 53% is comparable to a 50% target for peer banks outside Virginia. Our performance targets are fluid and aim to keep us among the top quartile of our peers, irrespective of the operating environment, and we believe these targets are attainable in 2022. In summary, Atlantic Union has shown solid financial results for the fourth quarter and the full year, positioning us well for sustainable, profitable growth and long-term value creation for our shareholders in 2022 and beyond. I will now pass it back to Bill Cimino to facilitate questions from our analysts.
William P. Cimino, Investor Relations
Thank you, Rob. And Michelle, we're ready for our first caller, please.
Operator, Operator
Thank you. Our first question comes from Casey Whitman with Piper Sandler. Your line is open, please go ahead.
Casey Whitman, Analyst
Good morning. I guess the first I'd ask is, some really nice loan growth towards the end of the quarter. Can you give us an idea for where new loan yields were coming in compared to the rest of the book?
John C. Asbury, CEO
I'm sorry, was that yields I had…
Casey Whitman, Analyst
Yeah, the new, sorry, the new production that you guys put on towards the end of the quarter, what were the average yields on that production versus the rest of the book?
Robert M. Gorman, CFO
The average yields on commercial growth we observed were around 3%, compared to about 20% from the existing portfolio. Therefore, we are noticing some declines in that area.
Casey Whitman, Analyst
Okay. Maybe can you walk us through sort of how you're feeling about rate hikes and where you are positioned from an alcove perspective and sort of what sort of deposit betas you're assuming to get there?
Robert M. Gorman, CFO
In terms of margins moving forward, we anticipate that the Federal Reserve will increase the federal funds rates, possibly starting as early as March, according to market indications. Our projection for 2022 includes three rate hikes: one in May, one in July, and another in November. From a deposit beta standpoint, we don't expect to raise rates immediately, and we likely won't see significant changes for non-index deposit clients until the fourth and fifth hikes occur. Therefore, we expect only modest increases in deposit costs this year. However, we foresee a significant improvement in core margin in 2022. We exited the fourth quarter with a core margin of 0.8%, which accounts for approximately 11 basis points of impacts from excess liquidity. We will be effectively utilizing that excess liquidity, and you'll see the results in the first quarter. We're projecting core margin growth of seven to eight basis points in the first quarter, increasing further as short-term rates rise starting in May, aiming for a core margin of around 310 by the end of the year. This projection excludes the diminishing impacts of the Paycheck Protection Program, with only about $4 million of deferred fees remaining, which will have little effect this year. The driving factor behind this is that about 45% of our loan portfolio is linked to one-month LIBOR and prime rates, which are expected to adjust immediately in response to Fed rate hikes, assuming LIBOR follows the same trajectory.
Casey Whitman, Analyst
Thank you. That was helpful. I have a question about expenses. It's a bit complicated with many factors this quarter. What would the starting run rate be that corresponds to the 2% guidance you provided for 2022? I assume it’s slightly above the 95 million to 96 million you were previously operating at, which would be useful to know.
John C. Asbury, CEO
Yeah Casey, so if you take in, if you look at our core, obviously the reported number is quite high. We've had the restructuring charges, but we also had a number of fairly unusual items that we would back out and not consider in our core run rate. Some of the commentary that I mentioned, if you back those out plus an elevated incentive accrual this quarter, if you back those out we think we're at around my feeling is we're at about a $96 million or so run rate coming out of the quarter. We are still guiding to be in about 2% growth off of that loan rate. So full year we are looking for anywhere between 385 million to 390 million is what we're looking at in terms of full year expense going forward. Hey Rob, can you speak to what will happen in Q1, there's still some residual expenses and timing issues on the branch consolidation and the operation center?
Robert M. Gorman, CFO
We are expecting around $5.7 million in additional restructuring costs associated with the 16 branch closures scheduled for March. In the first quarter, there will be increases primarily due to payroll tax resets, making it the highest quarter for costs, which will then decline. Moving into the second, third, and fourth quarters, we anticipate these costs will average about $2 million per quarter as a result of the actions taken.
John C. Asbury, CEO
Casey, we acknowledge it's hard from the outside looking in to get clear line of sight to the run rate of expenses. We were very busy in December. We admittedly purposefully cleared the decks to take care of some things that needed to be taken care of. But we do think that the run rate is 96 million for the quarter on sort of a clean basis around or about. And when we talk about 2% growth rate on that baseline, that does assume the incentive plan is fully funded.
Casey Whitman, Analyst
Okay. Alright, so the 385 million to 390 million guide does not include I would assume the 5.7 million?
Robert M. Gorman, CFO
Yeah, that's right Casey, yeah excludes that.
Casey Whitman, Analyst
But it would include everything else, including like the amortization of intangible assets...?
Robert M. Gorman, CFO
Yeah, it includes the amortization and everything else, except that 5.7 million.
William P. Cimino, Investor Relations
Thank you, Casey. And Michelle we are ready for our next caller, please.
Operator, Operator
And our next question comes from the line of Catherine Mealor with KBW. Your line is open, please go ahead.
Catherine Mealor, Analyst
Good morning. Remember last quarter you gave a core NII ex-PPP guide of about 5% to 6% for this year. How are you thinking about that number now that we've got some rate hikes in your assumptions?
Robert M. Gorman, CFO
Yeah. So if you exclude the PPP and accretion, well just PPP we're looking at about a 7.5% to 8% growth rate on the net interest income line this year, primarily related to putting that excess liquidity to work and higher rates and the rate increases I just mentioned.
Catherine Mealor, Analyst
Okay, great. And then the 7 to 8 bps in lower NIM that you're thinking about for next quarter, are you thinking of it as a big change in your excess liquidity or is that generally on a fairly similar balance sheet although it's risk?
John C. Asbury, CEO
Say that again Catherine. Basically on a core basis we're noting that there will be an uptick from what this quarter is. So about 287 is what we looking at in Q1 2022 versus 280.
Catherine Mealor, Analyst
Oh good.
John C. Asbury, CEO
Yeah, so it is a positive.
Catherine Mealor, Analyst
I thought you were going down. Okay, that…
John C. Asbury, CEO
No, we're going up.
Catherine Mealor, Analyst
Okay, great. That's what I was trying to figure out. Okay, so reported maybe it is going down, but…
John C. Asbury, CEO
Yeah. Reported we will be going down. Reported we will go down because, yeah, PPP will be out of the equation to the level we had in the fourth quarter.
Catherine Mealor, Analyst
Got it. Okay, that makes a lot more sense. And so you would assume within that some of the excess cash you had this quarter comes off as we move into next quarter?
Robert M. Gorman, CFO
Yes, that's correct. Much of the excess cash was reduced in December. While it may not be evident in the averages, you'll notice a decrease as we had strong loan fundings in December. Additionally, we invested some of that cash in the investment security portfolio. Overall, we expect a significant reduction. We anticipate an impact from excess liquidity of four to five basis points, which is down from the 11 basis points we recorded in the current quarter.
Catherine Mealor, Analyst
Okay, great. And then one more question about fees. I was surprised to see an increase in service charges, especially since there have been numerous discussions in the industry about potential weaknesses related to overdraft fees. Could you share what influenced the rise in service charges and any challenges we might encounter in that area moving forward?
Robert M. Gorman, CFO
In terms of the increase this quarter, we observed a seasonal rise in volumes due to the holiday season, which is not unusual. I'll ask John to address your questions regarding potential adjustments to policies related to overdrafts and similar topics.
Catherine Mealor, Analyst
That's right.
John C. Asbury, CEO
Over the past year or two, we have implemented various improvements to overdraft charges to make them more consumer friendly. We are closely monitoring the ongoing developments in the industry and plan to make further adjustments. While we are not ready to disclose specific details at this time, we want to assure you that there will be pressure to make changes to overdraft charges. As a reminder, we have received the J.D. Power Retail Banking Customer Satisfaction Award in the mid-Atlantic for two out of the last three years, which reflects our commitment to our retail customers. We are focused on understanding the evolving needs regarding consumer checking and will be making adjustments accordingly. More information will be available soon.
Catherine Mealor, Analyst
Okay, great. Thank you, John.
William P. Cimino, Investor Relations
Thanks Catherine. Michelle, we are ready for our next caller, please.
Operator, Operator
Thank you. And our next question comes from the line of Brody Preston with Stephens, Inc. Your line is open, please go ahead.
William P. Cimino, Investor Relations
Good morning.
John C. Asbury, CEO
Brody, how are you?
Brody Preston, Analyst
Doing well, hope you are doing well too. I wanted to quickly discuss expenses. Rob, I have noted approximately 18.6 million in one-time expenses this quarter related to branch closures, severance, and vendor termination. Your operating expense, including amortization of intangibles, appears to be around 101 million. The higher end of your guidance of 390 suggests about 97.5 million. If we start from that base of 101 heading into the first quarter, with some additional payroll tax expenses, and considering the impact of branch closures in the second quarter removing 2 million, I can easily estimate you down to around 99 to 100 million. Where will the remaining 2 to 3 million difference come from to reach the average quarterly run rate of 97.5 million?
Robert M. Gorman, CFO
Yeah. So Brody as I mentioned, our view is that the run rate is the adjusted core run rate that we'd be looking at is about 96 for the quarter. I think, if you look at the 120 million we reported you back off the 16.5 million you're down to about 103 million. And then you take out the various items I ticked off in my comments, just that we don't feel like will persist, those would be relating to the contract termination, severance, and some costs related strategic projects that won't recur. And then the other component is bringing that down would be the incentive accruals that we put through, those were inflated by about 3.9 million or so. So back that out and you get close to that number that I'm referring to. Now that performance incentive, we'll have to find its way back into the run rate because it basically was a pickup. As we are coming out of the third quarter, we thought we wouldn't have that level of incentive payout but we had a strong forward quarter. So we had to catch up. Interestingly Brody, if you look at salary and benefit excluding the incentive topping off, if you want to call it that, it was pretty much even quarter-over-quarter and that's ahead of the actions that are coming with branch consolidation, etcetera. So, we feel that we have a clear line of sight to be able to manage the 2% expense growth off of that $96 millionish base, assuming incentives are fully funded.
Brody Preston, Analyst
Got it. Okay. Thank you for clarifying some of it for me. On the growth run, I just wanted to circle back maybe to core C&I, and other commercial, they were both extremely strong this quarter. And so I wanted to ask if some of that was utilization rates ticking higher or was it purely new client acquisition? And then in the other commercial, could you speak to maybe the strength you saw in equipment finance this quarter?
John C. Asbury, CEO
Sure. David Ring, Head of Commercial Banking is here with me, wholesale banking as we now call it. I'll ask him to comment on this, but I'll set it up. We did see encouragingly commercial line utilization tick up in every single month of Q4, but the reality is it was still pretty minimal. So 28% is still about as low as you can imagine. So it was not on the back. We weren't fighting declining utilization for a change. That's good, but that's not really what lifted the boat. I think that we had really good performance production in Q4, was the best that I've seen production. It was back-end loaded. December production was thunderous and it was really a busy month for us. Equipment finance is performing well. Leasing shows up in the other commercial category, which you'll see on the balance sheet reporting and we were really strong across all categories, and certainly C&I was the headliner. Dave Ring, do you wish to comment on what we saw happen in Q4.
David V. Ring, Head of Commercial Banking
Sure John. As you mentioned, we achieved record production for the quarter. We had higher paydowns, but we more than compensated for that with C&I and equipment finance. Real estate remained relatively stable for the quarter, so most of the growth originated from the C&I and equipment finance sectors. When I consider the coiling spring we've talked about, it's clear that commercial line utilization can only increase from here. I believe we've moved past the lowest point, and growth will accompany working capital demands and sales. Although construction lending has slightly decreased, that's merely due to completed projects transitioning into permanent mortgage categories. We are tracking construction funding commitments and schedules, which may pose a challenge this year. However, our pipelines are significantly stronger than they were at this time last year, and despite impressive production in Q4, they are currently in good shape. I feel confident that we are on solid growth footing right now. When you factor in our asset sensitivity and the actions we've taken to reduce expenses, we are in a favorable position, and we're exactly where we need to be; we just need to follow through.
Brody Preston, Analyst
On the securities portfolio, if I can just ask for two stats maybe have what the duration of the portfolio is and then do you have what percent of the portfolio is floating rate?
John C. Asbury, CEO
Yeah, Brody the duration is approximately five years. I don't have exactly what the floating rate component is so I'll have to come back to you on that but it's relatively low. I just don't have the number in front of me here.
Brody Preston, Analyst
Got it, okay. And if I could sneak one more, the reserve for unfunded commitments, it looked like it stayed pretty flattish and so it was like a 7% increase, maybe in the dollar amount, but it was flattish as a percent of loan. So is it fair to assume that the unfunded commitments increased about 7% as well quarter-over-quarter?
Robert M. Gorman, CFO
Yeah, that's right. Actually, I think it increased about 0.5 million to 7.5. I think it's at 8 million now.
William P. Cimino, Investor Relations
Thanks, Brody. Michelle we are ready for our next caller please.
Operator, Operator
Thank you. And our next question comes from the line of David Bishop with Seaport Research. Your line is open, please go ahead.
William P. Cimino, Investor Relations
Good morning, David.
David Bishop, Analyst
Good morning, gentlemen. Most of my questions have been asked and answered. But just curious, your view of excess liquidity in cash, I saw you put some to work there at the end of the quarter, the cash about 800 million, just where you see that potentially settling into over the course of the year?
John C. Asbury, CEO
We are primarily focusing on utilizing the excess liquidity by channeling it into our loan portfolio and promoting loan growth. Over the quarter, we've increased our investment portfolio, now up approximately 300 million quarter-on-quarter. This investment portfolio represents around 21% of our total assets. We are allocating these funds towards mortgage-backed securities and municipal bonds with a distribution of 60% in mortgage-backed securities and 40% in municipal bonds, achieving a blended rate of about 2.2%. However, I anticipate that the security portfolio will not continue to grow but may decline over time due to maturities. Our goal is to leverage the excess liquidity to support the loan growth we expect to see in the first quarter and throughout the year.
David Bishop, Analyst
Got it. And then one final question maybe on an dollar basis. Just curious if you have the dollar amount of the loan pipeline at year end versus last quarter? Thanks.
Robert M. Gorman, CFO
Yes, at the end of the year, the pipeline reached approximately 2.2 billion, representing an increase of about 650 million compared to last year's figure. While not everything will close, we maintain a consistent outlook. This confidence is part of our optimistic stance and belief in achieving high single-digit loan growth.
William P. Cimino, Investor Relations
Great, thank you. Thanks David. And Michelle we are ready for our next caller please.
Operator, Operator
Our next question comes from the line of Laurie Hunsicker with Compass Point. Your line is open, please go ahead.
William P. Cimino, Investor Relations
Hi Laurie, good morning.
Laurie Hunsicker, Analyst
Good morning. I just wanted to go back on expenses. On Slide 12 you are break it out really nicely. Just want to make sure I'm understanding this right, the 4.4 million increase in salary and benefits obviously broke that out 3.9 plus the 500 contribution to ESOP. So are you suggesting that 3.9 is non-recurring?
John C. Asbury, CEO
No, what I'm suggesting Laurie is that gets fed back over on a quarterly basis as opposed to the hit, the increase in the quarter. So typically, we'd be accruing for incentives evenly throughout the year, depending on what our outlook is for the year. Through third quarter, we did not think the performance was going to end the year where it did. And so we had not accrued as much that was needed by the end of the year based on the performance of the fourth quarter. Yes, reflecting on my five years here, we've generally performed well in estimating incentives to avoid year-end adjustments. However, we did not manage as effectively last year and this year due to the challenging environment. We've been quite conservative, making predictions difficult. I believe what Rob is indicating is that we will distribute the incentives more evenly this year, as we anticipate being able to forecast with greater confidence.
Robert M. Gorman, CFO
Yeah, that's right Laurie.
Laurie Hunsicker, Analyst
Okay, and then just to clarify your 96 million run rate, because I think unlike Brody, my math somehow is higher, your 96 million run rate includes the incentive accrual fully baked into it, is that correct?
Robert M. Gorman, CFO
Yes, that's right. That 96 million as I mentioned, we were expecting a couple of percent growth rate on that. So that's, but you're right, it's fully baked in that number.
Laurie Hunsicker, Analyst
Got it, okay. And so when we think about 96 million, obviously, first quarter is elevated by the 5.7 million of branch closures plus you have the FICO that hits in that first quarter. So when we think about sort of the June quarter starting run rate, we're 96 million plus the 2% growth rate annualized as we go forward into 2022, is that right?
Robert M. Gorman, CFO
Yes, the first quarter will be significantly higher than the second, third, and fourth quarters. But that's essentially correct.
John C. Asbury, CEO
Yeah. First quarter is always seasonally high for tax purposes as you know, Laurie. And again, as a reminder, not all we have $8 million of costs identified, they're coming out of the system as a result of branch restructuring, the closure of the Ruther Glen Center, that kicks in really, it takes into Q2.
Laurie Hunsicker, Analyst
Okay, okay, right. That 2 million run rate savings. Okay, and then just remind me your payroll taxes are about $2 million or do you have a better number on that?
Robert M. Gorman, CFO
Say that again Laurie, just that one.
Laurie Hunsicker, Analyst
The payroll taxes at FICO, how much of that…
Robert M. Gorman, CFO
The payroll FICO tax is $2 million, is that your question Laurie?
Laurie Hunsicker, Analyst
Yeah.
Robert M. Gorman, CFO
How much is FICA tax. I was just like, for this quarter…
William P. Cimino, Investor Relations
Thank you, Laurie. And Michelle, we are ready for our last caller please.
Operator, Operator
Thank you. And our last question comes from the line of William Wallace with Raymond James. Your line is open, please go ahead.
William P. Cimino, Investor Relations
Hi Wally, good morning.
William Wallace, Analyst
Thank you, good morning to you. Maybe just real quick for David, we talked about line utilization. What was line utilization pre-COVID and are you guys modeling for increases in your high single-digit guide for the year?
David V. Ring, Head of Commercial Banking
Well, it's a little hard to say because of the growth of the banks, and its changing complexion. But low 40s is I think the fourth quarter before COVID was at 38%. It sounds like…
Robert M. Gorman, CFO
That's right, it was 38 and now it's 28.
David V. Ring, Head of Commercial Banking
We believed that number was somewhat low at the time. I anticipate that businesses will operate with more liquidity moving forward. Therefore, while line utilization may be structurally lower than in the past, it won't drop to 28%. There’s potential for improvement, especially in areas like filling jobs and increasing sales.
Robert M. Gorman, CFO
Yeah, there's about 25 million of upside for every percentage point.
William Wallace, Analyst
Okay. And are you guys modeling for increased utilization in 2022 for your guide?
Robert M. Gorman, CFO
No, no, we're not. That'll be upside.
John C. Asbury, CEO
Thank you, Wally. I have been with the company for over five years, and looking at the two significant deals we've completed, which have been crucial to shaping the bank as it stands today, there was no doubt about their strategic alignment or financial viability. They made perfect sense and were clearly communicated. When considering future opportunities, we only focus on those that make strategic and financial sense. However, we do encounter four major factors: first, execution risk—our confidence in successfully implementing the deal; second, opportunity cost—what we may lose out on by committing resources to a specific opportunity; third, cultural fit; and fourth, understanding the differences in strategy. While we can be flexible on these points for smaller deals, we cannot accommodate them for larger ones. Our perspective has shifted as we are now on solid organic ground, benefiting from rising rates and keenly observing industry developments in financial technology, which we aim to engage with. Preserving this option is important to us. While I'm not saying we won't pursue acquisitions, it is more likely that any we consider will be on a smaller scale. Last year, we thoroughly evaluated a larger opportunity but determined that it did not align with our criteria regarding execution risk, opportunity cost, cultural fit, and strategic differences. Consequently, we've made no moves, especially since we initially expected a prolonged period of low rates, which now seems less enticing. This is our current outlook; we're not ruling anything out or confirming any actions, but should we engage, it wouldn't come as a surprise given our track record.
William Wallace, Analyst
Thank you for that, John. I have two quick follow-up questions. David, John mentioned that the pipeline was 2.2 billion at the end of the year, increasing from 650 million. Was that 650 million at the end of the third quarter or at the end of last year?
David V. Ring, Head of Commercial Banking
That'd be compared to year-over-year.
William Wallace, Analyst
Okay. And then Rob, please proceed.
John C. Asbury, CEO
So yes, going into 2021 versus going into 2020 is what Dave was referring to.
William Wallace, Analyst
Okay, thanks. Okay, and then Rob, just I appreciate all the commentary around your net interest margin and your timing of rate hikes. But just so I don't have to do the mental gymnastics of figuring out what the timing difference in our models might be around when we're modeling heights, can you just kind of boil it all down and give what your expectation of margin expansion would be per 25 basis point Fed height?
Robert M. Gorman, CFO
Yeah, so for 25 bps we're looking at about eight to nine basis points of margin expansion.
William Wallace, Analyst
Okay, great. And then I don't know if we're out of time or not, but if we're not, John, I'd love if you could talk about any Fintech partnerships, like how close you might be or how you're kind of thinking about building those partnerships to drive fee income? Thanks.
John C. Asbury, CEO
Yes, while we intend to do an Investor Day in May and we'll take you into a deep dive on that and really the rest of our various strategies, as a reminder, we were one of the initial investors in the canopy fund, and that Rob going from memory would have been 2019 timeframe. So we have been leveraging that and other mechanisms to really whet financial technology partnerships. Thus far, I would generally characterize the types of financial technology partnerships that we've engaged in as providing services and products that complement the existing lines of business, product base, etc. Think of it as features and functionality for mobile banking, online banking, and back end processes as well. And we can give you lots of examples of that. Land would be an example, which we use our mortgage company, we learned about that through the seat we have at the table. When we talk about these funds, I want to be clear. We don't think of these as financial investments per se. Yes, they're financial investments and guess we've been successful. But, the real reason why we're interested in it is it allows us to build relationships as I said in my comments to look at a carefully screened and whetted set, and to really gain insight. So it informs our strategy, what will happen next is that we are really interested in the opportunity to build what I would call new business lines potentially. And we see blockchain as something that is potentially very disruptive to existing payment mechanisms. So there are coming real-time payment networks that could potentially underscore potentially render ACH Fed Wire, Zell things like that obsolete. We do not want to be a late adopter on it and so we're interested in categorically, especially in payment networks and what I would call back-office applications, the ability to go from start to finish on a home equity line in five days. Could be a possibility. So we don't want to get ahead of ourselves on this Wally. But what we're seeing is we're now moving this to the next level, and we've invested in other funds to expand our network of partnerships. We're not going to do anything, I think that would surprise you. We don't have any current intentions at this moment for engaging and what I would call store value concepts, which is like be a gateway to Bitcoin. I'm not saying we will not do that but I'm simply saying that we are especially focused on emerging payment networks and blockchain as a technology to vastly improve backend processes. We'll see where it goes from here.
William Wallace, Analyst
Okay, great. Thank you so much. Appreciate your time guys.
William P. Cimino, Investor Relations
Sure. Thanks Wally. And thanks everyone for joining us today. We look forward to talking with you next quarter. Have a good day. Thank you.
Operator, Operator
This concludes today's conference. Thank you for participating. You may now disconnect.