Q3 2019 Earnings Call
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I'd now like to hand, the conference over to your Speaker today Bill. Some you know thank you. Please go ahead Sir.
Thank you Tiffany and good morning, everyone.
Atlantic Union, Bankshares, President and CEO , John Asberry, an 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 is available to download on our Investor website investors Dot banker Atlantic Union Bank Dot com.
During the call today, we'll comment on our financial performance using both GAAP metrics and non-GAAP financial member measures.
Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures is included in our earnings release for the third quarter of 2019.
Before I turn the call over to John I would like to remind everyone that on todays call. We will make forward looking statements, which are not statements of historical fact in are subject to risks and uncertainties.
There could 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 any forward looking statements.
Please refer to our earnings release for the third quarter of 2019 in or other FCC filings for further discussion of the company's respecters. Another in important information regarding our forward looking statements, including factors that could cause actual results to differ all comments made during today's call are subject to that safe Harbor statement.
At the another call, we'll take questions from the research analyst community and now I'll turn the call over to John Asbury.
Thank you bill Thanks to all for joining us today and welcome to our second conference call is the newly rebranded Atlantic Union Bankshares Corporation, we remain pleased that or change in name signage and trading symbol has been uneventful and in fact, we've received a surprising number of complements about it I'd like to express my gratitude to our marketing team for leading this very successful effort.
I'd like to point out this month marks my three year anniversary of having joined the company what a difference I see three years, then and wouldn't exciting transformation, we have experienced and continue to experience our team checked off the boxes on the prior three year strategic plan and recently approved a new one I'll comment on later in my remarks, the current challenges, we face and the interest.
Freight environment, notwithstanding I've never been more optimistic competent and enthusiastic about the future of the company the now.
Turning to current events Atlantic Union, followed its good first half a year with a solid third quarter, you will recall, our stating in prior comments that results would be noisy for the first three quarters of the year as we wind up the access National Bank integration rebranding and a few other undertakings and that is certainly proven to be the case.
You can see in the earnings release, we did have a number of onetime items in the third quarter in a charge off of a long term land development work out all of which impacted our operating profitability metrics from the prior quarter for purposes of clarity, Rob Gorman will walk you through nonrecurring items in detail during his portion of the comments, but for now I'll hit the highlights for the quarter.
Yes.
To start we delivered strong deposit growth while loan growth was seasonally slow in the third quarter.
Continue to build out the leadership team with the selection of a seasoned wealth management leader, we will have more detail about this higher in an upcoming official announcement. We also hired another season leader Allison Holt Fuller into a new role a set of product management.
To have exemplary backgrounds in are important additions to the company's leadership, we rolled out our new three year strategic plan to our teammates and we consolidated four branches.
As for operating metrics for the quarter, our operating return on tangible common equity was 15.64%, which is a 94 basis point decrease from the second quarter operating return on assets was 1.29% down six basis points for the last quarter and operating efficiency ratio was 55.
One, 2%, which is a 266 basis point increase from the prior quarter.
Since last fall, we communicated our financial targets at an annualized basis in the fourth quarter of 2019 of an operating ROTC between 16, and 18% and operating our own a between 1.4 and 1.6% and an operating efficiency ratio at 50% or below.
Yup.
Really we're facing headwinds from the current rate environment at the beginning of the year. We expected there would be fed fund increases in 2019, and a steepening yield curve the rate environment as shown to be worse than our expectations and there has been a sustained and version of the yield curve, which continues to negatively impact our net interest margin. Nevertheless, based on what we know.
Today, we expect to be within the targeted ROTC range in the fourth quarter of 2019 on an annualized basis and our efficiency ratio should be near the 50% target for the fourth quarter as well achieving our ROI target. However, now looks like a 2021 event given our current interest rate modeling.
Again, Rob will elaborate on this in his section.
Loan growth with 3% annualized for the quarter point to point, while average loans grew 5% Q3 is predictably a seasonally slow loan growth quarter for us further dampened by seasonal paydowns among our government contracting clients due to the federal government September 30 fiscal year end. We also saw the persistent trend of CRT Paydowns remain.
At elevated levels Cnine line utilization during the quarter remained stable, while total commitments ticked up from the prior quarter.
As a reminder, the access acquisition closed on February Onest 2019 on a pro forma basis as if the access balances were included for the full year our year to date annualized loan growth is approximately 5% point to point slightly below year to date expectations.
Our loan pipelines are well balanced they remained strong at our higher than at this point last year based on everything we know at this time, we expect full year 2019 loan growth to be around 6%. We do think we could outperform this into third quarter forecast just as we did at this time last year, especially given our 14% annualized loan growth.
In last year's fourth quarter, and the disruption in the pending BB and T. Centrus merger. However, we think it's best to update or expectations based on where we are currently and then we'll see what happens.
Our deposit growth was a bright spot for the quarter coming and strong at about 17% annualized in the second quarter. We noted that we had experienced seasonal reductions in deposits from some larger relationships that we expected to return in the second half of the year and they did encouragingly, though our rebounded deposit growth was broadly based year to date.
Posit growth of approximately 9% point to point is at the higher end of our upper single digit growth guidance given the current strength. We continue to believe will be in our guidance range of high single digit deposit growth for the year.
Our loan to deposit ratio was around 94% at quarter end, which is slightly below or 95% target and thats a good place to be.
Turning to credit our credit quality remained solid the economy at our footprint of steady unemployment at Virginia ticked down to 2.8% and we still do not see any evidence of systemic changes to our credit environment charge offs did increase to 25 basis points annualized from 14 basis points in the prior quarter totally.
18 basis points year to date, the increase was primarily from one long running land development work out that incurred a $3.1 million charge off during the quarter accounting for about 40% of total charge offs. This does not reflect any change in our credit environment that was rather unique to the borrower his personal circumstances cost into the go sheet an orderly.
We sell the property to another developer versus continue to build it out as he has been doing for a very long time.
From our standpoint, we decided the best course of action was agreed to the sell in bulk eliminate the exposure be done with it versus ticketed Oreo and attempt to better outcome. The transaction is expected to close in November .
On the other hand, we also had an outsize loan recovery of $9.3 million from the zenith acquired portfolio not reflected net charge offs as the loan was charged off prior to acquisition and therefore was accounted for under non interest income.
As we've seen in prior quarters, a big part of charge offs, 40% in the third quarter came from a third party consumer loan portfolio. While it is served its intended purpose. This is not a strategic focus area and is being wound down over the next year.
The remaining 20% of charge offs for the quarter were well distributed among a handful of smaller borrowers and we noted nothing out of the ordinary with them.
As evidenced by this quarter charge offs are typically lumpy quarter to quarter, but we otherwise expect full year 2019 to look about like the past few years in terms of credit quality barring some unexpected change in the macroeconomic environment as I've said for nearly three years I continue to believe that problem asset levels at Atlantic Union and across the industry.
We remain below the long term trend line. Eventually we are going to see a return to more normalized credit losses, but we can't tell you when to expect that as we're not yet seeing any evidence of a systemic downturn.
Moving away from quarterly results in looking ahead as I mentioned earlier, we rolled out a new three year strategic plan to our teammates during the quarter, our planet's in keeping with how we'd like to operate Atlantic Union Bank, which is maintained forward progress press, our advantage, where we can and do what we say we're going to do.
The new plan will deliver on for overarching objectives that we believe are essential to our future success.
First meet the changing needs of our customers, we must remain nimble and respond to the rapidly evolving business environment. We note with caution any number of formerly well regarded businesses, who took their I offer customers failed to respond to a changing environment and found themselves obsolete, we want to avoid that outcome.
Second optimized digitized and automate processes, our business processes need to be optimized digitized an automated in order to improve efficiency responsiveness and get things right. Every single time. This is a multiyear undertaking but the work is underway now.
Third demonstrate organic growth. We've demonstrated were successful acquire an integrator that less obvious is the organic organic growth. We've also achieved we believe we have the platform scale markets and capabilities to demonstrate we can meet our objectives through organic growth. This doesn't mean, we would not consider acquisitions over the next three years.
But for the time being the best investment for Atlantic Union Bank is Atlantic Union Bank itself, we have an ambitious initiatives agenda inside the company and we need time without M&A distraction to focus and best position ourselves for growth and future success and last but not at least at every turn keep getting better we have a great opportunity to build the premier.
Mid Atlantic Regional Bank, and we can't do that on a status quo footing as the same goes the red to success is always under construction I love the keep getting better monitor and think it fits nicely with our can do attitude and it defines who we have the calm and what we stand for for those who know us and know our story. These objectives are a logical progression of what we've been.
Working on for some time not surprisingly our roadmap to achieving these outcomes is very familiar there our priorities, which remain unchanged save one and I'll give you a few updates on our priorities.
First diversify loan portfolio and revenue streams, we continued to make progress on our commercial banking effort and the commercial loan categories of Cnine owner occupied real estate are now one third of our loan balances to complement this effort, we're standing up and equipment finance team to close a competitive gap in our commercial offerings. This is something we've been exploring.
For about a year and we first signaled at our Investor Day presentation last fall. The team is based in Atlanta. They work together for some time with a great track record and their backgrounds in the Super regional and large national banks will leverage this new capability to take maximum advantage of opportunities across our mid Atlantic footprint. In addition to their independent original.
Actions, while it will take a few quarters for the team to get up to speed. We're excited to offer secured equipment finance to include leasing as a specialized commercial and industrial offering for our clients. They generally focused on equipment transaction sizes of $1 million an up.
Next to grow core funding as I mentioned earlier, our loan to deposit ratio is currently about 94%. We continue to believe we have opportunities to grow deposit base and deepen our market share in the latest FDIC depository market share data Atlantic Union became what we believed to be the first Virginia bank ever to overtake wanted the big.
Our bank competitors in the Richmond, and essay eclipsing BMT to take the number four position the coming tourist merger will solidify the disposition of Suntrust is eliminated.
Managing to higher levels of performance as mentioned, we're maintaining our top tier financial metric targets in will aim to stay in the top quartile Oliver peers by these measures.
Next strengthen digital capabilities, we've already implemented cell and Encino This year, which we view as table Stakes technology improvements for consumer and commercial clients on the Middleburg financial or wealth management side. We're in the early stages of adopting a new comprehensive wealth management platform, which will improve the client experience, while making us more efficient.
And scalable.
Also working at a new digital account opening solution and have already simplified the mobile banking enrollment process by eliminating repetitive data entry.
Next to make banking easier, we launched an improved digital service functionality for consumer customers, making it easier to update basic personal financial information in the fourth quarter. We're piloting a project to have temporary instant debit card issuing and our branches. This will not only make banking easier, but it will give customers everything they need to immediately.
We start using our services once opened last were replacing our priority of integrate excess national Bank, which will check off at year end with a new priority and thats capitalize on strategic opportunities who knows what the future holds but as we stated in our strategy, we must be nimble and ready to react to the changing marketplace. The greatest market opportunity, we're going to see it.
Lansing Union Bank over the next few years is likely the pending combination of BB NTN Suntrust. So I'll give a few updates on where we stand with that.
Year to date, we've hired 29 people from these companies in a variety of roles anecdotally were seeing more traction in the marketplace for Atlantic Union as the alternative bank a choice.
Not too large not too small hometeam alternative we believe we're well positioned to take advantage of this disruption and are not simply waiting for this to come to US we have an organized project team, leading a multifaceted strategy focused on maximizing this opportunity.
The team analyze their branch network as well as the BMT and Suntrust branch network to identify categorized and prioritize opportunities for Atlantic Union, we're expecting considerable tourists branch closures outside of the required divestitures and our Virginia trade areas and we want to be ready for the coming disruption.
We are accelerating some investment in projects, we had slated for 2020 into this year to close competitive gaps and capitalize on what we firmly believe will be.
Multiyear disruption at the single largest market share competitor operating in Virginia.
I realize this has been a lengthy update but I hope it provides insight into how we think in what we've been up to.
In summary, Atlantic Union had another solid quarter, we're making steady progress against our strategic priorities and our position to continue to improve our already good financial performance. Despite the interest rate environment headwinds, we're pleased with the favorable market reception to our new Atlantic Union Bank brand I remain highly confident and with the future holds for us and the potential we.
I have to deliver long term sustainable performance for our customers communities teammates and shareholders and outflows as they usually do by reiterating Atlantic Union is uniquely valuable franchise, its dense and its compact in great markets with a story. Unlike any other in our region. We've assembled the right scale, the right markets and the right team to deliver.
For high performance in a franchise that can no longer be replicated in Virginia, we have incremental growth opportunities in our North Carolina, and Maryland operations and what we believe will be a multiyear disruption with two of our largest competitors, causing us to believe we have everything we need to accomplish our objectives organically at the present time.
I'll now turn the call over to Rob to cover the financial results for the quarter Rob.
Well, thank you John and good morning, everyone. Thanks for joining us today.
I'd now like to take a few minutes to provide you with some details of Atlantic unions financial results for the third quarter.
Please note that for the most part my commentary will focus on Atlantic unions third quarter financial results on a non-GAAP operating basis, which excludes $1.9 million an after tax merger related costs and $895000 in after tax rebranding related costs for clarity I will specify which spot.
You have to metrics around the reported versus non-GAAP operating basis.
In addition, we're applicable I will make reference to the Companys financial results that are further adjusted for material strategic and atypical items, which impacted the current quarter.
Including actions taken to reposition the balance sheet for declining interest rates.
These items include the following the company received approximately $9.3 million in life insurance proceeds during the quarter.
Related to zenith acquired loan that had been charged off prior to the company's acquisition of Zenith, which was recorded in other noninterest income.
The company's sold approximately $75 million of securities recorded a gain on the sale of investments of approximately $7.1 million during the quarter.
The company also paid off $140 million and long term federal home loan bank advances and terminated related cash flow hedges, which resulted in debt extinguishment losses of approximately $60.4 million recorded in non interest expense.
The effective cost of these advances, including the heads was 5.8%. So by repaying. These high cost fixed rate advances, we are able to improve the go forward net interest margin by approximately four basis points than increased annual earnings by about four cents per share.
The third quarter report reported net income was $53.2 million an earnings pursue was 65 cents up approximately four point millions of $4.5 million were six cents from the second quarter.
The reported return on equity was 8.35% the reported return on assets was 1.23% and the reported efficiency ratio was 60.47%.
On a non-GAAP operating basis, which as noted excludes $2.8 million an after tax merger related and rebranding related costs consolidated net earnings for the second quarter were $56.1 million were 69 cents per share.
Down from $57.1 million were 70 cents per share in the prior quarter.
The non-GAAP operating return on tangible common equity was 15.64% in the third quarter and was 16.18% on a year to date basis. The non-GAAP operating return on assets was 1.29% in the third quarter and was 1.32% on a year to date basis.
non-GAAP operating efficiency ratio was 55.12% in the third quarter, then was 53.92% on a year to date basis.
Of note the third quarter operating efficiency ratio would've been approximately 430 basis points lower if adjusted for the strategic and atypical items referenced above.
As John mentioned, we expect improvements to the operating financial metrics in the fourth quarter. As a reminder, we remain committed to achieving top tier financial performance relative to our peers.
His last fall, we have been targeting the following operating financial metrics and operating return on tangible common equity within a range of 16% to 18% and operating return on assets in the range of 1.4% to 1.6% and an operating efficiency ratio of 50% or lower.
We expect to be in the targeted range for return on tangible common equity in the fourth quarter of 2019 and on a full year basis in 2020.
Due to the current low rate environment and expectations of further reductions in the fed funds rate. We continue to project additional net interest margin compression in the next several quarters, which will delay achievement of the low end of the return on assets targeted range until 2021.
In addition, due to additional net interest margin compression and its impact on net interest income. We're now projecting that operating efficiency ratio will be range bound between 50 and 52% over the medium term.
Now turning to the major components of the income statement tax equivalent net interest income was $139.4 million, which was down $2.1 million from the second quarter, primarily due to lower levels of loan related accretion income, which declined by $2.7 million from the prior quarter.
Net accretion of purchase accounting adjustments for loans time deposits and long term debt added 13 basis points to the net interest margin in the third quarter, which was down from the second quarter 20 basis point impact again, primarily due to the reduced levels of loan related accretion income.
The current quarters tax equivalent net interest margin was 3.64%, which is a decline of 40 basis points from the prior quarter.
The decline in the tax equivalent net interest margin was principally due to a 19 basis point decrease in the yield on earning assets, partially offset by five basis point decline in the cost of funds.
The 19 basis point decrease in the quarter to quarter, earning asset yield was primarily driven by a 21 basis point decline in the loan portfolio yield.
21 basis point quarterly decline.
On the loan yield was driven by 10 basis points impact from the lower loan accretion income.
And lower loan yields of 11 basis points, resulting from the impact of declines of market interest rates during the quarter, notably reductions in the one month LIBOR rate in the prime rate.
The quarterly five basis point decrease in the cost of funds to 109 basis points was primarily driven by 32 basis point decline in wholesale borrowing costs and favorable changes in the overall funding mix between quarters, partially offset by higher deposit costs, which increased two basis points from the second quarter to now.
95 basis points.
The material reduction in wholesale borrowing costs than the overall reduction in the cost of funds during the quarter resulted in part from the various management actions taken to reposition the balance sheet for declining interest rates that were executed in Q2 in Q3, including the repayment of high cost Federal home loan bank advances as noted earlier.
The provision for loan losses for the third quarter was $9.1 million or 29 basis points on an annualized basis, an increase of $3.2 million or nine basis points from the second quarter.
The increase in loan loss provision from the previous quarter was primarily driven by higher levels of net charge offs and loan growth.
For the third quarter 2019, net charge offs were $7.7 million, what 25 basis points on an annualized basis as compared to $4.3 million were 40 basis points in the prior quarter.
As in previous quarters, a significant amount on the net charge offs came from non relationship third party consumer loans, which are in runoff mode. In addition, as John mentioned, we also charged off $3.1 billion during the quarter related to a long running land development workout loan.
On a year to date based system September Thirtyth net charge offs were 16.3 million or 18 basis points.
Noninterest income increased $17.5 million to $48.1 million for the third quarter from $30.6 million in the prior quarter.
The increase in noninterest income was primarily driven by life insurance proceeds of approximately $9.3 million related to the zenith acquired loan that had been charged off prior to the acquisitions either.
As well as a gain of approximately $7.1 million due to the sale investment securities during the quarter.
In addition loan related interest rate swap income increased $1.8 million due to increased transaction volumes, resulting from the flat yield curve.
In mortgage banking income increased approximately $600000 from the prior quarter due to increased levels of refinance loan volumes driven by the low mortgage interest rate environment.
Partially offsetting these increases was a $3.1 million decline and debit card interchange income as a result of complying with the Durbin Amendment, which was effective for the company starting on July Onest of this year.
Excluding merger related costs and rebranding related costs in both the second and third quarters of 2019 operating noninterest expense increased $13 million were 14.3% 208 million hundred $8.1 million when compared to the prior quarter.
The increase in operating noninterest expense was primarily due to the 60.4 million dollar debt extinguishment loss previously discussed that to note. This lost operating non interest expense would have been $91.7 million, which would be which was down $3.5 million from the prior quarter.
In addition, third quarter operating non interest expense included approximately $309000 in Oreo valuation adjustments driven by updated appraisals received during the quarter.
$275000 in recruiting costs related to the new equipment finance team and $1 million in support of a community development initiative.
These expenses were offset by an FDIC small bank assessment premium.
Expense credit of approximately $2.4 million that the company quality qualify for as the FDIC deposit insurance fund for deferred reserve ratio exceeded 1.3.
1.38% in the second quarter, which triggered the credit.
We also expect the received $1.3 million, an additional FDIC credits in the fourth quarter.
As a reminder, we closed four branches in September that will result in an annual run rate expense savings of approximately $1.2 million beginning in the fourth quarter. In addition, im pleased to note that we achieved our 25 million dollar access related merger cost savings target on a run rate basis at the end of the third quarter.
Please note that we expect to incurred approximately 1 million more $1 billion more in merger costs and an additional $1 million in rebranding costs in the fourth quarter.
The effective tax rate for the third quarter was 60.8% compared to 16% in the second quarter increase in the effective tax rate was as compared to the previous quarter was primarily due to the lower core proportion of tax exempt income to pre tax income.
For the full year, we still expect an effective tax rate in the range of 16 to 16 in a half percent.
Now turning to the balance sheet period end total deposits stood a $17.4 billion at September Thirtyth, which was an increase of $282 million from June 30.
At quarter end loans held for investment were $12.3 billion, an increase of $86 million were approximately 3% on an annualized basis.
On a pro forma basis as if the access acquisition that closed on January Onest. Instead of February Onest year to date loans loan balances grew approximately 5% on an annualized basis through September thirtyth.
Looking forward as John mentioned, we now project loan growth of approximately 6% for the full year of 2019.
At September Thirtyth total deposits stood at $13 billion, which has an increase of $529 million were approximately 70% from the June thirtyth levels on a pro forma basis does affect the access to acquisition that closed on January onest instead of February onest.
Deposit balances increased approximately 9% annualized in the first nine months of the year.
Deposit balance growth was driven by increases in demand deposits money market and time deposit balances, partially offset by declines in interest checking account balances.
Turning to credit quality nonperforming assets totaled $36.4 million or 30 basis points as a percentage of total loans, an increase of $2.4 million or two basis points from the second quarter level.
The increase in an FDA days was primarily driven by the addition of the fully collateralized remaining loan balance related to the long running land development work out loan that was previously discussed.
The allowance for loan losses increased $1.4 billion from $230 million to $43.8 million, primarily due to loan growth during the quarter.
The allowance as a percentage of total loan portfolio ticked up one basis point to 36 basis points at quarter end.
And now I'd like to provide our thoughts on how the adoption of the current expected credit loss model or Cecil will impact the Atlantic Atlantic Union.
As you May know effective January Onest, 2020 Cecil will become the new accounting standard required companies to reserve for projected lifetime loan losses at loan origination date, replacing the current incurred loss impairment accounting methodology that requires companies to report provisions for loan losses, only when a loss becomes probable.
Under Cecil lifetime expected credit losses will be tournament will be determined using macro economic forecast assumptions and management judgments applicable to and through the expected life of the loan portfolios.
Since 2016, the company has had a companywide cross functional governance structure in place to oversee the implementation of the Cecil standard and ensure we are ready to adopt the Cecil standard on the effective date.
On adoption of the standard assuming the economic outlook and portfolio characteristics are consistent with recent periods.
The company estimates that the allowance for credit losses will increase to within a range of $90 million to $100 million or approximately double the allowance for loan loss reserve levels as of September thirtyth under the current incurred loss methodology.
The expected the increase was primarily driven by the companies acquired loan portfolio and the consumer loan portfolio due to the portfolios longer average life.
Ultimately to increase the allowance for credit losses will depend on the characteristics and mix of the company's loan and securities portfolios macro economic conditions and economic forecast modeled.
Final validation of Seattle, Cecil models and methodologies in other and other management judgments at that time with adoption on January 1st 2020.
From a shareholder stewardship and capital management perspective, we are 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.
As such during the third quarter 2019, the company declared and paid a quarterly cash dividend of 25 cents per common share an increase of two cents per share or 8.7 per cent compared to the prior quarters dividend level.
In addition, during the quarter the board of directors authorized share repurchase program to purchase up to $150 million of the company's common stock.
Through June Thirtyth of 2021 in open market transactions were privately negotiated transactions as of October 16th we have repurchased 1.4 million shares at an average price of $36.46.
The total remaining authorization to purchase shares is approximately 100 million at this time.
So to summarize while the quarter was quite noisy again Atlantic Union delivered solid financial results in the third quarter. Despite the headwinds of the current interest rate environment.
And the company continues to make progress towards a strategic growth priorities.
Finally, please note that we remain focused on leveraging the Atlantic Union franchise to generate sustainable profitable growth and remain committed to achieving top tier financial performance and building long term value for our shareholders.
And with that I'll turn it back over to Bill to open it up from questions from our analysts do go Bill. Thank you, Rob and Tiffany we are ready for our first caller. Please.
As a reminder to ask a question you want me to press Star one on your telephone.
Withdraw your question press, the pound or hash key.
First question comes from the line of Catherine Mealor. Your line is open.
Good morning Catherine.
Thanks, Good morning.
I will start first at the margin.
Rather what can you give us an update on what your outlook as.
For for the margin you previously guided for about four to five that appeared to order compression, but now making changes to the balance sheet to just updated that air.
Yes, so just to give you some context of our projection.
Going forward. We are currently assuming that we will get another three cuts from the fed in the fed funds rate.
One in October another in December and then one.
In the third quarter of 2020 .
In terms of that modeling what we're expecting to see is in the core margin for core for the fourth quarter were looking to.
Ups continued compression of probably three to four basis points and then quarterly through through 2020 were looking at about four to five basis points consistent with what we said before on a quarterly basis.
So.
That's our current outlook really hasnt changed much as you know we do have a bit.
More compression this quarter, which was primarily driven by higher or actually lower levels of one month LIBOR the drop was.
In terms of our projection the drop was more than we had originally projected so that added two basis points of compression versus our previous guidance.
Got it is it to another three to four beds compression in the fourth quarter and then four to five that per quarter through 2020, assuming three more cat.
Yes, Thats correct. Okay. So we were looking at assets.
Kind of stabilizing the margin coming out of next year, probably in the 333 33 35 range.
Okay.
And then under that scenario, how in 2021 would we get to a one for our away.
Where do you know what kind of coming out at 2020 with a three even 335 margin.
Yes.
We mentioned before that 1.4.
Return on assets is probably the most difficult to achieve we're going to continue to evaluate that based on our.
Going through our budget process for 2020, right now in forecasting through 2021.
We are going to reevaluate that guidance going forward and talk a bit more about that in a fourth quarter call.
Okay that makes sense.
Okay, and so then it's a bit on the on the gross.
You've now forecasting for guys getting that 6% for this year, how should we think about growth for next year is it fair to assume that 2020 questions should be higher than ethics percentages, given sonesta truest opportunities that you have.
Catherine This is John we would say expect somewhere in the high single digit range, yes, I wouldn't be projecting 9%, but you know 789 somewhere within that band should be doable based on the various initiatives that we have underway and based on market conditions based on what we know right now.
Okay, great. Thank you.
Thanks, Catherine and Tiffany ready for our next caller. Please.
Your next question comes from the line of Casey Whitman. Your line is the case I.
Hey, good morning morning, one.
Just a question on expenses, so if I take out that FDIC assessment credit core expenses. This quarter, maybe running around 94 million last quarter. I think you were guiding to expenses coming down collect the 90 $91 million range do you think that's still achievable given all the investments in hires you he's made.
And is there anything other than I think you mentioned like 1.2 million and branch closures savings to come out or do you think that's really just the run rates a little higher given given the investments, including the equipment Finance Division.
Yes, Thanks cases, Rob.
Hi.
Calculate that we have at a 91.7 million dollar.
Core run rate, if you will versus the nine for you mentioned.
As we said we've had some unusual items.
They were offset by that credit.
So I calculate above 91.7.
Going forward, we're looking at the $90 million to $91 million on a run rate basis in the fourth quarter.
And that excludes the rebranding costs of 1 million.
Potential conversion merger costs of 1 million.
And as we've said before.
When looking to accelerate.
Some of our spending related to the opportunity.
From the troost disruption and that's about $1 million so.
If you take all that together, we're looking in the $90 million to $91 million for Q4, and then going forward, what we'd be projecting is probably a 4% to 4.5% growth rate.
The.
With that run rate.
Got it got it so the recruiting costs and the Oreo valuation adjustments and the community development issue those kind of items as we would assume what it wouldn't necessarily I wouldn't come back is what you're saying, yes, exactly that's the way, that's where I'm looking at as well.
In the FDIC assessment credit is that is your expectation even get that for maybe one more quarter.
Yes, so the credit through total credit we're getting.
Related to that was $3.8 million.
Our total premium assessment this quarter was 2.4 million so basically was zero dough.
And we'll apply the remainder which is about 1.3 million to our assessment for the fourth quarter. So we're expecting $1.3 billion.
Credit coming through in the fourth quarter.
Got it.
And then I'll just ask that I guess, a bigger picture I mean, just on M&A sounds like.
Very focused on the organic growth here, but I guess any any update to your general thoughts on on whole bank M&A is in the kind of a timeline that you might start we engaging more in those conversations.
Hi, Casey this is John it's it's really it's difficult to imagine that we would want to do anything next year that doesn't mean that we felt like candidly, we're always having conversations there always conversations going on there's literally a Q.
We could do one tomorrow, if we wanted to but we don't we have more important things to do right. Now. So I think my big concern is that if we take on another M&A deal it will cause us to kick the can down the road and what we believe are actually far more strategically important opportunities. So we really need time to knock some of these same.
Got you heard me list out some of the initiatives that are on the table.
Particularly with the new leadership, we have a consumer digital strategy.
Recognizing that the largest opportunity we have is in fact this centrus BNP combination. So if anything changes in terms of our intentionality, we're going to tell you. We would begin to signal that it's just very difficult.
To imagine that we would want to try to get anything done next year again, which doesn't mean, we couldn't be having conversations with someone over that period of time as we always do so that's about all I can say for now.
Very helpful. Thanks for all the color.
Thanks Casey.
And Tiffany are ready for our next caller. Please.
Your next question comes from the line of Laurie Hunsicker Your line is.
Good morning, Hi, good morning.
Wondered if we could jump over to credit is certainly your credit is looking at that can you just have fresh gesture third party consumer what is that Buck and then how much of that as lending club at this point.
Yes, so it's a bit over 200 million total.
Third party Lori above $140 million that is the lending club book.
Thats been coming down as you know it's in runoff mode, it's been coming down by about $8 million to $9 million a month.
The previous quarters with 166, so it down to 140.
We expect that we'll continue to run off in the same fashion going forward.
Got it Okay and then.
Exiting out the one credit you said the majority of your charge offs came from that back.
So I'm doing the math right. It was around I don't have 4.7 million with unrelated to consumer.
Yes, I wasn't the.
The entire.
Wasn't.
Force there were some weather.
Relatively smaller small parcel total for this quarter would have been consumer 40% would have been our one land development loan and if you rewind the last couple of quarters third party.
Consumer charge offs had been running about.
Literally two thirds of total our charge offs, excluding third party have been running about five to six deps annualized which is too low.
As we've said consistently.
Okay, and so I guess when when should we expect to see this consumer bucket serrao, how how are you thinking about that.
You mean in terms of the third party we are expecting.
The majority of that will run off through the end of 2020.
The lending club pursuit for the most part so that should be running down.
Through the next year or so.
Okay, Great and then just specifically around that or or any guidance you can give us as we think about.
Loan loss provisioning with Ses off.
Can you help us just think about this piece of that or more generally and certainly I. Appreciate that color you gain but if you can just help us think about what an ongoing loan loss provisioning, but that look like for you guys put this back.
Yes, so Lori as you know.
We will be putting up an allowance for the acquired loan portfolio.
And also.
The purchase credit impaired or purchase credit deteriorated in diesel terms.
So we expect that to charge off ratio will increase because we will now be charging off of low loans that are in those books will be charged off against the allowance.
So I'd expect that you see 25 to 30 basis points, all things being equal.
That's assuming we don't necessarily have a lumpy good commercial credit come through like we did this quarter.
Okay, Great and then just one last question credit I saw that you guys had an uptick in your and your crude pass tailwind. There is there anything greater calling on there is there any color you thinking.
8 million that we've made a reference in the release that $12 million of total past dues were actually current as of now.
Of that 12 million $8 million were actually what we referred to as administrator past dues. So that would be the categories of commercial owner occupied non owner occupied that's simply needs we had maturing.
Credit facilities that were in process of renewal.
And those were not indicative of credit problems they were simply indicative of.
Getting the the renewals through the system on time, we've mentioned before that we've implemented an end to end loan origination system. The downside of doing such a thing as you run a J curve it actually takes longer to load.
New credit facilities, and renewals and as such as system initially and for the bankers to get up to speed, it's slower until they gain experience with it and then it becomes faster and so we are on the upside to that J curve. So we did have some slowdown in terms of processing renewals and that's what you're seeing.
Those were not credit issues. Okay. Okay. That's helpful. Okay, and then just over on expenses.
I just want to make sure that I've got that's right you obviously had rebranding expenses here of 1.133.
Did that include any of the branch closure expenses or if not what were those and.
Were they in the other other line.
Yes, Big they did not include any branch closure costs in the third quarter.
Actually we had guided to perhaps expect another two to 300 in the third quarter for for branch closures, but actually we came in quite a bit lower there was about 50.
Ended up being about $55 million 50, $55000 of branch closure costs, so not material and that would have been any other line item.
Okay, Great and then just one last thing here on sort of as we think about one time within both merger costs and rebranding costs as we finish out. This year 2019 are we pretty much done with those as we head into 20 or how should we be thinking about that yeah, that's exactly right Laurie.
This will be a final quarter of seeing both rebranding costs and merger costs.
Great. Thank you.
Thank you great. Thank you Laurie and thank you everyone for calling today as a reminder, a replay of the call will be available on our Investor website investors start Atlantic Union Bank Dot com. Thank you and have a good day.
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