Q3 2021 Atlantic Union Bankshares Corp Earnings Call
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Good day and thank you for standing by welcome to the Atlantic Union Bankshares third quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
After the Speakers' presentation, there'll be a question and answer session.
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Now I'd like to hand, the conference over to your Speaker today, Mr. Bill for me now it's amino you have the floor.
Thank you, Chris and good morning, everyone.
Atlantic Union, Bankshares, President and CEO, John Asbury, and executive Vice President and CFO, Rob Gorman with me today.
We have other members of our executive management team with us for the question and answer period.
Please note that during today's earnings release, and the accompanying slide presentation, we are going through.
On the webcast are both available to download on our Investor website at investors got Atlantic Union Bank Dot com.
During today's call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures.
Information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures is included in our earnings release for the third quarter of 2021.
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 fact and are subject to risks and uncertainties.
There can be no assurance that actual performance will not differ materially any future results expressed or implied by these forward looking statements cleaner takes no obligation to publicly revise or update any forward looking statement.
And please refer to our earnings release for the third quarter 2021, and our other SEC filings for further discussion of the risks 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.
Thank you Bill and thanks to all for joining us today, reflecting all of the big picture over the third quarter. We were pleased to see was reason for optimism in the outlook for COVID-19, declining unemployment and the most benign credit environment I've witnessed in my 34 year career on the other hand supply chain disruptions continued unabated pressures on wages and the ability of our business.
Clients to fill open positions remained a challenge and we don't expect any improvement in the short term rate environment for perhaps another year, having said that our business clients are holding up well in most report strong demand for their services, but are challenged and sewing quarters due to the scarcity of needed inventory supplies with equipment. The good news is this is a supply problem.
It's not a demand problem and despite challenges should improve in the coming quarters.
The economic outlook may have been muted somewhat by these factors, it's still a positive outlook and we remain decidedly in an optimistic camp. All of this has pros and cons for us with the pros being the absence of credit problems and what appears to be a coiled spring for loan growth.
The cons being surplus liquidity elevated loan pay downs and wage pressures.
Finally loan balances we experienced over the quarter was more than we expected. It was in fact, a record level of pay offs stabilized commercial real estate was sold or refinanced into the long term institutional markets and surplus liquidity was used by clients to pay down bank debt. We are encouraged by the outlook for loan growth, though as new loan production was the highest we've.
Seen in any quarter year to date and new construction loans set a record high. However, initial fundings were not enough to offset payoffs and closing should've been higher still were it not for the project delays, we've been seeing all year long.
We do believe we are set up for a solid finish in Q4 with quarterly loan growth looking good month to date and I will elaborate more on that momentarily.
I typically begin and end my comments on these calls with familiar statements and I do that intentionally to demonstrate consistency in our strategy and how we run the business. So I'll do that again now our mantra of soundness profitability and growth in that order of priority serves us well and continues to inform how we run the company is sound bank is and will remain our single highest priority.
Our prudent and conservative credit culture served the company well during the great recession, and it's serving us well in the current environment as evidenced by our credit quality, which remains pristine.
Our second priority is profitability and we did incur added expense to maintain competitiveness in the current labor environment, particularly for our retail branch network. We also had some one time expenses related to both hiring and severance we continue to balance investment and the business for the long term, while remaining mindful of the continuing challenges of the low rate environment the expense.
Troll will be a supreme importance for as far as the eye can see it's very clear wage pressures or pressures are real and will mitigate this through additional expense actions with the noise of PPP and provision releases subsiding. We now have enough line of sight to 2022 to reestablish our top tier financial targets as we said, we do Rob will walk.
Talking through the details on that during his section.
As for growth, we remain optimistic in our economic outlook and we believe we have a long runway ahead of us to grow both organically and through take away from our larger competitors that dominate market share in our home state of Virginia supplemented by our operations in Maryland, North Carolina, and our specialized lending capabilities in government contract finance and equipment finance.
We are focused on and believe we're benefiting from the disruption occurring at two of our largest competitors.
Mentioned elevated commercial real estate pay offs in commercial and industrial line pay downs were the headline for loan balances in Q3.
Loans, excluding the impact of PPP average down <unk>, 6% over the course of the quarter and that's approximately one 3% point to point due to CRE payoffs, having been the highest we've experienced the stabilized properties were sold or refinanced into the long term nonrecourse and institutional markets and C&I borrowers continued to pay down bank.
Debt with surplus liquidity C&I.
C&I line utilization ticked down three percentage points to 25% should be about bottomed out. It's mentioned while production was strong initial fundings were not enough to overcome outsized paydowns last quarter.
October has been busy to date and we have recaptured more than half of the reported third quarter loan balance declined in our commercial loan portfolio. Excluding PPP bookings should continue to be active in the seasonally strong Q4, and we expect to close out the year with good loan growth.
We're also encouraged that construction lending activity has been rising for some time in construction loans outstanding grew over the quarter first time, we've seen that for a while construction alone new commitments dropped significantly in the first half of 2020 with the onset of Covid and we're missing two quarters of normalized funding ramp up from them construction lending read.
Bounded beginning in Q3 'twenty has been running strong since then and set a record level in Q3 'twenty one bar.
Borrowers first need to burn through their equity as projects proceed before making drawdowns on their financing and while this has been a very strong headwind throughout 2021. It does set up a nice tailwind in 2022 for loan growth traditionally we can offset CRE paydowns with construction fundings that have not been able to do so this year due to the combination of new construction.
<unk> loans, having been suppressed much of last year, and historically high pay offs as I mentioned before that headwind is now abating as construction loans are funding up and growing.
Based on what we see at this time, we were expecting more normalized loan growth in the fourth quarter and in 2022, as our pipeline strength expanded lending capabilities, new hires market dynamics and economic outlook support that opportunity. We do believe we're on a growth footing.
PPP loan forgiveness during the third quarter with steady approximately 3000 clients from both round, one and round two receive forgiveness totaling approximately $392 million during the quarter, bringing the total amount forget them to date to approximately $1 $7 billion, our current PPP balances of 482 million.
Overall, the PPP loan forgiveness process is running smoothly and this should largely wrap up over the next two quarters.
Turning to credit the headline here remains the absence of credit problems, because we continue to climb out of the systemic downturn or credit losses have been minimal so far impressively for the second consecutive quarter charge offs netted to zero basis points realistically, though at some point credit losses will normalize, but given all the liquidity that remains in the system.
Declining unemployment and a strengthening economy, we see no sign of a systemic inflection point and all of that feels different to us.
And to that point, the economic outlook remains positive and we're optimistic here in our home state of Virginia September unemployment came in at three 8% down from four 3% in June and that was one percentage point better than the national average of four 8%. While that's all good news the employment challenge in our markets is not the unemployment rate it's the.
<unk> businesses to fill their open jobs.
I will talk you through the provision for credit losses in our seasonal modeling, but by all indications and metrics credit appears to have never been better.
The passenger challenges to new and unexpected ways, bringing out our best to meet the unprecedented needs of our customers and teammates and as I've said before we've come out on the other side as a stronger and more capable organization also as I've said before we've learned to work differently and our customers have learned to bank differently. We've seen usage in our digital channels increased substantially for example.
Ample year to date, approximately 17% of new checking accounts originated online 28% of savings accounts originated online and 9% of consumer loans originated online we expect to further drive these numbers up as we continued to refine our digital offerings and capabilities.
Digital digital logins are up 23% since this time last year with 76% of those logjams coming from a mobile device mobile check deposit utilization continues to grow and now accounts for 19% of our deposit transactions and sell users are up 71% year over year with more than 49000 users in transaction dollar.
Amounts are up 176%.
We continue to work on new projects and improve the omnichannel customer experience with quarterly releases and upgrades to our product offerings.
During the third quarter of the year. Our most significant accomplishments are major undertakings, we are having completed the transition to our universal banker model in our branch network. This is a big structural change and that enabled us to update our pay scales to remain competitive while also making grants staffing more efficient and productive while this did increase our salary expense run rate in Q3.
It's a good example of an investment one that makes us more productive efficient and scalable over the long run we added a new commercial team to our Maryland operations, and we finalized plans and our equipment Finance division to launch a new specialty vehicle financing team in the fourth quarter that further expands our growing specialty financing strategies.
Looking ahead, our goal remains to achieve and maintain top tier financial performance, regardless of the operating environment as evidenced by our newly reestablished financial targets. We will continue to work on ways to make the company more efficient and scalable, while improving and automating processes and the customer experience, we should see operating leverage results.
As coming from this I remain convinced we are emerging from the pandemic stronger better and more efficient than before and that will give us opportunities, both organic and possibly through M&A.
We are leveraging our learnings and ingrained, our newfound capabilities agility and innovation into the company's culture. So that we're flexible and adaptable in the current lower for longer rate environment and forthcoming post pandemic next normal while also delivering a differentiated customer experience.
We remain confident in what the future holds for us and the potential we have to deliver long term sustainable performance for our customers communities teammates and shareholders and of course I'll close with my customary reminder, that Atlantic Union Bankshares remains a uniquely valuable franchise dense and compact in great markets with a story. Unlike any other in our region, where scalable with it.
Right capabilities, the right markets and the right team to deliver high performance even in the most trying of times.
I'll now turn the call over to Rob to cover the financial results for the quarter.
Well, thank you John and good morning, everyone.
Thanks for joining us today.
Now, let's turn to the company's financial results for the third quarter.
In the third quarter reported net income available to common shareholders was $71 6 million.
And earnings per share per common share was <unk> 94 cents down approximately $10 8 million or <unk> 11 per common share from the second quarter.
The non-GAAP pre tax pre provision earnings were $72 $1 million, which was down from $77 million in the prior quarter.
For the third quarter return on equity was 10, 9%. The non-GAAP return on tangible common equity was 18, 8% return on assets came in at 147% and the operating efficiency ratio was $53 nine 1%.
Turning to credit loss reserves as of the end of the third quarter. The total allowance for credit losses was 109 million.
<unk> million dollars.
Cost of the allowance for loan and lease losses of $102 million and the reserve for unfunded commitments of $7 $5 million.
In the third quarter, our total allowance for credit losses declined by $19 million, primarily due to lower expected losses than previously estimated as a result of economic improvements in our footprint benign credit quality metrics to date risk rating upgrades during the quarter and an improved macroeconomic outlook over the forecast peer.
<unk>.
Total allowance for credit losses, as a percentage of total loans was <unk> 83 basis points at the end of September which was down from 94 basis points from the prior quarter.
Excluding SBA guaranteed PPP loans, the total allowance for credit losses, as a percentage of adjusted loans decreased 14 basis points to 86 basis points from the prior quarter.
A reminder, a day one <unk> reserve came in at 75 basis points.
The $19 million decline for the company's total allowance for credit losses took into consideration. The COVID-19 pandemic impact on credit losses go through the two year reasonable and supportable macroeconomic forecast utilizing the company's quantitative <unk> model and through management's qualitative adjustments beyond the two year reasonable and supportable forecast.
The seasonal quantitative model estimates expected credit losses, using a reversion to the mean of the Companys historical loss rates on a straight line basis over two years.
In estimating expected credit losses within the loan portfolio at quarter end the company utilized Moody's September baseline macroeconomic forecast for the two year reasonable and supportable forecast period.
<unk> September baseline economic forecast of Virginia, which covers the majority of our footprint has improved from the June baseline forecast now assumes that the Virginia unemployment rate averaged two 7% over the two year forecast period, which is down from the three 2% two year average state unemployment rate assumed in the June baseline forecasts.
Yes.
On an absolute level. The September baseline forecast now assumes GDP will increase by 6% in 2021 and four 3% in 2022.
In addition to quantitative modeling. The company has also made qualitative adjustments for certain industries viewed as being highly impacted by COVID-19.
<unk> economic scenarios were considered as part of the qualitative framework in order to capture the economic uncertainty and concerns related to the path of the virus vaccination distribution efforts and the potential for other more unfavorable economic development.
The negative provision for credit losses of $18 8 million.
In the third quarter was lower than the prior quarter's negative provision for credit losses of 27 4 million.
Presents a decline of $25 4 million from the $6 $6 million positive provision for credit losses recorded in the third quarter of 2020.
The decline in the provision for credit losses as compared to the same quarter in 2020 was driven by the benign credit impacts since the pandemic began the significant recovery in the economy since last year as well as the improvement in the economic forecast utilized in estimating the allowance for credit losses.
At September 30.
In the third quarter net charge offs were de Minimis.
$13000 or less than one basis point compared to $69000 in the prior quarter and $1 4 million or four basis points in the third quarter of last year.
Now turning to the pretax pre provision components of the income statement for the third quarter tax equivalent net interest income was $147 million, which was down $3 million from the second quarter, primarily driven by the decline in PPP loan fee accretion interest income from $11 million in the second quarter.
To $9 $4 million in the current quarter.
Net accretion of purchase accounting adjustments of $4 million added nine basis points to the net interest margin in the third quarter, which was in line with the nine basis point impact in the second quarter.
The third quarter's tax equivalent net interest margin was $3, one, 2%, which was a decline of 11 basis points from the previous quarter as earning asset yields declined by 15 basis points from the second quarter due to the impact of the low interest rate environment on core loan and investment security yields and the increase in low yielding cash balances due to <unk>.
Excess liquidity, which was partially offset by four basis points, a four basis point decline in the cost of funds from the second quarter.
The loan portfolio yield decreased to three 7% from 376% in the second quarter, primarily driven by the impact of the core loan yield compression of 10 basis points due to pay downs of higher yielding loans and lower loan yields on loan renewals and new production.
The core loan yield compression was partially offset by the increase in the yield on average PPP loans, which was $6 four 5% in the third quarter up from $4 nine 1% in the prior quarter.
In addition to earning asset yields declined by approximately seven basis points from the prior quarter due to elevated levels of excess liquidity held in low yielding cash equivalents and an additional two basis point decline due to lower investment securities portfolio yields, resulting from the reinvestment of portfolio cash flows and the deployment of <unk>.
This liquidity into the investment securities portfolio that lower market rates.
The quarterly decrease in the cost of funds to 19 basis points from 23 basis points was primarily driven by four basis point decline in the cost of deposits to 14 basis points in the third quarter interest bearing deposit cost declined by five basis points to 20 basis points in the third quarter, primarily due to the maturity and repricing of high cost time to.
In the quarter.
Noninterest income increased $1 5 million to $30 million in the third quarter up from $28 5 million in the prior quarter, primarily driven by the recapture of $1 $1 million worth of unrealized FDIC fund investment losses recorded in the prior quarter and other operating income in addition.
Deposit and other service charges increased $591000 mortgage banking income increased $199000 in asset management fees were higher by $210000. These quarterly increases were partially offset by declines in other noninterest income categories, including a decline of approximately $500000.
Banco life insurance income due to life insurance proceeds received in the prior quarter.
Noninterest expense decreased $3 3 million to $95 3 million from $92 million in the prior quarter.
The increase in noninterest expense was primarily driven by increases in salaries and benefits of $2 $8 million driven by higher salary costs of approximately $1 million.
As a result of branch banking pay structure changes and other market driven salary adjustments made during the third quarter of 2021. In addition increased performance based variable incentive comp and profit sharing expenses increased 650.
$655000 and employee related recruiting severance and other cost increases of approximately $900000.
In addition, other expenses increased by $1 6 million for the quarter, primarily due to Oreo and related credit expenses, increasing by $1 million, reflecting the impact of gains on the sale closed branches, which were recorded as a reduction in other expenses in the prior quarter.
Noninterest expense increase was partially offset by declines in professional service fee services fees of $616000.
Noninterest expense for the third quarter of 2021 also included approximately 200000 of expenses related to PPP loan forgiveness processing.
<unk> to approximately 250000 in expenses in the second quarter.
The effective tax rate for the third quarter decreased to 18% from 18, 3% in the second quarter.
The full year of 2021, we still expect the effective tax rate to be in the 17% to 18% range.
Turning to the balance sheet period end of October.
Assets stood at $19 9 billion at September 30, which was a decrease of approximately $54 million from June 30 is declining loan balances due to PPP loan forgiveness were partially offset by increases in cash and cash equivalent balances due to excess liquidity and by net growth in the investment securities portfolio.
At period end loans held for investment were $13 1 billion.
Inclusive of $467 million in PPP loans.
A decrease of $558 million from the prior quarter, primarily driven by $392 million in PPP loans that were forgiven during the quarter and declines in commercial loan balances ex PPP of approximately $165 million.
Loan balances, excluding PPP loans in the third quarter decreased by $166 million or five 1% annualized driven by declines in commercial loan balances of $165 million or.
We're 6% annualized as a result of historic levels of Paydown activity outpacing loan production levels across the portfolio.
Consumer loan balances were flat to second quarter levels levels, driven by a 13, 9% years growth rate in indirect auto balances.
Except by the strategic runoff of third party consumer loan balances.
At the end of September total deposits stood at 66 billion, a slight decline of $37 million or approximately 9% annualized from the prior quarter driven by a decline of $113 million in high cost time deposits at September 30th low cost transaction accounts comprised 56% of total deposit balances, which was up from <unk>.
54% in the second quarter.
From a shareholder stewardship stewardship and capital management perspective, we re.
Remain committed to managing our capital resources prudently as the deployment of capital for the enhancement of long term shareholder value remains one of our highest priorities.
The end of the third quarter Atlantic Union, Bankshares, and Atlantic Union Bank capital ratios were well above regulatory well capitalized levels.
During the third quarter of 2021, the company paid a common stock dividend of <unk> 28 per share, which was consistent with the prior quarter and also paid a quarterly dividend of $171.88 on each outstanding share of series a preferred stock.
The company repurchased two 3 million shares for $82 million 7 million in the third quarter, which fully utilized.
$125 million.
Share repurchase authorization from May four 2021 in total the company repurchased three 4 million shares under the repurchase program since may.
We continue to operate in a challenging operating environment and the <unk>.
<unk> on revenue growth caused by the lingering effects of the pandemic and the intractable lower for longer interest rate environment are now expected to persist into 2022.
However, with the financial impact of the PPP loan program winding down and the pandemic driven volatility related to expected credit losses and credit loss reserve levels Subsiding. We are now in a position to re establish our top tier financial metric targets to the following.
Return on tangible common equity within a range of 13% to 15%.
Return on assets in the range of one one to one 3% and an efficiency ratio of 53% or lower.
Our financial performance targets are dynamic and are set to be consistently in the top quartile among our peer group regardless of the operating environment and at this time.
New targets are reflective of the financial metrics required to achieve top tier financial performance and the current economic environment.
In summary, Atlantic Union delivered solid financial results in the third quarter and is well positioned to generate sustainable profitable growth and to build long term value for our shareholders.
And with that I'll turn it over to Bill to open it up for questions from our analyst community.
Thank you Rob.
<unk>, we're ready for our first caller please.
Thank you Sir.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.
But at the compile the Q&A roster.
Our first question comes from Casey Whitman of Piper Sandler. Your line is open Hi, Casey Good morning, Hey, good morning, good morning.
Maybe we can start with expenses just because there's a lot of movement. This quarter, Rob can you walk us through what you kind of consider the run rate for expenses over the next quarter or two from that I think $95 million that you guys had this quarter.
Yes, Casey so.
As we noted in our <unk>.
Prepared remarks, so we've actually increased during the quarter the run rate for the company and our view as we go forward here, we're going to be in the 95% to $96 million range.
As a result of.
The pull forward if you will.
In terms of increased salaries related to both the universal banking.
Operating model, we went through this quarter as well as <unk>.
The market.
Salary adjustments that were made in the quarter. So we do expect that that will continue as we go forward in the fourth quarter into 2021. In addition, we're also looking as noted as John noted.
We.
We've lifted out a couple of teams one in Maryland, and we're also launching a specialty vehicle.
Financing unit and Thats going to increase our run rate a bit. So again, we're looking at at the 95% to $96 million run rate going forward.
As we look forward, though we are looking at all aspects of managing our expenses and we're currently going through our budget process for 2022.
Our target for growth from that run rate is 1% to 2% we feel like we've got a lot of opportunity to.
Mitigate any additional expense growth going forward.
That's the current outlook as we speak we'll obviously update that in the fourth quarter earnings call.
I just want to underscore that point wage inflation is real we are investing in the business as we should but we have to mitigate that and so there's a reason why we published our go forward financial targets and Rob is right, we will manage to the.
To the lower net overall expense growth target.
Okay.
Those financial targets, you put out there does that assume.
Some help from rates or not.
It doesn't.
It does.
Some help.
Helping rates to get to the higher end of the ranges that we put out there we feel pretty good about our OTC and return on assets at.
At the lower end of the range in 2022, but expect that that should improve throughout the year next year.
In terms of our projections in terms of rates, we arent expecting much of a material increase.
In the short term rates until late next year in the fourth quarter, where we think the federal start moving.
At a quarter point.
Starting.
In the fourth quarter of next year, but topping out around 1% into 2023.
So not a lot of help in terms of.
The rate environment, but.
To get to the higher end of those targets, we'd be looking for some help.
But again, we don't expect that help the margin and net interest income component until till 2023.
Beyond beyond that period.
Okay helpful I'll, let someone else jump on thank you.
Thanks cases, which are ready for our next caller. Please.
Alright, thank you.
And next we have Catherine Mealor Kb Debbie your line is open.
Morning, Kathryn.
Thanks, Good morning.
Just wanted to get an update on your outlook for growth I think John you mentioned that you think fourth quarter will look better than <unk>.
You will see better growth in the fourth quarter.
Do you think a good target do you still think kind of mid single digit is the range that you could get to move into 2022.
And then I guess as we look towards that.
So I guess question one is on growth and then question. Two is just how would you think about it.
Other revenue levers that you can pull as we move into next year, just trying to get us closer to that 53% efficiency target. It feels like a long way from where we are today. If we pull out PPP is there just any kind of path or things that you're thinking on the revenue side I think would be helpful to help us get to that number yes. Thanks Kathryn exactly.
What happens in Q4 on the loan growth side is mostly going to be a function of just the level of payoffs that we see.
We hope that we are bouncing around bottom I.
Line utilization.
And if you look at.
Production is strong this was the best production quarter of the year construction lending new new production is the highest we've ever seen and that's really important. So what's happening now is the pump is timed as I've mentioned, we're missing two vintages of kind of normalized quarters, that's Q1 and Q2 of 'twenty.
<unk> of construction lending funding up it didn't go to zero, but it was down that's kind of through the system now and so we can see the schedules of construction loans funding up and that plays an important role in offsetting the pay offs. So we see that we see loans booking.
C&I balances quarter over quarter, excluding PPP actually werent down that much it was $18 million point to point and so with that showing you is that even though line utilization came down we're landing new clients and we're booking new fundings. So as we look at the pipeline, we feel pretty good about Q4.
Exactly what the number will be point to point, it's kind of hard to say.
Could it be and the.
Sort of normalized low pardon me upper single digit growth rate, possibly 5%, 6%, 7% point to point something like that we think based on what we're seeing right now and then as we get into next year. We think we should be in position to where we ought to be able.
To accomplish what we would call normalized organic growth, which for us normalized organic growth traditionally means high single digit I wouldn't look for 9% I would look at the lower end of that band. So we think thats possible and so obviously thats a big driver in terms of revenue.
As we look at.
Other forms of fee income the swap business, which is really our largest capital markets item has been slow this year, because we just haven't seen a whole lot of fundings and typically youll see that often times as loans rollout of the construction bucket into permanent mortgage for developers who choose to keep them.
Sometimes they'll swap for three to five years that sort of thing and we see some of this in the commercial business as well and we're adding new capabilities. We now have a syndications effort, where we can originate.
A larger deals and we are ahead of syndications and we are beginning to book syndication gains that helps on the margin.
We have a new foreign exchange program with a new head of foreign exchange that came out of one of the larger banks, that's comfortable or pardon me there is familiar with these markets.
And that's going to be an incremental revenue add and then of course, we continue to look to.
Other businesses, such as wealth management, Treasury management et cetera, and we're seeing more activity going on we've seen a rise in terms of the consumer base. We grew net households in the consumer bank about 3% that's actually pretty good you look at industry average is based on our data.
It's less than 1%. So we feel like we've got a bigger book of business spending is up so we're seeing more debit cards. So I guess, what I would say to you Kathryn is it's not going to be one thing other than additional revenue from loan growth, but it's going to be a series of things and we have some other initiatives that we're working on as well, but at the end of the day.
We have to take action to help offset some of the additional salary and benefit costs that we're incurring as a result of this environment. That's just the reality, we can't simply absorb that and we'll have more to say about that as we come back to you with Q4 earnings do you have anything you'd add I'll just add to that the <unk>.
<unk> ratio target of 53 or less is probably the.
The most challenging.
Metrics.
Top tier ranges we've set.
It's going to be difficult to achieve in 2022.
But as we go in and get some help from.
From the.
Rate increases going into 2003.
We've got a path to get there.
Our working assumption for next year is ex PPP to see 5% to 6% growth in net interest income.
8% to 10% in noninterest income some of which was good.
Sean mentioned steel where swap activity more FX activity and this just general increases in.
Deposit service charges and things like that.
Great very helpful. Thank you so much thanks.
Thanks, Catherine and Chris we're ready for our next caller. Please.
Thank you Sir.
Next we have David Bishop of Seaport Research. Your line is open good morning, David.
Yes, good morning, gentlemen, hey.
The slide on the six is pretty.
Pretty informative here in terms of.
The different channels in terms of opening some of the deposit accounts here.
And with the targets here.
Are those near term targets long term targets do you think the checking channel today gets even higher level than that.
<unk>.
Even further winnowing of the branch system over time.
So David I think that.
You broke up a little bit I think your question is that when we show the new accounted digital activity. The current percentages versus target sort of a near term or longer term I would say that those are very near term.
We do have industry data that benchmarks.
Call. It what you want to call it mid sized bank Super community banks were not allowed the height spin.
Specifics, but I can tell you we're over indexing and we feel very good about the ability to continue to drive up usage and we have some new offerings coming on that we can talk about as well, including for consumer lending Maria Maria Tedesco, President anything to add our view is that the targets that we've laid out on that slide are short term.
Absolutely we think we can.
Moved from there yes.
Completely agree I'm actually not sure I have anything to add okay.
Got it in a way that has implications that does have implications for our branch staffing branch network et cetera, as we see more digital adoption.
Got it and then maybe a few.
A little bit of color in terms of the.
For the barrel of the team and the new specialty Finance group, maybe just talk about.
Expectations for those tutors.
Certainly David Ring head of commercial banking is here, Dave do you want to take that what's going on in Maryland, as well as what's going on in equipment finance.
Sure we continue to invest in our growth markets, one of which is Maryland, and we've brought over a team that will cover Montgomery County, which is a county, we did not cover prior to hiring bringing the team and so we feel like.
Well number one they've already produced.
Just started three weeks ago, we've already booked $9 million of fundings from that team. So we expect them to be very active.
Three person team. So our typical production per banker is something in the range of 20% to $25 million.
To give you an expectation there and.
They've hit the ground running and we're very happy with that so C&I focus, yes, and it's all C&I.
On the flip side, we have also hired.
Two folks to cover real estate in there.
Right now.
It just started.
And then on equipment finance, it's been very successful. We're now one of the top 100 largest equipment finance companies, whether bank or non bank.
By monitor magazine now the specialty finance unit as a vertical which will cover.
Subtle buses that are under contract coach is under contract and.
School buses and smaller ticket items, our average ticket right now is around $6 million per per deal was about a note.
$8 million.
Yes.
In this business it will look like.
Like high volume lower tick.
<unk>, so a more granular portfolio. So the average ticket will be between 250 and 250000 per.
So we continue to look for opportunities to extend the capabilities equipment finance team and that helps us both in our footprint and they can also operate out of footprint as well. So that's been a big success for US we bought that from scratch and Thats. A good example of the type of organic growth.
Opportunities that we're interested them and they also are looking at a really good pipeline by almost any measure.
If you read the data.
The outlook for capital equipment investment is very strong the issue is simply getting the equipment off assembly lines off ships to the extent that it's imported and getting it in place supply chain disruption as an issue, but we feel good about the outlook for equipment finance in 'twenty two.
Got it and then just one final question, obviously, the port down in Norfolk, probably a key.
Distribution hub I know up in Baltimore their clearing some of that poor traffic container ships pretty quickly just curious how the.
Any sort of backlogs are.
Fly chain issues or distribution issues that are impacting norfolk or they may be benefiting from more yes.
David as you are probably recalling him on the board of the quarter, Virginia, So I love, having the point of insight.
Part of Virginia, as the fifth largest container port of volume in the United States. The third largest on the East coast. There are no backlogs, it's actually one of the most modern courts.
And the industry based on the investment that's been made so the good news is they're able to process pretty much in real time.
You haven't seen the number of ships lined up off the shore that we're seeing at other major ports on the east and the West coast. The limiting factor right now is really the ability to haul containers and whatever the cargo we ask once they come off the ship. That's the problem. So from time to time the railroads are placing.
Embargoes, which means that they won't allow the railcars to be loaded and put on the track because you don't have space. That's a problem because it's too congested and it's very difficult. If you don't have contracts.
Freight haulers shield top lines lined up it's hard to find capacity to for someone to come get the cargo.
They are.
A terrific operation they continue to book record month after a record month part of what's happening now is we're getting more first port of call.
Ship lines coming on so more ships are coming here is the first stop and we're doing that because they don't have to go wait in line somewhere else and so thats. Good for US. It has lots of implications for logistics. The biggest problem, we have to be able to take advantage of that here in Virginia is the lack of warehousing.
To put the cargo and it also has implications we actually don't want to cause it to be warehoused shut off on the railroad a truck line somewhere else you look for more value added manufacturing. So we're very bullish on logistics and we're very bullish on the port and its implications. It's also the hub for the.
Offshore wind, we have to what should be the largest wind energy field going on in federal waters, certainly off the east coast and Thats a big project underway. So these are this bodes well for the greater Hampton roads in Virginia.
Great appreciate the color.
Thanks, David Chris we're ready for our next caller please.
Yes, Sir.
And next we have Brody Preston of Stephens, Inc. Your line is open hi, Brian Good morning, Hey, good morning.
Everyone I hope you're doing well.
Hey, I just wanted to circle back on the financial targets and John I know, it's going to be a lot of a lot of different things that maybe get you there, but just when I kind of look at this quarter.
We're at like a 128 kind of ex PPP PPE and our ROA.
In 2018, and 19, you'll all provisioned 12 bps on average assets, so when I kind of like putting all that together I guess.
<unk> and <unk>.
Ending tax affected kind of ROA and the 1% range and so it seems like getting to the one one to one two because I know youre kind of skewed more towards the lower end without much help from rates.
Be reliant on on growth and so I guess, just when you. When you look at the forward projections do you think 7% ex PPP loan growth is enough to get you to that 110 to 120, ROA or is there going to be other things that need to happen.
And between that gets you there.
Yes.
Sure.
The upper single digits.
Get there in that range from from a loan growth perspective.
The real drivers of that are really keeping expense growth down.
While improving.
And the revenue stream.
PPP wanted.
Things as I mentioned was we are looking for about 8% to 10% growth in noninterest income.
Which will be helpful towards.
Those targets as well as the 5% to 6% ex PPP growth.
What I would call core net interest income.
So if you take those factors altogether, we should be seeing again ex PPP.
Should be seen about.
Call it 8% to 10% growth.
In our pre tax pre provision numbers, which should get us.
As I mentioned to those lower end of that.
The ranges on return on tangible common equity and the other way.
Also as I've mentioned, it won't get us to that 53% or less.
Efficiency ratio.
But thats where were going to have to rely on.
Some margin expansion due to the increase rates going forward plus.
Growth in our loan book.
Understood.
And then.
I think I think John had mentioned Rob in his prepared remarks that there were some onetime costs. This quarter do you happen to have what those were.
Yes, if you look at a couple of things.
$800000 range or so we had some severance costs, which we wouldn't expect to be continued we had some.
Sign on bonuses, although we expect that we will incur some of those this quarter as well.
So.
My estimate is about $800000 in that 95, plus yes, there wouldn't be normal run rate items.
Right. Okay. That's the real issue is we are we have increased the fee run rate.
Due to the salary adjustments that were made in the quarter.
Yes.
Yes.
On the CRE payoffs.
Wanted to ask is it.
Is it customer refis.
<unk>.
Our customers selling their properties and then are there any specific geographies within the footprint, where the payoffs are more concentrated than others.
It's pretty broad based.
The larger books of business are going to be places like here in the greater Richmond area.
And yet larger traditional markets like Publix Berg would be an example, and it's really across the key markets, but a couple of things are going on here more than half of it is going to be sale of property. Now. This is not that uncommon. So if you're a developer.
Constructive financier construction the property goes out of construction into we would categorize it as non owner occupied.
And then it stabilizes it leases up it gets a track record.
If it's a merchant developer, meaning their principal tension is to build which creates value in cell that's been going on at a very accelerated pace. There are several reasons for that you look at the low cap rates.
Good argument that commercial real estate values could be as good as it gets in the short term. There is some anecdotal evidence that theres a foot race going on trying to get ahead of a potential lies in capital gains tax the potential elimination of 10 31 exchanges now with based on what we heard the president say.
<unk> may be people should be a little less concerned about that I don't know.
We're clearly seeing these properties sold than if you intend to hold them and some do if youre going to hold it for the long term. What you should do is you should go to an institutional non recourse fixed rate term lender like an insurance company, while multifamily is kind of ground zero for this you can see it based on the drop in multifamily balances.
Because there's so many places you can go to get non recourse fixed rate.
Financing 20 year amortization, more and that and term and thats not something we do we do see banks out in the market competing with institutional lenders booking very long term fixed rate loans. We generally are not going to do that <unk> do you want to comment on what Youre seeing.
Just have set up a business, where we can act as intermediary for those permanent placements outside to the Investor community. So part of our capital markets effort as we can actually.
Placed fixed rate non recourse term debt institutional lenders and capture some of that.
You chain. If you will we can for example, do a construction loan and have our own takeout in place. So we may as well take advantage of that because that's the normal course, so I've already that's what we see going on.
It's at a record level.
It's been elevated for a while.
And I guess on a positive note, it's demonstrating that we're financing high quality projects with high values and Theres a lot of demand for them, but the good news is the construction pipeline in the commercial real estate pipeline looks terrific. We did have a record quarter of new bookings and I can't emphasize enough. The comment I made about what I call. It the missing.
Vintages of new construction loans, they were suppressed in Q1 and Q2 and so we didn't have them kind of refilling think of it as I was draining out of the commercial real estate bathtub faster than we were reselling it and so now the phosphate is on.
And it has been for a while so that actually will create a tailwind so that actually will create a tailwind and hopefully help mitigate this okay.
Questions everyone I appreciate it.
Thanks, Brody and.
Chris we're ready for our next caller please thank.
Thank you.
Laurie Hunsicker.
Compass point your line is open hi, Larry good morning.
Thanks, Good morning, Good morning, Robin Hood morning, Robin, hoping you could help us think about.
Our margin a little bit here.
PPP fees, obviously 21 basis points accretion 90 basis points in prior year release going down three basis points next quarter.
Can just remind us what is.
Unamortized fees remaining in PPP and then.
Kind of netting that youre getting to the QAD number how we should be thinking about that and how you're thinking about that I guess with respect to your targets any help you could give there would be great.
Yes in terms of what's remaining two of PPP.
Deferred fee.
Level, it's about $15 million.
We do expect that.
Material amounts should come in this quarter as we have.
About $450 million or so outstanding loans.
Alright.
Could be in the process of being forgiven over the next two quarters as well.
We estimate probably the bulk of that hopefully will be in this quarter and somewhat bleed into the first quarter.
So in terms of the core margin as you probably calculated.
This quarter could you take a PPP actually take out accretion.
We were about $2 89, which was down about 11 basis points from the prior quarter and a lot of that being driven by.
The lower yields that we're seeing.
On the loan side.
Due to lower interest rate environment.
Pay downs.
We would consider higher yielding loans out of the portfolio.
In securities yields.
Yields coming down a bit.
Two two.
Continued reinvestment at low market rates that we're seeing.
It was kind of twofold, one is we've probably seen about $40 million to $50 million.
Mortgage backed up.
Cash flow is coming through that we're reinvesting and then we've also added to the securities portfolio due to the excess liquidity.
The increase there.
$2 million to $300 million in the quarter I expected that.
Stay in that realm.
Relative position grew about 19% of total less than or we could get up closer to 20% before its all said and done.
We do have $600 million of excess liquidity.
We want to put to work both in the loan book and then probably some of that going into the securities book So.
All that said is we're expecting the core margin kind of at the bottom out around this level and start to see some hopefully increasing.
Increasing throughout next year.
No not not a lot until we start to see.
Some of the interest rate movements and the fed starts to move late next year into the next year.
'twenty three.
But kind of in this.
In this.
<unk>.
Two to five basis points, but as we go into next year. So we were thinking about it.
Primarily because we're reinvesting that excess liquidity into higher yielding assets.
Okay.
Very very helpful. Thanks, and then.
Just a follow up question on credit I guess, both for you and maybe Dave.
Just looking at your overall reserve alone 77 basis points.
PPP 80 basis points, how do you think about holding that line. How do you. How do you think about where the right level in terms of the therapy alone Sydney.
Yes kind of broke up there.
How do you think about the appropriate.
<unk>.
Today, how long is it going to go yes.
Right.
Of course, we've been releasing reserves.
Since the end of last year each quarter this year.
We're looking at that is.
So they won't see so it was about 75 basis points.
And if you look at just the allowance for loan losses. It was about 71 basis points.
And of that.
We are working our working assumption is that we think will be kind of stay.
Stabilizing in that in that area. However, it couldn't actually go a little bit lower but it all depends on continued economic.
A forecast looking good.
And the credit metrics continued to be good.
But there is a case to be made that it could go lower than that because if you.
Look at our day, one seasonal allowance that included.
No.
Almost $300 million of third party.
Consumer loans are in runoff mode dose those are down to about 87 million.
As we look at the end of this quarter.
And $24 million of our.
Cecil.
Allowance reserve was related to the portfolio is pretty heavy heavily reserved for.
And if you look at it from.
From the commercial and the other categories of loans, we were more in the 60 basis point range.
Tended to about 75, but it was about $60 PPP.
Our third party consumer that's come down nicely that will continue to come down so.
There is possibility, we could drop a little bit below that day, one seasonal although we're not calling for them at this point.
Okay, Okay, great and then.
Really quickly do you have an update on deferrals I know they were somewhat de minimis.
The dollar number that it's been minimal deferrals or just not a factor at this point.
Okay.
And then last question can you help us think how you're approaching M&A.
Are you still actively looking.
<unk> changed from last quarter, just any thoughts your currency is strong.
Yeah sure. Thanks, Laurie not a lot of not a lot new to add here is always I always preface any comments with the same statements I'll do it again for the record. This is we view ourselves.
<unk>, principally as an organic.
Strategy.
Can be supplemented complemented by M&A.
We are interested we do think it could be helpful. The goal here, which we try hard to achieve you want to actually do.
That puts you in a good position so sure we'd be interested nothing has changed there or anything that we would consider.
We'd have to make strategic and financial sense or we wouldnt consider it with.
We think about the continuum from larger to smaller more sort of we have this running debate in the company about how small is too small how largest too large, but we feel like it's all about optionality Laurie.
From our standpoint.
Don't like the term opportunistic I went whenever I hear the term opportunistic M&A because that sounds like something just came along or somebody did a process or an auction and thats not our style. So we need to make sure that there's good strategic alignment good cultural fit.
And I would just reiterate as we've said before if and when we did something.
I don't think we would surprise anyone in terms of why we did what we did because it would have to check all of those boxes.
Fair point.
We're disciplined.
I see this as a 2022 opportunity perhaps.
And I've been here I've been here five years now and their conversations have been engaged in for five years in some cases. So there's always some degree of conversation going on out there. So that's really the best answer I can give you, but I can assure you anything we do would make financial and strategic sense and it would be something where we have supreme confidence in our ability to.
Execute it well and we simply Wouldnt do it because it has too much damage otherwise.
Great. Thank you.
Thanks, Lori and Chris we're ready for our last caller. Please.
Yes, Sir.
And I think we have William Wallace of Raymond James Your line is open.
I would now like.
Hey, John Thanks for taking my question.
I have I have a couple but on the expense side.
You highlighted some <unk>.
That's why this market adjustments at the branch level.
Due to wage inflation pressures and I'm, just curious where you were you losing people.
What are you worried about losing people.
<unk> to recruit just kind of.
Some indication of why now rather Jordan the normal Colo time all of the above this issue was especially pronounced in terms of wage inflation at the entry level roles and sort of the lower tiers of the pay scale and so we were having challenges and remember were talking there is still a pandemic out there.
And we're talking about.
Bottom line client facing roles.
<unk>.
<unk>.
That added to the challenge, but the reality is that wages have gone up period.
For these types of roles, we were having some challenges in terms of attrition nothing crazy, but it was definitely higher than we wanted to see.
We're having challenges filling open jobs and you can see head count went up and some of that was simply the fact that as we made this change we began to be able to more successfully recruit we've seen attrition go down there is another I think this is one of the better things that we've done in the sense is it wasn't simply raise wages.
The branch this was really a strategy compliment Shawn O'brien head of consumer banking.
With the fundamental strategy, which is like let's change these roles around so instead of having traditional colors. We now have a universal bankers. These are higher value added roles, they're trained with the branches not busy they're able to come off teller line and assist customers with.
Advisory services sales activity et cetera, and making go back to the teller line when we need help there.
Just a higher value added well, there's nothing new about the universal banker model, but it was a change for us. So we had to bite. The bullet we did the right thing and I think that positions us more competitively Sean do you have anything you want to add to that in terms of kind of what we did and why.
Yes, I think that was a good summary, John the only thing I'd add is obviously the universal banker role allows us to run these branches with less staff.
So that is helpful. As post Covid, we are running with a smaller staff.
It has helped us with attrition as you mentioned, we've seen that drop considerably we are able to start bringing talent and again, we were struggling with that early in the year and then last we are seeing a significant increase in sales that you've talked about we are seeing significant growth in customers. We are seeing our highest.
Ever as far as the.
Checking sales.
We're even seeing a return to consumer lending growth, which is the first time in a long while so very positive trajectory for us in the branch network a good timing to because some of you recognize project sundown, which is our focused effort on that.
Truest merger and then I guess, we should also throw in that other big competitor.
Currency challenges, we are seeing outperformance as branch closures closures are happening now where do you want to comment sure I'm glad you mentioned projects come down because it really wasn't Scott noted sort of a truly target, but we've widened it because there are several opportunities in a market with its consolidation happening.
With other banks.
Mergers.
Program really is designed to acquire a consumer and business.
Market share from these competitors given the disruption that will continue.
So we've had several.
Programs that are targeted specifically when the French closings or lots of disruptions that we're hearing on the ground. So we have targeted these programs and last March we knew that was specifically like 33 branch closings in our market that campaign that included media.
Digital advertising feet on the street really guerrilla warfare kind of marketing.
We saw about a 28% increase in new checking accounts in that month, and then again.
Paul we've seen the same thing happening.
So we go in and out of the market depending on what's happening at that time.
Next year, we do have some new market intelligence I think about 40 truly branches, which is the largest branch closing.
You can expect to institute the exact same program at that time, and we expect very strong results as well. So you can see why we took the bull by the horns in terms of the consumer bank, we're getting we're getting good results from that team, which we appreciate.
Okay I appreciate all that color one last question.
On the C&I line utilization, you said I believe 25% and you hope you trough I wonder if you've gone back in time, and just kind of looked at how utilization rates have rebounded and times when they when they trough and maybe.
Based on historical.
Data.
How quick could rates, because the utilization rebound and to what magnitude well those are all great questions, Dave I'm going to ask you to chime in here in a minute since we are getting a little longer in the tooth in our careers. The first thing that comes to my mind is what we saw in the financial crisis in the great recession, when we saw.
Our utilization clines as companies began to hoard cash and sales dropped off et cetera.
The complexion of our organization has changed as we've grown added new capabilities. So it's kind of hard to say if you asked me what would you expect normal utilization to look like at Atlantic Union Bank. A couple of years ago I would have said, 42% low forty's is about what we would expect.
It's hard to know whats normal from here, but I can tell you, it's not 25% I have never seen anything that low David bring do you have any perspective on what to think just to add on to what you saw.
<unk> said it just goes up 10 percentage points to 35, we've added another two close to $250 million of Outstandings.
So any sort of.
Investments in the businesses will really help us. The other thing is companies are also not investing in owner occupied properties. They are just doing that.
Maintenance of what they have so we normally see a lot of owner occupied property financing and we're actually seeing a decrease in that here. So thats just normal amortization, mostly those are term loans that payback every month and to your point, we've seen a reduction and that so those operating companies borrowing on la.
Lines or real estate.
Just getting back to some form of <unk>.
Level of normal will help us and here's where supply chain disruption comes in in my opinion, which is talk to any business client we talk to a lot theyre going to tell you. They are having trouble meeting their orders that they could sell more stuff. If they had more inventory more equipment more people and said this is my point I made in my hope.
<unk> comments. This is a supply problem and I think it's going to be with us for a while but I think it's going to be on an improving trend and say what does that mean for us what it means is it means increasing line utilization as they begin to build working capital and we financed classic timing differences and that sort of thing so I think that yes.
There's a reason there's good reason to be hopeful that we will see some improvement in line utilization. We think we will continue to fight excess liquidity, but.
Businesses seem pretty confident and we keep adding new clients as well, which is good and then another point I hate to keep coming back to construction lending, but it's such an important part of the headwind that we faced what was construction loans outstanding a year ago $1 $2 billion, which is pretty normal for us and what is it right now.
$877 million. So there is another delta because of the ramp that's going on in that construction loan pipe.
We should have the ability to drive that up to Dave's point it won't take too much increase in utilization to pick up. So these are things that.
Give us some reason for optimism, but we don't want to be overly optimistic because theres going to be a lot of liquidity sloshing around for a while.
But these businesses are actually doing pretty well.
So to put words in your mouth as it is it fair to say that you would classify your <unk>.
7% ish type loan growth target as as conservative.
I wouldn't say that I wouldn't say at this point.
As such it's so difficult to forecast anything Wally.
I'd, just say realistic how's that.
We think we have a reasonable line of sight to making that happen anything could happen.
Would it be better it's possible, we'll continue to update you quarter by quarter.
Okay, great. Thank you very much for the time take care.
And thanks, everyone for joining us today, we appreciate your time, we ran a little bit over.
But.
We will be available on our website at investors got Atlantic Union Bank Dot com.
Good day, and we'll talk to you next quarter Goodbye.
Okay.
This concludes today's conference call. Thank you all for participating you may now disconnect and have a place.
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