Q3 2022 Atlantic Union Bankshares Corp Earnings Call
Okay.
Good day and thank you for standing by welcome to the Atlantic Union Bankshares third quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
Speaker's presentation, there will be a question and answer session to ask a question during that session you will need to press star one one on your phone.
Please be advised that today's conference is being recorded and I would now like to hand, the conference over to your speaker today, Mr. Bill <unk> Senior Vice President of Investor Relations. Sir. Please go ahead.
Thank you Christian good morning, everyone.
I have Atlantic Union, Bankshares, President and CEO , John Asbury, and executive Vice President and CFO , Rob Gorman with me today.
I have a number of other members of our executive management team with us protocols and answer period.
Please note that today's earnings release and the accompanying slide presentation. We are going to run. This webcast are available to download on our investor website investors start Atlantic Union Bank Dot com.
During today's call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures is included in the appendix to our slide presentation and in our earnings release for the third quarter of 2000.
We will make forward looking statements on today's call, which are not subject to statements of historical fact and are subject to risks and uncertainties.
There can be no assurance that actual performance will not differ materially from any future expectations. Our results expressed or implied by these forward looking statements.
We undertake no obligation to publicly revise or update any forward looking statement. Please.
Please refer to our earnings release for the third quarter of 2022, and our other SEC filings for further discussion of the Companys 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'll take questions from the research analyst community and now I will turn the call over to John Asbury.
Thank you Bill and thank you everyone for joining us today Atlantic Union Bankshares delivered another solid quarter, we recorded upper single digit loan growth and more than funded it with double digit deposit growth on a linked quarter annualized basis net interest margin expanded considerably asset quality remains strong and we expanded our asset based lending effort. We are on track to hit.
Our top tier financial targets in the fourth quarter of this year I have consistently stated my belief that our operating philosophy of soundness profitability and growth in that order of priority serves us well as we navigate the challenges and uncertainties of the ever changing operating environment Atlantic Union Bank is a story of transformation guided by a consistent but if.
<unk> strategy and it remains committed to delivering on our strategic objectives before I dig into our results I would like to comment on the macro economic environment and our primary operating footprint.
All of the uncertainty, Virginia traditionally it's been a stable economic area and not one that is prone to big swings in either direction.
Government has acted as both a significant catalyst in shock absorber to the Commonwealth's economic engine with that history, we expect the effects of any recession to be somewhat tempered in Virginia.
As unemployment rate has recovered to pre pandemic levels ticking down to two 6% to 6% in August from three zero in May and it remains below the three 5% current national average.
We interact extensively with our clients the business community and teams and can report that anecdotally, we do not believe the gloomy headlines properly reflect the situation on the ground in our footprint right now our markets remain strong our lending pipelines remain strong and we still don't see any near term shift away from the positive trends of low unemployment.
And credit environment, we continue to believe that the federal reserve will further raise short term rates doing whatever it takes to battle stubborn inflationary pressures since we remained fairly asset sensitive multiple short term rate cut rate hikes should be a positive for our operating results and our net interest margin should continue to expand driving revenue growth.
The Atlantic in your bank posted upper single digit annualized loan growth of approximately 8% point to point for the quarter and finished the third quarter with loan growth of approximately 10% on a year to date basis. Excluding PPP. This was our fourth consecutive quarter of high single digit annualized loan growth or better excluding PPP.
Our loan pipeline entering the fourth quarter remained strong running about even with this point last year. It's also well balanced with a 50 50 split between commercial real estate and commercial and industrial categories.
And continuing the best organic growth momentum, we've seen before the pandemic, we believe that we remain well positioned to deliver high single digit loan growth for the year and perhaps slightly better given the strength of our current pipeline competitive positioning market dynamics and fundamentals in the markets. We serve we do recognize that the economic environment in our footprint.
Change is persistent inflation and the threat of recession loan, but as we start Q4, we do have a line of sight to high single digit loan growth for the year. This is consistent with the one growth expectations. We have provided for the past several quarters.
C&I line utilization ticked down slightly at the end of the quarter to 32%, which is still well below our pre pandemic levels and better than at this point last year, which was approximately 25%. We do believe we have upside here is the working capital needs increase among our clients over time.
We also have a number of other positive growth factors to report from the quarter. For example, we had a strong loan production quarter slightly below Q2, and ahead of Q1 and Thats. Good performance for us given the seasonally slower summer months about 36% of production came from new to bank clients and 64% from growth at our existing clients.
CRE payoffs continue to slow and are well off the peaks we saw in the second through fourth quarters of last year as I said last quarter rising term rates have suppressed refinance activity and to the long term institutional markets and they're coming to fraud.
Institutional investors, making offers that just can't be refused on CRE properties, we think CRE in our markets is still quite healthy and the cooling of payoff activity is good for our outstanding loan balances in mix, continuing with bank financing and attractive option on stabilized properties.
Meanwhile, our installed base of construction commitments is providing a tailwind for loan growth as construction lending balances fund up and climb back toward more normalized levels exactly as we predicted what happened.
We recently retooled our SBA 700 program in June closing, a product gap with larger competitors and we executed our first at seven eight loan sale earlier this month we're.
We're excited about the future fee income growth opportunities in this space and it's a very nice complement to our historically strong SBA 504 program.
We are also now capable of leading loan syndications and had a few of them closed during the quarter given our new foreign exchange 70 sales and loan syndication capabilities. We believe we can grow these non interest income generators from essentially zero to around one 5 million per quarter by the end of 2023. These are the latest example.
Of high value added services that we've developed to further strengthen our competitive positioning as the alternative to the large banks in our markets and to differentiate Atlantic Union Bank from our smaller competitors. This is consistent with the strategy. We have communicated for years and we continue to execute on what we said we would do.
We also expanded our asset based lending program to close another key C&I product gap vis vis larger competitors batting a well experienced team early in the quarter similar to our successful approach with Atlantic Union equipment Finance, we believe that bringing over a complete team including production on portfolio management is the best approach to expand our specialty lending business.
We continue to believe that we have a long runway to grow both organically and through takeaway from our larger competitors that dominate market share in our home state of Virginia supplemented by our operations in Maryland, and North Carolina, and our specialized lending capabilities in government contract finance equipment finance and our recent enhancements to capabilities like <unk>.
Foreign exchange loan syndications, SBA, seven eight and asset based lending.
Our asset quality continued to impress and quarter after quarter leisure levels I have just not seen in my 35 year career at some point, we expect credit losses will normalize, but given all of the liquidity that remains in our system continued low unemployment and still solid fundamentals in our markets and client base, we have yet to see signs of a systemic influx.
<unk> point we.
We did increase the allowance for credit losses during the quarter due to loan growth and downward revisions to the macroeconomic forecast Rob will go into more detail on this in his section and some while economic uncertainty and the threat of recession could negatively impact our markets. The current economic situation and our footprint remains solid and as noted we expect.
The impact of any recession to be somewhat tempered in Virginia.
The combined effect of our past expense management actions upper single digit loan growth asset sensitivity in a rising rate environment. The deposit base that is heavily weighted to transaction accounts and strong asset quality track record all give us confidence in our ability to continue to generate positive operating leverage and differentiated financial performance, while meeting our top tier.
Our financial targets in the fourth quarter of 2022 and in 2023.
Despite all of these noted macroeconomic uncertainties, we believe that we remain an attractive topline and bottomline growth footing.
Now, let me be more specific about how we expect to drive positive operating leverage and the current operating environment.
With all the provisional swings caused by the pandemic and the impact of Pvp, our numbers have been unsurprisingly noisy, but if you drill down and adjust for those factors you can see the strength of the core franchise year over year pre <unk>.
<unk> adjusted revenue growth was approximately 13% and was 6% on a linked quarter basis from the second quarter.
When you consider the impact of our expense management actions on our adjusted expense run rate, which has increased 6% year over year, and one 7% quarter over quarter. The company generated positive pre paycheck protection program adjusted operating leverage of approximately 7% on a year over year basis, and 4% quarter over quarter.
I'd also like to point out that excluding PPP pretax pre provision adjusted operating earnings increased 25% year over year and 12% from the prior quarter.
Rob will take you through the details of our financial performance in his section, but youll find that were delivering on what we said we would do.
We are often asked about our view on whole bank M&A opportunity and I'll share our current thinking here.
While we do not believe we need to make bank acquisitions to meet our corporate and financial objectives, we will consider them under the right circumstances. The right circumstances. Our current view would generally be smaller lower risk in fill opportunities that would further densify, our footprint add scale market share and improve efficiency.
As we have consistently demonstrated during my time at the company, we will remain disciplined as we consider M&A with an eye towards strategic fit and the financial merits of the transaction anything we would be expected anything we do with anything would be expected to meet our previously communicated return thresholds, including tangible book value dilution earn back.
At the end of Q3, Mark My six year anniversary at Atlantic Union, and I'd like to express my gratitude to our teammates clients shareholders and communities for their support of this remarkable transformation. We have all been a part of over this time.
From a Virginia community Bank to Virginia's bank and now so much more.
The Atlantic Union Bank has been is and will continue to be a story of transformation. This is who we are as a company and it's a part of our culture. Our culture is a differentiator.
Frequently I am seeing teammates returning to the company after spending time in other organizations because they missed our culture.
It's all about the people, it's always all about the people.
Looking ahead there are many reasons that caused me to be confident despite all of the uncertainties as I begin my remarks, I noted how I believe the fundamentals favor us as we have a rather unique macroeconomic environment and our footprint. This should allow some reasonable growth opportunities even when national headlines tell a different story, we have been intentional on diversifying our product lines and Kate.
Abilities, while building the core franchise, our culture and our brand further.
Other our asset sensitivity is delivering strong net interest income growth through NIM expansion with more expected to come all the while we have consistently demonstrated we will make changes and we will make tough decisions, including expense actions that have enabled us to address the challenges of wage inflation across the sector and deliver positive operating.
Leverage and finally at the core of the company. We have always had a strong credit culture for 120 years, we have been a prudent lender and this is not something that we turn on and turn off given the outlook that prudent lending switch it's always on.
While our operating environment continues to change what is not changing is the Atlantic Union Bankshares remains a uniquely valuable franchise, it's dense and it's compact in great markets with a story. Unlike any other in the region and we're well on our way to becoming the Premier Bank in the lower mid Atlantic region overtime, we are scalable in growing our capabilities operating in the right markets with the right team.
To deliver high performance, even in the most trying of times.
I'll now turn the call over to Chief Financial Officer, Rob Gorman to cover the financial results for the quarter Rob.
Thank you Jonathan good morning, everyone. Thanks for joining us today.
Now, let's turn to the company's financial results for the third quarter. Please note that for the most part my commentary will focus on Iraqi unions results on a non-GAAP adjusted operating basis, which excludes the $9 1 million pre tax gain of $8 million.
After tax gain from the sale of the <unk>.
Business Securities to be partners in the second quarter.
There were no similar adjustments to the company's adjusted operating results for the third quarter.
In the third quarter reported net income available to common shareholders was $55 1 million and earnings per common share were <unk> 74, which.
This was down approximately $4 2 million.
<unk> <unk> per common share from the second quarter's reported net income available to common shareholders.
Adjusted operating earnings available to common shareholders in the third quarter were $55 1 million.
Adjusted operating earnings per common share were 74.
Approximately $3 $8 million or five cents per common share or an increase of 7% from the second quarter.
Pre tax pre provision adjusted earnings available to common shareholders holders in the third quarter were $73 4 million and <unk> 98 per common share, which is an increase of 11% from the second quarter.
Adjusted operating return on tangible common equity was 17, 2% in the third quarter, which was up from the adjusted operating return on tangible common equity ratio of 65% in the second quarter adjusted.
Adjusted operating return on assets was 115% in the third quarter, which is up from the one 1% adjusted operating return on assets in the prior quarter.
And the non-GAAP adjusted operating efficiency ratio was 54, 1% in the third quarter, which was an improvement of one 8% from the second quarter.
During the third quarter. The company also generated significant positive.
PPP adjusted operating Leverages as creepy peak adjusted revenue of approximately 6% was offset by approximately one 7% and adjusted expense growth on a linked.
Yes.
Turning to credit loss reserves as of the end of the third quarter. The total allowance for credit losses was $119 million, which was an increase of approximately $6 million from the second quarter, primarily due to net loan growth during the quarter and increased uncertainty in the long term macroeconomic outlook due to several stubbornly high inflation.
Tightening monetary policy and the ongoing geopolitical risks.
The total allowance for credit losses, as a percentage of total loans increased to 86 basis points at the end of September and that's up three basis points from the prior quarter for the reasons numbers above.
The provision for credit losses of $6 $4 million into third quarter increase from the prior quarter $3 6 million.
And a negative provision for credit losses of $18 $8 million recorded in the third quarter of last year.
Net charge offs remained muted their $587000 or two basis points annualized in the third quarter.
Now turning to pre tax pre provision components of the income statement for the third quarter tax equivalent net interest income was $155 million, which was up approximately.
Approximately $12 2 million or eight 6% from the second quarter driven by higher interest income due to average loan growth from the prior quarter increases in loan yields due to higher market interest rates and an additional gain of third quarter, partially offset by lower PPP and purchase accounting accretion interest income.
And increases in deposit and borrowing costs.
The third quarter's tax equivalent net interest margin was 343%, which was a net increase of 19 basis points from the previous quarter.
Due to an increase of 42 basis points in the yield on earning assets, partially offset by a 23 basis point increase in the cost of funds.
The increase in the third quarter as earning asset yields was primarily due to the 53 basis points increase in the loan portfolio yield.
Loan portfolio yield increased to four 2% in the third quarter, which was up from 367% reported in the second quarter again, due primarily the impact of higher short term interest rates on variable rate loan yields partially offset by the impact of a decline in pvp in purchase accounting accretion income on a linked quarter basis.
Loan yields excluding PPP in purchase accounting loan accretion income increased by 59 basis points during the quarter, which had a 48 basis points positive impact on third quarter margin.
Due to the impact of short term interest rates, given the companys asset sensitivity.
The 23 basis point increase in the third quarter as cost of funds was due primarily to a 32 basis points increase in the cost of interest bearing deposits driven by increases in interest checking money market and time deposit rates as well as the increased borrowing rates due to rising market interest rates.
To date, our total deposit beta is 12%.
Noninterest bearing deposit basis.
Percent through September .
Noninterest income decreased $12 7 million to $25 6 million.
This was primarily due to the $9 $1 million pre tax gain from the sale of the <unk> business during the second quarter.
Factoring out that gain adjusted operating noninterest income declined approximately $3 $6 million in the third quarter from the prior quarter, driven by lower fiduciary and asset management fees of $2 8 million, primarily driven by the sale of the Iowa eight business in the second quarter and lower wealth assets under management due to market conditions.
Other decreases from the prior quarter included $1 $3 million decline in service charges on deposit accounts, which is reflective of the changes to the company's overdraft policies implemented in the third quarter.
Also at 800 $810000 decrease in mortgage banking income, which was due to a decline in mortgage origination volumes and lower gain on sales margins and $550000 reduction in loan related interest rate swap fee income driven by a decline in average transaction swap fees.
These noninterest.
<unk> income categories.
Decrease is were partially offset by increases in other operating income of $890000 primarily related to syndication.
Exchange and other capital market transaction fees.
Other operating income and an increase of $729000 related to slowly due to mortality benefits received and an increase of 193000.
Interchange fees.
Noninterest expense increased $1 1 million.
To $99 9 million for the third quarter from $98 8 million in the prior quarter, primarily driven by a $1 $3 million increase in salaries and benefits expense due primarily to elevated new higher recruiting expenses and lower deferred loan origination cost, resulting from changes in the mix of loan originations from the prior quarter.
In addition, other expenses increased from the prior quarter by $1 1 million.
And that was primarily driven by Oreo gains of $630000 realized in the prior quarter.
The increases in non interest expenses from the prior quarter were partially offset by a $1 $2 million decline in professional services expense primarily related to lower strategic project costs.
The effective tax rate for the third quarter increased to 17% from 16, 7% in the second quarter, reflecting the impact of discrete items related to the sale of the IRR business in the prior quarter and 2022, we expect a full year effective tax rate to remain in the 17, 18% range.
Now turning to the balance sheet assets with $20 billion at September 30, which was an increase of five 8%.
<unk> from June 30 levels. The increase was primarily due to loan growth in the quarter.
At period end loans held for investment with $13 9 billion inclusive of $12 $1 million of PPP loans net of deferred fees.
Which was an increase of $263 million or seven 7% annualized for the prior quarter.
Excluding PPP loans loan balances in the third quarter increased seven 9% on an annualized basis driven by increases in commercial loan balances.
A $213 million or seven 3% linked quarter annualized and consumer loan balance growth of $63 million or 11, 1% annualized.
Excluding the effects of the PPP loans loan balances in the third quarter increased $1 2 billion.
Or nine 7% from the same period in the prior group.
At the end of September total deposits stood at $16 $5 billion Thats, an increase of $418 million or approximately 10% annualized from the prior quarter.
The growth in deposits was primarily driven by increased interest checking balances related to commercial client operating accounts.
At September 30 of transaction related deposit accounts accounts comprise 58% of total deposit balances, which is in line with second quarter levels.
From a shareholder stewardship and capital management perspective, we remain committed to managing our capital resources prudently as the deployment of capital for the enhancement of long term shareholder value remains one of our highest priorities.
Regarding the company's capital management strategy capital ratio targets are set to seek to maintain the company's designation as a well capitalized financial institution and to ensure that capital levels are commensurate with the company's risk profile capital stress test projections and strategic plan and growth objectives.
At the end of the third quarter Atlantic Union, Bankshares, and Atlantic Union Bank regulatory capital ratios were well above well capitalized levels.
<unk> tangible common equity.
Tangible asset capital ratio declined from the prior quarter, primarily due to unrealized losses on the available for sale Securities portfolio reported in other comprehensive income through the market interest rate increases in the third quarter.
We believe that the GAAP accounting versus regulatory accounting capital impacts of unrealized mark to Mark losses from rising interest rates in the available for sale securities portfolio will be recouped over time.
Plus we also track our tangible common equity ratio and tangible book value. Excluding this noncash GAAP accounting requirement.
During the third quarter company paid common stock dividends of 30.
Per share, which was a 7% increase from the prior quarter and also paid a quarterly dividend of $171 88 on each outstanding share of preferred stock.
The company did not repurchase any shares during the quarter in order to preserve capital for organic loan growth and to position the company for any adverse developments arising from the current macroeconomic.
Economic environment.
As noted at our Investor day in May we increased our top tier financial targets are the following.
Return on tangible common equity.
Within a range of 16% to 18% return on assets in the range of one three to one 5% and an efficiency ratio of 51% or lower.
Regarding the efficiency ratio target again, I'd like to point out that it is difficult to compare our efficiency ratio to peer banks that don't have significant operations in Virginia since Virginia banks do not pay state income taxes, but is there a franchise tax that flows through noninterest expenses and not income taxes for free.
<unk> quarterly noninterest expense run rate for approximately $4 $5 million adds approximately two 5% for the companys efficiency ratio.
So setting the efficiency ratio target of 51% of ROE as it is akin to a 48% efficiency ratio target for peer banks not headquartered in.
Virginia.
As a reminder, our top tier financial targets are dynamic and are set to be consistently in the top quartile among our proxy peer group regardless of the operating environment.
As such we reset these targets periodically to ensure that they are reflective of the financial metrics required to achieve top tier financial performance versus peers in the prevailing economic environment.
We expect that the company will achieve these top tier financial targets in the fourth quarter of 2022.
Over the full year 2023 based on the following key assumptions.
We expect to produce upper single digit loan growth on an annualized basis in the fourth quarter.
And on a full year basis in 2023.
The net interest margin is expected to continue to expand in the fourth quarter and in 2023 as a result of the company's asset sensitive position and the assumption that the federal Reserve Bank will increase the fed funds rate to four 5% by the end of 2022 and maintain at a four 5% throughout 2023.
As a result of loan growth and an expanding net interest margin net interest income is expected to grow by mid single digits in the fourth quarter from third quarter levels and by double digits in 2023 from full year 2022 loans.
We also expect that the company will generate meaningful.
Positive adjusted operating leverage in the fourth quarter and in 2023 due to mid single digit adjusted operating revenue growth outpacing flat expenses in the fourth quarter on a linked quarter basis and loan key low teen revenue growth outpacing mid single digit expense growth in <unk>.
23.
On the credit front, while we don't see any systemic credit quality issues lurking at this moment due to expectations for a shallow to mono resistant to begin sometime in 2023 for modeling purposes. We are assuming an uptick in the net charge off ratio to between 10 and 15 basis points in 2023 from less than five.
Basis points in 2022.
I would reiterate however that we do not see evidence of return in the benign credit environment. At this point. So this may end up getting a conservative assumption on our part.
The allowance for credit losses to loan balances.
To remain within the range of 85 to 90 basis points in 2023.
In summary, Atlantic Union again delivered solid financial results in the third quarter of 2022 and as noted we believe we are well positioned to generate sustainable profitable growth and to build long term value for our shareholders.
And with that let me turn it back to Bill some yields are open it up for questions from our analyst community.
Thanks, Rob.
For a few questions, Chris we're ready for our first caller. Please.
Thank you.
As a reminder to ask a question you will need to press star one one on your phone please.
Please standby as we compile the Q&A roster.
Yes.
Yeah.
And our first question will come from Catherine Mealor of K B W. Your line is open.
Morning, Kathryn.
Good morning, I think I'm still your one of your only analyst.
Someone else come in next year.
And I'll step out, but I'm, just going to go with a bunch of questions for now.
First with the margin.
The guidance you gave for next quarter and next year was really helpful. Just within that can you give us an update of how you're thinking about.
Deposit beta this quarter I thought was actually pretty good but it seems like you're growing deposits pretty well as well. So just kind of curious how you're thinking about deposit pricing and beta through the cycle.
Yes, I think that Kathryn good morning in terms of deposit betas as I've mentioned through three.
Through third quarter for this cycle to date horizon right.
Cycle.
We're about 12% 13%.
Total deposit betas.
And on our interest bearing deposit basis, we're about 80%.
As we look forward here, we continue to see the effect.
Continue to move fed funds rate.
Market interest rates.
Again, we're looking at a four 5%.
Fed funds rate by the end of this year.
Through the cycle through that.
This current.
Rising rate cycle, we expect to be about 25 to 36, 3% betas fall and through the cycle.
Total deposits of about 35.
To 40% or so.
Interest bearing deposits again as we go through the cycle as we get through.
Really the really next year, we think that that's where we're going so again.
You should start to see.
The base accelerated as we see more competition in the market.
We haven't really seen too much at this point in time.
We are.
As you see the deposit rates have increased.
Okay.
<unk> continues to be.
Monitoring that situation from a competitive position, but also from.
Deposit retention.
Okay.
And just thinking about the balance the 10%.
Deposit growth was really strong this quarter with you.
And in many markets throughout the us were there any.
Maybe.
Special this quarter that really push that.
Or would you expect kind of that pace of deposit growth to slow and maybe.
Maybe another kind of problem that is where do you think youll see most of that growth do you really think will continue to see a day grind out then the CD balances are you really trying to push it in other categories.
Yes, so our projection is we're probably in the 4% to 5% deposit growth.
Normalizing as we go forward here.
Outsize this quarter, 10% annualized.
Get some inflows from.
Actually commercial clients operating accounts, we expect that there'll be some runoff of some of those will come down a bit, but overall, probably looking at 3% to 5% deposit growth.
Which should help fund that loan growth that we're projecting.
Of course, we have other sources of liquidity to make sure that we take a pretty differences.
And the core funding.
On book growth.
Some of that is going to be.
Got it.
Pretty large the investment securities portfolio as you know bill let that run down we'll take some of the cash flows that come off of that which was about $60 million a quarter.
And we'll use that to short from a liquidity funding point of view.
And then we also have some we've got some.
The elevated cash at the end of quarter three.
300 <unk>.
Some of that as well so.
That's how we're thinking about capital, we don't think we'll be seeing double digit deposit growth.
Going forward, yes, but I would add that we actually are continuing deposit growth momentum early in the quarter subject to change.
What's interesting to me is that despite expectations.
The deposit base is very strong and stable.
We look by quartile at the consumer deposit base for example, based on balances, it's still higher than before the pandemic. It's stable not declining we continue to add net new consumer households, and the retail bank, which is impressive given that we closed the quarter of the retail branch network since the pandemic began.
The deposit base of Atlantic Union Bank is the Crown jewel of the franchise I've said that since my arrival and we've only expanded our capabilities that we've built for the south built out our commercial banking efforts et cetera. So Catherine we know deposit growth is going to be a struggle but.
It is the strength of this organization and it's not as if we were ever gave up our focus on it we've only increased our focus on it so we'll see what happens after that.
Tumor side, we did see growth in Cds was exit turnaround runoff weird to see run off some of that management of.
Cost Cds, but we've been running a few specials and receiving money coming through.
The last quarter two quarters.
For instance, we've got a 13 month CD.
CD special I think it pays 175 and <unk>.
<unk> thousand 701, special which is two in a quarter. So we'll continue to do those sorts of things to make sure that we sure to deposit base obviously.
Funding through the quarter and relationship.
Client basis better than go into the whole correct were still 58% transaction accounts.
Very impressive okay.
That's for sure Okay, that's where a lot of great detail and then go into the other side of the balance sheet on the loan side. The lung data I thought was actually better cure I think 40%.
Data I calculated how are you thinking about.
Maybe you can start with what Youre seeing your pricing come in and is that 40% beta. We saw this quarter is that true incredible to the next few rate hikes that we effectively.
Yes, I think youre right Kathryn that's what our track ratios.
Over 40% on the on the loan pricing side.
We do expect that that will continue at that level, just because of the call.
Almost half of our book.
Of the loans on the books is tied to short term rates, whether thats <unk>.
Prime rate or one month, LIBOR and now increasingly sell one silver so.
Short term rates continue to increase in the fed does does its job here increasing rates you should see those those betas remain at that point now at some point there may be some competitive pressures that would.
We drive that down a bit, but we're not seeing that at this point.
So just looking at the pricing floor.
Our wholesale book, our commercial book of New originations basically.
For Q Q2 to Q3, we basically see.
Variable and crime.
Match matched the market rate changes and one month LIBOR.
<unk>.
We also see.
Pretty much again this is the half of the book.
Variable in prime.
Looking almost.
North of 80% and data related to the market.
Re prices very very quickly.
Okay.
Fixed rate.
Go ahead sorry.
Got it.
Thank you for that and then I was wondering if the expenses the expense.
I think we came into.
The quarter thinking that the annual expenses are going to be.
19 of $3 95, and we came in a little bit higher this quarter and then we are guiding for flat next so I'm kind of rounding out at $3 98.
For the year with that and so just kind of curious what's driving the higher near term expenses.
And then you're guiding for mid single digit growth for next year is there is there any thing.
In the expense base for next year. If revenue is softer loan growth is softer that you can be nimble and pull that back if the revenue isn't as high as you project.
Yes.
That's right Jeff.
We're going through our detailed planning for 2023.
But we expect that.
Guidance.
I just provided is where we'll end up.
But to the extent that yielded revenue Doug.
Double digit revenue growth.
Materialized dialed back we've got some opportunities to do that.
In terms of.
Taking some expense growth off the table, we don't think we'll need to do that at this point, we're continuing to invest in the franchise.
ABL investment is occurring.
Sample of that we'll continue to do that going forward.
And at.
At this point in time, we're really focused on generating positive operating leverage significant positive operating leverage.
As.
Asset sensitivity benefits kick in for us.
So we've got a number of projects underway and investment projects.
Cool.
Increase some expenses to that to the levels I'm talking about is embedded in there.
At some point in time, we'll get benefits out of that and become more efficient and productive to do automation tools.
Thanks.
Sure.
So that's kind of the way, we're thinking about it at the moment and wage inflation is real.
Thats really whats kind of chicken is up a little higher than we had originally.
Projects are certainly coming into the year and even coming.
Coming out of the first half of the year, we continuously evaluate the retail branch network.
We may see opportunity there.
And incentive compensation is by definition variable so we can make that.
Anything that needs to be.
No.
That's how we think about it.
Okay very helpful. And then the last one is just on credit and I would not see any great signs of weakness yet and maybe.
Macro question to you is the Moody's model assistance for the Q.
Assumptions around unemployment and you said this John <unk>, Virginia as unemployment rate has always been somewhat slower than the nation and so with that as we think about it as unemployment starts to look worse and just macro models are you a little bit more protected just because you kind of look more regionally.
It will be in Virginia, specifically.
And that might put you in a better position for less kind of Moody's macro upward risk.
Versus some of your peers.
Yes, Kevin it's.
Picked up.
First shot at that one.
So yes it is.
As you mentioned.
Unemployment were two 6% here in Virginia. It was August September I guess at least we've got something on the web.
Richard.
So unemployment is a real sensitive variable selling the allowance for credit losses.
And we do look at movies and the baseline basis, and then overlay.
More.
While we do a weighted scenario, including Moody's.
Moody's baseline so Moody's baseline in terms of the Virginia unemployment.
Forecast goes into that equation, so as that goes up.
You may see.
Youre right.
Weighted scenario go up I will say, though.
I think as I mentioned on my Slide Didnt mentioned in my comment specifically, but.
Our Q3 allowance for credit losses picked up three basis points, a lot of that had to do with increasing recession probabilities over the next two years.
Expected over the next two years and when we can.
Run that through a weighted scenario.
Our.
When scenario junior unemployment rate.
Picks up.
Averages about five 5% so we've built in there.
Very conservative at this point, we think conservative.
That's fair.
So.
To get it to go higher than five 5% will take some work we've taken some real.
Deep recessionary.
There has to be applied so I think we're pretty good in terms of.
That assumption, but we will continue to review each quarter.
Yes.
That's super helpful.
So we do have some conservative assumptions regarding the unemployment rate in Virginia within our weighted scenario for the allowance.
Currently.
Great. Okay. Thank you for all the commentary that's all I got.
Thank you Catherine Thanks Catherine.
We appreciate all the questions from you and we believe that next quarter, we'll have more competition on the question line as we return to our full strength of sell side analysts covering the bank. Thanks.
Thanks, everyone for joining us this quarter and we look to talking with you in January have a good day.
This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.
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