Good day, and thank you for standing by. Welcome to the Atlantic Union Bancshares Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr.
Bill Cimino. Mr. Demino, you have the floor.
Thank you, Chris, and good morning, everyone. I have Atlantic Union Bancshares' President and CEO, John Asbury and Executive Vice President and CFO, Rob Gorman with me today. We also have other members of our executive management team with us for Please note that during today's earnings release and through the company's slide presentation we are going through today During today's call, we will comment on our financial performance using both GAAP metrics and non GAAP financial measures. Important information about these non GAAP financial measures, Including reconciliations to comparable GAAP measures is included in our earnings release for the Q3 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 from 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 Q3 2021 and our other SEC filings for further discussions of the Company's risk factors and other important information regarding our forward looking statements, including factors that could cause actual results to differ from those expressed or implied in any forward looking statement. All comments made during today's call are subject to that Safe Harbor statement. And 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 on the big picture over the Q3, we were pleased to see reason for optimism and the outlook for COVID-nineteen declining Employment 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 and most report strong demand for their services, but are challenged in filling orders due to
The good news is this
is a supply problem. It's not a demand problem and the supply challenges should improve in the coming quarters. While 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 coiling spring for loan growth And the cons being surplus liquidity, elevated loan pay downs and wage pressures. The decline in loan balances we experienced over the quarter was More than we expected, it was in fact a record level of payoffs as 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 In closing, it should have 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 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 It continues to inform how we run the company as SoundBank is and will remain our single highest priority.
A prudent conservative credit culture served the company well during the Great 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 Firing 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, though expense control will be of Supreme importance for as far as the eye can see, it's very clear wage pressures are real and we'll 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 Your financial targets as we said we do.
Rob will walk you through the details on that during this 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 takeaway from our larger competitors that dominate market share 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 2 of our largest competitors. As mentioned, elevated commercial real estate payoffs Commercial and industrial line pay downs were the headline for loan balances in Q3. Loans excluding the impact of PPP averaged down 0.6 percent over the course of the quarter, and that's approximately 1.3% point to point due to CRE payoffs having been The highest we've experienced is stabilized properties were sold or refinanced into the long term non recourse institutional markets And C and I borrowers continue to pay down bank debt with surplus liquidity.
C and I line utilization ticked down 3 percentage points to 25% It should be about bottomed out. As 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 3rd quarter loan balance decline 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 For a while, construction loan new commitments dropped significantly in the first half of twenty twenty with the onset of COVID and we're missing 2 quarters of normalized funding ramp up from them.
Construction lending rebounded beginning in Q3 2020, has been running strong Since then and set a record level in Q3 2021, borrowers first need to burn through their equity as projects proceed before making drawdowns on 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 pay downs with construction fundings, but have not been able to do so this year due to the combination of new construction loans having been suppressed much of last And historically high payoffs. As I mentioned before, the headwind is now abating as construction loans are funding up and growing. Based on what we see at this time, we're expecting more normalized loan growth in the Q4 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 Q3 was steady. Approximately 3,000 clients from both round 1 and round 2 received forgiveness, Our current PPP balances are $482,000,000 Overall, the PPP loan forgiveness process is running smoothly and it should largely wrap up over the next two quarters. Turning to credit. The headline here remains the absence of credit problems. As we continue to climb out of the systemic downturn, our credit losses have been minimal so far.
Impressively, for the 2nd consecutive quarter, charge offs netted to 0 basis points. Realistically, though, at some point, credit losses will normalize. Given all the liquidity that remains in the system, declining unemployment and the strengthening economy, we see no sign of a systemic inflection point and all of that feels distant 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 3.8%, Down from 4.3% in June, and that was 1 percentage point better than the national average of 4.8%.
While that's all good news, the employment challenge in our markets It's not the unemployment rate, it's the ability of businesses to fill their open jobs. Rob will talk you through the provision for credit losses Our CECL modeling that file indications and metrics credit the years to have never been better. The past year challenged us in new and unexpected ways Bringing out our best to meet the unprecedented needs of our customers and teammates. And as I said before, we've come out on the other side as a stronger and more capable organization. Also as I said before, we've learned to work differently and our customers have learned to bank differently.
We've seen usage in our digital channels increase substantially. For example, 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 continue to refine our digital offerings and capabilities. Digital logins are up 23% since this time last year with 76% of those logins coming from a mobile device. Mobile check deposit utilization continues to grow and now accounts for 19% of our deposit transactions and Zelle users are up 71% Year over year with more than 49,000 users and 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 Q3 of the year, and with significant accomplishments and major undertakings, we're having completed the transition to a 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 branch 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 in our equipment finance division to launch And new specialty vehicle financing team in the 4th 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 in our automating processes and the customer experience. We should see operating leverage results As coming from this, I remain convinced we're emerging from the pandemic stronger, better and more efficient than before and that will give us opportunities both organic and Possibly through Renee, we are leveraging our learnings and ingraining our newfound capabilities, agility and innovation into the company's culture so that we're flexible and adaptable And the current lower for longer rate environment and forthcoming post pandemic next normal, while also delivering a differentiated customer experience. I also 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 Bancshares remains a uniquely valuable franchise, dense and compact Great markets with a story unlike any other in our region.
We're scalable with the 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 Q3. In the Q3, reported net income available to common shareholders was $71,600,000 And earnings per share per common share was $0.94 down approximately $10,800,000 or $0.11 per common share from the 2nd quarter. The non GAAP pre tax pre provision earnings were $72,100,000 which was down from $77,000,000 in the prior quarter.
For the 3rd quarter, return on equity was 10.9%. The non GAAP return on tangible common equity was 18.8%, return on assets came in at 1.47% and the operating efficiency ratio was 53.91%. Turning to credit loss reserves. As of the end of the Q3, the total allowance for credit losses was $109,000,000 comprised of the allowance for loan and lease losses of $102,000,000 and the reserve for unfunded commitments of $7,500,000 In the Q3, the total allowance for credit losses declined by $19,000,000 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 period. The total allowance for credit losses as a percentage of total loans was 83 basis at the end of September, which was down from 94 basis points in 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. As a reminder, our day 1 CECL reserve came in at 75 basis points. The $19,000,000 decline to the company's total allowance for credit took into consideration the COVID-nineteen pandemic impact on credit losses, both through the 2 year reasonable and supportable macroeconomic forecast utilizing the company's quantitative CECL model and through management's qualitative adjustments. Beyond the 2 year reasonable and supportable forecast period, the CECL Quantitative model estimates expected credit losses using a reversion to the mean of the company's historical loss rates on a straight line basis over 2 years. In estimating expected credit losses within the loan portfolio at quarter end, the company utilized Moody's September baseline macroeconomic forecast for the 2 year reasonable and supportable forecast period.
Moody's September baseline economic forecast for Virginia, which covers the majority of our footprint, Has improved from the June baseline forecast as it now assumes that the Virginia unemployment rate will average 2.7% over the 2 year forecast period, which is down from the 3.2% 2 year average state unemployment rate assumed in a June baseline forecast. On a national level, the September baseline forecast now assumes GDP will increase by 6% in 2021 and 4.3% in 2022. In addition to quantitative modeling, the company has also made qualitative adjustments for certain industries viewed as being highly impacted by COVID-nineteen. Additional 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 developments. The negative provision for credit losses of $18,800,000 in the 3rd quarter was lower than the prior quarter's negative provision for credit losses of $27,400,000 It represents a decline of $25,400,000 from the $6,600,000 positive provision for credit losses recorded in the Q3 of 2020.
The decline in the provision of credit losses as compared to the same quarter in 2020 was driven by the benign credit impact 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 as of September 30. In the Q3, Dexter All House were de minimis at $113,000 or less than one basis point compared to $69,000 in the prior quarter and $1,400,000 or 4 basis points in the Q3 of last year. Now turning to the pre tax pre provision components of the income statement for the Q3. Tax equivalent net interest income was $140,700,000 which was down $3,000,000 from the 2nd quarter primarily driven by the decline in PPP loan fee accretion interest income From $11,500,000 in the 2nd quarter to $9,400,000 in the current quarter. Net accretion of purchase Accounting adjustments of $4,000,000 added 9 basis points to the net interest margin in the 3rd quarter, which was in line with the 9 basis point impact in the 2nd quarter.
The 3rd quarter's tax equivalent net interest margin was 3.12%, which is a decline of 11 basis points from the previous quarter As earning asset yields declined by 15 basis points from the 2nd 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 excess liquidity, which was partially offset by 4 basis point a 4 basis point decline in the cost of funds from the 2nd quarter. The loan portfolio yield decreased to 3.7% from 3.76% In the 2nd quarter, primarily driven by the impact of 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 6.45% in the 3rd quarter, up from 4.91% in the prior quarter. In addition, earning asset yields declined by approximately 7 basis points from the prior quarter due to elevated levels of excess resulting from the reinvestment of portfolio cash flows and the deployment of excess liquidity into the investment securities portfolio at lower market rates.
The quarterly decrease in the cost of funds to 19 basis points from 23 basis points was primarily driven by 4 basis point decline in the cost of deposits to 14 basis points in the 3rd quarter. Interest bearing deposit costs declined by 5 basis points to 20 basis points in the 3rd quarter, primarily due to the maturity and repricing of high cost time deposits in the quarter. Non interest income increased $1,500,000 to 30,000,000 in the 3rd quarter, up from $28,500,000 in the prior quarter, primarily driven by the recapture of $1,100,000 Worth of unrealized SBIC fund investment losses recorded in the prior quarter and other operating income. In addition, Deposit and other service charges increased $591,000 Mortgage banking income increased $199,000 and asset Management fees were higher by $210,000 These quarterly increases were partially offset by declines in other non interest income categories, including a decline of approximately $500,000 in bank owned life insurance income due to life insurance proceeds received in the prior quarter. Non interest expense increased $3,300,000 to $95,300,000 from $92,000,000 in the prior quarter.
The increase in Natus' expense was primarily driven by increases in salaries and benefits of $2,800,000 Driven by higher salary cost of approximately $1,000,000 as a result of branch banking pay structure changes and other market driven salary adjustments made during the Q3 of 2021. In addition, increased performance based variable incentive comp And profit sharing expenses increased $655,000 and employee related recruiting, severance and other cost increases of approximately $900,000 In addition, other expenses increased by $1,600,000 for the quarter, primarily due to OREO and related credit expenses increasing by $1,000,000 reflecting the impact of gains on the sale of 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 Services fees of $616,000 Contractor expense for the Q3 of 2021 also included approximately $200,000 in expenses related to PPP loan forgiveness processing compared to approximately $250,000 expenses in the 2nd quarter. The effective tax rate for the 3rd quarter decreased to 18% from 18.3% in the 2nd quarter. For 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, total assets stood at $19,900,000,000 at September 30, which was a decrease of Approximately $54,000,000 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 $13,100,000,000 which is inclusive of $467,000,000 in PPP loans, a decrease of $558,000,000 from The prior quarter primarily driven by $392,000,000 in PPP loans that were forgiven during the quarter and declines in commercial loan balances ex PPP of approximately $165,000,000 Loan balances excluding PPP loans in the 3rd quarter decreased by 100 and $6,000,000 or 5.1 percent annualized, driven by declines in commercial loan balances of $165,000,000 or 6% annualized as a result of historic levels of pay down activity outpacing loan production levels across the portfolio. Consumer loan balances were flat to 2nd quarter levels, driven by a 13.9% year over year growth rate in indirect auto balances, offset by the strategic runoff of 3rd party consumer loan balances. At the end of September, total deposits stood at $16,600,000,000 A slight decline of $37,000,000 or approximately 0.9 percent annualized from the prior quarter, driven by a decline of $113,000,000 in high cost At September 30, low cost transaction accounts comprised 56% of total deposit balances, which was up from 54% in the 2nd quarter.
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. At the end of the Q3, Atlantic Bank's capital ratios were well above regulatory well capitalized levels. During the Q3 of 2021, the company paid a common stock dividend of $0.28 per 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 2,300,000 shares for $82,700,000 in the 3rd quarter, which fully utilized its $125,000,000 share repurchase authorization from May 4, 2021. In total, the company repurchased 3,400,000 shares under the repurchase program since May.
We continue to operate in a challenging operating environment and the impact 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 In the pandemic driven volatility related to expected credit losses and credit loss reserve levels subsiding, we are now in a position to reestablish our Keyer financial metric targets to the following: return on tangible common equity within the range of 13% to 15% The return on assets in the range of 1.1% to 1.3% 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, we believe these new targets are reflective of the financial metrics required to achieve top tier financial performance in the current economic environment. In summary, Atlantic Union delivered solid financial results in the 3rd 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. Chris, we're ready for our first caller, please.
Thank you, sir. Standby as we compile the Q and A roster. Our first question comes from Casey Whitman of Piper Sandler. Your line is open.
Hi, Casey. Good morning. Hi.
Good morning. Maybe we could start with expenses just because there was 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 2 from that, I think $95,000,000 that you guys had this quarter?
Yes, Casey. So as we noted in our prepared remarks, So we've actually increased during the quarter the run rate for the company. And our view is as we go forward We're going to be in the $95,000,000 to $96,000,000 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 to this quarter as well as Some market salary adjustments that were made in the quarter. So we do expect that, that will continue as we go forward In the Q4 and into 2021. In addition, we're also looking, as noted, as John noted, We've lifted out a couple of teams, 1 in Maryland, and we're also launching a Specialty vehicle financing unit and that's going to increase our run rate a bit.
So again, we're looking at the $95,000,000 to $96,000,000 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, and 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. And That's the current outlook as we speak. We'll obviously update that in the Q4 earnings call.
Yes. 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 lower net overall expense growth target.
Okay. And those financial targets that you put out there, does that assume some help from rates or not?
It doesn't well, it does expect some help in rates to get to the higher end of the ranges We feel pretty good about ROTCE and return on assets 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 aren't expecting much of material increase in the short term rates until Late next year in Q4 where we think the Fed will start moving at a quarter point, a quarter starting in the Q4 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 from the margin And interest income component until 2023 and beyond that period.
Okay, helpful. I'll let Samnals jump on. Thank you.
Thanks, Katie.
Chris, we're ready for our next caller, please.
Thank you. And next we have Catherine Mealor of KBW. Your line is open.
Good morning, Catherine.
Thanks. Good morning. Just wanted to get an update on your outlook for growth. I think John, you mentioned that you think Q4 will look better than You'll see better growth in the Q4. So what's the do you think a good target?
Do you still think kind of mid single digit is the range that you could get to as we move into 2022? And then I guess as we look towards that, so question 1 is just on growth. And then question 2 is just how do you think about Other revenue levers that you can pull as we move into next year to try to get us closer to that 53 Percent 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 Be helpful to help us get to that number. Thanks.
Yes. Thanks, Catherine. 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, time utilization. Well, I will point out, if you look at production is strong. This was the best production quarter of the year.
Construction lending, New production is the highest we've ever seen and that's really important. So what's happening now is the pump is As I mentioned, we're missing 2 vintages of kind of normalized quarters, that's Q1 and Q2 of 2020 Of construction lending funding up, it didn't go to 0, but it was down. That's kind of through the system now. And so we can see the schedules of construction loans funding up That plays an important role in offsetting the payoffs. So we see that.
We see loans booking. C and I balances Quarter over quarter excluding PPP actually weren't down that much. It was $18,000,000 point to point. And so what that's showing you is that even though line utilization 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 in Yes. There's 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 that's possible. So obviously, that's a big driver in terms of revenue. As we look at other forms of fee income, the spot 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, you'll see that oftentimes as loans Roll out of the construction bucket into permanent mortgage for developers who choose to keep them. So sometimes they'll swap for 3 to 5 years, that sort of thing.
We see some of this in the commercial business as well. We're adding new capabilities. We now have a syndications effort where we can originate Larger deals and we have a head of syndications and we are beginning to book syndication gains that helps on the margin. We have a new foreign exchange program with the new head of foreign exchange that came out of 1 of the larger banks that's comfortable or pardon me that 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, etcetera. 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 averages 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, Catherine, 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 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 are incurring as a result of this environment. That's just the reality. We can't 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 To add to that, the efficiency ratio target of 53 or less is probably the most challenging of the metrics in the Top tier ranges we've set. It's going to be difficult to achieve that in 2022, but as we go in and get some help From the rate increases going into 'twenty three, we think we've got a path to get there. Our working Assumption for next year is XBBP to see 5% to 6% growth in net interest income and 8% to 10% in non interest income, Some of which was the, as John mentioned, more swap activity, more FX activity and there's just general increases in Deposit service charges and things like that.
Great. Very helpful. Thank you so much.
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 6 is 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 can that gets even higher level and can that inform Even further winnowing of the branch system over time.
So David, I think that you broke up a little bit. I think your When we show the new account digital activity, the current percentages versus targets are the 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, midsized banks, super community banks. We're not allowed to cite 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 Tedesco is here, President. Anything to add, our view is that the targets that we've laid out That slide are short term and we think we can move from there.
Yes, we completely agree. I'm Sure. Not sure I have anything to add.
Okay.
Got it.
By the
way, that has implications that does have implications for branch staffing, branch network, etcetera, As we see more digital adoption.
Got it. And then maybe a few a little bit of color in terms of The details for the Maryland team and the new specialty finance group, maybe just talk about expectations for those 2 groups?
Certainly, David Rain, 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 the 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 in. So we feel like Well, number 1, they've already produced even though they just started 3 weeks ago, we've already booked $9,000,000 of fundings from that team. So We expect them to be very active. It's a 3 person team.
So our typical production per banker It's something in the range of $20,000,000 to $25,000,000 to give you an expectation there. And
They hit the ground running, so we're very happy with that. That's a C and I focus.
Yes, and it's all C and I. On the flip side, we have also hired Two folks to cover real estate
in Maryland.
Right now, they've 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 is a vertical, which will cover shuttle buses That are under contract, Coach is under contract and school buses and smaller ticket items. Our average ticket right now It was around $6,000,000 per deal, with about a note size of 1,800,000 In this business, it will look more like high volume lower ticket, so a more granular portfolio.
So the average ticket will be between $250,000 $350,000 per.
So So we continue to look for opportunities to extend the capabilities of the equipment finance team and that helps us both in our And they can also operate out of footprint as well. So that's been a big success for us. We built that from scratch and that's a good example of the type of organic Growth opportunities that we're interested in and they also are looking at a really good pipeline. Almost any measure, if you read the data, The outlook for capital equipment investment is very strong. The issue was simply getting the equipment off assembly lines, off ships to the extent that Imported and getting it in place supply chain disruption is an issue, but we feel good about the outlook for equipment finance in 2022.
Got it. And just one final question. Obviously, the support down in Norfolk, probably a key distribution hub. I know up in Baltimore, they're clearing some of that port traffic container ships pretty quickly. Just curious how the any sort of backlogs or Supply chain issues or distribution issues that are impacting Norfolk or they may be benefiting from more.
Yes. As you David, as you're probably recalling, I'm on the Board of the Port of Virginia, so I love having this point of insight. The Port of Virginia is The 5th largest container port by volume in the United States, the 3rd largest on the East Coast. There are no backlogs. It's actually one of the most modern ports 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're not seeing the number of ships lined up off the shore that you'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 is 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 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 contract Freight haulers, truck lines lined up, it's hard to find capacity to for someone to come get the cargo.
But they are it's a terrific operation. They continue to book record month after record month. Part of what's happening now is we're getting more first Point of call, ship lines coming in. So more ships are coming here as the first stop and they're doing that because they don't have To go wait in line somewhere else. And so that's good for us.
It has lots of implications for logistics. The biggest problem we have to be able to take advantage of Here in Virginia is the lack of warehousing to put the cargo and it also has implications. We actually don't want Cargo to be warehoused and shot off on the railroad or 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 what should be the largest wind energy field going on in federal waters, certainly off the East Coast, And that's 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, Brody. Good morning.
Good morning, everyone. Hope you're doing well. I just wanted to circle back on the financial targets. And John, I know it's going to be a lot of different things that maybe get you there. But just when I kind of look at this quarter, You're at like a $128,000,000 kind of ex PPP and R ROA.
And 2018 to 2019, you all provisioned 12 bps on average assets. So when I kind of like put all that together, I get like an ending tax affected kind of ROA in the 1% range. And so It seems like getting to the 1.1 to 1.2 because I know you're kind of skewed more towards the lower end without much help from rates It's going to be reliant on growth. And so I guess just when you look at the forward projections, do you think 7% ex PPP loan growth is enough to get you to that $110,000,000 to $120,000,000 ROA or is there going to be other things that need to happen In between to get you there.
Yes. I think the upper single digits So we'll ask to get there in that range from a loan growth perspective. Real drivers of that are really keeping Expense growth down, while improving in the revenue stream, ex Pete, one of the 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 in what I'll call core net interest income. So if you take those factors altogether, You should be seeing, again, XPPP, you should be seeing about, call it, 8% to 10% growth in our pre tax pre provision number, Also, as I mentioned, it won't get us to that 53 or less efficiency ratio, but that's where we're going to have to rely on Some margin expansion due to increased rates going forward plus continued growth in the loan book.
Understood. Understood. And then, I think John had mentioned, Rob, in his prepared remarks that there were some one time costs this quarter. Do you happen to have what those were?
Yes. If you look at a couple of things, probably in the $800,000 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'll incur some of those This quarter as well. So my estimate is about $800,000 in that 95 plus.
Yes, there wouldn't be normal run rate items.
Right. The real issue is we are we have increased the run rate Due to the salary adjustments that were made in the quarter, they were also Understood.
On the CRE payoffs, I just want to ask, is it customer refis or are 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 larger traditional markets Fredericksburg would be an example. And it's really across the key markets. Bertie, 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, You construct it, we finance your construction, the property goes out of construction and to 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 The intention is to build which creates value and sell.
That's been going on at a very accelerated pace. There are several reasons for that. You look at the low cap rates, Yes, there's a good argument that commercial real estate values could be as good as it gets in the short term. There is some anecdotal evidence that there's a Foot race going on trying to get ahead of a potential rise in capital gains tax, a potential elimination of 10/31 exchanges. Now based on what we heard the President Say, recently, maybe people should be a little less concerned about that, I don't know.
But we're clearly seeing these properties sold. Then If you intend to hold them and some do, if you're 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. Multifamily is kind of ground 0 for this. You can see it based on the drop in multifamily balances Because there are so many places you can go to get non recourse fixed rate, term financing, 20 year amortization more And that and term and that's 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. Dave Ring, do you want to comment on what you're seeing?
Yes. We just have set up A business where we can act as intermediary for those permanent placements outside to the investor communities.
So part of our capital markets effort is we can actually place fixed rate non recourse term debt Institutional lenders can capture some of the value 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 Verdi, 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 there's a lot of demand for them. But the good news is that the construction pipeline and 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 that they were suppressed in Q1 and Q2 and so we didn't have them kind of refilling.
Think of it as it was draining out Commercial real estate bathtub faster than we were refilling it. And so now the faucet is on and it has been for a while. So that actually will create a tailwind and hopefully help mitigate this. Hope that
Questions everyone. I appreciate it.
Thanks, Brody. And Chris, we're ready for our next caller, please.
Thank you. Laurie Hunsicker of Compass Point, your line is open.
Hi, Laurie. Good morning.
Hey, thanks. Good morning. Robin, hoping you could help us think about Core margin a little bit here. PPP fees, obviously, 21 basis points accretion, Nine basis points and for your release going to potentially 3 basis points next quarter. If you can just remind us what is On amortized fees remaining in PPP and then just kind of netting that you're getting to a $2.80 number, how we should be
Yes, Laurie. In terms of what's remaining from a PPP deferred fee Level, it's about $15,000,000 and we do expect that material amounts should come in this quarter as We have about $450,000,000 or so outstanding loans that are in could be in the process of being forgiven over the next two quarters is what We estimate probably the bulk of that hopefully will be in this quarter and some would bleed into the Q1. So In terms of the core margin, as you probably calculated this quarter, which you take out PPP and you actually take out accretion, We were about 2.89%, which was down about 11 basis points from the prior quarter. Again, a lot of that being driven by The lower yields that we're seeing on the loan side due to lower interest rate environment and paydowns of We consider higher yielding loans out of the portfolio and securities yield coming down a bit due to We continue to reinvestment at the low market rates that we're seeing. It's kind of twofold.
One is we're probably seeing about $40,000,000 to $50,000,000 in Mortgage backed cash flow is coming through that we're reinvesting and then we've also added to the securities portfolio Due to the excess liquidity, we increased that $200,000,000 or $300,000,000 in the quarter. I expect that, that will kind of stay in that Relative position, we're about 19% of total assets now. We could get up closer to 20% before it's all said and done. We do have $600,000,000 of excess liquidity that we want to put to work both in the loan book and then probably Some of that going into the investment securities book. So all that said is we're expecting the core margin Kind of to bottom out around this level and start to see some hopefully increasing throughout next year, Although not a lot until we start to see some of the interest rate movements and the Fed to move late next year and into the next year, 2023.
But we're kind of in this up a couple 2 to 5 basis points as we go into next year is the way we're thinking about it, primarily because we're reinvesting that excess liquidity It's a higher yielding assets. Hope that helps.
Okay. Very, very helpful. Yes, thanks. And then Just a follow-up question on credit, so I guess both for you and maybe Dave. Just looking your overall reserves to loan, 77 basis points if You exclude PPP 80 basis points.
How do you think about holding that line? How do you think about where the right level in terms of reserves to loans should be?
Yes, I kind of broke up the
How do you think about the appropriate Is there under CECL
today?
How long is it going to go?
Yes. So yes, you're right. Laurie, of course, we've been releasing reserves Really since the end of last year and each quarter this year. The way we're looking at that is CECL day 1 CECL was about 75 basis points. And if you look at just the allowance for loan losses, it was about 71 basis points.
Including in that, Well, our working assumption is that we think we'll be kind of stabilizing in that area. However, it could actually Go a little bit lower, but it all depends on continued economic forecast looking good, and the credit metrics continue 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 1 CECL allowance that included Almost $300,000,000 of third party consumer loans that are in runoff mode. Those are down to About $87,000,000 as we look at the end of this quarter. And 24,000,000 Of our original CECL allowance reserve was related to that portfolio.
It was pretty heavy reserve for. And if you look at it from the commercial and the other categories of loans, we were more in the 60 basis point range, Blended to about 75, but it was about 60 if you take out PPP or 3rd party consumer. That's come down nicely. That will continue to come down. So There's a possibility we could drop a little bit below that day 1 CECL, although we're not calling for that at this point.
Okay. Okay, great. And then just really quickly, do you have an update on deferrals? I know there were somewhat de minimis, but do you have a dollar number there?
It's de minimis. Deferrals are just not a factor at this point.
Okay. And then John, last question. Can you help us think How you're approaching M and A? Are you still actively looking? Have things changed from last quarter?
Just any thoughts? Your currency is strong.
Yes. Sure. Thanks, Laurie. Not a lot new to add here. It I always preface any comment with the same statements.
I'll do it again for the record. This is we view ourselves principally as an organic strategy It can be supplemented or complemented by M and A. We are interested. We do think it could be helpful. The goal here, which we try hard to achieve, you want to actually give you a good position.
So sure, we'd be interested. Nothing has Change there, anything that we would consider would have to make strategic and financial sense or we wouldn't consider it. We think about the continuum from larger to smaller. And we're sort of we have this running debate in the company about How small is too small? How large is too large?
But we feel like it's all about optionality, Laurie. And From our standpoint, these I don't like the term opportunistic wince whenever I hear the term opportunistic M and A because that sounds like something just Came along or somebody did a process or an auction and that's 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 we would have to check all of those boxes. So at that point, we're disciplined.
I see this as a 2022 opportunity perhaps. And I've been here 5 years now and there are conversations I've been engaged in for 5 years, in some cases. So there's always some degree of conversation going on out 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 had supreme confidence in our ability to execute it well, but we simply wouldn't do it because it does too much damage otherwise.
Great. Thank you.
Thanks, Laurie. And Chris, we're ready for our last caller, please.
Yes, sir. And lastly, we have William Wallace of Raymond James. Your line is open.
Hi, Wally.
Hey, John. Thanks for taking my question. I have a couple. But on the expense side, you highlighted some, I think you classified it as market adjustments at the branch level due to wage inflation pressures. And I'm just curious, were you losing people?
Were you worried about losing people, struggling to recruit, just kind of some indication of why now rather during the normal COLA
Yes, 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, we're talking there's still a pandemic out there. And we're talking about frontline client facing roles and that's 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 were having challenges filling open jobs and you can see headcount 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's another I think this is one of the better things that we've done in the sense that it wasn't Simply, let's raise wages and the branch. This is really a strategy and I compliment Sean O'Brien, Head of Consumer Banking, With the fundamental strategy, which is like let's change these roles around.
So instead of having traditional tellers, we now have universal bankers. These are higher value added roles. They're trained when the branch is not busy. They're able to come off teleline And assist customers with advisory services, sales activity, etcetera, and they can go back to the teller line when we need Help there. It's just a higher value added role.
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 you know, post COVID, we are running with smaller staffs. It has helped us with attrition.
As you mentioned, we've seen that Dropped considerably. We are able to start bringing talent in again. We were struggling with that early in the year. And then last, we are seeing a We are seeing significant growth in customers. We are seeing our highest months ever as far as Checking sales and 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 too because some of you recognize Project Sundown, Which is our focused effort on the Truist merger and then I guess we should also throw in that other big competitor that's experiencing challenges. We are seeing outperformance as branch closures are happening now. Maria, do you want to comment on
Sure.
I'm glad you mentioned Project Sundown because it really wasn't it started out as sort of the truest target, but we widened it because there's several opportunities Our market with this consolidation happening with other banks and other mergers, the program really is designed to Consumer and business market share from these competitors given the disruption that we see in the market. So we've had several Programs that are targeted specifically when there's trench closings or lots of disruptions that we're hearing on the ground. So we have These programs and last March, we knew there 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, this fall, 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 There's about 40 truest branches, which is the largest branch closing. So we're going to expect to institute the exact same program 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 good results from that team, which we appreciate.
Okay. I appreciate all that color. One last question. On the C and I line utilization, you said, I believe, 25% and you hope you've troughed. I wonder if you've gone back in time and just kind of looked at How do utilization rates have rebounded in times when they've troughed?
And maybe based on historical Dave, how quick could rates could 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 a utilization plunge as companies began to hoard cash and sales dropped off, etcetera. Wally, 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 40s is about what we would expect. It's hard to know what's normal from here, but I can tell you it's not 25%. I have never seen anything Yes, that load. David Ring, do you have any perspective on what to think?
Just to add on to what you said, if it just goes up 10 percentage points to 35. We'd add another close to $250,000,000 of outstandings. And so any sort of Investments in the businesses will really help us. The other thing is, companies are also not investing in owner occupied property. They're just doing The 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 And
that's just normal amortization mostly. Yes, those are term loans that pay back every month. And to your point, we've seen a reduction in that.
Right. So those operating companies borrowing on lines or real estate, just getting back to some sort of level of normal You will help us in
the Q and A. Yes. Here's where supply chain disruption comes in, in my opinion, which is talk to any business client and we talk They're going to tell you they're having trouble meeting their orders that they could sell more stuff if they had More inventory, more equipment, more people. And so this is my point I made in my opening 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 so what does that mean for us? What it means is it means increasing line utilization As they begin to build working capital and we finance classic timing differences and that sort of thing. So I think that Yes, there's good reason to be hopeful that we'll see some improvement in line utilization, we think. We'll continue to fight excess liquidity, That business has seemed pretty confident and we keep adding new clients as well, which is good.
And then another point, I hate to keep coming back Construction lending, but it's such an important part of the headwind that we faced. What was construction loans outstanding a year $1,200,000,000 which is pretty normal for us. And what is it right now, 877,000,000 So there's 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 there's going to be a lot of liquidity splashing around for a while.
These businesses are actually doing pretty well.
So to put words in your mouth, is it fair to say that you would classify your 7% -ish type loan growth target as conservative?
I wouldn't say that. I wouldn't say at this point, There's such it's so difficult to forecast anything, Wally. I would just say realistic, how's that we think we have a reasonable Line of sight to making that happen, anything could happen. Could it be better? It's possible.
We'll continue to update you quarter by quarter.
Okay. Very well. Thank you very much for the time.
Take care. Thanks, Wally.
And thanks, everyone, for joining us today. We appreciate your time. We ran a little bit over, But the webcast will be available on our website at investors.atlanticumubank.com. Have a good