Atlantic Union Bankshares Corporation (NYSE:AUB) Q3 2022 Earnings Conference Call October 20, 2022 9:00 AM ET

Company Participants

Bill Cimino - SVP, IR
John Asbury - President and CEO
Robert Gorman - EVP and CFO

Conference Call Participants

Catherine Mealor - KBW

Operator

Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised today’s conference is being recorded.

And I would now like to hand the conference over to your speaker today, Bill Cimino, Senior Vice President of Investor Relations. Sir please go ahead.

Bill Cimino

Thank you, Chris. Good morning, everyone. I have Atlantic Union Bankshares’ President and CEO, John Asbury; and Executive Vice President and CFO, Rob Gorman, with me today. We also have other members of our executive management with us for the question-and-answer period.

Please note that today’s earnings release and the accompanying slide presentation we are going through on this webcast are available to download on our Investor website, investors.atlanticunionbank.com.

During today’s call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliation to comparable GAAP measures, is included in the appendix to our slide presentation and in our earnings release for the third quarter of 2022.

We will make forward-looking statements on today’s call, 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 expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statements. Please refer to our earnings release for the third quarter of 2022, and our other SEC filings for further discussion of the company’s risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ from those expressed or implied in any forward looking statement. All comments made during today’s call are subject to that Safe Harbor statement. At the end of the call, we will take questions from the research analyst community.

I’ll now turn the call over to John Asbury.

John Asbury

Thank you, Bill, and thank you everyone for joining us today. Atlantic Union Bank delivered another solid quarter. We recorded upper single digit loan growth and more than funded it with double digit deposit growth on a loan 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 and that order of priority serves as well as we navigate the challenges and uncertainties of the ever changing operating environment. The Atlantic Union Bank is a story of transformation guided by a consistent but evolving strategy, and it remains committed to delivering on our strategic objectives. Before I dig into our results, I would like to comment on the macroeconomic environment and our primary operating footprint. Despite all of the uncertainty, Virginia traditionally has been a stable economic area and not one that is prone to big swings in either direction. The federal government has acted as both a significant catalyst and shock absorber to the Commonwealth economic engine.

With that history, we expect the effects of any recession to be somewhat tempered in Virginia. Virginia’s unemployment rate has recovered to pre-pandemic levels ticking down to 2.26%, 2.6% in August from 3.0 in May, and remains below the 3.5% current national average. I 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 and our footprint. Right now our markets remain strong. The lending pipelines remain strong, and we still don’t see any near term shift away from the positive trends of low unemployment and a benign 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’ve remained fairly assets 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. Atlanta Union Bank posted upper single digits 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-day 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 remain 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 since 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 of the markets we serve. We do recognize that the economic environment and our footprint could change as persistent inflation and the threat of recession loom, that 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 loan growth expectations we have provided for the past several quarters. Seeing our line utilization tick 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 as 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 that’s good performance for us given the seasonally slower summer months. About 36% of production came from new to bank clients and 64% from growth from 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 into the long term institutional markets and they’re calming the froth of 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 pay off activity is good for outstanding loan balances and makes 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 7(a) program in June closing a product gap with larger competitors and we executed our first SBA 7(a) loan sale earlier this month. 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 seven ACLs and learn syndication capabilities, we believe we can grow these non interest income generators from essentially zero to around 1.5 million per quarter by the end of 2023. These are the latest examples of high value added services that we 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-à-vis larger competitors by adding 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 and portfolio management is the best approach to expand a specialty lending business. We continue to believe that we have a long runway to grow both organically and through take away from our larger competitors that dominate market share in our home state of Virginia, supplemented by our operations in Maryland and North Carolina and our specialized living capabilities in government contracts finance, equipment finance, and our recent enhancements to capabilities like foreign exchange, loan syndications, SBA 7(a) and asset based lending.

Our asset quality continued to impress quarter-after-quarter. These are 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 the system, continued low unemployment, and still solid fundamentals in our markets and client base we have yet to see signs of a systemic inflection point. We did increase the allowance for credit losses during the quarter due to loan growth and downward revisions to the macro economic forecast. While we’ll go into more detail on this in this section, and some economic uncertainty and the threat of recession could negatively impact our markets. The current economic situation and our footprint remain 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 and 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 financial targets in the fourth quarter of 2022 and in 2023. Despite all of these noted macro economic uncertainties, we believe that we remain on attractive top line and bottom line growth footing.

Now let me be more specific about how we expect to drive positive upward big leverage and the current operating environment. With all the provisioning swings caused by the pandemic and the impact of PPP, 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-PPP adjusted revenue growth was approximately 13% and was 6% on a linked quarter basis from the second quarter.

When you consider the impact of expense management actions on our adjusted expense run rate, which has increased 6% year-over-year and 1.7%. 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, pre-tax 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 you’ll find that we’re delivering on what we said we would do.

We are often asked about our view on a 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 infill opportunities that would further densify our footprint and 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 set and the financial merits of the transaction. Anything we would be expected, anything we do if anything, would be expected to meet our previously communicated return thresholds including tangible book value dilution and back.

The end 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, going 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.

A culture as a differentiator. More frequently, I’m seeing teammates returning to the company after spending time and other organizations because they missed our culture. In the end, it’s all about the people. It’s always all about the people. Looking ahead, there are many reasons that cause me to be competent despite all the uncertainties. As I began 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 in diversifying our product lines and capabilities while building the core franchise, culture and our brand.

Further our assets 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 when 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. The prudent lending switch it’s always on.

While our operating environment continues to change what is not changing is the Atlantic Union Bank shares remains a uniquely valuable franchise. It’s dense, and it’s compact in great markets with a story unlike any region and we’re well on our way to becoming the Premier Bank in the low and mid Atlantic region over time. We are scalable and growing our capabilities operating in the right markets and with the right team to deliver high performance even the most trying of times.

I’ll now turn the call over the Chief Financial Officer, Rob Gorman to cover the financial results for the quarter. Rob?

Robert Gorman

Thank you, John. 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 Atlanta Union’s results on a non-GAAP adjusted operating basis, which excludes the $9.1 million pre-tax gain or $8 million after tax gain from the sale of the RIA business Cary Street 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 $0.74 which is that approximately $4.2 million or $0.05 per common share from the second quarters reported net income available to common shareholders. Adjusted operating earnings available to common shareholders in the third quarter were 55.1 million and adjusted operating earnings per share was $0.74 up approximately $3.8 million or $0.05 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 $0.98 per common share, which is an increase of 11% from the second quarter. Adjusted operating return on tangible common equity was 17.2% in third quarter, which was up from the adjusted operating return on tangible common equity ratio of 60.5% in the second quarter.

Adjusted operating return on assets was 1.15% in the third quarter which is up from 1.1% adjusted operating return on assets in the prior quarter. And the non-GAAP adjusted operating efficiency ratio was 54.1% in third quarter which was an improvement of 1.8% from the second quarter. During the third quarter, the company also generated significant positive pre-PPP adjusted operating leverage as pre-PPPE adjusted revenue of approximately 6% was offset by approximately 1.7% in adjusted expense growth on linked quarter basis.

Turning to credit loss reserves as of the end of the third quarter, the total allowance for credit losses was $190 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 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 above. The provision for credit losses of $6.4 million in the 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 remain muted at $587,000, 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 $12.2 million or 8.6% from the second quarter, driven by higher interest income through average loan growth for the prior quarter, increases in loan yields due to higher market interest rates, and an additional day in the third quarter partially offset by lower PPP and purchase accounting accretion interest income and increases in deposit and borrowing costs.

The third quarters tax equivalent net interest margin was 3.43%, which was a net increase of 90 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 quarters earning asset yields primarily due to the 53 basis points increase in the loan portfolio yield. Loan portfolio federal yield increase to 4.2% in the third quarter, which was up from 3.67% reporting 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 PPP and purchase account increase in income on a linked quarter basis.

Loan yields excluding PPP and purchase accounting mode increasing 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 company’s assets sensitivity. The 23 basis point increase in the third quarter is cost of funds is due primarily to the 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 increased borrowing rates due to rising market interest rates.

Today total deposit bearing is 12% and non-interest bearing deposit basis is 18% through September. Non-interest income increased $12.7 million to $25.6 million which was primarily due to the $9.1 million pre-tax from the sale of the RIA business during the second quarter. Factoring out that gain adjusted operating non-interest 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 RIA business in the second quarter in lower wealth asset under management due to market conditions.

Other decreases from the prior quarter including 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 an $810,000 decrease in mortgage bank In the income which was due to a decline in mortgage origination volumes, and lower gain on sales margins, and a $550,000 reduction in loan related interest rate, swap fee income driven by a decline of average transactions swap fees. These non interesting income categories decreased as we partially offset by increases in other operating income of $890,000 primarily related to syndication, foreign exchange and other capital market transaction fees and other operating income and a increase of $729,000 related to [indiscernible] due to mortality benefits received and an increase of 193,000 in interchange fees. Non-interest expense increased $1.1 million to 99.9 million for the third quarter from that 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 costs resulting from changes in the mix of loan originations from the prior quarter. In addition, other expenses increase from the prior quarter by $1.1 million and that was primarily driven by [OREA] gains of $630,000 realized in the prior quarter. The increase of the non interest expenses from the prior quarter were partially offset by $1.2 million decline in professional services expense, primarily related to lower strategic project cost.

Effective tax rates 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 RIA business in the prior quarter. In 2022, we expect full year effective tax rates remain in the 17% to 18% range.

Now turning to the balance sheet. Total assets for $20 million at September 30, which was an increase of 5.8% annualized from June 30 levels. The increase was primarily due to loan growth in the quarter, appearing and loans held from investment with 13.9 billion inclusive of $12.1 million in PPP loans and defer fees, which was an increase of $263 million, or 7.7% annualized for the prior quarter.

Excluding PPP loans, loan balances in third quarter increased 7.9% on an annualized basis, driven by increases in commercial loan balances of 213 million or 7.3% linked quarter annualized and consumer loan balance growth of 60.3 million or 11.1% annualized. Excluding the effects of the PPP loans, loan balances in the third quarter increased $1.2 billion or 9.7% for the same period in the prior year. At the end of quarter total deposit stood at $16.5 billion, that’s an increase of $418 million, or approximately 10% annualized for the prior quarter. The growth in deposits was primarily driven by increase the interest checking balances related to commercial client operating accounts. September 30 transaction related deposit accounts comprise 58% of total deposit balances which is in line with second quarter levels.

For shareholders stewardship in capital management perspective remained committed to managing our capital resources prudently as a 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 a company’s risk profile, capital stress test projections and strategic plan growth objectives.

At the end of the third quarter Atlantic Union Bank shares and Atlantic Union Banks regulatory capital ratios were well above well capitalized levels. Companies tangible common equity to tangible assets capital ratio declined from the order primarily due to unrealized losses on the available for sale securities portfolio reported and 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 market losses from rising interest rates in the available for sale securities portfolio will be recouped over time and as such, we also track the tangible common equity ratio and tangible book value excluding this non-cash GAAP accounting acquired.

During the third quarter, common stock dividend $0.30 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 environment.

As noted at our investor base in May, we increased our top tier financial targets as following. Return on tangible common equity within a range of 60% to 80%. Return on assets in the range of 1.3% to 1.5%. And in efficiency ratio of 51% or lower. Regarding the assistant to ratio target again, I would like to point out that 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 instead pay a franchise tax that flows through non-interest expenses in that income taxes. The franchise tax quarterly non-interest expense run rate were approximately $4.5 million as approximately 2.5% of the company’s efficiency ratio.

So setting the efficiency ratio target of 51% or low into tangible 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 and 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 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 4.5% by the end of 2022 and maintain it at 4.5% throughout 2023. As a result of loan growth and expanding net interest margin 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 levels

We also expect that the company will generate meaningful positive adjusted operating leverage in the fourth quarter ending in 2023 due to the mid single digit adjusted operating revenue growth of flat expenses in the fourth quarter on linked quarter basis and low teen revenue growth outpacing mid single digit expense growth in 2023. On the credit front, while we don’t see any systemic credit quality issues lurking at this moment through the expectations were shallow to mild recession to begin sometime in 2023. For modeling purposes, we are assuming an uptick in a net charge off ratio to between 10 and 15 basis points in 2023, from less than five basis points in 2022.

I will reiterate, however, that we do not see evidence of a turn in the benign credit environment at this point. So this may end up being a conservative assumption on our part. The allowance for credit losses to loan balances is projected to remain within a range of 85 to 90 basis points in 2023.

In summary, Atlantic Union 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 Cimino for open it up for questions from our analyst community.

Bill Cimino

Thanks, Rob. Now, I paused for a few questions, Chris, we are ready for our first caller, please.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And first question will come from Catherine Mealor of KBW. Your line is open.

Catherine Mealor

Good morning. I think I’m still you’re one of your only analysts. If you see someone else come in the queue let me know. And I’ll step out. But I’m just going to go with a bunch of questions for now. But I’d like to start 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 data 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 in beta through the cycle.

John Asbury

Yes I think, Catherine good morning. In terms of the product betas, as mentioned through third quarter for this cycle to date, a rising rate cycle we’re about 12% or 80% deposit beginners, and on an interest bearing deposit basis we’re about 80%. As we report here, we continue to see the Fed continue to move Fed funds rate and market interest rates. Again, we’re looking at a 4.5% Fed funds rate by the end of this year through the cycle through this current rising rate cycle, we expect to be about 25% to 30%, beta all in the cycle until deposits in about 35% to 40% or so interest bearing deposits. Again, as we go through the cycle as we get through really next year, we think that’s where we’re going. So again, you should start to see the base accelerate as we see more competition, we haven’t really seen too much at this point in time. But we are, see the deposit rates have increased, which will come from a competitive position but also from a positive retention.

Catherine Mealor

And just thinking about the balance which is deposit was really strong this quarter. would you -- also ups were there any special this quarter that really pushed that in or so would you expect kind of that pace of deposit growth to slow and maybe another kind of follow them as is where do you think you’ll see most of that growth? Do you really think we’ll continue to see a decrease end up in the balances? Are you really trying to push it in other categories?

John Asbury

Yes. So our projection is referring to in the 4% to 5% deposit growth kind of normalizing as we go forward here. But outside this quarter and 10 plus percent annualized. We did get some inflows from, as I mentioned, commercial client operating accounts, we expect that there will be some runoff of some of those will come down a bit. But overall, we’re looking at 3% to 5% deposit growth, which should help fund that loan growth that we are projecting. Of course, we have other sources of liquidity to make sure that we make up for any differences in the core funding of loan book growth. Some of that’s going to be we’ve got a pretty large investment securities portfolios we’ll let that run down. We’ll take some of the cash flows that come off of that which is about $16 million a quarter. We want to use that to shore up from a liquidity funding point of view. And then we also have some, that’s elevated cash at the end of quarter plus some of that as well. So that’s how we think about capital. Well, we don’t think we’ll be seeing double digit deposit growth going forward.

Robert Gorman

Yes, but I would add that we actually are continuing deposit growth momentum early in the quarter subject to change. And what’s interesting to me is that despite expectations, the deposit base is very strong and stable. We look back quartile at the consumer deposit base, for example, based on balances, it’s still higher than before the pandemic. It’s stable. It’s not declined. We continue to add net new consumer households in the retail bank, which is impressive given that we closed the quarter of the retail branch network since the pandemic began. And the deposit base in Atlantic Union Bank is the crown jewel of the franchise. I’ve said that since my arrival, and we’ve only expanded our capabilities is that we built this out built out our commercial banking efforts, etc. So Catherine, we know deposit growth is going to be a struggle, but it is a 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.

John Asbury

And also on the consumer side, we did see a growth in -- was actually turned around the runoff, and see run off some of that manageable. But we’ve been running a few specials and received money coming through over the last quarter, two quarters. For instance, we’ve got a 13 month special, I think it pays 175 and 271 special, which is two in a quarter. So we’ll continue to do those sorts of things and make sure that we shore up the deposit base. Obviously, funding through the core relationship, client base is better than going to the whole.

Robert Gorman

We’re still 58% transaction accounts. Very impressive.

Catherine Mealor

Okay. For sure. Okay, that’s a lot of great detail. And then going to the other side of the balance sheet on the loan side, the loan data, I thought was actually better to have I think 40% was the data I calculated. How are you thinking about loans, you can start with where you’re seeing new pricing come in? And is that 40%? Beta we saw this quarter is that translatable to the next few rate hikes that we expect to see?

John Asbury

Yes I think you’re right Catherine. That’s what our calculation do that over 40% on the pricing side. We do expect that that will continue at that level almost half our book of loans on the books is tied to short term rates whether that’s fine rate, or one month LIBOR. And now, increasingly, so as the short term rates continue to increase, and the Fed does its job here, increasing rates, you should see those betas remain at that point. Now, at some point, there may be some competitive pressures that would drive that down a bit. But we’re not seeing that at this point.

There was just something at the pricing for a wholesale book or commercial book, the new regulations basically, from , Q2 to Q3 we basically see a variable and prime match the market rate changes in one month LIBOR and Fed funds. And also see pretty much again, this is the half the book variable and prime kind of looking almost north of 80%. And data is related to the market. So it is repricing very quickly on that front?

Catherine Mealor

And then I was going to expense. The expense if we came into the quarter thinking that the annual expenses are going to be 390 to 395. And we came in a little bit higher this quarter, and then we’re guiding for flat neck. So I’m kind of rounding out at 398 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 anything in the expense base for next year if revenue comes softer or longer if it’s after that you can be nimble and pull that back the revenue isn’t as high as you project?

Robert Gorman

Yes, that’s my job. I mean, we’re going through our detailed planning for 2023. We expect that what you guys just provided is where we will end up. But to the extent that you know, the revenue, the double digit revenue growth doesn’t materialize, we’ll dial 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 investments is a good example of that, we’ll continue to do that going forward.

And at this point in time, we’re really focused on generating positive operating leverage significant positive operating leverage, as the sensitivity benefits kick in for us. So we’ve got a number of projects underway in investment projects that will increase some expenses to that to the level and talk about budgeting there. At some point time, we’ll get benefits out of that and become more efficient and productive to do automation tools that we’re implementing. So that’s kind of the way we’re thinking about it at the moment. And wage inflation is real. That’s really what’s kind of ticking this up a little higher than we had originally projected, certainly coming into the year. And even coming out over the first half of the year.

John Asbury

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. So that’s how we think about.

Catherine Mealor

Okay, very helpful and then the last one just on credit. I know we’re not seeing any signs of weakness yet. And so maybe my macro question to you is this Moody’s model is too sensitive to your assumptions around unemployment. And you said this, John, and we seem that Virginia’s unemployment rate has always been so much lower than the nation’s and so is that as we think about if unemployment starts to look worse, in just macro models, are you a little bit more protected, just because you kind of look more regionally at what your unemployment rate 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?

John Asbury

Yes Catherine, so yes, so as you mentioned unemployment we’re 2.6% here in Virginia is August September. So unemployment is a real sensitive variable on setting that allows the credit losses, as you know, and we do look at Moody’s and the baseline basis and then overlay more when we do a weighted scenario, including Moody’s baseline, so Moody’s baseline in terms of the Virginia unemployment, forecast goes into that equation. So if that goes up, you may see one, go up. I will say, though, that [Technical Difficulty] mention on my slide, mentioned in my comments 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 run that through a way to scenario, unemployment rate, picks up averages about 5.5%. So we’ve built in a very conservative at this point, we think conservative estimates there. So to make to get it to go higher than 5.5% we taken some real deep recessionary factors to be applied. So I think we’re pretty good in terms of that assumption, but we could we’ll continue to review it each quarter.

Catherine Mealor

Yes, that’s super helpful.

John Asbury

But we do we do have some conservative assumptions regarding -- within our weighted scenario for the allowance currently.

Catherine Mealor

Great. Thank you for all the commentary. That’s all I got.

John Asbury

Thank you Catherine and 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 analysts covering the bank. Thanks, everyone for joining us this quarter and talking with you in January. Have a good day.

Operator

This concludes today’s conference call. Thank you all for participating. You may now disconnect and have a pleasant day.