Atlantic Union Bankshares Corp (AUB) 2022 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares Third Quarter 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during that session, you will need to press star 1 on your phone. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Bill Cimino, Senior Vice President of Investor Relations. Sir, please go ahead.

Thank you, Chris, and 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 a number of other members of our executive management team 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 reconciliations 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 subject to statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement. 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. And now I'll turn the call over to John Asbury.

Thank you, Bill. Thank you, everyone, for joining us today. Atlantic Union Bankshares delivered another solid quarter. We recorded upper single-digit loan growth and more than funded it with double-digit deposit growth on a linked quarter annualized basis. Net interest margin expanded considerably. Asset quality remained strong, and we expanded our asset-based lending effort. We are on track to hit our top-tier financial targets in the fourth quarter of this year. I have consistently stated my belief that our operating philosophy of soundness, profitability and growth in that order of priority, serves us well as we navigate the challenges and uncertainties of the ever-changing operating environment. 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 2.6% -- 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 at 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 in 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 remain fairly asset sensitive, multiple short-term rate hikes should be a positive for our operating results and our net interest margin should continue to expand driving revenue growth. Atlantic Ingo Bank posted upper single-digit annualized loan growth of approximately 8% point-to-point for the quarter and finished the third quarter with loan growth of approximately 10% on a year-to-date basis, excluding PPP. This was our fourth consecutive quarter of high single-digit annualized loan growth or better, excluding PPP. Our loan pipeline entering the fourth quarter remains 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 in the markets we serve. We do recognize that the economic environment in our footprint could change is persistent inflation in the threat of recession loan. But as we start Q4, we do have line of sight to high single-digit loan growth for the year. This is consistent with the one growth expectations we have provided for the past several quarters. C&I line utilization ticked down slightly at the end of the quarter to 32%, which is still well below our pre-pandemic levels and better than at this point last year, which was approximately 25%. We do believe we have upside here 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 at our existing clients. CRE payoffs continue to slow and are well off the peaks we saw in the second through fourth quarters of last year. As I said last quarter, rising term rates have suppressed refinance activity into the long-term institutional markets and they're coming to front 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 of payoff activity is good for our outstanding loan balances and mix continuing with bank financing and attractive option on stabilized properties. Meanwhile, our installed base of construction commitments is providing a tailwind for loan growth as construction lending balances fund up and climb back toward more normalized levels exactly as we predicted would happen. We recently retooled our SBA 7(a) program in June, closing a product gap with larger competitors, and we executed our first 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 7(a) sales and loan syndication capabilities, we believe we can grow these noninterest income generators from essentially 0 to around $1.5 million per quarter by the end of 2023. These are the latest examples of high value-added services that we've developed to further strengthen our competitive positioning as the alternative to the large banks in our markets and to differentiate Atlantic Union Bank from our smaller competitors. This is consistent with the strategy we have communicated for years, and we continue to execute on what we said we would do. We also expanded our asset-based lending program to close another key C&I product gap vis a 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 the specialty lending business. We continue to believe that we have a long runway to grow both organically and through takeaway from our larger competitors that dominate market share in our home state of Virginia, supplemented by our operations in Maryland and North Carolina and our specialized lending capabilities in government contract finance, equipment finance and our recent enhancements to capabilities like foreign exchange, loan syndications, SBA 78 and assay based lending. Our asset quality continued to impress and 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 macroeconomic forecast. Rob will go into more detail on this in his section. In sum, while economic uncertainty and the threat of recession could negatively impact our markets, the current economic situation and our footprint remains solid. And as noted, we expect the impact of any recession to be somewhat tempered in Virginia. The combined effect of our past expense management actions, upper single-digit loan growth, asset sensitivity in a rising rate environment, a 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 macroeconomic uncertainties, we believe that we remain on an attractive top line and bottom line growth footing. Now let me be more specific about how we expect to drive positive operating leverage in 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 our 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, and pretax pre-provision adjusted operating earnings increased 25% year-over-year and 12% from the prior quarter. Rob will take you through the details of our financial performance in this section, but you'll find that we're delivering on what we said we would do. We are often asked about our view on whole bank M&A opportunity, and I'll share our current thinking here. While we do not believe we need to make bank acquisitions to meet our corporate and financial objectives, we will consider them under the right circumstances. The right circumstances in our current view would generally be smaller, lower-risk infill opportunities that would further densify our footprint, add scale, market share and improve efficiency. As we have consistently demonstrated during my time at the company, we will remain disciplined as we consider M&A with an eye towards strategic fit and the financial merit 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 earned back. The end of Q3 marked my 6-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. Our culture is a differentiator. More frequently, I'm seeing teammates returning to the company after spending time in other organizations because they've 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 confident despite all of the uncertainties. As I began my remarks, I noted how I believe the fundamentals favor us is we have a rather unique macroeconomic environment in our footprint. This should allow some reasonable growth opportunities even when national headlines tell a different story. We have been intentional on diversifying our product lines and capabilities while building the core franchise, our culture and our brand. Further, our asset sensitivity is delivering strong net interest income growth through NIM expansion with more expected to come. All the while, we have consistently demonstrated we will make changes, and we will make tough decisions 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 Bankshares remains a uniquely valuable franchise. It's dense and it's compact in great markets with a story unlike any upon the region, and we're well on our way to becoming the premier bank in the lower Mid-Atlantic region over time. We are scalable in growing our capabilities, operating in the right markets and with the right team to deliver high performance even in the most trying of times. I'll now turn the call over to Chief Financial Officer, Rob Gorman, to cover the financial results for the quarter. Rob?

Well, thank you, John, and good morning, everyone. Thanks for joining us today. Now let's turn to the company's financial results for the third quarter. Please note that for the most part, my commentary will focus on Atlantic Union's results on a non-GAAP adjusted operating basis, which excludes the $9.1 million pretax gain or $8 million after-tax gain from the sale of the RIA business to Carry 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 down approximately $4.2 million or $0.05 per common share from the second quarter's reported net income available to common shareholders. Adjusted operating earnings available to common shareholders in the third quarter were $55.1 million and adjusted operating earnings per common share were $0.74, up approximately $3.8 million or $0.05 per common share or an increase of 7% from the second quarter. Pretax pre-provision adjusted earnings available to common shareholders 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 the third quarter, which was up from the adjusted operating return on canal 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 the 1.1% adjusted operating return on assets in the prior quarter. And the non-GAAP adjusted operating efficiency ratio was 54.1% in the third quarter, which is an improvement of 1.8% from the second quarter. During the third quarter, the company also generated significant positive pre QP adjusted operating leverage as pre-PD-adjusted revenue of approximately 6% was offset by approximately 1.7% in adjusted expense growth on a linked basis. Turning to credit loss reserves. As of the end of the third quarter, the total allowance for credit losses was $119 million, which was an increase of approximately $6 million from the second quarter, primarily due to net loan growth during the quarter and increased uncertainty in the long-term macroeconomic outlook due to 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 3 basis points from the prior quarter for the reasons coming above. The provision for credit losses of $6.4 million in the third quarter increased from the prior quarter $3.6 million and a negative provision for credit losses of $18.8 million recorded in the third quarter of last year. Net charge-offs remained muted at $587,000 or 2 basis points annualized in the third quarter. Now turning to pretax 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 due to average loan growth from 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 quarter tax equivalent net interest margin was 3.43%, which was a net increase of 19 basis points from the previous quarter. due to an increase of 42 basis points in the yield on earning assets, partially offset by a 23 basis point increase in the cost of funds. The increase in the third quarter's earning asset yields were primarily due to the 53 basis points increase in the loan portfolio yield. Loan portfolio yield increased to 4.2% in the third quarter, which is up from 3.67% reported in the second quarter, again, due primarily to 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 accounting increase in income on a linked-quarter basis. Loan yields, excluding PPP and purchase accounting loan increasing income, increased by 59 basis points during the quarter, which had a 48 basis point positive impact on third quarter margin due to the impact of short-term interest rates given the company's asset sensitivity. The 23 basis point increase in the third quarter's 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. To date, our total deposit beta is 12% and noninterest-bearing deposit basis, it's 18% through September. Noninterest income decreased $12.7 million to $25.6 million, which is primarily due to the $9.1 million pretax gain from the sale of the RIA business during the second quarter. Factoring out that gain, adjusted operating noninterest income declined approximately $3.6 million in the third quarter from the prior quarter, driven by lower fiduciary and asset management fees of $2.8 million, primarily driven by the sale of the IRR business in the second quarter and lower wealth asset under management due to market conditions. Other decreases from the prior quarter included a $1.3 million decline in service charges on deposit accounts, which is reflective of the changes to the company's global draft policies implemented in the third quarter. Also a $810,000 decrease in mortgage banking 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 swapped the income driven by a decline in average transaction swap fees. These noninterest income categories decreased as were partially offset by increases in other operating income of $819,000 primarily related to syndication, foreign exchange and other capital market transaction fees, excluding other operating income. -- an increase of $729,000 related to BOLI due to mortality benefits received and an increase of $193,000 in interchange fees. Noninterest expense increased $1.1 million to $99.9 million for the third quarter from $98.8 million in the prior quarter, primarily driven by a $1.3 million increase in salaries and benefits expense due primarily to elevated new higher recruiting expenses and lower deferred loan origination costs resulting from changes in the mix of loan originations from the prior quarter. In addition, other expenses increased from the prior quarter by $1.1 million, and that was primarily driven by OREO gains of $630,000 realized in the prior quarter. The increases the noninterest expenses from the prior quarter were partially offset by a $1.2 million decline in professional services expense, primarily related to lower strategic project costs. The effective tax rate for the third quarter increased to 17% from 16.7% in the second quarter, reflecting the impact of discrete items related to the sale of the IRA business in the prior quarter. In 2022, we expect a full year effective tax rate to remain in the 17% to 18% range. Now turning to the balance sheet. All assets were $20 billion at September 30, which was an increase of 5.8% from annualized from June 30 levels. The increase was primarily due to loan growth in the quarter. At period end, loans held for investment were $13.9 billion, inclusive of $12.1 million of PPP loans on our deferred fees, which was an increase of $263 million or 7.7% annualized from the prior quarter. Excluding PPP loans, loan balances in the 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% from the same period in the prior year. At the end of September, total deposits stood at $16.5 billion. That's an increase of $418 million or approximately 10% annualized from the prior quarter. The growth in deposits was primarily driven by increased interest checking balances related to commercial client operating accounts. At September 30, transaction-related deposit accounts comprised 58% of total deposit balances, which is in line with second quarter levels. From a shareholder stewardship and capital management perspective, we remain committed to managing our capital resources prudently as the deployment of capital for the enhancement of long-term shareholder value remains one of our highest priorities. Regarding the company's capital management strategy, capital relation targets are set to seek to maintain the company's designation as a well-capitalized financial institution and to ensure that capital levels are commensurate with the company's risk profile, capital stress test projections and strategic plan growth objectives. At the end of the third quarter, Randon Union Bankshares and Atlantic Union Bank's regulatory capital ratios were well above well-capitalized levels. The company can well common equity to tangible assets capital ratio declined from the quarter primarily due to unrealized losses on the available for sale securities portfolio reported in other comprehensive income due to market interest rate increases in the third quarter. We believe that the GAAP accounting versus regulatory accounting, capital impacts of unrealized mark-to-market get losses from rising interest rates in the available-for-sale securities portfolio will be recouped over time. And as such, we also track a tangible common equity ratio and tangible book value, excluding this noncash GAAP accounting in the quarter. During the third quarter, the company paid a common stock dividend of $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 Day in May, we increased our top-tier financial targets for the following means: return on changeable common equity within a range of 16% to 18%, return on assets in the range of 1.3% to 1.5% and an efficiency ratio of 51% more lower. Regarding the efficiency ratio target, I'd again like to point out that it is difficult to compare our efficiency ratio to peer banks that don't have significant operations in Virginia. Since Virginia banks do not pay state income taxes, but instead pay a franchise tax that flows through noninterest expenses and not income taxes. The franchise tax quarterly noninterest expense run rate or approximately $4.5 million adds approximately 2.5% of the company's efficiency ratio -- so setting the efficiency risk we target at 51% or low is a 10 to a 48% efficiency ratio target for pure 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 on a full year basis in 2023. The net interest margin is expected to continue to expand in the fourth quarter and in 2023 as a result of the company's asset-sensitive position and the assumption that the Federal Reserve Bank will increase the Fed funds rate to 4.5% by the end of 2022 and maintain it at 4.5% throughout 2023. As a result of loan growth and an expanding net interest margin, net interest income is expected to grow by mid-single digits in the fourth quarter from third quarter levels and by double digits in 2023 from full year 2022 levels. We also expect that the company will generate meaningful positive adjusted operating leverage in the fourth quarter and in 2023 due to mid-single-digit adjusted operating revenue growth outpacing flat expenses in the fourth quarter on a linked quarter basis and 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 initiatives looking at this moment due to expectations for a shallow to mild recession to begin sometime in 2023. For modeling purposes, we are assuming an uptick in the net charge-off ratio to between 10 and 15 basis points in 2023 from less than 5 basis points in 2022. I would reiterate, however, that we do not see evidence of a churn in the benign credit environment at this point. So this may end up being a conservative assumption on Orca. 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, Alaric Union again delivered solid financial results in the third quarter of 2022. And as noted, we believe we are well positioned to generate sustainable, profitable growth and to build long-term value for our shareholders. And with that, let me turn it back to Bill Cimino to open it up for questions from our analyst community.

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

Thanks, Rob. Now I'll have him for a few questions. Chris we are ready for our first caller, please

As a reminder, to ask a question, you need to press *11 on your phone -- and our first question will come from Catherine Mealor of KBW. Your line is open.

.Good morning Catherine

Good morning, I think I'm still your -- 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 on how you're thinking about deposit beta this quarter, I thought it 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 ebase through the cycle.

Yes. I think that Kathrin -- in terms of the deposit beta, as I mentioned through third quarter from this cycle to date, a rising rate fit cycle. We're about 12%, 2% or deposit betas and on an interest-bearing deposit basis, we're about 18%. As we look forward here, we continue to see the fit continue to move it funds rates 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 that this current rising rate cycle, we expect to be at about 25% to 30% data all in through the cycle on total deposits and about 35% to 40% or so on 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 in the market. We haven't really seen too much at this point in time, but we are as you see the deposit rates have increased quarter-to-quarter continue to be monitoring that situation from a competitive position, but also from positive retention..

And just thinking of the balance, the 10% deposit is really strong this quarter... the money markets were also up. Were there any special this quarter that really pushed that -- and so would you expect kind of that pace of deposit growth to slow? And another kind of follow-up on that is where do you think you'll see most of that growth? Do you really think we'll continue to see a big ground up in the CD balances are you really trying to push it in other categories?

Yes. So our projection is we're probably in the 4% to 5% deposit growth kind of normalizing as we go forward here. A bit upsized 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 that will come down a bit. But overall, we look at 3% to 5% deposit growth, which should help fund that the loan growth that we're 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 security portfolio. As you know, we're going to let that run down. We'll take some of the cash flows that come off of that, which is about $60m quarter, and we use that to sort from a liquidity funding point of view. And then we also have some -- that's an elevated cash at the end of the quarter, we were around $300-plus million some that as well. So that's how we're thinking about the capital. We don't think we'll be seeing double-digit deposit growth going forward.

Yes. But I would add that we actually are continuing deposit growth momentum early in the quarter, subject to change. And what's interesting to me is that despite expectations, the deposit base is very strong and stable. We look by quartile at the consumer deposit base, for example, based on balances, it's still higher than before the pandemic. It's stable. It's not declining. 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 of Atlantic Union Bank is the crown jewel of the franchise. I've said that since my arrival, and we've only expanded our capabilities is that we built this out, built out our commercial banking efforts, et cetera. 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.

I also add on the consumer side, we did see growth in CDs, which actually turned around runoff. We have been seeing run off some of that managed runoff the right cost CDs. But we've been running a few specials, and we're seeing money coming through over the last quarter, 2 quarters. For instance, we've got a 13-month seating special. I think it pays 175 and a 27-month special, which is at 2.25%. So we'll continue to do those sorts of things to make sure that we shore up to the pilot base, obviously, funding through the core relationship with our client base is better than going to the whole sector.

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

Okay. Yes, 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 beta, I thought was actually better up, I think 40% is the data I calculated. How are you thinking about loan -- maybe kind of 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?

Yes. I think you're right, Catherine, that's what our ectasis did over 40% on the loan pricing side. We do expect that that will continue at that level as you recall, almost half our book of loans on the books is tied to short-term rates, whether that's prime rate or 1-month LIBOR and now increasingly so going with silver. So as the short-term rates continue to increase in the Fed doesn't 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. So just looking at the pricing for our wholesale book, our commercial book and new originations is basically from Q2 to Q3, we basically see a variable and prime match the market rate changes in 1-month LIBOR and Fed funds and also see pretty much -- again, this is half the book on variable and prime kind of looking almost north of 80% of data related to the market. So it reprices very quickly on that book.

And then was maybe is expensive. The expense, I think we came into the quarter thinking that the annual expenses are going to be $390 million to $395 million, and we came in a little bit higher this quarter and then we're guiding for flat mix. So I'm kind of rounding out at 3.98% for the year with that. 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 become softer or loan growth is off or that you can be nimble and pull that back if the revenue isn't as high as you project?

Yes. We're going through our detailed planning for 2023. But we expect that what the guidance just provided is where we'll end up. But to the extent that the revenue double-digit revenue growth doesn't materialize, we'll bottle back. We've got some opportunities to do that in terms of taking some expense growth off the table. We don't think we'll need to do that at this point. We're continuing to invest in the franchise. ABL investment is 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 asset sensitivity benefits kick in for us. So we've got a number of projects underway in investment projects that increase expenses to that -- to the level I'm talking about is embedded in there. At some point in time, we'll get benefits out of that and become more efficient and productive to do automation tools that we're implementing. So that's kind of the way we're thinking about it at the moment. And wage inflation is real, and that's really what's kind of kicking us up a little higher than we had originally projected certainly coming into the year and even coming out of the first half of the year

We continuously evaluate the retail branch network. We may see opportunity there and incentive compensation is, by definition, variable. So we can make that anything it needs to be. So that's how we think about it.

Okay. Very helpful. And then my last one is 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 pushed into this to your assumptions around unemployment. And you said this, John, and we've seen that Virginia's unemployment rate has always been so much lower than the nation. And so with 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 Virgin specifically, and that might put you in a better position for less kind of Moody's macro upward risk versus some of your peers?

Yes. Catherine, I'll take that first site that one. So yes, so as you mentioned, unemployment were 2.6% here inVirginia...so unemployment is a real sensitive variable on setting the allowance of credit losses as you know. And we do look at Moody's on a baseline basis and then overlay more -- while 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 the rate scenario go up. I will say though that I think I mentioned on my slide, I didn't mention in my comment specifically, but -- our Q3 allowance for credit losses picked up 3 basis points. A lot of that had to do with increasing recession probabilities over the next 2 years expected over the next 2 years. And when we run that through a rate scenario, our wind scenario, Virginia on a point of 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% would take some work, we think, in some real deep recessionary doctors to be applied. So I think we're pretty good in terms of that assumption, but we'll continue to review it each quarter.

Yes 5.5% that's super helpful.

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

Great. -- thank you for all the commentary. Thats all I've got

Thanks, Katherine. -- 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 sell-side analysts covering the bank. Thanks, everyone, for joining us this quarter, and we look at talking with you in January. Have a good day.