Atlantic Union Bankshares Corp
NYSE:AUB
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Good morning. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter earnings conference call. [Operator Instructions]. Mr. Bill Cimino, Vice President of Investors Relations, you may begin your conference.
Thank you, Jamie and good morning, everyone. Before I get started, just a quick housekeeping item. We actually have a plant fire drill for our building today that should start around a little bit before 10:00. So we may have to end the call a little bit early. If you hear any alarms in the background, don't worry, it's all planned.
With me today I have Union Bankshares' President and CEO, John Asbury; and Executive Vice President and CFO, Rob Gorman. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release is available to download on our investor website, investors.bankatunion.com.
During the call, we'll 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 third quarter of 2018.
Before I turn the call over to John, I would like to remind everyone that on today's call, we will like 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. We undertake no obligations to publicly revise any forward-looking statement. Please refer to our earnings release for the third quarter of 2018, 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. All comments made on during today's call are subject to that safe harbor statement.
At the end of the call, we will take questions from the research analyst community.
And now, I'll turn the call over to John Asbury.
Thank you, Bill, and thanks to all for joining us today. Union followed up on our eventful first half with further improvements to our profitability metrics, as we began to realize the fuller impact of the Xenith merger cost saves looking past the noise in the quarter. The underlying strength and earnings potential of this uniquely valuable franchise are becoming apparent. Notably, we also continue to trend toward our targeted top-tier financial metrics that we expect to achieve in the fourth quarter. We were encouraged to see an improving loan growth trend over the quarter, having grown late quarter ending loan balances by mid-single digits annualized. Loan growth momentum is continuing month-to-date in October, pipelines are robust, and we're now in what is traditionally our strongest quarter of the year. We expect point-to-point high single-digit loan balance growth for the fourth quarter positioning us well for 2019. During the quarter, we increased loan growth in each month of the quarter, and of our major categories, commercial and industrial loans have the largest linked-quarter percentage gain at 22% annualized.
C&I line utilization during the quarter was stable. We continue to build out the C&I teams across the franchise with 15 new C&I hires having started during the quarter, spread among a number of markets. This brings our year-to-date total of C&I hires to 25. Delivered improvements to our financial metrics when excluding merger-related costs and the impact of strategic actions we have taken. As indicated, we expect to achieve our top-tier financial targets on an operating basis in the fourth quarter of 2018. Hired Maria Tedesco, which is our new president, with all lines of business reporting to her as well as enterprise-wide supporting roles of marketing, digital strategy and customer experience. Completed the Outfitter Advisers, registered investment adviser acquisition in Northern Virginia. And closed 7 branches, or roughly 5% of our network, as part of our previously communicated branch rationalization assessment. If you look at what we've been able to achieve year-to-date, including the October 5 Access National Bank acquisition announcement, it's a proof point of our team's ability to execute a tightly [indiscernible] acceleration strategy. I'm very proud of the Union team and how rapidly the company is evolving. And as we demonstrated all year long, we were able to do all of this while improving our quarterly financial results trending toward our top-tier financial metrics, which Rob will discuss in more detail. Most important, we continue to demonstrate discipline, focus and intensity in executing against our 2018 strategic priorities and building out our franchise that we firmly believe will deliver sustainable, long-term shareholder value.
I'll now detail some key topics from the quarter while trying not to duplicate too much of Rob's upcoming commentary. In terms of loan and deposit growth, average loan growth, excluding the impact of the marine finance and third-party consumer lander divestitures, for the quarter annualized was 2.9%, and average deposit growth for the quarter annualized was 6.6%. Linked-quarter ending loan balances grew by 5.2% annualized as momentum built towards quarter-end and deposits grew by 1.5% annualized. That point-to-point growth in deposits is lower than the average due to late quarter declines in demand deposit and money market accounts resulting from normal fluctuations among our commercial customers. As we build our commercial banking book, you should expect to see some unevenness when comparing period ending balances given the normal fluctuations that occur among business clients.
Growth in commercial real estate lending was needed by refinancing into the institutional markets due to the relatively flat yield curve providing attractive, long-term, fixed-rate nonrecourse financing options. During the third quarter, we experienced about $100 million of such pay-offs, though the incidence of this seems to be tapering off. You will note the 5.8% quarter-over-quarter decline, that's 23% annualized, in construction lending, which resulted from projects completing and rolling into the non-owner-occupied real estate category in a normal course, which grew 4.8% quarter-over-quarter, that's 19% annualized. Construction loans have declined because this category is not refilling with new projects as quickly as completed projects are rolling out. The construction pipeline has rebuilt from its low point that we saw at the end of the first quarter, so we expect this headwind to abate, though we still see above normal instances where we decline to match underwriting structures being offered by certain competitors. That we're able to overcome these challenges with mid-single-digit loan growth in the quarter, points to the importance of our diversification strategy and to commercial banking. Real estate market is not withstanding. We remain encouraged by our loan pipelines, especially in the commercial banking categories of C&I and owner-occupied real estate. As I indicated at the beginning of my comments, based on all that we know at this time, barring an unexpected uptake in pay-downs and our strong start to the fourth quarter, we expect loan growth for the fourth quarter to be in the upper single-digit range point-to-point, which would translate to a full year point-to-point loan growth on the higher end of the mid-single digits. We aim to roughly balance loan growth with deposit growth for the year. Our expectations for the full year of 2019 are for loan growth in the upper single-digit range, and balanced with deposit growth, which would include growth from Access National Bank's baseline.
Further detailing the commercial banking effort, as I mentioned, we hired 15 C&I bankers during the quarter and 25 year-to-date spread across a number of markets. Our hires are nearly all client-facing revenue producers. As our growth in the C&I loan type evidences, we are building momentum. But we do not expect the new bankers' full impact to be felt before mid-2019. For those not familiar with Virginia banking history, the most small- to midsize businesses here on the Commonwealth, once banked with Virginia banks just like Union until they were all at a loss to interstate banking consolidation over the course of the '90s. We believe no one is as well-positioned as Union to re-create that market dynamic, and we're now able to go toe-to-toe with the largest competitors in this space.
Credit quality remains strong. The economy and our footprint is steady and the leading indicators of credit quality within the Union remain benign. As I've said since my arrival, I believe the problem asset levels at Union and across the industry remain below the long-term trend line. But at this time, we do not see any early indications of a downturn in Union's portfolio level credit quality.
In the interest of time, I'm going to skip my normal quarterly update on our progress against our 6 priorities for 2018 in order to comment on 2 key developments at the company: the hiring of Maria Tedesco as President and our announcement regarding the pending acquisition of Access National Bank. Maria joined as president of Union Bank & Trust on September 28, and we put her to work immediately with the Access National Bank announcement, where she's already involved in the integration effort. Maria has high energy and used to working at a fast-paced environment and that makes her a great fit for the new Union team. While we did conduct a national search for the role, Maria was recommended as a candidate by a predecessor, John Stallings, who knew her previously from the industry. The same is true to me -- pardon me, the same is true for me, as Maria and I knew one another when we were peers running business banking in lines of business for super regionals, she at Citizens Bank in the Northeast, and me at Regions Bank in the Southeast. After completing a thorough selection process, that yielded much interest for some great candidates, it was clear we had the right leader in Maria and we're honored that she chose to join us. Her deep experience, leadership style and expertise in business banking, consumer banking, wealth management, mortgage, marketing and digital are an excellent complement to my own commercial banking background and she'll be a great partner in running the company. You'll have the opportunity to meet Maria and hear her initial thoughts on the business as well as hear from other key members of our executive leadership team at our November Investor Day. During that session, we'll discuss 2019 priorities and give you an update on our new 3-year strategic plan with updated financial targets. As a reminder, our Investor Day is November 14, at The Harmonie Club in New York City. If you need more information, please reach out to Bill Cimino, to get registered.
Turning to Access. On October 5, we announced that Union will acquire $2.9 billion asset Access National Bank in Northern Virginia. This was discussed in detail during our call that day, so I'll not repeat myself here. I'll summarize by saying that this is a company and a leadership team we know well and hold in high regard. Like Xenith, this was a negotiated deal. One that fits perfectly with our previously stated strategic and financial objectives for M&A that substantially completes our Virginia franchise by closing our gap in the large and attractive Northern Virginia market and indisputably positions Union as Virginia's bank. It further accelerates our C&I strategy and does so in Virginia's largest regional economy, reduces our CRE concentration ratio, increases our deposit transaction account percentage and provides greater scale to our wealth management business. We'll share more about the implications of this powerful addition to our targeted financial metrics and business strategy at our Investor Day on November 14. While it's only been two weeks since the announcement, we've already stood up our integration team and work has begun to ensure a smooth transition. Having just completed the Xenith integration, this is a process we know well.
In summary, Union has achieved a great deal so far in 2018, and we want to finish of the year by hitting our financial targets, making additional progress against our 6 strategic priorities, and obtain shareholder and regulatory approval for the Access acquisition. I remain highly confident in what the future holds for the Union, and in the potential we have to deliver a long-term sustainable performance for our customers, communities, teammates and shareholders.
I'll close with the message you've heard from me many times before. Union is a uniquely valuable franchise with a story unlike any other in the region. We have assembled the right scale, the right markets, and the right team to deliver high performance and a franchise that can no longer be replicated in Virginia with exciting opportunities awaiting us in North Carolina and Maryland. We're holding a strong hand and intent to play it.
I'll now turn the call over to Rob to cover the financial results for the quarter. Rob?
Thank you, John, and good morning, everyone. Thanks for joining us today. I'd now like to take a few minutes to provide you with some details of the Union's financial results for the third quarter, which begins to show the earnings potential of this franchise. Please note that for the most part, my commentary will focus on Union's third quarter financial results on a non-GAAP operating basis, which excludes $1.1 million of after-tax merger-related cost, but includes losses from discontinued operations of $565,000 related to Union's exit from the mortgage origination business in the second quarter.
You'll note that again this quarter, there is a bit of noise in our financial results. So in addition, I will make reference to Union's third quarter financial results that are further adjusted for the financial impact of strategic actions taken in the second and third quarters, including an after-tax downward adjustment of $737,000 to the initial estimated $16.5 million after-tax net gain recorded in the second quarter, related to the divestiture of the marine finance division, which was based on updated information obtained and wind down costs incurred during the third quarter. Union's exit from the mortgage origination business resulted in a net loss of $565,000 from discontinued operations as noted above, after-tax branch closure cost of $375,000 related to the previously announced closure of 7 branches during the third quarter of 2018, and approximately $565,000 in after-tax cost related to executive management changes incurred during the third quarter. For clarity, I will specify which metrics are on a reported versus non-GAAP operating basis, and which also exclude the financial impact of the noted strategic transactions in my commentary.
In the third quarter, reported net income was $38.2 million, and earnings per share were $0.58. Reported return on assets was 1.17%, reported return on tangible common equity was 13.7%, and reported efficiency ratio was 59.7%.
On a non-GAAP operating basis, which as noted, excludes $1.1 million in after-tax merger-related cost, consolidated net earnings for the third quarter were $39.3 million, or $0.60 per share. For the quarter, the company's non-GAAP operating return on assets was 1.21%, non-GAAP operating return on tangible common equity was 14.1%, and a non-GAAP operating efficiency ratio came in at 58.6%.
The quarterly financial results and financial metrics excluding the impact of merger-related costs as well as the strategic actions noted are as follows: consolidated net earnings for the third quarter were $41.6 million, or $0.63 per share, which is up from $40.3 million, or $0.61 per share in the prior quarter. Return on assets improved to 1.27%, up from 1.22% in the second quarter. Our return on tangible equity was 14.9%, versus 15.1% in the prior quarter. And the operating efficiency ratio improved to 57.3% from 58.7% in the second quarter.
As a reminder, we remain committed to achieving top-tier financial performance relative to our peers. We are targeting an operating return on assets in the range of 1.3% to 1.5%, and operating return on tangible common equity within a range of 15% to 17%, and an operating efficiency ratio below 55%.
Now that the cost saves -- savings from the Xenith acquisition are fully realized, we remain confident that we will report financial results within these targeted ranges beginning in the fourth quarter.
Now turning to the major components of the income statement. Tax-equivalent net interest income was $108 million, down $2.2 million from the second quarter due to lower accretion income and lower earning assets related to the loan sales in the second quarter. The current quarter's tax-equivalent net interest margin was 3.76%, which is a decline of 3 basis points from the previous quarter. Accretion of purchase accounting adjustments for loans, time deposits and long-term debt added 13 basis points to the net interest margin in the third quarter, which was a decline of a 7 basis points from 20 basis points in the second quarter.
The decline in the tax-equivalent net interest margin was principally due to a 6 basis point increase in the cost of funds which was partially offset by 3 basis point increase in the yield on earning assets. The quarterly 3 basis point net increase in earning asset yields to 4.65% was primarily driven by higher loan portfolio yields, which improved by 12 basis points on a core basis during the quarter, due to the impact of increased long-term interest rates on variable rate loan yields, partially offset by a 7 basis point decline related to lower loan accretion income. The quarterly 6 basis point increase in the cost of funds to 89 basis points was driven by higher deposit costs, which increased 10 basis points from the second quarter to 64 basis points, partially offset by the positive mix impact of reduced levels of average wholesale borrowing balances during the quarter. The provision for loan losses for the third quarter was $3.1 million, or 13 basis points on an annualized basis, which is an increase of $440,000 compared to the previous quarter. The increase in the provision from the second quarter of 2018 was primarily driven by higher levels of net charge-offs during the current quarter.
For the third quarter of 2018, net charge-offs were $3.2 million, or 13 basis points on an annualized basis, which compares to $1.8 million, or 7 basis points, in the prior quarter, and $4.1 million or 24 basis points for the same quarter of the prior year.
Noninterest income decreased to $20.7 million, to $19.9 million for the quarter ended September 30, from $40.6 million in the prior quarter, primarily driven by second quarter pretax gain on the sale of the marine finance division. As I noted earlier, the initial estimated pretax gain recorded in the second quarter of 2018 of $20.9 million was reduced by $933,000 for updated information obtained and wind down costs incurred during the third quarter. Excluding this gain and its subsequent adjustment from their respective quarters, noninterest income increased $1.1 million or 5.7% for the quarter ended September 30, when compared to the prior quarter.
Customer-related fee income increased $1.1 million primarily due to the acquisition of Outfitter Advisors as well as higher overdraft, letter of credit and debit card interchange fees, partially offset by lower loan swap fees.
Operating noninterest expenses declined by $1.9 million or 2.5% to $74.9 million when compared to the second quarter of 2018. The decrease in operating noninterest expense included a net decline in salaries and benefits of $1.5 million primarily due to planned synergies arising from the merger-related core system conversion that occurred in the second quarter, partially offset by increased incentive plan expenses of $480,000 recorded in the third quarter. Of note, full-time equivalent employees at the end of the third quarter stood at 1621 FTE, which is a reduction of 81 FTE since June 30, and 203 FTE since March 31.
In addition, OREO-related expenses declined $670,000 due to higher gains on sales of properties, and lower valuation adjustments in the third quarter as compared to the second quarter. Initially -- additionally, FDIC premiums declined $519,000 compared the second quarter. Including this quarter's operating noninterest expenses were branch closure cost of approximately $475,000 related to the consolidation of 7 branches in the third quarter, also included $714,000 in cost resulting from executive management changes during the third quarter as well as operating losses of approximately $463,000 related to a community development investment fund.
Importantly, we achieved our $28 million Xenith-related merger cost saves target during the quarter.
The effective tax rate for the 3 months ended September 30 was 15.9% compared to 19% in the second quarter. The decrease in the effective tax rate was primarily due to tax-exempt income being a higher component of pretax income in the third quarter compared to the second quarter, which included the marine finance division gain. At this time, we expect an effective tax rate of approximately 17.5% going forward in the fourth quarter and beyond.
Turning to the balance sheet. Period-end total assets stood at $13.4 billion at September 30, an increase of $306 million from June 30, primarily as a result of increases in the investment securities portfolio and loan growth during the third quarter, which was partially offset by lower cash and cash equivalent balances at quarter-end. At September 30, total investments were $2.3 billion, which is an increase of $520 million from June 30 levels, primarily the result of reinvesting the proceeds received at the end of the second quarter from the sale of Shore Premier Finance loans and certain third-party lending loans into the investment securities portfolio during the third quarter.
At quarter-end, loans held from investment were $9.4 billion, an increase of $121 million or 5.2% on an annualized basis from June 30 levels. Looking forward, as John noted, we now expect mid-single-digit, point-to-point, year-over-year loan growth in 2018. At September 30, total deposits stood at $9.8 billion, which is an increase of $37 million, or 1.5% on an annualized basis from June 30 levels, while average deposits increased to $158 million, or 6.6% annualized from the prior quarter.
Now turning to credit quality. Nonperforming assets increased $2 million to $34.9 million during the quarter, or 37 basis points as a percentage of total loans, comprised of $28.1 million of nonaccruing loans and $6.8 million in foreclosed property balances. The allowance for loan losses was unchanged from June 30 at $41.3 million. The allowance as a percentage of total loan portfolio also remain unchanged at 44 basis points at quarter-end.
So to summarize, our third quarter results demonstrate the significant earnings capacity we envisioned as a result of the Union and Xenith combination. Now that the cost savings from the Xenith acquisition have been fully realized, we remain confident that we will report financial results within our top-tier financial performance target ranges beginning in the fourth quarter. As always, we remain focused on leveraging the Union franchisor to generate sustainable, profitable growth and remain committed to achieving top-tier financial performance and building long-term value for our shareholders.
To that end, as John noted, we recently announced the signing of a definitive merger agreement to acquire Access National Bank, and have initiated the merger integration clearing process to ensure the achievement of the strategic and final -- financial benefits of the combination. We will share more about the implications of this acquisition to our targeted financial metrics and business strategy at our Investor Day on November 14 in New York. We hope to see many of you there.
And with that, let me turn it over to Bill Cimino, to open it up for questions from our analyst community.
Thanks, Rob. And Jamie, we're ready for our first caller, please?
[Operator Instructions]. Your first question comes from the line of Austin Nicholas from Stephens.
Maybe just as we look at expense expectations going into the fourth quarter, I know there's a lot of moving pieces this quarter, but if you back out the merger costs and maybe some of the items pointed out in the release, it looks like you get closer to a $73 million number. And I guess as we look out to the fourth quarter, can you maybe help us understand the puts and takes in that as it relates to any expenses remaining from the Xenith that were in the third quarter and then maybe any cost saves that will be realized in the fourth quarter from the recent branch consolidations as well? That will be helpful.
Yes. Thanks for that question. Yes, we are still expecting -- I think in the last quarter's call, we guided towards around $71 million or so in expenses. We're still guiding to that. And you'll see expense reductions in a number of categories from our salaries and benefits lines to occupancy. Included in that would be about $0.5 million of run rate savings that is related to the branch closures that occurred in August of this past quarter. So we -- you should see -- again, coming down, you're right about the $73-or-so million dollars that should come down to around $71 million or so run rate in the fourth quarter.
Understood. That's helpful. And then maybe as you look at the margin, and maybe just more importantly, on the core margin, it looks like it was up a couple of basis points this quarter. Could you maybe walk me through what maybe drove that up excluding the accretion? And then, maybe any thoughts on the outlook for the margin going into the fourth quarter, given that LIBOR has moved quite a bit since early September? And maybe how that affects both sides of the balance sheet?
Yes. Austin, in terms of the core margin, yes, it's up 4 basis points. We have, of course, 363 margin versus 359 in the prior quarter. That's really being driven by earning assets being up about 9 basis points and our cost of funds being up about 4 basis points or so. We are expecting some of that related to the mix of funding for the quarter. As you know, our earning assets were down a bit from the prior quarter as we were ramping up the reinvesting the proceeds from -- about $500 million of proceeds from the second quarter's divestiture of loans. And we've been putting that into our investment portfolio. We expect that our wholesale borrowings will increase as well to support that, and that our margins probably -- think about it as stabilizing in this range, we'd like to see it expand a bit, but at this point, we're guiding more towards kind of a stable margin just because we would expect to see some higher wholesale borrowing cost in the fourth quarter.
[Operator Instructions]. Your next question comes from the line of Catherine Mealor of KBW.
One follow-up question on just the balance sheet. Rob, you mentioned that you added a bunch of securities just after the sale of Shore. Has most of that complete at the end of the third quarter as we look at, kind of, more security balances ended in the third quarter, or should we expect to see a little bit more investment as we move into the fourth?
No, Catherine, we're pretty much done with that reinvestments that averaged in over the quarter. You could expect to see that what you see at the end of third quarter is pretty much what we're going to be going forward.
Okay. Great. And then any color also on the core loan yields. I mean, that -- I think that you saw some really nice expansion there. Any commentary on what you're saying both in terms of competition and then impacts from the moving LIBOR this quarter? Is it fair to say if that's the increase in loan yields we saw this quarter, with kind of a catch-up in LIBOR, should we see more than that as we move into the fourth quarter? Or is that -- or there are other dynamics to play that could offset that?
Yes. So in terms of the earning asset yields, yes, we did see that pick up about on a core basis, about 9 basis points, which about 12 was on the loan book itself, the loan yields went about 12 basis points. We are seeing effect of positive impacts of the Fed moving, they moved into 25 basis points, we should see some additional movement due to the recent Fed move in September as well as the LIBOR moving up, kind of -- it's kind of slow moving till September. It's been up kind of flattish before September. So we are expecting a pickup on the loan yield side, just because we've got about 48% of our portfolio is variable rate of which about half of that is repriced on 1-month LIBOR, so that's positive. And about 30% or 35% reprice is based on prime. So you can expect that we'll see some yield pickup during the quarter. As I mentioned earlier, we're, kind guiding more to the core margin that's kind of flat -- flattish just because we do expect with the leverages of the balance sheet that our wholesale cost -- borrowing costs are going to increase. We've got a bit of a benefit from the lower borrowing cost during this quarter as we were levering up. But that's pretty much how we expect to see a play-out during the fourth quarter and frankly, into the next year.
Then on the competitive environment -- Catherine, this is John, it feels pretty stable compared to what we've been seeing. David Ring, our commercial banking group executive, is sitting by me. Dave, any perspective on competitive conditions in terms of pricing?
We're seeing very healthy competition from all that, mostly on price, but we also see some structures weakening. So we're staying within our sweet spot for structuring price. We have the advantage of having expansion markets where we've expanded our bankers in the coastal region and there -- [indiscernible] provided that's left in Coastal Virginia.
We perceive as having traditionally been less price competitive.
Right, right. So we've been able to compete on price but still hit our targets. But also our LOLI team, which we built last quarter has started to see traction in the transaction. So we have more market opportunity, so we can be more particular and continue to build our book without stretching too far.
That's right. And then I would reiterate as always, is I've learned so well in my early days with Wachovia [indiscernible] profitability growth [indiscernible] priority, but we are able to accomplish all three of those. And it feels -- from a competitive standpoint, the pricing feels reasonably stable as compared to what we've been seeing most recently.
Right. And we're staying away from highly levered structures. We're trying to keep it within markets we know, companies we understand and we think we provide enough value when we're talking to a transaction that we can compete on price.
And then one point back to the core margin -- it's rather to the expansion that we saw in the NIM as you take out some of the noise, this is one more reason why we love the Access combination. That bank has 55% transaction accounts. That's one reason why you see Union outperforming only on the NIM because of our core deposit base, the crown jewel of this franchise, and as the percentage of transaction accounts only go up. So we should perform better than most in terms of the margin as we -- deposit beta, I should say, as we go forward.
Your next question comes from the line of Mr. William Wallace of Raymond James.
Can you guys remind us for the Outfitter Advisors deal, what was the annual revenue contribution you were anticipating from that roughly?
It was in a little -- call it about $2.5 million or so, $550,000 or $600,000 a quarter.
Okay. So was there -- I thought it was actually a little bit great -- bigger contribution, so that explains some of the movement in the second -- third quarter. But is there -- was there any -- something holding that back in the third quarter?
Not really. We think we came in the third quarter with a little over $500,000 related to that acquisition. So it's kind of in the ballpark, so nothing really held it back. But we are -- it's pretty much coming in the way we had modeled it.
Okay. Just to be clear, John, high single-digit loan growth in the fourth quarter, that's an annualized quarter-over-quarter growth expectation?
Yes. We're set up for a really good Q4 based on everything we know today, which is -- it's very evident if you study or listen to what we're saying. You can see how low loan the growth average vis-à-vis point-to-point, and that's because the $100 million of CRE pay-downs that we incurred from mostly refinances into the institutional markets were front-end loaded up. We were seeing that on the front end for the most part of Q3. And then we went into a build mode with very strong finish to Q3, and we are off to a good start in Q4. So we feel that we're set up for high single-digit loan growth point-to-point end of Q3 versus end of Q4.
Annualized?
Yes.
Yes.
Okay, okay. So moving on to the -- I'm just curious, they $933,000 adjustment to the gain related to the main finance business, one I'm just curious what wind down costs are there associated? I thought you sold the entire thing to Home and then what was the -- what valuation adjustments came in that drove this?
Yes, well in terms of the wind down costs, we did have some retention bonuses that we had to pay out in the third quarter. That's -- we'd expense as we pay those obviously, have to be here to get those. So that was part of it. The other part of it was basically as we were deconverting to -- from our system to Home system, we noted there was some pre-take dealer reserve related balances on our balance sheet that needed to be accounted for and written off as part of the deal. So that was kind of the biggest component of that, $900,000.
And the retention bonuses -- these are retention bonuses that were promised related to the Xenith acquisition, I assume, just that you...
Yes, they were promised for that as well as to transition to the Home.
Yes, correct. So we agreed to pay the previously offered severance to that team in order to stay and to transition over to Home Bancorp. So that made very good economic sense for us. And that's what he means by that.
Okay, okay. On the credit side, if you adjust for the PCI mark, even adjusting for that mark, showed that your reserve-to-loans are declining about 4 basis points a quarter this year. I noticed that the delinquencies were up and the MPAs were up slightly, I'm just curious, how are you thinking about that reserve-to-loan balance, making the adjustment for the PCI loans moving forward. I would expect and anticipate that at some point, you'd like to stabilize it, especially with CECL coming up but -- and that's, kind of, been the message, but that's not been what we're seeing. So can you talk a little bit about what you're thinking on the reserves?
Yes, well, in terms of the reserve when you add that -- the purchase accounting adjustments, we're about 80 basis points. And I think, that was down a few basis points from the prior quarter. Of course, we're following GAAP accounting currently, not -- CECL is a whole another matter that we'll address throughout '19. But we continue to see historical loss rates come down, which suggests that as we calculate the allowance that is suggesting that we stay at a stable level, which you saw this quarter, which basically was providing for the charge-offs that we saw this quarter. So there's a lot of things that go into it, historical loss ratios, qualitative factors, charge-offs, et cetera. But we feel comfortable with where we are today at the end of this quarter.
The balance sheet is actually less risky at this point than, say, a quarter ago because of the divestiture of the marine finance portfolio, consumer paper and GreenSky.
Okay. Right. So then, does that imply then that we won't continue to see the reserves-to-loans, as a ratio, declining that you will start to provide more than your charge-offs moving forward, or...
Yes, I think, you should expect to see a bit more provisioning and adding to the allowance just to hit that increased loan growth we would be providing more just related to that. As you know, there's relatively muted loan growth this quarter. But as it gets to upper single digits and maybe single digits, you'll see that move.
Okay. And have you all done in the, kind of, deep work on CECL or still way too early to ask about that?
It's too early for us to comment on it publicly in terms of what I means to us, but I can assure you, we're deep into it and we've got a project team and we've got outside parties assisting us on that. So we will be in good shape in terms of complying with CECL. And you'll hear more about that as we get through 2019.
And Jamie, we're ready for our last caller. Unfortunately, we are going to have to end after this caller because of the planned alarm test here, but -- so we do have time for one more caller though.
Which, by the way, we have no control over.
It's office tower, so we apologize for that.
Okay. Your next question comes from the line of Laurie Hunsicker of Compass Point.
Just wanted to stay on credit here. The uptick in charge-offs that you were at $3.2 million for the quarter. Do you have a breakdown of how much of that is consumer?
Yes, about $2 million of that was consumer related. And the rest was commercial.
I think we have one $500,000 commercial item that was the...
There was the biggest, yes.
Biggest item this quarter. There's no real pattern here, and I think what I would call a systemic going on.
And so the consumer charge-offs that you're seeing, are -- is this from the third-party originated, I mean, I realize obviously, you sold a chunk, but you still have lending club and stuff like that?
Yes, yes. So you can -- yes, it is tied to the third-party loans that we have on our books.
So the $2.15 million?
It has basically hovered -- quarter-to-quarter, that hasn't changed much. We did have a bit -- a couple of other consumer-related debt HELOCs and mortgage those sort of things that added to this quarter.
Okay. And then of your round numbers $1.3 million or so of consumer loans, how much of that is third-party originated?
We have about -- I want to say, about $225-or-so million related to the third-party pending Club and one other group.
Okay. And then just to clarify the charges that we saw the $2 million, was some of that related to the marine finance that you sold from last quarter? Or that was all just what's currently on your books?
So it was currently on the books.
Okay, okay. That makes sense. Okay. And then can you just talk a little bit also about -- I mean, your credit is still very, very high, but you obviously had a sharp increase in your total TDRs, you went from $20 million to $28 million, can you talk a little bit about that? And then also just directionally on the construction increase?
Yes. In terms of the TDRs, we did have some increase to that. The majority of that increase is related to the nonaccrual item that we mentioned in the release construction loan -- to the series of construction loans. And I don't know if, Doug, you want to comment on -- any further on that, but that was the main driver behind the TDR increase as well.
It's a single borrower on construction loans.
Homebuilder.
Homebuilder that involved houses that are being finished, but probably some loss in some of those houses.
That was a small homebuilder coming, I believe out of the legacy Hampton Roads.
It's an old [indiscernible]
Okay. And then just 1 question with respect to your construction and land book, that's $1.2 billion, 13%. How much of that is just land? Or I can follow up with you.
Yes, Laurie, let's -- we'll address that in maybe our...
Perfect. Okay. Just one more question, Rob. I just wanted to go back to your comments on margin. So you had suggested that the core margin linked-quarter to as we look to the fourth quarter will stay flat. Did I hear you right?
Yes. As let's -- yes, just because we're leveraging up the balance sheet more or earning assets in the investment portfolio plus higher wholesale borrowing, federal home loan bank borrowing plus.
Laurie, to answer your question, I'm looking at the data now. Our raw land is 12.2% of our total construction land and development exposure, that's about $143 million.
Okay, great. Okay. And then just going back to margin, so if your core margin is flat, and I'm just looking at your accretion income schedule that's projected for fourth quarter, that suggests that you're going to be down 5 basis points just on the accretion income piece, so that as we look at your reported margin, your reported margin will likely be down about 5 basis points. Am I thinking about that the right way?
Yes. You're thinking about it the right way. I calculated about 4 basis points just based on that. But yes, you're in the ballpark on that.
Thanks, everyone, for calling in today. As a reminder, a replay of this call will be available on our Investor website, investors.bankatunion.com. Have a good day. Goodbye.
This concludes today's conference call. You may now disconnect.