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Ladies and gentlemen, thank you for standing by. And welcome to the Atlantic Union Bankshares Third Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Bill Cimino. Thank you, please go ahead sir.
Thank you, Tiffany. 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 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.atlanticunionbank.com.
During the call today, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures is included in our earnings release for the third quarter of 2019.
Before I turn the call over to John, I would like to remind everyone that on today's call, we will make 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 obligation to publicly revise any forward-looking statements. Please refer to our earnings release for the third quarter of 2019 and our other SEC filings for a 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 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. Thanks to all for joining us today. And welcome to our second conference call as the newly rebranded Atlantic Union Bankshares Corporation. We remain pleased that our change in name, sign and trading symbol has been uneventful and in fact we have received a surprising number of compliments about it. I would like to express my gratitude to our marketing team for leading this very successful effort.
I'd like to point out this month marks my three year anniversary of having joined the company. What a difference I see three years in and what an exciting transformation we had experienced and continue to experience. Our team checked off the boxes on the prior three years strategic plan and recently approved a new one that I'll comment on later in my remarks. The current challenges we face in the interest rate environment notwithstanding, I've never been more optimistic, confident and enthusiastic about the future of the company than now.
Turning to current events. Atlantic Union followed it's good first half of the year with a solid third quarter. We will recall our stating in prior comments that results would be noisy for the first three quarters of the year as we wind up the Access National Bank integration, rebranding and a few other undertakings and that is certainly proven to be the case. As you can see in the earnings release, we did have a number of one-time items in the third quarter and a charge-off of a long-term land development workout, all of which impacted our operating profitability metrics from the prior quarter.
For purposes of clarity, Rob Gorman will walk you through non-recurring items in detail during his portion of the comments. But for now, I'll hit the highlights of the quarter. To start, we delivered strong deposit growth while loan growth was seasonally slow in the third quarter, continue to build out the leadership team with a selection of a seasoned Wealth Management leader. We will have more detail about this hire in an upcoming official announcement. We also hired another seasoned leader, Alison Holt into a new role as Head of Product Management. Both had exemplary backgrounds and are important additions to the company's leadership.
We rolled out our new three-year strategic plan to our teammates and we consolidated four branches. As for operating metrics for the quarter, our operating return on tangible common equity was 15.64%, which is a 94 basis point decrease from the second quarter. Operating return on assets was 1.29% down six basis points from the last quarter and operating efficiency ratio was 55.12% which is a 266 basis points increase from the prior quarter.
Since last fall, we've communicated our financial targets at an annualized basis in the fourth quarter of 2019 of an operating ROTCE between 16% and 18%, and operating ROA between 1.4% and 1.6% and an operating efficiency ratio at 50% or below. Clearly, we're facing headwinds from the current rate environment. At the beginning of the year, we expect that there will be Fed fund increases in 2019 and a steepening yield curve.
The rate environment is shown to be worse than our expectations and there has been a sustained inversion of the yield curve which continues to negatively impact our net interest margin. Nevertheless, based on what we know today, we expect to be within the targeted ROTCE range in the fourth quarter of 2019 on an annualized basis and our efficiency ratio should be near the 50% target for the fourth quarter as well. Achieving our ROA target, however, now looks like a 2021 event given our current interest rate modeling. Again, Rob will elaborate on this in his section.
Loan growth was 3% annualized for the quarter point-to-point while average loans grew 5%. Q3 is predictably a seasonally slow loan growth quarter for us further dampened by seasonal pay downs among our government contracting clients due to the Federal government September 30 fiscal year-end. We also saw the persistent trend of CRE pay downs remain in elevated levels. C&I line utilization during the quarter remain stable while total commitments ticked up from the prior quarter. As a reminder, the Access acquisition closed on February 1st, 2019. On a pro forma basis as if the Access balances were included for the full-year, our year-to-date annualized loan growth is approximately 5% point-to-point slightly below year-to-date expectations. Our loan pipelines are well balanced, they remain strong and are higher than at this point last year.
Based on everything we know at this time, we expect full-year 2019 loan growth to be around 6%. We do think we could outperform this end of third quarter forecast just as we did at this time last year, especially given our 14% annualized loan growth in last year's fourth quarter and a disruption of the pending BB&T-SunTrust merger. However, we think it best to update our expectations based on where we are currently. And then we'll see what happens.
Our deposit growth was a bright spot for the quarter coming in strong at about 17% annualized. In the second quarter, we noted that we have experienced seasonal reductions in deposits from some larger relationships that we expected to return in the second half of the year, and they did. Encouragingly though, a rebound of deposit growth was broadly based. Year-to-date, deposit growth of approximately 9% point-to-point is at the higher end of our upper single digit growth guidance. Given the current strength, we continue to believe will be in our guidance range of high single digit deposit growth for the year.
Our loan-to-deposit ratio was around 94% at quarter-end, which is slightly below our 95% target, and that's a good place to be.
Turning to credit, our credit quality remains solid, the economy and our footprint is steady, unemployment at Virginia ticked down to 2.8%. And we still do not see any evidence of systemic changes to our credit environment. Charge-offs increased to 25 basis points annualized from 14 basis points in the prior quarter, totaling 18 basis points year-to-date.
The increase was primarily from one long running land development work out that incurred a $3.1 million charge-off during the quarter, accounting for about 40% of total charge-offs. This does not reflect any change in our credit environment that was rather unique to the borrower whose personal circumstances caused him to negotiate an orderly sell of a property to another developer versus continuing to build it out as he's been doing for a very long time. From our standpoint, we decided the best course of action was agreed to the sale in bulk, eliminate the exposure, be done with it versus taking into OREO and attempt a better outcome.
The transaction is expected to close in November. On the other hand, we also had an outsize loan recovery of $9.3 million from the Xenith acquired portfolio not reflected in net charge-offs as the loan was charged-off prior to acquisition and therefore was accounted for under non-interest income. As we've seen in prior quarters, a big part of charge-offs 40% in the third quarter came from a third-party consumer loan portfolio. While it has served its intended purpose, this is not a strategic focus area and is being wound down over the next year.
The remaining 20% of charge-offs for the quarter were well distributed among a handful of smaller borrowers and we noted nothing out of the ordinary with them. As evidenced by this quarter, charge-offs are typically lumpy quarter-to-quarter but we otherwise expect full-year 2019 to look about like the past few years in terms of credit quality barring some unexpected change in the macroeconomic environment.
As I’ve set for nearly three years. I continue to believe that problem asset levels in Atlantic Union and across the industry remain below the long-term trend line. Eventually, we are going to see a return to more normalized credit losses. But we can't tell you when to expect that as we're not yet seeing any evidence of a systemic downturn.
Moving away from quarterly results and looking ahead, as I mentioned earlier, we rolled out a new three-year strategic plan to our teammates during the quarter. Our plan is in keeping with how we like to operate Atlantic Union Bank, which is maintain forward progress, press our advantage where we can and do what we say we're going to do. The new plan will deliver on four overarching objectives that we believe are essential to our future success.
First, meet the changing needs of our customers, we must remain nimble and respond to the rapidly evolving business environment. We note with caution any number of formerly well regarded businesses who took their eye off of customers failed to respond to a changing environment and found themselves obsolete. We want to avoid that outcome. Second, optimize, digitize and automate processes. Our business processes need to be optimized, digitized and automated in order to improve efficiency, responsiveness and get things right every single time.
This is a multi-year undertaking that the work is underway now. Third, demonstrate organic growth. We've demonstrated we're a successful acquirer and integrator, but less obvious is the organic growth we've also achieved. We believe we have the platform, scale, markets and capabilities to demonstrate we can meet our objectives through organic growth. This doesn't mean we would not consider acquisitions over the next three years. But for the time being, the best investment for Atlantic Union Bank is Atlantic Union Bank itself. We have an ambitious initiatives agenda inside the company and we need time without M&A distraction to focus and best position ourselves for growth and future success. And last but not least, at every term, keep getting better. We have a great opportunity to build the premier Mid-Atlantic regional bank. And we can't do that on a status quo footing.
As the saying goes, the road to success is always under construction. I love the keep getting better mantra and think it fits nicely with our can do attitude, and it defines who we have become and what we stand for. For those who know us and know our story, these objectives are a logical progression of what we've been working on for some time. Not surprisingly, our roadmap to achieving these outcomes is very familiar. There are priorities which remain unchanged day one, and I'll give you a few updates on our priorities. First, diversify loan portfolio and revenue streams. We continue to make progress on a commercial banking effort in the commercial loan categories of C&I and owner occupied real estate are now one-third of our loan balances.
To complement this effort, we are standing up an equipment finance team to close a competitive gap in our commercial offerings. This is something, we've been exploring for about a year and we first signaled at our Investor Day presentation last fall. The team is based in Atlanta. They work together for some time with a great track record, and they have backgrounds in the Super Regional and large national banks. We will leverage this new capability to take maximum advantage of opportunities across our Mid-Atlantic footprint in addition to their independent originations. While it will take a few quarters for the team to get up to speed, we're excited to offer secured equipment finance to include leasing as a specialized commercial and industrial offering for our clients.
They generally focus on equipment transaction sizes of $1 million and up. Next grow core funding. As I mentioned earlier, our loan-to-deposit ratio is currently about 94%. We continue to believe we have opportunities to grow deposit base and deepen our market share, and the latest FDIC depository market share data, Atlantic Union became what we believe to be the first Virginia bank ever to overtake one of the big four bank competitors Richmond MSA eclipsing BB&T to take the number four position The coming Truist merger will solidify this position as SunTrust is eliminated.
Managing to higher levels of performance. As mentioned, we're maintaining our top tier financial metric targets and will aim to stay in the top quartile of our peers by these measures. Next, strengthen digital capabilities. We've already implemented Zelle and nCino this year, which we view as table stakes technology improvements for consumer and commercial clients.
On the Middleburg Financial, our wealth management side, we're in the early stages of adopting a new comprehensive wealth management platform which will improve the client experience while making us more efficient and scalable. We're also working on a new digital account opening solution and have already simplified the mobile banking enrollment process by eliminating repetitive data entry.
Next to make banking easier. We launched an improved Digital Service functionality for consumer customers making it easier to update basic personal financial information. In the fourth quarter we're piloting a project to have temporary instant debit card issuing in our branches. This will not only make banking easier, but it will give customers everything they need to immediately start using our services once opened.
Last we’re replacing our priority of integrate Access National Bank, which will check-off at year-end with a new priority and that's capitalized on strategic opportunities. Who knows what the future holds. But as we stated in our strategy, we must be nimble and ready to react to the changing marketplace. The greatest market opportunity we're going to see at Atlantic Union Bank over the next few years is likely the pending combination of BB&T and SunTrust, so I'll give a few updates on where we stand with that.
Year-to-date, we've hired 29 people from these companies in a variety of roles. Anecdotally, we're seeing more traction on the marketplace for Atlantic Union as the alternative Bank of choice is the not too large, not too small home team alternative we believe we're well positioned to take advantage of this disruption and are not simply waiting for this to come to us. We have an organized project team leading a multi-faceted strategy focused on maximizing this opportunity. The team analyze their branch network as well as the BB&T and SunTrust branch network to identify, categorize and prioritize opportunities for Atlantic Union. We're expecting considerable Truist branch closures outside of the required divestitures in our Virginia trade areas and we want to be ready for the coming disruption.
We are accelerating some investment in projects we had slated for 2020 into this year, close competitive gaps and capitalize on what we firmly believe will be a multi-year disruption at the single largest market share competitor operating in Virginia. I realized this has been a lengthy update, but I hope it provides insight into how we think and what we've been up to. In summary, Atlantic Union had another solid quarter, we're making steady progress against our strategic priorities and are positioned to continue to improve our already good financial performance despite the interest rate environment headwinds.
We're pleased with the favorable market reception to our new Atlantic Union Bank brand. I remain highly confident in what the future holds for us and the potential we have to deliver long-term sustainable performance for our customers, communities, teammates and shareholders and are close as I usually do by reiterating, Atlantic Union is uniquely valuable franchise. It's dense and it’s compact.
In great markets with a story unlike any other in our region, we've 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. We have incremental growth opportunities in our North Carolina and Maryland operations and what we believe will be a multi-year disruption with two of our largest competitors causing us to believe we have everything we need to accomplish our objectives organically at the present time. I'll now turn the call over to Rob to cover the financial results for the quarter. Rob?
Well, thank you, John. And good morning, everyone. Thanks for joining us today. And now I'd like to take a few minutes to provide you with some details of Atlantic Union's financial results for the third quarter. Please note that for the most part, my commentary will focus on Atlantic Union's third quarter financial results on a non-GAAP operating basis, which excludes $1.9 million in after-tax merger related costs and $895,000 in after-tax rebranding related costs. For clarity, I will specify which financial metrics were on the report versus non-GAAP operating basis.
In addition, where applicable I will make reference to the company's financial results that are further adjusted for material strategic and atypical items which impacted the current quarter, including actions taken to reposition the balance sheet for declining interest rates. These items include the following, the company received approximately $9.3 million in life insurance proceeds during the quarter related to Xenith-acquired loan that had been charged-off prior to the company's acquisition of Xenith which was recorded in other non-interest income.
The company sold approximately $75 million of securities and recorded a gain on the sale of investments of approximately $7.1 million during the quarter. The company also paid-off $140 million in long-term Federal Home Loan Bank advances and terminated related cash flow hedges which resulted in debt extinguishment losses of approximately $60.4 million recorded in non-interest expense. The effective cost of these advances, including the heads was 5.8%. So by repaying these high cost fixed rate advances, we were able to improve the go forward net interest margin by approximately four basis points and increase annual earnings by about $0.04 per share.
In the third quarter, reported net income was $53.2 million and earnings per share was $0.65, up approximately $4.5 million or $0.06 from the second quarter. The reported return on equity was 8.35%. Reported return on assets was 1.23% and reported efficiency ratio was 60.47%.
On a non-GAAP operating basis, which as noted excludes $2.8 million in after-tax merger related and rebranding related costs, consolidated net earnings for the second quarter were $56.1 million or $0.69 per share down from $57.1 million or $0.70 per share in the prior quarter.
The non-GAAP operating return on tangible common equity was 15.64% in the third quarter and was 16.18% on a year-to-date basis. The non-GAAP operating return on assets was 1.29% in the third quarter and was 1.32% on a year-to-date basis.
The non-GAAP operating efficiency ratio was 55.12% in the third quarter and was 53.92% on a year-to-date basis. Of note, the third quarter operating efficiency ratio would have been approximately 430 basis points lower if adjusted for the strategic and atypical items referenced above.
As John mentioned, we expect improvements of the operating financial metrics in the fourth quarter. As a reminder, we remain committed to achieving top tier financial performance relative to our peers. Since last fall, we have been targeting the following operating financial metrics and operating return on tangible common equity within a range of 16% to 18%. And operating return on assets in the range of 1.4% to 1.6%, and an operating efficiency ratio of 50% or lower.
We expect to be in the targeted range for return on tangible common equity in the fourth quarter of 2019 and on a full-year basis in 2020. Due to the current low rate environment and expectations of further reductions in the Fed funds rate, we continue to project additional net interest margin compression in the next over quarters, which will delay achievement of the low end of the return on assets targeted range until 2021.
In addition due to additional net interest margin compression and its impact on net interest income, we are now projecting that the operating efficiency ratio will be range bound between 50% and 52% over the medium term.
Now turning to the major components of the income statement, tax equivalent net interest income was $139.4 million,
which is down $2.1 million from the second quarter, primarily due to lower levels of loan-related accretion income, which declined by $2.7 million from the prior quarter. Net 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 down from the second quarter’s 20 basis points impact again primarily due to the reduced levels of loan-related accretion income.
The current quarters tax equivalent net interest margin was 3.64%, which is a decline of 40 basis points from the prior quarter. The decline in the tax equivalent net interest margin was principally due to 19 basis point decrease in the yield on earning assets partially offset by five basis point decline in the cost of funds. The 19 basis point decrease in the quarter-to-quarter earning asset yield was primarily driven by a 21 basis point decline in the loan portfolio yield. 21 basis points quarterly decline on the loan yield was driven by 10 basis points impact from the lower loan accretion income and lower loan yields of 11 basis points resulting from the impact of declines in market interest rates during the quarter notably reductions in the one-month LIBOR rate and the prime rate.
The quarterly five basis point decrease in the cost of funds to 109 basis points was primarily driven by a 32 basis point decline in wholesale borrowing costs and favorable changes in the overall funding mix between quarters partially offset by higher deposit costs which increased two basis points from the second quarter to 95 basis points. Material reduction in wholesale borrowing costs and the overall reduction in the cost of funds during the quarter resulted in part from the various management actions taken to reposition the balance sheet for declining interest rates that were executed in Q2 and Q3 including the repayment of high cost Federal Home Loan Bank advances as noted earlier.
The provision for loan losses for the third quarter was $9.1 million or 29 basis points on an annualized basis, an increase of $3.2 million or nine basis points from the second quarter. The increase in loan loss provision from the previous quarter was primarily driven by higher levels of net charge-offs and loan growth. For the third quarter of 2019, net charge-offs were $7.7 million or 25 basis points on an annualized basis, as compared to $4.3 million or 40 basis points in the prior quarter. As in previous quarters, a significant amount on the net charge-offs came from non-relationship third-party consumer loans which are in run-off mode.
In addition, as John mentioned, we also charged off $3.1 million during the quarter related to a long running land development workout loan. On a year-to-date basis from September 30, net charge-offs were $16.3 million or 18 basis points. Non-interest income increased $17.5 million to $48.1 million for the third quarter from $30.6 million in the prior quarter.
The increase in non-interest income was primarily driven by life insurance proceeds of approximately $9.3 million related to the Xenith acquired loan that had been charged-off prior to the acquisition of Xenith as well as a gain of approximately $7.1 million due to the sale of Investment Securities during the quarter. In addition, loan related interest rate swap income increased $1.8 million due to increased transaction volumes resulting from the flat yield curve and mortgage banking income increased approximately $600,000 from the prior quarter due to increased levels of refinance loan volumes, driven by the low mortgage interest rate environment, partially offsetting these increases was a $3.1 million decline in debit card interchange income as a result of complying with the Durbin Amendment, which was effective for the company starting on July 1 of this year.
Excluding merger related costs and rebranding related costs in both the second and third quarters of 2019, operating non-interest expense increased $13 million or 14.3% to $108 million -- $108.1 million when compared to the prior quarter. The increase in operating non-interest expense was primarily due to the $16.4 million debt extinguishment loss previously discussed. Factoring out this loss, operating non-interest expense would have been $91.7 million, which would be which was down $3.5 million from the prior quarter.
In addition, third quarter operating non-interest expense included approximately $309,000 in OREO valuation adjustments, driven by updated appraisals received during the quarter, $275,000 in recruiting costs related to the new equipment finance team, and $1 million in support of a community development initiative. These expenses were offset by an FDIC small bank assessment premium expense credit of approximately $2.4 million that the company qualified for as the FDIC Deposit Insurance Fund for of DIF reserve ratio exceeded 1.3 -- 1.38% in the second quarter, which triggered the credit.
We also expect to receive $1.3 million in additional FDIC credits in the fourth quarter. As a reminder, we closed four branches in September that will result in an annual run rate expense savings of approximately $1.2 million beginning in the fourth quarter. In addition, I'm pleased to note that we achieved our $25 million Access related merger cost savings target on a run rate basis at the end of the third quarter.
Please note that we expect to incur approximately $1 million more, $1 million more in merger costs and an additional $1 million in rebranded costs in the fourth quarter. Effective tax rate for the third quarter was 16.8% compared to 16% in the second quarter. The increase in the effective tax rate was as compared to the previous quarter was primarily due to the lower proportion of tax-exempt income to pre-tax income.
For the full-year, we still expect an effective tax rate in the range of 16% to 16.5%. Now turning to the balance sheet. Period end total deposits stood at $17.4 billion at September 30, which was an increase of $282 million from June 30. At quarter-end, loans held for investment were $12.3 billion, an increase of $86 million or approximately 3% on an annualized basis.
On a pro forma basis, as if the Access acquisition had closed on January 1, instead of February 1, year-to-date loans, loan balances grew approximately 5% on an annualized basis through September 30. Looking forward as John mentioned, we now project loan growth of approximately 6% for the full-year of 2019. At September 30, total deposits stood at $13 billion, which is an increase of $529 million or approximately 70% from the June 30th levels.
On a pro forma basis, as if the Access acquisition had closed on January 1st instead of February 1st, deposit balances increased approximately 9% annualized in the first nine months of the year. Deposit balance growth was driven by increases in demand deposits, money market and time deposit balances partially offset by declines in interest checking account balances.
Turning to credit quality, non-performing assets totaled $36.4 million or 30 basis points as a percentage of total loans, an increase of $2.4 million or two basis points from the second quarter level. The increase in NPAs was primarily driven by the addition of the fully collateralized remaining loan balance related to the long running land development workout loan that was previously discussed. The allowance for loan losses increased $1.4 million from June 30 to $43.8 million primarily due to loan growth during the quarter. The allowance as a percentage of the total loan portfolio ticked up one basis point to 36 basis points at quarter end.
And now I'd like to provide our thoughts on how the adoption of the Current Expected Credit Loss model or CECL will impact Atlantic union. As you may know, effective January 1, 2020 CECL will become the new accounting standard requiring companies to reserve for projected lifetime loan losses at loan origination date replacing the current incurred loss impairment accounting methodology that requires companies to record provisions for loan losses only when a loss becomes probable. Under CECL, lifetime expected credit losses will be determined using macroeconomic forecast assumptions and management judgments applicable to and through the expected life of the loan portfolios.
Since 2016, the company has had a companywide cross functional governance structure in place to oversee the implementation of the CECL standard and ensure we are ready to adopt the CECL standard on the effective date. Upon adoption of the standard, assuming the economic outlook and portfolio characteristics are consistent with recent periods, the company estimates that the allowance for credit losses will increase to within a range of $90 million to $100 million or approximately double the allowance for loan loss reserve levels as of September 30 under the current incurred loss methodology.
The expected increase is primarily driven by the company's acquired loan portfolio and the consumer loan portfolio due to the portfolios longer average life. Ultimately, the increase to the allowance for credit losses will depend on the characteristics and mix of the company's loan and securities portfolios, macroeconomic conditions and economic forecasts model.
Final Validation of CECL models and methodologies in other and other management judgments at the time of adoption on January 1, 2020. From a shareholder stewardship and capital management perspective, we are 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.
As such during the third quarter of 2019, the company declared and paid a quarterly cash dividend of $0.25 per common share an increase of $0.02 per share or 8.7% compared to the prior quarter’s dividend level. In addition, during the quarter, the Board of Directors authorized the share repurchase program to purchase up to $150 million of the company's common stock through June 30 of 2021 in open market transactions or privately negotiated transactions.
As of October 16, we have repurchased 1.4 million shares at an average price of $36.46. The total remaining authorization to purchase shares is approximately $100 million at this time. So to summarize, while the quarter was quite noisy again, Atlantic Union delivered solid financial results in the third quarter despite the headwinds of the current interest rate environment and a company continue to make progress towards a strategic growth priorities. Finally, please note that we remain focused on leveraging the Atlantic Union franchise to generate sustainable, profitable growth and remain committed to achieving top tier financial performance and building long-term value for our shareholders. And with that, I'll turn it back over to Bill to open it up for questions from our analysts. There you go, Bill.
Thank you, Rob. And Tiffany, we're ready for our first caller please.
[Operator Instructions] Your first question comes from the line of Catherine Mealor. Your line is open.
Good morning, Catherine.
Thanks. Good morning. I wanted to start first with the margin. Rob, I wonder, if you could give us an update on where your outlook is for the margin. You've previously guided for about four to five bps per order compression. But you're not making changes to the balance sheet but just kind of updated thoughts there?
Yes, so just to give you some context of our projection going forward, we are currently assuming that will get another three cuts from the Fed in the Fed funds rate, one in October, another in December and then one in the third quarter of 2020. In terms of that modeling, what we are expecting to see is the core margin for the fourth quarter we're looking at continued compression of probably three to four basis points. And then quarterly through 2020, we’re looking at about four to five basis points consistent with what we said before on a quarterly basis. So that's our current outlook, really hasn't changed much. As you know, we did have a bit more compression this quarter, which was primarily driven by higher or actually lower levels of one month LIBOR, the drop was in terms of our projection.
The drop was more than we had originally projected. So that added two basis points of compression versus our previous guidance.
Got it. So another three to four bps compression in the fourth quarter and then four to five bps per quarter through 2020 assuming three more cuts?
Yes, that's correct.
Okay.
So we were looking at kind of stabilizing the margin coming out of next year, probably in the 3.30, 3.35 range.
Got it, okay. And then under that scenario how in 2021, would we get to a 1.4% ROA? We’re kind of coming at 2020 with a even 3.35 margin?
Yes, so as we mentioned before, that 1.4% return on assets is probably the most difficult to achieve. We're going to continue to evaluate that based on our going through our budget process for 2020 right now and forecasting through 2021, we are going to reevaluate that guidance going forward and probably talk bit more about that in our fourth quarter call.
Okay, that makes sense. Okay, and so then on the growth, you're now forecasting for growth to be about 6% for this year, how should we think about growth for next year? Is it fair to assume that 2020 growth should be higher than that 6% is given some of the Truist opportunities that you have?
Yes, Catherine, this is John. We would say expect somewhere in the high single digit range, I wouldn't be projecting 9% but 7%, 8%, 9% somewhere within that band, should be doable based on the various initiatives that we have underway and based on market conditions based on what we know right now.
Okay, great. Thank you.
Thanks Catherine. And Tiffany, we're ready for our next caller please.
Your next question comes from the line of Casey Whitman. Your line is open.
Hi Casey, good morning.
Good morning. Just a question on expenses. So if I take out that FDIC assessment credit, core expenses this quarter maybe running around $94 million last quarter, I think you’re guiding to expenses coming down to like the $90 million, $91 million range. Do you think that's still achievable given all the investments and hires you’ve made? And is there anything other than I think you mentioned, like $1.2 million in branch closure savings to come out? Or do you think that's really just the run rate is little higher given, given the investments including the equipment finance division?
Yes, thanks Casey. This is Rob. I calculate that we had a $91.7 million for run rate, if you will versus the $94 million you mentioned as we said, we had some unusual items. They were offset by that credit. So I calculate $91.7 million. Going forward, we're looking at the $90 million to $91 million on a run rate basis in the fourth quarter. And that excludes the rebranding cost of a million potential conversion, merger costs of a million. And as we've said before, we're looking to accelerate some of our spending related to the opportunity from the Truist disruption. And that's about $1 million. So if you take all that together, we're looking at $90 million to $91 million for Q4 and then going forward we will be projecting is probably a 4% to 4.5% growth rate off of that run rate.
Got it, got it. So the recruiting costs in the OREO valuation adjustments and the community development issue those kind of items we would assume wouldn't necessarily, wouldn't come back is what you're saying?
Yes, exactly that’s the way I'm looking at as well.
And the FDIC assessment credit is that, is your expectation that you would get that for maybe one more quarter?
Yes. So the credit, the total credit we're getting related to that was $3.8 million. Our total premium assessment this quarter was $2.4 million. So basically it was zeroed out and we will apply the remainder, which is about $1.3 million to our assessment for the fourth quarter. So we're expecting $1.3 million of credit coming through in the fourth quarter.
Got it. All right, then I'll just ask that I guess a bigger picture. I mean, just on M&A it sounds like still very focused on the organic growth here but I guess any update to your general thoughts on holding M&A and the kind of a timeline that you might start re-engaging more in those conversations?
Casey, this is John, it's really, it's difficult to imagine that we would want to do anything next year that that doesn't mean that we like candidly, we are always having conversations. There are always conversations going on. There's literally a queue. We could do one tomorrow if we wanted to, but we don't we have more important things to do right now. So I think my big concern is that, if we take on another M&A deal, it will cause us to kick the can down the road, and what we believe are actually far more strategically important opportunities.
So we really need time to knock some of these things out. You've heard me list out some of the initiatives that are on the table. Particularly with the new leadership, we have a consumer digital strategy recognizing that the largest opportunity we have is in fact this SunTrust BB&T combination. So if anything changes in terms of our intentionality, we're going to tell you, we would begin to signal it, it's just very difficult to imagine that we would want to try and get anything done next year again, which doesn't mean we couldn't be having conversations with someone over that period of time as we always do. So that's all I can say for now.
Very helpful. Thanks for all the color.
Thanks Casey.
Thanks Casey.
And Tiffany, we're ready for our next caller please.
Your next question comes from the line of Laurie Hunsicker. Your line is open.
Hi Laurie.
Good morning, Laurie.
Hi, good morning. Just wondered if we could jump over to credit and certainly your credit is looking good. But can you just refresh us your third-party consumer? What is that book and then how much of that is lending club at this point?
Yes, so it's a bit over $200 million total third-party Laurie. About $140 million of that is the Lending Club book that's been coming down as you know, it's in run-off mode, it's been coming down by about $8 million to $9 million a month. The previous quarter it was about $166 million. So we’re now down to $140 million. We expect that will continue to run-off in the same fashion going forward.
Got it, okay. And then axing out the one credit you said the majority of your charge-offs came from that book. So I'm doing the math right. It was around, I don't know $4.7 million was then related to consumer?
Yes, that wasn’t the far amount wasn’t but there’s still some other relatively smaller commercial.
I think the total for this quarter would have been consumer 40% would have been our one land development loan. And if you rewind the last couple of quarters, third-party consumer charge-offs have been running about literally two-thirds of total, our charge-offs excluding third-party have been running about five to six bps annualized which is too low as we've said consistently.
Okay, and so I guess when should we expect to see this consumer book at zero? How are you thinking about that?
You mean in terms of the third-party, we're expecting the majority of that to run-off through the end of 2020. The Lending Club proceeds for the most part. So that should be running down through the next year or so.
Okay, great. And then just specifically around that or any guidance you can give us as we think about loan loss provisioning with CECL. Can you help us just think about this piece of it or more generally, and certainly appreciate the other color you gave, but if you can just help us think about what an ongoing loan loss provision would look like for you guys with this book?
Yes, so Laurie, as you know, we will be putting up an allowance for the acquired loan portfolio. And also the books credit impaired or books credit deteriorated in CECL terms. So we expected the charge-off ratio will increase because we will now be charging-off loans that are in those books will be charged-off against the allowance. So I'd expect that you will see 25 to 30 basis points of things being equal. That's assuming we don't necessarily have a lumpy commercial credit come through like we did this quarter.
Okay, great. And then just one last question on credit. I saw that you guys had an uptick in your CRE past due. Is there anything greater going on there? Is there any color you think you can give on that one?
The $8 million we made a reference in the release that $12 million of total past dues were actually current as of now, of that $12 million, $8 million were actually what we refer to as administrative past dues. So that would be the categories of commercial owner occupied, non-owner occupied. That simply means we had maturing credit facilities that were in process of renewal. And those were not indicative of credit problems. They were simply indicative of getting the renewals to the system on time.
We mentioned before that we've implemented an end-to-end loan origination system. The downside of doing such a thing as you run a J-curve, it actually takes longer to load new credit facilities and renewals into such a system initially, and for the bankers to get up to speed. It's slower until they gain experience with it and then it becomes faster. And so we are on the upside of that J-curve. So we did have some slow down in terms of processing renewals. And that's what you're seeing those were not credit issues.
Okay. Okay, that's helpful. Okay. And then just over on expenses, I just want to make sure that I've got this right. You obviously had rebranding expenses here at 1.133. Did that include any of the branch closure expenses? Or if not, what were those and were they in the other, other line?
Yes, they did not include any branch closure costs in the third quarter. Actually, we had guided to perhaps expect another 200 to 300 in the third quarter from branch closures, but actually, we came in quite a bit lower that was about 50 ended up being about $55 million -- $55,000 of branch closure costs. So not material and that would have been any other line item.
Okay, great. And then just one last thing here on sort of this, we think about one-time within both merger costs and rebranding costs as we finish out this year 2019. Are we pretty much done with those as we head into 2020 or how should we be thinking about that?
Yes, that's exactly right, Laurie. This will be the final quarter of seeing both rebranding costs and merger costs.
Okay, great. Thank you.
Thank you.
Great, thank you, Laurie. And thank you everyone for calling today. As a reminder, a replay of the call will be available on our investor website investors.atlanticunionbank.com. Thank you and have a good day.
This concludes today’s conference call. Thank you for your participation. You may now disconnect.