Atlantic Union Bankshares - Q4 2023

Transcript

Operator (participant)

Hi, good day. Thank you for standing by. Welcome to the Atlantic Union Bankshares Q4 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question during the session, you will need to press star one one on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to speaker today, Bill Cimino, Senior Vice President of Investor Relations. Please go ahead.

Bill Cimino (SVP and Director of Investor Relations)

Thank you, Victor, 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 Q&A 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 Q4 and fiscal year 2023.

We will make forward-looking statements on today's call, which are not statements of historical facts and are subject to risks and uncertainties.

There can be no assurance that actual performance will not differ materially from any future expectation 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 issued today 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 from those expressed or implied in a forward-looking statement. All comments made during today's call are subject to that safe harbor statement. At the end of the prepared remarks, we will take questions from the research analyst community, and now I'll turn the call over to John Asbury.

John C. Asbury (President and CEO)

Thank you, Bill. Good morning, everyone. Thank you for joining us today. Looking back at 2023, it was a wild ride across the industry. Right out of the gate, we reached a tipping point in depositor behavior, set off by the Fed's aggressive series of rate increases in 2022. This resulted in a surge of deposit movement from non-interest bearing deposits into interest bearing alternatives and in turn, ignited a deposit rate rumpus that compressed net interest margins. As you know, four other 25 basis point rate increases eventually followed before the Fed paused. The high-profile non-traditional bank failures in March initially shook depositor confidence in the American banking system and further intensified margin pressure.

Thankfully, our deposit base remained sturdy, and we responded to the changing environment with actions that we believe will better position us to deliver long-term sustainable shareholder value.

Despite the year's disruptions, in the end, 2023 was a successful year for AUB, both financially and strategically, and we entered the new year with positive momentum. As a reminder, during 2023, we took 3 significant and proactive actions to respond to the ever-changing environment. First, we quickly realized the need to adjust our structural expense base when deposit costs rose in Q1. Just 9 months ago, during our Q1 2023 earnings call, we said we would take meaningful expense actions and then did what we said we would do in the Q2. We took out $17 million in structural expenses, with nearly all expense savings complete by the end of Q2. Second, on July 25, we announced our entry into a merger agreement with American National Bankshares, Inc., which has been well received across our markets.

We have been hard at work on integration planning, and we remain confident that we can achieve our estimated expense savings following the closing. As we have said before, the relationship between our two companies spans decades, and now more than ever, we believe that our mutual familiarity, complementary cultures, and the strategic rationale for the proposed transaction will position us well for success. Upon announcement, we stated that we expected to close sometime in the Q1 of 2024, and that remains our expectation. We have received regulatory approval for the merger from our state regulator and are waiting on the Federal Reserve to conclude its review. Third, we repositioned our balance sheet in two separate transactions to seek to deliver better returns in the higher rate environment.

The first involved the sale of Available-for-Sale securities early in the year, prior to the bank failures, and the second occurred in the Q3, when we paired a sale-leaseback of certain owned properties with a restructuring of a portion of our securities portfolio and a capital-neutral transaction. As previously disclosed, we estimate this will add $0.06 to annual after-tax earnings per share, and we had the full benefit of that in Q4 2023. I won't list every accomplishment in 2023, but despite the industry turmoil, we made excellent progress against our three years strategic plan that we updated in 2022.

A highlight for the year was our technology modernization effort, as we renegotiated our core operating system contract, improved our technology stack, and are now in the late stages of implementing an upgraded online and mobile banking offering with a change in platforms.

The new platform will be phased in over the course of 2024 and will deliver highly competitive capabilities and an improved client experience, all at lower cost, and that is a great combination. We also continued to build depth throughout the organization as we matured our talent management process and enhanced our leadership team. All of these and more combined for a successful 2023 that will position us well for the future. We see our financial results in 2023 as another confirmation of the merit and durability of our long-term strategy of being a diversified, traditional, full-service bank that makes a positive difference in our markets, with a strong brand and deep client relationships. We provide economically beneficial services and financing to help people and help businesses.

It's a straightforward business model that works and has stood the test of time over our 124-year history. That is why soundness, profitability, and growth in that order of priority remains our mantra. It informs how we run this company. We believe all that happened in 2023 is a proof point of why this philosophy is the right approach to running our bank. I'll now comment on macroeconomic conditions and their results. For forecasting purposes, we remain cautious on the economic outlook, although it does seem a soft landing is possible. Inflation continues its improving trend, despite some month-to-month volatility, and we believe we have seen the peak for short-term rates. The macroeconomic environment remains favorable in our footprint, and we're not expecting that to change in the near term. As we've said for some time, our markets appear healthy.

However, we have seen a slowdown in capital investment activity among certain parts of our client base in response to higher interest rates and economic uncertainty. Our lending pipelines reflect that and are down modestly from last quarter and from a year ago. They imply we should expect a mid-single-digit loan growth in 2024 on a standalone basis. Virginia's last reported unemployment rate ticked up slightly to a still very low 2.9% in November, and as usual, remains below the national average, which was 3.7% during the same period. We do not anticipate any materially negative near-term shift away from these low unemployment trends and the generally benign credit environment. But as always, we continue to closely monitor the health of our markets.

Given the ongoing investor focus on non-owner-occupied commercial real estate and more specifically, office exposure, I'll reiterate what I've said for the last three quarters. Commercial real estate finance is a historic strength of our company, and it's an asset class that has performed well in our markets over time. They have not traditionally been prone to boom and bust cycles. We stick to our knitting and generally deal with local and regional developers and operators that we know well and have track records with us. We've included non-owner-occupied office exposure detail on the appendix to our earnings presentation. As a reminder, we don't finance large, high-rise, or major metropolitan central business district office buildings, and we have no commercial real estate exposure in the District of Columbia.

The portfolio is performing well, is geographically diverse, granular, and modest in size at about 5% of our total loan exposure at year-end. We proactively monitor this portfolio, and we don't see any systemic concerns in the office book currently. While we may see some degree of problems in the portfolio over time, we currently expect them to be readily manageable. Turning now to quarterly results. We remain focused on generating positive operating leverage, that is, growing our revenue faster than our expenses. Here are a few financial highlights for the Q4 and for the full year of 2023, which Rob will detail next.

On a year-over-year basis for 2023, we generated positive adjusted operating leverage of approximately 1%, as adjusted revenue growth was up approximately 2.8%, while adjusted operating non-interest expenses increased approximately 1.8%. I also would like to point out that pre-tax, pre-provision adjusted operating earnings increased 5% year-over-year. Total deposits increased 5.6% year-over-year. Average deposit balances for Q4 increased $318 million, or approximately 7.5% from the prior quarter. As we've seen before, we did have a seasonal dip in deposits at year-end, but we're now seeing a normal rebuilding underway, and we're off to a very good start for Q1 2024.

The remixing of non-interest-bearing deposits to interest-bearing deposits slowed during the Q4, as expected, and we saw good growth in money markets and customer CDs. Quarter-end non-interest-bearing deposits were 24%, approximately, of total deposits, down from 25% on the prior quarter. We believe non-interest-bearing deposit remixing is stabilizing, but it's not quite yet over. We posted annualized loan growth of 9.1% during the seasonally high Q4 compared to the prior quarter, which was better than expected and led by growth in commercial loans. For the full year, loan growth was 8.2% point to point and averaged up 9.3%. Construction loan balances were down from the Q3 as projects completed and were recategorized as non-owner-occupied commercial real estate, but still ended up higher than the prior year.

As I mentioned earlier, we expect to be in the mid-single-digit growth, loan growth range for loans held for investment in 2024 on a standalone basis. At this time, our confidence is high that we'll remain in a growth mode for 2024. C&I line utilization this quarter was up modestly from the prior quarter, as well as from the prior year's Q4. Loan production in the Q4 was relatively balanced between existing clients and new bank clients. It was also relatively balanced between commercial and industrial and commercial real estate, plus construction. Commercial real estate payoffs declined year-over-year, but increased slightly from the Q3, which we interpret as a good sign that the CRE market is still healthy in our footprint.

Credit was again a good story, and we recorded annualized net charge-offs of 3 basis points for the Q4, up from 1 basis point in the Q3. For the full year, we finished at an impressive 5 basis points of net charge-offs. We expect that asset quality will eventually normalize following a very long run of minimal net charge-offs, but we still see no evidence of an inflection point coming or having occurred. Having said that, one-off credit losses do happen from time to time, as we saw in the Q1 of last year. That's normal and to be expected. Regardless, we remain confident and are pleased with our asset quality. In sum, we felt this was a strong and fundamentally sound year for Atlantic Union against an industry backdrop that was dramatic at times.

We continue to demonstrate we will take the necessary strategic actions to successfully navigate the challenges we face in this uncertain economic environment, and that we do what we say we will do. We expect uncertainty to continue for some time, especially given geopolitical events, but for the time being, we remain cautiously optimistic in our outlook. As usual, with uncertainty comes opportunity, which we believe we are well-positioned to capitalize on. Atlantic Union is a uniquely valuable franchise that is a diversified, traditional, full-service bank with a strong brand and deep client relationships in stable and attractive markets. It should soon be even more so with the addition of American National Bank to the AUB family. We remain on a solid footing, resilient, and expect a good start to the year. I'll now turn the call over to Rob to cover the financial results for the quarter.

Rob M. Gorman (EVP and CFO)

Thank you, John, and good morning, everyone.

Please note that for the most part, my commentary will focus on Atlantic Union's Q4 financial results on a non-GAAP adjusted operating basis, which excludes the following pre-tax items: gains of $1.9 million in the Q4 and $27.7 million dollars in the Q3 related to sale leaseback transactions, the net loss on sales of securities of $27.6 million dollars recorded in the Q3, the $3.4 million dollar FDIC special assessment expense recognized in the Q4, the $3.3 million dollar legal reserve related to our previously disclosed settlement with the CFPB in the Q4, merger-related costs of $1 million dollars in the Q4.

and $2 million dollars in the Q3 associated with our pending merger with American National, and expenses of $8.7 million dollars associated with our strategic cost savings initiatives recorded in the Q3.

In the Q4, reported net income available to common shareholders was $53.9 million, and earnings per common share was $0.72. For the full year 2023, reported net income available to common shareholders was $190 million, and earnings per common share was $2.53. Adjusted operating earnings available to common shareholders were $58.9 million, or $0.78 per common share for the Q4, and were $221 million, or $2.95 per common share for the full year 2023. The adjusted operating return on tangible common equity was 18.2% in the Q4 and 17.2% for the full year.

The adjusted operating return on assets was 1.18% in the Q4 and 1.14% for the full year. On an adjusted operating basis, the efficiency ratio was 52.9% in the Q4 and 54.2% for the full year of 2023. Turning to credit loss reserves, as at the end of the Q4, the total allowance for credit losses was $148.5 million, which is an increase of approximately $7.5 million from the Q3, primarily due to loan growth in the Q4 and an increase in the allowance on two individually assessed loans due to changes in borrower-specific circumstances.

The total allowance for credit losses as a percentage of total loans held for investment increased 3 basis points to 95 basis points at the end of the Q4 as compared to the Q3. The provision for credit losses of $8.7 million in the Q4 was up from $5 million in the prior quarter. Net charge-offs increased to $1.2 million, or 3 basis points annualized in the Q4, up from $294,000, or 1 basis point annualized in the Q3. For the full year, the net charge-off ratio was 5 basis points. Now turning to pre-tax, pre-provision components of the income statement for the Q4.

Tax equivalent net interest income was $157.3 million, which was an increase of $1.6 million from the Q3, driven by higher yields on both available-for-sale securities and the loan portfolio, as well as growth in average loans held for investment, partially offset by the impact of higher deposit costs, driven by continued competition for deposits, changes in deposit mix as depositors continue to migrate to higher-costing interest-bearing deposit accounts, and growth in average deposit balances during the quarter.

The Q4's tax equivalent net interest margin was 3.34%, which was a net decrease of 1 basis point from the previous quarter due to an increase of 20 basis points in the yield on earning assets, driven primarily by increases in loan and security yield, security investment yields, as well as favorable changes in earning asset mix and higher invested cash yields, which was more than offset by a 21 basis point increase in our cost of funds. The loan portfolio yield increased 13 basis points to 5.97% in the Q4 from 5.84% in the Q3, which added approximately 11 basis points to the net interest margin.

The increase was primarily due to the full quarter's impact on variable rate loan yields from the Federal Reserve's last rate increase in July, as well as the impact of higher market interest rates on new loan production yields, as well as on renewing loans. Securities portfolio yield increased by 38 basis points to 3.80% in the Q4 from 3.42% in the Q3, which added 4 basis points to the net interest margin. The increase was primarily due to the impact of the securities portfolio repositioning done in September. In addition, the favorable earning asset mix shift towards higher-yielding loans and higher yields on adjusted cash contributed an additional 5 basis points to the Q4's net interest margin.

The 21 basis point increase in the Q4's cost of funds to 2.25% was primarily due to the 26 basis point increase in the cost of deposits to 2.23%, which had an approximately 25 basis point negative impact on the Q4's net interest margin, partially offset by the 4 basis point margin positive impact of lower borrowing costs. Deposit cost increase was primarily driven by changes in deposit mix, as depositors migrated to higher costing interest-bearing deposit accounts during the quarter. Additionally, interest-bearing deposit rates increased as a result of higher overall market rates and the competitive deposit pricing environment.

Adjusted net operating non-interest income, which excludes gains and losses on sales of securities and gains on sale-leaseback transactions recorded in the third and Q4s, increased $1.1 million to $28.1 million from the prior quarter, driven by an $893,000 increase in loan-related interest rate swap fees due to several new swap transactions, a $679,000 increase in loan syndication revenue, as well as quarterly increases across most other fee revenue categories, with the exception of an $843,000 decline in other service charges, commissions, and fees, primarily due to a merchant vendor contract signing bonus recorded in the prior quarter. Reported non-interest expense decreased approximately $600,000 to $107.9 million for the Q4.

Adjusted operating non-interest expense, which excludes the amortization of intangible assets in the third and Q4s, the FDIC special assessment in the Q4, the legal reserve associated with our previously disclosed settlement with the CFPB in the Q4, merger-related costs associated with our pending merger with American National in the third and Q4s, and expenses associated with strategic cost savings initiatives in the Q3. Expenses increased $2.5 million to $98.2 million for the quarter, Q4, from $95.7 million in the prior quarter, primarily due to a $1.2 million increase in other expenses, reflecting an increase in OREO and credit-related expense, higher teammate training and travel expenses, and annual debit card plastic inventory purchases.

In addition, a $1.1 million increase in professional services expense, primarily for strategic initiatives in the Q4 and higher legal fees were incurred. A $799,000 increase in marketing and advertising expenses, primarily due to annual customer disclosure mailings during the quarter, and a $591,000 increase in occupancy expenses, which was driven by the increased lease payments related to the sale-leaseback transactions executed in the Q3. These increases were partially offset by a $763,000 decrease in salaries and benefits, which reflects the impact of headcount reductions from our strategic cost-saving initiatives executed in the second and Q3s.

At period end, loans held for investment, net of deferred fees and costs, were $15.6 billion, which was an increase of $351 million or 9.1% annualized from the prior quarter, driven by increases in commercial loan balances of $363 million or 11.1% linked quarter annualized, partially offset by declines in consumer loan balances of $11.9 million or 2% annualized. Average loans increased 6.7% from the prior quarter, and for the full year, loans increased 8.2%. At the end of December, total deposits stood at $16.8 billion, which was an increase of $32 million, or approximately 1% annualized from the prior quarter, while average deposits increased 7.5% annualized from the prior quarter.

For the full year, total deposits increased 5.6%. Total deposits increased from the prior quarter in the same period in the prior year, primarily due to increases in interest-bearing customer deposits and broker deposits, partially offset by declines in demand deposit balances. At the end of the Q4, Atlantic Union Bankshares and Atlantic Union Bank's regulatory capital ratios were well above well-capitalized levels. In addition, on an adjusted basis, we remain well capitalized as of the end of the Q4 if you include the negative impact of AOCI and held-to-maturity securities' unrealized losses in the calculation of the regulatory capital ratios. During the Q4, the company paid a common stock dividend of $0.32 per share, which was an increase of approximately 7% from the previous quarter.

Our full-year 2024 financial outlook for AUB on a standalone basis, excluding any impact from the American National acquisition, is as follows: We expect to generate full-year loan growth in the mid-single digit range and expect deposit balances to grow by low single digits during the year. We are also projecting that the full-year fully taxable-equivalent net interest margin will fall in the range of between 3.3% and 3.4%, driven by our baseline assumption that the Federal Reserve Bank will cut the Fed funds rate by 25 basis points 3x in 2024, beginning in June. In addition, we project that our through-the-cycle total deposit beta will be approximately 45%, which would be more than offset by the projected through-the-cycle loan yield beta of approximately 50%.

The through-the-cycle interest-bearing deposit beta is expected to be approximately 55%. The current rate cycle is projected to end when the FOMC pivots to reducing the Fed funds rate, which we now assume will begin in the Q2. As a result of loan growth and our tax-equivalent net interest margin projection, we expect taxable equivalent net interest income to increase by mid-single digits in 2024 from full year 2023 levels. We also expect that the company will generate positive adjusted operating leverage in 2024 from full year 2023, due to the expected mid-single digit adjusted operating revenue growth outpacing expected low single digit growth in adjusted operating non-interest expense.

On the credit front, while we don't see any systemic credit quality issues lurking at the moment, we are assuming a normalizing uptick in the net charge-off ratio between 10 and 15 basis points in 2024 from 5 basis points in 2023. But I would reiterate that we do not see evidence of a turn in the credit environment at this point, so this may end up being a conservative assumption as it was in 2023. The allowance for credit losses to loan balances is projected to remain within a range of 95-100 basis points in 2024. So in summary, Atlantic Union delivered strong financial results in the Q4 and the full year of 2023. Despite the challenging banking and operating environment we effectively managed through in 2023.

As a result, we believe we are well positioned to continue to generate sustainable, profitable growth and to build long-term value for our shareholders in 2024 and beyond. With that, I'll now turn it over to Bill Cimino, who will entertain and take a few questions.

Bill Cimino (SVP and Director of Investor Relations)

Thanks, Rob. Victor, we're ready for our first caller, please.

Operator (participant)

Thank you. At this time, we'll conduct a Q&A session. As a reminder, to ask a question, you want to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one again. Please stand by. We'll compile the Q&A roster. One moment for our first question. Our first question comes from the line of Casey Whitman from Piper Sandler. Your line is open.

Rob M. Gorman (EVP and CFO)

Good morning, Casey.

Casey Whitman (Managing Director)

Good morning.

Rob M. Gorman (EVP and CFO)

Good morning, guys.

Casey Whitman (Managing Director)

So appreciate the standalone margin guide for next year and the assumptions that go into it. Can you maybe walk us through sort of the trajectory, more specifically quarterly and sort of around, you know, what each cut does to the margin? Do you think you can still hold it in that 3.30%-3.40% range, even if we do get more than three cuts? Or how should we think about it?

Rob M. Gorman (EVP and CFO)

Yeah, Casey, that's a good question. As I mentioned, we are assuming three cuts. We're kind of taking the Fed at their word related to the dot plot reductions that they noted in the last meeting. So with that, basically, what we'll be seeing is kind of a first and Q2, kind of seeing the low point on the margin, maybe getting down to, you know, the 3.25 range, give or take. And then start to see that build up as our fixed rate loan portfolio starts to reprice higher, which will offset the variable rate note potential compression due to the Fed funds moving down starting in the Q2.

So additionally, we also see deposit rates kind of stabilizing as well coming out of the Q1. And we'll be fairly aggressive on taking deposit rates down over the balance of the year, assuming the Fed does cut. We have about $2.2 billion of high-cost CDs coming off the books over the first seven months of the year. We also have about $1.8 billion of deposits that are indexed to the Fed funds rate, so that will come down quickly alongside a variable rate loan portfolio. So that's how we see it happening, is coming down and kind of gradually increasing through the balance of the year.

And that's how we get to the 3.30%-3.40% range that we're suggesting for the full year of 2024. Now, if there's more than three cuts, that will be a negative towards our expectations from a net interest margin perspective. So if you believe the futures, Fed funds futures, which says there's 6 cuts starting in March, our estimates are that we would see, you know, 6-8 basis points further compression from that 3.30%-3.40% range. So maybe more in the 3.20%-3.30% range would be our guidance if that were to happen. But again, our baseline assumption is three cuts for the year.

Casey Whitman (Managing Director)

Okay, sorry, I don't know if I misheard or not, but did you say, you said 3.25% or 3.35% for Q1, all else equal here?

Rob M. Gorman (EVP and CFO)

Uh...

Casey Whitman (Managing Director)

That we're going down to...

Rob M. Gorman (EVP and CFO)

You should see it drop down to, you know, between 3.25% and 3.30% is what our suggest...

Casey Whitman (Managing Director)

Okay.

Rob M. Gorman (EVP and CFO)

Our projections are.

Casey Whitman (Managing Director)

Okay. And the 6-8 basis point potential further compression, if there's cuts, that's per cut or if there's all three?

Rob M. Gorman (EVP and CFO)

Say that again?

Casey Whitman (Managing Director)

Sorry, the 6-8 basis points of potential further...

Rob M. Gorman (EVP and CFO)

Oh.

Casey Whitman (Managing Director)

...compression, um...

Rob M. Gorman (EVP and CFO)

Yeah, that's on a full year basis.

Casey Whitman (Managing Director)

Okay.

Rob M. Gorman (EVP and CFO)

So, instead of the 3.30%-3.40% range, you could, you take a, you know, 6-8 basis points off that range.

Casey Whitman (Managing Director)

Okay. Are we prepared to give an update as to what American National might sort of add to that margin or do you want to...

Rob M. Gorman (EVP and CFO)

Well, you know, you know, it's going to be, well, obviously, we don't know exactly because, obviously, the deal hasn't closed, and we haven't finished our loan marks and other purchase accounting adjustments. But it will be favorable to that just based on the, you know, with the higher loan marks and the accretion that comes off of that, you see, you should see that on a combined basis, including accretion income, to be much higher than that range I just mentioned.

Casey Whitman (Managing Director)

Yep. Okay, let's know about-

Rob M. Gorman (EVP and CFO)

At this point, we don't have, you know, we have some projections there, but I'd hate to, you know, not knowing where rates are going, I don't want to put a fine point on that.

Casey Whitman (Managing Director)

Makes sense. Thanks for taking my questions.

Rob M. Gorman (EVP and CFO)

Thank you, Casey.

John C. Asbury (President and CEO)

Victor, we're ready for our next caller, please.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Catherine Mealor from KBW. Your line is open.

Rob M. Gorman (EVP and CFO)

Good morning, Catherine.

Catherine Mealor (Managing Director, Equity Research)

Thanks. Good morning. Rob, you mentioned the back book of your fixed rate loan repricing this year. Can you just give us a little bit of color of maybe do you know the number of loans or the amount of loans that you expect to reprice over the next year? And then can you also- I know that's a big positive for American National, too, as we layer that in, any kind of color you can give on that as well? Thanks.

Rob M. Gorman (EVP and CFO)

Yeah. I don't have specific numbers of loans and how that's repricing, but you know, our fixed rate portfolio is about a three years, give or take, duration. So you're seeing that reprice every day with renewing loans. And of course, new loans coming on are being priced higher. But in terms of the, I think the fixed rate portfolio, at least on the commercial side, is in the 5%-5.25% range from the portfolio perspective, and that's repricing, you know, higher in this, you know, 6.5%-7% range at the moment based on where term rates are currently in the market.

So that's part of our expectation is that, even though that may reduce rates in the short-term rates will come down, we'll have some that will drive down the variable rate yields, but we'll be repricing these fixed rate loans, and that should help offset at least some of that drag on the short rates coming down. As for American National, yeah, as you know, about 80% of their loan book is fixed rate, it has an average duration of about three years. So we're seeing, we fully expect to see that repricing happen fairly quickly, which would, you know, we're going to have accretion income because we're marking that book.

But that accretion income should flow back into core margin or core yields, over that, you know, period of time.

Catherine Mealor (Managing Director, Equity Research)

You mentioned the fixed rate loan book is going from 5.25% to, you know, 6.5%-7% on new production. What does that look like for the whole portfolio, just including some of the, you know, C&I higher rate variable loans?

Rob M. Gorman (EVP and CFO)

Yeah. So as you saw, our portfolio was reporting as a 5.97% loan yield, total portfolio. We're seeing that, if you look at repricing, we're more in the 7.5 range, 7.25%-7.5% range. The variable rate book is, you know, repricing in the high 7s and even the 8s, at this point.

Catherine Mealor (Managing Director, Equity Research)

Okay, great. And then talking about your, your guide for loan growth is a little bit higher than your deposit growth. Can you just talk about just general, I guess, kind of strategies and deposit growth for this year, you know, and, and what you envision in terms of mix change as we work through the year? It feels like that's getting better and kind of moderating, but I assume, you know, a lot of the growth still is going to come, you know, kind of out of CDs and higher priced deposit betas. So just kind of curious how you think about remix happens, as we get, you know-

Rob M. Gorman (EVP and CFO)

Yeah.

Catherine Mealor (Managing Director, Equity Research)

closer to kind of the end of.

Rob M. Gorman (EVP and CFO)

Yeah, so Catherine, on that front, we're really not projecting a big. We've seen a pretty large change in the mix this year. You know, primarily money's coming out of non-interest bearing, going into money market and CDs. We've seen a lot of growth in the CD book as well as the money market side. We're not projecting that there's going to be a major shift in the current mix we're seeing. We think non-interest bearing, which, you know, we were 24% this quarter, we're kind of projecting, you know, that's in the 22%-24% range as we go forward this year. We also think, from a deposit beta perspective, as rates come down, you know, we'll be repricing that money market book, and then CDs are maturing.

You know, as I mentioned, majority of our CD book is repricing or re- or maturing over the first seven months of this year, $2.2 billion. So depending on where rates go, we should be able to see some decline there. So with that, I think, again, not looking for major shifts in deposit mix. But you're right, I think net growth will come in some more of the interest-bearing deposits.

John C. Asbury (President and CEO)

Yeah, and I would add that, you know, over the long haul, we do think of deposit growth as being a limiting factor for loan growth, but we're not contemplating excessive loan growth. One thing I'm proud of at Atlantic Union Bank is we pretty consistently grow net consumer households, which is good, not by very rapid amount, but we tend to end up every quarter with more consumer households than we did the month before. And we are focused on, as always, expanding our business depository and treasury management offerings. We've seen good growth there. Don't forget, American National Bank would have a lower loan-to-deposit ratio than we do.

We bring a lot of things to the table that are going to augment their efforts to go after commercial and industrial clients, including deposit and treasury management-intensive clients, because we have some things that they don't currently offer. And I guess fundamentally, Catherine, we feel pretty good about it. We are off to a good start. Remember, look at the difference between average deposit growth in Q4 and point-to-point. It's pretty notable because we have consistently seen this big drop at year-end. It wasn't as dramatic as we saw last year, but we're off to a very good start in Q1. So I think it's all pretty achievable.

A point we've made before as well is we don't - we actually don't have to fund loan growth 100% by deposit growth, while we would like to, because we do have cash being thrown off the securities portfolio. We're liquidating the indirect auto portfolio. But to be clear, you know, we would like to match loan growth with deposit growth. So I think we'll be okay there.

Catherine Mealor (Managing Director, Equity Research)

Okay. Oh, great. Very helpful. Thank you.

John C. Asbury (President and CEO)

Thanks, Catherine. And Victor, we're ready for our next caller, please.

Operator (participant)

Thank you. One moment for our next question. Our next question will come from the line of Steve Moss from Raymond James. Your line is open.

John C. Asbury (President and CEO)

Hi, Steve.

Steve Moss (Managing Director)

Hi. Good morning. You know, just following up on loan growth here, just curious, you know, where you're seeing the drivers of underlying C&I growth here, and the multifamily growth that we saw this quarter?

John C. Asbury (President and CEO)

Where it's coming from?

Steve Moss (Managing Director)

Yes.

John C. Asbury (President and CEO)

I'm going to ask David Ring, who leads our commercial banking efforts, is with us. So Dave, what's your perspective on drivers of, I guess, CRE and commercial loan growth?

David V. Ring (EVP, Commercial Banking Group Executive)

Yes. So, you asked specifically about multifamily. You know, that is one of the categories that we continue to grow. We've shrunk the categories, the asset classes we do want to grow in real estate. So it's kind of, as we grow, we're growing real estate and C&I at similar loan growth numbers. So, on the C&I side, we're seeing growth in every region, except we're slowing down in the western side of Virginia. And, you know, that's why we're very excited about the addition of the American National team there, because we had a much smaller team on the West side.

John C. Asbury (President and CEO)

Yeah, we were under-resourced there.

David V. Ring (EVP, Commercial Banking Group Executive)

We were under-resourced there. So on the C&I side, we're seeing the C&I pipelines grow faster than the real estate pipelines. We're seeing it grow in every region. Then when you look at our specialty businesses, they're really adding to the equation because government contractor, asset-based lending, those are C&I, growth engines for us, and they're doing quite well.

John C. Asbury (President and CEO)

It's pretty well diversified.

Steve Moss (Managing Director)

Okay. That's helpful. And then, just on the NPLs that occurred this quarter, you know, two of them were commercial real estate. Just curious, you know, did they hit maturity walls? You know, what type of properties they are, any incremental call you guys can give?

John C. Asbury (President and CEO)

Yeah, one was commercial real estate, one was commercial industrial. Doug Willey is here. Doug, I know we had some unique circumstances. Do you want to speak to that?

Doug F. Woolley (EVP and Chief Credit Officer)

Yeah. Steve, thanks for the question. One of them was, I'll call it a fascinating situation. Partner dispute, it is non-owner-occupied, but it does have owner-occupied tenants owned by the partners. And they got in a dispute. They put the borrower in bankruptcy. One of the two declared bankruptcy, and we're just kind of working through that mess. You know, we took a specific reserve to buy time. We have an appraiser we're trying to assess, you know, the actual value of and whatnot. The other one was a distributor to retailers, seasonal.

I guess it's safe to say they had difficulty adjusting to the post-COVID world, where their business accelerated because of everyone being at home, and now sales and whatnot have dropped, expenses up. So anyway, we're working through that with them.

I think that, if you're looking to define what does an idiosyncratic credit issue look like, these are two good examples. They're not reflective of anything else that we're seeing.

Steve Moss (Managing Director)

Okay. That's helpful. And then in terms of just American National here, John, you know, you're waiting on the Fed. Just curious, you know, it seems like with the state approval, it should be more of a formality, but, you know, how are you thinking about a timeline to close here? And, you know, are you having to have more active discussions with the Fed, or just kind of any color you can give there?

Doug F. Woolley (EVP and Chief Credit Officer)

Yeah, I, I would say, as, as I indicated in my comments, when we announced the merger on July 25, we said we expected to close in Q1 2024. That remains our expectation. Everything is proceeding normally. And I have no reason to, to think we will not hit the expected timeline. It just simply takes longer. We've been looking at lots of data, and it's, it's frankly averaging five and sometimes six months. This is about as clean and straight up a deal as you can imagine. So it is a straight up combination.

We respect that the Fed needs to do their work. They're going through their process. Everything is functioning, functioning normally. It just takes longer than it used to, and that's, that's where we are.

Steve Moss (Managing Director)

Okay, great. Appreciate all the color. Thank you very much.

Doug F. Woolley (EVP and Chief Credit Officer)

Thank you, Steve.

John C. Asbury (President and CEO)

Victor, we're ready for our next caller, please.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Russell Gunther from Stephens. Your line is open.

Rob M. Gorman (EVP and CFO)

Hi, Russell. Good morning.

Russell Gunther (Managing Director)

Hey, John. Good morning, everybody. Just a couple follow-ups on the margin to start, please. First being, you guys gave us the deposit data peaks on the way up. I was just hoping to get some guidance around what you think the peak cumulative beta will be on the way down. What's embedded in those three cuts that you guys are guiding to?

Rob M. Gorman (EVP and CFO)

Yeah, Russell, on that front, you know, looking at the three cuts, we're looking at a you know, by year-end, with these cuts coming in, about a 20% beta on the downside, for this year. Of course, that would continue into the next year, assuming rates continue to go down. But, that's our, that's our working assumption right now, 20%.

Russell Gunther (Managing Director)

Okay, that's great. And then, the range of 3.30%-3.40%, could you just talk through what would get you towards the high end?

Rob M. Gorman (EVP and CFO)

Yeah, from that to answer that question, it's basically going to be on how quickly can we bring down deposit rates. We think there'll be, you know, the Fed will cut. It'll be a bit of a lag in terms of the ability to reduce the deposit rates. So more of, you know, let's see the second cut and the third cut is primarily when we think we can really start reducing those towards the second half of the year. But it's all going to be dependent on, you know, the competition for deposits and client response, if you will. And we'll ratchet-

Russell Gunther (Managing Director)

Yeah.

Rob M. Gorman (EVP and CFO)

We'll ratchet them down. We won't, you know, go from here to the endpoint very quickly. So that's probably the biggest driver there.

Russell Gunther (Managing Director)

Okay. No, it makes sense. And then just switching gears for a second. On the expense side of things, so appreciate the full year core guide. How does the Q4 shape up from a run rate perspective? Is there anything in there, you know, plus or minus, that stands out that normalizes, or is this a decent run rate to think about?

Rob M. Gorman (EVP and CFO)

Are you talking about this, the current Q4 2023?

Russell Gunther (Managing Director)

Yeah.

Rob M. Gorman (EVP and CFO)

Yeah, there are a couple of items, but I, you know, I probably would probably say, you know, it might be in, call it the $1 million range in the Q4 that would kind of, let's say, unlikely to continue to recur. So that's about the number that I, that I came up.

John C. Asbury (President and CEO)

That's out of the - you're referencing operating expenses?

Rob M. Gorman (EVP and CFO)

Yeah, yeah. Operating, yeah. Not, you know-

John C. Asbury (President and CEO)

Yep. Taking out FDIC, as seen in the other items.

Rob M. Gorman (EVP and CFO)

There's always be. Yeah, there's kind of some things that came through. There's one with this. Yeah.

John C. Asbury (President and CEO)

We also, frankly, have a bit of a sprint underway in the company as we get ready. We're working on integration, clearly. As we approach conversion, there's only so much other things you can get done, so there's been a premium on getting other things done, under the wire, if that makes sense.

Rob M. Gorman (EVP and CFO)

Yeah, I'd say it's, you know, a lot of that's in the strategic investments that we talked about from the professional fees line.

John C. Asbury (President and CEO)

Okay.

Rob M. Gorman (EVP and CFO)

And some other things.

Russell Gunther (Managing Director)

I appreciate it. Thank you, guys. And then I guess with the, you guys still expecting deal close this quarter, any change to timing of the conversion, or that should be on track, assuming deal stays on track as well?

Rob M. Gorman (EVP and CFO)

We are on track for conversion based on what we know right now, and we are working to it every day.

Russell Gunther (Managing Director)

Got it. All right. And then just one last one, John, for you. You mentioned in prepared remarks just willingness to take strategic actions to navigate the current environment. Certainly took a number of them in 2023. As you think about this year ahead, any big picture thoughts?

Rob M. Gorman (EVP and CFO)

Well, I think that, obviously, we have to deliver, the organic performance and potential of the franchise, as always. I think the big thing is obviously ensuring that we have a successful integration of American National Bank, and that's kind of the big, you know, sort of overarching thing. So those are the, those are the two big things that are on our mind. Which doesn't mean we don't think three steps ahead. We in fact do, but we'll talk about that later. Three big priorities: organic performance of the bank, transformation, activities and technology, and then, you know, strategic, initiatives, which by definition this year means American National Bank being successfully integrated so we can reach its full potential.

Russell Gunther (Managing Director)

Understood. Okay, great. Thank you guys for taking my question.

Rob M. Gorman (EVP and CFO)

Thanks, Russell.

John C. Asbury (President and CEO)

Thank you very much. Hey, Victor, we have time for one last caller, please.

Operator (participant)

Thank you. One moment for our last question. Our last question comes from the line of David Bishop from Hovde Group. Your line is open.

Rob M. Gorman (EVP and CFO)

Hi, David.

David Bishop, CFA (Director)

Hey, quick question for you. Rob, I don't know if you have this handy, but, did you have the end-of-period average interest-bearing deposit cost versus the average for the period? Just curious if there was much difference there.

Rob M. Gorman (EVP and CFO)

Yeah, the interest-bearing deposits, if you look at the month of December, it was 2.97% versus the Q4 average, which was 2.92%. So as I said, we continue to see some uptick in deposit costs, you know, driven by the items that we mentioned in the call, in this script.

David Bishop (Director, Equity Research)

Did you see much movement in market rates by competition, intra-quarter? Just curious what you saw from some of your bigger peers out there within the market, if there was much movement up or down.

Rob M. Gorman (EVP and CFO)

Yeah, there really hasn't been a lot of movement. I'd say, you know, from midyear to now. We are seeing a bit, you know, folks going more towards a shorter, when you look at CD specials, more of a shorter duration, you know, six to seven. We've got a seven months. So there's been a, you know, reduction of kind of longer duration CDs and coming back with specials on the shorter end. We have seen a bit of movement in money market rates as well. Some of the larger players, like Truist, have increased their promotional money markets a bit during the quarter, but not materially, anything to really concern ourselves with in terms of having to match that, although we keep a close eye on it.

John C. Asbury (President and CEO)

Yeah, the big guys are all making pretty clear commentary that as rates come down, they intend to bring down deposit rates.

Rob M. Gorman (EVP and CFO)

Yeah.

John C. Asbury (President and CEO)

We'll see if that plays out.

Rob M. Gorman (EVP and CFO)

Right.

David Bishop (Director, Equity Research)

Got it. Then one follow-up. I think, Rob, you mentioned, or John, some seasonality, on the deposit side this quarter. Any way to ring fence that, from a dollar perspective? Thanks.

Rob M. Gorman (EVP and CFO)

Yeah, I want to say, I would say, you know, call it $200 million-$300 million is probably when you look at point-to-point, there's. Especially if you look at it from an average point of view, the average is probably a better gauge.

John C. Asbury (President and CEO)

It's actually a pretty good way to think about it. I would agree with that. You typically see it in the second half of December.

Rob M. Gorman (EVP and CFO)

Yeah.

John C. Asbury (President and CEO)

And it comes out of, you know, government contractors, for example, professional practices, anyone on cash basis accounting. They tend to pay bonuses to get ahead of year-end. It's a very predictable pattern. And then just like we saw last year, you start to get a pretty quick reversal of that trend as you get into the new year. That's what we're seeing right now.

David Bishop (Director, Equity Research)

Great. Appreciate all the color.

John C. Asbury (President and CEO)

Thank you, David.

Rob M. Gorman (EVP and CFO)

Thanks, David. Thanks, everyone, for your time today. We look forward to talking with you all in April. Have a good day.

Operator (participant)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.