Atlantic Union Bankshares Corporation (NYSE:AUB) Q1 2023 Earnings Conference Call April 25, 2023 9:00 AM ET

Company Participants

Bill Cimino - Senior Vice President and Director of Investor Relations

John Asbury - President and Chief Executive Officer; Chief Executive Officer, Atlantic Union Bank

Robert Gorman - Executive Vice President and Chief Financial Officer

David Ring - Executive Vice President and Wholesale Banking Group Executive

Conference Call Participants

Casey Whitman - Piper Sandler & Co.

Catherine Mealor - Keefe Bruyette & Woods Inc.

Steve Moss - Raymond James

Operator

Good day and thank you for standing by. Welcome to the Atlantic Union Bankshares First Quarter 2023 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.

I would now like to hand over the conference over to your speaker for today, Bill Cimino, Senior Vice President, Investor Relations. Please go ahead.

Bill Cimino

Thank you and good morning everyone. I have Atlantic Union Bankshares' President and CEO, John Asbury, the 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 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 first quarter of 2023.

We will make forward-looking statements on today's call, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statements.

Please refer to our earnings release issued today and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ from those expressed or implied in any forward-looking statement. And 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.

John Asbury

Thank you, Bill. Good morning everyone and thank you for joining us today. It was an eventful start to the year across the industry. Early in the quarter deposit rate competition hit a tipping point and rapidly intensified as idle funds went in search of higher yielding alternatives. Late in the quarter, we witnessed the dramatic back-to-back failures of Silicon Valley Bank and Signature Bank, which initially shook confidence in an American banking system that is fundamentally built on confidence.

We will go into our quarterly results and our financial performance in a few moments, but I'll begin by stating I'm pleased to report that our deposit base proved resilient. We avoided any material loss of deposits due to bank safety concerns and we covered loan growth by growing customer deposits by $153 million or approximately 4% annualized. Total deposits grew $524 million or 13% annualized as we elected to use some broker deposits to reduce wholesale borrowings that we took on in the fourth quarter of 2022.

Our franchise remains strong, even in these uncertain times. We see the current environment as another confirmation of our long-term strategy of being a diversified, traditional, full service bank with a strong brand and deep client relationships. Now more than ever soundness, profitability and growth, in that order of priority, remain our mantra and inform how we run our company. To that point, let me provide some detail on the granularity of our deposit base, which we think of as the crown jewel of the AUB franchise.

At the end of the first quarter, 72% of deposits were either insured or collateralized. We had liquidity sources available to cover 140% of uninsured and non-collateralized deposits at quarter end and you can see the details of this on Page 18 of our supplemental presentation. Here are a few statistics as of March 31. Our average retail deposit account balance was approximately $19,000. Our average business deposit balance was approximately $99,000. The customer deposit portfolio is split at around 48% retail and 52% business deposits.

We did make greater use of insured cash sweeps or ICS products toward the end of the quarter for certain larger deposit balance relationships. Given all of the attention on banks and bank liquidity, it was a good opportunity to talk to our clients individually, explain why SVB and signature were neither representative of AUB nor the industry as a whole, discuss our client's individual needs and provide options for them where desired. This is a good example of the relationship approach and personalized service that continues to differentiate us from the larger banks.

Reflecting on all that went on in the industry over the quarter, it was the remixing of deposits and the sharp acceleration of deposit rate competition higher than we anticipated. It was more consequential for us than the bank failures in subsequent industry turmoil. As a result, over the quarter, we took further rate actions to remain competitive. Quarter end non-interest bearing deposits were 28% of total deposits, a decline of 3 percentage points linked quarter.

Fully taxable net interest margin declined 20 basis points to 3.5% for Q1 as compared to 3.70% for Q4 2022, which now appears to have been the peak for the cycle. Half of the decline could be attributed to our increased use of wholesale borrowings following the late year decline in deposits as we optimized for liquidity over the quarter.

By comparison, our Q1 net interest margin of 3.5% was still up from 3.04% year-over-year. We do expect deposit betas to remain under competitive pressure through the rising rate cycle, but remain manageable, helping us with net interest margin management going forward is that approximately half of our loan balances are variable rate and that we liquidated some securities to reduce high cost wholesale borrowings during the quarter.

To that point, over the quarter and before the bank failures, we executed a balance sheet restructuring by selling $506 million of available-for-sale securities in order to reduce funding costs and bring our total securities holdings to 15.5% of total assets, which approximates our historical level. We viewed this as an attractive trade with a short earn-back that was more about reducing funding costs and raising liquidity. However, given subsequent industry events, we're pleased to have the additional liquidity. Rob will have more details on the restructuring in his comments.

Now let's dig into the macroeconomic conditions and then our quarterly results. Despite rising expectations for a mild recession to set in later this year or perhaps early next year, as it stands today, the macroeconomic environment remains solid in our footprint and we do not expect this to change in the near-term. Our markets appear to be healthy and our lending pipelines are strong and only modestly down from where they were at this time last year.

Virginia's last reported unemployment rate of 3.2% in March was unchanged from February and below the national average of 3.5% during the same time period. We still don't anticipate any materially negative near-term shift away from these low unemployment trends and overall benign credit environment, but we will continue to closely monitor the health of our markets.

Given investor focus on non-owner occupied commercial real estate and more specifically office exposure, I'll share some perspective on that. SIRI Finance is a historic strength of our company and it's an asset class that has performed well in our markets which have not traditionally been prone to boom and bust cycles. We stick to our netting and generally deal with local and regional developers and operators that we know well and have track records with us.

Non-Owner occupied office exposure totaled $729 million and comprised 5% of our total loan portfolio at quarter end. Of this approximately 25% is medical office, which we consider among the highest quality office category. We don't finance particularly large, high rise or major metropolitan central business district office buildings. The portfolio is performing well and geographically diverse. I described most of our office exposure is suburban single story and mid-rise properties under long-term leases generally to local tenants that are less likely to use remote or hybrid work options than large national firms.

We've analyzed the rent rolls of every property we finance and reviewed each property with our borrowers with an eye toward any near-term lease expirations, which we define as less than two years. We proactively monitor this portfolio and we don't see any systemic concerns in the office book at this time. Should problems develop in this portfolio, we believe that would likely be distributed every years and we expect any problems that may develop to be readily manageable.

Turning to quarterly results, as usual, we remain focused on generating positive operating leverage, that is growing our revenue faster than our expense. Our results were noisy during the first quarter due to the loss on sale of securities and a $5 million legal reserve associated with an ongoing regulatory matter. Setting aside the legal reserve expense, our adjusted operating expense run rate was in line with our expectations for the seasonally high first quarter.

Last quarter we guided to mid-single dig percentage operating expense growth for 2023, but we do recognize that was based on a then higher NIM expectation than we now have. Consequently, we will take further expense actions to limit operating expense growth to a low single digit percentage to ensure positive operating leverage for the year. Rob will detail the outlook in his section.

With respect to the legal reserve, as we previously disclosed, the Consumer Financial Protection Bureau or CFPB is considering an enforcement action against us in connection with certain of our historical overdraft practices. During the quarter the CFPB commenced settlement discussions to resolve the matter. We believe it is in our best interest to determine whether this matter can be resolved on terms acceptable to us and we're actively engaged in discussions with CFPB to settle the matter.

Consistent with CFPB practice, if the settlement discussions are not successful, CFPB may commence litigation against us. We do not know the timing of any such settlement or the final amount of any loss in connection with the matter. Any final loss could be materially different from our current estimate and accrued amount. We do believe that our overdraft opt-in rate is well below the industry average and our current overdraft practices comply with applicable law. That's all I'm able to share on the matter at this time given the ongoing discussions.

Now, here are a few financial highlights for the first quarter, which Rob will detail later. On a year-over-year basis we generated positive adjusted operating leverage of approximately 5% as adjusted revenue growth was up 9.6% while adjusted operating non-interest expenses increased 4.4% year-over-year. I'd also like to point out that pre-tax pre-provision adjusted operating earnings increased 19.5% year-over-year.

We posted annualized loan growth of approximately 3.8% point to point in the seasonally slow first quarter following the seasonally high fourth quarter. Lending production was down in the quarter, which is not surprising to us given that it followed a year record high Q4 and a rising level of uncertainty. Construction, our lending production was especially slow, the lowest in over two years, as some developers chose to delay or pause certain projects.

Our pipelines are holding up pretty well down 9% from a year ago, mostly due to reduction in commercial real estate, but remained healthy and balanced. At this time, we expect loan growth of 4% to 6% during 2023. While our pipeline levels imply we may do better, we suspect opportunities may take longer to pull through in the current environment. We do recognize that the economic outlook and our footprint could change as persistent inflation, higher interest rates and the threat of a recession loom, but at least for now, we expect to remain in a moderate growth mode in 2023.

C&I line utilization this quarter was relatively flat to the fourth quarter at 33%. It's still below our pre-pandemic levels of more than 40%, but better than at this point last year, which was then approximately 30%. About 47% of loan production in the first quarter came from new-to-bank clients. Our largest production came from C&I followed by existing construction and land development loans funding up. While we've seen some new construction projects, slow, delay or cancel, we anticipate modest growth in this area driven by multifamily and industrial properties.

Commercial real estate payoffs declined both year-over-year and linked quarter. As I've said for the last year, rising term rates have suppressed both refinance activity into the long-term institutional markets and too good to refuse offers to sell CRE properties.

Turning to credit, we recorded annualized net charge offs of 13 basis points for the first quarter, our first material net charge off quarter in over three years. The majority of this was a memory care facility that was originated by our predecessor Xenith Bank. We are in process of selling the note and currently expect to complete the sale during the second quarter. This is one of two standalone memory care facilities that we financed with this one having experienced problems and the other performing well.

Additionally, we received a full payoff of a $2.6 million C&I nonperforming asset shortly after quarter end, meaning that current non-performing assets are now slightly below year end levels. One-off credit losses do happen as we saw in Q1 though admittedly it's been years since we last saw one. Despite this, we have yet to see any sign of a systemic inflection point in our asset quality metrics which remain benign. We continue to expect a normalization in asset quality at some point following a long run of minimal net charge-offs. We remain confident in and are pleased with our asset quality.

In sum, it was a challenging environment to begin the year and a noisy quarter with respect to the legal reserve and securities portfolio loss. Having said that, we remain confident in our positioning for the remainder of the year, and our ability to navigate challenges, both expected and unexpected as usual with uncertainty comes opportunity and we do see opportunity in this environment.

Atlantic Union is a diversified, traditional, full service bank with a strong brand and deep client relationships and stable and attractive markets. We're on a solid footing, resilient and looking forward to a good year, but not as good as what we would have thought one quarter ago.

I'll now turn the call over to Rob to cover the financial results for the quarter. Rob?

Robert Gorman

Well thank you John and good morning everyone. Thanks for joining us today. Now let's turn to the company's financial results for the first quarter.

Please note that for the most part my commentary I will focus on Atlantic Union's first quarter results on a non-GAAP adjusted operating basis, which excludes the pretax loss on the sale of securities of $13.4 million and a pretax $5 million legal reserve recorded in the first quarter.

Regarding the sale of securities during the first quarter, as John noted, we executed a deleveraged strategy selling securities with a total book value of $506 million yielding approximately 3.4% at a pretax loss of $13.4 million and used net proceeds to reduce FHLB borrowings costing 4.75%. The strategy was structured to provide the company with improved liquidity, tangible common equity, and run rate earnings with a short earn-back period of approximately two years.

On an annualized basis, we expect the transactions to be approximately 1.8% accretive to EPS, 13 basis points accretive to NIM, 6 basis points accretive to ROA, approximately 36 basis points accretive to return on tangible common equity, and 20 basis points accretive to tangible common equity-to-assets ratio.

In the first quarter, reported net income available to common shareholders was $32.7 million and earnings per common share were $0.44. Adjusted operating earnings available to common shareholders were $47.2 million or $0.63 per common share for the first quarter, which is up approximately 5% from the first quarter of 2022. The adjusted operating return on tangible common equity was 15.2% in the first quarter, which is up from 12.7% in the prior year's first quarter.

Adjusted operating return on assets came in at 1% in the first quarter, which is up slightly from last year's level in first quarter of 2022 of 98 basis points. On adjusted operating basis, the efficiency ratio was seasonally elevated at 56% in the first quarter, but down from 58.9% in the same quarter of last year. Also, during the first quarter, as John mentioned, on a year-over-year quarter basis, the company generated positive adjusted operating leverage of approximately 5% as total adjusted revenue grew approximately 9.6% and adjusted operating expenses were up 4.4%.

Turning to credit loss reserves as of the end of the first quarter, the total allowance for credit losses was $131.7 million, which is an increase of approximately $7.3 million from the fourth quarter, primarily due to increasing uncertainty in the economic outlook and loan growth during the quarter. The total allowance for credit losses as a percentage of total loans increased 4 basis points to 90 basis points at the end of March.

The provision for credit losses of $11.9 million in the first quarter was up from the prior quarter $6.3 million provision for credit losses, primarily driven by higher net charge offs and the bills of fee allowance for credit losses as a percentage of loans to 90 basis points as noted. Net charge offs increased to $4.6 million or 13 basis points on an annualized basis, up from $810,000 or 2 basis points annualized in the fourth quarter.

Now turning to pretax, pre-provision components of the income statement for the first quarter, tax equivalent net interest income was $157.2 million, which was down approximately $10.7 million or 6.4% from the fourth quarter, driven by the lower day count in the quarter, higher deposit and borrowing costs due to increases in market interest rates, as well as changes in the deposit mix as depositors migrated to higher costing deposit accounts. These decreases were partially offset by an increase in loan yields on the company's variable rate loan portfolio due to increases in short-term interest rates during the quarter, as well as by the impact of average loan growth.

First quarter's tax equivalent net interest margin was 3.5%, a net decrease of 20 basis points from the previous quarter due to an increase of 38 basis points and the yield on earning assets more than offset by a 58 basis point increase in the cost of funds. The increase in the first quarter's earning asset yield was primarily due to the 45 basis points increase in the loan portfolio loan yield, which had a 41 basis point positive impact on the first quarter's net interest margin. Also a mixed shift in the investment securities portfolio as a percentage of earning assets during the first quarter drove a 3 basis point decline in the quarter's net interest margin.

Loan portfolio yield increased to 5.35% in the first quarter, up from 4.9% in the fourth quarter, primarily due to the impact of increases in short-term market interest rates on variable rate loan yields. The 58 basis point increase in the first quarter is cost of funds to 1.42% is due primarily to the 56 basis points increase in the cost of deposits to 1.28%, which had a 48 basis point negative impact on the first quarter's net interest margin.

The total cost increase was driven by changes in the deposit mix as depositors migrated to higher costing interest bearing deposit accounts during the quarter, increased levels of higher cost broker deposits as well as increases in interest bearing deposit rates driven by rising market interest rates.

In addition, elevated high cost short-term borrowing levels resulting from the bias for liquidity as a result of the banking turmoil during the quarter increased the cost of funds by approximately 10 basis points from the prior quarter.

Noninterest income decreased $14.9 million to $9.6 million for the first quarter, primarily due to the $13.4 million pretax loss on the securities previously noted. The loss on the sale of securities excluding the loss on the sale of securities adjusted noninterest income decreased to $1.5 million to $23 million, primarily due to $2.2 million decline in loan related interest rates swap income from the prior quarter due to lower transaction volumes. This decline was partially offset by increases in several noninterest income categories, including certain service charges, fiduciary and asset management fees, mortgage banking income, and bank-owned life insurance income.

Noninterest expense increased $8.5 million to $108.3 million for the first quarter, up from $99.8 million in the prior quarter, primarily due to a $7 million increase in other expenses comprised of the $5 million legal reserve associated with the ongoing regulatory matter, the $3.2 million related to the gain recorded in the prior quarter related to the sale and leaseback of an office building partially offset by lower teammate and travel costs.

We also had a $2 million quarter-to-quarter increase in FDIC assessment fees due to the increase in the FDIC assessment rate, effective January 1^st, and the impact of the prior period's FDIC assessment fee refunds reflected in the prior quarter. Salaries and benefits expense increased $1.8 million due to the seasonal increases in payroll related taxes and 401(k) contribution expenses in the first quarter, partially offset by reductions of performance based variable incentive compensation and profit sharing expenses.

These increases in noninterest expense were partially offset by a $1.3 million decline in technology and data processing expenses primarily due to the write-down of obsolete software in the prior quarter, as well as a $1 million decrease in professional services expenses related to strategic projects that occurred in the prior quarter.

The effective tax rate for the first quarter decreased to 17% from 17.5% in the first quarter of 2022 due to, a higher proportion of tax exempt income to pretax income. In 2023 we expect the full year effective tax rate to be in the 16% to 17% range. This range is sensitive to the actual annual pretax earnings and the proportionality of non-taxable income to pretax earnings, primarily in securities and loans and other discreet tax items.

Turning to the balance sheet, total assets were $20.1 billion at March 31st, which was a decrease of $358 million or approximately 7% annualized from December 31st levels. The decrease was primarily due to the decline in investment securities portfolio related to the sale of securities during the first quarter, partially offset by loan growth in the current quarter. [Indiscernible] loans held for investment were $14.6 billion, an increase of approximately $135 million or 3.8% annualized from the prior quarter, driven by increases in commercial loan balances were approximately $96 million or 3.2% linked quarter annualized and consumer loan balance growth of $39 million or 7% annualized.

At the end of March, total of deposits stood at $16.5 billion, which was an increase of $524 million or approximately 13.3% annualized growth from the prior quarter driven by increases of $153 million in customer deposits and $371 million in broker deposits. At March 31^st, noninterest bearing deposits comprised 28% of total deposit balances, which is down 3 basis points or 3% from the fourth quarter level of 31% as depositors migrated to higher costing interest bearing deposit accounts in the quarter.

From a shareholder stewardship and capital management perspective, we remain committed to managing our capital resources prudently as the deployment of capital for the enhancement of long-term shareholder value remains one of our highest priorities.

Regarding the company's capital management strategy, capital ratio targets are set to seek to maintain the company's designation as a well-capitalized financial institution, and to ensure that capital levels are commensurate with the company's risk profile, capital stress test projections, and strategic plan growth objectives. At the end of the first quarter, Atlantic Union Bank shares and Atlantic Union Bank's regulatory capital issues were well above well capitalized levels.

In addition, on a pro form basis, we remain well capitalized if you include the negative impact of AOCI and held some maturity securities unrealized losses in the calculation of the regulatory capital ratios.

During the first quarter, the company paid stock dividend of $0.30 per share consistent with the prior quarter, and also paid a quarterly dividend of $171.88 on each outstanding share of its series A preferred stock. The company did not purchase any shares during the quarter in order to preserve capital for organic loan growth and to position the company for potential adverse developments arising from uncertainty in the macroeconomic environment.

We have updated our full year 2023 financial outlook to the following as a result of the changing banking environment. We now expect to generate loan growth of 4% to 6% in 2023. We are currently projecting that the full year net interest margin will fall in a range between 3.35% to 3.45%, driven by the assumption that the Federal Reserve Bank will increase the Fed funds rate to 5.25% in May and maintain it at that level throughout 2023.

In addition, we are now projecting that our through the cycle deposit data will approximate approximately 40%, which will be partially offset by increasing loan yields. As a result of loan growth and lower net interest margin, we now expect fully taxable equivalent net interest income to grow by mid-single digits in 2023 from full year 2022 levels. We also expect that the company will generate positive operating leverage in 2023 due to the expected mid-single digit operating revenue growth a pacing expected low single digit expense growth in 2023 from full year 2022 levels.

Due to elevated net charges of 13 basis points in the first quarter, any expectations for a mild recession to begin sometime in 2023, we expect to see an uptick in the full year net charge off ratio to 10 basis points in 2023 from the 2 basis points in 2022. The allowance for credit loss of the loan balances is projected to remain at 90 basis points throughout 2023.

In summary, Atlantic Union delivered solid financial results in the first quarter of 2023 despite the challenging banking environment we find ourselves in. As noted in the prior earnings calls, we expect to consistently generate financial results to place us in the top quartile among our proxy peer group regardless of the operating environment. That said, we are reevaluating our previously published financial targets to determine whether they need to be adjusted to ensure they are reflective of the financial metrics required to achieve top tier financial performance versus peers in the prevailing economic environment. However, we continue to believe we are well positioned to generate sustainable, profitable growth and to build long-term value for our shareholders in 2023 and beyond.

And with that, I'll turn it back over to Bill Cimino to open it up for questions from our analysts.

Bill Cimino

Thanks, Rob. We are now ready for our first caller, please.

Question-and-Answer Session

Operator

All right, well thank you so much, presenters. [Operator Instructions] And our first question comes from the line of Casey Whitman of Piper Sandler & Co. Your line is now open.

John Asbury

Good morning, Casey.

Casey Whitman

Good morning. Good morning. Maybe I'll just start on the fee income guide you guys gave. What kind of assumption should we be making for the loan swap fees, it seems like that could move, move that outlook a lot?

John Asbury

Yes, we are looking to for that to bounce back as we go through, if not the second quarter in the back half of the year, Casey. So you know, we had elevated levels in the fourth quarter of last year, it kind of dropped off some of that seasonal production lower production in the first quarter. But we expect to see that in the, call it the $10 million to $12 million range for the full year as we go forward here, but we'll have to see how that plays through.

Casey Whitman

Okay. Okay. And sticking with, I guess, noninterest items, so you touched on this a bit, John, in your opening remarks, but sort of what are some of the expense levers that you're able to pull here with the low revenue outlook? And are there other ones you'd be considering if the revenue outlook continues to go down or credit cost proved to be much higher? Just sort of walk us through how you're thinking about the expense base here.

John Asbury

Yes Casey, what we're looking at is reducing the rate of expense growth. We've taken -- we've been pretty aggressive through the years in terms of management of the bank's expenses. I would generally describe it as pretty much across the board, and I would not say that to be one individually large item, but we do think that we'll have line of sight in order to achieve a low single digit growth target.

Robert Gorman

Yes, I think Casey just to add to that, there are levers we can pull, incentive expenses depending on where we come up versus our targets that we set for the year that could be down. We're also looking at perhaps delaying some things that we had previously thought we would be able to fund with the revenue growth we thought we would see as we started the year.

So things like that. And then various hiring delays and adding staff, et cetera. And, and they're always very, but as John says it's really across the -- yes everyone will participate. All leaders and we are pretty much continuously working on what I would call efficiency and process improvement measures.

So we're not talking about a really large number here and we'll be able to deliver on it. Yes but the point is that we do want to show a positive operating leverage, so revenue outlook is lower. We need to adjust accordingly.

John Asbury

Yes, I think that's a really important point Rod makes. We will -- we are committed to positive operating leverage. Bear in mind as we did the planning, given whether NIM was a quarter ago and what our expectations were prior to the developments of quarter one, we were looking at materially higher revenue growth, which gave us the ability to plan for some additional investment and expense spend and now we adjusted the plans as a result.

Casey Whitman

Okay. I'll just ask one more and let someone else jump on, but just given your loan growth assumption, what are you sort of assuming on the deposit side in terms of growth in 2023?

John Asbury

Yes, so excluding the broker deposits that we noted in the first quarter, we're looking at about 2% is our working assumption for this year on an organic deposit growth basis. So as we said, 4% to 6% on the loan side, call it about 2% on the deposit side picking up the difference with some perhaps brokered deposits or other funding, co-sale funding needs or sources or as well, we have cash flow coming out of the securities portfolio, so we could bring down our securities as presented. Total assets we're at 15.5%. We typically want to run in the 15-ish range, so there's some opportunity there.

Casey Whitman

Okay. I'll let someone else unpack that a bit. Thank you, guys.

Bill Cimino

Thank you, Casey. And we're ready for our next caller, please.

Operator

All right, thank you so much. And your next question comes from the line of Catherine Mealor of KBW. Your line is now open.

John Asbury

Good morning Catherine.

Catherine Mealor

Hey, good morning. Can you all hear me?

John Asbury

Yes, we can.

Catherine Mealor

That's great. Okay, thanks. Good morning. I was on mute. If we just go back to the fees and can you help us just think about how you're seeing the trend in service charges for the back half of the year and if this legal issue with the CFPB drives any changes in your outlook for that number or some of that already kind of taken into account from previous guides? Thanks.

Robert Gorman

Yes Catherine on service charges on deposits, we don't -- there's no real impact at all from what John mentioned on the CFPB matter impacting that. But pretty much looking at seasonal ups and downs for the remaining of the year, but I would say it's kind of flattish, the outlook is kind of flattish to what first quarter came in and the various service charge categories which will be up, which won't actually be up year-over-year because as you recall, midyear in 2022, we changed some -- our overdraft policies and that led to approximately $1.5 million or so estimated decline in the overdraft revenue in that service charge line. But if you look at the first quarter's run rate, we think that's a pretty good run rate for the balance of the year.

Catherine Mealor

Okay. So we -- so is that, that $1.5 million hasn't reflected in this run rate yet, correct?

Robert Gorman

Say that again, Catherine, sorry?

Catherine Mealor

Is that $1.5 million, is that fully in today's run rate?

Robert Gorman

Yes, that's fully baked in, yes, already.

Catherine Mealor

Okay, so that's all that's already in.

Robert Gorman

Yes. If you just take the first quarter's service charge line out for the full year, that's a good run rate.

Catherine Mealor

Okay, great. That's helpful. And then if you just answered this, I apologize, I was kind of jumping back and forth. Can you walk us through where deposit costs were towards the end of the quarter and how you're thinking about deposit costs in just the next couple of months?

Robert Gorman

Yes, as we mentioned, Catherine, we are expecting that betas will be increasing just to put that out there in terms of the -- through the cycle by year end, we expect that the betas that you saw through the cycle so far is 28%. We think that's going to start to tip towards 40%. When it's all said and done on the total deposit and pushing 50% on interest bearing deposits through the cycle. We do expect the Fed will go one more and then hold. So it's based on that assumption. In terms of the -- if you look at what March cost of deposits was it's actually up to 1.43%. So if you look at it versus the quarter's average, it has uptick and that's the expectation we have for the balance of the year that will continue to increase.

Catherine Mealor

Great. And as you think about that 40% total, 50% interest bearing beta, I mean do you think you'll get there as soon as the next quarter or two? How do you kind of think about the lag and…

Robert Gorman

Yes, yes, I would say when that, Fed will move in a couple of weeks in May, and then we think it will top out it in the third quarter going into the fourth quarter will be stable.

Catherine Mealor

Okay. And then one last one just on the deposits. There's been a lot of mixed shift across the industry out of noninterest bearing into interest bearing and CDs. How are you thinking about what that mixed shift looks like for you towards the end of the year?

Robert Gorman

Yes, we're seeing it kind of normalize towards the pre-pandemic levels. On noninterest bearing deposits we're about 28% of total deposits at March 31^st. We expect that to tick down a bit, probably to about 25% is what our projection would say at this point in time. But it could be plus or minus that level by year end.

Catherine Mealor

Okay. Very helpful.

Robert Gorman

Which is kind of a normalizing impact there.

Catherine Mealor

Yes. And about where you were pre-pandemic?

Robert Gorman

Yes, we were probably in 23, 24 range, I think.

Catherine Mealor

Great. All right, thank you.

Operator

All right. Thank you so much. And your next question comes from the line of Steve Moss of Raymond James. Please go ahead.

John Asbury

Hi Steve. Good morning.

Steve Moss

Hey, good morning. Maybe just starting on the margin here in terms of where is loan pricing these days in terms of the new production that you're putting on, and just kind of curious also on the pace of fixed rate loan rate repricing over the next 12 to 24 months?

John Asbury

Yes, so in terms of the originations new production in the quarter, going on about, just call it 6.75% to 7%. And that's kind of the mix that's come on during the quarter was about 63% was a variable tied to LIBOR/ [indiscernible] or Prime. So if you blend that with fixed rate deposits coming on, which is at a lower rate because term rates are bit lower, would be inverted curve. We're probably averaging out about 6.75 for new commercial loan yields coming on.

Steve Moss

Okay.

John Asbury

And that should, oh, sorry, go ahead Steve. Sorry.

Steve Moss

Oh no, I was just goning to then say, in terms of fixed rate loans rate price, I'm just kind of curious as to kind of how we think about that pace and how much you guys can pick up on the asset side as the year goes on?

Robert Gorman

In terms of fixed rate yields, yes we were up above, yes call it about 30 basis points, quarter-to-quarter. It really depends on what happens to the yield curve, but we're not -- we aren't calling for the belly of the curve to change too much from where it is today. So probably see that kind of stable at that level unless we see some uptick in the 2 to 5-year rates which would obviously be a benefit to us from a new fixed rate loan production.

Steve Moss

Okay. And, and then in terms of just with regard to the securities portfolio with the sale of securities, any thoughts on additional restructuring or additional sales going forward here?

John Asbury

We're not planning on that, Steve, but I wouldn't take it off the table depending on what happens with the balance of the year here. But I don't think that you should expect that we're going to take any material realized loss or realize any material losses from the sale of securities. We're kind of set. They set 15% of total assets. Were a little over that now, so I wouldn't expect to see any material sales around the margins.

Steve Moss

Okay. And then in terms of loan growth guidance here, you guys said the pipeline here is still strong, only modestly lower versus before. But the guide is a step down. Just kind of curious, are you thinking about just a deceleration and growth as the year goes on or maybe you expect more commercial estate projects to cancel? Just kind of curious as to how you're thinking about that dynamic.

John Asbury

Yes, Steve, you're correct. So when we look at the loan pipeline, it definitely implies based on our experience, higher growth rates than what we're forecasting now. We just know from experience that when uncertainty rises, commercial borrowers, commercial real estate developers can become more hesitant and it takes longer for things to pull through the pipeline. So from our standpoint, we just wanted to make sure that we were, from a planning standpoint and setting expectations being pretty realistic. We'll see how things go out there.

David Ring, who is Head of our Commercial Businesses is here. David, what is your intuition in terms of loan growth from here? Would you agree that things will likely be slower than before?

David Ring

I do. I think our pipeline is good enough to do better than we're forecasting, but we take the approach that, call it 30% of our production is, or 40% of our production ends up in the fourth quarter booking. So that could fall into January. So we like to take the approach that if things might be delayed, we'll take a more conservative approach towards our loan growth projection, but our pipeline remains more than robust to cover it.

Steve Moss

Okay. That's helpful. And just may be just one last one from me. C&I growth here was strong. Just kind of curious, have you given incremental color as to the drivers there and what you're seeing?

John Asbury

Yes, I mean, we've developed our C&I practice really over the last five years and every year you know we get better and better at it and every quarter we're seeing C&I growth come in. And what you'll see is our commitments are growing in the C&I side, which is a good for the future. It's a good predictor for the future that our commitments keep growing at the rate they're currently growing. So our utilization is still steady, but our commitments continue to grow.

Steve Moss

All right, great. Well, I appreciate all the color. Thank you very much.

John Asbury

Thank you, Steve.

Operator

Thank you so much. And we don't have any more questions. I would now like to turn the conference back to Bill for closing remarks.

Bill Cimino

Thanks [indiscernible] and thanks everyone for joining us today. As a reminder, we'll have our annual meeting next week on Tuesday, May 2nd, and we'll look forward to talking with you then. Have a good day.

Operator

Thank you so much presenters and thanks to all our attendees. This concludes today's conference call. Thank you for participating and you may now disconnect.