Atlantic Union Bankshares Corporation (NYSE:AUB) Q4 2023 Earnings Conference Call January 23, 2024 9:00 AM ET

Company Participants

Bill Cimino - Senior Vice President of Investor Relations

John Asbury - President and Chief Executive Officer

Robert Gorman - Executive Vice President and Chief Financial Officer

David Ring - Executive Vice President and Wholesale Banking Group Executive

Douglas Woolley - Executive Vice President and Chief Credit Officer

Conference Call Participants

Casey Whitman - Piper Sandler

Catherine Mealor - KBW

Steve Moss - Raymond James

Russell Gunther - Stephens

David Bishop - Hovde Group

Operator

Good day. Thank you for standing by. Welcome to the Atlantic Union Bankshares Fourth 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 the conference over to your speaker today, Bill Cimino, Senior Vice President of Investor Relations. Please go ahead.

Bill Cimino

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 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 fourth quarter and fiscal year 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 a forward-looking statement.

All comments made during today's call are subject to that Safe Harbor statement. And 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 Asbury

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 shift depositor confidence in the American banking system and further intensified margin pressure. Thankfully, our deposit base remains 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 three 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 nine months ago during our Q1 '23 earnings call, we said we would take meaningful expense actions and then did what we said we would do in the second quarter.

We took out $17 million in structural expenses with nearly all expense savings complete by the end of Q2. Second, on July 25th 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 first quarter 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 involve the sale of available-for-sale securities early in the year, prior to the bank failures. And the second occurred in the third quarter 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 have the full benefit of that in Q4 '23.

I won't list every accomplishment in '23, but despite the industry turmoil we made excellent progress against our three-year strategic plan that we updated in 2022. A highlight for the year was our technology modernization effort, as we've 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 the 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 continue 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 that help people and help businesses.

It's a straightforward business model that works and it 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 then our 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 in the appendix to our earnings presentation. And 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. This 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 fourth quarter and for the full year 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%.

Also I 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 '24. The remixing of non-interest-bearing deposits to interest-bearing deposits slowed during the fourth quarter 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 is not quite yet over. We posted annualized loan growth of 9.1% during the seasonally high fourth quarter, 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 third quarter as projects completed and were re-categorized 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 fourth quarter. Loan production in the fourth quarter 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 third quarter, 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 three basis points for the fourth quarter, up from one basis point in the third quarter. For the full year we finished at an impressive five basis points of net charge-offs. We expect that asset quality will eventually normalize following a very long run of minimal net charge-offs that 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 first quarter 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.

Robert Gorman

Thank you, John, and good morning, everyone. Please note that for the most part, my commentary will focus on Atlantic Union's fourth quarter financial results on a non-GAAP adjusted operating basis which excludes the following pre-tax items.

Gains of $1.9 million in the fourth quarter and $27.7 million in the third quarter related to sale-leaseback transactions. The net loss on sales of securities of $27.6 million recorded in the third quarter.

The $3.4 million FDIC special assessment expense recognized in the fourth quarter. The $3.3 million legal reserve related to our previously disclosed settlement with the CFPB in the fourth quarter. Merger related costs of $1 million in the fourth quarter and $2 million in the third quarter associated with our pending merger with American National. And expenses of $8.7 million associated with our strategic cost savings initiatives recorded in the third quarter.

In the fourth quarter, 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 was $58.9 million or $0.78 per common share for the fourth quarter and were $221 million or $2.95 per common share for the full year '23.

The adjusted operating return on tangible common equity was 18.2% in the fourth quarter and 17.2% for the full year. The adjusted operating return on assets was 1.18% in the fourth quarter and 1.14% for the full year. And on adjusted operating basis, the efficiency ratio was 52.9% in the fourth quarter and 54.2% for the full year of 2023.

Turning to credit loss reserves as of the end of the fourth quarter, the total allowance for credit losses was $148.5 million, which is an increase of approximately $7.5 million from the third quarter, primarily due to loan growth in the fourth quarter 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 three basis points to 95 basis points at the end of the fourth quarter as compared to the third quarter. Provision for credit losses of $8.7 million in the fourth quarter was up from $5 million in the prior quarter. Net charge-offs increased to $1.2 million or three basis points annualized in the fourth quarter, up from $294,000 or one basis point annualized in the third quarter. For the full year, the net charge-off ratio was five basis points.

Now turning to pre-tax pre-provision components of the income statement, for the fourth quarter, tax equivalent net interest income was $157.3 million, which was an increase of $1.6 million from the third quarter, driven by higher yield 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 fourth quarter's tax equivalent net interest margin was 3.34%, which was a net decrease of one 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 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 fourth quarter from 5.84% in the third quarter, which added approximately 11 basis points of 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 yield as well as on renewing loans.

Securities portfolio yield increased by 38 basis points to 3.80% in the fourth quarter from 3.42% in the third quarter, which added four 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 to favorable earning asset mix shift towards higher yielding loans and higher yields on invested cash contributed an additional five basis points to the fourth quarter's net interest margin. The 21 basis point increase in the fourth quarter'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 fourth quarter's net interest margin, partially offset by the four basis point margin positive impact of lower borrowing cost.

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 operating non-interest income, which excludes gains and losses on sales of securities and gains on sale leaseback transactions recorded in the third and fourth quarters increased $1.1 million to $28.1 million from the prior quarter, driven by 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 reported in the prior quarter.

Reported non-interest expense decreased approximately $600,000 to $107.9 million for the fourth quarter. Adjusted operating non-interest expense, which excludes amortization of intangible assets in the third and fourth quarters, the FDIC special assessment in the fourth quarter, the legal reserve associated with our previously disclosed settlement with the CFPB in the fourth quarter, merger-related costs associated with our pending merger with American National in the third and fourth quarters, and expenses associated with strategic cost savings initiatives in the third quarter.

Expenses increased $2.5 million to $98.2 million for the quarter, fourth quarter 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 classic inventory purchases.

In addition to $1.1 million increase in professional services expense primarily in support of strategic initiatives in the fourth quarter 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 $591,000 increase in occupancy expenses, which was driven by the increased lease payments related to the sale leaseback transactions executed in the third quarter.

These increases were partially offset by $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 third quarters.

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 and the same period in the prior year, primarily due to increases in interest-bearing customer deposits and brokered deposits, partially offset by declines in demand deposit balances.

At the end of the fourth quarter, 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 fourth quarter, 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 fourth quarter, the company paid common stock dividend of $0.32 per share, which was an increase of approximately 7% from the previous quarter.

At a full-year 2024 financial outlook for AUB on a standalone basis excluding any impact from 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're also projecting that the full year fully taxable -- tax 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 three times in 2024 beginning in June.

In addition, we project that our through the cycle total deposit beta will be approximately 45%, which will be more than offset by the projected through the cycle loan yield beta of approximately 50%, but 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 second quarter. 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 of between 10 basis points and 15 basis points in 2024 from five 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 projected to remain within a range of 95 basis points to 100 basis points in 2024.

So in summary, Atlantic Union delivered strong financial results in the fourth quarter 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

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

Question-and-Answer Session

Operator

Yeah. And at this time, we will conduct the question-and-answer session. [Operator Instructions] Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Casey Whitman from Piper Sandler. Your line is open.

John Asbury

Good morning, Casey.

Casey Whitman

Hey, good morning.

Robert Gorman

Good morning.

John Asbury

Hi.

Casey Whitman

So, appreciate the stand-alone 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 what each cut does to the margin? Do you think you can still hold it in that 330-340 range even if we do get more than three cuts or how should we think about it?

John Asbury

Yeah, Casey, that's a good question. As I mentioned, we are assuming three cuts, we kind of taken the Fed that they were related to the dot plot reductions that they noted in the last meeting. So with that basically what we think we'll be doing, what we'll be seeing is kind of a first and second quarter kind of seeing the low point on the margin, maybe getting down to 325 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 second quarter. So additionally, we also see deposit rates kind of stabilizing, as well coming out of the first quarter. 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 are 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 happenings kind of coming down to kind of gradually increasing through the balance of the year. And that's how we get to the 330 to 340 range that we're suggesting for the full year of 2024. Now if there is more than three cuts that will be negative towards our expectations from a net interest margin perspective. So if you believe the futures -- Fed fund futures which says there is six cuts, starting in March, our estimates are that we would see six basis points to eight basis points further compression from what -- from that 330 to 340 range. So maybe more in the 320 to 330 range would be our guidance, if that were to happen. But again, our baseline assumption is three cuts for the year.

Casey Whitman

Okay. Sorry, and I don't know I misheard or not, but did you say -- you said 325 or 335 for first quarter, all else equal here.

John Asbury

We see it drop down, you know, within -- between 325 and 330 is what I suggest our projections are.

Casey Whitman

Okay. And the six basis point to eight basis point potential further compression, if there's cuts, that's per cut or if there's all three?

John Asbury

Say that again.

Casey Whitman

Sorry, the six basis points to eight basis points of potential further compression that --

John Asbury

Yeah, that's -- yeah, that's on a full year basis. So --

Casey Whitman

Okay.

John Asbury

Instead of the 330 to 340 range you could -- you think of six basis points to eight basis points of that range.

Casey Whitman

Okay. And are we prepared to give an update as to what American National like sort of add to that margin or --

John Asbury

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

Casey Whitman

Yeah [indiscernible]

John Asbury

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

Casey Whitman

Make sense. Thanks for taking my questions.

John Asbury

Thank you, Casey.

Bill Cimino

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

Operator

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

John Asbury

Good morning, Catherine.

Catherine Mealor

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 you know the number of loans, 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, to layer that, that end, any kind of color you can give on that as well. Thanks.

Robert Gorman

Yeah, I don't have specific numbers of loans and how that's repricing. But our fixed rate portfolio is about a three-year give or take duration. So you've seen that re-price 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 a commercial side is in the 5, 5.25 range from a portfolio perspective. And that's repricing higher in this yield of 6.5% to 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 Fed may reduce rates in the short -- and 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 down -- that drag on the short rates coming down. As for American National, yes, you know about 80% of their loan growth 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 as repricing happens over that period of time.

Catherine Mealor

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

Robert Gorman

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

Catherine Mealor

Okay. Great. And then talking about 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 in deposit growth for this year. And what you envision in terms of mix change if we look through the year, feels like that's getting better and kind of moderating. But I assume a lot of the growth is still going to come and you kind of have CDs and higher priced deposit book. So just kind of curious how you think about remix happens as we get closer to kind of the end of --

Robert Gorman

Yeah, so Catherine on that front, we're really not projecting a big -- we've seen -- we've seen pretty large change in the mix this year primarily what is 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 we were at 24% this quarter. We're kind of projecting that's in the 22% to 24% range as we go forward this year. We also think from a deposit beta perspective as rates come down we'll be repricing that money market book and then CDs are maturing, as I mentioned, the majority of our CD book is repricing 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, that growth will come into more of the interest bearing deposits.

John Asbury

Yeah, and I would add that 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 am 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, as we actually don't -- while we would like to, we don't have to fund loan growth 100% by deposit growth because we do have cash being thrown off the securities portfolio, we're liquidating the indirect auto portfolio. But to be clear, we would like to match loan growth with deposit growth. So, I think we'll be okay there.

Catherine Mealor

Great. Very helpful. Thank you.

Bill Cimino

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

Operator

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 Asbury

Hi, Steve.

Steve Moss

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

John Asbury

Where it's coming from?

Steve Moss

Yeah.

John Asbury

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 in commercial loan growth?

David Ring

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, 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 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 Asbury

Yeah, we were under-resourced there.

David Ring

We're 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 growing in every region. Then when we 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 Asbury

So it's pretty well diversified.

Steve Moss

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

John Asbury

Yeah, one was commercial real estate. One was commercial industrial. Doug Woolley is here. Doug, I know we have some unique circumstances, do you want to speak to that?

Douglas Woolley

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

John Asbury

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

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

John Asbury

Yeah, I would say, as I indicated in my comments, when we announced the merger on July 25th, we said we expected to close in Q1 '24, that remains our expectation. Everything is proceeding normally. And I have no reason 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 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 -- it's a straight up combination. We respect that the Fed needs to do their work, they're going through their process, everything is functioning normally. It just takes longer than it used to, and that's where we are.

Steve Moss

Okay, great. I appreciate all the color. Thank you very much.

John Asbury

Thank you, Steve.

Bill Cimino

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

Operator

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

John Asbury

Hi, Russell.

Robert Gorman

Good morning.

Russell Gunther

Hey, John. Good morning, everybody. Just a couple of follow-ups on the margin to start, please. First being you guys gave us the deposit beta peaks on the way up, 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?

John Asbury

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

Russell Gunther

Okay. That's great. And then the range of 330 to 340. Could you just talk through what would get you towards the high end?

John Asbury

Yeah, from that, to answer that question is basically going to be how quickly can we bring down deposit rates. We think there will be -- the Fed will cut, it will be a bit of a lag in terms of the ability to reduce deposit rates. So more of 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 the competition for deposits and client response, if you will. And we'll ratchet -- we'll ratchet them down, we won't go from here to the endpoint very quickly. So that's probably the biggest driver there.

Russell Gunther

Okay. Yeah, 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 fourth quarter shape up from a run rate perspective, is there anything in there, plus or minus that stands out that normalizes or is this a decent run rate to think about?

John Asbury

Are you talking about this, the current, fourth quarter '23.

Douglas Woolley

Yeah, there were a couple of items, but I probably would -- probably say it might be in, call it the $1 million range in the fourth quarter that we kind of let's say unlikely to continue to recur. So that's what the number that I've been up to.

John Asbury

That's out of, Doug, you're referencing operating expenses.

Douglas Woolley

Yeah. Yeah, operating. Yeah, you know, just taken out of these, I see in the other items.

John Asbury

There's kind of some things that came through. There's one that [indiscernible]. We also frankly had 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.

Douglas Woolley

Yeah, so I'd say it's -- a lot of that's in the strategic investments that we talked about from the professional fees line and some other things.

Russell Gunther

Okay. I appreciate it. Thank you, guys. And then, I guess with -- 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.

John Asbury

We are on track for conversion based on what we know right now. And we are working through it every day.

Russell Gunther

Got it. Perfect. And then just one last one, John, for you, you mentioned in prepared remarks the 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?

John Asbury

Well, I think, 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 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 strategic initiatives, which by definition this year means American National Bank being successfully integrated, so we can reach its full potential.

Russell Gunther

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

John Asbury

Thanks, Russ.

Russell Gunther

Thank you very much.

Bill Cimino

And Victor, we have time for one last caller, please.

Operator

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

John Asbury

Hi, David.

Robert Gorman

Hey, David.

David Bishop

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 costs versus the average for the period? Just curious if there's much difference there.

Robert Gorman

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

David Bishop

Did you see much movement in market rate 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.

Robert Gorman

Yeah, it really hasn't been a lot of movement. I'd say from mid-year 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, six to seven, we've got seven month. So there's been a 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 Asbury

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

Robert Gorman

Yeah.

John Asbury

So we'll see if that plays out.

Robert Gorman

Right.

David Bishop

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

Robert Gorman

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

John Asbury

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

Great. Appreciate all the color.

John Asbury

Thank you, David.

Bill Cimino

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

Operator

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