Atlantic Union Bankshares Corp
NYSE:AUB
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Earnings Call Analysis
Q3-2023 Analysis
Atlantic Union Bankshares Corp
Atlantic Union has undertaken key strategic actions to adapt to the challenging financial environment. Firstly, they executed a $17 million expense reduction program initiated in June, which aligns with maintaining positive operating leverage. Concurrently, Atlantic Union announced its plans to acquire American National Bankshares, poised to optimize financial performance and expand market reach. This move has been met with positive feedback and is on track for completion in early 2024. Additionally, they repositioned their balance sheet twice this year, anticipating a higher-for-longer interest rate environment, yielding immediate accretive benefits to earnings.
The company reported robust third-quarter results, characterized by strong customer deposit growth funding loan activity, which suggests the company's markets are in good health. However, in forecasting, Atlantic Union is bracing for a potential mild recession, though a soft landing remains within the realm of possibility given the inflation trends and Federal Reserve activities.
Atlantic Union's reported net income for common shareholders stood at $51.1 million. On an adjusted basis, earnings and return on tangible common equity both saw improvements from the previous quarter, and the efficiency ratio declined by 3 points, demonstrating increased operational efficiency. Provisions for credit losses decreased due to lower net charge-offs, and the net interest margin faced slight compression as a result of the cost of funds outpacing yield on earning assets. Total deposits increased by approximately 9% annualized from the previous quarter, cementing a strong base for the bank's operations.
Looking ahead to 2023, Atlantic Union expects loan growth in the upper mid-single digits, anticipating this increase would be matched by deposit growth. They also project that their fully taxable equivalent net interest margin will stabilize between 3.35% to 3.45%, assuming the Fed funds rate remains at 5.5%. With expected mid-single digit revenue growth surpassing a relatively flat growth in non-interest expense, Atlantic Union foresees positive adjusted operating leverage for the year.
Non-interest bearing deposits are expected to stabilize at pre-pandemic levels of approximately 23% to 25%, with minimal outflows and a notable shift towards higher-cost, higher-yielding accounts. The average consumer and business account balances indicate robust engagement and utilization of banking services.
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Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares Third Quarter 2023 Earnings Call. [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, Investor Relations.
Thank you, Josh, 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 accompanying slide presentation that 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 third 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, and 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. All comments made during today's call are subject to that safe harbor statement. And at the end of the call, we will take questions from the research Anexis community. And now I'll turn the call over to John.
Thank you, Bill. Good morning, everyone, and thank you for joining us today. The third quarter operating results were strong for Atlantic Union. There was noise in the quarter due to 3 meaningful and proactive measures we have taken this year to address the demanding environment in which our industry operates. We believe these measures are a proof point of our willingness and ability to take action to better position the bank for success both now and in the future, while building long-term shareholder value. These actions were, first, in our Q1 '23 quarterly earnings comments, we announced our intent to undertake structural expense reductions when deposit costs rose faster than expected in order to maintain positive operating leverage. We did what we said we would do and announced an expense reduction program in June that is expected to reduce the annual expense run rate by approximately $17 million and had all measures implemented by July. Second, concurrent with Q2 '23 earnings, we announced our entry into a merger agreement to acquire Danville, Virginia-based American National Bank shares in an all-stock transaction. We believe this transaction will improve AB's financial performance, further build out our franchise in a way that keeps us dense and compact open contiguous expansion markets in North Carolina and further drive the scarcity value of our franchise. The initial feedback from the community and American National clients has been strongly positive, and we believe we are on track to close the transaction in the first quarter of 2024. We remain excited about what we'll do together with the American National team once the merger is completed. Third, we have now acted twice this year to reposition our balance sheet for a higher for longer interest rate environment. We undertook the second action in the third quarter by pairing a sale leaseback of 27 properties with a restructuring of a portion of our securities portfolio. This enabled us to unlock equity in certain owned real estate assets and use that to restructure certain available-for-sale securities in a capital-neutral transaction. Rob will have more details on the transaction, which was immediately accretive to our earnings and is anticipated to have a greater impact in the fourth quarter now that the proceeds have been reinvested into higher-yielding securities in our available-for-sale portfolio. All these actions were strategic in nature with anticipated benefits in both the near term and long term. We'll go into our quarterly results and our financial performance in a few minutes, but broadly, we saw impressive customer deposit growth, which more than funded our loan growth during the quarter, better-than-expected loan growth in the normally seasonally slow third quarter, a decline in operating expenses demonstrating the initial benefits of our expense actions, modest net interest margin compression and negligible charge-offs. All of this indicates that our franchise remains healthy, strong and resilient. We see our financial results this quarter as another confirmation 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 121-year history. This is why soundness, profitability and growth in that order of priority remains our mantra and informs how we run this company. I'll now comment on macroeconomic conditions and then our quarterly results. Inflation appears to be on an overall improving trend despite month-to-month volatility, and we expect the Fed to be most likely done with its rate tightening cycle. While for the purpose of forecasting, we continue to plan for a mild recession, it seems there's a real possibility of a soft landing. The macroeconomic environment remains favorable in our footprint, and we still do not expect this to change in the near term. Our markets appear to be healthy and our lending pipelines are down a bit from last quarter but are slightly higher than a year ago, which suggests to us that the current macro environment is in pretty good shape in our footprint. Virginia's last reported unemployment rate of 2.5% in August improved from 2.9% in May and as usual, remains below the national average of 3.8% during the same time period. We're not anticipating any materially negative near-term shift away from these low unemployment trends and generally benign credit environment. But as always, we continue to closely monitor the health of our markets. Given continued investor focus on nonowner-occupied commercial real estate and more specifically office exposure, I'll reiterate what I've said for the past 2 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, which have not traditionally been prone to boom and bust cycles. We stick to our knitting and we generally deal with local and regional developers and operators that we know well and have track records with us. Nonowner-occupied office exposure totaled $792 million and comprised approximately 5% of our total loan portfolio at quarter end. Of this, approximately 22% is medical office, which we consider among the highest quality office category. We do not finance large high-rise or major metropolitan central business district office buildings, and we have no exposure in the District of Columbia. The portfolio is performing well and is generally geographically diverse. I described most of our office exposure 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 recently finished another deep dive analysis of the reroll of the larger office loans that cover more than half of our portfolio with an eye toward any near-term lease expirations, which we define as less than 2 years. As with last quarter, we proactively monitor this portfolio, and we don't see any systemic concerns in the office book currently. Should problems develop in the portfolio, we believe they would likely be distributed over years, and we expect any problems that may develop to be readily manageable. Turning 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 third quarter, which Rob will detail momentarily. On a year-over-year basis, we generated positive adjusted operating leverage of approximately 3.1% as adjusted revenue growth was up approximately 5.2%, while adjusted operating noninterest expenses increased approximately 2.1%. I'd also like to point out that pretax pre-provision adjusted operating earnings increased 10.6% year-over-year. Total deposits grew 9.1% annualized for the quarter and are up 7.2% year-to-date. Given our year-to-date performance at this time, we expect to be in the mid-single digits for deposit growth for the year, which should largely pace loan growth. The remixing of noninterest-bearing deposits to interest-bearing deposits continued over the quarter at a decreasing rate, and we saw good growth in customer CDs. Quarter end noninterest-bearing deposits were 25% of total deposits, a decline of 1.6 percentage points linked quarter. We posted annualized loan growth of 5.7% during the third quarter led by growth in commercial loans. Year-to-date loan growth was 7.7% annualized. Loan growth was up across commercial real estate and commercial industrial Banking in the quarter. Construction line balances were down from the second quarter as projects rolled off, but are still higher than the prior year. Our pipelines are holding up pretty well, are slightly elevated from a year ago and remain healthy. Given our year-to-date performance at this time, we expect to be in the upper end of our mid-single-digit loan growth guidance for 2023. While the economic outlook in our footprint and borrower demand could change, we expect to remain in a growth mode for the rest of 2023. C&I line utilization this quarter was relatively flat with the prior quarter, but up from prior year's third quarter. Commercial real estate payoffs declined year-over-year and were down slightly from the second quarter. Turning to credit. That was a good story as we recorded annualized net charge-offs of 1 basis point for the third quarter, down from 4 basis points in the second quarter. We have yet to see any sign of a systemic inflection point in our asset quality metrics, which remain benign. While we continue to expect a normalization in asset quality at some point following the long run of minimal net charge-offs, we remain confident and are pleased with our asset quality. In sum, we thought this was a strong and fundamentally sound quarter for Atlantic Union. We have continued to demonstrate that we will take the necessary strategic actions to successfully navigate the challenges we face in this uncertain economic environment. And we don't foresee that uncertainty ending anytime soon with recent geopolitical events and a possibly contentious process for the next round of congressional funding. 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 AUV family, we remain on a solid footing, resilient and expect a good finish to the year. Last month marked my seventh year anniversary at Atlantic Union Bank, and I'd like to take this opportunity to thank our teammates to the essential role they have played in the evolution of this great company. As I look back, I can say that overall, we have done what we said we would do. And while our strategy has evolved and responded to our changing environment has also remained consistent and is working. I'll now turn the call over to Rob to cover the financial results for the quarter. Rob?
Well, thank you, John, and good morning, everyone. Thanks for joining us today. Please note that for the most part, my commentary will focus on Atlantic Union's third quarter financial results on a non-GAAP adjusted operating basis, which excludes the pretax cost of $8.7 million recorded in the third quarter and $3.9 million recorded in the second quarter related to our strategic cost-saving initiatives announced in the second quarter as well as the $2 million in pretax costs related to our proposed merger with American National, which was incurred in the third quarter. In addition, the third quarter financial results on a non-GAAP adjusted operating basis exclude the pretax gain of $27.7 million related to the sale-leaseback transaction and the pretax net loss on the sales of securities of $27.6 million. Our previously disclosed sale leaseback transaction of 27 owned properties, including 25 branches, generated cash proceeds of approximately $46 million and resulted in a pretax gain of approximately $27.7 million in the third quarter or $22 million after tax net of transaction-related costs. Aggregate first year -- first full year of rent expense under the lease units will be approximately $3.7 million or $2.9 million after tax, which will be partially offset by the elimination of the annual pretax depreciation expense on the properties of approximately $969,000 and the estimated increase in annual pretax interest income of approximately $2.2 million generated by the investment of the transaction's net cash proceeds. Concurrent with the sale leaseback transaction, the company restructured a portion of its investment portfolio by selling approximately $228 million in available for sale securities yielding approximately 2.3%, resulting in a pretax net loss of approximately $27.7 million, almost wholly offsetting the net gain recognized from the sale leaseback transaction. The net proceeds from the securities sales and the sale-leaseback transaction have been reinvested into the available-for-sale securities portfolio yielding approximately 6%. In combination on an annualized basis starting in the fourth quarter, these strategic actions are expected to increase earnings per share by $0.06 or 2% at 5 basis points of the net interest margin and reduced the efficiency ratio by approximately 24 basis points. In the third quarter, reported net income available to common shareholders was $51.1 million and earnings per common share were $0.68. Adjusted operating earnings available to common shareholders were $59.8 million or $0.80 per common share for the third quarter, which was an increase of $4.4 million or 7.9% from the second quarter and up $4.7 million or 8.5% from the third quarter of 2022. The adjusted operating return on tangible common equity was 18.3% in the third quarter, up from 17% in the second quarter. Adjusted operating return on assets was 1.21% in the third quarter, which was up 5 basis points from the prior quarter. And on an adjusted operating basis, the efficiency ratio was 52.4% in the third quarter, which was down 3% from 55.3% in the second quarter. Turning to credit loss reserves. As of the end of the third quarter, the total allowance for credit losses was $140.9 million, which is an increase of approximately $4.7 million from the second quarter primarily due to loan growth in the third quarter and the impact of continued uncertainty in the economic outlook. The total allowance for credit losses as a percentage of total loans held for investment was 92 basis points at the end of the third quarter. The provision for credit losses of $5.5 million in the third quarter was down from $6.1 million in the prior quarter, which was primarily driven by lower net charge-offs. Net charge-offs decreased to $294,000 or 1 basis point annualized in the third quarter from $1.6 million or 4 basis points annualized in the second quarter. The year-to-date net charge-off ratio was 6 basis points on an annualized basis. Now turning to pretax, pre-provision components of the income statement for the third quarter. Tax equivalent net interest income was $155.7 million, which was a slight decrease from the second quarter as higher deposit costs due to increases in market interest rates, changes in the deposit mix as depositors continue to migrate to higher cost and interest-bearing deposit accounts and growth in average deposit balances were partially offset by an increase in loan yields on our variable rate loans due to increases in short-term interest rates during the quarter as well as by growth in average loans held for investment. The third quarter's tax equivalent net interest margin was 3.35%, which was a net decrease of 10 basis points from the previous quarter due to an increase of 20 basis points in the yield on earning assets, driven primarily by increases in loan yields and loan growth, which was more than offset by a 30 basis point increase in the cost of funds. The loan portfolio yield increased 22 basis points to 5.84% in the third quarter from 5.62% in the second quarter, which added 20 basis points to the net interest margin, primarily due to the impact of rising market interest rates on variable rate loan yields, new loan production yields as well as on renewing loan yields. The 30 basis point increase in the third quarter's cost of funds of 2.04% was primarily driven by the 36 basis point increase in the cost of deposits to 1.97%, which had a 35 basis point negative impact on third quarter's net interest margin, which was partially offset by the 4 basis point impact of lower borrowing costs. The deposit cost increase was driven by changes in the deposit mix as depositors migrated to higher cost interest-bearing deposit accounts during the quarter, the modest increase in higher cost broker deposit balances as well as by the increases in interest-bearing deposit rates driven by rising market interest rates. Adjusted operating noninterest income, which excludes the loss on sales of securities and the net gain on the sale-leaseback transaction recorded in the third quarter increased $2.8 million to approximately $27 million from the prior quarter, driven by a $1 million merchant services vendor contract signing bonus as well as quarterly increases across most of the other fee revenue categories. Reported noninterest expense increased $2.8 million to $108.5 million for the third quarter from $105.7 million in the prior quarter. Adjusted operating noninterest expense, which excludes the amortization expense related to intangible assets in the second and third quarters, expenses associated with strategic cost savings initiatives in the second and third quarter and merger-related costs in the third quarter declined by $3.9 million to $95.7 million in the third quarter from $99.5 million in the prior quarter. The quarterly decline in adjusted operating noninterest expenses was primarily driven by a decrease of $1.6 million in salaries and benefits expense, reflecting the impact of the strategic cost savings initiative executed in the third quarter. In addition, professional services expense declined $1.1 million related to the LIBOR transition and other strategic project costs, which were incurred in the prior quarter. Marketing and advertising expenses declined by $598,000 and technology in the ag processing expense was also lower by $643,000. At period end, loans held for investment, net of deferred fees and costs were $15.3 billion, an increase of approximately $217 million or 5.7% annualized from the prior quarter, driven by increases in commercial loan balances of $238 million or 7.4% linked quarter annualized growth, partially offset by declines in consumer loan balances of $21 million or 3.6% annualized. At the end of September, total deposits stood at $16.8 billion, which was an increase of $375 million or approximately 9% annualized from the prior quarter, which was driven by increases in interest-bearing customer deposits and broker deposits, partially offset by lower levels of noninterest-bearing demand deposits. At the end of the third quarter, Atlantic Union Bankshares and Atlantic Union Bank's regulatory capital ratios were well above well-capitalized levels. In addition, on a pro forma basis, we remain well capitalized as of the end of the third quarter if you include the negative impact of AOCI and held-to-maturity securities unrealized losses in the calculation of the regulatory capital ratios. Our financial outlook for the full year 2023 is as follows: We expect to generate full year loan growth in the higher end of our mid-single-digit range, which is expected to be materially matched by deposit growth. We continue to project that the full year fully tax equivalent net interest margin will fall in a range between $3.35 to $3.45, driven by the assumption that the Federal Reserve Bank maintains the Fed funds rate at 5.5% through the end of the year. In addition, we now 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%. The through-the-cycle interest-bearing deposit beta is expected to be approximately 55%. As a result of loan growth and our tax equivalent net interest margin projection, we continue to expect the taxable equivalent net interest income to increase by mid-single digits in 2023 from full year 2022 levels. We also expect that the company will generate positive adjusted operating leverage in 2023 due to expected mid-single-digit adjusted operating revenue growth outpacing expected relatively flat adjusted operating ownership expense growth in 2023 from full year 2022 levels as a result of the strategic cost saving actions we took during the second quarter. In summary, Atlantic Union delivered strong financial results in the third quarter of 2023 despite the challenging banking environment we find ourselves in. 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 2023 and beyond. And with that, I'll turn it back over to Bill now to open it up for questions from our analysts.
Thanks, Rob. And Josh, we're ready for our first caller, please.
[Operator Instructions]. Our first question comes from Casey Whitman with Piper Sandler.
So Rob, just because your NIM guide for the year is still sort of a broad range. Do you think margin compression in the fourth quarter should be sort of less than what we saw in the third quarter at the help of the securities restructuring? And then my follow-on question is just when do you think the margin sort of bottoms for AUB, I guess, excluding the impact of American National.
Yes. So in terms of the fourth quarter, we do look for further compression in the margin. We're modeling between 5 and 10 basis points, inclusive of the impact of the restructuring. In terms of the -- where we think it's going to trough, if you will, we think that's in the first quarter in the 325 range, give or take, a few basis points and then kind of stabilize from that point forward. Of course, this all depends on our assumption, if our working assumption of the fed funds rate staying at $5.50 and market rates kind of being where they are, that's our current outlook based on that.
Okay. And that was stand-alone, right, the margin?
Yes. Yes. Stand alone, yes. If you bring in -- if it's a little complex in terms of the impacts of the American National merger impacts, which obviously will bring in a lot of accretion income. So again, I think we said on the call when we announced the acquisition, we'd be in the 360 to 370 range with accretion on a combined basis.
Okay. And then can you talk about just sort of where new loan production is getting put on now and then maybe sort of pair that against where the incremental cost of the new deposit is just sort of to get an idea of the spread coming on.
Yes. So new production this quarter came on around 7% and combination of both the variable rate loans coming on production and fixed rate. I think the variable rate loans are probably about 50-50 in terms of rounded in terms of fixed versus variable. Arbor was coming on closer to 8%. Fixed was coming on a little over 6%. So blended, we're talking about 7%. So that continues a churn. It's fixed rate loans, portfolio fixed rate loans reprice or we add new loans. That's going to help the loan yields continue to go up. But again, we expect deposit rates to continue to go up primarily from the continued remix that we're seeing. We think that's slowing down, but will continue to impact the margin a bit more than loan yields. So a little negative continuing there.
Okay. And I'll just switch gears just to ask, obviously, there's more questions in the industry around shared national credit. So can you maybe walk us through the size of that book for you and any color around that you might want to add?
Yes. Casey, this is John. This is not a primary focus for us. We do have some shared national credits. Historically, what we've done, most of it would be Virginia-based corporations where we know them. This is a single-digit percentage of the loan portfolio. It's more important to talk about what we do not do. We do not maintain what some banks will call a secure pay, syndications platform also then in the industry as a buy desk. We are not buying secondary issuances in the open market. What we would do would be to deal with companies that we know where we have relationships with management that we physically call on anything we would take on would almost certainly be a primary syndication. You will see subsets of this, some of the larger government contractors. We have some of that asset-based lending. We have some of that, although as we've expand asset-based lending and really built out our infrastructure, the primary focus there is more individual bank deals. This is not a big effort for us.
[Operator Instructions]. Our next question comes from Catherine Mealor with KBW.
Seeing that you had a really nice quarter. You saw some nice growth in service charges and trust fees. Just kind of curious how you're thinking about fee growth into the next quarter and really you think that into '24.
Yes. So in terms of those categories really is being impacted by net client growth number of accounts, and we continue to see about 2% to 3% in new client growth, so we'd expect to be in the 2% to 3%, 2% to 4% growth rate as we go forward. Also included in there is debit card interchange. So we continue to see more growth here as well with a number of new accounts come in as well. And then the seasonal impacts in the fourth quarter. So you'd expect to see some of that Q3 to Q4 increase with the holiday season and more transactions coming through. But in the end, we're talking about 2% to 4% growth in those categories as we go forward on a stand-alone basis.
Okay. Great. And then on loans, John, you made a comment that you're still in growth mode going into the fourth quarter. How do you think about growth into next year and just where you're comfortable adding new loans where you're kind of pulling back? And really what this kind of client appetite is today with higher rates?
Yes, I'm going to -- we have Doug Woolley Chief Credit Officer; and David Ring had a commercial banking here, too. And since most of the production comes out of the commercial side, I'll ask Dave to comment. My few sense on this is that the environment, it is Okta. I do think that, in general, our economy, as I indicated in my prepared comments, is in good shape. We are in the budgeting process for next year. And at this point, what we are discussing would be something in the mid-single-digit loan growth range. I think we will continue to be able to grow at a net phase. We'll see what happens. Dave, as you think about it, what is your take on this?
Yes. Our pipeline going into the year would support that, John, mid-single-digit growth. It's probably going to come more from the C&I and equipment finance and the regular businesses that are operating businesses versus real estate. We just saw our production for this quarter be 2/3 C&I, 1/3 real estate. So we're seeing that start to happen today, and we think it will continue into the next quarter into the next year.
I think that's a good assessment. It really points back to the merit of our 7-yearlong effort to diversify the bank's capabilities. If we were just a commercial real estate lender, I would be giving you a different answer. But I think the diversification of the things that we do, the brand that we've built for small and midsized businesses, the overall strength of our markets, all of this makes us bullish. The wildcard will be American National Bank. We -- I don't want to get too far into that right now. But as we said when we announced the merger, we bring a bigger balance sheet, we bring infrastructure and capabilities, particularly on the C&I side. You marry that with the great team that they have, the reputation that they have, the physical presence, the things we can do and kind of the industrial markets of the south side of Virginia or Southern Virginia as I should call it. And then the entry of the Piedmont Triad, all of these things give us confidence that we should be able to achieve, let's just call it, mid-single-digit growth, and then we'll see what happens from there.
Our next question comes from Russell Gunther with Stephens.
Just a couple of follow-ups. So on the loan growth discussion. I appreciate your thoughts there. How does the North Carolina market fold into there? What's the opportunity set, particularly as American National folds in?
What do you think, Dave? Now, don't be too bullish here.
Well, we've been in North Carolina in real estate. Were there quite a while for 7 years and we've been pretty successful there. What American National brings is a really good commercial and industrial bankers in markets like the Triad and the triangle areas of North Carolina. So we think there's going to be opportunity there. We don't know what it is completely yet, but we think it's going to be an opportunity for growth.
It's going to be incremental growth opportunity. And they sit there, if you look at the map on the I-40 corridor starting in Winston, Salem, over to Greensboro, Burlington, they have a small Raleigh office. And those are good industrial markets. So I agree with Dave. On the real estate side, we mostly bring a bigger balance sheet. On the commercial and industrial side, we bring robust treasury management services, equipment finance, asset-based lending and just the infrastructure to be able to better go after, I would say, midsized companies. And then Southern Virginia, which used to be called the south side, where their home perf is Danville, Martinsville over into South Boston. And by the way, we do double down in Roanoke, these are good commercial and industrial markets, and we've not had a presence in Southern Virginia. We are in Roanoke. So we're bullish. I don't want to sound too bullish. I'm just saying that these are things that will be incrementally beneficial to us. And if you look at the backgrounds of the American National people, they absolutely do have people with commercial and industrial backgrounds, too, in addition to good traditional commercial real estate community banking backgrounds, all of this is beneficial. I think there's a lot we can do together so over time.
[Indiscernible] will come in over time.
Over time. Yes, just to be clear, over time. So we'll see where it goes from here. But I think that this is really an expansion platform. We're going to be able to do more things in Southern Virginia. And we're going to be able to definitely build for a very long time as far as the eye can see along that I-40 corridor in North Carolina using exactly the same strategy we have here in Virginia. We're built to be the challenger bank to the large institutions with the alternative to the large institutions. We can do what they do for small and midsized businesses. And we think do it more respresponsively. And at the same time, we recognize we compete against the small banks all day every day. So we're kind of covering both bases. That's the hallmark of Atlantic Union Bank, authentic human experience plus digitally forward technology, that is our strategy.
Just switching gears with a follow-up on the margin. So a lot of good detail in terms of expectations. One that I wanted to focus on was the deposit remix comments made that, that's slowing, but certainly remains impactful to the NIM. So as you think about where noninterest-bearing ultimately shakes out as a percentage of total deposits, just give us some updated thoughts on that front? And is that a function of outflow? Is that a function of remix out of non-IB from current customers into higher-yielding products? Just some additional color would be helpful.
Yes. So Russell, we're projecting that we'll be in the 23% to 25% range kind of where we were pre-Pandemic levels 22% to 25%. We've been holding fairly steady, and we saw a big decline from fourth quarter through the first 2 quarters and has kind of slowed down. Most of that is not really outflow going out of the bank. It's really getting remixed into just checking and some of the other higher cost -- higher yielding rates categories. So we do expect to kind of stabilize around where we are, may drop a bit, but we'll have to see how that plays out, but really not much shift going on here. In the end, there's a stabilized level where people are using demand deposits for operating accounts and there's a certain level it's going to stabilize, and that's where we think it will be.
Yes, Rob is right about that. And as we've really grown the commercial business base of clients, small, midsized businesses, you pick up more operating accounts they're using treasury management services. And I think if you look at our average balances, the average consumer balance this quarter was $19,000 going through memory. The average business client has about $100,000 in their account. This suggests to me that many of them are probably kind of an operating level and noninterest-bearing. We think it's hard to say to -- we can't predict with any precision where it's going to be. But I agree with Rob. I think we're sort of approaching bottom. We'll see exactly...
Yes. I think, Russell, on the remix, a lot of that is kind of remixing from what I would call deposits and standard rates kind of moving to these higher levels from a interest checking where money market accounts to higher-yielding CD is kind of really what we're talking about for remix and expect that will continue, but certainly slow down from what it was in the first couple of quarters.
Okay. Great. Just a clarification on the fee outlook. So I think I only have caught this. There was a merchant servicer signing bonus that was this quarter and about $1 million. I mean just kind of where in the P&L that fell line item-wise.
Yes, that's in other fees, Russell in service charges, other fees and service charges. You look at...
That's helpful And then...
The other service charges, admissions in fees.
And then last one for me. Credit has been really strong for you guys. I hear the commentary about normalization understood. What does normalization look like for Atlantic Union as you think out to '24? And what would be the drivers of that normalization be?
Yes. So we project that 15 to 20 basis points of annualized charge-offs is probably a normal level for us. Of course, we haven't come near that to date in this period. But that's kind of what we're looking for. Things like higher interest rates and other recessionary factors could play into that. We're not projecting that at this point, although our allowance for credit losses does skew towards more recessionary environment. But that's about what we think. And Doug, I don't know if you have anything to add from the Chief Credit Officer perspective, that's a view that we have as a company.
Yes, the weakening, if it comes, we'll be in smaller credits. We don't see anything. We've done a recent resizing of maturing commercial real estate loans and construction loans converting to their mini perm that are resizing on that, and all of that looks perfectly fine. So if something happens, it will be in the smaller commercial credit base and as is always the case, the consumer portfolio.
And if you think about the drivers of the CECL modeling, what drives it underpinning the unemployment rate, what's happening with the gross domestic product. And it's just hard to see the economy falling off a cliff anytime soon, at least in the markets in which we operate. Having said that, I would caution there's always the intimates one-off. Now you can't have a 4 off and a 5 off and a 10 off, but things do happen from time to time, there could be idiosyncratic. We're always subjective to that. We saw one of those this year. But overall, Russell, we still feel pretty good. But I acknowledge black-swan events happen all the time. But we feel pretty good about where we are right now.
One moment for our next question. Our next question comes from Steph Moss with Raymond James.
Maybe going back to loan pricing here. Rob, you mentioned loans coming in at 7% for the quarter. Just curious, should we expect a step-up in loans being added in loan rates for loans we added this quarter?
Sorry, do you mean production, Steph, is your question, what does -- what do we expect for production in Q4? Or do you expect the rate...
The expected rate. So what do you expect for this in the fourth.
Yes. I think you'll see probably kind of staying where we saw in the third quarter, averaging about 7%, maybe a little over 7%. I think the term rates being up, you might see the fixed rate loans get priced a bit higher on the production. But I think if the Fed does stay steady, I don't think you'll see much movement in the short-term rates. So variable rate new loans coming out will probably be in the closer to 8%, which was what we saw in the third quarter. So I'm not looking for a lot of shift there. But if it's going to happen, it's going to be in the fixed rate term loans just because the term rates have gone up since the end of the quarter.
Okay. And then on the deposit front, curious with your margin guide here of to the 3.25% range, what you guys are thinking for -- what that's implying for a deposit beta? And just maybe just a little talk around the competition for deposits you guys see in your markets?
Yes. So in terms of the betas, we're now saying the total deposit beta through the cycle is going to be around mid-40s. That's up from, I think, last quarter, we were guiding to about 40%. Interest-bearing deposits guide now is 55% betas through the cycle. Offsetting that would be our loan yield beta, which is about 50% through the cycle. So we will continue to project that unless there's movement in the short-term rates and from the Fed's perspective. But in terms of the total deposit rates, if you look at it on average, this quarter, we were at 197 cost of deposits. If you look at it from September levels, just for the month of September, it's at 2.07%. So we're seeing that continuing to move up. Now the [indiscernibe] also moved up. But we'll continue to see that through the first quarter, maybe into the second quarter that we'll continue to see deposit rates ratchet up somewhat offset by loan yields, we're acting it up. But we'll see how it plays out. In terms of market rates or competitive rates, we haven't really seen much movement at all in the last 2 quarters, maybe since, I guess, maybe late April, May, it's been pretty steady. We haven't really raised our rates at all in terms of our published deposit rates or specials, CD specials or money market promos. So we're not looking to see a lot more market rates unless we see or composite rates increase from the pendent of view as we see market rates rise, which we're now projecting at the moment.
Okay. That's helpful. And then John, I apologize, I dialed in at the end of your credit comments here. But just on the 30- to 89-day past due bucket picking up here, it was across the owned nonoccupied in C&I. Kind of curious, any color or maybe what -- any underlying trends there?
Yes. That was largely driven by a couple of administrative past dues. We literally had 1 credit that was 1/3 of that increase. And for various reasons, it was not renewed on time, it's subsequently been renewed. We are not concerned about that. We've seen no material change in past dues from our perspective. Doug, do you have anything to add to that?
John, well said, a few smaller loans, but administrative past dues drove that.
Yes, which are cleared.
Thanks, Steve, and thanks, everyone, for joining us today. We look forward to talking with you in 3 months' time. Everybody, have a good fourth quarter.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.