Earnings Call Transcript
Atlantic Union Bankshares Corp (AUB)
Earnings Call Transcript - AUB Q4 2023
Operator, 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. 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, Senior Vice President of Investor Relations
Thank you, Victor, and good morning, everyone. I have Atlantic Union Bankshares President and CEO, John Asbury; and Executive Vice President and CFO, Rob Gorman with me today. We also have other members of our executive management team with us for the 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, President and CEO
Thank you, Bill. Good morning, everyone. Thank you for joining us today. Looking back at 2023, it was a wild ride across the industry. Right from the start, we experienced a shift in depositor behavior triggered by the Federal Reserve's aggressive rate increases in 2022. This led to a significant movement of funds from non-interest-bearing deposits to interest-bearing options, resulting in a rise in deposit rates that compressed our net interest margins. As you are aware, four additional 25 basis point rate hikes followed before the Fed paused. The high-profile failures of non-traditional banks in March initially undermined depositor confidence in the American banking system and further heightened margin pressure. Fortunately, our deposit base remains strong, and we have taken actions to adapt to the changing environment that we believe will enhance our ability to deliver sustainable shareholder value over the long term. Despite the year's challenges, 2023 ultimately proved to be a successful year for AUB in both financial and strategic terms, and we entered the new year with positive momentum. During 2023, we implemented three key and proactive measures in response to the evolving landscape. First, we quickly recognized the need to adjust our structural expense base when deposit costs increased in the first quarter. Nine months ago during our Q1 '23 earnings call, we committed to meaningful expense actions, and we followed through with the removal of $17 million in structural expenses, nearly completing this task by the end of Q2. Second, on July 25th, we announced our merger agreement with American National Bankshares Inc., which has been positively received across our markets. We are actively engaged in integration planning and remain confident in achieving our anticipated expense savings following the closing. Our longstanding relationship with American National, along with our mutual understanding, complementary cultures, and the strategic rationale for this merger, positions us well for success. We expect the merger to close in the first quarter of 2024, pending the Federal Reserve's review, for which we have already received state regulatory approval. Third, we repositioned our balance sheet through two transactions to enhance returns in the higher rate environment. The first transaction involved selling available-for-sale securities early in the year, ahead of the bank failures. The second transaction occurred in the third quarter, where we coupled a sale-leaseback of certain properties with a restructuring of a portion of our securities portfolio in a capital-neutral manner. As previously noted, we estimate this will add $0.06 to our annual after-tax earnings per share, and we expect to realize the full benefit in Q4 '23. While I won't list every achievement in 2023, we made significant progress on our three-year strategic plan updated in 2022, despite the industry turmoil. A highlight of the year was our technology modernization efforts. We renegotiated our core operating system contract and improved our technology stack, and we are currently implementing an upgraded online and mobile banking platform. This new platform will be rolled out throughout 2024, providing competitive capabilities and a better client experience at a lower cost. We also focused on enhancing our workforce through improved talent management processes and leadership development. These efforts, among others, contributed to a successful 2023, positioning us well for the future. We view our financial results from 2023 as further validation of our long-term strategy of being a diversified traditional full-service bank that positively impacts our markets. With a strong brand and solid client relationships, we offer services and financing that benefit individuals and businesses. It's a simple yet effective business model that has endured for 124 years. That's why we prioritize soundness, profitability, and growth in that order; it guides our company’s operations. Everything that transpired in 2023 underscores why this philosophy remains the right approach for running our bank. Now, turning to the macroeconomic conditions and our performance. For our forecasts, we maintain a cautious outlook on the economy. While a soft landing seems possible, inflation is showing improvement despite some month-to-month fluctuations, and we believe we've reached the peak for short-term rates. The macroeconomic environment in our areas remains favorable, and we expect this trend to continue in the near future. As we've stated for some time, our markets look healthy. However, we've noticed a decline in capital investment activities in some segments of our client base due to higher interest rates and economic uncertainty. As a result, our lending pipelines are down slightly compared to last quarter and last year, indicating mid-single-digit loan growth expectations for 2024 on a standalone basis. Virginia's unemployment rate increased slightly to a still low 2.9% in November, remaining below the national average of 3.7%. We do not foresee any significant shifts away from these low unemployment trends or the generally stable credit environment; however, we will continue to monitor our markets closely. Given the focus on non-owner occupied commercial real estate, particularly in office spaces, I want to reiterate what I've expressed in past quarters. Commercial real estate finance has historically been a strength for our company, and this asset class has consistently performed well in our markets. We work primarily with local and regional developers and operators whom we know well and have established relationships with. We included details regarding our non-owner occupied office exposure in the appendix of our earnings presentation. It's important to note that we do not finance large high-rise buildings or major metropolitan central business district offices and have no exposure to commercial real estate in the District of Columbia. The portfolio is performing well and represents about 5% of our total loan exposure at year-end. We actively monitor this portfolio and currently do not identify any systemic concerns with our office book. While some challenges may arise over time, we expect them to be manageable. Now, let’s move to our quarterly results. We remain committed to achieving positive operating leverage by growing our revenue at a faster rate than our expenses. Here are a few financial highlights for the fourth quarter and for the full year 2023, which Rob will elaborate on next. For 2023, we achieved a positive adjusted operating leverage of about 1%, with adjusted revenue growth up approximately 2.8%, while adjusted operating non-interest expenses rose about 1.8%. Additionally, our pre-tax, pre-provision adjusted operating earnings increased 5% year-over-year. Total deposits grew 5.6% year-over-year, and average deposit balances for Q4 rose by $318 million, or about 7.5%, compared to the previous quarter. As seen in prior years, we experienced a seasonal dip in deposits at year-end, but we are currently observing a normal recovery and are starting Q1 '24 on a strong note. The shift from non-interest-bearing to interest-bearing deposits slowed in the fourth quarter as anticipated, with positive growth in money markets and customer CDs. End-of-quarter non-interest-bearing deposits were roughly 24% of total deposits, down from 25% in the prior quarter. We believe the transition of non-interest-bearing deposits is stabilizing but not yet complete. We recorded annualized loan growth of 9.1% during the typically high fourth quarter, surpassing expectations, driven by an increase in commercial loans. For the entire year, loan growth was 8.2% point-to-point and averaged 9.3%. Construction loan balances decreased since the third quarter as projects were finished and reclassified as non-owner occupied commercial real estate, yet overall, they remained higher than the previous year. As mentioned earlier, we anticipate mid-single-digit loan growth in 2024 for loans held for investment on a standalone basis. We are confident that we will maintain a growth trajectory for 2024. C&I line utilization increased modestly this quarter, compared to the previous quarter and last year's fourth quarter. Loan production in Q4 was fairly well distributed between existing and new clients, as well as between commercial and industrial, and commercial real estate combined with construction. The volume of commercial real estate payoffs dropped year-over-year but saw a slight increase from the third quarter, which we view as a positive indicator of a healthy CRE market within our footprint. Credit metrics stayed strong, with annualized net charge-offs at three basis points for the fourth quarter, up from one basis point in the third quarter. For the full year, we recorded a commendable five basis points in net charge-offs, and we expect asset quality to normalize following an extended period of minimal net charge-offs without any signs of an inflection point. While individual credit losses may occur, as we observed in the first quarter of last year, they are normal and anticipated. Nevertheless, we remain confident in our asset quality. In summary, we consider 2023 to have been a strong and fundamentally sound year for Atlantic Union, even amidst occasional dramatic industry shifts. We continually show our commitment to taking strategic actions crucial for navigating the challenges posed by the uncertain economic landscape, and we follow through on our commitments. We expect uncertainty to endure for some time, especially considering geopolitical factors, but for now, we remain cautiously optimistic in our outlook. With this uncertainty comes opportunity, and we believe we are well-positioned to take advantage of it. Atlantic Union is a uniquely valuable franchise— a diversified traditional full-service bank with a strong brand and deep client relationships in stable and promising markets, and it will soon become even more so with the addition of American National Bank to the AUB family. We stand on solid ground, resilient, and are poised for a strong start to the year. I will now hand the call over to Rob to discuss the financial results for the quarter.
Rob Gorman, Executive Vice President and CFO
Thank you, John, and good morning, everyone. I will focus primarily on Atlantic Union's fourth quarter financial results on a non-GAAP adjusted operating basis, excluding certain pre-tax items. These include gains related to sale-leaseback transactions, a net loss on sales of securities, a special FDIC assessment expense, a legal reserve for a settlement, merger-related costs tied to our pending merger with American National, and expenses linked to our strategic cost savings initiatives. In the fourth quarter, our reported net income available to common shareholders was $53.9 million, with earnings per common share at $0.72. For the full year 2023, reported net income was $190 million, and earnings per common share were $2.53. Adjusted operating earnings for the fourth quarter were $58.9 million, or $0.78 per common share, and $221 million, or $2.95 per common share for the full year. The adjusted operating return on tangible common equity was 18.2% for 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 year. The efficiency ratio on an adjusted operating basis was 52.9% in the fourth quarter and 54.2% for 2023. As of the end of the fourth quarter, the total allowance for credit losses was $148.5 million, up about $7.5 million from the third quarter, mainly due to loan growth and increased allowance for two specific loans. The allowance for credit losses as a percentage of total loans rose to 95 basis points at the end of the fourth quarter. In the fourth quarter, we had a provision for credit losses of $8.7 million, an increase from $5 million in the previous quarter. Net charge-offs rose to $1.2 million in the fourth quarter compared to $294,000 in the third quarter. For the full year, the net charge-off ratio was five basis points. As for pre-tax pre-provision components of our income statement, tax equivalent net interest income in the fourth quarter was $157.3 million, an increase of $1.6 million from the third quarter, driven by a higher yield on available-for-sale securities and a growing loan portfolio, despite increased deposit costs. The tax equivalent net interest margin for the fourth quarter was 3.34%, a slight decrease from the previous quarter mainly due to rising costs of funds. The loan portfolio yield increased to 5.97% in the fourth quarter, primarily influenced by the Federal Reserve's last rate hike, while the securities portfolio yield rose to 3.80%. The costs of funds increased due to higher deposit rates as customers moved to higher-cost interest-bearing accounts. Our adjusted operating non-interest income grew to $28.1 million in the fourth quarter, led by increases in loan-related swap fees and loan syndication revenue, although we saw a decline in other service charges. Reported non-interest expense for the fourth quarter decreased to $107.9 million. However, adjusted operating non-interest expense rose to $98.2 million due to increases in other expenses, professional services, marketing, advertising, and occupancy costs, partially offset by lower salaries and benefits from headcount reductions. At the end of December, loans held for investment were $15.6 billion, an increase of $351 million from the prior quarter. Total deposits reached $16.8 billion, reflecting growth in interest-bearing deposits. Our regulatory capital ratios were well above the required levels, and we also paid a dividend of $0.32 per share, a 7% increase from the previous quarter. Looking ahead for 2024, excluding impacts from the American National acquisition, we anticipate mid-single-digit loan growth and low-single-digit deposit growth. We expect our net interest margin to fall between 3.3% and 3.4% and project an increase in taxable equivalent net interest income due to growth and favorable margins. While we foresee a potential uptick in the net charge-off ratio, we don’t currently see systemic credit quality issues. In summary, Atlantic Union achieved strong financial results in the fourth quarter and throughout 2023, navigating a challenging environment and positioning ourselves for sustainable growth in 2024 and beyond. I will now turn the call over to Bill Cimino for questions.
Bill Cimino, Senior Vice President of Investor Relations
Thanks, Rob. And Victor, we're ready for our first caller, please.
Operator, Operator
And at this time, we will conduct the question-and-answer session. 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, President and CEO
Good morning, Casey.
Casey Whitman, Analyst
Hey, good morning.
Rob Gorman, Executive Vice President and CFO
Good morning.
John Asbury, President and CEO
Hi.
Casey Whitman, Analyst
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, President and CEO
That's a great question, Casey. As I mentioned, we are anticipating three cuts, based on the Fed's dot plot reductions noted in their last meeting. We believe that in the first and second quarters, we may see the margin reach its low point, possibly around the 325 range. After that, we expect to see gradual increases as our fixed-rate loan portfolio reprices higher, which will counteract any compression from the variable rate notes due to the Fed funds decreasing starting in the second quarter. Additionally, we foresee deposit rates stabilizing after the first quarter, and we plan to aggressively lower deposit rates throughout the year, assuming the Fed proceeds with cuts. We have approximately $2.2 billion in high-cost CDs maturing over the first seven months of the year, along with about $1.8 billion in deposits tied to the Fed funds rate, which will decrease quickly alongside the variable-rate loan portfolio. This is how we envision the progression, gradually increasing through the year, leading us to the 330 to 340 range that we're projecting for 2024. However, if there are more than three cuts, it would negatively affect our expectations for the net interest margin. If you follow the Fed fund futures suggesting six cuts starting in March, we estimate an additional compression of six to eight basis points from the 330 to 340 range. In that scenario, our guidance would likely shift to the 320 to 330 range. But again, our base assumption remains three cuts for the year.
Casey Whitman, Analyst
Okay. Sorry, I’m not sure if I misheard, but did you mention 325 or 335 for the first quarter, assuming all else is equal?
John Asbury, President and CEO
We anticipate it will drop between 325 and 330 based on our projections.
Casey Whitman, Analyst
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, President and CEO
Say that again.
Casey Whitman, Analyst
Sorry, the potential further compression of six to eight basis points.
John Asbury, President and CEO
Yeah, that's on a full-year basis.
Casey Whitman, Analyst
Okay. Are we ready to provide an update on what American National could potentially add to that margin?
John Asbury, President and CEO
Well, we don't know exactly because the deal hasn't closed and we haven't finished our loan marks and other purchase accounting adjustments. However, it will be favorable based on the higher loan marks and the accretion that comes from that. On a combined basis, including the accretion income, it should be much higher than the range I just mentioned.
Casey Whitman, Analyst
Yeah, it’s going to be favorable based on the higher loan marks and the accretion that comes from that. You should see that on a combined basis, including the accretion income, to be much higher than the range I just mentioned.
John Asbury, President and CEO
At this point, we have some projections, but I am uncertain about where rates are heading, and I don't want to emphasize that too much.
Casey Whitman, Analyst
Make sense. Thanks for taking my questions.
John Asbury, President and CEO
Thank you, Casey.
Bill Cimino, Senior Vice President of Investor Relations
And Victor, we're ready for our next caller, please.
Operator, 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, President and CEO
Good morning, Catherine.
Catherine Mealor, Analyst
Thanks. Good morning. Rob, you mentioned the back book of your fixed-rate loan repricing this year. Can you provide some details on the number and amount of loans you expect to reprice over the next year? Additionally, I know that's a significant positive for American National, so any insights you can share on that would be appreciated. Thanks.
Rob Gorman, Executive Vice President and CFO
I don't have specific numbers regarding the loans and their repricing. However, our fixed-rate portfolio has an approximate duration of three years. We're seeing it reprice daily with the renewal of loans, and new loans are being priced higher. From a commercial perspective, the fixed-rate portfolio is currently in the range of 5 to 5.25 percent and is repricing higher based on current market term rates of about 6.5% to 7%. Our expectation is that even if the Fed lowers rates in the short term, which might reduce variable rate yields, the repricing of these fixed-rate loans should help mitigate some of the effects of declining short-term rates. Regarding American National, about 80% of their loan growth consists of fixed-rate loans with an average duration of around three years. We anticipate that repricing will occur quickly, leading to accretion income as we adjust that book, and this income should positively impact core margin or core yields during the repricing period.
Catherine Mealor, Analyst
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?
Rob Gorman, Executive Vice President and CFO
Our total portfolio is reporting a loan yield of 5.97. In terms of repricing, we're in the 7.25 to 7.5 range. The variable rate book is currently repricing in the high 7s and even into the 8s.
Catherine Mealor, Analyst
Okay. Great. Could you discuss your guidance for loan growth, which is slightly higher than deposit growth? I'm interested in your overall strategies for deposit growth this year and how you foresee changes in the mix as the year progresses. It seems to be improving and stabilizing, but I assume a significant portion of the growth will still be in CDs and higher-yield deposits. I'm curious about how you view the remix as we approach the end of the year.
Rob Gorman, Executive Vice President and CFO
Catherine, on that topic, we aren't anticipating a significant change. This year, we've noticed a considerable shift in our deposit mix, particularly with non-interest bearing accounts moving into money market accounts and CDs. There's been substantial growth in both the CD and money market segments. We expect the current mix to remain stable. Non-interest bearing accounts stood at 24% this quarter, and we project it will fall within the 22% to 24% range moving forward this year. Additionally, as interest rates decrease, we plan to reprice our money market accounts, and many of our CDs are set to mature in the coming months, with $2.2 billion maturing over the first seven months. Depending on the direction of interest rates, we may see some decrease there. Overall, we do not foresee major shifts in our deposit mix, but it's true that growth will likely come from increased interest-bearing deposits.
John Asbury, President and CEO
I would add that over the long term, we see deposit growth as a limiting factor for loan growth, but we are not aiming for excessive loan growth. I am proud that Atlantic Union Bank consistently grows net consumer households, albeit slowly. Each quarter, we end up with more consumer households than the previous month. We remain focused on expanding our business depository and treasury management offerings, which have shown good growth. It's important to note that American National Bank has a lower loan-to-deposit ratio than we do. We offer several advantages that enhance their ability to attract commercial and industrial clients, especially those that are deposit and treasury management intensive, as we provide services they currently do not. Overall, we feel optimistic about our trajectory. We have started off well, with a noticeable difference between average deposit growth in Q4 and point-to-point figures. Although there was not as significant a year-end drop as last year, we have started Q1 positively, and I believe our goals are achievable. As we have mentioned before, we do not need to fund loan growth entirely through deposit growth, as we are generating cash from our securities portfolio and liquidating the indirect auto portfolio. However, we do prefer to align loan growth with deposit growth, and I think we will manage well in that regard.
Catherine Mealor, Analyst
Great. Very helpful. Thank you.
Bill Cimino, Senior Vice President of Investor Relations
Thanks, Catherine. And Victor, we're ready for our next caller, please.
Operator, Operator
Thank you. One moment for our next question. Our next question comes from the line of Steve Moss from Raymond James. Your line is open.
John Asbury, President and CEO
Hi, Steve.
Steve Moss, Analyst
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, President and CEO
Where it's coming from? 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, Commercial Banking Leader
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, President and CEO
Yeah, we were under-resourced there.
David Ring, Commercial Banking Leader
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, President and CEO
So it's pretty well diversified.
Steve Moss, Analyst
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, President and CEO
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, Credit Officer
Yeah, Steve, thanks for the question. One of them was, I'll call it a fascinating situation; partner dispute, it is non-owner occupied, but it does have owner-occupied tenants, owned by the partners. And they got 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, President and CEO
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, Analyst
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, President and CEO
I would say, as I mentioned in my comments, when we announced the merger on July 25th, we anticipated closing in the first quarter of 2024, and that remains our expectation. Everything is proceeding normally, and I have no reason to believe we won't meet the expected timeline. It just simply takes longer. We've been reviewing a lot of data, and it typically averages five to six months. This deal is as straightforward as it can be. We respect that the Fed needs to do their work and go through their process; everything is functioning normally. It just takes longer than it used to, and that's the situation we're in.
Steve Moss, Analyst
Okay, great. I appreciate all the color. Thank you very much.
John Asbury, President and CEO
Thank you, Steve.
Bill Cimino, Senior Vice President of Investor Relations
And Victor, we're ready for our next caller, please.
Operator, 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, President and CEO
Hi, Russell.
Robert Gorman, Executive Vice President and CFO
Good morning.
Russell Gunther, Analyst
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, President and CEO
Yeah, Russell on that front, looking at the three cuts, we're looking at it by year end with these cuts come in at 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, Analyst
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, President and CEO
To answer that question, it will depend on how quickly we can lower deposit rates. We believe the Fed will make cuts, but there will be some delay in our ability to reduce deposit rates. We expect that the second and third cuts will be the points at which we can really start lowering those rates in the latter half of the year. However, this will hinge on competition for deposits and client reactions. We'll decrease the rates gradually rather than swiftly reaching the endpoint. That's likely the main factor at play.
Russell Gunther, Analyst
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, President and CEO
Are you talking about this, the current, fourth quarter '23.
Douglas Woolley, Credit Officer
Yeah, there were a couple of items, but I 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 the number that I've been up to.
John Asbury, President and CEO
That's out of, Doug, you're referencing operating expenses.
Douglas Woolley, Credit Officer
Yeah. Yeah, just taken out of these; I see in the other items.
John Asbury, President and CEO
There are a few things that have come up. One is unclear. We also had a bit of a push within the company as we prepare; we are clearly working on integration as we get closer to conversion, and there is limited capacity to accomplish other tasks. Therefore, there has been a focus on completing other necessary tasks efficiently.
Douglas Woolley, Credit Officer
I would say a lot of that relates to the strategic investments we discussed regarding the professional fees line and some other aspects.
Russell Gunther, Analyst
I appreciate it. Thank you, everyone. Are you still expecting to close the deal this quarter? Is there any change to the timing of the conversion, or should we assume everything is on track as long as the deal proceeds as planned?
John Asbury, President and CEO
We are on track for conversion based on what we know right now. And we are working through it every day.
Russell Gunther, Analyst
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, President and CEO
We must focus on delivering the organic performance and potential of our franchise as always. The main priority is ensuring a successful integration of American National Bank. These are the two key points we’re concentrating on right now. While we definitely think ahead, we will discuss those plans later. Our three primary priorities are the organic performance of the bank, transformation activities and technology, and strategic initiatives, with the successful integration of American National Bank this year being crucial to realizing its full potential.
Russell Gunther, Analyst
Understood. Okay, great. Thank you, guys, for taking my questions.
John Asbury, President and CEO
Thanks, Russ.
Bill Cimino, Senior Vice President of Investor Relations
Thanks, everyone, for your time today. We look forward to talking with you all in April. Have a good day.
Operator, Operator
Thank you for your participation in today's conference. That does conclude the program. You may now disconnect. Everyone, have a great day.