Atlantic Union Bankshares (AUB) Q4 2023: Deposit Mix Shift Drives 7.5% Average Growth, Margin Resilience in Focus
AUB’s fourth quarter revealed a business adapting to ongoing deposit remixing, with average deposit balances up sharply and non-interest-bearing share stabilizing. Management is betting on disciplined expense control, prudent loan growth, and merger execution to defend margins in a rate-cutting environment. Investors should watch how integration, deposit repricing, and credit normalization play out as the cycle turns.
Summary
- Deposit Mix Stabilization: Non-interest-bearing outflows slowed, but interest-bearing growth continues to reshape funding costs.
- Strategic Integration Ahead: American National merger is set to close soon, adding scale and repricing opportunity.
- Margin Defense in Rate-Cut Cycle: Management plans aggressive deposit repricing and expense discipline to offset lower rates.
Business Overview
Atlantic Union Bankshares (AUB) is a diversified, full-service regional bank operating primarily in Virginia and surrounding states. It generates revenue through net interest income—spread between loan yields and deposit costs—alongside non-interest income streams such as fees, treasury management, and loan syndication. Major segments include commercial and industrial (C&I) lending, commercial real estate (CRE), construction, and consumer banking. The bank’s business model emphasizes relationship-driven lending, a granular and regionally diverse loan book, and stable deposit franchises.
Performance Analysis
AUB delivered solid fourth-quarter results against a backdrop of industry-wide deposit migration and margin compression. Average deposit balances rose 7.5% from the prior quarter, driven by continued customer movement from non-interest-bearing to higher-yielding money markets and CDs. Non-interest-bearing deposits now represent 24% of total balances, down only modestly from last quarter, signaling stabilization in the mix shift that has pressured funding costs throughout 2023.
Loan growth was robust at 9.1% annualized for the quarter, led by commercial lending. Credit quality remained pristine, with net charge-offs at just three basis points annualized, and the allowance for credit losses increased in line with portfolio growth. Adjusted operating leverage remained positive for the year, as revenue growth outpaced low-single-digit expense increases. Margin dynamics reflected the tug-of-war between higher loan and security yields and rising deposit costs, with net interest margin (NIM) down just one basis point sequentially.
- Deposit Cost Pressure: Cost of deposits increased 26 basis points, but management expects stabilization and opportunities for repricing in 2024.
- Expense Control: $17 million in structural expenses were cut in 2023, supporting positive operating leverage despite inflation and integration costs.
- Balance Sheet Repositioning: Securities sales and sale-leasebacks improved earnings power, adding $0.06 to annual after-tax EPS in Q4.
The bank’s asset quality, stable capital, and prudent growth position it well as it enters a year of likely rate cuts and merger integration.
Executive Commentary
"Despite the year's disruptions, in the end, 2023 was a successful year for AUB, both financially and strategically, and we entered a new year with positive momentum."
John Asbury, President & CEO
"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, up-pacing expected low single-digit growth, and adjusted operating non-interest expense."
Rob Foreman, EVP & CFO
Strategic Positioning
1. Deposit Franchise Adaptation
Deposit remixing—movement from non-interest-bearing to interest-bearing products—has been the dominant funding theme since early 2023. Management now sees this trend stabilizing, but acknowledges that the cost structure is permanently altered. The bank’s ability to reprice $2.2 billion of maturing CDs and $1.8 billion of Fed funds-indexed deposits in 2024 will be crucial for margin defense as rates fall.
2. Loan Growth Discipline and Diversification
AUB’s lending strategy is rooted in diversified C&I and CRE portfolios with a focus on relationship banking. Management expects mid-single-digit loan growth in 2024, supported by healthy pipelines. The upcoming American National merger will further diversify the loan book and add scale, especially in under-resourced regions like western Virginia.
3. Cost Efficiency and Technology Modernization
Expense control remains a key lever, with $17 million in structural costs removed in 2023. The bank is also modernizing its technology stack, moving to a new online and mobile platform in 2024, which is expected to enhance client experience while lowering costs. These investments support both operational efficiency and organic growth.
4. Merger Integration and Strategic Expansion
The American National Bankshares acquisition is on track for Q1 2024 closing. Management anticipates meaningful expense synergies and a margin uplift from repricing the acquired fixed-rate loan portfolio. The deal also brings a lower loan-to-deposit ratio and additional treasury management capabilities to the combined organization.
5. Prudent Credit Risk Management
Asset quality remains a core strength, with negligible net charge-offs and proactive monitoring of CRE and office exposures. The office portfolio is modest, granular, and regionally focused—about 5% of total loans—with no exposure to high-rise or central business district properties. Management expects some normalization of credit costs but sees no systemic risk on the horizon.
Key Considerations
This quarter’s results highlight a bank balancing growth, margin, and risk amid a shifting macro and regulatory environment. The success of the American National integration, deposit repricing execution, and expense discipline will determine whether AUB can maintain its profitability as the rate cycle turns.
Key Considerations:
- Deposit Beta Management: Ability to reprice high-cost CDs and indexed deposits will be critical as the Fed cuts rates.
- Merger Synergy Realization: Achieving targeted expense savings and revenue enhancements from the American National deal is a near-term priority.
- Loan Growth vs. Funding Constraints: Management is mindful that deposit growth will limit loan expansion, but expects to offset with securities cash flows and portfolio optimization.
- Expense Growth Discipline: Structural cost cuts and technology upgrades are intended to keep expense growth below revenue growth, sustaining positive operating leverage.
- Credit Normalization Watch: While current asset quality is strong, the bank is budgeting for a modest increase in net charge-offs as the cycle matures.
Risks
Key risks include accelerated deposit cost pressure if competitive dynamics intensify, slower-than-expected realization of merger synergies, and potential asset quality deterioration if economic conditions worsen. Margin compression could exceed guidance if the Fed cuts rates faster or deeper than anticipated, and regulatory delays could impact merger timing. The bank’s exposure to CRE and office loans, while modest, remains a sector to monitor as commercial real estate markets evolve.
Forward Outlook
For Q1 2024, AUB guided to:
- Net interest margin bottoming between 3.25% and 3.30% before gradual recovery as deposit repricing accelerates.
- Mid-single-digit loan growth with deposit growth in the low single digits, reflecting a continued focus on funding discipline.
For full-year 2024, management maintained standalone guidance:
- Net interest margin between 3.3% and 3.4%, assuming three Fed cuts beginning in June.
- Positive adjusted operating leverage as revenue growth outpaces expenses.
Management highlighted several factors that will shape results:
- Ability to aggressively reprice $2.2 billion of CDs and $1.8 billion of indexed deposits as rates fall.
- American National integration is expected to be margin accretive and deliver expense synergies.
Takeaways
AUB enters 2024 with a stable deposit base, disciplined growth plans, and a clear path to margin defense, but faces challenges from deposit cost structure and execution risk around merger integration.
- Deposit Strategy Is Central: The stabilization of non-interest-bearing outflows and planned repricing actions are critical to margin performance as the rate cycle turns.
- Merger Execution Will Define 2024: The American National deal offers upside but requires flawless integration and realization of planned synergies.
- Watch for Credit Normalization: Asset quality remains strong, but management is prudently budgeting for higher charge-offs as the cycle matures.
Conclusion
Atlantic Union Bankshares demonstrated resilience in 2023, proactively managing deposit costs, expenses, and credit risk while preparing for a transformative merger. The bank’s ability to defend margins and deliver on integration promises will be the key investor watchpoints in the coming quarters.
Industry Read-Through
AUB’s experience underscores the ongoing challenges regional banks face from deposit remixing and margin compression, even as funding cost pressures begin to moderate. Peer banks should expect continued competition for core deposits, with the need for aggressive repricing as rates fall. M&A remains a lever for scale and efficiency, but integration execution and synergy realization are critical. The quarter also highlights the importance of granular credit monitoring, especially in CRE and office segments, as the industry navigates an uncertain macro environment. Technology modernization and cost discipline are increasingly non-negotiable for community and regional banks seeking to defend profitability in a lower-rate world.