Atlantic Union Bankshares Corp (AUB) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by, and welcome to the Atlantic Union Bankshares First Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to the speaker of today's call, Mr. Bill Cimino, Senior VP of Investor Relations. You may begin.

Thank you, Latanya, 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 remotely and in person for the question-and-answer period.

Please note that today's earnings release and accompanying slide presentation we are going through on the 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 our earnings release for the first quarter of 2022.

I would like to remind everyone that on today's call, we will make forward-looking statements, 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 statement, and please refer to our earnings release for the first quarter of 2022 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 today -- on today's call are subject to that safe harbor statement.

At the end of the call, we will take questions from the research analyst community. Finally, before we begin, I would like to remind everyone of our upcoming Investor Day on May 9 where you'll hear members of our management team go into greater detail on what we've accomplished and what we -- what the next 3 years should look like for Atlantic Union Bankshares. Registration and further details can be found on the advisory posted this past Monday on our investor website.

I'll now turn the call over to John Asbury.

Thank you, Bill, and thanks to all for joining us today. Atlantic Union Bankshares is off to a strong start in 2022. On the last quarterly earnings call, I noted that we were set up to start the year better than at any point in my 5-plus years at the company and that we did, tipping into low double-digit annualized loan growth, excluding PPP, in what has traditionally been a slow growth quarter for us. This growth shows we have momentum and points to the organic growth potential of our franchise. As I've consistently stated, our operating philosophy of soundness, profitability and growth in that order of priority serves us well as we navigate the challenges of operating not just through a pandemic, but now through generationally high inflation, rising interest rates and geopolitical uncertainty. While we recognize the pandemic is not yet over, restrictions in our markets have eased, and we're all becoming accustomed to the new normal of living with COVID-19.

Our corporate office-based teams have returned to our buildings, and while some roles are now completely virtual, most work on a hybrid arrangement, while our team succeeded and arguably excelled over the course of this disruption or even better when we're physically together. What we do and how we do it is really all about our culture and our people, and we are committed to workplace flexibility as an opportunity to attract and retain talent. We'll continue to take a progressive view toward the changing nature of workplace expectations and will adjust based on our actual experiences.

In scanning the horizon, we're incrementally more cautious about the implications of surprisingly high inflation, rapidly rising interest rates and geopolitical uncertainties such as the tragedy in Ukraine. While this will likely mute economic growth to some extent as seen in the changes in Moody's forecast since last quarter, for the time being, we still don't see it derailing the fundamental positive trends of a growing economy, low unemployment and a benign credit environment.

We continue to believe that the Federal Reserve having already raised short-term rates and signaling multiple short-term rate hikes to follow throughout 2022 is a positive for us as we remain fairly asset sensitive. As a result, our net interest margin should expand from here. In addition to inflation and the consequences of the war in Ukraine, we still face headwinds from supply chain disruption and business clients, challenged to fill open positions.

While we've said before, we expected that to improve as the year goes on, now we're not so sure. Despite all of this, from our vantage point, we think American businesses have proven their resiliency and that all of this is manageable. Despite the headwinds and uncertainties, Atlantic Union has now had 2 consecutive quarters of low double-digit loan growth, with the first quarter coming in point-to-point at approximately 10.8% annualized, excluding PPP. Average loans on a linked quarter annualized basis grew 12.8%, excluding PPP.

First quarter loan production is typically our seasonal low point, but this year's first quarter was different. Production, while not as high as the traditionally peak of fourth quarter was still higher than every other quarter over the last 2 years. While runoff was down from Q4, it was still higher than the first quarter of last year. So loan growth remains mostly a production story for Atlantic Union Bank.

New construction loan originations remained strong. And based on our unfunded construction loan commitments and funding schedules, this should be a tailwind for balances this year, just as it was for Q1. We were also encouraged to see C&I line utilization tick up each month of the quarter, ending the period at 30%, which is still well below our pre-pandemic levels. It is good to see this trend and commitment levels grow. We feel we have a lot of upside here as sales and working capital needs among our client base increased.

Our pipelines remained strong, solid, well balanced between CRE and C&I. They're significantly higher than they were at this point in 2021, and they're also higher than at the end of the fourth quarter, which means that our strong Q1 growth did not drain the pipeline. We are encouraged by our competitive positioning, the market dynamics and economic strength in our footprint.

All of that, plus our expanded lending capabilities continue to lead us to expect upper single-digit loan growth for 2022. While some quarters may be better than others, one quarter does not a year make, and with so much uncertainty remaining, we'll want to see more calendar behind us in 2022 before we consider moving off of our full year expectation of upper single-digit loan growth.

Having said that, I would note we continue to believe we have a long runway ahead of us to grow both organically and through takeaway from our larger competitors that dominate market share here in our home state of Virginia, and this is supplemented by our operations in Maryland, North Carolina and our specialized lending capabilities in government contract finance and equipment finance.

Our asset quality continued to impress. And once again, the credit headline for the quarter was the absence of credit problems. Charge-offs net of recoveries for the quarter came in at plus $4,000, a net recovery or 0 basis points annualized. That's a slight improvement from last quarter's 2 basis points of net charge-offs, but back in line with the effectively 0 base in last year's Q3 and Q2. Quarter-after-quarter, these are levels I have never seen in my nearly 35-year career. At some point, credit losses are going to normalize. But given all of the liquidity that remains in the system, the low unemployment rate and is still a fundamentally strong economy, we have yet to see any sign of a systemic inflection point. Its day will come, we just don't know when. In the meantime, I do enjoy the absence of heads-up phone calls from our Chief Credit Officer.

Back to macroeconomics. While the outlook may not be quite as good as last year, it's still good. And overall, we remain optimistic at this time. Here in our home state of Virginia, March unemployment came in at 3%, down from 3.4% in November, and that was the latest number that we had shared when we announced Q4 earnings, and this is better than the national average of 3.6% for the same time period, having just, again, looked at the unemployment data for the country, there is no more popular state in America than Virginia with such a low unemployment rate.

What has not changed is the challenge of businesses to fill their open jobs, and this will likely not resolve until we see more people return to the workforce. One would think that higher cost due to inflation and improved COVID-19 conditions may motivate more people to return to work. We'll see. Rob will talk through the provision for credit losses in our CECL modeling as we posted an increase in the provision instead of releasing for the first time in a few quarters. As Rob will explain, this was due to strong loan growth, incrementally lower economic growth expectations and the geopolitical and economic outlook uncertainties I mentioned before.

Turning to expenses. We did still have some noise from onetime charges remaining from December's expense actions, but lesser than last quarter. We closed 16 branches at the beginning of March, and that was 12% of our current branch network. Since the start of the pandemic, we will have reduced our retail branch network by approximately 25% or 35 branches. This reflects our recognition of changing consumer behaviors, never better analytics on customer usage of the branch network and alternative delivery channels and our need to continue to invest in our digital products and technology in order to respond to wage inflation pressures as well.

Regarding expenses, Rob will take you deeper into the details in his comments, but we continue to expect that we will hold operating non-interest expense growth to 2% in 2020, following our usual seasonally-higher expenses in Q1. Our expense management actions, combined with upper single-digit loan growth expectations and our asset sensitivity do give us confidence in our ability to generate positive operating leverage and differentiated financial performance, while meeting our top-tier financial targets for 2022.

From my perspective, with all of the uncertainties and challenges acknowledged, we are looking at a recipe for what could be the best organic growth footing I've seen in my 5.5 years at the company. The powerful combination of a growth footing, plus asset sensitivity in a rising rate environment, plus expense actions already taken, plus benign credit should equal top-tier financial performance.

As we think about the future of our company and our industry, we want to more rapidly diversify our income streams, both in terms of net interest income and non-interest income. While it's never been a large component of our non-interest income, as I mentioned in the last call, we are making consumer-friendly changes to our non-sufficient funds and overdraft policies in Q3 that we expect to reduce our non-interest income by approximately $4.5 million to $6.5 million on an annualized run rate basis.

Examples of coming actions include the elimination of non-sufficient fund fees for consumer accounts, fee-free overdraft transfers, lower overdraft caps, the establishment of a no overdraft bank on certified checking product and 2-day advanced direct deposit payroll for ACH credits, allowing our customers to get paid 2 days early.

With the rising rate environment, we expect to more than offset these loss fees with increases in net interest income. We are investing in new value-added ways to serve our clients to generate additional non-interest revenue over time. We will say more about those plans as they develop at our upcoming Investor Day.

One area beyond our core banking operations that we are focusing on is the digital asset ecosystem. As I mentioned in the last call, we began investing in fintech funds a few years ago. We've added to our position this year, and we're using those to inform our digital offerings and to vet and identify opportunities to enhance those offerings.

We're also interested in new and emerging opportunities such as blockchain, which we think improve disruptive to existing payment systems and infrastructure. To reiterate, our growth strategies are at a very high level, they are in order of priority: one, driving the organic growth and performance of our core banking franchise; two, leveraging financial technology and fintech partnerships to drive transformation, generate new sources of income and new capabilities; and three, selectively considering M&A as a supplemental tertiary strategy. This is an option we will preserve and consider under the right circumstances.

As I've said before, we've come out on the other side of the pandemic as a stronger and more capable organization. We've learned to work differently, and our customers have learned to bank differently. And this has enabled us to consolidate 25% of our branches since the pandemic began with better-than-expected customer experience -- acceptance. Despite the branch consolidations, we continue to grow our net consumer households.

We continue to work on new projects and improve the omnichannel customer experience with quarterly releases and upgrades to our product offerings. We look forward to sharing what we've accomplished when we provide additional details at our upcoming Investor Day. Our goal remains to achieve and maintain top-tier financial performance regardless of the operating environment. We continue to work on ways to make the company more efficient and scalable, while improving and automating processes and the customer experience. All of this provides room for operating leverage improvements.

As we turn the page on the first quarter, I remain confident in what the future holds for us and the potential we have to deliver long-term sustainable performance for our customers, communities, teammates and shareholders. I'll now close, as I always do, by reminding that Atlantic Union Bankshares remains a uniquely valuable franchise, dense and compact in great markets with a story unlike any other in our region. We're scalable with the right capabilities, the right markets and the right team to deliver high performance even in the most trying of times.

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

Well, thanks, John, and good morning, everyone. Thank you all for joining us today. Now let's turn to the company's financial results for the first quarter. Please note that for the most part, my commentary will focus on Atlantic Union's first quarter results on a non-GAAP adjusted operating basis, which excludes pre-tax restructuring costs of $5.5 million or $4.4 million after tax expenses in the first quarter and the prior quarter's pre-tax restructuring cost of $16.5 million or $13.1 million in after-tax expenses, which was related to the closure of 16 branches and the company's operations center during March of this year. As a reminder, the company expects to lower its annual expense run rate by $8 million or $2 million on a quarterly basis beginning in the second quarter as a result of these strategic actions.

In addition, fourth quarter non-GAAP adjusted operating earnings excludes the pre-tax gain of $5.1 million or $4.1 million on an after-tax basis related to the sale of Visa, Inc. Class B common stock in December 2021. In the first quarter, reported net income available to common shareholders was $40.7 million, and earnings per common share were $0.54, which was down approximately $4.1 million or $0.05 per common share from the fourth quarter.

Non-GAAP adjusted operating earnings available to common shareholders in the first quarter were $45.1 million and adjusted operating earnings per common share were $0.60, which is down approximately $8.7 million or $0.11 per common share from the prior quarter. Non-GAAP adjusted operating return on tangible common equity was 12.69% in the first quarter. The non-GAAP adjusted operating return on assets was 0.98%. And the non-GAAP adjusted operating efficiency ratio reported in the first quarter is 58.86%.

Turning to credit loss reserves. As of the end of the first quarter, the total allowance for credit losses was approximately $111 million comprised of the allowance for loan and lease losses of $103 million and the reserve for unfunded commitments of $8 million. The total allowance for credit losses increased approximately $2.8 million in the first quarter, primarily due to net loan growth during the quarter and increased uncertainty in the macroeconomic outlook due to high inflation, tightening monetary policy and geopolitical risks. The total allowance for credit losses as a percentage of total loans was 82 basis points at the end of March, unchanged from the prior quarter. As a reminder, our day 1 CECL reserve was 75 basis points of total loans.

The provision for credit losses of $2.8 million in the first quarter, increased from the prior quarter's negative provision for credit losses of $1 million and a negative provision for credit losses of $13.6 million recorded in the first quarter of 2021 as the allowance for credit losses has normalized toward pre-pandemic CECL day 1 reserve levels. As Sean noted, net charge-offs remained negligible in the first quarter.

Now turning to pre-tax pre-provision components of the income statement for the first quarter. Tax equivalent net interest income was $134.3 million, which was down approximately $7.3 million from the fourth quarter, driven by lower PPP loan-related interest and fees of $8.4 million as well as lower net accretion of purchase accounting adjustments of $2.2 million. These declines were partially offset by higher interest income due to average balance growth in the securities and loan portfolios from the prior quarter as excess cash was redeployed into these higher earning assets.

In addition, other borrowing costs were lower by $1.2 million in the first quarter driven primarily due to the acceleration of the unamortized discount related to the redemption of the company's subordinated debt incurred in the prior quarter. The first quarter's tax equivalent net interest margin was 3.04%, which is a decline of 6 basis points from the previous quarter due to -- comprised of a decline of 8 basis points and the yield on earning assets, partially offset by a 2 basis point decline in the cost of funds. The decline in the first quarter's earning asset yield is driven by a 23 basis point impact of lower loan portfolio yields, partially offset by an increase of 4 basis points due to higher securities yields and the 10 basis point benefit from a more favorable earning asset mix as excess liquidity was deployed into higher-yielding loans and securities during the quarter.

The loan portfolio yield decreased to 3.49% in the first quarter from 3.81% in the fourth quarter due to the $8.4 million decline in PPP loan-related interest and fees, which negatively impacted the first quarter loan yields by 20 basis points and the earning asset yield by 15 basis points and also the decline of $2.2 million in net accretion of purchase accounting adjustments, which negatively impacted the first quarter loan yields by 7 basis points and the earning asset yield by 5 basis points from the prior quarter.

Core loan yields, excluding PPP and purchase accounting loan accretion income decreased slightly, which had a 3 basis point negative impact on first quarter margin. Reduction in core loan yields is due to the continued paydowns of higher-yielding loans and lower loan yields on loan renewals and new production during the quarter. The 2 basis point decline in the cost of funds is principally due to the 4 basis point decline in time deposit rates as well as a decrease in borrowing costs related to the $1 million acceleration of unamortized discount mentioned earlier.

Non-interest income declined $6.2 million to $30.2 million in the first quarter from $36.4 million in the prior quarter, and that was due to -- primarily due to the $5 million -- $5.1 million gain from the sale of Visa Class B common stock recorded in the fourth quarter, also lower unrealized gains on equity investments of $1.4 million from the prior quarter.

Bank owned life insurance revenue declined approximately $589,000 due to debt proceeds received in the prior quarter, a decrease of $217,000 interchange fees due to seasonally lower transaction volumes as well as lower mortgage banking income of $213,000, which is reflective of the seasonal decline in mortgage origination volumes and increases in mortgage rates during the quarter.

In addition, deposit account service charges declined approximately $212,000 primarily as a result of the seasonal decline in transaction volumes. These non-interest income category declines were partially offset by an increase in loan interest rate swap fee income of $2.4 million due to higher transaction volumes in the quarter.

Turning to non-interest expense. Reported non-interest expense decreased $14.6 million to $105.3 million in the first quarter, primarily driven by lower restructuring expenses of $11 million as the prior quarter reflected $16.5 million related to the closure of the company's op center and the consolidation of 16 branches that was completed in March of this year compared to $5.5 million in restructuring charges associated with the closings in the first quarter.

In addition, non-interest expenses declined in several expense categories from the prior quarter, including lower tech and data processing expenses of $747,000 driven by a software contract termination cost that occurred in the prior quarter. There was a reduction of $590,000 in professional services expenses associated with our strategic projects, $434,000 decrease in equipment expenses and lower marketing and advertising expenses of $382,000 in the current quarter versus the prior quarter. Partially offsetting these expense reductions, salaries and benefits increased by $328,000 during the first quarter as seasonal increases in payroll-related taxes and 401(k) contribution expenses in the first quarter were materially offset by a decline in the performance-based variable incentive comp and profit sharing expenses.

The effective tax rate for the first quarter increased to 17.5% from 14.4% in the fourth quarter, reflecting the impact of changes in the proportion of tax-exempt income to pre-tax income. In 2022, we expect the full year effective tax rate to be in the 17% to 18% range.

Turning to the balance sheet. Total assets were $19.8 billion at March 31, a decrease of approximately 5.7% from December 31 levels due to a decline in cash and cash equivalents of $406 million as excess liquidity was redeployed to fund net loan growth of $264 million and net deposit runoff of $127 million.

In addition, the investment securities portfolio declined by approximately $160 million, primarily due to the impact of market interest rate increases on the market value of the available for sale securities portfolio. At period end, loans held for investment were $13.5 billion, which included $67.4 million in PPP loans, net of deferred fees, which is an increase of $264 million from the prior quarter, driven by non-PPP loan balance growth of $346 million, partially offset by $76 million of PPP loans that were forgiven during the first quarter. Excluding PPP loans, loan balances in the first quarter increased 10.8% annualized, driven by increases in commercial loan portfolio of $297 million or 10.9% linked quarter annualized and consumer loan balance growth of $48.9 million or 9.8% linked quarter annualized.

At the end of March, total deposits stood at $16.5 billion, a decline of $127 million or approximately 3% annualized from the prior quarter as a decline of $182 million in high-cost time deposits was partially offset by growth in low-cost deposits. At March 31, low-cost transaction accounts comprised 58% of the total deposit balances, which is slightly higher than the fourth quarter levels of 56%.

From a shareholder stewardship and capital management perspective, we remain committed to managing our capital resources prudently as the deployment of capital for the enhancement of long-term shareholder value remains one of our highest priorities. At the end of the first quarter, Atlantic Union Bankshares and Atlantic Union Bank's regulatory capital ratios were well above well-capitalized levels.

The company's tangible common equity to tangible assets capital ratio declined from the prior quarter, which was primarily driven by the unrealized losses on AFS or available for sale securities portfolio recorded in other comprehensive income due to market interest rate increases in the quarter.

During the first quarter, the company paid a common stock dividend of $0.28 per share, consistent with the prior quarter and also paid a quarterly dividend of $171.88 on each outstanding share of Series A Preferred Stock. In addition, the company repurchased approximately 630,000 shares -- common shares for $25 million during the first quarter and currently has $75 million remaining on its $100 million share repurchase authorization.

With the financial impact of the PPP loan program winding down, the pandemic-driven volatility related to expected credit losses and credit loss reserve level subsiding and the expectation that interest rates would begin increasing this year, we noted in our fourth quarter 2021 earnings conference call in January that we set our top-tier financial metrics to be the following: return on tangible common equity within a range of 13% to 15%, return on assets in the range of 1.1% to 1.3% and an efficiency ratio of 53% or lower.

As an update, we are now projecting that the company will achieve the top end of these previously published top-tier financial metric target ranges for the full year of 2022 as a result of the company's asset sensitivity and updated financial remodeling assumptions, including that the Fed funds rate will move much higher to 2.5% by the end of 2022, an increase on a more accelerated basis, 50 basis point hikes in May and June, followed by 25 basis point increases in the remaining meetings -- Fed meetings in 2022. These are much higher than previously assumed in our modeling.

As a reminder, our financial performance targets are dynamic and are set to be consistently in the top quartile among our peer group, regardless of the operating environment. As such, given the current economic environment and our expectation that the Fed will materially increase the Fed funds rate in 2022, we are currently reevaluating these targets to ensure they are reflective of the financial metrics required to achieve top-tier financial performance in the current economic environment. We expect to be in a position to discuss any revisions to our target at our upcoming Investor Day.

So in summary, Atlantic Union delivered solid financial results in the first quarter and continues to be well positioned to generate sustainable, profitable growth and to build long-term value for our shareholders.

With that, let me turn it back over to Bill Cimino to open it up for questions from our analyst community.

Thanks, Bob. And Latanya, we're ready for our first caller, please.

(Operator Instructions) Our first question comes from Casey Whitman of Piper Sandler.

Maybe I'll start with capital. Just with the TCE ratio down to around 7%, can you continue to be as aggressive with buybacks here? Or is there a level that you're sort of comfortable running that ad? Or can you go lower? Just give us a sense for sort of how you're thinking about capital here with the AOCI that you guys took this quarter?

Yes, Casey, this is Rob. I'll handle that question. Yes. So as you do recall, as we've noted here that the AOCI impact had a fairly material impact on our tangible common equity ratio. Obviously, that does not impact any of our regulatory capital ratios. So we are evaluating our capital management actions beyond ensuring that we have capital for loan growth and a sustainable dividend going forward. We are evaluating that. We do expect that the impact -- the negative impact will earn that back over the next several quarters. Obviously, we're very asset sensitive, as noted. We don't view that as any economic issue for us. It's more of an accounting entry in terms of the fair market value. We have no intention of liquidating our available for sale portfolio. So with that, we do expect to start earning that back, but we will be evaluating primarily the level of share buybacks going forward, not necessarily taking any share buybacks off the table at this point, but we will evaluate that as we go forward here.

Okay. And Rob, maybe sticking with you, can you just walk us through sort of what each rate hike does to your margin? And then what kind of deposit betas you're assuming in that analysis and sort of how quickly you need to move deposit rates assuming you haven't had to move them yet?

Yes. So Casey, it's mentioned, we're going to have a -- as I mentioned, we're modeling that the Fed funds rate will increase throughout the year. And at the end of the year, we're modeling that it will be at about a 250 level from the current 50. So several hikes. Those hikes will become faster. As I mentioned, we expect May and June to see 50 basis point hikes, followed by the remainder of the meetings at 25 basis points. Just to give you kind of a estimate of what that means to us. So for every 25 basis points, the Fed fund moves and LIBOR follows SOFR follows and prime follows. That's about 5 basis points on our core margin, approximately about $8 million in net interest income.

So we're projecting that the core net interest margin, which, if you do the calculation for the first quarter, taking PPP and purchase accounting out of the equation, we came in at 2.95%, which was up 15 basis points from the prior quarter due to redeploying that excess liquidity, I mentioned. But we'll have a fairly significant increase in the margin. We're projecting that, that 2.95% will end up if the Fed moves the way we're suggesting or we're thinking that we could be in the 3.45% to 3.50% by the end of the year. So fairly material.

In terms of the deposit betas implied in that, we do expect that deposit betas will move really probably after the May 50 basis points. We've been thinking that we'd have to see the Fed funds rate move to about 100 basis points, and then you start to see deposit rates, maybe the competition moving on deposit rates. So we're projecting that, that will start in May, June.

Overall, through the cycle, we're suggesting and modeling that we'll have like the 25% deposit beta on total deposits that will be more in the 30% -- a little over 30% on interest-bearing deposits as we go through the cycle. So it will ramp up throughout the year. That's the way we're thinking about it.

On our next question comes from Catherine Mealor of KBW.

Maybe just one follow-up on the NIM guidance. How should we think about kind of the size of the balance sheet as your margin expands so significantly? And I guess a lot of that excess cash was deployed this quarter, and so it doesn't feel like that's as much of a lever, but just kind of help us think through maybe how much you're expecting to grow the securities book throughout the next year?

Yes, Catherine, in terms of securities book, we will most likely not be adding to the book. We've increased it over the -- during the pandemic with the excess liquidity that we had throughout the pandemic. We've been investing -- putting that cash to work throughout -- since the third quarter of 2020. Typically, we've run about 15% of total assets in the securities book pre-pandemic. We're now about 20% to 21%. So we are expecting that we won't be adding to that at the securities book. We ought be using the cash flows that come off of that and kind of bring it down over a period of time more to the 15% -- back to the 15%, that will take a bit of time. But using the cash flows that are coming off the portfolio to fund loan growth going forward. So that will be a liquidity source for us as we expect, as John mentioned, high single-digit loan growth going forward.

Okay. Great. That helps. And then on the expenses, I remember last quarter, you gave a range of $385 million to $390 million and this quarter's expense was a little bit higher than that kind of run rate. So did that $385 million to $390 million expense range for the full year is still a target? Or are we a little bit above that now?

Yes. We're going to confirm that guidance, $385 million the initial guidance, we had $385 million to $390 million. You have to remember in the first quarter, you really can't take that, extrapolate that run rate throughout the year. There's seasonal increases there related to payroll taxes, 401(k) contributions that are related to we pay incentives during the quarter. So they kind of get ratcheted up. And then, of course, there's a reset of payroll taxes for higher salary teammates. So if you look at the numbers, so kind of just give you a thought kind of calculation that we're looking at -- so normal the -- after you take out the 1x this quarter, we had about a $99.8 million expense base. To that, you've got to back out this seasonal payroll tax in 401(k), and that's about $3 million or so. Offsetting that is we do increase merits in March, so we have one month of 4% merit increase for teammates. So you have to add back $1 million to offset that.

And then don't forget, $2 million is coming out starting really April 1 on a quarterly basis due to the branch closures in the op center. So again, if you look forward, we're probably looking at $96 million, $97 million in the out quarters, combined that with the first quarter, we're still in that $385 million to $3.90 million on a full year basis. So that number is going to come down quite a bit, Catherine in the second quarter.

And our next question comes from William Wallace of Raymond James.

Let's go back to NIM. First, I believe in the text of the release, you said that the purchase accounting accretion was down due to lower prepayments. With rates rising, is it safe to assume that your prepayments will remain low, and therefore, this kind of -- this amount that you got in the second quarter is kind of a more likely run rate type level? Usually, we take your table and add a little bit for kind of accelerated purchase accounting accretion.

Yes. Yes, the purchase account accretion is going to be down this year, call it, 4 basis points or 5 basis points for the full year compared to higher levels we had last year. That's right. So in the quarter, Wally, I think purchase accounting was about 4 basis points on the reported margin. PPP was about 5 basis points. Purchase accounting should kind of remain in that range 3 basis points to 4 basis points going forward. PPP will basically go away pretty much this quarter or second quarter. And then again, as I mentioned, the core margin was 2.95% at PPP, that's 3% and then 4 basis points for purchase accounting. But the way we're looking at it is, if you look at the core margin, that was up 15 basis points due to the excess liquidity and growth in the portfolio -- loan portfolio, and that's where you'll see some significant improvement or expansion in the margin as the Fed moves going forward here based on our assumptions.

Okay. And last quarter, I wrote down that you said that you anticipated 8 basis points to 9 basis points for every 25 basis point hike. I'm curious what you changed in the modeling. Did you get more aggressive with deposit betas or…

Yes, a couple of things. Yes. I guess a couple of things there, Wally. One is that we only had 3 rate hikes during the year. So basically, we thought we wouldn't see any deposit moves for the balance of the year. So that was part of it. Now with the aggressive rate hikes we're seeing, we have ratcheted that up a bit and moved it earlier in the year. So kind of two-pronged there.

Do you think that -- do you anticipate -- and I know this is -- it's guess work to a degree. But do you anticipate that it will be kind of a linear move? Or do you think that you'd get a little bit more benefit upfront and then you'll start to see more kind of noise from your deposit customers asking for cost as the Fed continues to hike and you'll start to see a little bit less of that expansion as we get further along with Fed tightening?

Yes. That's exactly how we're modeling it, Wally. So very limited moves, but moves nonetheless up over the next, call it, 100 basis point move, if you go through May and June, you'll start to see that ratcheting up in terms of the betas, implications as you get out probably the second half late in the year coming out to about that 25% beta, as I mentioned, for the total deposits. But it would definitely move slowly to that level. I won't say competition is going to have some to say about it, right?

I would imagine on the loan pricing side as well. So…

Yes, that's sure.

Circling back to the question about the AOCI. It sounded like you said you thought you'd get it back in the next 3 or 4 quarters. I thought that your securities portfolio was maybe kind of a little bit longer dated 2 to 3 years. Were you saying that you anticipate getting that capital back because you'll be earning it back? Or are you saying you anticipate recovering the $100 or so million AOCI hit as securities mature over the next 3 or 4 quarters.

Yes. Yes. What I meant to say there, Wally, was that we'll ratchet that up over the next several quarters to get closer to 7.75, closer to 8, but we won't recapture that, that's 3 or 4 quarters, but it will take some time now. We'll see where rates go from here, but that's our working assumption at this point. It will take 2 points to get back to the [80-20], it'll take a little longer than that.

Okay. Okay. And then, John, just last question on your prepared remarks. I'm not sure if I heard you correctly. Did you say a $4.5 million to $6.5 million fee reduction due to the policy changes around overdraft and NSF -- or was it $4.5 million to $5.5 million. And can you tell us when do you anticipate we will start to see those? And can you give us an update on any communications you've had with the CFPB?

Yes. I don't have any -- anything to add on in terms of any regulatory communications related to overdraft practices. To answer your question, yes, $4.5 million to $6.5 million is the band. This is an estimate in terms of the income loss from these customer-friendly changes. We expect them to begin in Q3 of this year, of course. It -- does it mean we're not sure where we'll be within this band because it's such a variable. It depends upon what's going on with balances and customer behaviors. But I think that's a good conservative band in terms of where we're going to be.

From our standpoint, Wally, it seems clear to us where the puck is headed. And we don't want to wait. We don't want to be sort of a late adopter. We've been -- the hallmark of this company is the client experience. And we have been making consumer-friendly changes. We would rather go ahead and be among the leading pack. We've never been a big overdraft shop, not that reliant on it. And we feel like from a value proposition offering, this is a good thing to do. So it's actually, I think, will be a good message and well received by the customer base.

I think what's implied is, has someone compelled us to do this. We have heard the first question about it. This is our choosing, and we recognize that we're in the kind of earlier pack, at least among the midsized banks. But mark my words, this is where it's going. So let's deal with it now.

John, I thought you disclosed in your K that you received a notice from the CFPB around a potential lawsuit regarding your…

No.

Am I totally mistaken about it?

You're referencing what's called it NORA, which is a Notice and Opportunity to Respond and Advise, which is a mechanism the CFPB uses to make inquiries of banks. The CFPB is broadly making inquiries across the industry around overdraft practices. And I'm not -- obviously, we -- there's really -- that's basically a set of questions and issues that they outlined. We then respond to them in writing. We chose to disclose that because we are transparent, and we thought it was the right thing to do. That had nothing to do with pricing issues, and I'll just leave it at that. It is overdraft related.

And Wally, the timing of that was also after the first quarter call -- or the last quarter call as well when we received the NORA.

Yes. Right. Okay. So you're saying that the changes in policies that you are implementing around NSF and overdraft were underway because you did mention it during the fourth quarter call in January before you got this notification and the notification doesn't have anything to do with whatever policies that you're -- and changes that you're making it something else?

I would say this is simply an acceleration of a series of consumer-friendly moves that we've been making for quite a while. We did not want to jump the gun. We've been interested to watch what's happening. You can look upstream of us and see changes that are happening. And you can see some of the midsized banks having made changes as well. But from our standpoint, we think about this as really part of the value proposition of the bank. It's -- we think it's -- we think this is where it's going. And this is not any new idea.

Yes, I agree.

Our next question comes from Laurie Hunsicker of Compass Point.

Just to stay with where Wally was on the NSF, I just want to sort of further dive down. So I think that was running at about $17 million or so a year. How much was in this quarter?

Now let's be clear what we're talking about. You're looking at the sum total of NSF and overdraft charges in…

And overdraft.

Yes. And so we're talking about the elimination of non-sufficient funds which is when we return an item without paying it. That's what's being eliminated. We are not eliminating overdraft fees when we actually create an overdraft for a customer.

I'm sorry. I thought I heard you say in your remarks free overdraft, what did I miss there?

I don't know. What you missed is I said free -- I said no charges for non-sufficient funds that's the proverbial bounced check. So if we return an item without sufficient funds, we will not charge for that item. That is different from paying an item which creates an overdraft.

And -- but you would make comments around overdraft. What were those? Just referring on that and…

We have a series of changes that we're making across all of these categories, Laurie. So examples of things that we're doing on overdraft would be reducing the caps, not charging fees when overdrafts are covered by transfers either from overdraft lines of credit or accounts which are linked, such as a savings account, which is drawn on to cover and overdraft. And we have some other things going on as well.

The 2-day advanced credit for an ACH payroll deposit has nothing to do with overdraft per se, but that's simply an additional service that we have -- the technology is there. We have the capability to give people 2-day early access to their direct to positive payroll. So we decided to do that because we can, and we think that's part of our customer-friendly value proposition. So I was -- the $4.5 million to $6.5 million estimate speaks to a basket of various changes, most of which are related to either the NSF fee waiver or other overdraft-related practices.

Got it. Got it. Okay. And then, Rob, maybe you can just help put this together. So as we look in the back half of 2022, we look obviously to a drop in NSF, a drop in mortgage banking. How should we be thinking about that quarterly run rate on non-interest income. Obviously, you've got some other lines there that are moving higher. How should we be thinking about that?

Yes. So Laurie, the way we're looking at it is when we came into the year, of course, not knowing rates would spike as much and impact the mortgage business as much as it is or will be as we go forward here. We had said we'd be growing non-interest income about 8% or 9%. We're kind of -- we're backing off on that. Obviously, we didn't necessarily project the overdraft issue as well. So we're really looking at about a 2% to 3% growth rate over 2021 full year.

Last year, it was about $120 million, and we're looking at maybe a couple of million more than that this year, give or take. So kind of flattish. So we're dialing that back due to the mortgage pullback, which we had. We had said it would pull back probably about 40% or about 40%, and I would think it may be more in the 50% -- 60% range. So that's dialing back from last year.

Overdraft is coming down a bit. We are looking at additional resources or sources of income, some of which, as you saw in the first quarter, loan swap fees were up materially on a quarterly basis versus last year's quarter run rate. So we expect that -- some of that will continue. And we've also got other sources of -- our new sources of revenue that could make up for some of the other reductions I'm talking about here, FX for exchange, for example, SBA 7(a) gains, those sorts of things. So kind of sticking with that at this point.

Okay. Great. That's helpful. And then just wanted to clarify the PPP forgiveness income. I backed into this number. I just wanted an actual -- I backed into it at $2.8 million. Is that a right number for this quarter?

Say that again, PPP.

The PPP income in the…

The income -- yes, the absolute income, yes, it's about $3 million. That's right.

Okay. And that --so that leaves you with round numbers about $1.5 million? Or do you have a…

Yes. There's only $1.6 million left there to come into the income stream. So we do expect that will -- second quarter, that should -- it should be done by the end of the second quarter.

And our last question comes from Brody Preston of Stephens Inc.

Rob, so I wanted to circle back just on the margin comment you made real quick. I think you said 3.45% to 3.50% by the back end of the year with the updated rate hikes and beta assumptions. I just want to ask, was that core or was that headline?

Yes, that was core, Brody. So add another 3 basis points to 4 basis points of the purchase accounting in their PPP, as you know, goes away by then.

Okay. Okay. Yes, because that was really on the headline there just in what I treat the model today. So because I was wondering what the other leverage points were to get. You said you expect to be for the full year at the high end of those ranges. And so I just wanted to make sure I was sticking with that margin correctly.

Yes.

Okay. And then I did want to ask just on the loan portfolio pricing. I think it's 4%, you said are at their floors, 12% of the 16% are above floors. So that 12% should reprice if we get this May hike, correct? And the 4%, how many rate hikes do we need to get those off the floors?

Yes. So the next 50 basis points, which you presumably see in May will bring in about 75% of that. So may be down to 1% would still be at floor, and then another 25 basis points or so would kind of bring it all into the variable rate bucket.

Okay. And within your modeling of NII, and I know this is fluid, but are you assuming you get the full kind of repricing benefit from the floating rate loans going forward on a static basis? Or is there any assumption of floating rate becoming fixed rate over time? Or just any degradation in that floating rate mix.

Yes. We don't have any degradation going back to floor levels as rates rise, we'll be kind of call it in the money, if you will. If you go out farther into '24, we do think rates -- you may see those rates coming down and that could impact the out years there. But at this point in time, we're thinking it's hike all the way through '23, and then you might see some pullback from the Fed.

Got it. And what new origination yields coming on at currently?

I think on a blended basis, about [3.20] or so, I think, on the commercial side, that includes floating and fixed rate weighted.

Got it. And then my last one would just be, I thought the mortgage banking, although it was down, it held up a bit better than I expected. So could you just remind us what the portion like the purchase versus refi mix is within that portfolio this quarter, what it was this quarter and what it typically is?

Yes. So this quarter, actually, it kind of held up in the 35% to 36% range. That was down a bit from fourth quarter, which was, I think, around 40%. We do think that, that's going to kind of come back down because late in the quarter, you saw mortgage rates spike 5% up to 5% or a little higher. So that's expected to come down. We think on a normal basis, you see 20% to 25% of the origination book regardless of the rates have a 75% purchase and a 20% to 25% refi. So we think that's going to be coming back down to that -- those lower levels.

And Brody, as you know, this is really the old Access National Bank, more good shop under the leadership -- the fine leadership of Dean Hackemer. It's never been a big refi shop. It also doesn't really do the accordion that you so often see. Dean would tell you that we don't add a lot of people to mortgage when times are good, only to turn around and eliminate them when times are not so good. What that means is it somewhat limits the capacity during boom times. But at the same time, it doesn't fall as much. So they do a really good job of managing that business for profitability regardless of the environment, which is a bit uncommon.

Thanks, Brody, and thanks, everyone, for joining us today. We look forward to speaking with you in a few weeks at NASDAQ. Have a good day.

This concludes today's conference. Thank you for participating. You may now disconnect.