Earnings Call Transcript - AUB Q1 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares First Quarter 2022 Earnings Conference 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. To ask a question during the session, if you require any further assistance, 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.

Bill Cimino, Senior VP of Investor Relations

Thank you, Natalia. And good morning, everyone. Atlantic Bankshares' President and CEO John Asbury, and Executive Vice President and CFO, Rob Gorman are 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'll 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'd like to remind everyone that on today's call, we will make forward-looking statements which are not statements of historical facts 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 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 the forward-looking statements. 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 9th, where you'll hear members of our management team go into greater detail on what we've accomplished and what we expect the next three 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.

John C. Asbury, President and CEO

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 and what has traditionally been a slow growth quarter for us. This point shows we have momentum and indicates 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 teams have returned to our buildings, and while some roles are now completely virtual, most work is in a hybrid arrangement. Our team succeeded and arguably excelled over the course of this disruption; we're 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're 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 the 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 disruptions and business clients challenged to fill open positions. While we've said before that 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 two consecutive quarters of low double-digit loan growth, with the first quarter coming in point-to-point at approximately 10.8%, 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 fourth quarter, was still higher than every other quarter over the last two years. While growth 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 along with committed levels growth. We have a lot of upside here as sales and working capital needs among our client base increased. Our pipelines remain strong, solid, well-balanced between CRE and C&I. They're significantly higher than they were at this point in 2021 and 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, 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 make a year. And with so much uncertainty remaining, we will 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 taking away from our larger competitors to dominate market share here in our home state of Virginia. 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 a net recovery of $4,000, which is 0 basis points annualized. That's a slight improvement from last quarter's two basis points of net charge-offs, but back in line with the effectively 0 basis points 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. Given all the liquidity that remains in the system, the low unemployment rate, and a still fundamentally strong economy, we have yet to see any sign of a systemic inflection point. This 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, which 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 looked at the unemployment data for the country, there is no more populous state in America than Virginia with such a low unemployment rate. What has not changed is the challenge for 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 costs 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 one-time charges remaining from December's expense actions, but less 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, 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 2022 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 5-1/2 years with 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 has 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 two-day advance direct deposit payroll for ACH credits, allowing our customers to get paid two days early. With a rising rate environment, we expect to more than offset these lost 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 these 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 could prove disruptive to existing payment systems and infrastructure. To reiterate our growth strategies at a very high level, they are in order of priority: 1. Driving the organic growth and performance of our core banking franchise; 2. Leveraging financial technology and Fintech partnerships to drive transformation, generate new sources of income and new capabilities; and 3. 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. This has enabled us to consolidate 25% of our branches since the pandemic began with better-than-expected customer 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 you 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 will now turn the call over to Rob to cover the financial results for the quarter.

Robert M. Gorman, CFO

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. In the prior quarter's pre-tax restructuring cost of $16.5 million or $13.1 million in after-tax expenses 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 exclude 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 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 one reserve levels. As John noted, net charge-offs remain negligible in the first quarter. Now turning to the 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 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 six basis points from the previous quarter due to a decline of eight basis points in the yield on earning assets, partially offset by a two basis point decline in the cost of funds. The decline in the first quarter's earning asset yields was driven by the 23 basis point impact of lower loan portfolio yields, partially offset by an increase of four 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. Also contributing was a decline of $2.2 million in net accretion of purchase accounting adjustments, which negatively impacted the first quarter loan yields by seven basis points and the earning asset yield by five basis points from the prior quarter. Core loan yields, excluding PPP and purchase accounting loan increases in income decreased slightly, which had a three basis point negative impact on first-quarter margin. The two basis point decline in the cost of funds is principally due to the four 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, primarily due to the $5 million gain from the sale of Visa Class B common stock recorded in the fourth quarter. Also, low unrealized gains on equity investments of $1.4 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 in interchange fees due to seasonally lower transaction volumes, as well as lower mortgage banking income of $213,000, which is reflective of a 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 $60.5 million related to the closures of the company's operations 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 costs incurred in the prior quarter. There is a reduction of $590,000 in professional services expenses associated with our strategic projects, a $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. A seasonal increase in payroll-related taxes and 401(k) contribution expenses in the first quarter were materially offset by a decline in performance-based variable incentive compensation 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 31st, a decrease of approximately 5.7% from December 31st 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 in 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 the 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 31st, 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 common equity to tangible assets capital ratio declined from the prior quarter, primarily driven by the unrealized losses on the 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; it 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 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 levels subsiding, and the expectation that interest rates would begin increasing this year, we indicated 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're 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 modeling assumptions, including that the Fed funds rate will move much higher to 2.5% by the end of 2022 and increase on a more accelerated basis, 50 basis point hikes in May and June, followed by 25 basis point increases in the remaining Fed meetings in 2022, these projections 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 Federal Reserve will materially increase the Fed funds rate in 2022, we are currently reevaluating these targets to ensure they reflect 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. 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. And with that, let me turn it back over to Bill Cimino to open it up for questions from our analyst community.

John C. Asbury, President and CEO

Thanks, Bob, and with that, we're ready for our first caller please.

Operator, Operator

As a reminder to ask a question, please press star one on your telephone and to withdraw your question, please press the pound key. Please stand by. Our first question comes from Casey Whitman of Piper Sandler. Your line is open.

Bill Cimino, Senior VP of Investor Relations

Good morning, Casey.

Casey Whitman, Analyst

Good morning, how are you? Maybe I'll start with capital. Just with the TC ratio down to around 7%, can you continue to be as aggressive with buybacks here, or is there a level that you're comfortable running that at, or can you go lower? Just give us a sense of how you're thinking about capital here with AOCI investor this quarter.

Robert M. Gorman, CFO

Casey, this is Rob, I'll handle that question. As you do recall, as we've noted here, the AOCI impact didn't materially impact our tangible common equity ratio. Obviously, that does not affect 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 expect that the negative impact will be earned 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 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 share buybacks off the table at this point, but we'll evaluate that as we go forward here.

Casey Whitman, Analyst

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

Robert M. Gorman, CFO

Yes, Casey. As I mentioned, we're modeling that the Fed funds rate will be increased throughout the year, and by the end of the year we're modeling that it will be above a 250 basis point level from the current 50 basis points. 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 an estimate of what that means to us: for every 25 basis points the Fed fund moves and LIBOR follows, SOFR follows, and Prime follows. That's about five 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 295, which was up 15 basis points from the prior quarter due to redeploying that excess liquidity I mentioned. But we have a fairly significant increase in the margin; we project that 295 will end up, if the Fed moves as we're suggesting, we could be in the 345 to 350 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, with competition moving on deposit rates. Overall, through the cycle, we're suggesting in modeling that we'll have like a 25% deposit beta on total deposits, with that being more in the 30% range over interest-bearing deposits, as we go through the cycle to ramp up throughout the year. That's the way we think about it.

Casey Whitman, Analyst

Okay. Thanks.

Robert M. Gorman, CFO

Thanks, Casey. We're ready for our next caller, please.

Operator, Operator

Your next question comes from Catherine Mealor of KBW. Your line is open.

John C. Asbury, President and CEO

Hi, Catherine.

Catherine Mealor, Analyst

Hi. Good morning. Maybe just one follow-up on the NIM guidance. How should we think about the size of the balance sheet as your margin expands? Those significantly, and a lot of that excess cash was deployed this quarter. Is there anything that feels like that's as much of a lever, but just help us think through maybe how much you're expecting to grow the securities book throughout the next year? Thanks.

Robert M. Gorman, CFO

Catherine, in terms of securities, we will most likely not be adding to the book. We've increased it over the pandemic with the excess liquidity we've had throughout, and we've been investing in putting that cash to work since the third quarter of 2020. Typically, we've run about 50% 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. The securities book we ought to be using, the cash flows that come off of that, to bring it down over a period of time more to the 15% range. That will take a bit of time, but using the cash flows that are coming off the portfolio to fund loan growth going forward will be a liquidity source for us as we expect, as John mentioned, high single-digit loan growth going forward.

Catherine Mealor, Analyst

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 expenses is a little bit higher than that; kind of run rate. So is that $385 million to $390 million expense range for the full year still a target or are we a little bit above that now?

Robert M. Gorman, CFO

Yes. We're going to confirm that guidance of $385 million to $390 million. You have to remember in the first quarter, you really can't extrapolate that run rate throughout the year. There are seasonal increases related to payroll taxes and 401(k) contributions related to, we pay incentives during the quarter. So they get ratcheted up, and then versus a reset of payroll taxes for higher salaried teammates. So if you look at the numbers, to give you a thought calculation that we're looking at, normally after you take out the one-time expenses in this quarter, we had about $99.8 million in expenses. To that you need to back out this seasonal payroll tax; that's about $3 million or so. Offsetting that is we do increase merits in March, so we have one month of a 4% merit increase for teammates. So you tack on a million to offset that. And then don't forget $2 million is coming out starting really April 1st on a quarterly basis due to the branch closures in the operations center. So again, if you look forward, we're probably looking at $96, $97 million in the out-quarters combined that with the first quarter; we're still at $385 to $390 on a full-year basis. So that number is going to come down quite a bit, Catherine, in the second quarter.

Catherine Mealor, Analyst

Got it. That makes a lot of sense. Great. Thanks. I'll pop out.

Robert M. Gorman, CFO

Thanks, Catherine, and Latania, we're ready for our next caller, please.

Operator, Operator

And our next question comes from William Wallace of Raymond James. Your line is open.

William Wallace, Analyst

Good morning. 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 the amount that you guide 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 account accelerated purchase accounting accretion.

Robert M. Gorman, CFO

Yeah, the purchase account accretion is going to be down this year, call it four or five 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 was about four basis points on the reported margin, PPP was about five basis points. Purchase accounting should remain in that range, three to four 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 295 without PPP; that's at 3%. Then four basis points for purchase accounting. 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 loan portfolio, and that's where you'll see some significant improvement or experience in the margin as the Fed moves going forward here based on our assumptions.

William Wallace, Analyst

Okay. From last quarter, I wrote down that you said that you anticipated eight to nine 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?

Robert M. Gorman, CFO

Yes. Typically, I'll say a couple of things there, Wally. One is that we only get three rate hikes during the year. So basically, we thought we wouldn't see any deposit moves for the balance here; 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 it's two-pronged there.

William Wallace, Analyst

Do you anticipate, and I know this is guesswork 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 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?

Robert M. Gorman, CFO

That's exactly how we're modeling it. So very limited moves, but moves nonetheless. Over the next 100 basis point move, if you go through May and June, you'll start to see that ratchet up in terms of the betas implications as you get out in probably the second half late in the year. Coming out to that with the 25% betas I mentioned for total deposits, but it would definitely move slowly to that level.

William Wallace, Analyst

Okay.

Robert M. Gorman, CFO

But we'll see. Competition is going to have something to say about it, right?

William Wallace, Analyst

Yeah.

Robert M. Gorman, CFO

So we'll work through this.

William Wallace, Analyst

I would imagine on the loan pricing side as well?

Robert M. Gorman, CFO

Yes, that should.

William Wallace, Analyst

Circling back to the question about the AOCI, it sounds like you said you thought you'd get it back in the next three or four quarters. I thought that your securities portfolio was maybe kind of a little bit longer, dated two to three 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 million AOCI hit as securities mature over the next three or four quarters?

Robert M. Gorman, CFO

Yeah. What I meant to say there, Wally, was that we'll ratchet that up over the next several quarters to get closer to 775, closer to eight, but we will recapture that in the next three or four 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. I think it will take 2 points to get back to the 820; it will take a little longer than that.

William Wallace, Analyst

Okay. Thanks. 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 to $6.5 million fee reduction due to the policy changes around overdraft and NSF, or was it $4.5 to $5.5 million? And can you tell us when you anticipate we will start to see those and can you give us an update on any communications you've had with the CFPB?

John C. Asbury, President and CEO

I don't have any updates regarding regulatory communications on overdraft practices. To answer your question, the estimated income loss from these customer-friendly changes is between $4.5 million and $6.5 million. We expect these changes to start in the third quarter of this year. However, the exact impact may vary based on customer balances and behaviors. We believe this is a reasonable estimate. While we have a clear direction on where things are heading, we prefer to act proactively rather than being a late adopter. Our company is known for prioritizing the client experience, and we have been implementing consumer-friendly changes. We want to be among the leaders in this area. We have never relied heavily on overdrafts, and we see this as a positive value proposition. I believe this will resonate well with our customers. It might seem like we were compelled to make these changes, but this decision was made on our own. We recognize that we are among the early adopters, especially within mid-sized banks. Ultimately, this is the direction in which the industry is moving, so we are addressing it now.

William Wallace, Analyst

John, I thought you mentioned in your K that you received a notice from the CFPB about a potential lawsuit regarding your big overdrafts shop.

John C. Asbury, President and CEO

No.

William Wallace, Analyst

Am I totally mistaken?

John C. Asbury, President and CEO

You're referring to NORA, which stands for Notice and Opportunity to Respond and Advise. This is a method the CFPB employs to inquire about banks. The CFPB is broadly investigating overdraft practices across the industry. There’s a set of questions and topics outlined that we respond to in writing. We chose to be transparent and disclose this because it felt appropriate. This is not related to pricing issues. The timing of the overdraft matter coincided with when we received the NORA after the last quarter’s call.

William Wallace, Analyst

So you're indicating that the changes and policies you are implementing regarding NSF and overdraft were already in progress, as you referenced during the fourth-quarter call in January prior to receiving this notification. The notification is unrelated to the policies and changes you are making; it pertains to something else.

John C. Asbury, President and CEO

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 up on the stream of us and see changes that are happening. You can see some of the mid-sized banks have made changes as well. But from our standpoint, we think about this as really part of the value proposition of the bank. We think this is where it's going, and this is not any new idea.

Brody Preston, Analyst

Hi, Brody. Hey. Good morning, everyone. How are you?

John C. Asbury, President and CEO

Good. Thank you.

Brody Preston, Analyst

Rob, so I wanted to circle back to some of the margin comments you made real quick. I think you said 345 to 350 by the back end of the year with the updated rate hikes and data assumptions. I just wanted to ask, was that core or was that headline?

Robert M. Gorman, CFO

That was core, Brody. So added another three to four basis points with the purchase accounting in their PPP goes away by then.

Brody Preston, Analyst

Because I was maybe on that headline there just what I had treat models today, so 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, so I just wanted to make sure I was sticking with that margin correctly. And then I did want to ask just on the loan portfolio pricing, I think it's 4%. You said our app therefore is 12% of the 16 or above floor, so that 12% should reprice if we get this May hike and the 4%. How many rate hikes do we need to get those off the floors?

Robert M. Gorman, CFO

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

Brody Preston, Analyst

And within your modeling of NI and I know this is fluid, but are you assuming you get the full re-pricing 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 and mix?

Robert M. Gorman, CFO

We are not experiencing any degradation across the four levels. The rate increases will translate into revenue. Looking ahead to 2024, we believe that rates might decrease, which could affect the following years. However, for now, we anticipate a continued hike throughout 2023, with the possibility of a pullback from the Fed later on.

Brody Preston, Analyst

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

Robert M. Gorman, CFO

I think it's, on a blended basis, about 320 or so I think. On the commercial side, that includes floating and fixed-rate weighted.

Brody Preston, Analyst

Got it. My last question is about the mortgage banking sector. Although it was down, I expected it to hold up a bit better. Can you remind us of the purchase versus refinance mix within that portfolio for this quarter, as well as what it typically is?

Robert M. Gorman, CFO

This quarter, it actually remained in the 35% to 36% range. That was a slight decrease from the fourth quarter, which was around 40%. We believe it will decrease further because late in the quarter, mortgage rates rose to 5% or slightly higher, so we expect it to come down. Typically, you would see 20% to 25% of the origination book in refinancing, regardless of the rates, while we currently have a mix of 75% purchases and 25% refinancing. We expect this to return to those lower levels.

John C. Asbury, President and CEO

And Brody, as you know, this is really the deal of access National Bank mortgage shop under the leadership at Dean Hacker merger. It's never been a big refi shop. It also doesn't really do the accordion that you 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. They do a really good job of managing that business for profitability, regardless of the environment, which is a bit uncommon.

Brody Preston, Analyst

Got it. Thank you very much for taking my questions. I appreciate it.

John C. Asbury, President and CEO

Thank you.

Robert M. Gorman, CFO

Thanks, Brody.

John C. Asbury, President and CEO

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

Operator, Operator

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