Earnings Call Transcript - AUB Q1 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares' First Quarter 2024 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. I would now like to hand the conference over to your speaker today, Bill Cimino, Senior Vice President of Investor Relations. Please go ahead.

Bill Cimino, Senior Vice President of Investor Relations

Thank you, Didi, and good morning, everyone. I have Atlantic Union Bankshares' President and CEO, John Asbury, and Executive Vice President and CFO, Rob Gorman, with me today. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release and the accompanying slide presentation we are going through on 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 the appendix to our slide presentation and in our earnings release for the first quarter of 2024. Since our acquisition of American National Bank closed after quarter-end, our discussion today will not include any American National results. We did provide a pro forma look at our assets, loans, and deposits for quarter-end on Slide 4. We did provide financial outlook numbers for the full year that include the impact of American National. Speaking of which, we will make forward-looking statements on today's call, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement. Please refer to our earnings release issued today and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ from those expressed or implied in the forward-looking statement. All comments made during 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. And now, I'll turn the call over to John Asbury.

John Asbury, President and CEO

Thank you, Bill. Good morning, everyone. I appreciate you joining us today. I want to extend a special welcome to our new shareholders and team members from American National Bank. Our merger was completed on April 1, and we are optimistic about our progress. For those of you who are new to our company, we conduct our operations with a focus on soundness, profitability, and growth, in that exact order. This straightforward philosophy has proven effective over time. Our traditional operating model remains unchanged: we provide loans, accept deposits, and offer fee-based services to our customers under our brand. As a traditional, diversified bank, we aim to offer financing and services that support individuals, businesses, and communities. We are confident in our ability to compete with both larger banks as an alternative and smaller banks, where we often have more capabilities. The banking environment is still tough for institutions of all sizes due to ongoing net interest margin pressures, which AUB also faces. Fortunately, we anticipate that the financial benefits from the American National Bank merger will begin to show in the second quarter, positively impacting both our net interest margin and profitability. Rob will share further details in his segment. Now, I will discuss the microeconomic conditions we are observing before moving on to our first quarter results. Regarding the economic outlook, we remain cautious in our forecasts. While a soft landing seems possible, inflation remains a concern and does not appear to be declining toward the Fed's target levels as quickly as expected, leading us to predict fewer interest rate cuts or perhaps none this year. Nevertheless, the economic environment in our region continues to look favorable, and we do not foresee significant changes in the near future. Our markets appear robust, although we have observed a slowdown in capital investment among some of our clients due to rising interest rates and economic uncertainty. Our lending pipelines indicate that we should see mid-single-digit loan growth in 2024, including American National Bank. Virginia's unemployment rate was last reported at 2.9% in March, remaining below the national average of 3.8% for the same period. Among the frequent inquiries from investors and analysts is our credit outlook for non-owner occupied office space and, to a lesser extent, multifamily commercial real estate. We have included additional disclosures on these loan categories in our supplemental materials, and I would like to share our perspective on them. Starting with non-owner occupied office, 22% of this portfolio consists of medical properties that have not been impacted by work-from-home trends. Our portfolio is detailed, with an average loan size of $1.9 million and a median size of $664,000. We do not finance large office buildings in central business districts. Moreover, non-owner occupied office loans account for only 4.9% of total loans, making it a manageable exposure that is well-diversified geographically. In our region, Greater Washington, D.C. draws attention, but we have no exposure in D.C. and our non-owner occupied office loans in northern Virginia and Maryland only total $65 million. We rarely partake in non-recourse commercial real estate lending, and most of our office loans are backed by guarantees from owners to ensure their ongoing commitment. The suburban office buildings we finance are mostly leased to local and regional businesses, which tend to be less supportive of remote work than larger corporations. Thus, our buildings typically see better utilization. Overall, this portfolio is performing well, and while we expect to encounter some challenges over time, we believe they will be manageable. As for multifamily exposure, this portfolio is also detailed and comprises a reasonable size at 6.8% of total loans. Our markets are healthy and expanding, with no signs of overbuilding, and most report a housing shortage. Rents remain stable, and there are currently no rent control laws in our markets. With an average loan size of $3.3 million and a median size of $829,000, we don’t finance high-rise luxury apartments. While higher interest rates raise concerns about debt service coverage and property values, it's key to note that multifamily revenues have increased due to rising rents. Additionally, we typically require personal guarantees for multifamily projects to ensure borrower commitment. We often finance multifamily construction during the stabilization period and typically underwrite for institutional lender takeout, allowing developers to refinance or sell projects and invest in new ones. As shown in our supplemental presentation, asset quality in multifamily is strong. We do not foresee significant issues in this asset class and expect that, if problems do arise, they will be manageable. We recognize concerns surrounding banks' office and multifamily exposure and hope this overview clarifies our position at AUB. Now, let’s move on to our quarterly results. Here are some financial highlights from the first quarter, with more detail to come from Rob. Total deposits increased by 5% year-over-year and 11% annualized quarter-over-quarter. As observed previously, we experienced a seasonal dip in deposits at the end of 2023, but we saw better-than-expected inflows in the first quarter. Broker deposits grew modestly but remain a low 3.9% of total deposits. Crucially, customer deposits increased by 8.4% on an annualized basis, sufficiently funding our loan growth for the quarter. Our loan-to-deposit ratio decreased to 91.7% at the end of the quarter, down from 93% in the prior quarter. Our target range for the loan-to-deposit ratio remains between 90% and 95%. The mix of deposits shifted in this higher rate environment, with growth primarily from money market accounts and CDs, while we have also witnessed a continued migration from noninterest-bearing to interest-bearing deposits, though at a slower pace. Noninterest-bearing deposits make up approximately 22% of total deposits, which we believe is nearing its bottom. We achieved annualized loan growth of 5.6% in the first quarter, driven by commercial loans. The rise in construction line balances stems from existing project commitments moving toward completion. As I mentioned earlier, we expect mid-single-digit growth for loans held for investment in 2024, inclusive of American National Bank. Commercial and industrial line utilization this quarter was consistent with the previous quarter but increased compared to the first quarter of last year. Loan production this quarter leaned more toward existing clients rather than new, with about 75% from current customers. Additionally, production favored commercial and industrial lending over commercial real estate, where approximately 63% of production was attributed to C&I. Commercial real estate payoffs slightly decreased from the fourth quarter while rising a bit compared to the same period last year, which suggests ongoing health in the commercial real estate markets where we operate. Credit quality remains stable, with net charge-offs at 13 basis points annualized during Q1 mainly due to two credits we had already reserved for in the last quarter. To remind you, we also reported 13 basis points of net charge-offs in the first quarter of 2023, and for all of 2023, the net charge-off ratio was just 5 basis points. Credit quality remains strong at AUB, although we do not consider the minimal losses of recent years as sustainable. We expect asset quality to eventually normalize after this extended period of low net charge-offs, but we do not see any current signs of a shift in this trend. Looking ahead, we still anticipate net charge-offs between 10 and 15 basis points for 2024, though we don't foresee enough potential losses to reach that figure at this time. While isolated credit losses can occur, as seen with the two credits mentioned earlier, this is normal. Regardless, we are confident in and satisfied with our asset quality. Now, turning to our merger with American National, which closed on April 1; we are thrilled to have our new teammates and shareholders join us. After announcing the deal, we collaborated closely with the American National team to prepare for legal day one and the critical core systems conversion, which is on schedule for late May. We’ve already completed our first mock systems conversion, which went smoothly. This marks my third acquisition of a $3 billion asset bank, and we have improved our integration strategy with each experience. We are well-prepared for a seamless integration and conversion. Beyond the logistics, what excites us most is the people at American National and how well our cultures align. The more we engage with them and understand their markets, the more optimistic we grow about our combined opportunities. Furthermore, we are enthusiastic about leveraging our new North Carolina markets for growth, and we are actively investing in that region. We have begun adding experienced bankers to our team and plan to expand our commercial and industrial capabilities in North Carolina. We believe that American National's resources, combined with our enhanced capabilities and larger balance sheet, create a strong partnership. In summary, we feel well-positioned for 2024, and the strategic measures taken last year, combined with the financial advantages from the merger, should enhance AUB's performance going forward. We remain on a solid growth path and are prepared to take any necessary strategic actions to navigate the uncertainties ahead. We expect this uncertainty, especially due to geopolitical events, to persist. However, we remain cautiously optimistic about our prospects. With uncertainty comes opportunity, and we believe we are well-equipped to seize it. Finally, I want to thank our Atlantic Union Bank team, whose commitment to excellence earned us a second consecutive National Top Workplace USA award from the annual survey. This engaged team is what drives our success, and no matter the challenges or opportunities we face, our people are the key to our success. Now more than ever, Atlantic Union represents a uniquely valuable franchise with its diversified, traditional, full-service banking model, a strong brand, and deep client relationships in stable, attractive markets. I will now turn the call over to Rob for further details on our financial results for the quarter.

Rob Gorman, Executive Vice President and CFO

Thank you, John, and good morning, everyone. Thanks for joining us today. I'd now like to take a few minutes to provide you with some details of Atlantic Union's financial results for the first quarter. As Bill mentioned, my comments today relate to Atlantic Union's financial results and do not include financial results of American National, since the transaction closed on April 1. Also, please note that, for the most part, my commentary will focus on Atlantic Union's first quarter financial results on a non-GAAP adjusted operating basis, which excludes the following pre-tax items: gain of $1.9 million in the fourth quarter related to sale-leaseback transactions; FDIC special assessments of $3.4 million recognized in the fourth quarter and $840,000 in the first quarter; a $3.3 million legal reserve related to our previously disclosed settlement with the CFPB in the fourth quarter; and merger-related costs of $1.9 million in the first quarter and $1 million in the fourth quarter associated with our merger with American National. In the first quarter, reported net income available to common shareholders was $46.8 million and earnings per common share was $0.62. Adjusted operating earnings available to common shareholders were $49 million or $0.65 per common share for the first quarter. The first quarter's adjusted operating return on tangible common equity was 13.9%. The adjusted operating return on assets was 99 basis points, and on an adjusted operating basis, the efficiency ratio was 56.8% in the first quarter. Turning to credit loss reserves, as of the end of the first quarter, the total allowance for credit losses was $151.8 million, which is an increase of approximately $3.3 million from the fourth quarter, primarily driven by loan growth in the first quarter and the continued uncertainty in the economic outlook on certain loan portfolios. The total allowance for credit losses as a percentage of total loans held for investment increased to 96 basis points at the end of the first quarter as compared to 95 basis points at the end of the fourth quarter. Provision for credit losses of $8.2 million in the first quarter was down from $8.7 million in the prior quarter. Net charge-offs increased to $4.9 million or 13 basis points annualized in the first quarter from $1.2 million or 3 basis points annualized in the fourth quarter, primarily related to two credit relationships which were previously reserved for in the prior quarter's allowance for credit losses. Now, turning to the pre-tax pre-provision components of the income statement for the first quarter. Tax equivalent net interest income was $151.5 million. And that's a decrease of $5.8 million from the fourth quarter, primarily driven by higher deposit costs due to growth in average deposit balances and changes in the deposit mix and the lower day count in the quarter, as well as higher short-term borrowing costs due to an increase in average short-term borrowings in the quarter. These decreases were partially offset by higher yields on the loan portfolio and higher average loan balances. First quarter's tax equivalent net interest margin was 3.19%. And that's a decrease of 15 basis points from the previous quarter due to an 18 basis point increase in the cost of funds, which was partially offset by a 3 basis point increase in the yield on earning assets due primarily to higher yields on loans. The loan portfolio yield increased 6 basis points to 6.03% in the first quarter from 5.97% in the fourth quarter, which added approximately 5 basis points to the net interest margin in the first quarter. The increase was primarily due to the impact of higher market interest rates on new loan production yields as well as on renewing loan yields. The 18 basis point increase in the first quarter's cost of funds to 2.43% was due primarily to the 16 basis point increase in the cost of deposits to 2.39%, which had an approximately 11 basis points negative impact on the first quarter's net interest margin, as well as a 7 basis point margin impact of higher average short-term borrowing balances on the quarter's funding mix. The deposit cost increase was primarily driven by changes in the deposit mix as depositors continued to migrate to higher costing interest-bearing deposit accounts during the quarter. Adjusted operating non-interest income, which excludes the $1.9 million gain on a sale leaseback transaction recorded in the prior quarter, decreased $2.5 million to $25.5 million for the fourth quarter, primarily due to a $2.4 million decline in loan-related interest rate swap fees as swap transactions decreased from the seasonally high fourth quarter levels. Reported non-interest expense decreased approximately $2.6 million to $105.3 million for the first quarter from $107.9 million in the prior quarter. Adjusted operating non-interest expense, which excludes amortization of intangible assets, excludes the FDIC special assessment in both the fourth quarter of '23 and the first quarter of '24, the legal reserve associated with our previously disclosed settlement with the CFPB in the fourth quarter and merger-related costs associated with our merger with American National in the fourth and first quarters, increased $2.5 million to $100.7 million from $98.2 million in the prior quarter. The increase in adjusted operating expenses was primarily driven by a $5.2 million increase in salaries and benefits due to seasonal increases in payroll-related taxes and 401(k) contribution expenses in the first quarter, which were partially offset by a $1.3 million decline in professional services expenses and a $700,000 decline in marketing and advertising expenses. At the end of March, loans held for investment, net of deferred fees and costs, were $15.9 billion, an increase of $216 million or 5.6% annualized from the prior quarter, driven by increases in commercial loan balances of $270 million or 8.2% linked quarter annualized, partially offset by declines in consumer loan balances of $54 million or 9.4% annualized, primarily due to the runoff of auto loan balances related to the strategic decision made last year to exit the indirect auto loan business. At the end of March, total deposits stood at $17.3 billion, an increase of $460 million or approximately 11% annualized from the prior quarter, primarily due to increases in interest-bearing customer deposits and broker deposits, partially offset by declines in demand deposits, which now stand at 22% of total deposits. At the end of the first quarter, Atlantic Union Bankshares and Atlantic Union Bank's regulatory capital ratios were comfortably above well-capitalized levels. In addition, on an adjusted basis, we remain well capitalized as of the end of the first quarter if you include the negative impact of AOCI and held to maturity securities unrealized losses in the calculation of the regulatory capital ratios. During the first quarter, the company paid a common stock dividend of $0.32 per common share, which was an increase of 6.7% from the previous year's quarterly dividend. As noted on Slide 14, we've now updated our full year 2024 financial outlook for AUB to include the estimated post-closed impact of the American National acquisition beginning in April, and have also provided comments related to our fourth quarter run rate revenue and expense targets to highlight the financial benefits of the acquisition once we complete the systems conversion work and achieve our 40% cost savings goal. Please note that the 2024 financial outlook includes preliminary estimates of the purchase accounting adjustments that are subject to change. We now expect loan balances to end the year at or above $18 billion, while year-end deposit balances are projected to be at or above $19.8 billion. Fully tax equivalent net interest income for the full year is now projected to come in between $725 million and $740 million. We are targeting the fourth quarter fully tax equivalent net interest income run rate to fall between $195 million and $205 million. As a result, we are projecting that the full year fully tax equivalent net interest margin will fall in a range between 3.4% and 3.5% for the full year, and we are targeting between 3.55% and 3.65% in the fourth quarter, driven by our baseline assumption that the Federal Reserve Bank will cut the Fed funds rate by 25 basis points twice in 2024, beginning in September. In addition, the fully tax equivalent net interest margin projection and target ranges include the impact of our preliminary estimate of net accretion income from the American National transaction, which is subject to change once purchase accounting adjustments are finalized and which can be volatile quarter to quarter. In addition, the net interest margin projection and target ranges assume that a through-the-cycle total deposit beta will be approximately 45%, which will be more than offset by the projected through-the-cycle loan yield beta of approximately 50%. The through-the-cycle interest-bearing deposit beta is expected to be approximately 58%. The current rate cycle is projected to end when the FOMC pivots to reducing the fed funds rate, which, as noted, we now assume will begin in September. On a full-year basis, adjusted operating non-interest income is expected to be between $105 million and $115 million. And we are targeting the fourth quarter adjusted operating non-interest income run rate to fall between $30 million and $35 million. Adjusted operating non-interest expenses for the full year are estimated to fall in the range of $445 million to $455 million, while the fourth quarter adjusted operating non-interest expense run rate we are targeting is expected to be between $110 million and $115 million, which assumes full achievement of our 40% merger-related cost saves on a run rate basis beginning in the fourth quarter. Based on these projections and fourth quarter run rate targets, we expect to produce financial returns that will place us within the top quartile of our peer group and meet our objectives of delivering top-tier financial performance for our shareholders. In summary, Atlantic Union delivered solid financial results in the first quarter despite the challenging banking environment we are effectively managing through. The American National transaction closed April 1, and as John said, the integration work is going very well, and we remain confident that we will achieve the financial benefits of the combination once the cost savings are fully realized on a run rate basis starting in the fourth quarter. As a result, we believe we are well positioned to continue to generate sustainable, profitable growth and to build long-term value for our shareholders in 2024 and beyond.

Bill Cimino, Senior Vice President of Investor Relations

Thank you, Rob. And, Didi, we're ready for our first caller, please.

Operator, Operator

Okay. Thank you. One moment for our first question. And our first question comes from Catherine Mealor from KBW.

John Asbury, President and CEO

Good morning, Catherine.

Rob Gorman, Executive Vice President and CFO

Hey, Catherine.

Catherine Mealor, Analyst

Hey, good morning. I wanted to see, Rob, if you could just, in the NIM guidance that you lay out, is there any way just to put a range on where you're thinking the accretable yield will go? And then maybe even outside of that, where you think the core NIM will go within that guidance?

Rob Gorman, Executive Vice President and CFO

Our projection for the core perspective in 2024 is to fall within the range of 3.20% to 3.30%. Additionally, for the reported numbers, you can add 20 to 25 basis points to that, mainly due to the impact of American National, including accretion income.

Catherine Mealor, Analyst

Okay, great. So that core range of 3.20% to 3.30% assumes two rate cuts. It seems that with these two rate cuts, you believe there will be some expansion from this quarter’s level. What would happen if there are no rate cuts? How sensitive is the outcome?

Rob Gorman, Executive Vice President and CFO

Yeah. If we don't get any rate cuts, Catherine, the impact is actually 2 basis points or 3 basis points to the good, primarily because we won't see the rate cuts if they don't happen. We wouldn't see our variable rate loan yields decline by whatever the Fed cuts. So, it's actually a benefit of 2 basis points to 3 basis points for 2024.

Catherine Mealor, Analyst

Okay. Great. And then, within that margin guide, if we look at deposit costs, deposit cost increased a little bit more than I had expected this quarter. Are you seeing stabilization towards the end of the quarter? And just any kind of comments on maybe spot rates on deposit costs towards March or April? And then maybe even what that looks like with American National?

Rob Gorman, Executive Vice President and CFO

Yeah. So, in terms of where we ended the quarter, if you look at March, we were up a little bit from the reported full quarter average, where 2.43% was total cost of the deposit. So, up about 3 basis points or 4 basis points from the average for the first quarter. We are projecting that those deposit costs will increase through the second quarter and kind of stabilize in the third quarter, and hopefully, see a bit of a decline in the fourth quarter, if we see those rate cuts that we're calling for. I would say that we think we'll stabilize and call it give or take approximately in the 2.5% range in terms of total deposit cost, again, assuming that the Fed cuts in the back half of the year.

Catherine Mealor, Analyst

Okay. Great. And then maybe one last margin-related question. Does this forecast in the margin assume that you liquidate American National's bond portfolio and then reinvest that? How do we think about that?

Rob Gorman, Executive Vice President and CFO

Yes, that's true. We do expect that. We've actually done some restructuring right after the close, where about two-thirds of the portfolio was restructured. You will see that reflected when we report second quarter earnings. We believe we have completed that restructuring early in April, and the benefits will be apparent as we move forward. The accretion income does not include those benefits, as they will be realized through a core net interest margin going forward.

Catherine Mealor, Analyst

Okay. Perfect. All right. Thanks for all the clarity. Appreciate it.

John Asbury, President and CEO

Thanks. Catherine. And, Didi, we're ready for our next caller, please.

Operator, Operator

Thank you. One moment. And our next question comes from Casey Whitman of Piper Sandler.

John Asbury, President and CEO

Hi, Casey.

Casey Whitman, Analyst

Good morning. John, you mentioned that we might be reaching the bottom in the shift away from noninterest-bearing accounts. Can you elaborate on what gives you that confidence or what evidence you can share? Thank you.

John Asbury, President and CEO

The pace of decline is slowing down, indicating a shift. We have observed it decreasing at a lesser rate. Historically, we are approaching levels seen before the pandemic. It's important to note that we now have a larger number of commercial and industrial clients with noninterest-bearing operating accounts. Over the past few months, we've experienced a consistent decline. It's unlikely that businesses are just now noticing large sums in their noninterest-bearing accounts. Instead, they are likely becoming more efficient in managing their cash, as it benefits them to do so. Additionally, companies appear to be using more of their cash on hand since borrowing costs are higher, opting for cash purchases instead of financing. While this declining trend is challenging to predict precisely, it does seem we are approaching a bottom.

Rob Gorman, Executive Vice President and CFO

Yeah. Casey, I'd also add that American National is helpful from that point of view because they're about 31% noninterest-bearing to total deposits. So, we'll be blending them together. We're probably getting back to about a 24%, give or take. But to John's point, we think we're at the bottom here around 22% on a standalone basis. Yeah, we'll see what happens.

John Asbury, President and CEO

Correct.

Casey Whitman, Analyst

Perfect. Thank you. And then piggybacking on some of Catherine's questions, just, I guess, Rob, can you walk us through what the size of the overall balance sheet then might be with American National?

Rob Gorman, Executive Vice President and CFO

Yeah. So, it's about $3 billion in terms of their total assets at closing. So, we expect we'll continue to grow. I think we're at $24.5 billion, pro forma 3/31 number. So, we expect to grow the loan book about 5% on a combined basis, on a full-year basis we reported. So, you'll see those assets grow accordingly.

Casey Whitman, Analyst

Okay. Understood. And then maybe just a bigger picture question on M&A. Obviously, you just closed American National. You've got the systems conversion, I think, going on in May. John, can you walk us through sort of your thoughts around future M&A and how we should think about that?

John Asbury, President and CEO

Sure. It's hard to think about anything but a successful conversion and integration of American National Bank right now. But I understand your question because we always do try to think a couple of steps ahead. Casey, nothing has changed in terms of our declared priorities. First, organic performance of this bank, which now includes American National. Make the most of what we have right here, right now. That is by far the most important thing we have to do. Second, innovation and transformation activities. We have a lot of work underway there. We have a new mobile and online banking platform that's coming online this year as well. A lot went on in the technology space. And we see continued opportunity for automation, which will pull expenses out and improve quality. Third, and it's a distant third, would be strategic investment to include a whole bank acquisition. So, we have had other conversations that have gone on for years, just like American National Bank went on for years. You never know what the timing would be. If all goes well with American National Bank and everything is in good order, would we consider something else consistent with what we described before? We might if it made strategic and financial sense. But I hope we're being clear that first things come first.

Casey Whitman, Analyst

Great. Thank you for the call.

John Asbury, President and CEO

Thanks, Casey. And, Didi, we're ready for our next caller, please.

Operator, Operator

Thank you. One moment. And our next question comes from Steve Moss of Raymond James.

John Asbury, President and CEO

Good morning, Steve. Have we lost Steve?

Operator, Operator

He removed from queue. Let me promote the next person.

John Asbury, President and CEO

Okay.

Operator, Operator

Our next question comes from David Bishop of Hovde Group.

John Asbury, President and CEO

Hi, David. Good morning.

Operator, Operator

David, your line is open.

David Bishop, Analyst

Hey, sorry about that. Can you hear me?

John Asbury, President and CEO

Yeah. You're making me nervous, David.

David Bishop, Analyst

Sorry, John. Congratulations on being promoted. Thank you for calling in.

John Asbury, President and CEO

Hey, John, just curious, obviously, you mentioned at the beginning the resilience in the economy and the opportunities in the new markets in North Carolina. Just curious how to reconcile that with what appears to be maybe conservative guidance in terms of loan growth or are there some portfolios maybe you're going to run off post-close that sort of maybe provides the lower end of the loan growth guidance? Just curious, maybe just reconcile maybe some of the guidance versus the economic reality. Yes. There are no runoff portfolios associated with American National Bank. The only runoff portfolio in our bank, I suppose you would say, would be the indirect auto finance. We have things like office that we certainly don't have any appetite for taking on new exposure as well. But, David, I think, perhaps David Ring, Head of Wholesale Banking of commercial-related businesses can comment here. We do think that clients are being cautious. We feel good about these economies. We feel good about credit. But there is less investment going on right now. So, I think the mid-single-digit loan growth guidance, where we stand today is a good expectation. Could it be better than that? I think it could. Dave, what is your view?

David Ring, Head of Wholesale Banking

We've noticed a decrease in opportunities, which have started to contract somewhat. Our pipelines remain strong, but they're currently in the process of rebuilding and are in the earlier stages. We believe that, in the future, there’s potential for good growth. Additionally, we are looking into expansion opportunities in new markets that we believe will lead to more growth in the latter half of the year. We have always maintained a cautious approach and have not altered our standards, particularly regarding some areas of the real estate asset class.

John Asbury, President and CEO

I would agree. So, I think that's a pretty conservative approach, David. And if things change as we gain more experience in the year, we'll obviously revisit our guidance. But I think that's a good reasonable assumption.

David Bishop, Analyst

Got it. John, I noticed some growth in broker deposits. I'm curious if there's any specific maturation happening and what the average costs are.

Rob Gorman, Executive Vice President and CFO

The average cost is just over 5%, around 5.25%. We have approximately three tranches totaling about $150 million, with a slightly extended duration to benefit from the inverted curve, which has costs of about 4.50%. Additionally, we have some one-month broker loans maturing in the next few months that are paying about 5.25%. These numbers fluctuate based on our funding requirements at any given time. As John mentioned, we're currently just under 4% of total deposits in brokered accounts, and we've ranged from 2% to 4% in the past.

David Bishop, Analyst

Do you think that it stays around that range?

Rob Gorman, Executive Vice President and CFO

Yes. Yeah, I do.

David Bishop, Analyst

Got it. And then maybe on the loan side, just curious what fixed-rate loans that might be repricing at average rate versus what they repriced into. Thanks.

Rob Gorman, Executive Vice President and CFO

Yes. So, the repricing of the fixed-rate loans, I think, we're putting on about 7.5%. So, up considerably from where the fixed-rate loan yield is on the portfolio today. So, it's been inching up over the last several quarters. The most current quarter was about 7.5% on the fixed side.

John Asbury, President and CEO

Great. Thank you.

David Bishop, Analyst

Thank you.

John Asbury, President and CEO

Thanks, Dave. And, Didi, we're ready for our next caller, please.

Operator, Operator

Okay, thank you. One moment. And our next question comes from Russell Guenther of Stephens.

John Asbury, President and CEO

Hi, Russell. Good morning.

Russell Guenther, Analyst

Good morning. I appreciate all the color on the margin. I just had a follow-up. So, as we think about the roughly 20 basis point to 25 basis point of purchase accounting contribution, how does that cadence look for next year? Is that a decent kind of run rate into '25 or just trying to get a sense as to when that earnings contribution could begin to taper?

Rob Gorman, Executive Vice President and CFO

Yeah. So, through '25, yeah, that's a good estimate. We're talking about 25 basis points in 2025. It starts to taper a bit as we get into '26 and '27. Of course, as you know, income can be volatile depending on prepays, et cetera, but that's our current estimate. We're doing essentially four to five years on our loan interest rate mark is what we're talking about.

Russell Guenther, Analyst

Okay. That's really helpful. Thank you. And then just a quick one on the loan growth outlook. So, could you give us a sense for how you're going about investing in the Carolina markets? I think you mentioned adding some bankers there. If there's a number you could share or general background? What the opportunity set to continue to add commercial lenders in that footprint is? And then, just lastly, is the pickup in that market ultimately enough to move you back to your mid-to-high single digit pace, or is that a general pickup in sort of the macro economy that gets you there? Thank you.

John Asbury, President and CEO

How about if I start, and I'll ask David Ring to follow. First of all, we're not talking about massive lift outs and that sort of thing. It'll be highly selective. I do think that the North Carolina market is going to be additive to our overall growth expectations. So, in other words, I think that it gives us confidence in our guidance and probably gives us more likelihood of upside. Dave, I know we are not quite yet ready to get into too much detail, but what are your thoughts on where we'd expect to expand? I would actually before I should comment, we feel very, very good about the American National team and the bankers that we have down there. So, we think we're going to take that and build from it.

David Ring, Head of Wholesale Banking

Yeah. We have a very talented team that we inherited from American National, but we also have a very strong commercial real estate presence in North Carolina already because of our Charlotte group that's been in business for about eight years there now. And so, what we're looking to do in North Carolina is move into the faster-growing markets and where the capital is moving. And so, we have plans and we're executing them now. We're just not ready to disclose what the final results are.

Russell Guenther, Analyst

Understood. Well, guys, that's it for me. Thank you for taking my question.

John Asbury, President and CEO

Thank you, Russell.

Bill Cimino, Senior Vice President of Investor Relations

Thanks, Russell. And thanks, everybody, for joining us today. We look forward to talking with you in July. And, everybody, have a good quarter.

Operator, Operator

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