Earnings Call Transcript - AUB Q1 2026

William Cimino, Senior Vice President, Investor Relations

Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares First Quarter 2026 Earnings Conference Call. 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, Investor Relations. Please go ahead, sir. Thank you, everyone. I have Atlantic Union Bankshares' President and CEO, John Asbury, and Executive Vice President and CFO, Alex Dodd, with me today. Since Alex is only 8 days into his job, former CFO, Rob Gorman, will cover the first quarter financial results in his transition capacity as a senior financial adviser to the company until his September 30 retirement. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release and the accompanying slide presentation we are going through on this webcast are available to download on our Investor website, investors.atlanticunionbank.com. During today's call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in the appendix to our slide presentation and in our earnings release for the first quarter of 2026. We will also 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, except as required by law. Please refer to our earnings release and slide presentation 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 statements. All comments made during today's call are subject to that safe harbor statement. And 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.

John Asbury, President and CEO

Thank you, Bill. Good morning, everyone, and thank you for joining us today. I am pleased to introduce Alex Dodd as our new Chief Financial Officer. Alex brings a wealth of experience, having successfully helped guide a smaller institution through its transformation into a larger, more complex financial organization. His background aligns well with our executive leadership team, and I am confident he will add tremendous value as we continue to drive growth and innovation. Over the next few months, we look forward to having Alex meet many of you during our active Investor Relations calendar. While Rob Gorman will remain with us full time until his retirement at the end of September, I do want to extend my sincere gratitude to Rob for his invaluable contributions and his dedication to ensuring a seamless CFO transition. Atlantic Union Bankshares reported solid first quarter financial results, reflecting disciplined execution and a successful conclusion of the integration of Sandy Spring Bank. We believe the adjusted operating financial results for the quarter showcased the organization's earnings capacity. While we had a final set of merger-related charges impact this quarter's results, the underlying operating performance supports our continued confidence in achieving the financial outlook for adjusted operating return on assets, return on tangible common equity and efficiency ratio that we have set for 2026. We do look forward to reporting results without the merger noise starting next quarter, which we believe should more clearly demonstrate the financial strength and operational efficiency we are committed to delivering for our shareholders. Our commitment to creating shareholder value remains unwavering. We believe Atlantic Union is well positioned to deliver sustainable growth, top-tier financial performance, and long-term value for our shareholders. We believe the strategic advantages gained from the Sandy Spring acquisition, combined with continued organic growth opportunities due to our robust presence in attractive markets, reinforce our status as the premier regional bank headquartered in the lower Mid-Atlantic. I'll briefly cover the Q1 2026 highlights and share market insights before Rob presents the financial review. And here are the highlights from the first quarter. Quarterly loan growth was approximately 2.2% annualized during the typically slow first quarter with total loans ending at $27.9 billion. For additional context, quarterly loan growth averaged roughly 5.9% annualized over this year's first quarter. Loan production remained strong and when compared to the previous 4 quarters was second only to the fourth quarter of last year. We were pleased to see record level fundings from Atlantic Union Equipment Finance and record level production from our North Carolina-based commercial real estate team. However, we also experienced elevated payoffs late in the quarter, particularly within our commercial real estate portfolio due to a number of property sales. This activity highlights the strength of our CRE markets, robust investor demand, and the availability of ample liquidity. The first quarter saw a slight increase in line of credit utilization from the fourth quarter and was relatively flat year-over-year. At the end of the first quarter, our loan pipelines were noticeably higher than at the beginning, giving us confidence that we are pacing to meet our loan growth targets for 2026. A deeper look at the pipeline report reveals that our construction and development pipeline has achieved a record high. For those familiar with my construction lending bathtub analogy, this means our pipeline is filling up at a faster rate than draining, which positions us well for continued growth in construction lending balances throughout the year. While forecasting loan growth remains challenging in this uncertain macroeconomic environment, particularly with the recent energy price shocks, we continue to expect 2026 year-end loan balances to range between $29 billion and $30 billion. Our deposit base demonstrated strong customer deposit growth this quarter, nearly offsetting the planned reduction in high-cost broker deposits. Broker deposits currently represent just 2% of total deposits and play a purposeful role in our liquidity strategy. We believe this approach provides us flexibility to add broker deposits in the future if needed. And depending on cost and market conditions, we anticipate any new additions, if any, would be at lower rates than those currently rolling off. Above all, our core customer deposit base remains the crown jewel of the franchise, and our primary focus is on growing customer deposits and expanding our share of wallet. Net interest margin, excluding the impact of accretion income, which can be volatile, improved by 4 basis points quarter-over-quarter, matching our expectations. Our reported FTE net interest margin declined 11 basis points to 3.85%, mainly because accretion income was lower compared to the elevated levels seen in Q4 '25. Rob will provide more detail about the factors influencing NIM performance in his section. Credit quality continues to show strength and improvement. Our first quarter annualized net charge-off ratio was just 2 basis points. For the year, we are still projecting a range of 10 to 15 basis points, although we do not yet have full visibility into reaching that range. Key asset quality indicators remain robust and are improving. Nonperforming assets as a percentage of loans held for investment declined by 6 basis points to 0.36% from 0.42% in the prior quarter, bringing us closer to our historical operating levels. Criticized and classified assets also improved, decreasing to 4.5% of total loans from 4.7% last quarter. And looking at the most current unemployment data, the Bureau of Labor Statistics reported Virginia's January unemployment rate remained stable at 3.7%, Maryland's unemployment rate was 4.3% and North Carolina's was 3.8%, all of which are at or below January's national average of 4.3%. We continue to expect unemployment levels in Virginia, Maryland, and North Carolina to stay manageable and comparable to or below the national average, consistent with Moody's current state-level forecast. We remain confident in our markets and consider them among the most attractive in the country. I do want to acknowledge the ongoing conflict in Iran and its potential impact on our bank and the markets we serve. We are closely monitoring the geopolitical developments and their effects on the broader economy. The most immediate consequence has been the sharp increase in petroleum prices. Should this trend persist over an extended period, our primary concern is not a direct credit event given our portfolio's limited sensitivity to energy prices, but rather a possible decline in consumer and business confidence. At present, our loan pipelines remain strong. Business sentiment across our markets is positive and the underlying economy in our footprint continues to be favorable. Additionally, it appears likely that defense spending will rise as a result of the geopolitical situation, which should provide a stimulative effect for certain areas of our markets. We remain vigilant and believe we're well positioned to navigate these challenges while supporting our clients and our communities. We have deliberately and thoughtfully built a distinctive valuable franchise outlined in our strategic plan, delivering on our commitments and establishing the banking platform we set out to create. With a strong foundation, we believe we are well positioned to capitalize on our expanded markets, drive continued growth in Virginia and pursue new organic opportunities in North Carolina and in our specialty lines. With disciplined execution of our prior acquisitions and no additional acquisitions currently planned during this phase of our strategic plan, our focus has shifted to demonstrating the franchise's earnings power and capital generation ability. After dedicating capital to strategic investments over the past 2 years to complete the company we envisioned and worked diligently to build and consistently communicated our plans to do so, we believe we are well positioned to demonstrate clear and tangible benefits from these efforts. In summary, we had a good start to 2026, and we believe that our full year results will demonstrate the differentiated financial performance compared to our peers, which in turn will help build long-term shareholder value. With that, I'll turn the call over to Rob for a detailed review of our quarterly financial results.

Robert Gorman, Executive Vice President, CFO

Well, thank you, John, and good morning, everyone. I'll now take a few minutes to provide you with some details of Atlantic Union's financial results for the first quarter of 2026. My commentary today will primarily address Atlantic Union's first quarter financial results presented on a non-GAAP adjusted operating basis, which for the first quarter excludes $9 million in pretax merger-related costs. As John noted, we don't expect to incur any additional Sandy Spring merger-related costs going forward. In addition, in the first quarter, we finalized the fair value assets acquired and liabilities assumed related to the Sandy Spring acquisition, inclusive of measurement period adjustments primarily related to loans, other assets, and other liabilities. The 1-year measurement period related to the Sandy Spring acquisition concluded and related goodwill was finalized as of March 31 at $541 million. In the fourth quarter, reported net income available to common shareholders was $119.2 million, and earnings per common share were $0.84. Adjusted operating earnings available to common shareholders were $126.2 million or $0.89 per common share for the first quarter, which resulted in an adjusted operating return on tangible common equity of 19.6%, and adjusted operating return on assets of 1.41%, and an adjusted operating efficiency ratio of 49.9% in the quarter. Turning to credit loss reserves at the end of the first quarter. The total allowance for credit losses was $321.9 million. Please note that effective January 1, 2026, the company made certain changes to its allowance for credit losses methodology as part of the continued enhancement of its credit modeling practices, resulting in the company moving from two loan portfolio segments, Commercial and Consumer, to three loan portfolio segments, Commercial Real Estate, Commercial and Industrial and Consumer. These model enhancements enable more dynamic and precise modeling and allow for more granularity in monitoring our estimated credit losses. As a result, and paired with portfolio mix changes, the total allowance for credit losses as a percentage of total loans held for investment decreased 1 basis point to 115 basis points at the end of the first quarter. The allowance for loan losses as a percentage of total loans held for investment decreased by 2 basis points from the prior quarter to 104 basis points, while the reserve for unfunded commitments coverage ratio increased 1 basis point to 11 basis points on March 31, which was primarily driven by higher construction and land development unfunded commitments. As John mentioned, net charge-offs were $1.6 million or only 2 basis points annualized in the first quarter. Now turning to the pretax pre-provision components of the income statement for the first quarter. Tax equivalent net interest income was $316.9 million, which was a decrease of $17.9 million from the fourth quarter, primarily driven by a decrease in loan accretion income, the lower day count in the first quarter, lower average earning assets and the full quarter impact on variable-rate loan yields following the cumulative 75 basis point reduction in the Fed funds rate between September and December 2025. The decreases in tax equivalent net interest income were partially offset by a decrease in interest expense, primarily from lower deposit costs. As John noted, the first quarter's tax equivalent net interest margin declined by 11 basis points from the prior quarter to 3.85% due to lower earning asset yields, which were partially offset by lower cost of funds. Earning asset yields decreased 20 basis points from the prior quarter to 5.79%, primarily due to lower loan accretion income of $13 million, which was inclusive of the impact of a $3.5 million nonrecurring loan fair value measurement period adjustment related to the Sandy Spring acquisition and lower yields on variable-rate loans as previously noted. Cost of funds decreased 9 basis points from the prior quarter to 1.94% for the first quarter due primarily to lower deposit costs of 13 basis points, which reflected the impact of Fed funds rate reductions on customer deposit rates and the decline in higher cost in average broker deposit balances. Of note, excluding the impact of net accretion income, our core net interest margin increased by 4 basis points to 3.45% from 3.41% in the prior quarter, which is primarily driven by lower deposit costs, partially offset by lower core loan yields. Noninterest income declined by $2.2 million to $54.8 million for the first quarter, primarily driven by lower loan-related interest rate swap fees due to seasonally lower transaction volumes, which was partially offset by higher capital markets income. Reported noninterest expenses decreased by $33.4 million to $209.8 million for the first quarter, primarily driven by a $29.6 million decline in merger-related costs and a $2.3 million decrease in amortization of intangible assets. Adjusted operating noninterest expense, which excludes merger-related costs in the fourth quarter of '25 and the first quarter of '26 and the amortization of intangible assets in both quarters, decreased by $1.6 million to $185.3 million for the first quarter. This decrease was primarily due to a $3.1 million reduction in other expenses, primarily due to lower noncredit-related losses on customer transactions, a $2.3 million decrease in professional services expenses related to strategic projects that occurred in the prior quarter, and a $1.9 million decrease in technology and data processing expenses. These decreases were partially offset by a $5 million increase in salaries and benefits expense, primarily due to seasonal increases in payroll taxes and 401(k) contribution expenses. At March 31, loans held for investment net of unearned income were $27.9 billion, which was an increase of $150.3 million or 2.2% annualized from the prior quarter. At March 31, total deposits were $30.4 billion, which was a decrease of $80.4 million or approximately 1% annualized from the prior quarter, primarily due to decreases of $517.9 million in broker deposits, partially offset by an increase of $438.5 million in interest-bearing customer 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. Company paid a common stock dividend of $0.37 per share in the first quarter, in line with the fourth quarter's dividend amount and an increase of 8.8% from the previous year's first quarter dividend amount of $0.34 per common share. On a linked quarterly basis, tangible book value per common share increased $0.24 or 1% to $19.93 per share in the first quarter despite the headwinds caused by the increase in AOCI unrealized losses. We estimate that the increase in AOCI had a negative impact to our tangible book value of $0.16 per share in the first quarter. As noted on Slide 17, we are updating our full year 2026 financial outlook for AUB to the following: we expect loan balances to end the year between $29 billion and $30 billion, while year-end deposits balances are projected to be between $31 billion and $32 billion. On the credit front, the allowance for credit losses to loan balances is projected to remain at current levels in the 115 to 120 basis points range, and the net charge-off ratio is expected to fall between 10 and 15 basis points in 2026, although we don't currently have a line of sight to reaching that range this year. Fully taxable equivalent net interest income for the full year is projected to come in between $1.34 billion and $1.35 billion, inclusive of accretion income of between $140 million and $145 million. As a result, we are projecting that full year tax equivalent net interest margin will fall in a range between 3.90% and 4% for the full year, driven by our baseline assumption that the Federal Reserve Bank will not cut the Fed funds rate in 2026 and that term rates will remain stable at current levels. On a full year basis, noninterest income is expected to be between $220 million and $230 million, while adjusted operating noninterest expense is estimated to fall in the range of $742 million to $752 million, including the expense impact of our North Carolina investment and other 2026 strategic initiatives. Based on these projections, we expect to generate annual growth in tangible book value per share of 12% to 15%, produce financial returns that will place us within the top quartile of our proxy peer group and meet our objective of delivering top-tier financial performance for our shareholders. In summary, Atlantic Union delivered solid operating results in the first quarter and 2026 is off to a good start. We remain firmly focused on leveraging this valuable Atlantic Union Bank franchise to generate sustainable, profitable growth and to build long-term value for our shareholders in 2026 and beyond. Before I transition the call back to Bill, I would like to briefly reflect on my tenure at AUB. When I joined the organization in 2012, AUB had approximately $4 billion in total assets with a market capitalization of around $360 million. Currently, our assets have grown to nearly $40 billion, and our market capitalization exceeds $5 billion, establishing us as the largest regional bank headquartered in lower Mid-Atlantic. It's been a great privilege to have played a part in the company's growth and financial success over the past 14 years. And looking ahead, I'm pleased to have Alex step into the role of CFO as my successor, and I'm confident that his extensive financial leadership experience will contribute significantly to Atlantic Union's future success. I'll now turn the call over to Bill to see if there are any questions from our research analyst community.

William Cimino, Senior Vice President, Investor Relations

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

Operator, Operator

Our first question is from Russell Gunther with Stephens.

Russell Gunther, Analyst

Wanted to start on the core margin, please. Nice to see that up a little bit this quarter. Would be helpful to get a sense for how you expect that to trend over the course of the year and particularly touching on the direction of deposit costs from here with the Fed on pause. Just wondering if you have the ability to lower further or if there's an upward bias to deposit costs.

Robert Gorman, Executive Vice President, CFO

Yes. We do expect the core margin to gradually increase from this point onward. As I mentioned, we do not anticipate any rate cuts from the Fed this year, which means our variable-rate loan yields shouldn't be negatively affected. However, sustained higher rates will limit our ability to significantly reduce deposit costs going forward, suggesting that they will likely remain stable. There may be a slight increase in customer deposit rates. The positive aspect is that we do have some broker deposits maturing this quarter and the next, currently yielding about 5.15%. This could lead to an improvement considering current broker rates and customer deposit rates for CDs and money markets. In the near term, this will benefit us. The main factor for the increase in net interest income or net interest margin is the ongoing repricing of our fixed-rate loan back book, which will continue throughout this year. We project that term rates, particularly the 5-year term rates, will remain stable. We have around $850 million to $900 million of maturing fixed-rate loans on the legacy AUB side each quarter for the remainder of the year. This should result in an increase of about 90 to 100 basis points in portfolio yields, moving from the 5.10% to 5.15% range up to the 6% to 6.10% range. This context supports our expectation that the core margin will continue to grind higher.

Russell Gunther, Analyst

Got it. Okay. Rob, that's helpful detail. And then last one for me would be on the expense front, solid result this quarter. You lowered that guide. At the Investor Day in December, that deck had mentioned considering some additional branch rationalization in '26. So wondering if that is at all contemplated in the lower guide? And if not, given the lower NII outlook, is that on the cards at all as a potential offset?

Robert Gorman, Executive Vice President, CFO

Yes. It's certainly not in the guidance that we just provided in those numbers on the noninterest expense side. There's always some thoughts around that where we could be looking at that if we really thought the revenue growth was not going to materialize. But we do think we've got a pretty good handle on the expense discipline around expenses. That's why we did lower that. Part of that was this first quarter, we came in better than we expected. That should continue as we go forward. As you know, we said that the first quarter is a seasonally high expense quarter for the year. So you should see things coming down, especially on payroll taxes and 401(k), which are at the high end. I mean, that was an increase of over $5 million quarter-to-quarter. That's going to come down over time, it's just elevated due to incentive payments, et cetera, which drive those higher in the first quarter. So you should see those costs come down. Now we did mention that we do have investments being made primarily in the North Carolina franchise, opening 10 new branches, not all this year, probably 3 branches will be opened by year-end, another 5 or 6 next year and then the remainder early in 2028, but that expense will start coming on board later this year, call it, second, third, and fourth quarter will start to increase. So those are somewhat offset to this reduced level of payroll taxes and 401(k) that we'll see going into the next 3 quarters.

William Cimino, Senior Vice President, Investor Relations

Our team is ready for our next caller please.

Operator, Operator

Our question will come from the line of Janet Lee with TD Cowen.

Sun Young Lee, Analyst

So I want to get some clarification. Much of the deposit decline in the quarter seems to be driven by a runoff of broker deposits. I assume that lower broker deposits is partly attributing to your lower deposit guide for the full year, but it would be great to hear the direction of travel for core customer deposits and broker deposits over the course of '26 that's assumed in your updated deposit guide.

Robert Gorman, Executive Vice President, CFO

Yes. We are targeting a 3% to 4% growth in customer deposits. In terms of brokered deposits, we've significantly reduced our holdings, with a decrease of around $500 million from quarter to quarter. These are expensive deposits, and since we experienced lower loan growth this quarter, we did not need to replace them with new brokerage funding, which is a positive sign. This quarter, we have about $200 million in brokered deposits maturing at a high cost, along with another $80 million expected in the third quarter. The future of brokered deposits will depend on whether we see an increase in loan growth in the upcoming quarters. If we reach the higher end of our targets, we may need to reintroduce some brokered deposits to cover any gaps.

Sun Young Lee, Analyst

Got it. The accretion income decreased by $13 million compared to the previous quarter, which appears to include some one-time adjustments of $3.5 million. Are you still keeping your PAA guidance of $150 million to $160 million for the full year? Or is that affecting your NII guidance? I understand it can be challenging to predict the accretion, but I'm interested in how that might trend moving forward.

Robert Gorman, Executive Vice President, CFO

Yes. We have lowered that, Janet, to, call it, $145 million to $150 million accretion. Part of that was the $3.5 million one-time, which wasn't anticipated in the earlier guide. And we do expect kind of more of a normalization of prepayments on that portfolio, was a pretty low quarter compared to the fourth quarter in terms of prepayments and accelerated accretion. On a baseline perspective, excluding any early or prepayments accelerated accretion, it's about $10 million to $11 million on the loan accretion side per quarter. And then the wildcard is what the accelerated prepayments look like and the accretion that comes through related to that. And it's been running probably normalized, is probably more in the $3 million a month kind of thing. So that's kind of what is in our projection for that.

William Cimino, Senior Vice President, Investor Relations

We're ready for our next caller please.

Operator, Operator

Our next question comes from the line of David Chiaverini with Jefferies.

David Chiaverini, Analyst

So I wanted to touch on loans. You mentioned about the loan pipelines being strong. Can you talk about customer sentiment and what you're seeing there in terms of drivers?

John Asbury, President and CEO

Yes. Dave Ring, our Head of all of our Commercial-related businesses, which we call wholesale is here. Dave, do you want to speak to what you're seeing? I can give my perspective, too. But...

David Ring, Head of Commercial Business

Sure. As you mentioned, our pipelines are much stronger than they were a year ago or even at the end of the first quarter. The sentiment is that while we’re not witnessing many companies refraining from transactions, some are pausing, primarily due to interest rates rather than other economic factors. Once interest rates stabilize, I believe our pipeline will convert quite rapidly.

John Asbury, President and CEO

Yes, I think when discussing interest rates, it's clear that clients have been waiting for lower rates. Now that we seem to be in a long-term higher rate environment, as they realize that rates are unlikely to decrease soon, they are moving forward. It’s worth noting that we achieved record fundings in Atlantic Union Equipment Finance in the first quarter, with outstanding production from our North Carolina-based commercial real estate team operating throughout the Carolinas. Our pipelines are looking strong, and the construction lending pipeline is also very promising. We are witnessing activity despite uncertainties surrounding the situation in Iran, which doesn’t seem to have affected sentiment significantly. I agree with the point made about speculation on future rates. Overall, we are optimistic about the outlook moving forward, as the fundamentals across our regions remain solid.

David Chiaverini, Analyst

Great. And then shifting over to capital management. Can you comment on to what extent, if any, the Basel III endgame proposal could have on Atlantic Union? And then also touch on your buyback appetite and timing, is later this year still in the cards?

Robert Gorman, Executive Vice President, CFO

Yes. Regarding the first question about the impact of Basel III, our current estimate is that it would reduce risk-weighted assets by about 6% to 6.5%, which would lead to an increase of approximately 65 to 75 basis points in our CET1 regulatory capital ratio. We'll wait for the final rules to see how this plays out, but we view it positively for our regulatory capital ratio. As for potential buybacks, we consider any CET1 above 10.5% as excess capital available for share buybacks and aim to manage our ratio between 10% and 10.5%. We still plan to reach that 10.5% threshold by the end of Q2, and nothing has changed leading into Q3. Therefore, we expect to request authorization from our Board of Directors, pending their approval, and we anticipate being in the market soon after receiving it.

William Cimino, Senior Vice President, Investor Relations

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

Operator, Operator

Our next question is going to come from the line of David Bishop with Hovde Group.

David Bishop, Analyst

Congratulations, Rob, on the retirement. Enjoyed working with you. John, Dave, just curious from the net charge-off guidance I see in the slide deck, you're still sticking with the 10 to 15 basis points guidance. Just curious, is there any line of sight into reaching even that lower end, just given what's happening on a high-level basis? And maybe what could get you there on sort of a worst-case scenario, maybe what the portfolios can drive that higher?

John Asbury, President and CEO

We currently do not have any visibility into achieving even the lower end of our guidance, which indicates that we don't expect any positive developments at this time. However, based on our experience, there is often an unexpected event that can occur. Doug Woolley, our Chief Credit Officer, might have some insights on whether there are any systemic or ongoing concerns.

Douglas Woolley, Chief Credit Officer

Yes. No portfolios at risk. Like John said, they inevitably end up being one-offs, sometimes larger than we expect, but always resolved quickly once identified.

John Asbury, President and CEO

As a $38 billion bank, we're not going to run the bank with 2 basis points of annualized net charge-offs. Having said that, I've made similar comments for 9.5 years. So I mean, it would be great. We would love to do that very thing, but we'll see. We think it's a reasonable assumption based on what we know right now, Dave.

David Bishop, Analyst

Got it. And one follow-up. I know you mentioned the seasonal impact on swap fees were down this quarter. If we do see maybe stability in the term structure of rates, do you think that impacts the overall level of swap fees this year from a go-forward basis?

Robert Gorman, Executive Vice President, CFO

Yes, we had a pretty good quarter with swaps. We'll keep monitoring how that develops. You're correct that the volatility will influence that. I'm not sure if Dave Ring wants to add anything.

David Ring, Head of Commercial Business

Yes, for swaps, volatility generally doesn't affect our sales. It's mainly about the new transactions being booked. We have a very strong approach to ensuring we review all incoming transactions, and we assist clients in deciding whether to manage their interest rates. Our success in swap production is attributed to our methodology and the fact that we complete many new transactions each quarter.

John Asbury, President and CEO

I would say that if there's no expectation that rates are about to drop, that's generally helpful based on my experience, meaning there's not much to wait for those people who aren't sort of betting on lower rates.

William Cimino, Senior Vice President, Investor Relations

We're ready for our next caller, please.

Operator, Operator

Our next question comes from the line of Brian Wilczynski with Morgan Stanley.

Brian Wilczynski, Analyst

I wanted to just quickly go back to the net interest income outlook for the year. For 2026, it looks like you brought that down by about $18 million at the midpoint. It sounds like the lower purchase accounting accretion explains a portion of that. But I was just wondering if you could speak to any change in the core net interest income outlook and anything new that you're seeing on that front specifically?

Robert Gorman, Executive Vice President, CFO

Yes. So Brian, yes, the bulk of the adjustment there is accretion income that you saw in the first quarter that we brought that down a bit. The other driver there is we've increased our deposit rate outlook from our original guidance earlier in the year. We're seeing some competition in some of our markets. We do regional pricing. But in terms of the regions where we're seeing some increases, and we've raised rates in those regions is the Metro D.C. area, former Sandy Spring footprint. And then some impact, even though it's not as large for us, is North Carolina. We've also seen heavy competition from our larger players in those markets and some of our peers. So we did increase those rates a bit. For instance, we now have CD specials in the 4% range or CDs offerings in the 4% range for 3 and 6 months. And we also now have an advantaged money market rate, which is in the 3.80% range. That requires new money to come in, but those are increasing deposit rate outlook as we go through this year.

John Asbury, President and CEO

Rob, on the accretion income expectations, is it fair to say that's more of a timing issue?

Robert Gorman, Executive Vice President, CFO

It's a timing issue regarding whether the acceleration of accretion income will come from prepayments associated with the Sandy Spring acquired portfolio. The amount could be higher or lower. We experienced a spike in the fourth quarter, as mentioned last quarter, but this quarter has been lower, not counting the $3.5 million nonrecurring adjustment. So, it tends to vary from quarter to quarter based on the prepayments we receive.

John Asbury, President and CEO

Yes, as you mentioned, there is a base level that provides a favorable accounting advantage, but the volatility is influenced by prepayment activity, which is quite unpredictable.

Brian Wilczynski, Analyst

And maybe just to clarify on the PAA, the updated expectation, is it $145 million to $150 million? I may have misheard, but I think earlier in the call, you might have said $140 million to $145 million. So just wanted to clarify what the new expectation is.

Robert Gorman, Executive Vice President, CFO

It's really $140 million to $150 million, Brian, I kind of misstated that. So the midpoint of about $145 million is what we're thinking.

Brian Wilczynski, Analyst

Got it. Got it. And then you mentioned the strong production during the quarter on the loan side. It sounds like loan pipelines are quite strong, albeit with some paydowns towards the end of the quarter. I'm wondering, to the extent that loan growth surprises negatively over the course of the year, say, in a scenario where paydowns remain elevated, do you think that the NII guidance is still achievable? Would there be more offsets maybe on the deposit side? Or would the NII guidance become more challenging in that scenario?

Robert Gorman, Executive Vice President, CFO

Yes. I think the range that we put out there assumes that there's much lower growth than what we're projecting internally. So the range is what, 3% to 7% if you look at the loan guidance, and then the net interest income related to that is kind of on the low end. But certainly, if it comes in lower or it's flat, that will have some impact on that guidance and likely bring it lower, but we're not projecting that flat growth rate. But certainly, as I said earlier, we may then take other actions maybe from an expense point of view, maybe on the deposit cost perspective to maintain that net interest margin. But we do have some other levers on the expense side we could pull if the revenue growth doesn't come through.

John Asbury, President and CEO

Just for market clarity, Rob has not retired yet. So we're going to get our money's worth out of him until September, but Alex is CFO as of now, and we'll go through a very planful transition, as you know.

William Cimino, Senior Vice President, Investor Relations

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

Operator, Operator

Our next question will come from the line of Catherine Mealor with KBW.

Catherine Mealor, Analyst

One more on the loan side or on the NIM side. Could you repeat what loan maturities you have maturing per quarter? And then on average, where new loan yields are coming on the books today?

Robert Gorman, Executive Vice President, CFO

Yes, regarding the fixed rate portfolio, we have approximately $850 million to $900 million maturing each quarter. The new loans, whether they are refinances or new loans, are currently in the range of 6% to 6.10%, compared to the existing portfolio which is around 5% to 5.10%.

Catherine Mealor, Analyst

Okay. And are those just legacy...

Robert Gorman, Executive Vice President, CFO

Yes. Just legacy, yes.

Catherine Mealor, Analyst

Great. So you're seeing that going from about 5% to 6.10%.

Robert Gorman, Executive Vice President, CFO

Yes, right.

Catherine Mealor, Analyst

Got it. Great. And then we talked a lot about deposit cost competition on this call. What about loan competition? Are you still seeing it? Can you talk about the competitive dynamic in lending, both in terms of how it affects volumes and rates today?

John Asbury, President and CEO

It's competitive. It's always competitive, particularly for a bank like us that deals with what I would call the higher quality set of credit. Dave, do you want to comment on what you're seeing?

David Ring, Head of Commercial Business

Yes. It's competitive in structure and price. So it really depends on the asset. The better the organization or better the company or better the prospect, the more competitive it gets for sure. What we're seeing now is the larger banks are very active in the markets we're in now, and so we feel like we compete best against them actually. So we feel like strong competition, but we're teed up to compete against them.

John Asbury, President and CEO

Yes, we'll get our fair share, Catherine.

Catherine Mealor, Analyst

Great. I have one more question regarding growth. You've kept your end-of-period growth guidance the same. I understand this is a challenging question, but it is important for the full year net interest income forecast in relation to growth. Do you think that growth is going to be skewed more towards the end of the period? Or do you anticipate a significant improvement in growth starting as early as the second quarter? Will we see that ramp up in growth beginning sooner rather than later?

John Asbury, President and CEO

Yes. Honestly, Q1 exceeded my expectations in terms of production. We were nearing 4% annualized loan growth until the very last week of Q1. The average loan growth from Q1 compared to Q4 was 5.8%, which is quite strong for Q1, a seasonally slow period following a robust Q4. The productivity is evident, and we have made a solid start in Q2. I believe we are on track to see continued growth. We are not suggesting that we anticipate a slowdown until the second half of the year. Do you have anything to add on that, Dave? We can observe it in the pipeline.

David Ring, Head of Commercial Business

Yes. The pipeline, if you were to just look at quarter-over-quarter pipeline is up 26%, even though we had a really strong fourth quarter. And so I think it's just a matter of conversion, and we're doing that. Like John said, we already had a good start to the second quarter. So we're confident that our conversion rates will be good.

John Asbury, President and CEO

So Catherine, we feel optimistic about being on track to meet our expectations. It isn't all dependent on the end of the year. Historically, Q4 is always the strongest quarter for me, but we are not solely relying on that.

William Cimino, Senior Vice President, Investor Relations

And we're ready for our last caller.

Operator, Operator

And our last question will come from the line of Steve Moss with Raymond James.

Stephen Moss, Analyst

Just maybe not to beat a dead horse, but just following up on deposit costs. Just kind of curious, how are you thinking about the marginal cost of deposits for you guys? I hear you on the 4% CD rate, but just think about the blended holistic dynamic what you're bringing in, where does that roughly shake out these days?

Robert Gorman, Executive Vice President, CFO

Yes. If you examine the deposit growth mix, it will come from money markets and the CD portfolio. As I mentioned, on a marginal cost basis, those are likely in the ranges I indicated. The average cost of deposits will rise slightly. For money markets, this won't affect the existing portfolio significantly, but it will gradually increase over time. As CDs mature, you'll see a similar effect. This is essentially how to approach it. Currently, those are the primary growth areas for deposits, alongside some operating accounts we're bringing in as part of our growth strategy. However, the main drivers for the growth will continue to be in those areas.

Stephen Moss, Analyst

Okay. And then maybe just kind of think along the lines, just given how high the cost is, just curious if you guys are thinking about maybe running off more securities here as the year goes on just to fund growth, if we see remix that way, maybe how low are you guys willing to take securities and cash here?

Robert Gorman, Executive Vice President, CFO

Yes, that's a good question, Steve. We are reducing the securities portfolio as a percentage of total assets. This is part of our strategy to address any gaps between deposit growth and loan growth. Currently, the securities portfolio accounts for about 13.5% of total assets, and we expect this to decrease to around 12% to 12.5%, which has been our historical range. The cash flows from securities maturities are approximately $75 million a month, providing us with a solid funding opportunity for loan growth as we transition those funds to the loan book.

Stephen Moss, Analyst

Okay. Regarding the reserve methodology change, could you explain the underlying dynamics and how this might affect the behavior of your reserves in the future? You mentioned that it wasn't a material benefit. Is it just an increase of around $1 million or $2 million to the provision? I'm curious about how we should view the dynamics for this quarter and the changes in sensitivity going forward.

Robert Gorman, Executive Vice President, CFO

Yes. The significant change we discussed is that we now have modeling across three segments. We have divided the Commercial Real Estate and Commercial and Industrial portfolios. The major advantage is that we now have loan-level credit modeling for the Commercial Real Estate side, allowing for more detailed analysis regarding collateral and related aspects. In our allowance for credit losses using the previous modeling, about 50% of our reserve consisted of what we viewed as qualitative factors compared to quantitative modeling. With the new approach, qualitative factors now account for about 20% to 25%, while the quantitative model, which is more detailed, represents approximately 75% of the total allowance. This means we have a significantly improved model, and we anticipate minimal volatility in it moving forward, depending on the economic forecast, which may fluctuate slightly, but that would also apply to the old model. We are pleased with the changes we've implemented, having evolved through four models now, with this being the most effective. Interestingly, it reinforces our qualitative assessments because the new model aligns closely with the allowance for credit losses we show on the balance sheet.

Stephen Moss, Analyst

Okay, that's helpful. I'll follow up on that later, but I appreciate the information. John, you mentioned the loan pipeline and the positive trends in North Carolina. I'm curious about what that looks like these days and what percentage of the loan pipeline it represents. It would be helpful to get a bit more context on that.

John Asbury, President and CEO

Yes. And when I say North Carolina, I should say broadly Carolinas because the commercial real estate team covers both of the Carolinas. Dave, do you want to speak to like how do you think about that in terms of how much of a broadly North Carolina, where Carolinas are as a part of the overall equation in terms of pipeline?

David Ring, Head of Commercial Business

No. I mean it certainly helped this quarter that Carolinas was our second largest growth engine for the company for commercial. So that kind of speaks for itself. I think the pipelines are strong enough to replicate this performance in the Carolinas. So we feel really good about it.

John Asbury, President and CEO

And we're expanding. In the past, when we mentioned the Carolinas, we were primarily referring to the commercial real estate team based in Charlotte. The acquisition of American National Bank provided us a foundation mainly in the Piedmont Triad. Our Wilmington loan production office is performing well since the American National acquisition. We are also growing in Raleigh, where we’re investing in branches in the Greater Raleigh area and Wilmington, and we are steadily adding to our team. Over time, I believe this region will become increasingly important. It’s arguably one of the fastest growth markets in the country, with employment rising quicker than in many other locations, and it’s conveniently located. We are confident about this. It's essential to recognize how diversified Atlantic Union Bank is, and I believe we often do not receive enough acknowledgment for that. We need to communicate better that we operate as a diversified bank across three high-quality states and offer specialized services like equipment finance. We are optimistic about our opportunities.

Unknown Executive, Unknown

Great. Thank you all so much.

William Cimino, Senior Vice President, Investor Relations

Thanks, everyone, for joining us, and we look forward to talking with you next quarter.

Operator, Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.