- Key takeaway: Some banks are finding that taking advantage of loan-growth opportunities requires them to surrender some of their net interest margin.
- What's at stake: The return of loan growth is a welcome development for banks, but it's also brought a new set of challenges.
- Supporting data: Atlantic Union Bankshares in Richmond, Virginia, grew its loan book by more than $720 million during the second quarter, but also made a slight downward adjustment to its net interest margin guidance.
Case in point: Atlantic Union Bankshares in Richmond, Virginia. The $38.1 billion-asset company reported a 33% quarter-over-quarter increase in net income, with loan growth driving much of the improvement. Atlantic Union's June 30 loan total was $28.7 billion, up $727 million from March 31.
To fund the increase, Atlantic Union drew down its investment portfolio by about $200 million. It also borrowed more. Borrowings of $1.88 billion were up 44% from the first quarter.
Going forward, Atlantic Union expects to be able to fund loan growth with deposits, but as more customers opt for interest-bearing accounts, its cost of funding is creeping higher. Indeed, new deposits — primarily certificates of deposit, money-market accounts and interest checking accounts — are going on Atlantic Union's books at rates between 3% and 3.5%, Chief Financial Officer Alex Dodd told analysts on Tuesday.
Pricier deposits blunt the impact of increased interest income, so Atlantic Union compressed its full-year 2026 net interest margin guidance. The new projections, unveiled Tuesday, target a NIM in the 3.9% to 3.95% range, down slightly from the previous 3.9% to 4% range.
"We're encouraged by the loan growth we saw in the quarter, but the cost of funding is going up higher than we expected," Dodd said.
Analysts and investors watch banks' net interest margins closely, since the metric helps determine core profitability. It also provides insights into pricing discipline and credit quality. With loan growth surging, however, certain banks appear comfortable ceding some of their margin to benefit from a jump in lending activity.
KeyCorp CFO Clark Khayat told analysts Tuesday that "incremental balance-sheet growth may be modestly margin-dilutive," but the Cleveland-based bank is willing to make that trade "to a degree, to add quality relationship clients with a strong return profile."
The $191.3 billion-asset KeyCorp reported second-quarter net income totaling $472 million, up 22% from the same period last year. Key's second-quarter results included 4% year-over-year loan growth, a level that required some wholesale funding to support.
Key believes the loan-growth trend will carry over into the second half of 2026. It boosted its full-year average loan-growth projection to 4% to 5%, up from the previous 2% to 3% outlook. Average commercial loans are expected to rise 8% to 10%. At the same time, the 2026 NIM guidance was airbrushed to 3%-3.5%. The previous target was a flat 3.5%.
"NIM is clearly an important metric for us," CEO Chris Gorman told analysts on Tuesday. "But as you can imagine, what we're most intensely focused on is our long-term return targets."
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A third bank facing this tradeoff is Buffalo, New York-based M&T Bank.
M&T executives suggested last week that the $216.5 billion company will experience some NIM compression as it works to finance
"I think we're okay trading a few basis points away from that and getting more growth in net interest income," Bible said. "I think that's a fair trade."
