Atlantic Union Bankshares Corporation

Thank you for standing by, and welcome to the Atlantic Union Bank Shares second quarter 2025 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Bill Cimino, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Jonathan, and good morning, everyone. I'm Atlantic Union Bank Chair's 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 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 gap metrics and non-gap financial measures. Important information about these non-gap measures 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 second quarter of 2025. In our remarks on today's call, we will also 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 from 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 a forward-looking statement. All comments made during today's call are subject to that safe harbor statement. At the end of the call, we'll take questions from the research analyst community, and now I'll turn the call over to John Asbury. Thank you, Bill. Good morning, everyone. Thank you for joining us today. It was a productive and eventful quarter for Atlantic Union Bank shares marked by the acquisition of Sandy Spring Bank, which closed on April 1. As anticipated, the acquisition introduced some merger accounting noise this quarter, and Q2 will serve as a better starting point for future linked quarter comparisons. We do believe our operating results demonstrate the strong earnings potential of our franchise, as we envisioned when we announced the Sandy Spring acquisition. We are pleased that our operating performance following the merger is meeting our expectations. The integration of Sandy Spring is progressing smoothly, and we benefited from the two companies' strong cultural alignment leading into the merger. The sale of approximately $2 billion of commercial real estate loans acquired from Sandy Spring Bank closed on June 26th and exceeded our initial pricing estimates. We also physically settled in full the forward sales of common equity in April concurrent with the merger closing, receiving approximately $385 million before expenses. We are working diligently on integration activities and are on track for our fourth quarter core systems conversion. Leveraging our experience from past acquisitions, including last year's conversion of American National Bank, we are confident in our integration efforts and systems preparations. Our shareholder value proposition remains unchanged. We believe Atlantic Union is well-positioned to deliver sustainable growth, top-tier financial performance, and long-term shareholder value. The strategic benefits from the Sandy Spring acquisition, along with organic growth opportunities, will bolster our position as the premier regional bank in the Lower Mid-Atlantic with a strong presence in attractive markets. I will summarize key aspects of our second quarter results and provide insights into market conditions before handing over to Rob for a detailed financial review. I will then discuss our organic growth initiatives in North Carolina, which we're excited about, before opening the call for questions. Here are the highlights from our second quarter. Our quarter-end loan-to-deposit ratio was approximately 88%. Our CET1 capital ratio was 9.8%, and our bank-level CRE concentration ratio was 284%. The Sandy Spring acquisition closed one quarter earlier than anticipated, a positive development, though it gave us one quarter less capital accumulation than planned at announcement. I reported FTE net interest margin expanded by 38 basis points to 3.83%. Notably, our core net interest margin, which excludes the impact of accretion income, improved by eight basis points. Assuming the Sandy Spring acquisition closed on March 31 instead of April 1, and excluding the negative loan fair value marks on the acquired loans and the effect of the commercial real estate loan sale, our loan growth was approximately 4.0% annualized quarter over quarter. This exceeded our internal expectations given the economic uncertainties And we observed growing business confidence with a robust loan pipeline and strong production, particularly later in the quarter. Our pipelines indicate that we should have solid loan growth in the second half of the year. We continue to project year-end loan balances between $28 and $28.5 billion, inclusive of the negative impact of loan fair value marks. Deposit growth trends tends to be seasonally slow in the second quarter, and we also paid down broker deposits by approximately $340 million in Q2 and intentionally reduced some higher-cost non-relationship deposits acquired in the Sandy Spring portfolio. The commercial real estate loan sale process was complex, but it yielded a strong outcome, better than planned, and reflected the quality of Sandy Spring's client base and markets. Completion of the sale removes a risk element. We reduced our commercial real estate concentration, lowered the loan-to-deposit ratio, and increased capacity for future growth while providing a positive start to our integration efforts. Credit quality remained solid as we reported only one basis point of annualized net charge-offs, and past due loans remained low. Second quarter NPAs as a percentage of loans held for investment were 0.60%. The increase reflects AUB's more conservative approach to loan rating and marking under acquisition accounting as Sandy Springs loans were added to AUB's loan portfolio. We remain confident in our asset quality and market conditions. We have lowered our forecast for the 2025 net charge-off ratio to be between 15 and 20 basis points for the full year, inclusive of a few non-performing assets with specific reserves that we expect to charge off later this year. We are well distributed across Virginia, Maryland, and North Carolina with a presence in Washington, D.C. These regions are highly attractive to operate in. In the greater Washington, D.C. region, despite continuing headlines about government employment reductions, the economic data and our observations suggest resilience. The region with a population of about 6.4 million people remains robust, and we view changes in government employment to date as manageable, although there continues to be uncertainty about where it may all end up. For perspective, approximately 23% of our total loans are in the Washington metro area, with the remaining 77% across other parts of our footprint. As we stated last quarter, the credit exposures that have been most in focus in the greater Washington region are government contractors and office buildings. We updated disclosures on these categories on pages 22, 23, and 24 of our supplemental presentation. Our government contractor finance portfolio, primarily national security and defense related, is performing well, as you can see on slide 24 of our supplemental presentation. Of note, the recent budget reconciliation bill will increase defense spending to a record level. and we believe defense modernization spending will be an overall benefit to our government contract portfolio. Regarding the office loan portfolio, AUB does not and Sandy Spring did not finance large office properties as evidenced by our $1.9 million average loan size, and we have only $71 million of exposure in the District of Columbia. The portfolio is performing well, as you can see on slide 22 of the supplemental presentation. More broadly, it is also worth pointing out that as of the most current unemployment data for June, there remains no more populous state in America with a lower unemployment rate than Maryland at 3.3%. Virginia is the third most populous state in the country with the lowest unemployment rate at 3.5%. For strong pipelines and an expanded footprint in attractive markets supplemented by our specialty lines, we believe we are positioned well for solid organic growth in the second half of 2025. Rob will now provide further details on the quarter, and I will then return with comments on our future direction before opening the call for questions.

Rob? Well, thank you, John, and good morning, everyone. Thanks for joining us today. I'll now take a few minutes to provide you with some details of Atlantic Union's financial results for the second quarter. Here are some key data points related to Sandy Spring acquisition that should be kept in mind as we review the second quarter's results. The fair value of assets acquired totaled $13 billion and included loans held for investment of $8.6 billion and loans held for sale of $1.9 billion, which primarily consisted of the CRE loans sold during the quarter subsequent to the acquisition. The total loan portfolio fair value mark discount was $789.7 million, comprised of a credit mark of $162.8 million and an interest rate mark of $626.8 million. The fair value of liabilities assumed totaled $12.2 billion and included total deposits of $11.2 billion. Core deposit intangibles and other intangibles acquired totaled $290.7 million, and the preliminary goodwill arising from the transaction totaled $496.9 million. Also, please note that for the most part, my commentary will focus on Atlantic Union second quarter financial results on a non-GAAP adjusted operating basis, which excludes the following items. The $89.5 million negative pre-tax impact of the CECL Day 1 initial provision for credit loss expense on purchased non-credit deteriorated or non-PCD loans acquired from Sandy Spring, which represents the CECL double count of the non-PCD loan credit mark. And the $11.4 million negative pre-tax impact of provision expense on unfunded commitments acquired from Sandy Spring. Also excludes pre-tax merger related costs of $78.9 million in the second quarter associated with the merger. And the $15.7 million pre-tax gain on the sale of $2 billion of CRE loan sales acquired in the Sandy Spring acquisition. as well as the $14.3 million pre-tax gain on the sale of our equity interest in Cary Street Partners. That said, in the second quarter, reported net income available to common shareholders was $16.8 million, and earnings per common share were 12 cents. Adjusted operating earnings available to common shareholders were $135.1 million, or 95 cents per common share for the second quarter, resulting in an adjusted operating return on tangible common equity of 23.8%, an adjusted operating return on assets of 1.46%, and an adjusted operating efficiency ratio of 48.3% in the second quarter. Now turning to credit loss reserves at the end of the second quarter, the total allowance for credit losses was $342.4 million, which was an increase of approximately $133 million from the first quarter, primarily due to the initial allowance related to the Sandy Springs acquired loans of $129.2 million, which includes a $28.3 million loan loss reserve on PCD loans and the CECL double count of the non-PCD loan credit mark and provision expense on acquired unfunded commitments totaling $100.9 million. The total allowance for credit losses as a percentage of total loans held for investment increased to 125 basis points at the end of the second quarter, and that was up from 113 basis points at the end of the first quarter. Provision for credit losses of $105.7 million in the second quarter includes the acquisition-related CECL double count of $100.9 million. Excluding the day one initial provision recorded on non-PCD loans and unfunded commitments acquired from Sandy, spring, the second quarter provision for credit losses was down from the prior quarter, primarily reflecting the impact of the overall bill and the allowance for loan losses due to heightened uncertainty in the economic outlook in the prior quarter, as well as lower net charge-offs in the second quarter. Net charge-offs decreased to $666,000, or one basis point annualized in the second quarter, down from $2.3 million, or five basis points annualized in the first quarter. Now turning to the pre-tax pre-provision components of the income statement for the second quarter, tax equivalent net interest income was $325.7 million, which was an increase of $137.8 million from the first quarter, primarily driven by the addition of Sandy Spring acquired loans and deposits, merger-related net accretion interest income related to acquisition accounting, as well as by organic loan growth. As John noted, the second quarter's tax equivalent net interest margin was 3.83%, And that was an increase of 38 basis points from the previous quarter, primarily driven by the incremental net increase accretion of purchase accounting adjustments on loans, deposits, and long-term borrowings related to the Sandy Spring acquisition. Earning asset yields for the second quarter increased 37 basis points to 6.05% compared to the first quarter, and the cost of funds decreased by one basis point to 2.2% compared to the prior quarter. The loan portfolio yield increased 47 basis points to 6.48% in the second quarter from 6.01% in the first quarter, primarily driven by the incremental merger-related loan increase in income of $32.5 million, which added approximately 39 basis points to the loan yield from the prior quarter, which was in addition to an increase in linked quarter core loan yields of nine basis points, driven by back-book fixed-rate loans repricing higher. Securities and other earning asset yield increases in the second quarter added one basis point to the earning asset yield, primarily driven by the restructuring of C&E Springs investment portfolio and fair value accounting adjustments arising from the acquisition. These earning asset yield increases were partially offset by a two basis point decline due to shifts in the earning asset mix. One basis point decline in the second quarter's cost of funds to 2.22% was due primarily to the nine basis points decrease in the cost of deposits at 2.2%, partially offset by higher borrowing costs, primarily due to increased long-term subordinated debt as a result of the CME spring acquisition. Non-interest income increased $52.3 million to $81.5 million for the second quarter, primarily driven by the $15.7 million free tax gain on the sale of the $2 billion of CRE loans and the $14.5 $3 million pre-tax gain on the sale of our equity interest in Cary Street Partners, as well as the full quarter impact of the Sandy Spring acquisition. Excluding the realized gains on sale during the quarter, adjusted operating non-interest income increased $22.2 million from the first quarter of $51.5 million, primarily due to the impact of the Sandy Spring acquisition, which drove the majority of increases in fiduciary and asset management fees, service charges on deposit accounts, and interchange fees. In addition to acquisition impacts, the quarterly bank-owned life insurance income increase of $3.8 million included $2.4 million in death benefits received in the second quarter, and a mortgage banking income increase of $1.8 million included the impact of Sandy Springs Mortgage Business, as well as a seasonal increase in mortgage loan origination volumes. In addition, other operating income increased $2.4 million, primarily due to an increase in equity method investment income. Reported non-interest expense increased $145.5 million to $279.7 million for the second quarter of 2025, primarily driven by a $74 million increase in merger-related costs, as well as other increases in non-interest expense due to the full quarter impact of the Sandy Spring acquisition. Adjusted operating non-interest expense, which excludes merger-related costs in the first and second quarters, and amortization of intangible assets in both quarters increased $58.6 million to $182.4 million for the second quarter, up from $123.8 million in the prior quarter, primarily due to the impact of the Sandy Spring acquisition, which drove the majority of the increases in several non-interest expense categories compared to the prior quarter. The company's effective tax rate in the second quarter was a negative 13.2%, reflecting the impact of an $8 million income tax benefit recorded during the quarter related to the company's re-evaluation of its state-preferred tax asset as a result of the Sandy Spring acquisition. Going forward, the company's estimated annual effective tax rate is projected to increase within a range of 21% to 22% from approximately 19.5% in the prior year, reflecting the impact of the Sandy Spring acquisition as Sandy Spring operated in a higher state tax jurisdiction, which now impacts a large proportion of the company's consolidated pre-tax income. At June 30th, loans held for investment, net of deferred fees and costs were $27.3 billion, which was an increase of $8.9 billion from the prior quarter, again, primarily driven by the Sandy Spring acquisition. Assuming the Sandy Spring acquisition closed on March 31st instead of April 1st, and excluding both the negative loan fair value marks on the acquired loans and the effect of the CRE loan sale transaction, pro forma loan growth was approximately 4% annualized. At June 30th, total deposits stood at $31 billion, which was an increase of $10.5 billion from the prior quarter due to increases in interest-bearing customer deposits and demand deposits primarily related to the addition of Sandy Spring acquired deposits. Assuming the Sandy Spring acquisition closed on March 31st instead of April 1st, home form of deposits decreased $752.8 million, or approximately 9.5% annualized from the prior quarter, which was primarily due to lower broker deposits, which declined by approximately $340 million, as well as declines in time deposit balances of approximately $143 million, as we intentionally let maturing higher-cost non-relationship time deposits acquired from Sandy Spring to run off during the second quarter. At the end of the second quarter, Atlantic Union Bank's years 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 second quarter if you include the negative impact of ALCI and health to maturity securities unrealized losses in the calculation of the regulatory capital ratios. During the second quarter, the company paid a common stock dividend of 34 cents per share, which was an increase of 6.3% for the previous year's second quarter dividend amount. As noted on slide 16, we've updated our full year 2025 financial outlook for AUB, which includes estimates of purchase accounting adjustments with respect to Sandy Spring that are subject to change. We expect loan balances to end the year between $28 billion and $28.5 billion, while year-end deposit balances are projected to be between $31 billion and $31.5 billion. The allowance for credit losses to loans is expected to fall between 1.2% and 1.3%, and our full-year net charge-off ratio is projected to be between 15 and 20 basic points. Fully taxed equivalent net interest income for the full year is projected to come in between $1,150,000,000 and $1.2 billion. As a result, we are projecting that the full-year fully taxed equivalent net interest margin will fall in the range between 3.75% and 4%. driven by our baseline assumption that the Federal Reserve Bank will cut the Fed funds rate by 25 basis points in September, November, and December. In addition, the fully tax equivalent net interest margin projection includes the impact of our estimate of net accretion income from the C&E spring acquisition, which can be volatile and subject to change. On a full year basis, adjusted operating non-interest income is expected to fall between $175 and $185 million And the adjusted operating non-interest expenses for the full year, which includes amortization of intangible assets expense of approximately $60 million, are estimated to fall in the range of $670 million to $680 million. Based on these projections, we expect to produce financial returns that will place us within the top quartile of our 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 second quarter, inclusive of Sandy Spring, despite the noise of acquisition accounting. We are on track and confident that we will achieve the anticipated financial benefits of the combination with Sandy Spring, some of which were evident in the second quarter financial results. 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 2025 and beyond. I'll now turn the call back over to John.

Thank you, Rob. In December, we'll host an analyst day at the New York Stock Exchange, and Bill will send out more information on that shortly. This will be our third analyst day since I've been here, and we'll share our new three-year strategic plan, which we expect to finalize and approve this fall. While you should not expect anything dramatic in terms of changes, it will be the next phase of the strategy we have articulated and consistently executed over the years. Although I don't want to front run too much of what we'll share in December, I do want to highlight our geographic footprint expansion strategy, as it's a question we frequently receive. For background, and as a reminder, I've often described the AUB story and our transformation as chapters in a book. Chapter one involved consolidating Virginia and securing our position as Virginia's bank. We believe we have now accomplished that. Chapter two was extending the Virginia franchise to secure a similar footing in the lower Mid-Atlantic which we believe was achieved with our acquisition of Sandy Spring. We now have the number one regional bank, a depository market share in both Maryland and Virginia, a feat we believe unprecedented and likely not replicable in our markets. Chapter 3, which is already underway, focuses on the organic expansion of our presence in North Carolina. The acquisition of American National Bank last year was pivotal for densifying our presence in western and southern Virginia, as well as providing us a meaningful entry into North Carolina. When we acquired American National, we clearly stated our intention to invest in North Carolina's growth markets, and we now plan to accelerate those investments. The Sandy Spring acquisition has provided us with significant growth opportunities in the large markets of Maryland and Northern Virginia. As evidenced by this quarter's operating results, we believe it also provides us with the financial capacity to accelerate investments in our company, including organic expansion in North Carolina. We will build on the North Carolina base we enhanced with American National's Piedmont Triad Presence and Raleigh office, in addition to AUB's existing branches in the Outer Banks, our longstanding Charlotte Loan Production Office, and the Wilmington Loan Production Office we established after the American National merger. These are attractive markets where we believe we can successfully utilize our model to drive incremental growth. Starting in 2026, we plan to open 10 new branches, in North Carolina, with seven in the Research Triangle and three in Wilmington. We also plan to expand our commercial banking wealth and mortgage teams there. We believe these actions will provide us with a critical mass to compete in those markets and offer new supplemental organic growth opportunities in some of the best population growth markets in the country. The branch build-out is expected to be completed over a three-year period In sum, we have intentionally and carefully built a uniquely valuable franchise that we envisioned in our strategic plans over the past nearly nine years. We believe we are well positioned to realize the potential of the new markets acquired through the Sandy Spring acquisition, to continue our growth in Virginia, and to execute on attractive organic growth opportunities in North Carolina. We also plan to continue to supplement organic growth with our existing specialty lines. We'll have more details during our Investor Day in December, but I hope this provides a clear picture of the next chapter in the AUB story. And I would like to close by acknowledging our Chief Financial Officer Rob Gorman's planned retirement, which we announced in the second quarter. We have launched a nationwide search and are looking both internally and externally for our next CFO. Rob joined us in 2012 when we were a well-regarded $4 billion asset Virginia community bank. His vision for the company's potential predates my tenure. and he has been instrumental to our success. Rob's leadership, expertise, and friendship have been invaluable. He's not done yet, and for those of you who know him, he'll run through the finish line. I'll now turn the call over to Bill to see if there are any questions from our research analyst community. Thank you, John. And Jonathan, we're ready for our first caller, please.

Certainly. And our first question for today comes from the line of Russell Gunther from Stevens. Your question, please. Good morning, Russell. Hey, good morning, guys.

Hey, good morning, John. Maybe to start on the loan growth discussion. Appreciate the commentary about being well positioned for the back half of this year. We have those kind of guideposts. How should we think about the pro forma growth outlook on a larger balance sheet? And as we think about your plans for the Carolinas as a piece of that?

Yeah, I think that, you know, we're in the Carolinas right now. as you know. And the Charlotte LPO, which is now nine years old, is actually the single largest piece of it. We picked up an additional presence in teams, of course, with the American National Bank merger, and we're very happy with them. We have the new, relatively new, Wilmington LPO. So that's all rolled in, if you will, to our forecast. David Ring, who is our head of wholesale banking, which are all of our various commercial businesses, is here. Maybe I'll ask Dave to comment. But Dave, my view is as I look at the, I'll call it the, I hate to use this term, but the legacy AUB pipeline, excluding Sandy, it is at a record level and Sandy spring, that piece of the franchise, you know, soon to be rebranded in the fall as AUB is looking pretty good too. So what, what is your take in terms of what to expect?

So in the back half of the year, we do have good momentum coming in, especially starting in June. It really started. And, um,

like john said the pipeline is as strong as it's ever been and so if you do the math and calculate your runoff and your how fast your pipeline turns we should be in good shape for the rest of the year thank you guys uh and then maybe switching gears uh onto the expense outlook uh beyond you know what you've provided for this year and as you consider the carolinas i think pro forma for sandy spring talk to an efficiency ratio in the 45% range. Is that still the right way to think about this going forward into 26, or could we see that creep up as you build out the Carolinas organically?

Yeah, Russell, this is Rob. Yeah, we're still targeting that mid-45 or mid-40s efficiency ratio. That's inclusive of the investment we're making in the Carolinas, so we looked at that very carefully. It's still We reconfirm our thoughts on 2026 in terms of the metrics, return on assets in the 150 range, ROTC 20 plus percent, and then business ratio mid 40s, inclusive of the investment we're making down in the Carolinas.

And that also includes some additional investment on the technology front in particular. I think every group of the bank seems to have shown up with AI-related requests, for example. And while we can't do everything, we do have the financial capacity to continue to invest in the company. So mid-40s, it looks good. I will note, as you can see, Russell, on an operating basis, we achieved what is a personal long-term goal for me. We broke 50. So we think we are solidly in the 40-something efficiency ratio category now. which is pretty good for a bank with a relatively large retail footprint.

I appreciate your thoughts, both of you, on that. And then just the last one for me would be how you're thinking about capital levels here. Is there any interest in exploring the reversal of the CECL double count? And then given just capital does accrete quickly with the pro forma return profile, how are you thinking about that related deployment? Is that all organic growth pegged? Is there consideration of buybacks? Just helpful to get your big business capital thoughts.

Yeah, so if you look at the CET1 ratio, we're about 9.8% at the end of this quarter. We're looking forward. We think that will continue to increase by about 25 to 30 base points a quarter, so pretty heavy internally generated capital increases. In terms of the CECL double count, we'll evaluate that or the change in the accounting there. We'll evaluate that. Russell, but it's probably about a 30 basis point impact if we didn't have that issue or the change had been made prior to this quarter. We'll evaluate that. I don't think we will make that change, but we'll see how that plays out. In terms of deployment, yeah, we'll continue to obviously invest in the organic growth of the company. That's number one. And then continue to look at our dividend payout ratio, which is in the 35% to 45% target range. And then beyond that, you know, if we start to get up closer to, you know, between 10.5% and 11%, we'll look at other deployment options beyond those two, which could be, you know, repurchasing shares, put a program in place to repurchase shares. That's probably something we could evaluate probably in the first quarter, second quarter of next year. Okay, great.

Thank you both for taking that question. Thanks, Russell. And Jonathan, we're ready for our next caller, please.

Certainly. Our next question comes from the line of David Bishop from Hope Group. Your question, please.

Good morning, David. Hey, good morning, John. Good morning, Rob. And congratulations, Rob, on the news. Just curious, from a credit quality perspective, John, maybe on the, you know, you have the marks on the legacy Sandy Springs. I'm just curious what you saw from a credit quality perspective on a sort of legacy Atlantic Union basis, maybe sort of color on what happened on Criticize Classified. New NPA formation looks like it was pretty low, but just wanted to make sure I did the numbers right.

Yeah, I think the increase in NPA, as we stated, really was simply the Sandy Spring portfolio coming in. The overall credit looked quite stable. Doug Woolley is here, Chief Credit Officer. Doug, do you want to share a perspective on that?

Yeah, what John said, David, is that it's a reflection of our work on the Sandy portfolio. The rest of the footprint looks fine.

Nothing material or noticeable in credit risk profile anywhere. Got it.

Then, John, I know in the past couple quarters there's been some headwinds, especially within the GovCon process. segment. Just curious what you're seeing there in terms of the pipeline and rebuild of that portfolio, any sort of stabilization in that headwind.

GovCon is performing fine. As I indicated, most, not all, but most of our government contract finance portfolio is national security and defense related, and they're arguably winners. Now that we have a record defense spending bill, the modernization of defense spending, the shift toward drone warfare, anti-drone defense, unmanned vehicles, unmanned ships, cybersecurity, missile defense in general, all of that tends to favor the types of contractors that we deal with, and it looks pretty good. One of the issues we faced in government contract finance has been we saw a lot of activity with private credit that was paying it down, but overall, Yeah, it looks pretty good. Dave, do you have anything to add in terms of opportunities there?

I'll just say that we do a lot of due diligence on a weekly basis on that portfolio. So in other words, we look at contracts that are approved and contracts that are taken away from our clients on a weekly basis and update cash flows to make sure that those clients are able to pay. And the portfolio looks really strong.

Yep. Blind selectivity matters. We've been in that business for 15 years. Knock on wood, we've never had a charge-off. I'm not saying that will always be the case, but I think we're in the right segment.

Got it. And one final question, maybe, Rob, from a housekeeping perspective. I know there's lumpiness in terms of purchase accounting accretion, income levels, but any sort of sense where that could be trending over the near term here? Is this a good estimate moving forward into the latter half of the year? Thanks.

Yeah, if you look at this quarter, we had about $45 million of accretion income come through. That's a pretty good run rate the way we're looking at our projections. So I would go with that. It could be volatile, as you know. It could be higher prepayments and things of that nature. But we think the $45 million is a pretty good number to run with.

Great. I appreciate the color.

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

Certainly. Our next question comes from the line of Brian Wilczynski from Morgan Stanley. Your question, please. Good morning, Brian.

Hey, good morning. Thanks for taking my question. Maybe just going back to the loan growth side. So you're at $27.3 billion today. Can you just talk about what you're hearing from your commercial borrowers about the environment and specifically how you're thinking about the drivers of loan growth from here for both C&I and also CREs separately?

Dave, you want to take that?

Sure. You know, the way I'd characterize the market that we're dealing with right now is still a little, they're still holding back, thinking about tariffs and other things. We've seen our borrowers actually invest or borrow more for inventory build up before tariffs would come across to them. Uh, but there has been like a break in optimism and it's moving, you know, we're starting to see our sales cycles shorten and closings happen more quickly on the real estate side. You know, that's a little trickier for us because we manage that very closely and we look at how construction and development works. And, you know, we've peeled that back a little bit and we see those pipelines shrinking. But we're doing more deals on stabilized properties. And so we do see both the CRE business growing this year and the CNI business growing. And we're seeing that right now. But we expect that to continue.

I agree. There's no question the mood improved over the course of the quarter. I think some of that was just people getting more accustomed to the uncertainty. The tariff issue, it's not that our markets are somehow particularly susceptible to tariffs, as we've argued before and had Federal Reserve data to back it up. We're probably less impacted by tariffs in our markets than most places. It's really more business sentiment. But I think that the mood has clearly improved as people have gotten more accustomed to the volatility and generally feeling more optimistic about where we go from here and that's showing up. I see clear evidence of that. So I think that we're, to Dave's earlier point, I think we're on a pretty good footing, Brian, where I think that we're looking at a reasonable growth trajectory for the remainder of the year.

That's really helpful. Thank you. And then as a follow-up, maybe on the funding side, so you have about $1.6 billion of cash on the balance sheet post-loan sale. Can you just dig into how you're going to deploy that in terms of paying down higher cost source of funding, how much you can do there, and how quickly you can move on it? Thanks.

Yeah, Brian, so... In terms of, we've got about $1.6 billion of cash, which is about a billion dollars, probably a billion and one higher than we typically would have. That obviously comes from late in the quarter where we received the proceeds from the CRE sale. Our game plan there is to continue to pay down high-cost broker deposits, and those are maturing in the third quarter. So $200 to $300 million, maybe a little higher than that over the next quarter. and then there's a bit more in the fourth quarter. In addition to that, we're going to be investing a bit more in the investment portfolio. Probably about $500 million or so will be going into there. We're kind of laddering that in over this quarter. And then we're hoping that loan growth continues to be higher. to get to that $28 billion, so we'll be using some of that cash for funding loans. So that's how we're planning to utilize it.

And is it fair to assume that the loan-to-deposit ratio maybe ticks up a little bit from here?

Yeah, it likely will. I mean, we're comfortable in the 90% to 95%. That's historically where we've run. We're 88% now, so you can see that tick up a bit higher as you certainly take out the broker deposit numbers or take those down.

Got it. That's really helpful. Thank you for taking my questions.

Certainly. Thank you, Brian. Thanks, Brian. And we're waiting for the next caller, Jonathan.

Certainly. Our next question comes from the line of Steve Moss from Raymond James. Your question, please.

Morning, Steve. Hey, guys. This is Chase on for Steve. Good morning. We know Steve's got a good excuse for not being on the call.

Thank you for reminding me.

First one for me, I've been hearing a lot about pricing competition. Where are loan yields coming in at now, either in terms of blended or AUB and legacy SaaS or markets separately? Thanks.

Yeah, so in terms of where we see loan yields coming in this quarter, it hasn't really changed too much. If you look at the fixed rate portfolio, I think we're at about the 6.25 to 6.50. That's the back book fixed rate increase in pricing we're seeing. We've got about a 5.10 average yield on those loans, and we're repricing, as I said, the 6.25 to 6.50 range. So that's continued for the last several quarters in the same kind of range, so nothing really materially has changed there on the negative side.

Gotcha. And I see in your 2025 financial outlook slide that you have three cuts, the rest of the year baked into the modeling there. Did you happen to run a two-cut scenario? And if so, is there anything you can share on how different it was from the three-cut scenario?

Yeah. So we did run a scenario where we had no cuts, zero cuts, which could happen. And it's about a one to two basis point prop improvement in the margin this year. So if we don't get those cuts, because our variable rate loan book, which is about 50% of our loan book, won't be priced down. So I'll pick up a couple of basis points. If that plays out into 2026, where we had three cuts in 2026, so if we delay those cuts, It's probably a three to four basis point, five basis point improvement in 2026 Outlook.

Thanks for that. One last one for me. Now that you're actively working on integrating all of SASR, what opportunities are you most excited about?

Thanks.

I would say, and we have numerous other leaders here at the table, I would say, first of all, what we bring to the table for the former Sandy Spring franchise is liquidity. They're unconstrained in terms of their ability. We bring new products and capabilities, particularly on the commercial and industrial side. And I think we've got a wonderful group of people up there. So I think that we couldn't be happier with the cultural fit So I feel really good about that. I am super excited about what we're talking about doing in North Carolina, and I feel good about the Virginia market. So I'm feeling pretty optimistic across the board. I think that any sort of calm that comes to the markets in terms of the hesitancy that we've seen, which appears to be abating, is going to be good for us because I think we're meaningful in these markets. These are good markets, and we play an important point

Anyone have anything to add to that? When the stage is set, we should be able to deliver.

That's all for me. Thank you, guys, for all the color. Thank you. Thanks, Chase.

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

Certainly. Our next question comes from the line of Catherine Mueller from KBW. Your question, please.

Hi, Catherine. Hey. Good morning. Maybe just one on what you were just talking about in terms of kind of CNI and growth in the D.C. market. Can you just talk a little bit about the opportunity for growth, maybe in kind of two buckets in D.C.? I think maybe one in terms of bringing your kind of CNI product, maybe what kind of growth rate would you expect to see in CNI in some of Sandy Springs markets? and what that kind of ramp and transition happens. Do we need to hire more lenders, or can you do it with the team you've got? Just kind of paint a picture for what that looks like. And then secondly, on the CRE side, are there opportunities within the clients or some of the relationships that they had with the $2 billion of loans that you just sold that you're still servicing? Is there an inherent kind of growth opportunity within that client base as you're willing to lean in and kind of grow CRE opportunities? you know, as you build capital over time. Thanks.

Yes, certainly, Catherine. One thing I'll point out politely is that we don't think about it as the D.C. market. We think about it as the state of Maryland because Sandy was the Maryland bank, not the D.C. bank. We have two branches in D.C., but far more important.

Thank you for that clarification.

Yes, thank you. You know why I'm sensitive to that.

I do, I do.

Yes, so state of Maryland and then more broadly, northern Virginia. we think we do have a great team up there and we feel good about that team. Uh, and under jail Brian's leadership, Dave, I think as we've looked at, you know, the size of the team, the capabilities, you know, we feel pretty good. Uh, do you have anything you would want to add to that?

Yeah, we, um, you know, when we look at the teams, we also look at their book sizes and their support, the support levels that we give them. And we think it's fully staffed at this point and we don't really need to add unless somebody leaves on the Cree side. Just remember, Cree has multiple transactions with customers. So even if there's a customer in the book of business that we just sold, we don't necessarily have to take that deal out. We can just do another transaction with them. That's the beautiful part of the Cree banking is as you manage those relationships, you get multiple opportunities.

Yeah, I agree. And so, Catherine, the good thing, single best part of the commercial real estate sale is that we're servicing those credits. And I do think we had a great partner in Blackstone who certainly delivered. But we are still managing those relationships. And as they have additional opportunities, it frees up capacity. So if there were a hold limit issue, for example, where we might have had too much exposure or limited upside or additional capacity, that is now resolved. with the sale, and then opportunities may come up over time with them. So I think it kind of reloads the opportunities for us. And as you know, because you covered them, a good bank that they were, they were a bit constrained in terms of liquidity and commercial real estate concentration, and those are no longer a factor. And we think we're in a really good position to continue to pick and choose, and we think we'll see opportunity up there and then elsewhere too.

And then maybe you want to follow up just on the margin. Is it fair to, I mean, you've got a big range within the margin and we're kind of starting a little bit on the lower end of where we thought we'd be, which was kind of where we had painted the picture. But is it fair to think that as we move through the year and kind of growth improves and you kind of work through some of the liquidity and pay down broker that the margin just gradually kind of trends towards the higher end of the range? Yes, Kathy. Is there, I guess, what's the risk that we kind of stay stagnant in the margin near term? Maybe that's the way to put it.

Yeah. I think what, you know, as we said, the margin should grind higher on a core basis, and that's really what we should be seeing. We saw that about eight basis points of core margin improvement expansion this quarter. In terms of going forward, we've kind of played out the reduced cost of the CD book. You know, previously we were in the 440s in terms of the CD rates paid in maturing CDs going on in the 375 to 4% range. We're kind of playing that out. There's probably another quarter's worth of that to bring down deposit costs. We will continue to do bring those deposit costs down as the Fed brings rates down. Of course, we have an offset to that with the variable rate loan book repricing as well. So the grind higher is probably going to slow a bit, but it still will grind higher, but it's not going to be, you know, 8 to 10 basis points, you know, per quarter. So that's kind of why we're kind of, you know, have that range there. But to your point, it should grind higher from here. But that outlook was on a full year basis, 375% to 4%. So as you go into the third and fourth quarter, you should see that a bit higher than where we are today.

Yeah, the fact that we were sitting on $1.5 billion of cash at quarter end because the portfolio sale happened days before quarter end, we didn't have the opportunity to deploy much of it, that sets up opportunity for sure.

That's great. Okay, thank you.

Thank you, Catherine.

Appreciate it.

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

Certainly. We have a follow-up question from the line of Brian Wilczynski from Morgan Stanley. Your question, please.

Hi, Brian. Hey, just circling back with one more question on credit. So credit was clearly really positive this quarter. Sounds like you're not seeing anything in terms of signs of weakness across the portfolio. The guidance for the year, 15 to 20 basis points of NCOs, is significantly higher than where you've been trending. And I know there's one potential idiosyncratic loss that could get resolved in the second half. But aside from that, can you just comment on any conservatism that's baked into that guidance? Is there anything you're seeing right now that would indicate that losses are going to move higher, or are you just being conservative with that outlook? Thanks.

Yeah, Brian, I'd say that it's a conservative outlook, but it does include... A COUPLE OF LOANS WHERE WE HAVE SPECIFIC RESERVES ON THEM AND EXPECT TO SEE THOSE RESOLVED IN THE SECOND HALF OF THE YEAR. SO THAT'S KIND OF PLAYING INTO THAT 15 TO 20 RANGE IF THOSE PLAY OUT THE WAY WE THINK THEY MIGHT BASED ON SPECIFIC RESERVES WE HAVE. SO IT'S PROBABLY A BIT CONSERVATIVE. IT MAY NOT HIT THAT 15 BASIS POINT CHARGE OFF RATIO. BUT NOT KNOWING THERE'S NOTHING beyond the things that I just mentioned that would suggest it should be higher. But just thought that range made sense for us in case something came through in the second half of the year. That's right.

We don't have a line of sight to that, but we'll review it again after this quarter.

Got it. Thank you again.

Thanks, Brian. And thanks for everyone who called in today. We appreciate your questions, and we look forward to talking with you next quarter. Have a good day. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.