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DATE
Thursday, July 24, 2025 at 9 a.m. ET
CALL PARTICIPANTS
Chief Executive Officer — John Asbury
Executive Vice President and Chief Financial Officer — Rob Gorman
Chief Credit Officer — Doug Woolley
Head of Wholesale Banking — David Ring
Director of Investor Relations — Bill Cimino
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TAKEAWAYS
Sandy Spring Acquisition: Closed April 1, adding $13 billion in assets, $8.6 billion in loans held for investment, and $1.9 billion in loans held for sale.
CRE Loan Sale: $2 billion of acquired commercial real estate loans were sold on June 26, 2025, exceeding initial pricing estimates and generating a $15.7 million pretax gain.
Net Interest Margin: core NIM increased eight basis points, excluding accretion income.
Net Interest Income: Tax equivalent net interest income was $325.7 million, rising $137.8 million sequentially, primarily from Sandy Spring contributions and merger-related accretion.
Loan Growth: Loans held for investment reached $27.3 billion at quarter-end, up $8.9 billion from the prior quarter; Assuming the Sandy Spring acquisition closed on March 31 instead of April 1, and excluding both the negative loan fair value marks on the acquired loans and the effect of the CRE loan sale, pro forma loan growth was approximately 4% annualized, above internal expectations.
Deposit Balances: Total deposits were $31 billion, increasing $10.5 billion from the prior quarter; adjusted for the acquisition close, pro forma deposits declined by $752.8 million due to intentional brokered and time deposit runoff.
Credit Quality: Net charge-offs were $6.666 million (one basis point annualized), and Nonperforming assets rose to 0.6% of loans, primarily from the newly acquired Sandy Spring portfolio.
Capital Ratios: CET1 capital ratio at quarter-end was 9.8%; bank-level commercial real estate concentration ratio was 284%.
Provision for Credit Losses: Provision for credit losses totaled $105.7 million, including a $100.9 million CECL day-one double count related to Sandy Spring; allowance for credit losses (GAAP) rose to $342.4 million (1.25% of loans held for investment).
Adjusted Operating Results: Adjusted operating net income to common shareholders was $135.1 million, or $0.95 per share; adjusted operating ROATCE was 23.8% and adjusted operating return on assets was 1.46%.
Efficiency Ratio: Adjusted operating efficiency ratio improved to 48.3%.
Dividends: Paid a common stock dividend of $0.34 per share. This amount represents an increase of 6.3% from the previous year's second quarter dividend.
Full-Year Guidance: Projected 2025 year-end loan balances of $28 billion–$28.5 billion and deposits of $31 billion–$31.5 billion; guidance for fully tax-equivalent net interest margin at 3.75%–4% for the full year, net interest income of $1.15 billion–$1.2 billion for the full year, and an allowance for credit losses to loans ratio expected to fall between 1.2% and 1.3% at year-end.
Expense Guidance: 2025 adjusted operating noninterest expense forecast is $670 million–$680 million, excluding estimated $60 million in intangibles amortization for the full year.
Branch Expansion: Plans to open 10 new branches in North Carolina from 2026 through 2028 and expand commercial, wealth, and mortgage teams in North Carolina starting in 2026.
SUMMARY
Atlantic Union Bankshares Corporation integrated Sandy Spring Bank one quarter ahead of schedule, materially increasing both loan and deposit bases and generating immediate merger-related financial benefits. The $2 billion sale of commercial real estate loans provided liquidity, improved the loan-to-deposit ratio, and reduced commercial real estate concentration, unlocking additional growth capacity. Adjusted return metrics reached high levels, including an adjusted operating return on tangible common equity of 23.8% and an adjusted operating efficiency ratio below 50%. Loan growth momentum was supported by a strong pipeline in both legacy and acquired markets, with management projecting continued organic expansion and highlighting Maryland and North Carolina as focal points for strategic growth. Deposit costs continued to decline while Loan yields increased to 6.48% from 6.01% in the prior quarter, contributing to the upward trend in net interest margin, with management emphasizing a gradual "grind higher" in the near term.
Key leadership transition was announced as Chief Financial Officer Rob Gorman disclosed his planned retirement, and a nationwide search for his successor is underway, with no anticipated changes to strategic direction or targets.
Management stated the Sandy Spring acquisition "provided us with significant growth opportunities in the large markets of Maryland and Northern Virginia," and enables accelerated investment in North Carolina expansion.
Rob Gorman said, we're still targeting a mid-40s efficiency ratio for 2026, inclusive of the investment we're making in the Carolinas. This guidance remains unchanged despite organic expansion plans.
Excess cash from the CRE loan sale will be used to pay down high-cost brokered deposits and reinvest in the securities portfolio, with $200 million–$300 million deposit runoff expected in the next quarter.
The company projects CET1 capital to continue rising by 25–30 basis points per quarter through internal capital generation. Share repurchases may be considered when CET1 capital ratio levels approach 10.5%–11%.
Commercial credit quality remained stable, with the increase in nonperforming assets "simply the Sandy Spring portfolio coming in," and Management characterized full-year net charge-off guidance as conservative, with allowance for specific problem credits.
Approximately 23% of total loans are in the Washington Metro Area; management highlighted resilience in these markets and noted recent record defense spending may benefit government contractor exposures.
Loan production is increasing in both C&I and stabilized CRE, with short sales cycles and growing borrower optimism reported late in the quarter.
INDUSTRY GLOSSARY
CECL (Current Expected Credit Loss): Accounting standard requiring estimation and recognition of all expected loan losses over the life of the asset at origination or purchase.
Net Interest Margin (NIM): Percentage measure of the difference between a bank's income from interest-bearing assets and its cost of funds relative to average earning assets.
ROATCE (Return on Average Tangible Common Equity): Ratio expressing earnings relative to average tangible (excluding goodwill and intangibles) common equity, used as a profitability and capital efficiency indicator.
CRE (Commercial Real Estate): Loan or asset category secured by commercial property, including office, retail, industrial, or multifamily real estate.
Pro Forma Loan Growth: Loan growth calculation adjusted for merger timing and significant portfolio transactions to reflect underlying organic expansion rate.
Full Conference Call Transcript
John Asbury: Executive Vice President and CFO, Rob Gorman, is 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 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 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. Now I'll turn the call over to John Asbury.
John Asbury: Thank you, Bill. Good morning, everyone. Thank you for joining us today. It was a productive and eventful quarter for Atlantic Union Bankshares, 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 26 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 fair loan value marks on the acquired loans and the effect of the commercial real estate loan sale, our loan growth was approximately 4% 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 billion and $28.5 billion, inclusive of the negative impact of loan fair value marks. Deposit growth 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, 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 0.6%.
The increase reflects AUB's more conservative approach to loan rating and marking under acquisition accounting as Sandy Spring's 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 fifteen and twenty 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, DC. These regions are highly attractive to operate in.
In the Greater Washington DC region, despite continuing headlines about government employee 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. 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. 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%. With 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?
Rob Gorman: 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 results for the second quarter. Here are some key data points related to the 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's second quarter financial results on a non-GAAP adjusted operating basis, which excludes the following items: the $89.5 million negative pretax impact of the CECL day one initial provision for credit loss expense on purchase noncredit deteriorated or non-PCD loans acquired from Sandy Spring represents the CECL double count of the non-PCD loan credit mark, and the $11.4 million negative pretax impact of provisioning expense on unfunded commitments acquired from Sandy Spring.
Also excludes pretax merger-related costs of $78.99 million in the second quarter, associated with the merger, and the $15.7 million pretax gain on the sale of $2 billion of CRE loan sales acquired in the Sandy Spring acquisition, as well as the $14.3 million pretax 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 $0.12.
Adjusted operating earnings available to common shareholders were $135.1 million or $0.95 per common share for the second quarter, resulting in an adjusted operating return on tangible common equity of 23.8% and 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, an increase of approximately $133 million from the first quarter, primarily due to the initial allowance related to the Sandy Spring 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, 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-PC 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 build in 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 $6.666 million 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 pretax pre-provision components of the income statement for the quarter. Tax equivalent net interest income was $325.7 million, 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%, 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 2.22% 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 accretion 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 Sandy Spring's 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 of 2.2%, partially offset by higher borrowing costs primarily due to increased long-term subordinated debt as a result of the Sandy Spring acquisition.
Noninterest income increased $52.3 million to $81.5 million for the second quarter, primarily driven by the $15.7 million pretax gain on the sale of the $2 billion of CRE loans, and the $14.3 million pretax 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 noninterest income increased $22.2 million for the first quarter to $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 the mortgage banking income increase of $1.8 million included the impact of Sandy Spring's 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 noninterest 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 noninterest expense due to the full quarter impact of the Sandy Spring acquisition.
Adjusted operating noninterest 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 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 noninterest 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 reevaluation of its state deferred 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 19.5% in the prior year, reflecting the impact of the Sandy Spring acquisition as Sandy Spring operated in higher state tax jurisdictions, now impacting a large proportion of the company's consolidated pretax income. At June 30, loans held for investment, net of deferred fees and costs, were $27.3 billion, an increase of $8.9 billion from the prior quarter.
John Asbury: Again, primarily driven by the Sandy Spring acquisition. Assuming the Sandy Spring acquisition closed on March 31 instead of April 1, 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 30, total deposits stood at $31 billion, 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 additional Sandy Spring acquired deposits.
Assuming the Sandy Spring acquisition closed on March 31 instead of April 1, pro forma deposits decreased $752.8 million or approximately 9.5% annualized from the prior quarter, primarily due to lower brokered deposits, which declined by approximately $340 million, as well as declines in time deposit balances of approximately $143 million as we intentionally allowed maturing higher-cost nonrelationship time deposits acquired from Sandy Spring to run off during the second quarter. At the end of the second 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 second quarter.
If you include the negative impact of AOCI and held-to-maturity securities unrealized losses in the calculation of the regulatory capital ratios. During the second quarter, the company paid a common stock dividend of $0.34 per share, an increase of 6.3% from 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 the 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 fifteen and twenty basis points. Fully tax-equivalent net interest income for the full year is projected to come in between $1.15 billion and $1.2 billion. As a result, we are projecting that the full-year fully tax-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 and December.
In addition, the fully tax-equivalent net interest margin projection includes the impact of our estimate of net accretion income from the Sandy Spring acquisition, which can be volatile and subject to change. On a full-year basis, adjusted non-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 excludes 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.
John Asbury: 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. It 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 by depository market share in both Maryland and Virginia, a feat we believe unprecedented and likely not replicable in our markets. Chapter three, 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. 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 Triad presence and Raleigh office, in addition to AUB's existing branches in the Outer Banks, our long-standing 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 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.
Bill Cimino: Thank you, John. And we're Jonathan, we're ready for our first caller, please.
Operator: Certainly. And our first question for today comes from the line of Russell Gunther from Stephens. Your question, please.
Russell Gunther: Good morning, Russell.
John Asbury: Hey, good morning, guys.
Russell Gunther: 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?
John Asbury: And as we think about your plans for the Carolinas as a piece of it, yeah. I think that, you know, we're in the Carolinas right now.
David Ring: 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 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 is your take in terms of what to expect?
David Ring: So in the back half of the year, we do have good momentum. Coming in, especially starting in June. It really started. And like John said, the pipeline is as strong as it's ever been. And so if you do the math, calculate your runoff and how fast your pipeline turns, we should be in good shape for the rest of the year.
Russell Gunther: Thank you, guys. And then maybe switching gears onto the expense outlook beyond what you've provided for this year and as you consider the Carolinas. I think pro forma for Sandy Spring, talked 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?
Rob Gorman: Yeah, Russell, this is Rob. Yeah, we're still targeting that mid-forty-five 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 still would reconfirm our thoughts on 2026 in terms of the metrics, return on assets in the one fifty range. ROTC, 20 plus percent. And then the efficiency ratio mid-forties, inclusive of the investment we're making down in the Carolinas.
John Asbury: 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, you know, 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-forties 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.
Russell Gunther: So we, you know, we think we are solidly in the forty-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 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 this 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.
Rob Gorman: Yeah. So if you look at the CET1 ratio, we're about 9.8% at the end of this quarter. We're looking at looking forward, we think that will continue to increase by about 25 to 30 basis 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, as we if we start to get up closer to 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 or second quarter of next year.
Russell Gunther: Okay. Great. Thank you both for taking my question.
John Asbury: Thanks, Russell. And, Jonathan, we're ready for our next caller, please.
Operator: Certainly. Our next question comes from the line of David Bishop from Hope Group. Your question, please.
David Bishop: Good morning, David.
John Asbury: Yes. Hey, good morning, John. Good morning, Rob. And congratulations, Rob, on the news. I'm just curious. From a credit quality perspective, John, maybe on the you know, you have the marks on the legacy Sandy Spring. But just curious what you saw from a credit quality perspective on a sort of legacy Union basis. Maybe sort of color on what happened on criticized classified and new NPA formation. Looks like it was pretty low, but just wanted to make sure I did the numbers right.
Doug Woolley: Yeah. I think the increase in NPA, as we stated, really was simply the Sandy Spring portfolio coming in. Overall credit looked quite stable. Doug Woolley is here, Chief Credit Officer. Doug, do you want to share a perspective on that?
Doug Woolley: Yeah. What John said, David, is that it's a reflection of our work on the Sandy portfolio. Rest of footprint looks fine. No, nothing material noticeable in the credit risk profile anywhere.
David Bishop: Got it. Then, John, I know in the past couple quarters, there have been some headwinds, especially within the GovCon 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?
John Asbury: 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, you know, 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 contracts finance has been, you know, we saw a lot of activity with private credit, you know, that was paying it down. But overall, you know, it looks pretty good.
Dave, do you have anything to add in terms of opportunities there?
David Ring: 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, you know, cash flows to make sure that those clients are able to pay, and the portfolio looks really strong.
John Asbury: Yep.
David Ring: Client selectivity matters. We've been in that business for fifteen years. Knock on wood. We've never had a charge-off. Not saying that will always be the case, but I think we're in the right segment.
David Bishop: 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.
Rob Gorman: 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, you know, our projections. So I would go with that. They could, you know, it could be volatile as you know, you know, it could be a car or prepayments and things of that nature, but we think the $45 million is a pretty good number to run with.
David Bishop: Great. Appreciate the color.
John Asbury: Thanks, Dave. And, Jonathan, we're ready for our next caller, please.
Operator: Certainly. Our next question comes from the line of Brian Wodzinski from Morgan Stanley. Your question, please.
Brian Wodzinski: Good morning, Brian.
John Asbury: 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?
David Ring: Dave, you want to take that?
David Ring: Sure. You know, the way I 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 buildup before tariffs would come across to them. 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 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 C&I business growing. And we're seeing that right now. But we expect that to continue.
John Asbury: 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 that 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, you know, the volatility and generally feeling more optimistic about where we go from here. And that and 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, yeah, we're looking at a reasonable growth trajectory for the remainder of the year.
Brian Wodzinski: That's really helpful. And then as a follow-up, 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 sources of funding? How much you can do there, and how quickly you can move on it. Thanks.
Rob Gorman: Yeah, Brian. So in terms of we've got about $1.6 billion of cash, which is about a billion dollars probably a billion one higher than we typically would have. That's 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 brokered deposits, and those are maturing in the third quarter. 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 into the investment portfolio. Probably about 500 million or so would be going into there.
You know, we're kind of laddering that in over this quarter. And then we're hoping that loan growth continues to be higher. 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.
Brian Wodzinski: And is it fair to assume that the loan-to-deposit ratio maybe ticks up a little bit from here?
Rob Gorman: Yeah. It likely will. I mean, we're comfortable in the 90 to 95%. That's historically where we run. We're 88 now, so you could see that tick up a bit higher as you pick up certainly take out the broker deposit numbers. Or take those down.
Brian Wodzinski: Got it. That's really helpful. Thank you for taking my questions.
John Asbury: Certainly. Thank you, Brian. Thanks, Brian. And we're ready for the next caller, Jonathan.
Operator: Certainly. Our next question comes from the line of Steve Moss from Raymond James. Your question, please.
John Asbury: Good morning, Steve.
Chase: Hey, guys. This is Chase on for Steve. Good morning.
John Asbury: It's good morning, Chase. How are you doing, Chase? Yeah. We know Steve's got a good excuse for not being on the call.
Chase: Yes. Thank you for reminding me. Yeah. 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 legacy SaaS or market separately? Thanks.
Rob Gorman: 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, we're at about the six and a quarter to six fifty. That's the back book fixed rate increase in pricing we're seeing. We got about a five ten average yield on those loans, and we're repricing it, as I said, the six and a quarter to six fifty range. So that's continued for the last several quarters. The same kind of range. So nothing really materially has changed there on the negative side.
Chase: Gotcha. And I see in your 2025 financial outlook slide that you have three cuts, rest of year baked in 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?
Rob Gorman: Yeah. So we did run we ran a scenario where we had no cuts, zero cuts, which could happen. And it's about a one to two basis point 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 reprice down. So I'll pick up a couple basis points that plays out into 2026, where we have three cuts in 2026. So if we delay those cuts, probably a three to four basis point, five basis point improvement in 2026 outlook.
Chase: Thanks for that. One last one for me. Now that you're actively working on integrating all of SaaS or what opportunities are you most excited about? Thanks.
John Asbury: I would say the and we've 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. Yeah. They're unconstrained in terms of their ability. We bring new products and capabilities, particularly on the commercial and industrial side. So 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, you know, 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?
Chase: When the stage is set, we should be able to deliver.
Chase: That's all for me. Thank you guys for all the color.
John Asbury: Thank you. Thanks, Chase. Thanks, Chase. And Jonathan, we're ready for our next caller, please.
Operator: Certainly. Our next question comes from the line of Catherine Mealor from KBW. Your question, please.
Catherine Mealor: Hi, Catherine. Good morning.
John Asbury: Hey, good morning. Maybe just one on the to but the way you were just talking about in terms of kind of C&I and growth in the DC market. Can you just talk a little bit about the opportunity for growth maybe in kind of two buckets in DC? I think maybe one in terms of bringing your kind of C&I product, maybe what kind of growth rate would you expect to see in C&I in some of Sandy Spring's 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 grow CRE, you know, as you build capital over time? Thanks.
John Asbury: Yes. Oh, certainly, Catherine. One thing I'll point out politely is that we don't think about it as the DC market. We think about it as the state of Maryland. Because Sandy was the Maryland bank, not the DC bank. We have two branches in DC. But far more than clarification.
Catherine Mealor: Yeah. Thank you. You know why I'm sensitive to that?
John Asbury: I do. I do. Yes. So state of Maryland and then, yeah, more broadly, Northern Virginia. We think we do have a great team up there, and we feel good about that team. And under Jay O'Brien's leadership, Dave, I think as we've looked at, you know, the size of the team and capabilities, you know, we feel pretty good. Do you have anything you would want to add to that?
David Ring: Yeah. We you know, when we look at the teams, we also look at their book sizes and 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 CRE side, you know, just remember, CRE 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.
John Asbury: Yeah. It's the beautiful part of the banking is as you manage those relationships, you get multiple opportunities.
David Ring: 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, you know, 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, you know, opportunities may come up over time with them. So I think it kind of reloads the opportunities for us.
And they're 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.
Catherine Mealor: And then maybe one follow-up just on the margin. Is it fair to 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 brokered that the margin just gradually kind of trends towards the higher end of the range?
Rob Gorman: Yes, Catherine. Reason is there I guess, what's the risk that we kind of stay stagnant in the margin near term? Maybe that's a way to put it.
Rob Gorman: 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, we're previously, we're in the four forties in terms of the CD rates paid. In new in maturing CDs going on in the three seventy-five to 4% range. We're kind of playing that out. There's probably another quarter's worth of that to bring down deposit cost. We'll continue to bring those deposit costs down as the Fed brings the 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, eight to 10 basis points, you know, per quarter. 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, three seventy-five to 4%. So as you go into the third and fourth quarter, you should see that a bit higher than where we are today.
John Asbury: Yes. The fact that we were sitting on $1 billion of cash at quarter-end because portfolio sales happened days before quarter-end. We didn't have the opportunity to deploy much of it. That sets up opportunity for sure.
Catherine Mealor: That's great. Okay. Thank you.
John Asbury: Great first of and I'll a great day. Appreciate it.
Catherine Mealor: Yep. And, Jonathan, we're ready for our next caller, please.
Operator: Certainly. We have a follow-up question from the line of Brian from Morgan Stanley. Your question, please.
Brian Wodzinski: 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, dollars 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?
Rob Gorman: Yeah. Brad, 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 the 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 we 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.
John Asbury: That's right. We don't have a line of sight to that, but we'll review it again after this quarter.
Brian Wodzinski: Got it. Thank you again.
John Asbury: 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.
Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.