Q3 2025 Atlantic Union Bankshares Corp Earnings Call
Speaker #2: Good day and thank you for standing by . Welcome to the Atlantic Union Bankshares third quarter 2020 Earnings Conference Call . At this time , all participants are in a listen only mode .
Speaker #2: After the speaker's presentation , there will be a question and answer session . To ask a question during the session , you will need to press star one one on your telephone .
Speaker #2: You will then hear an automated message advising that your hand is raised . To withdraw your question , please press star one . One again .
Speaker #2: Please be advised that today's conference is being recorded . I'd now like to hand the conference over to your speaker today , Bill Cimino , Senior Vice President of Investor Relations .
Speaker #2: Please go ahead .
Speaker #3: Thank you , Daniel , and good morning , everyone . I have a Union Bank shares . President and CEO John Asbury and executive Vice President and CFO Rob Gorman .
Speaker #3: 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 .
Speaker #3: Investors Atlantic Union Bankshares Corp . During today's call , we will comment on our financial performance using both GAAP and non-GAAP financial measures .
Speaker #3: Important information about these non-GAAP financial measures , including reconciliations to comparable GAAP measures , is included in the appendix to our slide presentation and our earnings release for the third quarter of 2025 .
Speaker #3: In our remarks on today's call , we will also make forward looking statements , which are not statements of historical fact and are subject to risks and uncertainties .
Speaker #3: There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward looking statements .
Speaker #3: 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 the 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 .
Speaker #3: Including factors that could cause actual results to differ from those expressed or implied in the forward looking statement . All comments made during today's call are subject to that safe harbor statement , and at the end of the call , we'll take questions from the research analyst community .
Speaker #3: Now , I'll turn the call over to John . Thank you . Bill . Good morning , everyone , and thank you for joining us today .
Speaker #3: Atlantic Union Bankshares delivered a solid third quarter while maintaining our focus on execution and integration of the Sandy spring acquisition . Our quarterly operating results illustrate the earnings potential of a company we envision while merger related costs continued to create a noisy quarter , we believe we are on a path to deliver on the expectations related to the acquisition of Sandy spring .
Speaker #3: For adjusted operating return on assets , return on tangible common equity and efficiency ratio in the Sandy spring , integration is progressing smoothly .
Speaker #3: Over the weekend of October 11th , we successfully completed our core systems conversion and closed five overlapping branches as planned . We are experienced acquirers and I want to recognize our outstanding and dedicated team for their commitment and diligence in executing this complex process .
Speaker #3: We have now unified Sandy spring Bank under the Atlantic Union Bank brand and operate as one integrated team . While some merger related impacts will persist in our fourth quarter results , we expect to enter 2026 having achieved our cost savings targets from the acquisition and with our enhanced earnings power visible on a reported basis , our commitment to creating shareholder value remains unwavering .
Speaker #3: We believe Atlantic Union is well positioned to deliver sustainable growth . Top tier financial performance and long term value for our shareholders . This advantages gained from the Sandy Spring acquisition , combined with continued organic growth opportunities , reinforce our status as the premier regional bank headquartered in the Mid-Atlantic .
Speaker #3: We have a robust presence in attractive markets, providing us with further growth opportunities. I will now summarize the key highlights from our third quarter performance and share insights into current market conditions before turning the call over to Rob for a detailed financial review.
Speaker #3: Here are the highlights from our third quarter quarterly loan growth was approximately 0.5% annualized in the typically seasonally slower third quarter . Notably , lending production increased modestly versus the second quarter .
Speaker #3: However , in the latter part of the quarter , an uptick in loan paydowns and a decline in revolving credit utilization from 44% to 41% offset some of the increased production average loan growth quarter over quarter was a good story , as 4.3% annualized .
Speaker #3: Our pipelines indicate we should have loan growth consistent with the seasonally strong fourth quarter . While forecasting loan growth remains challenging and the still uncertain economic environment we currently expect year end loan balances to range between 27.7 billion and 28 billion , inclusive of the negative impact of the fair value loan marks we paid down approximately $116 million in brokered deposits during the quarter and continued to reduce higher cost non-relationship deposits from the Sandy spring portfolio by moving quickly to lower our deposit rates , we anticipate further improvement in our cost to deposits in the fourth quarter .
Speaker #3: We were pleased to see approximately 4% annualized growth in non-interest bearing deposits in the third quarter . Our reported FTE net interest margin remained steady at 3.83% , reflecting a modest decrease in accretion income quarter over quarter .
Speaker #3: As a reminder , some quarterly fluctuation and accretion income is to be expected . Importantly , if you exclude the impact of accretion income , our net interest margin improved compared to last quarter .
Speaker #3: I'd also like to point out the strength we saw in fee income , especially with the interest rate swaps and in wealth management opportunities in both lines were augmented by the Sandy spring acquisition .
Speaker #3: And during the quarter , approximately 1 million of swap income is attributed to the former Sandy spring Bank . Sandy Spring did not offer interest rate swaps for the acquisition , and we believe it will provide upside to the combined entity going forward .
Speaker #3: Overall , credit quality improved despite an increase in charge offs , largely driven by two commercial and industrial loans that have been partially reserved for in prior quarters .
Speaker #3: One was the larger credit first disclosed in the fourth quarter of 2024 , involving a borrowing base , misrepresentation , ongoing uncertainty in its resolution led us to charge off the remaining balance of approximately 15 million .
Speaker #3: In addition to the previously incurred specific reserve of 14 million leading asset quality indicators are encouraging third quarter non-performing assets as a percentage of loans held for investment remained low at 0.49% .
Speaker #3: Past dues remain low and criticized asset levels improved by more than $250 million , or 16% , which brings criticized loans as a percentage of total loans down to 4.9% at the end of the third quarter , from 5.9% at the end of the second quarter .
Speaker #3: As typical, we'll present more details in our third quarter 10-Q filing. We do remain confident in our asset quality and reaffirm our forecast for the full year 2025.
Speaker #3: Net charge off ratio to be between 15 and 20 basis points , in line with prior guidance in the Greater Washington , D.C. region .
Speaker #3: Recent headlines have focused on government employment reductions and the government shutdown . However , we believe both our economic data and on the ground observations indicate resilience in the market .
Speaker #3: Atlantic Union maintains a well portfolio with approximately 23% of total loans in the Washington metro area , and the remaining 77% across our broader footprint .
Speaker #3: The exposures that prompt the most inquiries are government contractors and office buildings in the Washington metro area . Updated disclosures on these segments can be found on pages 21 through 23 of our supplemental presentation .
Speaker #3: And these portfolios are performing well . Our government contractor finance portfolio is predominantly focused on national security and defense . We believe these businesses are well positioned , supported by a record high defense budget and ongoing defense modernization efforts .
Speaker #3: Government shutdowns are not new to us , with more than 15 years in the specialty , we have seen many , most contractors we finance provide essential services and have historically continued to operate during shutdowns .
Speaker #3: Typically, we are drawing on lines of credit to maintain payroll and repaying those lines when government funding resumes. We’re certainly monitoring the shutdown and its duration more broadly.
Speaker #3: August unemployment rates for Maryland and Virginia stood at 3.6% , well below the national average of 4.3% . And among the lowest for states with larger populations .
Speaker #3: Official government September data is not yet available due to the shutdown . While we anticipate some increases in unemployment rates across our markets , we expect this to remain manageable and below the national average , consistent with the current Moody's state level forecast .
Speaker #3: With the Sandy Springs systems conversion now behind us , strong pipelines and expanded footprint and attractive markets , specialty lines and increased investment in North Carolina .
Speaker #3: We believe we are well positioned for continued organic growth . In summary , it was a good quarter as we continued our focus on disciplined execution and the integration of Sandy spring this quarter also marks my ninth year with the company .
Speaker #3: Over this time , we have intentionally and carefully built the distinctive and uniquely valuable franchise that we envisioned and our strategic plan and have consistently communicated for years .
Speaker #3: We have done what we said we'd do and establishing the banking platform we set out to create with this foundation in place , we believe we are well positioned to capitalize on the expanded markets gained through the Sandy spring acquisition .
Speaker #3: Continue our growth in Virginia and pursue new organic growth opportunities in North Carolina and across our specialty lines . We are set up well to demonstrate the organic earnings power of the franchise .
Speaker #3: We have worked so hard to build on a reported basis , absent merger related noise in 2026 . And that's what we intend to do .
Speaker #3: Looking ahead , our focus remains on delivering sustainable top quarter performance relative to our peers and creating long term value for our shareholders .
Speaker #3: With that , I'll turn the call over to Rob for a detailed review of our quarterly results . Results . Before opening the call for questions .
Speaker #3: Rob .
Speaker #4: Thank you , John , and good morning , everyone . I'll now take a few minutes to provide you with some details of Atlantic Union's financial results for the third quarter .
Speaker #4: I commentary today will primarily address Atlantic Union's third quarter financial results , presented on a non-GAAP adjusted operating basis , which excludes $34.8 million in pre-tax merger related costs from the spring acquisition and a $4.8 million pre-tax loss recorded in the third quarter for the final CRE loan settlement related to the approximately $2 billion of Sandy spring acquired CRE loans that we sold in the second quarter .
Speaker #4: As a result , the final net pre-tax gain from the CRE sale interaction was $10.9 million . That said , in the third quarter reported net income available to common shareholders was $89.2 million and earnings per common share were $0.63 .
Speaker #4: Adjusted operating earnings available to common shareholders were $119.7 million , or $0.84 per common share , for the third quarter , resulting in an adjusted operating return on tangible common equity of 20.1% and adjusted operating return on assets of 1.3% and an adjusted operating efficiency ratio of 48.8% .
Speaker #4: In the third quarter . Turning to credit loss reserves at the end of the third quarter , the total allowance for credit losses was $320 million , which is a decrease of approximately $22.4 million from the second quarter , primarily driven by the net charge off of two individually assessed commercial industrial loans that were partially reserved for in the prior quarter .
Speaker #4: As John noted , as a result , the total allowance for credit losses as a percentage of total loans held for investment decreased to 117 basis points .
Speaker #4: At the end of the third quarter , down from 125 basis points at the end of the prior quarter . That charge offs increased to $38.6 million , or 56 basis points annualized in the third quarter , from $666,000 , or only one basis point annualized in the second quarter , primarily due to the net charge off of the two commercial industrial loans that we've discussed .
Speaker #4: This brought the annualized net annualized year to date net charge off ratio through the third quarter to 23 basis points . Although we are maintaining our full year net charge off ratio guidance to be in the 15 to 20 basis point range .
Speaker #4: Now , turning to the pre-tax pre-provision components of the income statement for the third quarter tax equivalent net interest income was $323.6 million .
Speaker #4: That's a decrease of $2.1 million from the second quarter , primarily driven by lower interest income on loans held for sale due to the impacts of the sale of approximately $2 billion of performing CRE loans at the end of the second quarter and lower net accretion income , partially offset by lower borrowing costs and higher investment income .
Speaker #4: As we use proceeds from the CRE loan sale to pay down short term borrowings and broker deposits , and to purchase additional investment securities .
Speaker #4: In the third quarter . As John noted , the third quarter tax equivalent net interest margin remained at 3.83% as lower earning asset yields were fully offset by declines in the cost of funds earning asset yields for the third quarter declined by five basis points to 6% , compared to the second quarter , due primarily to lower accretion income and the impacts from the CRE loan sale , which resulted in a decrease in average loans held for sale balances and an increase in lower yielding cash and investment average balances .
Speaker #4: The cost of funds declined by five basis points in the third 1:45 .17 percent , primarily due to the impact of the four basis point drop in the cost of interest bearing liabilities to 2.93% from 2.97% in the second quarter , driven by lower average short term borrowings and brokered deposit balances , as well as lower customer time deposit rates .
Speaker #4: Non-interest income decreased $29.7 million to $51.8 million for the third quarter, primarily driven by the $15.7 million preliminary pre-tax gain on the CRE loan sale in the prior quarter, compared to a $4.8 million pre-tax loss in the third quarter of 2025.
Speaker #4: Related to the final CRE loan sale settlement accounting , as well as by the 14.3 million pre-tax gain on the sale of our equity interest in Kerry Street Partners , which was recorded in the second quarter .
Speaker #4: Adjusted operating non-interest income , which excludes the pre-tax loss and gain on the CRE loan sale in both quarters . The pre-tax gain on the sale of our equity interest in Cary Street Partners in the second quarter , and pre-tax gains on sales of securities in both quarters increased $5.1 million from the second quarter to $56.6 million , primarily due to a $4.2 million increase in loan related interest rate swap fees due to higher transaction volumes , and a $1.2 million increase in other operating income , primarily due to an increase in equity method investment income .
Speaker #4: These increases were partially offset by a $2.2 million decrease in bank owned life insurance income due to death benefits of $2.4 million . That was received in the second quarter .
Speaker #4: Reporting non-interest expense decreased $41.3 million to $238.4 million for the third quarter , primarily driven by a $44.1 million decline in merger related costs associated with the Sandy spring acquisition .
Speaker #4: Adjusted operating non-interest expense , which excludes merger merger related costs in the second and third quarters , and the amortization of intangible assets in both quarters .
Speaker #4: Increased $3.1 million to $185.5 million for the third quarter , primarily due to a $1.3 million increase in marketing and advertising expense and $966,000 increase in professional services .
Speaker #4: Expenses related to strategic projects , $874,000 increase in other expenses , primarily due to an increase in other real estate owned and credit related expenses and an $800,000 increase in occupancy expense .
Speaker #4: These increases were partially offset by a $1.6 million decrease in salaries and benefits expense , primarily driven by reductions in full time equivalent employees and lower group insurance expenses , which was partially offset by an increase in variable incentive compensation expenses .
Speaker #4: As September 30th , loans held for investments , net of deferred fees and costs , were $27.4 billion . That was an increase of $32.8 million from the prior quarter , while average loans held for investment increased $291,000,000.8 million , or 4.3% annualized from the prior quarter on September 30th .
Speaker #4: Total deposits stood at $30.7 billion , a decrease of $306.9 million , or 3.9% annualized from the prior quarter , primarily due to declines of $256.3 million in interest bearing customer deposits and $116.1 million in brokered deposits .
Speaker #4: This was partially offset by an increase of $65.5 million in demand deposits . The end of the third quarter , Atlantic Union Bankshares Corp Atlantic Union Bank's regulatory capital ratios were comfortably above well capitalized levels in addition , on an adjusted basis , we remained well capitalized as of the end of the third quarter .
Speaker #4: If you include the negative impact of Aoci and held the maturity securities unrealized losses in the calculation of the regulatory capital ratios during the third quarter , the company paid a common stock dividend of $0.34 per share , which was an increase of 6.3% from the previous year's third quarter dividend amount .
Speaker #4: As noted on slide 16 , we've updated our full year 2025 financial outlook for AUB and have also provided our financial outlook for the fourth quarter .
Speaker #4: Please note that the financial outlook for 2025 and the fourth quarter include preliminary estimates of purchase accounting adjustments with respect to the Sandy spring acquisition that are subject to change .
Speaker #4: We now expect loan balances to end the year between $27.7 billion and $28 billion by year end deposit balances are projected to be between $30.8 billion and $31 billion , driven by mid-single digit annualized growth in loans and low single digit annualized growth in deposits .
Speaker #4: In the fourth quarter , fully tax equivalent with net interest income for the full year , is projected to come in between $1,000,000,160 million and $1,000,000,165 billion , or million dollars .
Speaker #4: If we are targeting the fourth quarter , fully tax equivalent net interest income run rate to fall between $325 million and $330 million .
Speaker #4: 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 3.8% for the full year and between 3.85% and 3.9% in the fourth quarter , driven by our baseline assumption that the Federal Reserve Bank will cut the fed funds rate by 25 basis points in October and December , and that term rates remain stable .
Speaker #4: In addition , the projected fully tax equivalent net interest margin ranges include the impact of our estimate of the net increase in income from the Sandy spring acquisition , which are volatile and subject to change on a full year basis .
Speaker #4: Adjusted operating non-interest income is expected to be between 185 and $190 million , and we are targeting the fourth quarter adjusted operating non-interest income run rate to fall between $50 million and $55 million .
Speaker #4: Adjusted operating non-interest expenses for the full year are estimated to fall in the range of 675 to $680 million , while the fourth quarter adjusted operating non-interest expense run rate is expected to be between 100 and $83 million and $188 million , based on these projections , we expect to produce financial returns that will place us with in the top quartile of our peer group on an operating basis and meet our objective of delivering top tier financial performance for our shareholders .
Speaker #4: In summary , Atlantic Union delivered solid operating financial results in the third quarter . We continue to be on track and confident that we will achieve the anticipated financial benefits of the combination with Sandy spring .
Speaker #4: 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 .
Speaker #4: I'll now turn the call over to Bill to see if there are any questions from our research analysts community .
Speaker #3: Thanks , Rob and Daniel . We're ready for our first caller . Please .
Speaker #2: As a reminder to ask a question , please press star one . One on your telephone and wait for your name to be announced .
Speaker #2: To withdraw your question , please press star one . One again . Please stand by while we compile the Q&A roster . Our first question comes from Russell Gunther with Stephens .
Speaker #2: Your line is open .
Speaker #3: Hi , Russell . Hey .
Speaker #5: Good morning guys . Hey , John . Good morning guys . First question for me is on the loan growth front . I appreciate your guys thoughts in terms of what transpired this quarter in the mid-single digit outlook for next , I'm wondering is that mid-single digit a sustainable outcome for 2026 based on where pipelines and investor sentiment stands today .
Speaker #5: And as you look out , is a high single digit a possibility on this larger pro forma balance sheet ? And I guess an adjacent question , John , I think you mentioned , you know .
Speaker #5: Whether it's an increased appetite or expectation for growth within specialty lines . So I'd be curious if you could expand upon that as well .
Speaker #3: Sure . To answer your questions . We do expect at this point mid-single digit loan growth on the total company for next year , based on past experience .
Speaker #3: We certainly believe that we're capable of doing high single digit loan growth . And what I will refer to as a more normalized environment , assuming we see such a thing again , which I think we will eventually .
Speaker #3: But there's still a lot of uncertainty out there . Obviously . And we do see strength in our specialty lines . And as part of our strategic planning process and as a reminder , we're going to do an investor Day in early December , and we'll take you into more detail .
Speaker #3: You know , we continue to look at additional opportunities to further grow and expand our specialty lines , such as equipment , finance and others .
Speaker #3: Dave , do you have anything to add to that ? Yeah , I mean , we're still seeing production for new client acquisition .
Speaker #4: And . growing at the .
Speaker #3: Slightly higher rates , 35% of our production this quarter came .
Speaker #6: From new clients coming into the bank . You know , that's a great trend and positive momentum . The pipelines at Sandy spring , now that they've been converted here since April 1st , have grown dramatically .
Speaker #6: You know , three , 3 or 4 fold . And our pipeline within the legacy Bank is higher than it normally is as well .
Speaker #6: So , you know , if pull through is what we expect it to be , we think we'll have a good , solid fourth quarter .
Speaker #3: Yeah . And so as you saw our loans averaged up 4.3% Q over Q , which is good . But what really happened is in the back half of the quarter , you know , we saw Paydowns , which are always an issue to some extent .
Speaker #3: But the line utilization drop was kind of what really hit us toward the end of the quarter . And that should come back over time .
Speaker #5: Thank you guys . I appreciate that . And then just last question for me , switching gears a bit onto the expense outlook , I appreciate your thoughts on where I thought you could shake out , and I believe you guys mentioned cost savings for Sandy .
Speaker #5: Spring will fully be in the run rate in early 2026, so I just wanted to circle back to what was, I believe, the efficiency guide for the pro forma franchise.
Speaker #5: About 45% , excluding amortization expense , is that still on the cards for 2026 ? And as it relates to the expense side of the house , how are you guys thinking about keeping a lid on the absolute expense base as you were organically build out North Carolina over the next few years ?
Speaker #4: Yeah . Russell , I'll take that one . Yeah , we still we're of course , in the middle of our 2026 planning process .
Speaker #4: But we fully expect to see mid-single digits, mid-40s on the efficiency ratio, inclusive of the investments in the North Carolina franchise coming out of the.
Speaker #4: You see our guide in the fourth quarter, $183 to $188 million. If you annualize that, add some inflation to that, and account for additional costs associated with North Carolina.
Speaker #4: You know , we should be flat year over year if you're pro forma first quarter , if you include the first quarter run rate for Sandy spring in 2025 , should be flattish , which would basically be able to provide us with a mid 40s efficiency ratio .
Speaker #4: So feel good about that . Of course , you know , if we don't see the revenue come in , you know , the other part of that is , you know , revenue growing , you know , high single digit level going into next year .
Speaker #4: If we don't see that , we're obviously focused on positive operating leverage . So we would we would take some actions on the expense side , maybe have to delay some things .
Speaker #4: But at this point in time , we don't anticipate that happening .
Speaker #5: That's really helpful , John , thank you very much , Rob . I appreciate it , guys . Thanks for taking my questions .
Speaker #3: Thank you . Thanks , Russell and Daniel for our next caller . Please .
Speaker #2: Our next question comes from Stephen Scouten with Piper Sandler . Your line is open .
Speaker #3: Good morning Steve .
Speaker #4: Steve .
Speaker #5: Hey , good morning .
Speaker #7: Guys . Hey , Rob , I wanted to just follow back on that expense messaging you just gave there . So if we're looking at 190 million .
Speaker #7: And then you said add North Carolina , add inflation , and then it should be flat from there . Or is there a baseline like of A1Q 26 kind of all in I'm assuming all cost saves out kind of run rate .
Speaker #7: You can you can give us as a starting point .
Speaker #4: Yeah . So what I would say is it's probably it's probably about the 100 and 90 give or take level would be a good , good run rate for going forward on , you know , excluding any of the related or amortization of intangibles .
Speaker #4: That's how we're kind of looking at it . So you got call it a 185 ish run rate add . You know , another five or so annualize that for for those items that we talked about inflation , etc.
Speaker #4: should be pretty good run rate .
Speaker #7: Got it. And that, and that one key 26 run rate should encapsulate all the Sandy Spring costs at that point in time, correct?
Speaker #7: Yeah , yeah yeah .
Speaker #4: So yeah , we won't we won't see it all in the in the fourth quarter because there's , you know we just finished the conversion .
Speaker #4: There's cleanup going on . There's some related systems disengagement that's happening . We've still got , you know , some duplicate costs there .
Speaker #4: So those all come up by the end of the fourth quarter .
Speaker #7: Got it . Got it . Okay . And on the John you noted there were higher level of pay downs than I think you guys noted in the press release to lower line utilization there at quarter end .
Speaker #7: Do you have any data in terms of kind of what pay down levels were this quarter ? Maybe versus any prior quarters and kind of , you know , what would lead you to believe that maybe that pay activity would would slow a bit , or is the better growth ?
Speaker #7: Not so much about pay down levels slowing , but but production levels continuing to ramp higher ?
Speaker #3: Yeah , I think it's probably more about production levels continuing to ramp higher . And let's see , I'll call on Dave Ring here who leads all our commercial businesses .
Speaker #3: But Dave , we've you know , we've seen for a while higher levels of pay downs . But as I think about Q3 versus Q2 , I don't think it was out of line .
Speaker #6: No , no production in both quarters was very close . It was a little higher this quarter than last quarter . Pay downs were relatively the same .
Speaker #6: Yeah . Over the quarter , you know , they're just more players right now in our markets . And we're going to see some of the pay activity that we're seeing today probably throughout the rest of the year and into next year .
Speaker #6: But we're relying on higher production costs . .
Speaker #3: And so often on pay downs , you'll see commercial real estate that is sold or refinanced into the institutional non-recourse term . Markets like some of the Fannie or Freddie programs , for example , for multifamily .
Speaker #3: And the pullback that we've seen in term yields tends to create more of that . But we feel good about , the overall setup .
Speaker #7: Got it . And then last thing for me just around the the margin obviously the low end of that range kind of remained at the 3.75 .
Speaker #7: But obviously the range was tightened kind of removing some theoretical upside . There . What kind of changed quarter over quarter , that kind of takes that higher level off the table ?
Speaker #7: Is it just where we ended up here in the third quarter , or is it more rate cuts being baked in or kind of lend any color there to what's leading to that ?
Speaker #7: Yeah .
Speaker #4: It's more about where we came out in the third quarter , kind of dialed back some of the impacts of the accretion income in the fourth quarter .
Speaker #4: That would have been driving up , you know , it could be higher on the higher end . So we dial that back a bit , but we feel like on the core basis , we should we should see some expansion .
Speaker #4: That's why we're guiding to 385 to 390 in the in the fourth quarter . So it's a bit higher than what we came in at 383 in the third quarter .
Speaker #4: But that 375 to 380 is is for the full year . Stephen . So that that's kind of where we are . So it's going to we see it going up but not quite as much as we had anticipated .
Speaker #4: We had a 375 to 4% coming into this year . But accretion hasn't been coming in as high as we were expecting .
Speaker #3: Yeah , it's it is somewhat difficult to predict that with great precision because it's influenced , as you know , by payoffs and that sort of thing .
Speaker #3: And so you'll see a little bit of volatility . And obviously as we get a few more quarters under our belt , we'll have a better sense for the sort of what to expect .
Speaker #3: But there's always an element of fluctuation in that , be it up or down .
Speaker #7: Yeah . No doubt all this modeling is a little bit a little bit science . So definitely .
Speaker #3: That's correct .
Speaker #7: Stephen . Okay .
Speaker #4: Thanks , Stephen .
Speaker #3: Daniel . Ready for our next caller , please .
Speaker #2: Thank you. Our next question comes from Catherine Mueller with KBW. Your line is open.
Speaker #3: Hi .
Speaker #8: Good morning. Hi. My question is just back to the margin, maybe just getting into the pieces of it on the deposit side.
Speaker #8: As we think about another couple of rate cuts , I think if you as assets . But Sandy spring lessons that a little bit .
Speaker #8: Right . And so then as we think about Nim expansion over the next few quarters , even with rate cuts , help us think about first on the deposit side , how much room do you think you can lower deposit costs to keep the margin kind of in that that level .
Speaker #8: And then secondly , if you could give us just some color on on new loan yield rates and kind of where you're seeing where you think loan yields go outside of some of the purchase accounting noise , thanks .
Speaker #4: So , Catherine , we think we have a lot of room on the deposit cost side as the fed gives us cover and continues to lower rates .
Speaker #4: We're expecting , you know , obviously we saw 25 basis point cut in September expecting one late October . And then in December just to give you a perspective on that , we had about $13 billion of deposits that repriced pretty quickly following that , that cut like an 85 basis of that , of that population , about 85% betas , the good news that we're seeing is on the deposit side , we can lower rates pretty quickly .
Speaker #4: We're talking probably mid 50s betas on interest bearing deposits and mid 40s through the cycle on total deposits . If you look at the , you know , the short term rate changes we just made , those those pretty much offset the variable rate .
Speaker #4: Note loan book that we have , which is about , you know , $1,314 billion . So those kind of are offsetting each other in terms of reducing or having the impact of lower yields on the loan side versus lower deposit costs .
Speaker #4: So the real impact as we go forward here , in terms of looking for a core margin expansion , is what's what's happening with term term loans in the back book , fixed rate and new loans coming on , what rates are those coming on ?
Speaker #4: We think, as a result of our, you know, average portfolio yields of, you know, call it 5, 10 to 5, 15 on our fixed loan portfolio today, repricing in the call it 6, 10 to 6, 20 range in the last quarter.
Speaker #4: We should be able to see a pickup in terms of the core margin , primarily due to lower deposit costs , lower variable rate loan yields , offset by higher fixed rate loan yields .
Speaker #8: Okay . That's awesome . Thank you . And then my second question is just on credit I know you were you didn't like having these two losses this quarter .
Speaker #8: Just kind of curious if you could give just a broader perception of of the of any other credit trends you're seeing within the portfolio ?
Speaker #8: I think there's , you know , especially within D.C. and just kind of the health of the Sandy spring portfolio , now that you've got a couple quarters under your belt with that portfolio , does any kind of credit , additional credit commentary would be helpful just to try to figure out whether those two were isolated events or if there's anything else we should be aware of happening within the portfolio .
Speaker #3: Yeah . Those are those are certainly the two that you saw that had specific reserves . One of them was partially reserved , and it was just an unusual situation that both actually were identified in .
Speaker #3: Partial reserves were taken in Q4 of last year , one , in the end , was fully reserved , actually slightly more than the ultimate resolution .
Speaker #3: The other just due to ongoing uncertainty . We elected to charge the rest of it off as we work to maximize recovery . So that's , you know , totally unrelated .
Speaker #3: Broadly speaking , the overall credit trends look good . You can see that on our numbers . You can see obviously , you know , .49 non performing assets as a percentage of the total loan book is pretty good .
Speaker #3: Number pass is down . Criticized down . And we feel pretty good . You know obviously we're well aware of all the headlines that go on in the greater Washington region .
Speaker #3: But we're hard pressed to point to any real problems as a result of that . You know , the client base is actually quite resilient .
Speaker #3: So we feel pretty good about it . Doug , anything you would add now that all .
Speaker #4: The leading indicators of those kinds of big .
Speaker #3: Problems .
Speaker #4: All with very good and and moving .
Speaker #3: In the right direction , like John said , criticised noticeably lower since the second quarter . Past dues . continue to be low .
Speaker #3: So we all feel very good about where we are . Obviously , we're paying attention to what's .
Speaker #4: Going on in .
Speaker #3: And around DC with the shutdown , but we just don't .
Speaker #4: See any weakness anywhere .
Speaker #3: We'll be prepared for anything. Supporting.
Speaker #4: Customers and whatnot .
Speaker #3: That was Chief Credit Officer Doug Willie .
Speaker #8: Great . Was it fair to say the D.C. noise is maybe more of a growth issue than a credit issue ?
Speaker #3: Yeah , I would say so . I do think that it impacts , you know , confidence to some extent . But as Dave pointed out , the pipelines are growing .
Speaker #3: And you've heard me make this point before . Don't think of us as a D.C. bank . About 23% of the total portfolio would be in the broad greater Washington metro area .
Speaker #3: But Sandy itself was , is , and always has been . You , the Bank of Maryland . And we we are seeing opportunities there .
Speaker #3: So overall , you know , we think that , you we're on the right spot . As you know , we do not finance large office buildings , which definitely could be problematic .
Speaker #3: And from a government contract finance standpoint , I would expect to see more opportunity there over time since it's mostly focused on national security and defense and even interestingly , we were talking to the head of government contract finance yesterday .
Speaker #3: Even with the government shutdown , because the Defense Department is still operating , we're seeing contracts awarded , like right now . So we we do feel pretty good .
Speaker #3: About the the opportunity there over time . But yeah , I think it does put a damper on growth , particularly as it relates to commercial real estate investment .
Speaker #3: But it's very submarket specific as well . Even in that greater metro D.C. area .
Speaker #8: Helpful caller . Thank you .
Speaker #3: Thanks, Catherine and Daniel. Ready for our next caller, please.
Speaker #2: Thank you . Our next question comes from Janet Lee with TD Cowen . Your line is open .
Speaker #3: Janet , welcome . We're glad . Thank you for picking up coverage on us . .
Speaker #9: Of course . Good morning . Thanks for thanks for having me . I believe you guys touched on it a little bit . Apologies if I missed it .
Speaker #9: So are you . You're attributing all of the the loan decline that you saw on the CNI side to lower utilization and basically , are you also inferring to the loan growth coming back in that mid-single digits as the utilization picks back up seasonally in the fourth quarter to the mid-single digits range ?
Speaker #9: Or is that more so in a typical environment , you'd be a mid-single digits to high single digit grower .
Speaker #3: Yeah , I wouldn't say all of it was a result of the reduced line utilization , but that was a material number contributing toward that .
Speaker #3: And I think it's they bring you have to weigh in here . From my standpoint , we've got the pipeline right now to support the targets that we laid out , which , you know , are roughly mid-single digit loan growth based on what we're seeing in Q4 .
Speaker #3: So that's not really predicated on a reversal . In line utilization , although that would be helpful . Is that accurate ? Yeah , we're we're we .
Speaker #6: Have the pipeline to it's just pull through . We just have to pull it through and sometimes it takes longer than others and things creep into other quarters .
Speaker #6: But we have the pipeline that will that implies that .
Speaker #3: Dave makes a good point. We actually had some financings that were slated and expected to have closed in Q3 that did not.
Speaker #3: And we're seeing that come through now . We're actually off to a pretty good start in Q4 .
Speaker #9: Got it . Now that's a helpful color . So and on a core basis , I guess you're not guiding to 2026 . But should I think of the core Nim trajectory based on your comment as being able to stay stable as rates come down with an upward bias , if the yield curve steepens , or would it be a a sort of board pressure given your sensitivity profile , how should I think about that ?
Speaker #4: Yeah , the way we're thinking about it is we think there's there's opportunity for core expansion . You know , give or take , you know , you know , low single digits per quarter .
Speaker #4: That's predicated on that . The fixed rate loan portfolio back book and new fixed loans coming on are repricing higher . You know , call it 100 or so basis points higher .
Speaker #4: So that really depends on where term rates go . So if we do have a steeper curve that would be very helpful to to to that projection .
Speaker #4: If it goes if it increases more that would be more beneficial . So we are calling for in our baseline for the fed to cut two times here in the remainder of this year , two times next year .
Speaker #4: But we do expect to see some expansion in the margin again , not material . If term rates were to drop materially from really looking at call it the five year term rate , we could see some some contraction in that that projection that I'm talking about , you know , either flat margin or it could be down depending on the , the , the term rate structure .
Speaker #4: .
Speaker #3: And we are certainly less asset sensitive than we used to be . Sandy is a bit of a natural hedge . And as you can see on slide 11 of the supplemental presentation where we break out the drivers of net interest margin change to Rob's earlier point , the interest margin actually went up Q over Q .
Speaker #3: It was really just fluctuation and accretion that caused the reported net interest margin to be stable .
Speaker #9: Thank you . If I could just ask one more question for , for for those of us , including myself , who's newer to the name , so you made it clear that you know , the government contractor finance group is doing fine .
Speaker #9: I mean , it's more security , like national security and defense . Focus . Are more protected . They're if the government shut down is prolonged , hopefully not .
Speaker #9: But if it does get extended , like what would you be . In what way could it or could it impact you the most in terms of like , what would you be most worried about ?
Speaker #9: Is it the consumers in your the consumer customers in your market , or is it just , you know , lower commercial activity ?
Speaker #9: Could you just elaborate on on what would you be most worried about ? Or maybe not ?
Speaker #3: Yeah , sure . The government contractors should be fine . We have lived through many shutdowns before . The longest shutdown was 35 days .
Speaker #3: In the first Trump administration . We've never had an issue as it relates to government shutdowns . They have to wait to be paid .
Speaker #3: But most of them are doing essential services . And so they will continue to work as indicated . Normally , what we would expect to see them do is they'll draw on their lines as they await payment .
Speaker #3: It creates a timing difference to the extent that we have any that are working on non-essential services. What they do, it's a variable cost structure.
Speaker #3: They would furlough workers . You're already seeing that in some cases up there . So I think broadly , you know , it certainly , you know , could sort of I guess I would say further slow things down .
Speaker #3: You know , we should be fine . The one thing we can , the only thing we can say with certainty is the US government will reopen .
Speaker #3: That will happen . The question is how long it's going to take . You know , interestingly , I was just looking at some data as of end of day yesterday , we had had 55 zero .
Speaker #3: Consumers . You know , contact us , wanting to talk about some sort of potential relief because they've been impacted . And the most common thing that you would see might be a payment deferral or a fee deferral .
Speaker #3: And that's that's on the consumer side . And we're very happy to work with customers . You know , if there's any sort of event , whether , you know , like like this in that region .
Speaker #3: So we we do not have any reason at this point in time to be particularly concerned about it .
Speaker #9: Thank you . That's very helpful .
Speaker #3: Thanks , Janet . And Dan , you're ready for our next caller . Please .
Speaker #2: Thank you . Our next question comes from Brian Wolczynski with Morgan Stanley . Your line is open .
Speaker #3: Hi , Brian .
Speaker #10: Hi . Good morning . Maybe just sticking with the loan growth . I think during your prepared remarks , you talked a little bit about higher competition that you saw in the third quarter across some of your markets .
Speaker #10: I was wondering if you could give some more detail on that , where it's coming from and just what you're seeing broadly .
Speaker #3: Yeah , we're certainly accustomed to competition . I'm a 38 year commercial banker by background , and I don't ever remember a time when it's not been competitive , at least for the better credits , which is the types of things that we do .
Speaker #3: We sometimes see other banks kind of turn it on and turn it off, which we've never done. We've always been a consistent provider of capital, and that's part of how we differentiate ourselves in the marketplace.
Speaker #3: We are definitely in a turn it on environment right now , where some who had pulled back or fully opened for business , you know , we see that show up in terms of an element of pricing pressure .
Speaker #3: Not that we've ever been the low cost provider , but it's , you know , it's the banks are eager for business . Dave , anything to add ?
Speaker #6: I mean , in the first couple of quarters , we were impacted a bit by private credit .
Speaker #3: Particularly in the government contractor space . Yeah .
Speaker #6: Competitor and some of the specialty businesses . But that's slowed down a little bit , frankly . And it's really the traditional banks coming back in turning it on again .
Speaker #6: Like John said, one of the things we're very proud of is that we're consistently in the market. We don't turn it on and turn it off.
Speaker #6: And, but we're seeing some of those banks come back in and turn it on.
Speaker #10: That's really helpful . And then maybe just on Sandy spring , you mentioned that the integration is now complete . I was wondering if you could talk a little bit more about some of the revenue related synergies .
Speaker #10: I think you mentioned briefly that that swap income was higher , but as you look out to Sandy spring , what are the opportunities that you see on the revenue side that that you can lean into a little bit more over the next few quarters ?
Speaker #3: Yes . Sort of moving starting at the top of the house , the single best opportunity is simply the fact that they're no longer constrained by commercial real estate concentrations or liquidity issues , which means they are , in fact , fully open for business .
Speaker #3: So that's good from a lending standpoint . They do pick up additional capabilities , interest rate hedging is a great example . Other examples that we'll see as it begins to mature would be foreign exchange , where we we have a good offering .
Speaker #3: Broadly . They had a good treasury management offering . But we brought additional capabilities to the table as well . Do you want to pick up from there specialty lines ?
Speaker #3: We've already seen equipment finance business up there . I mean , the biggest probably help .
Speaker #6: Over the next call it 15 months . You is just them getting back into the market . We retained almost all their bankers and most of them have stayed on their own as well .
Speaker #6: Without us having to work hard to retain them . And and they are back to business , back in calling . So new client acquisition is going to be a real important thing in that market for us .
Speaker #6: The things we bring to the table around , you know , talking at a higher level to clients , bringing in products like John said , plus loan syndications , asset based lending and some other things into that market .
Speaker #6: That's a really good asset based lending market , for instance , which we will penetrate deeper because of our acquisition of Sandy Springs .
Speaker #6: So there are a lot of things , but I would think of it just holistically as two good banks coming together , combining products and services .
Speaker #6: They had some that we didn't have . Correct .
Speaker #3: They they had some really interesting offerings , some niche treasury management capabilities that we now have .
Speaker #6: Right . And they've brought some really good leadership to the table as well . And so we really think we're just stronger in that market because of the combination .
Speaker #10: That's really helpful . Thanks for taking my questions .
Speaker #4: Thanks .
Speaker #3: Daniel . Ready for our next caller please .
Speaker #2: Thank you . Our next question comes from David Bishop with Harvey Group . Your line is open .
Speaker #3: Hi , Dave .
Speaker #6: Hey . Hey .
Speaker #11: Good morning John . And hey , staying on that topic in terms of the the Sandy spring opportunity , you know , John is in Rob and Dave , as you expand , maybe their pure commercial lending capabilities .
Speaker #11: Do you see the opportunity to sort of harvest more , you know , deposits behind new loan relationships and maybe what legacy Sandy spring was bringing to the table ?
Speaker #6: You know , overall , they did a pretty good job gathering deposits . And , you know , we've done a pretty good job since April 1st of retaining those and trying to deepen and enhance the relationships to get more .
Speaker #6: But, you know, they actually brought some products to the table that we're going to leverage in that market around escrow.
Speaker #6: The title businesses , litigation services , things like that , that'll bring pretty chunky , nice big deposits into the bank . But in general , if you acquire a CNI client and you're giving them a line of credit , it comes with the deposits .
Speaker #6: It comes with the Treasury management fees . And so we're really focused on new client acquisition in that market . And we do think , you know , we give them the capacity and the ability to do more faster new client acquisition .
Speaker #6: Like I said earlier , 35% of our production this quarter was from new client acquisition . We expect that to kind of ramp up with Sandy over time .
Speaker #3: Yeah , it's a good team with with great leadership , and we you know , we certainly compliment each other .
Speaker #11: Got it a follow up maybe John , I think you mentioned in the preamble some pretty material , but I think it was 250 million decline in criticized .
Speaker #11: I'd be curious on any sort of color you can give on where you saw that improvement . Types of credits , segments , etc.
Speaker #11: . Thanks .
Speaker #3: Pretty much . Across the board , part of what we did in part just a function of the environment , you know , we continue to dig pretty deeply in terms of scrutinizing the portfolio .
Speaker #3: Not that we don't do that in the normal course . We've essentially done that . You know , with the Sandy spring portfolio being new to us and the reality is we call them as we see them , you know , the overall health of our client base is pretty good .
Speaker #3: And so we've seen it pretty much across the board . Doug , Wyllie , the chief credit officer here , is that a fair assessment ?
Speaker #3: Yeah , Dave , the the the improvement in credit is at the client level . There are no industries or markets that are of any concern .
Speaker #3: It's just individual .
Speaker #4: Clients that may suffer difficulties.
Speaker #3: And of course, we work with them all the way through. And that's where the improvement.
Speaker #4: Comes from . The improvement .
Speaker #3: Of their operations . And we do believe we are conservative risk raters .
Speaker #11: Perfect . I appreciate the color .
Speaker #3: Thanks. Thanks, Dave.
Speaker #6: And Daniel .
Speaker #3: We're ready for our last caller.
Speaker #6: Please .
Speaker #2: Thank you . Our final question comes from Steve Moss with Raymond James . Your line is open .
Speaker #3: I , Steve .
Speaker #4: Morning .
Speaker #7: Hey .
Speaker #12: John Robert Gorman everyone . Maybe you know , going back to loan growth here . John , I hear you on , you know , the mid digits with potential to be doing higher single digits over time here .
Speaker #12: And obviously the pipeline has increased . Just curious here . You know with the North Carolina expansion you know what kind of contribution could you see next year from that from loan growth .
Speaker #12: You know if it's if , if any that could be additive .
Speaker #3: Dave . So .
Speaker #6: You know , we're adding bankers in North Carolina . We've actually seen North Carolina turn to positive growth . You know , after .
Speaker #3: An initial American national settling .
Speaker #6: Yep. And, you know, there's very positive momentum there. What we like about North Carolina is that it is a really active market.
Speaker #6: And you could drive down any highway and see multiple manufacturing distribution facilities, and we have now, we think, placed a lot of talent in that market to go after that business.
Speaker #6: We have pretty low market share . So there's a lot of upside in that state .
Speaker #3: Yes , it's arguably , you know , from an economic development standpoint , it's it's arguably the best of the growth markets where we have a physical presence which we're expanding .
Speaker #3: So Steve , that is potential upside . You know , we're being very conservative in terms of how we think about it . You know , we're speaking to loan growth expectations for the entirety of the franchise .
Speaker #3: But, Dave, you and I were having a conversation yesterday. You’ve been here eight years, and we think about how diversified the bank is now versus what we first saw.
Speaker #3: And all the I think you referred to it as the levers that we have to pull now . So this is a very diversified franchise .
Speaker #3: And so we see opportunities really in all markets . But North Carolina will have the fastest rising tide .
Speaker #6: And we do have roughly 20 bankers now in that market going at it, which is an increase over time. So we're very excited about the opportunity there.
Speaker #6: We're in Wilmington . We're all in the Triad and Triangle markets . And and we have a presence in Charlotte and in South Carolina as well .
Speaker #6: So we're pretty excited about that okay .
Speaker #12: Appreciate that color there . And then one last one for me . Most of my questions and asked answered . But I'm not sure if I missed it .
Speaker #12: Curious Rob is to the purchase accounting assumptions for the fourth quarter and for 2026 .
Speaker #4: Yeah . So in terms of the accretion income , I think you could , if you take a look at the third quarter , it's kind of what we're anticipating for the fourth quarter .
Speaker #4: Call it about 40 , $41 million , which was down from the third quarter . As we mentioned , it's probably going to continue to decline as we go through next year .
Speaker #4: But , you know , call it about a , you know , between a 35 and $40 million run rate , you know , on a quarterly run rate going through next year .
Speaker #4: And continue to come down as we go into 2027.
Speaker #3: And of course , that's being replaced . That capital is being reinvested .
Speaker #4: Yeah , exactly . It's turning turning into core .
Speaker #3: Since it's mostly interest rate marks .
Speaker #12: Okay . And actually maybe just one last one for me here , John , with regard to capital return here , profitability , you know , you're talking about .
Speaker #12: You're definitely building capital . Just curious . You know , you talk about a buyback as well . You know , how to think about maybe the timing of of a buyback starting next year .
Speaker #3: Yeah , we're definitely going to be accreting capital at a at a good rate . And even more so as we get , through Q4 , once all of the Sandy spring related expenses are out .
Speaker #3: And you can see we have pretty handsome operating metrics right now , which should get better still . So , Rob , do you want to talk about how we would think about the .
Speaker #3: Well, actually, let me say this clearly, as always. The first priority for capital is simply to reinvest in the business and fund lending growth.
Speaker #3: But what we're guiding to implies that we're going to be accumulating capital faster than we need it; therefore, capital will continue to rise.
Speaker #4: Yeah . You know , taking into consideration or our growth on the balance sheet , the investment in strategic initiatives and things , assuming we , you know , we've got capital for that .
Speaker #4: We're comfortable managing with a Cet1 between ten and a 10.5% . So anything beyond call it 10.5% would be available for for buybacks , excess capital , if you will , as our projection call for that , it's probably would be in that position probably in the second half of next year .
Speaker #4: So likely we would ask the board for a an authorization to repurchase shares sometime in that time frame .
Speaker #12: Great. I appreciate all the color there. Thank you very much.
Speaker #6: Thank you .
Speaker #3: Steve . And thanks , everyone for joining us today . And we look forward to talking with you at our Investor Day in December .
Speaker #3: Have a good day .