AUB - NASDAQ

Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares Third Quarter 2025 Earnings Conference Call. [Operator Instructions] 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. Please go ahead.

Thank you, Daniel, and good morning, everyone. I have Atlantic Union Bankshares' President and CEO, John Asbury; and Executive Vice President and CFO, Rob Gorman, with me today. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release and the accompanying slide presentation we are going through on this webcast are available to download on our investor website, investors.atlanticunionbank.com. During today's call, we will comment on our financial performance using both 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 our earnings release for the third quarter of 2025. 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. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statements 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, 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. Now I'll turn the call over to John.

Thank you, Bill. Good morning, everyone, and thank you for joining us today. 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 the company we envisioned. 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 for adjusted operating return on assets, return on tangible common equity and efficiency ratio. The Sandy Spring integration is progressing smoothly. Over the weekend of October 11, we successfully completed our core systems conversion and closed 5 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. 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. We believe Atlantic Union is well positioned to deliver sustainable growth, top-tier financial performance and long-term value for our shareholders. The strategic advantages gained from the Sandy Spring acquisition, combined with continued organic growth opportunities, reinforce our status as the premier regional bank headquartered in the lower Mid-Atlantic. 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. 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. However, in the latter part of the quarter, an uptick in loan paydowns had 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 at 4.3% annualized. 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 broker deposits during the quarter and continued to reduce higher cost nonrelationship deposits from the Sandy Spring portfolio. By moving quickly to lower our deposit rates, we anticipate further improvement in our cost of deposits in the fourth quarter. We were pleased to see approximately 4% annualized growth in noninterest-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. As a reminder, some quarterly fluctuation in accretion income is to be expected. Importantly, if you exclude the impact of accretion income, our net interest margin improved compared to last quarter. I'd also like to point out the strength we saw in fee income, especially with interest rate swaps and in wealth management. Opportunities in both lines were augmented by the Sandy Spring acquisition. 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 that will provide upside to the combined entity going forward. Overall, credit quality improved despite an increase in charge-offs largely driven by 2 commercial and industrial loans that have been partially reserved for in prior quarters. 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 in addition to the previously incurred specific reserve of $14 million. Leading asset quality indicators are encouraging. Third quarter nonperforming assets as a percentage of loans held for investment remained low at 0.49%. Past dues remained 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. 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 net charge-off ratio to be between 15 and 20 basis points, in line with prior guidance. In the Greater Washington, D.C. region, 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. Atlantic Union maintains a well-diversified portfolio with approximately 23% of total loans of the Washington metro area and the remaining 77% across our broader footprint. 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, 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. Government shutdowns are not new to us. With more than 15 years in this specialty, we have seen many. Most contractors we finance provide essential services and have historically continued to operate during shutdowns, typically drawing on lines of credit to maintain payroll and repaying those lines when government funding resumes. We are certainly monitoring the shutdown and its duration. More broadly, 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. 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. With the Sandy Spring systems conversion now behind us, strong pipelines and expanded footprint in attractive markets, specialty lines and increased investment in North Carolina, 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. Over this time, we have intentionally and carefully built the distinctive and uniquely valuable franchise that we envisioned in our strategic plan and have consistently communicated for years. We have done what we said we do in 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, 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 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. Looking ahead, our focus remains on delivering sustainable top quarter performance relative to our peers and creating long-term value for our shareholders. With that, I'll turn the call over to Rob for a detailed review of our quarterly results before opening the call for questions. Rob?

Well, thank you, John, and good morning, everyone. I'll now take a few minutes to provide you with some details of Atlantic Union's financial results for the third quarter. A 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 pretax merger-related costs from the Sandy Spring acquisition and a $4.8 million pretax 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. As a result, the final net pretax gain from the CRE sale transaction 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. Adjusted operating earnings available to common shareholders for $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% 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 and industrial loans that were partially reserved for in the prior quarter, 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 at the end of the third quarter, down from 125 basis points at the end of the prior quarter. Net charge-offs increased to $38.6 million or 56 basis points annualized in the third quarter from $666,000, only 1 basis point annualized in the second quarter, primarily due to the net charge-off of the two commercial industrial loans that we've discussed. This brought the 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. Now turning to the pretax pre-provision components of the income statement for the third quarter, tax equivalent net interest income was $323.6 million. 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 CLO 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 as we used proceeds from the CRE loan sale to pay down short-term borrowings and broker deposits and to purchase additional investment securities in the third quarter. As John noted, the third quarter's 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 5 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. The cost of funds declined by 5 basis points in the third quarter to 2.17%, primarily due to the impact of the 4 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 broker deposit balances as well as lower customer time deposit rates. Noninterest income decreased $29.7 million to $51.8 million for the third quarter, primarily driven by the $15.7 million preliminary pretax gain on the CRE loan sale in the prior quarter compared to a $4.8 million pretax loss in the third quarter of 2025, related to the final CRE loan sale settlement accounting, as well as by the $14.3 million pretax gain on the sale of our equity interest in Cary Street Partners which was recorded in the second quarter. Adjusted operating noninterest income, which excludes the pretax loss and gain on the CRE loan sale in both quarters, the pretax gain on the sale of our equity interest in Care Street Partners in the second quarter and pretax 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. These increases were partially offset by a $2.2 million decrease in bank-owned life insurance income due to debt benefits of $2.4 million that was received in the second quarter. Reported noninterest 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. Adjusted operating noninterest expense, which excludes merger-related cost in the second and third quarters and the amortization of intangible assets in both quarters 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, a $966,000 increase in professional services 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. 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. At September 30, 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 $291.8 million or 4.3% annualized from the prior quarter. At September 30, 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 broker deposits. This was partially offset by an increase of $65.5 million in demand deposits. At the end of the third 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 third 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 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. 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. Please note that the final 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. We now expect loan balances to end the year between $27.7 billion to $28 billion while 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 in the fourth quarter. Fully tax equivalent with net interest income for the full year is projected to come in between $1.160 billion and $1.165 billion that we are targeting the fourth quarter fully tax equivalent net interest income run rate to fall between $325 million and $330 million. As a result, we are projecting that the full year fully tax equivalent net interest margin will fall in a 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. In addition, the projected fully tax equivalent net interest margin ranges include the impact of our estimate of the net accretion income from the Sandy Spring acquisition, which are volatile and subject to change. On a full year basis, adjusted operating noninterest income is expected to be between $185 million and $190 million, and we're targeting the fourth quarter adjusted operating noninterest income run rate to fall between $50 million and $55 million. Adjusted operating noninterest expenses for the full year are estimated to fall in a range of $675 million to $680 million, while the fourth quarter adjusted operating noninterest expense run rate is expected to be between $183 million and $188 million. Based on these projections, we expect to produce financial returns that will place us within the top quartile of our peer group on an operating basis and meet our objective of delivering top-tier financial performance for our shareholders. 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. 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 over to Bill to see if there are any questions from our research analyst community.

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

[Operator Instructions] Our first question comes from Russell Gunther with Stephens.

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. Wondering, is that mid-single-digit sustainable outcome for 2026 based on where pipelines and investor sentiment stands today? 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 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.

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, 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, 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. We continue to look at additional opportunities to further grow and expand our specialty lines such as equipment finance and others. Dave, do you have anything to add to that?

Yes. I mean we're still seeing production for new client acquisition and growing at a slightly higher rate, 35% of our production this quarter came from new clients. Coming into the bank, that's a great trend and positive momentum. The pipelines at Sandy Spring now that they've been converted here since April 1 have grown dramatically, three or fourfold. And our pipeline within the legacy bank is higher than it normally is as well. So if pull-through is what we expected to be, we think we'll have a good solid fourth quarter.

Yes. And so as you saw, loans averaged up 4.3% Q-over-Q, which is good. But what really happened is in the back half of the quarter, we saw paydowns, which are always an issue to some extent. But the line utilization drop was kind of what really hit us towards the end of the quarter, and that should come back over time.

I appreciate that. And then just last question for me, switching gears a bit on to the expense outlook. I appreciate the thoughts on where 4Q could shake out. And I believe you guys mentioned cost saves for Sandy Spring will fully be in the run rate in early 2026. So I just wanted to circle back to what was a, I believe, the efficiency guide for the pro forma franchise, 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 organically build out North Carolina over the next few years?

Yes. Russell, I'll take that one. Yes, we still -- we're, of course, in the middle of our 2026 planning process, but we fully expect to see mid-single -- mid-40s on the efficiency ratio, inclusive of the investments in the North Carolina franchise. Coming out of the -- you see our guide in the fourth quarter is $183 million to $188 million. If you annualize that at some inflation to that and additional costs associated with North Carolina. We should be flat year-over-year to pro forma first quarter. If you include the first quarter run rate for Sandy Spring in 2025, it should be flattish, which would basically be able to provide us with the mid-40s efficiency ratio. So feel good about that. Of course, if we don't see the revenue come in, but the other part of that is revenue growing at high single-digit level going into next year. If we don't see that, we're obviously focused on positive operating leverage. So we would take some actions on the expense side, maybe have to delay some things. But at this point in time, we don't anticipate that happening.

Our next question comes from Stephen Scouten with Piper Sandler.

Rob, I wanted to just follow back on that expense messaging you just gave there. So if we're looking at $190 million and then you said add North Carolina, add inflation and then it should be flat from there? Or is there a baseline like of a 1Q '26 kind of all in? I'm assuming all cost saves out kind of run rate you can give us as a starting point?

Yes. So what I would say is it's probably about the $190 million give or take level would be a good run rate for going forward on excluding any of the related or amortization of intangibles. That's how we're kind of looking at it. So you've got, call it, a $185-ish million run rate at another $5-or-so million annualized that for those items that we talked about inflation, et cetera, so it would be pretty good run rate.

Got it. And that 1Q '26 run rate shouldn't calculate all the Sandy Spring cost savings at that point in time, correct -- more or less?

Yes. We don't see it all in the fourth quarter because there's -- we just finished the conversion, there's cleanup going on. There's some related systems disengagement that's happening. We still got some duplicate costs there. So those will all come up by the end of the fourth quarter.

Got it. Got it. Okay. And on the -- John, you noted there were a higher level of paydowns and I think you guys noted in the press release to lower line utilization there at quarter end. Do you have any data in terms of kind of what paydown levels were this quarter maybe versus any prior quarters? And kind of what would lead you to believe that maybe that paydown activity would slow a bit? Or is the better growth not so much about paydown levels slowing but production levels continue to ramp higher?

Yes. 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. But -- we've seen for a while higher levels of paydowns. But as I think about Q3 versus Q2, I don't think it was out of line.

No. No. Production in both quarters was very close. It's a little higher this quarter than last quarter. Paydowns were relatively the same over the quarter. There are just more players right now in our markets, and we're going to see some of the paydown activity that we're seeing today probably throughout the rest of the year and into next year, but we're relying on higher production cost.

Yes. And so often on paydowns, 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. And the pullback that we've seen in term yields tends to create more of that. But we feel good about the overall setup.

Got it. And then last thing for me, just around the margin, obviously, the low end of that range kind of remained at the 3.75%, 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? Is it just where we ended up here in the third quarter? Or is it more rate cuts being baked in? Or kind of -- any color there to what's leading to that?

Yes. 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. That would have been driving -- it could be higher on the higher end. So we dialed that back a bit. But we feel like on the core basis, we should see some expansion. That's why we're guiding to 3.85% to 3.90% in the fourth quarter. So it's a bit higher than when we came in at 3.83% in the third quarter. But that 3.75% to 3.80% is for the full year, Stephen. So 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. We had a 3.75% to 4% coming in this year. But accretion hasn't been coming in as high as we were expecting.

Yes. It is somewhat difficult to predict that with great precision because it's influenced, as you know, by payoffs and that sort of thing. 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 normally expect. But there's always an element of fluctuation in that, be it up or down.

Yes, no doubt. All this modeling is a little bit art, a little bit science. So definitely...

Correct, Stephen.

Our next question comes from Catherine Mealor with KBW.

My question is just back to the margin, maybe just getting into the pieces of it. And on the deposit side, as we think about another couple of rate cuts, I think of you as asset-sensitive, but Sandy Spring lessens that a little bit, right? And so then as we think about on the NIM expansion over the next few quarters even with rate cuts. Can you help us think about, first, on the deposit side, how much room you think you can lower deposit costs to keep the margin kind of in that level? And then secondly, if you could give us just some color on new loan yield rates and kind of where you see -- where you think loan yields go outside of some of the purchase accounting noise?

Yes. 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, we're expecting. Obviously, we saw a 25 basis point cut in September. We're expecting one in late October and then in December. Just to give you a perspective on that, we had about $13 billion of deposits that reprice pretty quickly, following that cut like an 85 basis -- of that population, about 85% betas. The good news that we're seeing is on the deposit side, we can lower rates pretty quickly. We're talking probably in mid-50s betas on interest-bearing deposits in mid-40s through the cycle on total deposits. If you look at the short-term rate changes we just made, those pretty much offset the variable rate note loan book that we have, which is about $13 billion, $14 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. So the real impact as we go forward here in terms of looking for a core margin expansion is what's happening with term loans and the back book fixed rate and new loans coming on, what rates are those coming on. We think as a result of our average portfolio yields of, 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. 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.

Okay. That's awesome. And then my second question is just on credit. I know you were -- you didn't like having these two C&I losses this quarter. Just kind of curious if you could give just a broader perception of any of the credit trends you're seeing within the portfolio. I think there's especially within D.C. and just kind of the health of the Sandy Spring portfolio now that you've got a couple of quarters under your belt with that portfolio. Just any kind of credit -- additional credit commentary would be helpful. Just to try to figure out whether those two are isolated events or if there's anything else we should be aware of happening within the portfolio?

Yes. 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 and partial reserves were taken in Q4 of last year. One in the end was fully reserved, actually slightly more than the ultimate resolution. 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 totally unrelated. Broadly speaking, the overall credit trends look good. You can see that in our numbers. You can see, obviously, 0.49% nonperforming assets as a percentage of the total loan book is a pretty good number. Past dues down criticized down. And we feel pretty good. Obviously, we're well aware of all the headlines that go on in the greater Washington region, but we're hard-pressed to point to any real problems as a result of that. The client base is actually quite resilient. So we feel pretty good about it. Doug, anything you would add?

Now all the leading indicators of those kinds of big problems all look very good and moving in the right direction. Like John said, criticized noticeably lower since the second quarter. Past dues continue to be low. So we all feel very good about where we are. Obviously, we're paying attention to what's going on in and around D.C. with the shutdown. But we just don't see any weakness anywhere, and we'll be prepared for anything supporting customers and whatnot. I was Chief Credit Officer, Doug Woolley.

Great. Is it fair to say the D.C. noise is maybe more of a growth issue than a credit issue for that?

Yes, I would say so. I do think that it impacts confidence to some extent. But as Dave Ring pointed out, the pipelines are growing. 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. But Sandy itself was -- is and always has been the Bank of Maryland. And we are seeing opportunities there. So overall, we think that we're in the right spot. As you know, we do not finance larger office buildings, which definitely could be problematic. 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, even with the government shutdown because the defense department is still operating, we're seeing contracts awarded like right now. So we do feel pretty good about the opportunity there over time. But yes, it's -- I think it does put a damper on growth, particularly as it relates to commercial real estate investment, but it's very submarket specific as well, even in that Greater Metro D.C. area.

Our next question comes from Janet Lee with TD Cowen.

Janet, we're glad. Thank you for picking up coverage on us.

Of course. I believe you guys touched on it a little bit. Apologies if I missed it. So are you attributing all of the loan decline that you saw on the C&I side to lower utilization? And basically, are you also referring 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? Or is that more so in a typical environment, you'd be a mid-single digit to high single-digit grower?

Yes. I wouldn't say all of it was a result of the reduced line utilization, but that was a material number contributing to that. And I think it's -- Dave Ring, you'll have to weigh in here. From my standpoint, we've got the pipeline right now to support the targets that we laid out, which are roughly mid-single-digit loan growth based on what we're seeing in Q4. So that's not really predicated on a reversal and line utilization, although that would be helpful. Is that accurate?

Yes. We're -- we 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. But we have the pipeline that will -- that implies...

Dave makes a good point. We actually had some financings that were slated and expected to have closed in Q3 that did not. And we're seeing that come through now. We're actually off to a pretty good start in Q4.

Got it. That's a helpful color. So 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 upper bias if the yield curve steepens? Or would it be a sort of board pressure given your asset sensitivity profile? How should I think about that?

Yes. The way we're thinking about it is we think there's opportunity for core expansion, give or take, in the low single digits per quarter. That's predicated on that the fixed rate loan portfolio back book and new fixed loans coming on are repricing higher, call it, 100 or so basis points higher. So that really depends on where term rates go. So if we do have a steeper curve, that would be very helpful to that projection that goes -- if it increases more, that will be more beneficial. So we are calling for in our baseline for the Fed to cut 2x here in the remainder of this year, 2x next year, 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 5-year term rate, we could see some contraction in that projection that I'm talking about -- either a flat margin or it could be down depending on the term rate structure.

And we are certainly less asset sensitive than we used to be. Sandy acts as 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 core net interest margin actually went up Q-over-Q. It was really just fluctuation in accretion that caused the reported net interest margin to be stable.

If I could just ask one more question. For those of us including myself, who is newer to the name. So you made it clear that the government contractor finance group is doing fine. I mean, it's more security like national security and defense focus or more protected there. If the government shut down is prolonged, hopefully not. 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? Is it the consumers in your -- the consumer customers in your market? Or is it just lower commercial activity? Could you just elaborate on what would you be most worried about or maybe not?

Yes. Sure. The government contractors should be fine. We have lived through many shutdowns before. The longer shutdown was 35 days in the first Trump administration. We've never had an issue as it relates to government shutdowns. They have to wait to be paid, but most of them are doing essential services. And so they will continue to work, as I indicated. Normally, what we would expect to see them do is they'll draw on their lines as they await payment. It creates a timing difference. To the extent that they -- we have any that are working on nonessential services, what they do, it's a variable cost structure. They would furlough workers. You're already seeing that in some cases up there. So I think broadly, it certainly could sort of, I guess, I would say, further slow things down, we should be fine. The one thing we -- the only thing we can say with certainty is the U.S. government will reopen. That will happen. The question is how long it's going to take? Interestingly, I was just looking at some data. As of the end of the day yesterday, we had 50, 5-0 consumers 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. And that's on the consumer side, and we're very happy to work with customers if there's any sort of event weather like this in that region. So we do not have any reason at this point in time to be particularly concerned about it.

Our next question comes from Brian Wilczynski with Morgan Stanley.

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. I was wondering if you could give some more detail on that, where it's coming from and just what you're seeing broadly?

Yes. 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. We sometimes see other banks kind of turn it on and turned 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. We are definitely in a turn it on environment right now, where some who had pulled back or fully open for business. We see that show up in terms of an element of pricing pressure, not that we've ever been the low-cost provider. But it's -- the banks are eager for business. Dave, anything to add?

In the first couple of quarters, we were impacted a bit by private credit.

Yes, particularly in the government contract space.

Right. As a competitor in some of the specialty businesses, but that slowed down a little bit, frankly. And it's really the traditional banks coming in back in, turning it on again, like John said. And one of the things we're very proud of is we're consistently in the market. We don't turn it on and turn it off. And -- but we're seeing some of those banks come back in and turn it on.

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. I think you mentioned briefly 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 you can lean into a little bit more over the next few quarters?

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. 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, will be foreign exchange, where we have a good offering broadly. They had a good treasury management offering, but we brought additional capabilities to the table as well. Dave, do you want to pick up from their specialty lines? We've already seen equipment finance business up there.

I mean the biggest probably help over the next, call it, 15 months is just them getting back into the market. We've retained almost all of their bankers. And most of them have stayed on their own as well without us having to work hard to retain them. And they are back to business back and calling. So new client acquisition is going to be a real important thing in that market for us. The things we bring to the table around 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. That's a really good asset-based lending market, for instance, which we will penetrate deeper because of our acquisition of Sandy Spring. So there are a lot of things just -- but I would think of it just holistically as two good banks coming together, combining products and services, they had some that we didn't have.

Correct.

They had some really interesting offerings, some niche treasury management capabilities that we now have.

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.

Our next question comes from David Bishop with Hovde Group.

Staying on that topic in terms of the Sandy Spring opportunity. John and Rob and Dave, as you expand maybe their pure commercial C&I lending capabilities, do you see the opportunity to sort of harvest more deposits behind new loan relationships and maybe what legacy Sandy Spring is bringing to the table?

Overall, they did a pretty good job gathering deposits. And we've done a pretty good job since April 1 of retaining those and trying to deepen and enhance relationships to get more. But -- they actually brought some products to the table that we're going to leverage in that market around escrow, the title businesses, litigation services, things like that, that will bring pretty chunky, nice big deposits into the bank. But in general, if you acquire a C&I client and you're giving them a line of credit, it comes with the deposits. It comes with the treasury management fees. And so we're really focused on new client acquisition in that market. And we do think we give them the capacity and the ability to do more faster new client acquisition. Like I said earlier, 35% of our production this quarter was from new client acquisition, and we expect that to kind of ramp up with Sandy over time.

It's a good team with great leadership, and we complement each other.

Got it. And then a follow-up, maybe, John, I think you mentioned the freeable some pretty material movement, I think it was $250 million decline in criticized. Maybe curious any sort of color you can give on where you saw that improvement types of credits, segments, et cetera?

Pretty much across the board. Part of what we did in part just a function of the environment, we continue to dig pretty deeply in terms of scrutinizing the portfolio, not that we don't do that in the normal course. We've especially done that with the Sandy Spring portfolio being new to us. And the reality is we call them as we see them. The overall health of our client base is pretty good. And so we've seen it pretty much across the board. Doug Woolley, the Chief Credit Officer is here, is that a fair assessment?

Dave, the improvement in credit is at the client level. There are no industries or markets that are of any concern. It's just individual clients that may suffer difficulties. And of course, we work with them all the way through, and that's where the improvement comes from, the improvement of their operations. And we do believe we are conservative risk raters.

Our final question comes from Steve Moss with Raymond James.

Maybe going back to loan growth here. John, I hear you on the mid-single digits with potential to be doing higher single digits over time here. And obviously, the pipeline has increased. Just curious here with the North Carolina expansion, what kind of contribution could you see next year from that from loan growth, if any, that could be additive?

Dave?

So we're adding bankers in North Carolina. We've actually seen North Carolina turn to positive growth after...

Initial America...

Yes. And there's very positive momentum there. What we like about North Carolina is it is a real active market, and you could drive down any highway and see multiple manufacturing distribution facilities. And -- we have now -- we think we placed a lot of talent in that market to go after that business. We have pretty low market share. So there's a lot of upside in that state.

Yes. It's arguably from an economic development standpoint, it's arguably the best of the growth markets where we have a physical presence, which we're expanding. So Steve, that is potential upside. We're being very conservative in terms of how we think about it. We're speaking to loan growth expectations for the entirety of the franchise. But Dave, you and I have a conversation yesterday, you've been here 8 years. And we think about how diversified the bank is now versus what we first saw 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. And so we see opportunities really in all markets, but North Carolina will have the fastest rising tide.

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. We're in Wilmington. We're also in the Triad and Triangle markets, and we have a presence in Charlotte and in South Carolina as well. So we're pretty excited about that.

Okay. Appreciate that color there. And then one last one for me. Most of my questions have been asked and answered. But I'm not sure if I missed it. Curious, Rob, as to the purchase accounting assumptions for the fourth quarter and for 2026.

Yes. 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, call it about $40 million, $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. But call it about between $35 million and $40 million run rate -- quarterly run rate going throughout next year and continue to come down as we go into '27.

And of course, that's being replaced, that cash income has been reinvested.

Yes, exactly. Turning into core.

Since it's mostly interest rate marks.

Okay. And actually, maybe just one last one for me here. John, with regard to capital return here, profitability, you're talking about -- you're definitely building capital. Just curious, you talked about a buyback as well, how to think about maybe the timing of a buyback starting next year?

Yes. We're definitely going to be accreting capital at a good rate. And even more so as we get through Q4 once all of the Sandy Spring related expenses are out. 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 -- well, actually, let me say this, clearly, as always, first priority for capital is simply to reinvest in the business and fund lending growth. But what we're guiding for implies that we're going to be accumulating capital faster than we need it. Therefore, capital will continue to rise.

Yes. Taking into consideration our growth on the balance sheet, the investment and strategic initiatives and things, assuming we've got the capital for that. We're comfortable managing with a CET1 between 10% and 10.5%. So anything beyond, call it, 10.5% would be available for buybacks, excess capital, if you will. Our projection call for that is probably be in that position probably in the second half of next year. So likely we would export for an authorization to repurchase shares sometime in that time frame.

Thank you, Steve. And thanks, everyone, for joining us today. We look forward to talking with you at our Investor Day in December. Have a good day.