Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares Third Quarter 2025 Earnings Conference Call. 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. 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 would 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.

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 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% 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 Cary 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 that were 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 costs 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.

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, I'll take that one. We are currently in the middle of our 2026 planning process, and we fully expect to see a mid-single-digit efficiency ratio, including the investments in the North Carolina franchise. Our guidance for the fourth quarter is between $183 million and $188 million. If you annualize that factoring in some inflation and additional costs related to North Carolina, we anticipate being flat year-over-year compared to the pro forma first quarter. When you consider the first quarter run rate for Sandy Spring in 2025, it should remain relatively stable, which would allow us to maintain a mid-40s efficiency ratio. We are optimistic about that. However, if we do not see the revenue come in, which we expect to grow at a high single-digit level next year, we will focus on achieving positive operating leverage. If necessary, we may take some actions on the expense side, including possibly delaying some initiatives. But at this time, we do not expect that to be necessary.

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 for those items that we talked about inflation, etc., so it would be pretty good run rate.

Got it. And that first quarter '26 run rate shouldn't account for all the Sandy Spring cost savings at that time, correct?

Yes, we won't see everything in the fourth quarter because we just finished the conversion and there's some cleanup happening. Additionally, there's some disengagement of related systems taking place. We still have some duplicate costs to manage, and those should all be resolved by the end of the fourth quarter.

Got it. Okay. John, you mentioned there was a higher level of paydowns, and I think you noted in the press release a lower line utilization at the end of the quarter. Do you have any data on the paydown levels this quarter compared to previous quarters? What makes you believe that paydown activity might slow down a bit? Or is the stronger growth not necessarily about slowing paydowns, but rather that production levels are continuing to increase?

Yes. I think it's mainly about production levels continuing to increase. I'll bring in Dave Ring, who oversees all our commercial businesses. We've observed higher levels of paydowns for some time now. However, when I compare Q3 to Q2, I believe the trend was consistent.

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 the last thing for me is about the margin. The low end of that range stayed at 3.75%, but the range was tightened, which removed some potential upside. What changed from quarter to quarter that eliminated that higher level? Is it just the way we ended up in the third quarter, or are there more rate cuts anticipated? Any insights on what's driving that would be helpful.

Yes. It’s primarily about our performance in the third quarter, which led us to reduce some of the expected impacts of accretion income in the fourth quarter. This could have pushed the numbers higher, but we adjusted our expectations slightly. However, we believe that on a core basis, we should still see some growth, which is why we are forecasting a range of 3.85% to 3.90% for the fourth quarter. This is an increase from the 3.83% we reported in the third quarter. Yet, the full-year guidance remains at 3.75% to 3.80%. So, while we anticipate growth, it won’t be as significant as we initially expected. We were looking at a range of 3.75% to 4% for this year, but the actual accretion has not met our expectations.

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.

Our next question comes from Catherine Mealor with KBW.

My question is regarding the margin, specifically the components of it. Considering potential rate cuts, I view you as asset-sensitive, but Sandy Spring moderates that a bit, correct? As we look at NIM expansion over the next few quarters despite potential rate cuts, could you share your thoughts on the deposit side? How much more do you believe you can lower deposit costs to maintain the margin at its current level? Additionally, could you provide some insights on new loan yield rates and your expectations for loan yields beyond any impacts from purchase accounting?

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% 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 great. My second question is about credit. I know you were unhappy with the two C&I losses this quarter. I'm curious if you could provide a broader view of the credit trends you're observing within the portfolio. Specifically regarding D.C. and the performance of the Sandy Spring portfolio now that you've had a few quarters of experience with it. Any additional commentary on credit would be helpful to determine whether those two losses are isolated incidents or if there are other issues we should be aware of in the portfolio.

Yes, those are certainly the two that had specific reserves. One was partially reserved due to an unusual situation, and both were identified with partial reserves taken in the fourth quarter of last year. One was fully reserved, actually slightly more than the ultimate resolution, while the other was charged off completely due to ongoing uncertainty as we work to maximize recovery. This is unrelated to broader trends. Overall, our credit trends appear strong, as reflected in our numbers. The nonperforming assets stand at 0.49% of the total loan book, which is a solid figure. Past dues and criticisms are down, and we feel positive about the situation. We are mindful of the headlines coming from the greater Washington region, but we find it difficult to identify any real issues arising from that. Our client base remains quite resilient, so we feel confident.

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.

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 agree. I think it does affect confidence to some degree. However, as Dave Ring mentioned, our pipelines are expanding. I've previously emphasized that we shouldn't be viewed solely as a D.C. Bank; around 23% of our total portfolio is in the broader Greater Washington metro area. Nonetheless, Sandy has always been the Bank of Maryland, and we are identifying opportunities there. Overall, we believe we are positioned well. As you know, we do not finance larger office buildings, which could present challenges. From the perspective of government contract finance, I anticipate increased opportunities in that area over time since it primarily focuses on national security and defense. Interestingly, we were speaking with the head of government contract finance yesterday, and despite the government shutdown, since the defense department continues to operate, we are witnessing contracts being awarded at this moment. Therefore, we feel optimistic about the opportunities in that sector over the long term. However, I think it does stifle growth, particularly regarding commercial real estate investment, although it varies significantly across submarkets, even within the Greater Metro D.C. area.

Our next question comes from Janet Lee with TD Cowen.

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. While reduced line utilization contributed to the decline, it wasn't the only factor. From my perspective, we currently have the pipeline to meet the targets we've set, which indicate approximately mid-single-digit loan growth based on current observations in Q4. This projection doesn't solely depend on a reversal in line utilization, although that would be beneficial. Is that correct?

Yes. We have the pipeline in place; we just need to maintain momentum. Sometimes it takes longer than expected and activities may spill over into other quarters. However, we have the pipeline that suggests strong growth.

Yes. And we are setting up well for that with the production levels we are seeing.

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 are used to competition. With my 38 years of experience in commercial banking, I can't recall a time when it hasn't been competitive, especially for quality credits, which is what we focus on. Some banks tend to be inconsistent, ramping up and pulling back, but we have always been a reliable source of capital, which sets us apart in the market. Currently, we are in a competitive environment where banks that previously reduced their activity are now fully engaged again. This is contributing to some pricing pressure, although we've never positioned ourselves as the low-cost option. Banks are eager for business. Dave, do you have anything to add?

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

Yes, particularly in the government contract space.

As a competitor in some of the specialty businesses, there has been a slight slowdown. The traditional banks are re-engaging and ramping up their activities again, as John mentioned. We take pride in being consistently present in the market; we don’t oscillate in our participation. However, we have noticed those banks returning and resuming their operations.

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 solid job of gathering deposits, and since April 1, we've successfully retained those deposits while working to deepen and enhance relationships for additional growth. They've also introduced new products related to escrow, title services, and litigation that will generate significant deposits for the bank. Generally, when we bring in a commercial and industrial client and provide them with a line of credit, it includes deposits and treasury management fees. Therefore, our primary focus is on acquiring new clients in that segment. We believe we have the capacity to accelerate our new client acquisitions. As mentioned earlier, 35% of our production this quarter came from new client acquisitions, and we anticipate continued growth in this area 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 fee income 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, etc.?

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?

Yes, 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?

We are expanding our team of bankers in North Carolina, where we've noted a shift towards positive growth after an initial downturn. There is strong momentum in the state. North Carolina is an active market, with numerous manufacturing and distribution facilities visible along the highways. We believe we have successfully placed talented individuals in this market to target new business opportunities. Our market share currently is low, which presents significant growth potential in the state.

Yes, from an economic development perspective, North Carolina is arguably the most promising growth market where we are expanding our physical presence. So, Steve, there is potential upside. We are being quite conservative in how we view this. We are discussing loan growth expectations for the entire franchise. Dave, you and I talked yesterday; you have been here for 8 years, and we recognize how diversified the bank is now compared to what we initially observed. You mentioned the various levers we can pull now. This is a very diversified franchise. We see opportunities in all markets, but North Carolina is likely to experience the fastest growth.

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.

In terms of the accretion income, for the third quarter, we expect it to be around $40 million to $41 million, which is a decrease from the previous third quarter. We anticipate that this figure will likely continue to decrease as we move into next year. We are projecting a quarterly run rate between $35 million and $40 million throughout next year, with a continued decline expected as we approach 2027.

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

Okay. Just one last question from me. John, regarding capital return and profitability, I see that you are definitely building capital. I’m curious about the timing of a potential buyback starting next year.

Yes. We will certainly be accumulating capital at a strong pace, especially as we progress through Q4 after addressing all associated expenses. Our operating metrics are currently strong and should improve further. Our top priority for capital remains to reinvest in the business and support lending growth. However, our guidance suggests we will be accumulating capital faster than necessary, so capital levels will continue to rise.

Yes. Taking into consideration our growth on the balance sheet, the investment in 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.

This concludes today's conference call. Thank you for participating. You may now disconnect.