Earnings Call Transcript - AUB Q2 2025

Operator, Operator

Thank you for joining us, and welcome to the Atlantic Union Bankshares Second Quarter 2025 Earnings Call. Today's program is being recorded. I would now like to introduce your host for today's program, Bill Cimino, Senior Vice President, Investor Relations. Please proceed, Bill.

William P. Cimino, Senior Vice President, Investor Relations

Thank you, Jonathan, 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 in our earnings release for the second quarter of 2025. In our remarks on today's call, we will also make forward-looking statements, which are not statements of historical facts and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied from these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement, except as required by law. Please refer to our earnings release and slide presentation issued today and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ from those expressed or implied in the forward-looking statement. All comments made during today's call are subject to that safe harbor statement. At the end of the call, we'll take questions from the research analyst community. And now I'll turn the call over to John Asbury.

John C. Asbury, President and CEO

Thank you, Bill. Good morning, everyone, and thank you for being here today. We had a productive and significant quarter at Atlantic Union Bankshares, highlighted by the acquisition of Sandy Spring Bank, which was completed on April 1. As expected, this acquisition brought some merger accounting complexities this quarter, and we believe Q2 will provide a clearer basis for future comparisons. Our operating results reflect the strong earnings potential we anticipated when we announced the acquisition. We are pleased that our performance post-merger is aligning with our expectations. The integration of Sandy Spring is going smoothly, and we have benefited from the shared cultural values of both organizations. We closed the sale of about $2 billion in commercial real estate loans from Sandy Spring Bank on June 26, surpassing our initial pricing expectations. Concurrent with the merger closing in April, we also completely settled the forward sales of common equity, receiving around $385 million before expenses. We are diligently working on integration and are on track to convert our core systems in the fourth quarter. Drawing from our experiences with previous acquisitions, including last year's conversion of American National Bank, we are confident in our integration efforts and system preparations. Our strategy for shareholder value remains consistent. We believe Atlantic Union is well-positioned for sustainable growth, strong financial performance, and long-term value for our shareholders. The strategic advantages of the Sandy Spring acquisition, combined with organic growth prospects, will strengthen our role as a leading regional bank in the lower Mid-Atlantic, particularly in desirable markets. I will highlight key points from our second quarter results and discuss market conditions before handing it over to Rob for a detailed financial analysis. Following that, I will share insights into our organic growth plans in North Carolina, which we are excited about, and then open the floor for questions. Here are the second quarter highlights: our loan-to-deposit ratio was approximately 88%, our CET1 capital ratio was 9.8%, and our commercial real estate concentration ratio was 284%. The earlier-than-expected closing of the Sandy Spring acquisition is positive, although it resulted in one less quarter of capital buildup than we initially planned. Our reported net interest margin expanded by 38 basis points to 3.83%, and our core net interest margin improved by 8 basis points. If we assume the acquisition closed on March 31, excluding certain negative adjustments, our loan growth was about 4.0% annualized quarter-over-quarter, exceeding our internal forecasts amid economic uncertainties. We have noted growing business confidence, a robust loan pipeline, and strong production, especially in the latter part of the quarter. Our pipelines suggest solid loan growth for the second half of the year, and we continue to anticipate year-end loan balances between $28 billion and $28.5 billion, accounting for negative adjustments. Deposit growth was slower than usual in the second quarter, partly due to a reduction in broker deposits by about $340 million and the intentional reduction of some higher-cost, non-relationship deposits from the Sandy Spring portfolio. The commercial real estate loan sale process was challenging, but we achieved an excellent result that reflected the quality of Sandy Spring's clientele and markets. The completion of this sale mitigates risks, decreases our commercial real estate concentration, enhances our loan-to-deposit ratio, and creates additional capacity for growth, marking a positive start to our integration process. Our credit quality remains strong, with only one basis point of annualized net charge-offs, and past due loans are low. The percentage of non-performing assets as a share of loans held for investment was 0.60%. This increase is attributed to a conservative approach to loan ratings and acquisitions from the Sandy Spring portfolio. We are still confident in our asset quality and market conditions. We have adjusted our forecast for the 2025 net charge-off ratio to between 15 and 20 basis points for the year, including some non-performing assets with specific reserves we expect to charge off later this year. Our geographic presence spans Virginia, Maryland, and North Carolina, including Washington, D.C. These regions present attractive operating environments. In Greater Washington, D.C., despite ongoing concerns regarding government job reductions, economic data and our insights indicate resilience. The region, home to around 6.4 million people, remains robust, and we believe that the changes in government employment so far are manageable, although uncertainties persist. Notably, approximately 23% of our total loans are in the Washington metro area, with the other 77% spread across our footprint. The principal credit exposures in the Greater Washington region focus on government contractors and office buildings. We have updated our disclosures on these categories in our supplemental presentation. Our government contractor financing, primarily related to national security and defense, is performing well. The recent budget reconciliation bill is likely to bolster defense spending significantly, which we expect will benefit our government contract portfolio overall. In terms of our office loan portfolio, neither AUB nor Sandy Spring financed large office properties, as evidenced by our average loan size of $1.9 million, with only $71 million in exposure in Washington, D.C. This portfolio is also performing well. Furthermore, as highlighted by recent unemployment data for June, Maryland has the lowest unemployment rate among populous states at 3.3%, while Virginia boasts the third-lowest rate at 3.5%. With strong pipelines and an expanded presence in attractive markets supported by our specialty lines, we believe we are well-positioned for solid organic growth in the second half of 2025. Rob will now provide additional details about the quarter, after which I will discuss our future direction before we open the call for questions.

Robert Michael Gorman, Executive Vice President and CFO

Thank you, John, and good morning, everyone. I appreciate you being here today. I will now share some details regarding Atlantic Union's financial performance for the second quarter. It is important to note key points related to the Sandy Spring acquisition as we review the second quarter results. The fair value of assets acquired was $13 billion, which included $8.6 billion in loans held for investment and $1.9 billion in loans held for sale, mainly consisting of CRE loans sold in the quarter following the acquisition. There was a total loan portfolio mark discount of $789.7 million, which included a credit mark of $162.8 million and an interest rate mark of $626.8 million. The fair value of liabilities assumed was $12.2 billion, including total deposits of $11.2 billion. The intangibles acquired, including core deposit intangibles, totaled $290.7 million, and the preliminary goodwill from this transaction amounted to $496.9 million. My commentary will primarily focus on Atlantic Union's second quarter financial results on a non-GAAP adjusted operating basis, excluding specific items: the $89.5 million negative pretax impact from the CECL day 1 initial provision for credit loss expense on purchased noncredit deteriorated loans acquired from Sandy Spring, which represents the double count of the non-PCD loan credit mark, and the $11.4 million negative pretax impact from provision expense on acquired unfunded commitments. It also excludes pretax merger-related costs of $78.9 million associated with the merger and a $15.7 million pretax gain on the sale of $2 billion of CRE loans acquired in the Sandy Spring acquisition, along with a $14.3 million pretax gain from the sale of our equity interest in Cary Street Partners. In the second quarter, reported net income available to common shareholders was $16.8 million, and earnings per common share were $0.12. Adjusted operating earnings available to common shareholders were $135.1 million or $0.95 per common share, resulting in an adjusted operating return on tangible common equity of 23.8% and an adjusted operating return on assets of 1.46%, with an adjusted operating efficiency ratio of 48.3%. At the end of the second quarter, the total allowance for credit losses was $342.4 million, reflecting an increase of about $133 million from the first quarter, mainly due to the initial allowance related to Sandy Spring acquired loans, which included a loan loss reserve on PCD loans and the CECL double count on non-PCD loan credit marks. The total allowance for credit losses as a percentage of total loans held for investment rose to 125 basis points at the end of the second quarter, up from 113 basis points at the end of the first quarter. The provision for credit losses of $105.7 million in the second quarter included the CECL double count. Excluding the day 1 provision on non-PCD loans and unfunded commitments from Sandy Spring, the provision for credit losses decreased from the previous quarter due to overall increases in the allowance for loan losses amid uncertainty in the economy and lower net charge-offs. Net charge-offs fell to $666,000 or 1 basis point annualized in the second quarter from $2.3 million or 5 basis points in the first quarter. Regarding the pretax pre-provision components of the income statement for the second quarter, tax equivalent net interest income was $325.7 million, a rise of $137.8 million from the first quarter, primarily fueled by Sandy Spring acquired loans and deposits, merger-related net accretion interest income, and organic loan growth. The tax equivalent net interest margin for the second quarter was 3.83%, an increase of 38 basis points from the prior quarter, driven mainly by the net accretion of purchase accounting adjustments following the Sandy Spring acquisition. Earnings asset yields for the second quarter grew by 37 basis points to 6.05% compared to the first quarter, while the cost of funds slightly decreased to 2.2%. The loan portfolio yield increased by 47 basis points to 6.48% from 6.01%, driven by merger-related loan accretion income, which added approximately 39 basis points to the loan yield. Increases in securities and other earning asset yield added 1 basis point to the earning asset yield, mostly from the restructuring of Sandy Spring’s investment portfolio. However, shifts in the earning asset mix partially offset these increases. The slight decline in the cost of funds was mainly due to decreased deposit costs, counterbalanced by increased borrowing costs linked to the acquisition. Noninterest income rose by $52.3 million to $81.5 million due to gains on sales of CRE loans and equity interest, alongside the overall effects of the Sandy Spring acquisition. Adjusted operating noninterest income climbed $22.2 million from the first quarter driven largely by the acquisition. Noninterest expenses increased by $145.5 million to $279.7 million, primarily due to merger-related costs and other expenses from the acquisition. Adjusted operating noninterest expenses rose to $182.4 million for the second quarter, significantly impacted by the Sandy Spring acquisition. The company's effective tax rate for the second quarter was a negative 13.2%, resulting from an income tax benefit tied to the reevaluation of a state deferred tax asset due to the acquisition. Looking ahead, we estimate the annual effective tax rate to be within 21% to 22%, up from approximately 19.5% last year, reflecting the higher state tax rates where Sandy Spring operated. By June 30, loans held for investment, net of deferred fees and costs, increased to $27.3 billion, up $8.9 billion from the prior quarter, largely due to the Sandy Spring acquisition. If the acquisition closed on March 31 instead of April 1, and disregarding negative loan fair value marks and the CRE loan sale effects, pro forma loan growth was around 4% annualized. Total deposits at June 30 reached $31 billion, boosted by new interest-bearing and demand deposits from the Sandy Spring acquisition. Pro forma deposits, assuming an earlier closing, decreased 9.5% annualized due to declines in broker and time deposit balances as we let higher-cost deposits mature. At the end of the second quarter, the regulatory capital ratios for Atlantic Union Bankshares were well above well-capitalized levels. The company paid a common stock dividend of $0.34 per share, marking a 6.3% increase from the previous year's dividend. Our full-year 2025 financial outlook for AUB has been adjusted, accounting for estimated purchase accounting adjustments from Sandy Spring that could change. We project loan balances to end the year between $28 billion and $28.5 billion, with deposit balances estimated at $31 billion to $31.5 billion. The allowance for credit losses to loans is expected to fall between 1.2% and 1.3%, and the net charge-off ratio for the full year is projected to be between 15 and 20 basis points. Fully tax equivalent net interest income is anticipated to be between $1.15 billion and $1.2 billion, with a fully tax equivalent net interest margin projected between 3.75% and 4%, assuming rate cuts by the Federal Reserve this fall. The projections for fully tax equivalent net interest margin also account for estimated net accretion income from the Sandy Spring acquisition. Yearly adjusted operating noninterest income is expected to range from $175 million to $185 million, while adjusted operating noninterest expenses are estimated between $670 million and $680 million, excluding about $60 million in amortization of intangible assets. We expect to deliver financial returns within the top quartile of our peer group and aim for top-tier financial performance for our shareholders. In summary, Atlantic Union achieved solid operating results in the second quarter, including impacts from Sandy Spring despite the complexities of acquisition accounting. We are on track to realize the anticipated financial benefits of this acquisition, with some benefits already reflected in the second quarter results. We believe we are well positioned to sustain profitable growth and continue to build long-term value for our shareholders in 2025 and beyond. I will now turn the call back to John.

John C. Asbury, President and CEO

Thank you, Rob. In December, we'll host an Analyst Day at the New York Stock Exchange, and Bill will send out more information on that shortly. This will be our third Analyst Day since I've been here, and we'll share our new 3-year strategic plan, which we expect to finalize and approve this fall. While you should not expect anything dramatic in terms of changes, it will be the next phase of the strategy we have articulated and consistently executed over the years. Although I don't want to front run too much of what we'll share in December, I do want to highlight our geographic footprint expansion strategy as it's a question we frequently receive. For background and as a reminder, I've often described the AUB story and our transformation as chapters in a book. Chapter 1 involved consolidating Virginia and securing our position as Virginia's bank. We believe we have now accomplished that. Chapter 2 was extending the Virginia franchise to secure a similar footing in the lower Mid-Atlantic, which we believe was achieved with our acquisition of Sandy Spring. We now have the number one regional bank by depository market share in both Maryland and Virginia, a feat we believe is unprecedented and likely not replicable in our markets. Chapter 3, which is already underway, focuses on the organic expansion of our presence in North Carolina. The acquisition of American National Bank last year was pivotal for densifying our presence in Western and Southern Virginia as well as providing us a meaningful entry into North Carolina. When we acquired American National, we clearly stated our intention to invest in North Carolina's growth markets, and we now plan to accelerate those investments. The Sandy Spring acquisition has provided us with significant growth opportunities in the large markets of Maryland and Northern Virginia. As evidenced by this quarter's operating results, we believe it also provides us with the financial capacity to accelerate investments in our company, including organic expansion in North Carolina. We will build on the North Carolina base we enhanced with American National's Piedmont Triad presence and Raleigh office in addition to AUB's existing branches in the Outer Banks, our long-standing Charlotte loan production office and the Wilmington loan production office we established after the American National merger. These are attractive markets where we believe we can successfully utilize our model to drive incremental growth. Starting in 2026, we plan to open 10 new branches in North Carolina with 7 in the Research Triangle and 3 in Wilmington. We also plan to expand our commercial banking, wealth, and mortgage teams there. We believe these actions will provide us with a critical mass to compete in those markets and offer new supplemental organic growth opportunities in some of the best population growth markets in the country. The branch build-out is expected to be completed over a 3-year period. In sum, we have intentionally and carefully built a uniquely valuable franchise that we envisioned in our strategic plans over the past nearly 9 years. We believe we are well positioned to realize the potential of the new markets acquired through the Sandy Spring acquisition to continue our growth in Virginia and to execute on attractive organic growth opportunities in North Carolina. We also plan to continue to supplement organic growth with our existing specialty lines. We'll have more details during our Investor Day in December, but I hope this provides a clear picture of the next chapter in the AUB story. And I would like to close by acknowledging our Chief Financial Officer, Rob Gorman's planned retirement, which we announced in the second quarter. We have launched a nationwide search and are looking both internally and externally for our next CFO. Rob joined us in 2012 when we were a well-regarded $4 billion asset Virginia community bank. His vision for the company's potential predates my tenure, and he has been instrumental to our success. Rob's leadership, expertise, and friendship have been invaluable. He's not done yet. And for those of you who know him, he will run through the finish line. I'll now turn the call over to Bill to see if there are any questions from our research analyst community.

William P. Cimino, Senior Vice President, Investor Relations

Thank you, John. Jonathan, we are ready for our first caller, please.

Operator, Operator

And our first question for today comes from the line of Russell Gunther from Stephens.

Russell Elliott Teasdale Gunther, Analyst

Maybe to start on the loan growth discussion. I appreciate the commentary about being well positioned for the back half of this year. We have those kind of guideposts. How should we think about the pro forma growth outlook on a larger balance sheet and as we think about your plans for the Carolinas as a piece of it, yes?

John C. Asbury, President and CEO

Yes, we're currently focused on the Carolinas. The Charlotte LPO, which has been operational for nine years, is the largest component of our presence there. We have also strengthened our teams through the merger with American National Bank, which we are pleased with. Additionally, we have the relatively new Wilmington LPO, and all of this is incorporated into our forecast. David Ring, our Head of Wholesale Banking, is here as well, and I might ask him to share his thoughts. From my perspective, the legacy AUB pipeline, excluding Sandy, is at an all-time high. Furthermore, the Sandy Spring portion of our franchise, which will be rebranded as AUB in the fall, is also looking promising. What are your insights on what we should anticipate?

David V. Ring, Head of Wholesale Banking

So in the back half of the year, we do have good momentum coming in, especially starting in June, it really started. And like John said, the pipeline is as strong as it's ever been. And so if you do the math and calculate your runoff and how fast your pipeline turns, we should be in good shape for the rest of the year.

Russell Elliott Teasdale Gunther, Analyst

And then maybe switching gears on to the expense outlook beyond what you've provided for this year and as you consider the Carolinas. I think pro forma for Sandy Spring, you talked to an efficiency ratio in the 45% range. Is that still the right way to think about this going forward into '26? Or could we see that creep up as you build out the Carolinas organically?

Robert Michael Gorman, Executive Vice President and CFO

Yes. Russell, this is Rob. Yes, we're still targeting that mid-45 or mid-40s efficiency ratio. That's inclusive of the investment we're making in the Carolinas. So we looked at that very carefully. It still would reconfirm our thoughts on 2026 in terms of the metrics, return on assets in the 1.50 range, ROTCE 20-plus percent, and then efficiency ratio mid-40s, inclusive of the investment we're making down in the Carolinas.

John C. Asbury, President and CEO

That also includes additional investment in technology, particularly as every group in the bank has presented AI-related requests. While we can't address everything, we do have the financial ability to keep investing in the company. I want to highlight that, as you can see, we achieved a personal long-term goal of mine, breaking the 50 mark on an operating basis. We believe we are now firmly in the 40-something efficiency ratio category, which is impressive for a bank with a sizable retail presence.

Russell Elliott Teasdale Gunther, Analyst

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

Robert Michael Gorman, Executive Vice President and CFO

Yes, at the end of this quarter, our CET1 ratio is around 9.8%. Moving forward, we expect that to increase by approximately 25 to 30 basis points each quarter due to significant internally generated capital growth. Regarding the CECL double count, we will assess its impact, which is likely about 30 basis points if the change had been made before this quarter. While I don't anticipate making that change, we will monitor the situation. In terms of capital deployment, our priority remains on investing in the organic growth of the company. We will also continue to review our dividend payout ratio, currently targeted between 35% and 45%. Additionally, if we approach a CET1 ratio of 10.5% to 11%, we will consider other deployment options such as share repurchases. We could potentially evaluate that in the first or second quarter of next year.

Operator, Operator

Our next question comes from the line of David Bishop from Hovde Group.

David Jason Bishop, Analyst

Congratulations, Rob, on the news. I’m curious about the credit quality perspective, John. Regarding the marks on the legacy Sandy Spring front, what did you observe on a legacy Atlantic Union basis? Can you provide some insight into what happened with criticized classified and the formation of new non-performing assets? It looks like it was quite low, but I want to ensure my numbers are accurate.

John C. Asbury, President and CEO

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

Douglas F. Woolley, Chief Credit Officer

Yes. What John said, David, is that it's a reflection of our work on the Sandy portfolio. The rest of the footprint looks fine. No, nothing material or noticeable in credit risk profile anywhere.

David Jason Bishop, Analyst

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

John C. Asbury, President and CEO

GovCon is performing well. As I mentioned, most of our government contract finance portfolio is related to national security and defense, and these contracts are generally beneficial. With the recent record in defense spending, the focus on modernizing defense expenditures, and the emphasis on drone warfare, anti-drone defenses, unmanned vehicles, unmanned ships, cybersecurity, and missile defense, this trend favors the contractors we work with, and the outlook is positive. One challenge we encountered in government contract finance was increased activity in private credit that was reducing attention to these contracts. But overall, the situation looks favorable. Dave, do you have any additional insights on opportunities in this area?

David V. Ring, Head of Wholesale Banking

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

John C. Asbury, President and CEO

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

David Jason Bishop, Analyst

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

Robert Michael Gorman, Executive Vice President and CFO

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

Operator, Operator

Our next question comes from the line of Brian Wilczynski from Morgan Stanley.

Brian Wilczynski, Analyst

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

John C. Asbury, President and CEO

Dave, do you want to take that?

David V. Ring, Head of Wholesale Banking

Sure. I would describe the current market as somewhat cautious, with borrowers hesitating due to concerns about tariffs and other factors. However, we have noticed an increase in borrowing as they prepare for potential tariffs by building up inventory. There has been a decline in optimism, but we're beginning to see shorter sales cycles and faster closings. The real estate sector is more complicated for us since we monitor it closely, considering construction and development processes. We've slightly scaled back in that area and observed a reduction in our pipelines, but we are increasing our activity with stabilized properties. Consequently, we expect growth in both the commercial real estate and commercial and industrial sectors this year, and we currently see positive trends that we anticipate will continue.

John C. Asbury, President and CEO

Yes, I agree. There's no doubt that the mood improved throughout the quarter. Some of that improvement can be attributed to people becoming more accustomed to the uncertainty. Regarding the tariff issue, our markets are likely less affected by tariffs than others, as we've pointed out before with support from Federal Reserve data. It's more about business sentiment, and the mood has definitely improved as people have adapted to the volatility and feel more optimistic about the future. I see clear signs of that. So, to reiterate what Dave mentioned earlier, we’re on solid ground, and I believe we are looking at a reasonable growth trajectory for the rest of the year.

Brian Wilczynski, Analyst

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

Robert Michael Gorman, Executive Vice President and CFO

Yes, Brian. We have approximately $1.6 billion in cash, which is about $1 billion to $1.1 billion more than usual. This increase is due to the proceeds from the CRE sale received late in the quarter. Our plan is to continue reducing high-cost brokered deposits, which will mature in the third quarter. We expect to pay down around $200 million to $300 million, possibly a little more, over the next quarter, with additional reductions in the fourth quarter. Additionally, we intend to invest around $500 million more into the investment portfolio throughout this quarter. We're strategically gradually incorporating that investment. We also anticipate that loan growth will remain strong, aiming for $28 billion, so some of that cash will be utilized for funding loans. That's how we intend to use the cash.

Brian Wilczynski, Analyst

And is it fair to assume that the loan-to-deposit ratio maybe ticks up a little bit from here, just given the actions you took?

Robert Michael Gorman, Executive Vice President and CFO

We are likely to see an increase. We are comfortable with a loan-to-deposit ratio in the range of 90% to 95%, which has been our historical average. Currently, we are at 88%, so we may see that ratio rise as we adjust the broker deposit numbers downward.

Operator, Operator

Our next question comes from the line of Steve Moss from Raymond James.

Unidentified Analyst, Analyst

This is Chase on for Steve. First one for me. I've been hearing a lot about pricing competition. Where are loan yields coming in at now, either in terms of blended or AUB in legacy SASR or markets separately?

Robert Michael Gorman, Executive Vice President and CFO

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

Unidentified Analyst, Analyst

Got you. And I see in your 2025 financial outlook slide that you have 3 cuts rest of the year baked into the modeling there. Did you happen to run a 2-cut scenario? And if so, is there anything you can share on how different it was from the 3-cut scenario?

Robert Michael Gorman, Executive Vice President and CFO

Yes, we are currently operating under a scenario with no cuts, which could occur. This would lead to an improvement of about 1 to 2 basis points in our margins this year. Since approximately 50% of our loan book consists of variable rate loans that won't see a repricing down, I expect to gain a couple of basis points. If this scenario extends into 2026, where we anticipate three cuts, delaying those cuts could result in an improvement of around 3 to 5 basis points for the 2026 outlook.

Unidentified Analyst, Analyst

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

John C. Asbury, President and CEO

I would say first of all, what we bring for the former Sandy Spring franchise is liquidity. They're unrestricted in their abilities. We offer new products and capabilities, especially in the commercial and industrial sectors. I think we have a fantastic group of people involved, and I'm very pleased with the cultural fit. I'm really excited about our plans in North Carolina and feel positive about the Virginia market as well. Overall, I am quite optimistic. Any improvement in market calmness related to the hesitancy we've experienced, which seems to be easing, will be beneficial for us since we are significant players in these markets. They are strong markets, and we hold an important position. Does anyone have anything to add? I believe we are well-positioned to deliver.

Operator, Operator

Our next question comes from the line of Catherine Mealor from KBW.

Catherine Fitzhugh Summerson Mealor, Analyst

Could you follow up on the discussion about the growth opportunities in the D.C. market, specifically regarding Commercial and Industrial products? What growth rate do you anticipate for C&I in some of the Sandy Springs markets? What does the ramp-up and transition look like? Will you need to hire more lenders, or can your current team handle it? Additionally, on the Commercial Real Estate side, are there potential opportunities with clients from the $2 billion in loans you recently sold and continue to service? Is there a growth opportunity within that client base as you look to expand CRE over time?

John C. Asbury, President and CEO

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

Catherine Fitzhugh Summerson Mealor, Analyst

Thank you for that clarification.

John C. Asbury, President and CEO

Thank you. You know why I'm sensitive to that. Yes. So State of Maryland and then more broadly, Northern Virginia, we think we do have a great team up there, and we feel good about that team and under Jay O'Brien's leadership. Dave, I think as we've looked at the size of the team and capabilities, we feel pretty good. Do you have anything you would want to add to that?

David V. Ring, Head of Wholesale Banking

Yes, when we evaluate the teams, we consider their book sizes and the levels of support we provide. We believe the team is fully staffed at this time, and we don't anticipate needing to hire additional staff unless there are departures. Regarding the commercial real estate side, it's important to note that there are multiple transactions possible with customers. Even if we have recently made a sale to a customer in our portfolio, we don't have to remove that deal; we can pursue additional transactions with them. The advantage of commercial real estate banking is that as you nurture those relationships, you create multiple opportunities.

John C. Asbury, President and CEO

Yes, I agree. The best aspect of the commercial real estate sale is that we are managing those credits effectively. We had a great partner in Blackstone who certainly delivered. We are still managing those relationships, and as they present additional opportunities, it allows us to free up capacity. For instance, if we had previously faced a limit due to too much exposure or restricted upside, that concern has been addressed with the sale. Opportunities may arise over time with them, which refreshes our prospects. As you know, a well-regarded bank was somewhat limited by liquidity and commercial real estate concentration, but those issues are no longer relevant. We believe we are in a strong position to selectively pursue new opportunities, and we anticipate seeing potential in that area and beyond.

Catherine Fitzhugh Summerson Mealor, Analyst

I have a follow-up regarding the margin. It seems we are starting at the lower end of our expected range. As we progress through the year and see improvements in growth, along with addressing liquidity and reducing brokered investments, can we expect that the margin will gradually move toward the higher end of the range? What is the risk that the margin remains stagnant in the near term?

Robert Michael Gorman, Executive Vice President and CFO

Yes. I believe the margin should gradually improve on a core basis, and that’s what we expect to see. We experienced about 8 basis points of core margin improvement this quarter. Looking ahead, we have already seen the effects of reduced costs from the certificate of deposit book. Previously, we were paying CD rates in the 4.40% range, while new and maturing CDs are currently in the 3.75% to 4% range. We anticipate another quarter of reducing deposit costs. We will continue to lower those costs as the Federal Reserve reduces rates. However, we also face an offset with the repricing of our variable rate loan book. Therefore, the pace of improvement will likely slow a bit, but it will continue to rise, just not at the rate of 8 to 10 basis points per quarter. This is why we have that range. Nonetheless, it should still trend higher from this point forward. On a full year basis, we expect it to be in the range of 3.75% to 4%. As we move into the third and fourth quarter, you should see that improve beyond our current position.

John C. Asbury, President and CEO

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

Operator, Operator

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

Brian Wilczynski, Analyst

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

Robert Michael Gorman, Executive Vice President and CFO

Yes, Brian, I would consider it a conservative outlook, but it does take into account a couple of loans for which we have specific reserves and expect to resolve in the second half of the year. This plays into the 15% to 20% range if everything unfolds as we anticipate based on those specific reserves. It might be a bit conservative, and we may not reach that 15 basis point charge-off ratio, but I don't see anything beyond what I've mentioned that would indicate it should be higher. I believe that range makes sense for us in case anything arises in the second half of the year.

John C. Asbury, President and CEO

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

William P. Cimino, Senior Vice President, Investor Relations

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

John C. Asbury, President and CEO

Thank you.

Operator, Operator

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