Atlantic Union Bankshares Corporation (NYSE:AUB) Q4 2024 Earnings Conference Call January 23, 2025 9:00 AM ET

Company Participants

William Cimino - Senior Vice President of Investor Relations
John Asbury - President and Chief Executive Officer
Robert Gorman - Executive Vice President and Chief Financial Officer
David Ring - Executive Vice President and Wholesale Banking Group Executive
Shawn O’Brien - Executive VP & Consumer Banking Group Executive
Douglas Woolley - Executive VP & Chief Credit Officer

Conference Call Participants

Nick Lorenzoni - Stephens Inc.
Catherine Mealor - Keefe, Bruyette, & Woods, Inc.
Stephen Scouten - Piper Sandler & Co.
David Bishop - Hovde Group
Stephen Moss - Raymond James

Operator

Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares Fourth Quarter 2024 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Bill Cimino, Senior Vice President, Investor Relations. Please go ahead.

William Cimino

Thank you, Michelle, 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 fourth quarter and full year 2024. We will also make forward-looking statements on today's call 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 statement. And please refer to our earnings release and our slide presentation issued today and our other SEC filings for a 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 will take questions from the research analyst community. And now I'll turn the call over to John.

John Asbury

Thank you, Bill. Good morning, everyone, and thank you for joining us today. 2024 was a good year and a consequential year for Atlantic Union.

We were excited to close our acquisition of American National Bankshares on April 1, and we continue to be impressed with our new and expanded markets and how well the two companies came together as one since closing. And on October 21, we added to the excitement by announcing our proposed acquisition of only Maryland-based Sandy Spring Bancorp. Let me begin with some perspective on the status report on the proposed acquisition since last quarter. The acquisition of Sandy Spring will join the number one regional depository market share bank in Maryland with the number one original depository market share bank in Virginia.

In our view, not only has there never been such a regional bank franchise headquartered in the lower Mid-Atlantic, but there may also never be another, as we believe our combined franchise will not be able to be replicated in our footprint. We believe the proposed acquisition will benefit our customers and markets with an expanded and even more convenient branch network, enhanced product offerings, a robust community benefit plan and access to more capital. We also believe it will benefit our teammates with expanded career opportunities, resources and capabilities. And finally, we believe it will benefit our shareholders by positioning us well to deliver differentiated financial performance.

As for the status of the merger, we were pleased to receive our merger approvals from the Federal Reserve Bank of Richmond on January 13, seven weeks after filing applications. We are awaiting approval from the Virginia Bureau of Financial Institutions in the Maryland Office of Financial Regulation. Assuming receipt of remaining regulatory approvals, each company's respective shareholder and stockholder approvals as applicable at the special meetings to be held on February 5 and the satisfaction of other closing conditions, we expect to close the transaction on 1 first of this year.

Our merger integration planning process is well underway with the Sandy Spring team and from the meetings I've attended, I remain highly confident in our cultural compatibility, the strategic logic of the merger and its potential. We've been delighted by both teams' enthusiasm over what we believe our combined franchise will offer to our customers and our communities. I'll now comment on the macroeconomic conditions in our markets and then share a few thoughts on the fourth quarter.

The macroeconomic environment remains favorable in our footprint, and we do not expect that to change in the near term. Our markets continue to appear healthy, and our lending pipelines imply we should expect mid-single-digit annualized loan growth in 2025 within the current AUB franchise. We believe that a good indicator of economic health is employment, and the three states where we operate, continue to have unemployment rates better than the last reported national average unemployment rate of 4.1%.

In our case, unemployment rates by state for the last reported period of November are 3.0% for Virginia, 3.1% from Maryland and 3.7% for North Carolina. Virginia is our largest market, and our governor's summed up the state economy well recently by saying the economy is strong, very strong, and we agree. We're confident in the economy in all our markets and with our increased presence in North Carolina and our planned expansion in Maryland with the Sandy Spring merger, we believe we do and will operate in some of the most attractive and stable markets in the country.

Turning now to quarterly results. Here are a few financial highlights for the fourth quarter and the full year 2024. We continue to be on a moderate growth path for both deposits and loans.

Point-to-point loan growth for the fourth quarter was approximately 3% annualized. As you can see by comparing point-to-point growth to the average for the quarter, loan growth skewed to the back half of the quarter and accelerated following the elections and the Fed rate cut in December. Deposit growth in the fourth quarter was approximately 2% annualized after reducing brokered deposits by more than $200 million.

Noninterest-bearing deposit average balances were about even quarter-to-quarter, and point-to-point decreased modestly to approximately 21% of total deposits. It's a typical pattern to see a seasonal drop in noninterest-bearing transaction accounts at year-end. With the Federal Reserve rate cuts, we've been fairly aggressive in moving deposit rates lower, as you can see from the decline in the cost of deposits.

For some of our larger negotiated rate depositors, we were able to reduce deposit rates by more than the latest Fed cut, which we believe will have additional benefits to the net interest margin in the first quarter of 2025. In past quarters, we've been able to pay down overnight FHLB borrowings with surplus funds from some of the larger accounts that have significant fluctuations in the normal course of the cash operating cycles. We can no longer do that, since we significantly reduced our overnight FHLB borrowings during the quarter.

This funding mix dynamic contributed to some of the quarter's NIM compression. And speaking of net interest margin, because we're still mildly asset-sensitive, the expectation that the Fed may have fewer rate cuts than previously expected or perhaps none bodes well for us, and should be a net positive for AUB's margin. Our loan growth was on top of the highest quarterly runoff we've seen since before the pandemic.

We saw elevated payoffs or pay downs among both our C&I client base, especially in government contracting and larger businesses and in commercial real estate. We view the elevated commercial real estate payoffs, which we predicted last quarter, is demonstrating that CRE markets in our footprint, and that there's ample liquidity and demand for commercial real estate sales and refinances into permanent markets. That's very encouraging to see.

The good news is that total loan production increased 29% quarter-over-quarter, enough to overcome the spike in payoffs and allow for modest loan growth. C&I utilization this quarter increased slightly from the last quarter in the prior year's fourth quarter. Loan production in the fourth quarter was weighted nearly two third from existing clients and about a third from new clients, demonstrating we continue to grow our client base.

Production continued to favor C&I over commercial real estate, with about 60% of production coming from C&I. We were pleased to see an increase in production and construction and land development for the third consecutive quarter, which we view as another sign of relatively healthy commercial real estate markets in our footprint. Rob will provide the details around quarterly results, but I will note that the fourth quarter earnings were negatively impacted by a higher provision for loan losses driven by a $13.1% million specific reserve on a $27.7% million asset-based C&I loan involving an apparent misrepresentation of its borrowing base, which was identified at year-end.

This individual credit primarily accounted for the increase in nonperforming assets over the quarter, though NPAs remained low at approximately 0.32% of loans held for investment. Aside from this atypical event, credit remains solid, with only three basis points of net charge-offs this quarter and five basis points for the year. As I mentioned every quarter and have for about eight years, we do not consider the negligible losses we have seen over the past few years to be sustainable.

We do expect to have occasional one-off losses, but generally not of the type or size we saw this quarter. We remain confident in our asset quality that we believe some normalization of our long run of historically low losses is inevitable. In sum, we're building out our unique franchise and realizing the financial benefits of the American National combination, which were unfortunately clouded this quarter by the specific credit reserve.

As has been the case for some time, we expect economic uncertainty to continue, but we're optimistic in our outlook, and we believe we are well positioned for a successful 2025 and beyond. Atlantic Union is a story of transformation from a Virginia community bank to the largest regional bank headquartered in Virginia, to what will be the largest regional bank headquartered in lower Mid-Atlantic upon closing our proposed acquisition of Sandy Spring. Meanwhile, we remain more excited than ever about the growth opportunity in our North Carolina markets, and we're investing in them.

We now have and are continuing to build the franchise we have long sought using our announced strategic plan as our guidepost. Now more than ever, Atlantic Union is a uniquely valuable franchise that is dense, diversified, traditional full-service bank with a strong brand and deep client relationships in stable and attractive markets. We also believe we have unmatched scarcity value in this region.

I'll now turn the call over to Rob to cover the financial results for the quarter. Rob.

Robert Gorman

Thank you, John, and good morning, everyone. I'd now like to take a few minutes to provide you with some details of Atlantic Union's financial results for the fourth quarter and full year 2024. Please note that for the most part, my commentary will focus on Atlantic Union's fourth quarter and 2024 financial results on a non-GAAP adjusted operating basis, which in the fourth quarter excludes $7 million in pretax merger-related costs and for the full year excludes the additional FDIC special assessment of $840,000 in the first quarter, the pretax loss on the sale of American National securities of $6.5% million in the second quarter, the effect of the $4.8% million valuation allowance for deferred taxes that was charged to the income tax expense in the second quarter and the pretax merger-related cost of $40 million incurred in 2024 associated with our merger with American National and our proposed merger with Sandy Spring. As a reminder, the full year 2024 non-GAAP adjusted operating results have not been adjusted to exclude the $13.2% million negative pretax impact of the CECL initial provision for credit loss expense on purchased non-credit deteriorated for non-PCD loans acquired from American National, which represents the CECL double count of the non-PCD credit mark. It does not also include the $1.4% million negative pretax impact of unfunded commitments acquired from American National.

It should also be noted that the weighted average diluted common shares outstanding increased during the fourth quarter, driven by the dilutive accounting impact of the forward sale of our common stock in October under the treasury stock method of accounting, which requires the dilutive potential common shares related to the forward sale to be included in the diluted weighted average shares even though the underlying common stock has not been issued to date. This impact is calculated by taking the difference between the average market price of AUB stock in the quarter and the forward stock price multiplied by the number of shares underlying the forward sale and dividing that result by AUB's average market price for the quarter. That said, in the fourth quarter, reported net income available to common shareholders was $54.8% million, and diluted earnings per common share was $0.60%. For the full year 2024, reported net income available to common shareholders was $197.3% million, and diluted earnings per common share were $2.24%. Adjusted operating earnings available to common shareholders were $61.4% million or $0.67% per diluted common share for the fourth quarter, which resulted in an adjusted operating return on tangible common equity of 15.3% and adjusted operating return on assets of 103 basis points and an adjusted operating efficiency ratio of 52.7% in the fourth quarter.

For the full year, adjusted operating earnings available to common shareholders were $241.3% million or $2.74% per common share, which resulted in an adjusted operating return on common equity of 16.12%, an adjusted operating return on assets of 106 basis points and an adjusted operating efficiency ratio of 53.3% in 2024. Turning to credit loss reserves. At the end of the fourth quarter, the total allowance of credit losses was $193.7% million, which was an increase of approximately $16.1% million from the third quarter primarily due to the specific reserve John mentioned earlier, continued uncertainty in the economic outlook on certain loan portfolios and organic loan growth in the fourth quarter. The total allowance for credit losses as a percentage of total loans held for investment increased to 105 basis points at the end of the fourth quarter.

The provision for credit losses of $17.5% million in the fourth quarter was up from $2.6% million in the prior quarter, primarily driven by the specific reserve and slightly higher net charge-offs during the quarter. Net charge-offs increased to $1.4% million or only three basis points annualized in the fourth quarter, but that was up from $666,000 or 1 basis point annualized in the third quarter. Now turning to the pretax pre-provision components of the income statement for the fourth quarter.

Tax equivalent net interest income was $187 million, which was an increase of $208,000 from the third quarter. The increase in net interest income from the prior quarter reflects the net impact of a $5.6% million decline in interest expense on interest-bearing liabilities and a $5.4% million decrease in interest income on earning assets. The decrease in interest expense is primarily due to a $4.7% million decrease in borrowings expense as a result of $312 million in lower average short-term borrowings and the impact of lower deposit rates in the quarter. The decrease in interest income on earning assets is due primarily to a $9 million decline in income on loans held for investment driven by lower loan yields on our variable rate loans resulting from the impact of the Federal Reserve interest rate cuts at the end of the third quarter and during the fourth quarter. The decline in loan interest income was partially offset by a $4.6% million increase in interest income from other earning assets as a result of a $402 million increase in average cash and other earning asset balances.

The fourth quarter's tax equivalent net interest margin was 3.33%, a decline of five basis points from the previous quarter, primarily due to lower core loan yields driven by decreases in variable rate loan yields, partially offset by lower cost of funds and an increase in yields on cash and other earning assets. Additionally, the reversal of accrued interest on the specific reserve loan negatively impacted margin by approximately 1 basis point in the quarter. Earning asset yields for the fourth quarter decreased 20 basis points to 5.74% compared to the third quarter of 2024, and the cost of funds decreased by 15 basis points to 2.41% compared to the prior quarter. The 20-basis point decline in earning asset yield is due primarily to the decrease in the loan portfolio yield, which was lower by 21 basis points from 6.35% to 6.14% during the fourth quarter, driven by lower yields on our variable rate loans and a decrease in the securities portfolio yield from 3.92% to 3.87%. These declines were partially offset by an increase in yield on cash and other earning assets, which increased from 3.48% to 4.27% during the fourth quarter.

A 15-basis point decrease in the fourth quarter's cost of funds to 2.41% was due primarily to a 42-basis point decline in the cost of borrowings to 4.87%, a 9-basis point decline in the cost of deposits of 2.48% and a favorable shift in the deposit and short-term borrowing funding mix. Noninterest income increased $941,000 to $35.2% million for the fourth quarter, primarily driven by a $3.6% million increase in loan-related interest rate swap fees due to an increase in transaction volumes, which was partially offset by a $1.5% million decrease in bank-owned life insurance income, driven by debt benefits received in the prior quarter and a $770,000 decrease in other operating income primarily due to a decline in equity method investment income. Reported noninterest expense increased $7.1% million to $129.7% million for the fourth quarter, primarily driven by a $5.6% million increase in pretax merger-related costs associated with the pending Sandy Spring acquisition. Adjusted operating interest expense, which excludes merger-related costs and amortization of intangible assets in both quarters increased $1.6% million to $117 million for the fourth quarter, driven by a $1.8% million increase in salaries and benefits expense primarily due to increases in variable incentive compensation expense and self-insured related group insurance costs, as well as a $1.4% million increase in professional service fees related to strategic projects that occurred during the fourth quarter.

These increases were partially offset by a $1.7% million decrease in franchise and other taxes. At December 31, 2024, loans held for investment net of deferred fees and costs were $18.5% billion, which was an increase of $133 million or 2.9% on an annualized basis from September 30, 2024, primarily driven by increases in construction and land development and commercial and industrial loan portfolios, partially offset by declines in the multifamily real estate loan portfolio. On a pro forma basis, as if the American National balances were acquired on December 1 -- December 31, 2023, loans held for investment increased $661 million or approximately 3.7% for the full year, excluding the impact of the acquisition's fair value loan marks.

At December 31, 2024, total deposits stood at $20.4% billion, which was an increase of $92 million or 1.8% annualized from the prior quarter due to increases in interest-bearing customer deposits, partially offset by decreases in demand deposits and broker deposits. On a pro forma basis, as if the American National balances were acquired on December 31, 2023, deposits increased $974 million or approximately 5% for the full year. At the end of the fourth 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 fourth 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 fourth quarter, the company paid a common stock dividend of $0.34% per common share, which was an increase of 6.3% for both the third quarter of '24 and fourth quarter of '23 dividend amounts. As noted on Slide 13, our full year of 2025 financial outlook for AUB on a stand-alone basis, excluding the financial impact of the pending Sandy Spring acquisition, is as follows. We expect mid-single-digit loan to deposit growth for the full year.

Fully taxable equivalent net interest income for the full year is projected to come in between $775 million and $800 million. We are projecting that the full year fully tax equivalent net interest margin will be in a range between 3.45% and 3.6%, driven by our baseline assumption that the Federal Reserve Bank will cut the Fed funds rate by 25 basis points twice in 2025 and the yield curve will steepen throughout 2025. The projected expansion of the net interest margin from current levels is expected to be primarily driven by the impact of increasing yields on our fixed rate loan portfolio as the back book continues to reprice higher, as well as by the impact of lower time deposit rates is approximately $3.3% billion at a current average interest rate of approximately 4.4% will mature over the next 6 months.

These favorable NIM impacts will be partially offset by lower variable rate loan yields, driven by the Fed funds rate cuts anticipated. On a full year basis, adjusted net -- adjusted operating noninterest income is expected to be between $125 million and $135 million. Adjusted operating noninterest expenses, which exclude the amortization of intangible assets expense of approximately $20 million for the full year, are estimated to be in the range of $475 million to $490 million.

In summary, Atlantic Union delivered solid operating financial results in the fourth quarter despite challenging banking and operating environment we are effectively managing through. 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. Let me now turn the call over -- back over to Bill Cimino for questions from our analyst community.

William Cimino

Thanks, Rob. And Michelle, for our first caller, please.

Operator

[Operator Instructions] Our first question is going to come from the line of Russell Gunther with Stephens Inc. Your line is open. Please go ahead.

Nick Lorenzoni

Hey. Hey. Good morning, everyone.

This is Nick Lorenzoni. I'm just going in for Russell today. Hey, good morning.

I wanted to start off on the macro side. And with the Department of Government Efficiency, DOGE, playing a growing role in streamlining federal operations and even potentially influencing economic activity in Virginia and Maryland, can you guys provide any insight into how these developments might impact your business model.

John Asbury

Yes. Let me -- I'll give you some big picture perspective. And obviously, we don't know exactly what is going to happen up there.

It's certainly been a busy week in Washington with the numerous executive orders coming out. Obviously, we saw the mandate that came out this week to return federal workers to the office and to put a hiring freeze on. A concept of a hiring freeze is something that most private companies understand.

We've done that before ourselves. Having federal workers come back to the office is something that has been long requested by the Mayor of Washington, D. C.

, and we do believe that that will be an economic benefit to the area. It will help the metro, it will help small businesses, et cetera. The incoming administration has been clear that they are committed to a safe, clean and vibrant Washington, D.

C. , and we think that will help. Now let me give you some other kind of broad comments.

We are all for improving government efficiency and reducing federal spending. That is a good objective, and we wish them much success. If the new administration can reduce the federal workforce in some way, shape or form, which is, frankly, easier said than done, given the essential services provided in the nation's capital, we'd expect to see most of those jobs absorbed into the private sector.

And for perspective, the Greater Washington metropolitan statistical area is the sixth largest MSA in the country with a population of 6.3% million people. Its current unemployment rate is 3.2%, and it's one of the most affluent and highly educated regions of the country. Also, to size this, there are 373,000 federal workers in the Washington MSA, and we do question, as mentioned, exactly how many of those can actually go away over time.

So, the realities of the geopolitical situation and incoming administration's pro national defense stance is likely going to benefit our markets. And I think that's important to understand. And that includes the type of government contractors we finance, which typically provide essential services to what we call the three-letter agencies such as Department of Defense, National Security Agency, et cetera.

We would expect to see more funding for those types of agencies. And also, for anyone who is all familiar with the Greater Washington region, whether you've spent time there or lived in the area and observed it like we have, there's no question that traditionally, a change in administration is an economic stimulus for Washington region. Go find a hotel in Washington, D.

C. right now, and you'll find out what I mean. Interestingly, the Washington Business Journal just reported that the sales of high-end homes in 2024 in the Greater Washington region hit a record high, which is interesting.

And then I think the last point that I'll make -- and I'll focus on Sandy Spring for a moment -- is to remember, while there's any number of sort of Greater Washington commercial real estate-oriented banks, don't confuse that with Sandy Spring, which is the Maryland Bank. They are a geographically compact franchise that exclusively operates in what's referred to as the Washington-Baltimore combined statistical area, that has a population of 10 million people. And that's comparable to Chicago and Northern California, the San Francisco CSAs.

The unemployment rate in that combined statistical area is 3.1%. And it is broadly, one of the most highly educated and affluent markets in the country. So, this is a big market. It is a diverse market in terms of its industries.

The federal government influences -- but it's not just about the federal government. And so, we see opportunity. Time will tell exactly what's going to go on up there.

Clearly, there's a lot of conversation and press around large office buildings and the government liquidating their very large, old buildings which are underutilized. That doesn't impact us. We don't perceive that as impacting Sandy Spring because not of the robust finance things that look like that.

So, we'll see how it plays out over time, but it is the nation's capital, and it's not going away.

Nick Lorenzoni

Okay. Got it. That's great color.

Thank you. Now just switching gears. I appreciate the organic NIM outlook for 2025, but could you walk us through the cadence and drivers of organic NIM expansion.

And then are there any changes to the pro forma Sandy Springs guide of 3.75% to 3.85%.

Robert Gorman

Yes. So, in terms of our guidance and how to get there at the expansion that we're suggesting, as we noted in my comments, what we're looking at is that there will be two cuts from the Fed -- the Fed funds rate in 2025, expect that in the second half of the year. But in terms of between now and then, we are seeing that our back book fixed rate loan portfolio is repricing higher, and -- by 1.25% or 1.50% basis points or so.

And we've got about a $1 billion, maybe $800 million to $900 million of maturing fixed rate loans per quarter in 2025 repricing at, call it, one and a quarter, 1.50% on a basis point perspective. So that's helpful. We do see there's a bit of a lag on our deposit costs coming down in the quarter.

But we do expect that we will continue to reduce our CD book from a rate paid perspective. As I mentioned, we have $3.3% billion of maturing CDs in the first six months of 2025. Those maturing CDs paid 4.4% currently.

Our current CD offerings are more in the 3.75% to 4%. So, you'll see a lower cost associated with those maturing CDs. And there's other factors in that, but those are the big drivers that we expect to see NIM expansion in 2025.

As regards to Sandy Spring, we really don't see much change in that outlook in terms of the 2025 impact of Sandy Spring, it might be a bit higher than the numbers you're citing, closer to the forehandle, if you include purchase accounting accretion, which could be a bit higher based on rates going up a bit since we announced the deal, there should be a bit more accretion. So, I would say, between 3.75% and 4% would be the right numbers on the combined basis.

John Asbury

Rob, could you speak to what we saw NIM do over the course of the quarter. My perspective is that we absorbed a 100-basis point decrease in rates because we saw 100 basis points of Fed cuts, 50 in September, which fully impacted us in the quarter, 25 in November, 25 in December. We're still mildly asset sensitive.

So, when rates are cut, it creates a bit of a lag in terms of you have the loan book reprices and then, of course, we push rates down. So, there was a bit of a lag effect. So, can you speak to that.

Robert Gorman

And just -- add, just a comment on the quarter. I should also point out that if you look at net interest spread for the fourth quarter, even though we were down on NIM, the net interest spread was basically flat quarter-to-quarter. So, earning asset yields came down 20 basis points. The interest on interest-bearing liabilities came down 20 basis points, kind of so net even.

We did see some lower levels of free funding related to DDA, which kind of impacted that decline in the margin impacted that. But in terms of what you just mentioned, John, yes. So, if you look at November to December, we're basically flat from a net interest margin perspective.

So, we're seeing that as rates are coming down and lag on the deposit costs are picking up. And that should continue into 2025 as well.

John Asbury

So, I feel like we've got a pretty good running start on this, and that should have been bottom for us. We also pointed out a couple of technical things like understanding that we had about a basis point of NIM go with the onetime reversal of interest on the one credit that had the specific reserve. We did -- there are a few technical issues I commented on, which is we used to be able to take some larger sort of volatile deposits with larger clients to pay off overnight borrowings.

We don't really have that anymore typically. And so, we were able to reduce what we paid on those accounts more than the rate cut, and that happened in December. And that actually will impact the NIM.

Robert Gorman

Yes, I have a really good success in engaging our commercial -- large commercial clients in terms of lowering those exception price deposits and -- to your point. So, that should be picking up as we go into 2025.

John Asbury

So, it's a pretty good setup for NIM expansion.

Nick Lorenzoni

Perfect. Well, that's all I have. Thanks for taking my questions.

William Cimino

Thank you. And Michelle, ready for our next caller, please.

Operator

All right, one moment for our next question. And our next question is going to come from the line of Catherine Mealor with KBW. Your line is open.

Please go ahead.

Catherine Mealor

Hi, good morning. Just a question back on the margin. Just -- I think, Rob, you touched on this, just a little bit, but just wanted to dig into.

Can you talk about just the impact of Sandy Spring, the acquisition. And how we should think about the move in rates since that deal was announced to where we are today. And that impact on kind of the core margin versus accretable yield and how that might impact the marks.

Robert Gorman

Yes. So, -- yes, on that question, Catherine, as you know, rates have moved up a bit since we announced the deal. So, if we were to mark those loans in the balance sheet today, you'd see a bit of a higher mark, which will lead into more accretion income as we go forward.

So, the net impact of that is you might see a bit -- again, if we were to close the deal today and mark them today, might see a bit of a bit higher tangible book value dilution, but higher earnings, EPS accretion and interest accretion coming through. But the earn back would kind of stay in that 2% to 2.25% range. So, in terms of the accretion impact, you'll see more impact, again, based on where rates are today.

And marking the book than we have projected at the announcement just because rates have increased. So, -- but in terms of the overall net interest margin, I think as I just mentioned, we probably see a bit of a lift in the combined margin, with accretion income more -- closer -- guiding up to more-closer to the 4% range than what we might have guided to at announcement.

Catherine Mealor

Okay. And then how do we think about -- so the loan mark makes sense to me. So, on the other side of the balance sheet, with less rate cuts, I would think there would be less ability to lower Sasser's deposit costs as you kind of move through next year.

How do you think about that as an offset.

Robert Gorman

Yes. Well, one of the offsets there is also on the AUB side. We won't see -- 50% of our loan book is variable rate. We won't see as much impact on that.

So, it's kind of washing out, if you will, in terms of those when you combine the balance sheets. But we'll continue to be aggressive. Once we have the balance sheet combined and we close the transaction, we'll be looking at various deposit rate strategies to continue to bring the overall organization's deposit rates down, but specifically looking at Sandy Spring's network or franchise.

John Asbury

Catherine, two points. We're sort of a natural hedge to each other. They're modestly liability sensitive, we're modestly asset sensitive.

So, part of the pressure that we always experience when rates go down, they will lead to some extent. Now clearly, we're larger than they are. But at the same time, when rates don't go down or go up, that pressures them because on the other side of the equation.

So, it's a very good natural hedge for us both. And I will tell you that selfishly, if you asked us to choose what scenario do you choose for rates to do here with a focus on the net interest margin only, Rob, I would vote for leave them where they are. What would you vote for.

Robert Gorman

Yes. Yes, I would agree.

John Asbury

That's a positive scenario for us, but we are planning for two cuts from here in terms of the NIM guide that we've given you.

Catherine Mealor

Okay. That's very helpful. And maybe one other is on credit.

It seems like the reserve build this quarter was really all related to that one C&I loan. It looks like you're building in a little bit of a cushion for a modest reserve build on a core basis next year. Just kind of thinking about that conservatively or anything that you're seeing that would drive that over the next year in particular.

Robert Gorman

Nothing particular -- nothing particularly is driving that, Catherine. At the end of this quarter, as you mentioned we're at 1.05%, and we've guided to between 1 and 1.10%. That could be closer to the 1 versus the 1.10%.

We haven't seen -- we don't really see anything else at this point in time. But it's basically a conservative assumption in our outlook.

John Asbury

Yes. Assuming the specific reserve works its way onto a charge-off, obviously, that brings down the reserve because obviously, by definition, it's specific to that credit. We guided to 10 bps to 15 bps of net charge-offs in 2024.

We were at five. So, my view is we are sort of contemplating an ultimate charge-off of whatever it may be associated with that particular credit. But otherwise, there's not a lot different in terms of our outlook for everything else.

That's about asset quality.

Robert Gorman

That's right. In the charge-off outlook where we said 15 to 20, that kind of builds in that there's a potential charge-off with the specific. So, we don't know that for a fact yet.

But we're anticipating that, and that's why the outlook has kind of increased a bit on the charge-off for 2025.

Catherine Mealor

Makes sense. Thank you very much.

William Cimino

Thank you. Thanks, Kathryn and Michelle. We're ready for our next caller, please.

Operator

All right, one moment. Our next question is going to come from the line of Stephen Scouten with Piper Sandler. Your line is open.

Please go ahead.

Stephen Scouten

Good morning. Guys. Just quick clarification on the expected closing of Sandy Spring.

I think you said April 1. Shareholder vote, February 5. Is it possible that depending upon what you hear in the timing from Virginia and Maryland, that could close earlier.

Or is it just -- is that going to stay the plan given conversion dates and other kind of internal plan.

John Asbury

Good question. We expect that we will hear soon from both Maryland and Virginia, everything is operating in the normal course. It is kind of interesting isn't it, that just for the record, the Federal Reserve came in faster than the states, which is not typically what we see.

But everyone is going through their process. Let's assume that we get everything in in short order. I think the question is, could we close in the month of March.

Yes, we could. Would we do that. No, we would not. Why would we not do that.

Because it's very complicated to close a merger in the last month of a quarter. We could do it, but we choose not to do it. Do you care to.

Robert Gorman

Yes, I agree with that. Yes, it's a lot cleaner to do it on the first of a new quarter. There's a lot of accounting complexities and reporting requirements associated with a stub period in one quarter.

So, it's just cleaner to do it with the new quarter starting.

Stephen Scouten

Yes. No, that makes perfect sense. And then I know you guys were commenting on higher payoffs within your stand-alone portfolio.

Are you -- has Sandy Spring, to your knowledge, experienced some of the same dynamics. And do you have any updated commentary on what that could potentially do for the potential needed size of the CRE loan sale.

John Asbury

I won't comment on Sandy Spring. We can't speak for them. So, you'll have to ask them.

We presume they will release soon -- next week. We'll let them speak to exactly when that will be. But I will say across the industry, we predicted that we would see elevated commercial real estate sales.

Most of what -- probably, payoffs. Most of what that is, the majority of it is refinances into the term market. So, it's kind of interesting that the developers have been waiting.

And I think they've decided rates probably aren't going down much from here, and they want their capital back to go reinvest into other projects, so they're going into the term markets. And I think we're likely going to see that across the board. Our agreement is we will sell $2 billion in terms of our -- that is our agreement, and that's what we will do.

And then as I mentioned, we're seeing a rise in construction financing, which is good, three quarters in a row, we've kind of been waiting on that. Dave, do you want to -- Dave Ring is here, head of our commercial businesses. Do you want to comment on payoffs.

Probably the most unusual thing we saw this quarter were elevated commercial and industrial payoffs. We especially saw that in the government contract finance business. Do you have any high-level perspective as to what's going on there.

David Ring

Yes. And just -- thanks, John. Just to comment on what you just said, about 57% of our real estate payoffs were refinancings to the term market.

John Asbury

Versus sales, which is.

David Ring

Sales. Yes. Then there's a portion of them that are just line payoffs, which are not sales either.

So, we're seeing like a nice mix of sales refinancing line paydowns, which is very good for our portfolio, healthy, very healthy for our portfolio. The rest of the portfolio, we're seeing some payoffs that are normal, and then we're seeing payoffs from private credit enterprises that are coming in mostly against our government contracted portfolio. So, that's kind of the new dynamic we're seeing in our portfolio, seeing private credit that, in our minds, looks like pseudo equity because it's not structured very well.

It doesn't look like a bank deal. So, we see that, and we see that as healthy, too. It's a healthy dynamic to help customers grow and take out some of the riskier loans off our portfolio.

John Asbury

Yes, it's first time we've really seen this in any meaningful way, and they tend to deal with sort of the larger middle market types of clients. Frequently, the avenue they used to get in is there's private equity behind a number of these companies, and that seems to be sort of the conduit for how they come in. But we saw more of that than we've seen before.

So, that's kind of interesting.

David Ring

But we are seeing kind of a rich pipeline coming back in. Real estate, steady. C&I pipeline has grown year-over-year.

About 31%.

John Asbury

I want to elaborate on DEFCON for just a moment, is that there are going to be winners and losers, we think, based on what we're seeing in terms of kind of the focus of the new administration. This administration is pro-defense, pro-national security, and we actually believe that the types of clients that we finance, which are not large -- we're not talking about a large global weapons system's contractors, the types of middle-market companies that deal with cybersecurity, information security, these are all areas that are going to get more investment. And so you have to pick and choose.

This is sort of a niche operation for us. And I think there's a reason why you see private equity and private credit coming into these companies because they see opportunity.

Stephen Scouten

Yes, for sure. Makes a lot of sense. Okay.

And then maybe just last thing for me. I mean, there's a lot of moving parts here for sure, like you said, some new dynamics around payoffs. You've got Sandy Spring combination pending.

You've got mid-single-digit growth as the guidance, which can be a fairly wide range. Can you give maybe some thoughts around what would cause you to be maybe at the lower end of that range and what could deliver towards the higher end of that range. And even like where you'd almost want to cap that out.

I know -- you guys aren't trying to grow 10%, let's say. So, just kind of how you think about those dynamics and the ranges that could come about.

John Asbury

Yes. You don't want to -- I mean, a bank like us, excessive growth would not be a good scenario. That makes me wonder why are you growing excessively.

Remember, we deal with -- we go head-to-head all day every single day, particularly with the big guys. And we tend to deal with quality clients. And, so if we had a wider risk box, we would be doing more, but that is not us.

Probably, Dave, I guess I ask you, my gut reaction would be elevated payoffs, just like we saw, we would have had much better loan growth in Q4, have we not had elevated payoffs because production was very good.

David Ring

Yes. It's hard to say where you fall in the loan growth because we kind of stick to our same formula. We don't really want to compete on structure.

We like the way we structure transactions. And sometimes, if a competitor is structuring something, we will -- a different way, we will let it go. And so that range that we give you really reflects how aggressive the competition is going to be versus how aggressive we are going to be.

John Asbury

Yes, I would agree. And yes, there's a reason why I think for every year that I've been here, and I've been here eight years, our investor presentation always begins with the philosophy of soundness, profitability and growth. I'm an old credit officer out of Wachovia by background.

That is John Midland Sound bank, profitable bank, growing bank. If you do accomplish all three, that is the correct order. Bad things happen when you get things out of order.

Stephen Scouten

Yes. Without a doubt, I appreciate all the color and commentary. Very helpful, guys.

William Cimino

Thank you. Okay, thank you, Sak Michelle, we're ready for our next caller, please. Operator.

Operator

And our next question is going to come from the line of Dave Bishop with Hovde Group. Your line is open. Please go ahead.

David Bishop

I think John, maybe a sort of holistic question for you. As you get bigger across the lower or Mid-Atlantic here in Maryland and Virginia and North Carolina, obviously, you're already bumping up and competing against you said, sort of the three big uglies. Do you think from a deposit pricing and maybe beta perspective, you're more tied to what they do in terms of sort of moving funding cost.

Or do you still have the ability to sort of relationship price, as you noted, and bring down price.

John Asbury

I would like for the transcript to reflect that it was David Bishop and not John Asbury that referred to large banks as the "big uglies." To answer your question, our strategy is not to try to win anything based on pricing. We have to be competitive, Dave. But we do believe that we don't have to match.

To me, it's kind of sad when we find ourselves having to match like dollar for dollar or anything because you hope that clients will value the relationship. And not simply -- there are people, there's no question, there are segments that go for pricing and pricing only. I will say that across all of these markets, it's really, really important to understand that there's no one quite like us.

We are the -- we are number one in depository market share for regional banks, which means under $100 billion in Virginia. Sandy has that position in Maryland. The price is set for deposits by these larger players.

Yes, there are smaller players that can influence, particularly local markets. But I think overall, as a strategy, we tend to sort of follow the big guys. And we do the best we can to hopefully differentiate.

Shawn O'Brien is head of Consumer and Business Banking. Shawn, you probably deal with this more than anyone. What do you say.

Shawn O’Brien

I think that there are always smaller banks that our competitors will drive up deposit pricing. But generally, we have the pricing ability to stay very close to the large banks. So, I think that's fair.

We may have higher pricing in some markets where we want to compete. So, we don't have universal pricing everywhere. But I think, yes, we have the ability to price very close to what those big banks are offering.

John Asbury

Yes. But we don't have to beat them. And the truth of the matter is that we try to make sure that we get paid for what we deliver.

Dave, are you there.

William Cimino

I think we might have gotten cut off. Michelle, we'll go to the next caller, please. And then we'll try to circle back to Dave if he can get back on the line.

Operator

All right. One moment, please. Our next question is going to come from the line of Steve Moss with Raymond James.

Your line is open. Please go ahead.

John Asbury

Steve. Operator, we seem to have an issue. That's odd that we have two in a row that we can't hear.

Are you able -- are you hearing anything.

Operator

Mr. . Moss, is your line muted. Mr.

. Moss, can you hear us now.

Stephen Moss

I can hear you guys. Can you hear me.

John Asbury

Yes. Thank you. Glad you're back.

Stephen Moss

Sorry. Re-dialing, the call dropped off. So, I missed the last couple of commentary.

Okay. So, I guess maybe just with regard to purchase accounting here and the NII guide. Just curious, what's the -- how much accretion do you guys expect for 2025.

Robert Gorman

You mean accretion in terms of the interest income side.

Stephen Moss

Yes, that -- Yes.

Robert Gorman

So overall, on the deal we announced which was 25% or 22% accretive. It's going to go up a bit, assuming rates stay where they are, maybe closer to between 25% and 30%. So, that's what we're expecting out of the gates in terms of accretion income in terms of the impact on the net interest margin.

John Asbury

Rob, just for absolute clarity, you're talking about the Sandy Spring acquisition, right.

Robert Gorman

Yes. Is that what your question was.

Stephen Moss

In terms of the stand-alone guide, yes.

John Asbury

Okay. So, AUB stand.

Robert Gorman

Yes, in terms of accretion on the margin, yes, it's going to be stable from here. It's about 20, 22 basis points on the margin, Steve, 23.

Stephen Moss

Okay, perfect.

Robert Gorman

Yes. When you look at the guide, if that's what you're referring to, I'm sorry, I misinterpreted that question. Yes, I think about it in about 20 to 22 basis points of accretion.

Stephen Moss

Okay. Appreciate that. And then I'm not sure if this was asked and answered, but you guys are talking about market dynamics and competition with private credit, but I was just kind of thinking overall, what are you guys seeing for loan pricing these days.

Obviously, moving to five year could help, but definitely hearing tighter spreads from a number of people.

John Asbury

Dave Ring, would you like to speak to that.

David Ring

Well, it's really on an individual basis. Tighter spreads happen sometimes. But most of the time, we're going to get the spread that we require within our pricing model.

A lot of banks our size don't even utilize formal pricing models. We do. And so, we're really able to monitor and adjust on the fly when we're talking about how competition reacts and we have specific people within our group to monitor that every day.

John Asbury

But I would say it's a competitive environment for quality credit. I do read comments about surprisingly high yields on things and they're traditionally fixed rate loans on real estate and are things that maybe we wouldn't be willing to do. So, we're not going to be sort of a -- we're not going to have the highest yield on credit because of the credit risk appetite that we have.

So, -- and then you're into kind of like the quality realm. And it's going to be more competitive. There's nothing new about that.

Stephen Moss

Okay. And then in terms of the nonperformer, it sounds like it's an asset-based loan with some fraud. Just kind of curious, is that what's the prospect for recoveries there.

Is that really a preliminary provision. Could we kind of see a higher provision for that specific credit.

John Asbury

I would say that the specific reserve by definition reflects, to the best of our knowledge, what to expect. Doug, do you have -- Doug Woolley is here, Chief Credit Officer. I mean, how else would you say it but that.

Douglas Woolley

Yes, that's exactly the way to say it. And towards the end of the quarter. So, loss unknown, but anticipated using a specific reserve.

It was known, it would have been a charge-off. So, we're working through the process right now.

John Asbury

Yes, there's a methodology behind the number that we came up with. We believe that is the appropriate reserve based on everything we know at this time, and that's about all we can say.

Stephen Moss

Okay. Got it. And then in terms of the Sandy Spring transaction here, rates having backed up a bit, I think, John, you alluded to, you fully expect to sell the entire $2 billion of CRE you mentioned before.

And therefore, I assume just given where rates are, you guys are also likely take the entire equity raise down as it stands these days.

Robert Gorman

Yes, that's right, Steve. We fully expect to take the entire forward issue all of the shares related to that forward.

John Asbury

The good news is we continue to hear from Morgan Stanley, who is at work on this now. Who will actually conduct the commercial real estate portfolio to these markets are liquid. Demand is high.

They are pleased with the marks, I guess, you would say that they're seeing as they're conducting other real estate sales. So, we feel good about -- I guess I would say, Rob, we would stand by all of our original assumptions on the CRE sale.

Robert Gorman

Yes. At the moment, we would do that. Even though rates backed up a bit, we still feel we had estimated about $0.90% on the dollar related to those -- that $2 billion portfolio sale. We still feel pretty good about that, rates backed up a bit.

John Asbury

Faster bracing also means less uncertainty. That portfolio sale will happen faster than we would have thought because we weren't expecting to be in a position to close when we hope to close.

Stephen Moss

Right, 100%. Okay. Great.

Really appreciate all the color.

William Cimino

And operator, let's try to get Dave Bishop back if we can.

Operator

And Dave Bishop with Hovde Group, your line is open, please proceed with your question.

William Cimino

Welcome back, Dave. Oh no. We haven't got him yet.

David Bishop

Have you heard -- can you hear me.

John Asbury

There you are. We're glad you're back.

David Bishop

I don't know if you're -- my question before I get cut off. I'm not sure what happened out there in ether. My question, I guess, from a big picture perspective as you get bigger and you compete with the large three big uglies, do you think your deposit beta more mirrors them to be more captive what they're doing in the market from a pricing perspective.

Or you can still sort of retain that flexibility to sort of one-off like relationship.

John Asbury

Thank you. We gave you a long-winded answer to your question, but you couldn't hear it, so you can read that in the transcript. I guess the summary version is that there's no question that pricing is set by the larger players broadly in these markets.

Individual sub-submarkets are influenced by smaller banks, but we think of the price makers as being the large players. Having said that, our strategy, we don't do anything where we try to win anything, deposits, lending anything else just based on a pure we're the cheapest strategy or pay the most on deposits. So, we always try to be able to gain a premium.

So, we -- I will say that as a general strategy, yes, we sort of follow the big guys. And they kind of set the price, and we try to do better. Your key point is it's a relationship. It's negotiated based on relationship wherever possible.

Is that a fair summary.

David Bishop

Okay. Great. Yes, I'll have to read the transcript to get the blow by blow, but I appreciate that.

And then I guess one final question and maybe you alluded to it in Steve's question. But as it relates to read the press headlines in terms of what Trump wants to do in D. C.

with all the buildings, I know the FBI is already moving out and such, and they're pretty old. But do you get the sense there's a decent amount of capital from -- I know you've been shying away from CRE out there, but you get the sense that there's a decent amount of sponsors and developers that would like to get their hands on these properties and maybe redevelopment into multifamily housing. Just curious, what do you think the demand that aspect.

John Asbury

With the right incentives, it will be interesting to hear. You can, of course, ask that. The Sandy leadership will be joining us is going to have a very specific view, but I'm pretty familiar.

I would tell you that you have to ask yourself if it's true that the US. government wants to liquidate a lot of these old large properties that are typically B or C grade that need capital improvement, that are underutilized, what becomes with them. The likelihood of them being converted into like Class A plus office space -- and my personal opinion is low.

There's a scarcity of housing. There is a serious problem with housing across all of these markets, a shortage. The highest and best use could potentially be conversion into multifamily.

That is expensive. I don't think that could realistically happen in the absence of some sort of incentive program like tax credits. So personally, I look at this, and I say to myself, there's a significant opportunity here if this is going to happen if the right investment and incentives are provided to attract capital to provide more housing.

But I don't know what that looks like exactly. I think that in terms of like the impact on us, as I've been clear on whether it's Sandy Spring or AUB in our opinion, it's sort of irrelevant if you see more old large office buildings going on in the market. That doesn't impact us because we don't fancy large office buildings, nor does Sandy.

And they have not much exposure in D. C. anyway on non-other occupied, and we have zero currently.

So, I frankly see opportunity. I just hope that whoever the powers that be look at this and ask, like what becomes of this. Is there an opportunity, but I think there'll have to be incentives in some way, shape or form, and we'll see what happens.

Dave, you live in the area. I know you sit right in the heart of Sandy Springs franchise. You know this market very well.

How do you think about things.

David Ring

Yes. I mean I totally agree in terms of the affordability of housing down there. I mean, like you hit it on the head, it's a very well-educated, a fluid market, a lot of moving parts to it.

But the mayor is trying to clean up the city here as much as she can. I think she's doing a pretty decent job here. But you see some of the numbers floating around.

It's a fire sale price of 20% to 30%, maybe that's enough to -- not of a discount to really sort of make the IRR hurdles in terms of the rehab indeed to raise ceiling heights and floor heights and such to get that -- to get sort of a floor clearing price to get those properties moved pretty nicely.

John Asbury

I agree. At the right basis, things can work, and that may in and of itself be one of the incentives that the government is willing to put it in the right hands at a price that makes it works. Perhaps that could help, too.

So, I do think that, again, the administration has been clear, they're committed to a clean vibrant and safe Washington, D. C. So, it's -- we'll see what becomes of all of this.

I wish them much success in terms of improving government efficiency and reducing regulation, that will be good for everyone, way beyond the Greater Washington region.

William Cimino

Thank you, Dave, and thanks, everyone, for calling today. We apologize for the technical difficulties, and we'll talk to you next quarter. Have a good day.

Operator

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