D-Wave Quantum falls nearly 3% as earnings miss overshadows revenue beat
Sandy Spring Bancorp Inc reported a significant earnings miss for Q1 2025, with an actual EPS of -$0.87 against a forecast of $0.52, marking a notable deviation from expectations. Despite this, the company posted a revenue of $171.05 million, surpassing the forecasted $108 million. The stock price remained stable at $27.60, reflecting a cautious market response. According to InvestingPro analysis, the stock appears undervalued based on its Fair Value assessment, trading at just 0.81 times book value.
Key Takeaways
- Sandy Spring Bancorp’s Q1 EPS missed expectations by $1.39 per share.
- Revenue exceeded forecasts, reaching $171.05 million.
- The stock price remained unchanged post-earnings report.
- The acquisition of Sandy Spring Bancorp by Atlantic Union Bancshares was completed.
- Market sentiment remains cautious amid mixed financial results.
Company Performance
Sandy Spring Bancorp’s Q1 performance was marked by a significant earnings miss, contrasting with a strong revenue beat. The EPS loss suggests potential operational or financial difficulties, while the revenue increase indicates robust business activities. InvestingPro data shows a modest return on assets of 0.14% and a debt-to-equity ratio of 0.63, indicating conservative leverage. The completion of its acquisition by Atlantic Union Bancshares positions the company in a strategic growth phase, especially in affluent Mid-Atlantic markets, with analysts forecasting 19% revenue growth for FY2025.
Financial Highlights
- Revenue: $171.05 million, surpassing the forecast of $108 million.
- Earnings per share: -$0.87, missing the forecast of $0.52.
- The acquisition of Sandy Spring Bancorp was finalized on April 1, 2025.
Earnings vs. Forecast
Sandy Spring Bancorp’s actual EPS of -$0.87 fell short of the forecasted $0.52, resulting in a negative surprise of $1.39 per share. This earnings miss is significant compared to previous quarters, where the company typically met or exceeded expectations. However, the revenue beat of $171.05 million against a forecast of $108 million offers a positive counterbalance.
Market Reaction
Despite the earnings miss, Sandy Spring Bancorp’s stock price remained unchanged at $27.60. This stability suggests that investors may have anticipated the poor earnings performance or are awaiting further developments post-acquisition. The stock trades between its 52-week high of $39.55 and low of $19.52, indicating moderate investor confidence.
Outlook & Guidance
Looking forward, the company anticipates loan balances of $28-29 billion and deposit balances of $31-32 billion for the full year 2025. Net interest income is projected to be between $1.15-1.25 billion, with a net interest margin of 3.75-4.0%. The company expects to realize full transaction cost savings from the Sandy Spring acquisition by 2026. InvestingPro subscribers can access detailed analysis including the company’s Altman Z-Score, comprehensive valuation metrics, and expert ProTips. The Pro Research Report available for this stock provides deep insights into its financial health and growth prospects among 1,400+ top US equities.
Executive Commentary
"We are an experienced acquirer... the integration work is on track and going well," stated John Asbury, CEO of Atlantic Union Bancshares, highlighting confidence in the post-acquisition phase. Rob Foreman, CFO, noted, "We have created the largest regional bank in the Mid-Atlantic," underscoring the strategic significance of the acquisition.
Risks and Challenges
- The significant EPS miss indicates potential operational challenges.
- Economic uncertainties and potential recession could impact future earnings.
- Integration of Sandy Spring Bancorp may incur unforeseen costs.
- Market volatility and interest rate changes could affect financial performance.
Q&A
During the earnings call, analysts questioned the potential economic impact of tariffs and the qualitative reserve build due to recession probabilities. The management addressed these concerns by detailing the loan portfolio composition and emphasizing the resilience of their government contract lending.
Full transcript - Sandy Spring Bancorp Inc (SASR) Q1 2025:
Conference Operator: Good day and thank you for standing by. Welcome to the Atlantic Union Bancshares First Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there’ll be a question and answer session. To ask a question during the session, you’ll need to press 11 on your telephone.
You will then hear an automated message advising your hand is raised. To answer your question, please press 11 again. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to Bill Ciminum, vice excuse me, senior vice president, investor relations. Please go ahead.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Thank you, Lisa, and good morning, everyone. I have Atlantic Union Bancshares’ President and CEO, John Asbury and Executive Vice President and CFO, Rob Foreman 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 for a slide presentation and in our earnings release for the first quarter of twenty twenty five. Since our acquisition of Sandy Spring Bancorp closed in the second quarter, our first quarter financial results do not include Sandy Spring. We have provided, however, certain pro form a and pro form a forward looking financial data for the combined company. The pro form a and pro form a forward looking financial data should not be relied on as being indicative of future results and are subject to risks and uncertainties. Please refer to slide four of our presentation issued today for additional information.
We’ve also updated our financial outlook for the full year to include the expected impact of our acquisition of Sandy Spring. In our remarks on today’s call, we will also make forward looking statements, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward looking statements. We undertake no obligation to publicly revise or update any forward looking 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 a 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. Now I’ll turn the call over to John. Thank you, Bill. Good morning, everyone, and thank you for joining us today.
It was an eventful and busy first quarter for AUB with their acquisition of Sandy Spring having closed on April 1, a full quarter ahead of our original expectations due to our receipt of regulatory approval earlier than anticipated. It was also a quarter when the economic outlook became more uncertain, financial markets became more volatile and government policies changed abruptly. Nevertheless, we believe we are well positioned to capitalize on the franchise’s strength and potential. We have a lot to cover today. And Rob and I will begin by summarizing AUV’s first quarter results, share perspective on our now expanded franchise and finish by updating you on the financial logic of Sandy Spring acquisition, which we believe remains very much intact.
Turning now to quarterly results, here are a few financial highlights from the first quarter. I’ll begin with our 12 basis point net interest margin expansion and an 18 basis point reduction in cost of funds, consistent with the expectations we set in our comments last quarter. Average loan growth was approximately 1.3% annualized quarter over quarter in the typically seasonally slow first quarter, following the typically seasonally high fourth quarter. Loans held for investment ended the quarter down 0.9% annualized from the end of the fourth quarter due to some late quarter payoffs and revolving credit pay downs. Production was good, the third highest of the past five quarters.
Deposit growth in the first quarter was approximately 2.1% annualized point to point, which includes the impact of reducing broker deposits by more than $100,000,000 in the quarter. We were pleased to see non interest bearing deposits increased by $194,000,000 during the quarter. As a percentage of total deposits, non interest bearing deposits represented 22% of total deposits, up from 21% at the end of the fourth quarter. Credit remains solid with five basis points of annualized net charge offs this quarter and otherwise mild credit trends. We booked a $17,600,000 loan loss provision expense in the first quarter, mainly reflecting the impacts of increased uncertainty in the economic outlook and elevated risk of a national recession.
This increased the allowance for loan losses as a percentage of loans held for investment to 1.05% and the total allowance for credit losses to 1.13% of loans held for investment. I would like to be clear that we remain quite confident in our asset quality and market strength. We currently expect our net charge off ratio to be low between fifteen and twenty five basis points for the full year 2025, and we are not forecasting a recession. However, we acknowledge the uncertainty in the economic forecast and the unquantifiable potential impacts of new trade policy on the economy. Consequently, we elected to use management judgment and prudently increase qualitative factor overlays consistent with the forward looking CECL accounting methodology.
We do see varying judgments in the industry on how to account for the economic ambiguity this quarter, but this is ours, consistent with our operating mantra of soundness, profitability and growth in that order of priority. Here are three reminders for context. First, the quarter’s loan loss provision is pre Sandy Spring acquisition since that did not close until April 1. Second, about 12% of our total loan portfolio was marked to fair value last year in connection with the American National acquisition, which included estimated credit losses. And third, despite the well publicized federal government efficiency initiatives, we see little evidence of it impacting the majority of the AUB franchise at this point, nor do we currently expect it to.
The qualitative factor overlay added to our allowance related to economic uncertainty is more about the increased possibility of a national recession and the potential for continued volatility and unintended consequences of trade policy than any impact we consider unique to us, yet from federal cutbacks or tariffs. As for loan growth expectations, last quarter for AUB on a standalone basis, we indicated our expectation of mid single digit loan growth for the year. We have updated our loan and deposit outlook this quarter to show expected year end loan and deposit balances rather than a percentage growth estimate that are inclusive of Sandy Spring for the next nine months and inclusive of the impacts of the expected $2,000,000,000 commercial real estate loan sale. This is our loan growth base case, and we’ll revisit it as the economic outlook clarifies over the next few quarters. We are encouraged that the standalone AUV pipeline has rebuilt nicely following strong production over the past two quarters, and it is the second highest of the past seven quarters.
What remains to be seen though is pull through timing, as we know from experience that uncertainty can lead to hesitation in business investment decisions. Rob will now take you through further detail on the quarter, and then I’ll come back with additional perspective on the company and our markets. Rob? Well, thank you, John, and good morning, everyone. I’ll now take a few minutes to provide you with some details of Atlantic Union’s financial results for the first quarter.
As Bill mentioned, my comments today relate to Atlantic Union’s first quarter financial results and do not include the financial results of Sandy Spring since the transaction closed on April 1. Please note that for the most part, my commentary will focus on Atlantic Union’s first quarter financial results on a non GAAP adjusted operating basis, which in the first quarter excludes $4,900,000 in merger related costs related to our acquisition of CME Spring. That said, in the first quarter, reported net income available to common shareholders was $46,900,000 and diluted earnings per common share were $0.52 Adjusted operating earnings available to common shareholders were $51,600,000 or $0.57 per diluted common share for the first quarter, resulting in an adjusted operating return on tangible common equity of 13.2% and adjusted operating return on assets of 90 basis points and an adjusted operating efficiency ratio of 57%. Turning to credit loss reserves at the end of the first quarter, the total allowance for credit losses was $2.00 $9,000,000 which is an increase of approximately $15,300,000 from the fourth quarter, primarily due to the increased uncertainty in the economic outlook as John noted. As a result, the total allowance for credit losses as a percentage of total loans held for investment increased eight basis points to 1.13% at the end of the first quarter.
Provision credit losses of $17,600,000 in the first quarter was primarily driven by Moody’s quarter to quarter economic forecast change and qualitative factor overlays given the increasing recession risk not captured in the March economic forecast published by Moody’s. Now turning to the pretax pre provision components of the income statement for the first quarter. Tax equivalent net interest income was $187,900,000 which is an increase of approximately $882,000 from the fourth quarter. The increase from the prior quarter is due primarily to the impact of lower deposit costs indirectly driven by the decrease in the Fed funds rate, reflecting the full quarter impact of the Federal Reserve lowering rates 100 basis points between September and December 2024. The increase was partially offset by a decrease in interest income on loans held for investment due to lower yields, primarily driven by the impact of the Fed funds interest rate cuts on our variable rate loans, as well as the lower day count in the first quarter.
As John noted, the first quarter’s tax equivalent net interest margin was 3.45%, which is an increase of 12 basis points from the previous quarter due to an 18 basis point decrease in the cost of funds, which was primarily driven by the 23 basis point reduction in the cost of interest bearing deposits as well as short term borrowing funding mix shifts. This favorable impact was partially offset by a six basis point decline in earning asset yields, primarily driven by the 13 basis point decline in the loan portfolio yield, net of the positive impact from increased securities yields and earning asset mix changes in the first quarter. Non interest income decreased $6,000,000 to $29,200,000 in the first quarter, primarily driven by a $2,700,000 decline in loan related interest rate swap fees due to lower transaction volumes in the seasonally slower first quarter and a $2,500,000 decrease in other operating income, primarily due to a decline in equity method investment income and lower gains on the sale of equipment finance lease equipment. Non interest expense increased $4,500,000 to $134,200,000 for the first quarter from $129,700,000 in the prior quarter. Adjusted operating non interest expense, which excludes merger related costs and amortization of intangible assets in both quarters, increased $6,800,000 to $123,800,000 for the quarter, up from $117,000,000 in the prior quarter, primarily driven by a $4,100,000 increase in salaries and benefits expense due to seasonal increases of $4,700,000 in payroll taxes and four zero one contribution expenses in the first quarter.
In addition, dollars 1,300,000.0 increase in other expenses was driven primarily by OREO related gains recognized in the prior quarter, a 1,000,000 increase in franchise and other taxes and $805,000 increase in technology and data processing expense, primarily driven expense related to an upgrade to the consumer online banking system in the first quarter and a $616,000 increase in occupancy expenses primarily driven by seasonal winter weather related expense. These increases were partially offset by a $666,000 decrease in professional fees. At March 31, loans held for investment, net of deferred fees and costs were $18,400,000 which is a decline of $42,900,000 or 0.9% on an annualized basis from December 31, primarily driven by declines in the construction and land development and commercial and industrial loan portfolios, partially offset by increases in the multifamily real estate and non owner occupied commercial real estate loan portfolios. The decrease in construction and development loans and increases in multifamily and non owner occupied commercial real estate loans during the quarter were primarily driven by the completion of construction projects in the quarter and the conversion of the related construction loans into term loans in the multifamily and non owner occupied commercial real estate categories.
At March 31, total deposits stood at $20,500,000,000 which was an increase of $105,300,000 or 2.1% annualized from the prior quarter, primarily due to increases in demand deposits, partially offset by declines in brokered At the end of the first quarter, Atlantic Union Bank shares 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 first quarter if you include the negative impact of AOCI and held the maturity securities unrealized losses in the calculation of the regulatory capital ratios. In summary, Atlantic Union delivered solid operating financial results. Despite the challenging banking operating environment we are effectively managing through. Driven by our operating mantra of soundness, profitability and growth in that order of priority, we took prudent action to build the allowance for credit losses during the quarter to account for the current economic uncertainty and increasing risk of a recession.
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. With that, let me turn it back over to John for some comments regarding the expanded franchise of Sandy Spring. Thank you, Rob. I’ll now share some perspective on our expanded franchise post Sandy Spring acquisition. Let me begin by pointing out that post merger and assuming we complete our previously disclosed anticipated sale of approximately $2,000,000,000 of commercial real estate loans, the Sandy Spring franchise would be about one third of the combined company by asset size, meaning the AUV standalone assets would be two thirds of the combined franchise on a pro form a basis as of March 31.
Between our previous acquisition of American National Bank and now Sandy Spring, approximately 46% of our pro form a combined loan portfolio will have been marked for credit and interest rates, which we believe puts us in a position of strength in the face of economic uncertainty. As is evident from Slide 15, our supplemental presentation pre merger, we view Sandy Spring as well distributed across Maryland with a presence in Washington DC and Northern Virginia. With a distinguished one hundred and fifty six year history, they were Maryland’s bank. A state which ranks as the most affluent in the nation by median household income is among the most well educated, and has consistently maintained one of the lowest unemployment rates of any state in the country. There is a significant market focus on the applications of government efficiency related impacts on the Greater Washington DC region.
This is the sixth largest metropolitan statistical area in America with a population of about 6,400,000 people. We view the region as resilient. It’s been diversifying its economy for decades, and we believe this will continue, if not accelerate, due to the changes underway in government policy. Today, the Greater Washington region is not only the nation’s capital, it’s also the East Coast technology hub. It’s projected to be one of the biggest AI growth hubs in The US, has the world’s largest number of data centers, and has one of the nation’s largest clusters of defense technology and cybersecurity firms.
Stepping back to look at the broader franchise, as you can see on slide 18, AV operates in some of the nation’s most affluent counties. And in large metro areas with some of the lowest unemployment rates in the country based on the most currently available data. We recognize unemployment numbers in the Greater Washington MSA are expected to rise, but the region enters this from a position of strength with consistently low unemployment rate and historically tight labor market providing some capacity to absorb federal job cuts. As for the impact of possible reductions in the federal workforce across our franchise, according to research posted by the Federal Reserve Bank of Richmond using Bureau of Labor Statistics data, the share of state unemployment that is federal government is relatively low in North Carolina at 1%, Virginia at 3.5% and Maryland at 5.3% of total state employment. These figures exclude active duty military personnel.
Eighty percent of federal government employment in Virginia, the largest component of our franchise is national security or defense agency related, which we expect to be relatively insulated from government workforce downsizing. About 39% of federal employment in Maryland is National Security of Defense Agency related and compared to 29% of the District Of Columbia where our presence is limited. There is a highly educated workforce in the region and the population is projected to grow steadily over the next five years. On the next few slides, we’ll take March 31 data from both companies and combine them using AUB’s methodology. Note these figures do not include the effects of acquisition accounting or our expected sale of $2,000,000,000 of commercial real estate loans.
Regarding non owner occupied office, neither Sandy Spring nor AUB finance large office buildings. And as you can see, the average non owner occupied office building loan is a little under $2,000,000 for the combined loan portfolio. Note the positive asset quality metrics and the lack of regional concentration in the portfolio. There’s little exposure to U. S.
Government tenants. The large mostly obsolete properties the government wishes to liquidate or large lease buildings they may leave are not comparable to what we have financed. In the District Of Columbia, we have limited exposure of $73,000,000 of non owner occupied office. We do not currently see offices of particular concern in our combined credit portfolio. Turning to the multifamily portfolio, you can see that there’s a wide geographic dispersion and strong asset quality metrics.
Worth noting is the fundamentals of housing of all types throughout the Greater Washington region remain strong. Due to the scarcity of land and cost of development, new development of housing in the region has been constrained. There’s also a positive crosscurrent underway due to return to office mandate tailwinds. We believe this will benefit the Greater Washington economy by supporting local retail establishments, near end housing demand and ridership on the metro, which has one of the most significant post pandemic ridership recoveries among major U. S.
Transit systems. Regarding government contract finance, again, using pro form a data as if the merger closed on March 31, not including any acquisition accounting impacts and using AUV’s methodology on a combined basis. AUV has about $770,000,000 of government contract loans with about 80% of that coming from the AUV side. AUV has been in this business for over fifteen years without a single charge off. We principally focus on national security and defense related contractors and our clients in this segment have yet to see any material impacts from contract terminations.
The government’s expected increases in national security and defense spending as evidenced by the proposed record $1,000,000,000,000 defense budget and the spending prioritization of modern technologies such as in missile defense, drone warfare, unmanned vehicles, artificial intelligence and secure communications is expected to bode well for our client base and for the region. All of this means we believe our franchise is well diversified across some of the most attractive markets in the country and is resilient. Moving outside of the Greater Washington region, particularly in the rest of Virginia and in North Carolina, we expect the potential impact of changes in federal government policies to be little different from anywhere else in the country. AV’s footprint is defined as Maryland to North Carolina, with Virginia as our largest market and the linchpin of the franchise. We have done what we set out to do by intentionally and carefully building a franchise that we believe has never existed before and cannot be replicated in our markets.
The number one regional bank by depository market share in the Lower Mid Atlantic states of Maryland and Virginia. And we plan to continue to expand our presence in North Carolina over time. We are aware of our market power and scarcity value and will seek to leverage it to serve our customers and communities while creating value for our shareholders. And I want to make two last points about the Sandy Spring acquisition before I turn back to Rob. First, we are an experienced acquirer.
This is my fourth merger with Atlantic Union and the integration work is on track and going well, aided by the two companies similar cultures, histories, mutual familiarity and adjacency. Second, as we received earlier than planned approval and closed one quarter earlier than expected, we were able to move up our planned core systems conversion to October 2025 from February 2026, which we expect to accelerate our cost savings. Given the change in rate environment since we announced the merger, we wanted to refresh some of the data about the acquisition. Rob will now take you through an update on the merger economics and take you through a comparison of the original merger assumptions to the current expectations. As you will see, the financial logic remains comparable to or in some cases better than what we presented at announcement.
Rob? Thanks, John. As John noted, I’ll now provide you with an update on the Sandy Spring acquisition economics and integration activities to date and take you through a comparison of the original acquisition financial assumptions to our updated projections. In short, this acquisition checks all of our strategic and financial boxes for M and A just as we said it would. As noted, due to the accelerated receipt of regulatory approvals, we closed the deal on April 1 ahead of schedule.
In conjunction with the transaction closing, we physically settled the previously announced forward sale of common equity on April 1 by issuing 11,300,000.0 common shares. We received approximately $385,000,000 in net proceeds before expenses in full settlement of the forward sale. Also on April 1, we launched the $2,000,000,000 commercial real estate loan sale process that we previously discussed on the transaction announcement date, and we intend to complete the loan sale by the end of the current quarter. More expedited closing date for the acquisition allowed us to move forward our core systems conversion to October 2025 from February 2026 or approximately four months earlier than initially scheduled. This is expected to accelerate the achievement of full transaction cost savings of 27% of Sandy Spring’s expense base in 2026 and provide an additional quarter of savings in 2025.
As previously noted, as part of the transaction planning, we chose to take proactive actions related to the capital raise and commercial real estate loan sale to better position and derisk the combined company’s balance sheet, so that we are poised for future growth with substantial capital and liquidity and without any commercial real estate concentration constraints. Now here’s a quick snapshot of the combined franchise, which represents a pro form a look at the key measures as if the deal closed on March 31 instead of April 1 and before any acquisition accounting adjustments and before the proposed sale of CRE loans. On a pro form a basis, the combined company has approximately $38,000,000,000 of total assets, dollars 30,000,000,000 of loans, dollars 32,000,000,000 of deposits and $13,500,000,000 in assets under management as well as 183 branches across the footprint. Given the accelerated closing timeline and current macroeconomic environment, we have outlined the updated key transaction metrics on Slide 26. The post financial impacts noted here are substantially in line with the key metrics at the announcement date and stack up well against our shareholder value proposition elements.
We have created the largest regional bank in the Mid Atlantic, continue to be well capitalized, believe we will benefit from significant future capital generation and expect to produce top quartile profitability metrics on a sustainable basis. Turning to Slide 27, you can see the full comparison of the key metrics at close relative to at the transaction announcement date. With the closing occurring earlier than originally announced, we are projecting to realize an additional quarter’s worth of financial benefits from the acquisition in 2025. Interest rates were a bit higher at closing than expected at announcement, which resulted in comparatively greater interest rate related fair market value adjustments, leading to slightly greater tangible book value per share dilution, but greater earnings per share accretion, which results in a relatively unchanged earn back period of two point one years. We’ve already hit a number of key transaction milestones.
In addition to our April 1 closing items, we also repositioned the Sandy Springs securities portfolio, which allowed us to better position our pro form a asset liability and interest rate risk management objectives on a combined basis. Regarding the commercial real estate loan sale, since the process is ongoing, we can’t provide much specific commentary, but it is moving along well and we intend to complete the transaction by the end of the current quarter. The targeted amount of the commercial real estate loans being sold remains at $2,000,000,000 and the sale perimeter is expected to align with our expectations from the acquisition announcement date. We have added Slide 29 to help illustrate our projected pro form a earnings composition and the conversion of acquisition related loan interest rate mark accretion into core cash earnings over time. As can be seen, core cash earnings will represent the majority of overall projected earnings in 2025, while acquisition related loan interest rate accretion will represent a smaller component of total projected 2025 GAAP earnings.
We distinguish accretion income arising from the acquired loans interest rate mark from accretion income arising from the acquired loans credit mark and view the loan interest rate mark as a built in scheduled accounting tailwind to our GAAP earnings. Interest rate marks are fundamentally different than credit marks. And as you can see from this slide, our expected accretion income is nearly all generated from loan interest rate accretion rather than from the credit mark accretion. In addition, we expect the loan fair value mark value adjustment accretion composition to decline as a percentage of total GAAP earnings on an accelerated basis over time as loans mature and are renewed at market interest rates. In short, accretion income related to the acquired loan interest rate marks will convert to cash income at market interest rates over time.
Therefore, we believe that accretion income related to the loan interest rate marks is sustainable to the earnings power of the post acquisition combined company. Since the Sandy Spring transaction closed on April 1, the impacts of the acquisition were not in the first quarter’s reported capital metrics, but for illustrative purposes, we have projected our pro form a capital metrics as of March 31 as if the fully combined if fully combined for the acquisition close, the full settlement of the forward sale of common equity and the commercial real estate loan sale. At a pro form a basis, our CET1 ratio would have been approximately 9.75% at March 31. In addition, we expect that our CET1 ratio at the end of the current quarter, including all of the pro form a impacts noted, will be approximately 10%. As noted on Slide 31, we’ve updated our full year 2025 financial outlook for AEB to include the estimated post close impact of the Sandy Spring acquisition beginning in April and assuming that the proposed commercial real estate loan sale closes by June 30.
Please note that the 2025 financial outlook includes preliminary estimates of purchase accounting adjustments that are subject to change. With that, we expect loan balances at the end of the year to be between $28,000,000,000 and $29,000,000,000 while year end deposit balances are projected to be within the 31,000,000,000 to $32,000,000,000 range. We expect our allowance for credit losses to loans to fall between 1.21.3% and a full year net charge off ratio to fall between fifteen and twenty five basis points. Fully taxable equivalent net interest income for the full year is projected to come in between $1,150,000,000 and $1,250,000,000 As a result, we are projecting that the full year fully tax equivalent net interest margin will fall in the range between three point seven five percent and four percent for the full year, driven by our baseline assumptions that the Federal Reserve Bank will cut the Fed funds rate three times in 2025 beginning in June. We’re also assuming that GDP growth was slow, but we are not forecasting a recession in 2025.
In addition, we expect that the unemployment rate will rise in our markets, but remain below the national unemployment rate in 2025. In addition, the fully tax equivalent net interest margin projection and target ranges include the impact of our preliminary estimate of net accretion income from the CME Brink transaction, which is subject to change once purchase accounting adjustments are finalized, and which can be volatile quarter to quarter. On a full year basis, adjusted operating non interest income is expected to fall between $165,000,000 and $185,000,000 Adjusted operating non interest expenses, which excludes the amortization of intangible assets expense of approximately $55,000,000 for the full year are estimated to fall in the range of $665,000,000 to $685,000,000 Based on these projections, we expect to produce financial returns that will place us within the top quartile of our peer group and meet our objective of delivering top tier financial performance for our shareholders. I’ll now turn the call over to Bill to see if there are any questions for our research analyst community. Don’t Thanks, Rob and Lisa.
We’re ready for our first caller, please. Lisa, we’re ready for our first caller. Alright, let’s see if we can message her. Alright. Lisa, we see you messaging us that you’re speaking, but we’re not hearing you.
I wonder if you’re able to just release the first call. Catherine, can you hear us?
Catherine, Analyst: Oh, yeah. Can you hear me?
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Yeah. Great. Thank you.
Catherine, Analyst: All right. Way to improvise there. That was great. Wanted to maybe start just on the marks from the Sasser deal. Is there any way you can I appreciate the kind of updated looks the interest rate marks are coming up just a little bit just given kind of your note Rob was a little bit more tangible book value dilution but higher accretion?
And just curious if you can update us on maybe what that low mark looks like?
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Yes. So the low mark as of threethirty one rates as you know interest rates went up a bit since the announcement date. We’re looking at about a 7% of loans mark, which is about $800,000,000 which is higher than what we originally had projected, which was in the think about $600,000,000 range at the announcement date. So that interest rate fair value adjustment will accrete through income over what we’re saying is a seven year some of the year digits accretion income flow.
Catherine, Analyst: Okay, great. And then you are using some of the year digits with that as a way to forecast kind of what your
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: exactly. Yes, that’s right.
Catherine, Analyst: And within that, is there an assumption that you’ll see kind of accelerated pay downs?
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Yes. The nature of the sum of the year digits would call for more pay downs earlier than what the maturity schedule might say. But so there’s some of that in the projections that we have in there. Got it.
Catherine, Analyst: And maybe it’s fair because we’ve got a couple of cuts coming the next few years, maybe that’s
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Yes, exactly. Could be faster and it’s kind of unpredictable. It can be volatile quarter to quarter as you know, depending on what rates where rates are, where loan yields are.
Catherine, Analyst: Okay, great. And then was there any change to the credit mark with Sasser?
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Actually, the credit mark came in a bit better than what we had projected at the announcement date. It’s about a 1.3% mark on that entire portfolio versus what we had originally projected to be a bit higher, I think in the 1.5%. So it came in a little better.
Catherine, Analyst: Okay, great. And I know you can’t I know you’re just in the midst of the CRE loan sale, but is there any just given the volatility and moving rates, is there any risks do you think that, that sale could come at a steeper discount? Or do you I think when you announced the deal was you already had about a 10% discount to those loans. I’m just kind of curious how you’re thinking about the risk of that being a little bit higher as you get towards the close.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Yes, you’re right in terms of the projected discount. Obviously, with all the market turmoil rates this way and that, just a general market turmoil up there, we’re monitoring it very closely. Really can’t talk too much specifically on that. But at this point in time, we don’t see there’s any major negative to what we were projecting at the close.
Catherine, Analyst: Okay, great. And just as kind of an update, most of the type of credits that you have in that loan sale are multifamily retail. Can you just remind us kind of a composition of what’s in that book?
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Yes, the majority of it is retail and multifamily to your point. And those are the big things. Think there’s some other miscellaneous things, but those are the big categories. And that hasn’t changed since when we discussed it at the announcement date. And Catherine, one thing to point out, this is a relatively short duration portfolio.
Would you comment on that, Rob? Yes, portfolio is probably the duration of maturity of those loans is probably in the three to four year range at this point. These are good loans. Obviously, are not distressed loans at all. The interest rate environment does affect that pricing.
But again, we feel comfortable in the range that we talked about. But we’ll see more to come on that. I can’t talk too much more specifics because we’re in the middle of that. Yes, the process is going well. The reason why I comment on the duration is don’t go look at what was the ten year treasury on October 21 and what it is today.
You need to look at like the three year treasury or four. And what you’re going to find is that it’s comparable to or actually a little bit lower than a fund announcement. So it’s been up, it’s been down, it’s been all over. Yes, it’s moved way up around quite a bit, but we’re closely monitoring.
Catherine, Analyst: Very helpful. I’ll put that in queue. Thank you.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Okay. Thanks, Catherine. And, Lynneesa, let’s try this again for our next caller, please.
Conference Operator: Thank you. And the next question will be coming from the line of David Bishop of Holy Group. Please go ahead.
David Bishop, Analyst, Holy Group: Hi, David. I think she said my name. Hey, how are doing,
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: John? Yes. Know it’s you.
David Bishop, Analyst, Holy Group: Hey, just curious, obviously, Sandy Spring is freshly in their rear view mirror, so to speak. But as you integrate the bank and you look at obviously a lot of noise with the tariff situation, but on a poor loan growth perspective, where do you think that shakes out from a longer term perspective? Is it mid single digit, mid to high single digits? Where do you see that trending out over the longer term? When things
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: get Yes. Over the longer term, would say, David, that we’re looking at, as we said before, striving for that upper single digit loan growth. I think in the medium term, that might be a bit lower in the more in the mid single digit. But over the longer term in a more normalized environment, we think upper single digits would be the way to go or the projections we would have. There’s a lot of opportunity up in the C and D Spring footprint.
And of course, the broader franchise is also upside down in North Carolina, not to say that Virginia does have good growth, but those would allow us to grow a little faster than we have been. Correct. So some of the key points about Sandy, we acknowledge the disruption that is going on. It will pass. And so on the other side of this, you still have extremely attractive markets.
There is no franchise like us. We fully release the Sandy Spring, their former Sandy Spring team to go do business. There are no constraints or we’ve set the thing up so that we can grow it without being concerned about CRE concentration limits, liquidity ratio loan to deposit ratio and some of the things that they’ve had to deal with in the past. We also bring not just more capital and capacity to the table, we have some additional tools too in terms of commercial industrial banking capabilities in particular. And so, we are nothing has changed in terms of the strategic logic.
And we see opportunity to gain market share and really grow the franchise there on the other side of the current disruption.
David Bishop, Analyst, Holy Group: Got it. And then turning to credit, looked like there was a little blip on the C and I side. There was one, I think about a $9,000,000 credit that led to non accrual. Just curious in the loan loss provision this quarter, I assume most of it, the overlay was due to the economic overlay. Was curious if there’s any sort of specific accruals or reserves for that C and I credit, maybe walk through the provision
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: for the most part, increase in the reserve that you saw this quarter, 15,000,000 increase was primarily driven by this uncertainty in the market, this qualitative overlay. We did have a bit of a specific reserve that we added for that particular credit. But that wasn’t the driver of the material driver of the increase in the reserve. Yes, it was really the reason why the reserve looks higher than what you would normally expect is because of the use of management judgment and the overlays. Otherwise, it would look pretty normal.
Pardon me, meant to say the provision is specifically.
David Bishop, Analyst, Holy Group: Got it. That’s a final question, John. You know, obviously, you noted the disruption. We’re all aware that usually where there’s disruption, there’s also, you know, some opportunities as well. Any, any early reads where there could be some opportunities that are sort of like, you know, unforeseen benefits from all the David
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Ring is here, our Head of all of our Commercial Businesses. I’ll ask David to comment, but I’ll kind of headline it with this. Their pipeline looks pretty good. So Dave, what do you we’ve all been up there quite a bit. What do you see?
David Ring, Head of Commercial Businesses, Atlantic Union Bancshares: Yeah, I mean, there’s kind of disruption everywhere, but up there, what we’ve done is we’ve kept the overwhelming majority of producers and leadership. And so there’s a lot of continuity there to take advantage of what the market has to offer. And right now that disruption is helping us the pipeline since the last time I looked at it about three weeks ago doubled. And they are definitely motivated to do business. So we think we’re gonna find some good transactions up there and be very successful.
David Bishop, Analyst, Holy Group: Great. Appreciate the color.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Thank you, David. Thanks. And Lisa, we’re ready for our next caller, please.
Conference Operator: Thank you. One moment for the next question. The next question will be coming from Brian Wodzinski of Morgan Stanley. Your line is open.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Brian, hello and welcome.
Brian Wodzinski, Analyst, Morgan Stanley: Hi, good morning. It’s my pleasure, Ann, and thank you for taking the question. Wanted to just start off on the net interest income guidance. Can you just walk us through what could get you to the low end of that range versus the high end? Of course, a lot of certainty in the environment, both from a growth perspective and also interest rates, but just wondering how you’re thinking about the high end versus the low end there.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Yes, in terms of the low end, think if we see significant we’re assuming three cuts from the Fed. If we see multiple more, will be a fairly large or be an impact on our variable rate loan book, which could drive which would impact that projection negatively. In addition, if term rates came down significantly as well, part of the NIM on the core side, part of the NIM expansion we’re expecting relates to fixed rate loans repricing higher than what’s on the books. We could see that that could shrink. At this point in time, our fixed rate loan book is portfolio is about five a little over 5% and we’re repricing renewing loans at about a 6.25% rate based on the current term rate.
So that could affect it as well. And then of course, just net loan growth, We’re not calling for a ton of loan growth this year, but if we see a runoff in the loan portfolio that could affect that as well. And then the other side of that is if rates spike, then we could see an impact on the ability to lower deposit costs going forward too. So all that will come into play on the lower end. In terms of the high end and not to mention Brian, there is volatility in our assumption regarding the accretion income that’s going to be coming through that can be volatile, that could come in lower than our expectations based on what we just talked about in terms of how we expect that to flow in over the seven year period this year based on the accelerated seventy year digit, you can get a quarter to quarter volatility on That’s great color.
Brian Wodzinski, Analyst, Morgan Stanley: Thank you. And then for my follow-up on the reserve build this quarter, I understand that the main driver was just a more uncertain economic outlook and the overlays that you gave for the quarter. But I was just wondering if you’re seeing any weakness in the portfolio today, any signs that things could be deteriorating in either their portfolio or in the geographic footprint in general, anything standing out from client conversations since the tariffs were announced? Was just wondering if you had any color there. Thanks.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Let’s start with Doug Woolley, Chief Credit Officer, sort of macro perspective on overall health of portfolio.
Doug Woolley, Chief Credit Officer, Atlantic Union Bancshares: Yes, Brian, on tariffs, that’s the big uncertainty. No one knows what’s going on. No one knows what will go on. We’ll spend the next couple of months, diving into the client base to see what they think as the impact, primary, secondary and what the tail of that impact is, but there’s nothing known right now about tariffs. There’s nothing known about pockets of credit quality issues or anything like that.
Like any other bank, we’re constantly surveilling the landscape to try to figure out what any given indicator might mean to anything. And there’s just nothing that we see right now. Obviously, it’s great on uncertainty everywhere.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Correct. Hence, the specific reserve, not specific reserve, correct. Correction, the use of management judgment to use the increase the overlay. Slide 33 of the earnings supplement is a really good slide. And this is put out by the Federal Reserve Bank of Richmond.
And it’s their assessment of the tariff impact. When I think about the uncertainty that we’re looking at and what we’re addressing or attempting to address with the increase in the provision to deal with uncertainty. If the root cause of it is the tariff, it’s not that our trade policy, it’s not that we think that our portfolio or our region is some somehow disproportionately impacted by tariffs. It’s not. And we’re in the Federal Reserve’s camp, as you can see on Slide 33.
We’re no more impacted in this region by tariffs maybe less than many areas. But the tariff policies are ultimately creating a higher risk or elevated risk of a recession. And that’s our point. And it’s very difficult to know how this thing plays out. So it’s creating a lot of uncertainty.
As Dave mentioned, Dave Ring, pipelines look good. They’ve been building. We question the pull through. So we do think that uncertainty can often create hesitancy. We know that from experience.
But it’s difficult to point to any particular segment and say this one’s unduly impacted versus that one. Regionally, I would say that certainly the Greater Washington region just because of concern about the various fed federal cutbacks that are going on there in the workforce is creating an awful lot of angst and is creating some slowdown in consumer spending and that sort of thing. It doesn’t show up in the data yet. Go look at initial and continuing unemployment claims as we do as recently as last week for Washington DC, for Maryland and Virginia. If you look at a couple of year trend line, there’s an imperceptible difference.
Nothing has really moved yet. Maryland’s unemployment rate is still the lowest 3%. There is no more populous state in America with a lower unemployment rate than Maryland. It didn’t change in March. It’s three point zero.
The next most populous state with the lowest unemployment rate is Virginia, which ticked up slightly at 3.2. So these are fundamentally, we view these as pretty good economies. There’s just a lot of concern and angst. But we think that as things clarify, the opportunities are gonna be there. Greater Washington is a special case.
They’re gonna have to get through whatever the disruption is and let that work its way through.
Brian Wodzinski, Analyst, Morgan Stanley: That’s really helpful. Thank you for taking my questions.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Thank you, Brian. And Lisa, we’re ready for our next caller, please.
Conference Operator: Thank you. And the next question will be coming from the line of Steve Moss of Raymond James. Your line is open.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Hi, Steve.
Steve Moss, Analyst, Raymond James: Hey, John. Good morning, everyone. Maybe we’re just maybe this will take a tacky, but just curious with regard to the commercial real estate loan sale. The phrasing in this quarter’s deck is at least 2,000,000,000 versus before it’s kind of up to 2,000,000,000. Just wondering, you guys thinking about upsizing the sale?
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: No, not at this point. Are Steve, we’re $2,000,000,000 is basically the number that we are looking at targeting and feel good about that. We wouldn’t be upsizing that for any reason at this point in time or for that matter downsizing it at all. We feel comfortable with that number. That’s the plan.
Steve Moss, Analyst, Raymond James: Got you. And then in terms of the load mix here this quarter, quite the pullback in construction. Just wondering is that a trend you expect to continue? Or do
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: you expect to kind of
Steve Moss, Analyst, Raymond James: refill that bucket here over time?
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: About the pipeline?
Steve Moss, Analyst, Raymond James: Construction loan balances.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Steve, just a nuance on that. A lot of that decline you see was basically construction loans completing construction completing and going into any perm term loans in the real estate buckets that you saw grow. But I’ll let Dave talk about what we’re
David Ring, Head of Commercial Businesses, Atlantic Union Bancshares: general, the construction book and pipeline is down. If you think about what customers have to do to make the project make sense with interest rates the way they are and other things, other components of their decision making, it’s natural for it to slow down a little bit. But what we are seeing is now an increase in our overall real estate pipeline. So it’s kinda gonna get offset by some of the other asset classes or some of the other parts of the pipeline that are doing well. We have active conversations going on with construction projects.
I’ll give you one example, we just met with a developer who has put five projects on pause, simply waiting for the right time to start them up again. So we have that kind of building pipeline behind this. We just aren’t seeing it yet materialize.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: And I just wanna underscore something Rob said earlier, which is that almost always when you see loans leave construction, what’s happening is they’re moving into permanent mortgage, what we call mini perm. So once they get the certificate of occupancy, we recode as no longer a construction loan. It’s what we call permanent mortgage. And so it simply rolls to that other category. And so refilling the bucket of construction is sort of the goal there.
Interestingly, we just held a fairly large event with real estate developer clients and centers of influence here in Central Virginia. And in talking to them, they were more optimistic than I would have expected. I worked the room as I’m prone to do. I conducted my survey, what are you seeing? How are you feeling?
Are you seeing any tariff impacts? And today’s point, some of them are sort of pausing, but they see opportunity. Only one said that they have actually experienced a cost increase at this moment on a project due to tariffs, but they all said it’s coming. The materials that aren’t in the country right now, Obviously, prices are gonna go up. So we still see the fundamentals are good.
It’s gonna be a timing issue. That’s why we question the pull through on the pipeline. Hope that makes sense.
Steve Moss, Analyst, Raymond James: Yes, it does. And then just with regard to credit and more of the reserve build here on the guide 120 to 130 ACL
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: rough calculation here. Looks like that
Steve Moss, Analyst, Raymond James: implies further result qualitative reserve billing over time. Just curious how much do you think is just as you put the overlays here, if tariffs moderate, do we expect ACL guide to come down? Or are there areas that you guys are
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: just saying too much uncertainty, we’re going to probably build further? Yeah, I think if, you know, from the tariff and the probabilities of recession decline, as you know, they’ve increased, which is part of the reason we put the quality of both delays on it. We could see that that 01/2020 to 01/1930 could be a bit lower. At this point in time, that 120 to 130 also includes Sandy Spring and the CECL double count that in the PCD allowance impact. So it’s really related to that.
And applying what we did at Atlantic Union with qualitative overlays has also found its way into those estimates. So to your point, it could be better than that, but really depends on how this current tariff situation plays out from the impacts on the economic environment. And Rob, for absolute clarity, just to break this down, what we’re reporting today is AUB only pre merger because Right. So at this point, yes. So what you saw today was AUB only, which was 1.13%.
We believe then we lay on Sandy And so we deal with that. You’ll see that come through this quarter. But just what I’m the point I’m trying to make is for AUB, the reserve you’re looking at now, end of q one is the right reserve in our assessment. For Atlantic Union. Correct.
That’s at $3.31. Correct. And then we will take during q two the we’ll go through the work to set the reserve or set the allowance, I should say, for Sandy Spring. So when we come out and when we release at the end of q two, our opinion is that is the right reserve. Based on everything that we know for the combined company.
That is different from saying, and we still have work to do to continue to build it up, so on and so forth. So it’s our opinion as of that point in time. Yeah. It is really yeah. And it also, you know, will be combined organization as of June 30 when we report results and the allowances that, you know, a lot of this relates to what’s the economic forecast.
We use movies and we have a weighted Moody’s scenarios. So if that were to change significantly one way or the other, we might see those numbers shift a little. Yes. And Rob, one other thing, there’s a reason why we keep commenting that 46% of the entire portfolio has been marked. That’s different from the allowance that you have to acknowledge that that’s a good thing.
Yeah, the 46% includes a credit component and a lot a lot of that relates to the interest rate rate mark due to where we are in the rate cycle. That’s right.
Steve Moss, Analyst, Raymond James: Right. Okay. I appreciate
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: all the color. Thank you very much, guys. Okay. Thank you, Steve. And, Lisa, we’re ready for our next caller, please.
Conference Operator: Thank you. And the next question will be coming from the line of Steven Scouten of Piper Sandler. Your line is open.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Hi, Steven. Good morning. Good morning, Steven.
Steven Scouten, Analyst, Piper Sandler: Good morning, everyone. Thanks for the time.
Steve Moss, Analyst, Raymond James: You’ve covered
Steven Scouten, Analyst, Piper Sandler: a lot of things in good detail already. But I guess one of the things obviously that I think has been weighing on the stock is you mentioned tariffs, but it’s also doge ideology here and fear. And I guess around the government contracting business, which you identified, it’s really pretty small and hasn’t had any net charge offs over the last four quarters. If one of those loans, let’s say, were to go bad, how do you think about loss given default rates on a loan like that? And how do you think about theoretical loss content if there was weakness there?
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Well, this is secured
Doug Woolley, Chief Credit Officer, Atlantic Union Bancshares: lending. Doug, you want to take that Secured lending, the, a lot of the facilities are margined against contracts, that, billings rather. And these are normally highly desirable contracts. So the contracts themselves are not going to
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: be the issue. It could
Doug Woolley, Chief Credit Officer, Atlantic Union Bancshares: be how the company is run. This is a highly private equity group driven market with ownership. And, there would be there would be a lot of players going after a Belcon client that was fumbling a little bit. So we would think loss given default would be very low.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Yeah, we’ve actually seen that before. One thing I’ll point out, you look at the criticized percentage, and you may say that’s high. That’s not new. It’s looked like that for years. It’s kind of the nature of the beast.
It’s a complex business. The government is slow to approve contracts. When contracts are awarded, there are often disputes. But it is a good business. There’s a reason why we have principally focused it on national security and defense.
There’s a reason why we haven’t seen, I’m not aware of a single contract termination or stop work in the national security or defense related contract portfolio. We have some that are not, but that’s the minority. And it’s also important to understand that in many cases, the personnel have to have security clearances, which is exceptionally valuable and rare. So this is a really interesting space. It’s kind of a niche.
And in fifteen years, we have never had a charge off. I am not saying we will never have a charge off. I’m simply saying that our experience has been really good.
Doug Woolley, Chief Credit Officer, Atlantic Union Bancshares: And Steven, it’s a very high variable cost business. So the companies can flex up and down if they lose contracts. And again, employees are highly desirable. So if they happen to lose a contract, as often as not, those employees go over to whoever won the contract. So because of that, it’s very easy to flex the expenses.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: That’s really great color. Thanks. Everything else I had has basically been covered. Appreciate the time this morning. Okay, Steven.
Lisa, we’re ready for our last caller, please.
Conference Operator: Thank you. And the next question will be coming from the line of Russell Gunther of Stephens. Your line is open.
Bill Ciminum, Senior Vice President, Investor Relations, Atlantic Union Bancshares: Hi, Russell. Hey. Good morning, guys. Hey. Good morning, John.
Appreciate the incremental disclosure this quarter. Just wanted to get a sense for how you guys are thinking about, the qualitative reserve build relative to the direct and indirect exposure to Doge. Really just qualitatively trying to get a sense to the extent for which you think you’ve ring fenced this overhang for AUB. Yeah, I would say, Russell, that there’s some component of Doge in there, but it’s not the big driver of the qualitative factor. The real impact is related to potential recession, probabilities of recession going up as a result of tariffs and all the issues related to that that could impact the economic environment going forward negatively.
So little impact from a Doge perspective. We don’t really think there’s much, Doug can comment on this, a real big impact from a credit perspective from those. We think there may be a potential growth issue with that in the Northern part of the franchise. Yes, right, not in our franchise, but in the Northern Virginia and in DC areas. So again, not a big factor at all in that overlay.
So again, as we’ve said, the overlay that you saw was for the AUB pre merger franchise. And where we’re pretty limited in terms of Greater Washington region. And the government contract portfolio would be the one that would, I guess you would say be most exposed. And you’ve seen our arguments that we’re actually in a really good spot. And with what could be a trillion dollar record defense budget, we actually think that those contractors are going to grow.
And they’re gonna have opportunity and there’s more capital going into that space. To paint a picture of our kind of a window into our world and Virginia, if you leave Northern Virginia and you head south and you talk to any business person, it is unlikely anyone’s going to mention Doge. It’s not a big deal south of the Greater Washington region. They will talk about tariffs. They will talk about economic uncertainty.
So the government cost reduction issues are more regionalized in that Greater Washington region. Where they show up in Virginia or in North Carolina is no different, in my opinion, than anywhere else in The United States. And it would be in the context of university research cuts, maybe some municipal grants. But there’s nothing that’s really unique as it relates to that elsewhere in Virginia once you really get out of that greater Washington region. Move over to Hampton Roads where there’s another large population of federal employees.
That’s all about defense. And with the president’s executive order to increase American shipbuilding, a big winner is likely going to be Hampton Roads and Newport News shipbuilding and the largest naval base in the world, so on and so forth. So it’s very important just to understand that this franchise is very diversified and you do see regional differences. Hope that helps. It does quite a bit.
I appreciate the color. And then just last one for me. We’ve touched on NII guide and the range of the pro form a NIM, but it would be helpful to get a sense prior to layering all that in. The margin this quarter came in better than guide. Just how are you thinking about legacy AUB in 2Q prior to folding in Sandy Spring?
Thank you. Yes, Russell. So in terms of just AUB, we do expect some continued expansion of the margin in Q2. As we if you look back at what we guided to for the full year AUB standalone in January, we said $345,000,000 to $360,000,000 We think we’ll be heading higher than that low end. Obviously, we’re at $345,000,000 this quarter.
That expansion is on the back of continuing deposit costs coming down. We have about $800,000,000 per quarter over the next few quarters of CDs repricing. I think the cost of those that CD portfolio is about 4.3% now, and we’re repricing those in the 3.75% to 4% range. So that will continue to help. And then we are seeing fixed rate loans reprice higher, as I mentioned earlier, from a portfolio of fixed rate loans yield of about a little over 5% repricing in the 6.5% range give or take.
So those are helpful and that will continue as we go into this quarter and third and fourth quarters. That, we think Sandy Spring, just for color, have seen their margin expanded nine basis points this quarter, primarily on the backs of lower on the back of lower deposit costs. And we expect that, that will continue to adjust their deposit rates down as well. So that’s a nice tailwind for us going forward. I appreciate it guys.
Great color. Thank you. Thanks, Ross. Thanks, Ross. Thanks, everybody, for joining us today.
We look forward to talking with you in our next quarterly update. Have a good day.
Conference Operator: Thank you all for joining today’s conference call. You may now disconnect.
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