Q1 2025 Atlantic Union Bank Earnings Call
Okay.
Speaker Change: Good day, and thank you for standing by walk them through the Atlantic Union Bankshares first quarter 2025 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need your breasts.
Bill: One one on your telephone you will then hear an automated message advisory your hand is raised to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like turn the conference over to Bill to meet them by excuse me Senior Vice President.
Speaker Change: Relations. Please go ahead.
Bill: Thank you Lisa and good morning, everyone.
Speaker Change: Union Bankshares, President and CEO, John Asbury, and executive Vice President and CFO, Rob Gorman with me today.
Speaker Change: We also have other members of our executive management team with us for the question and answer period.
Speaker Change: Please note that today's earnings release any accompanying slide presentation are going around in this webcast are available to download on our investor website investors got Atlantic Union Bank Dot com.
Speaker Change: During today's call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures.
Speaker Change: Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures.
Speaker Change: An extra slide presentation and in our earnings release for the first quarter of 'twenty five.
Speaker Change: Since our acquisition of Sandy Spring Bancorp.
Speaker Change: Second quarter, our first quarter financial results do not include spring. We have provided however, certain payment certain pro forma and pro forward forward looking financial data for the combined company.
Speaker Change: The pro forma and pro forma forward looking financial data should not be relied on as being indicative of future results and are subject to risks and uncertainties.
Speaker Change: Please refer to slide four of our presentation issued today for additional information.
Speaker Change: We've also included we've also updated our financial outlook for the full year to include the expected impact of our acquisition of Sandy spring.
Speaker Change: Our remarks on today's call. We will also make forward looking statements, which are not statements of historical fact and are subject to the rest of uncertainties.
Speaker Change: There'll be no assurance that actual performance will not differ materially from any future expectation for results expressed or implied by these forward looking statements.
Speaker Change: We undertake no obligation to publicly revise or update any forward looking statement, except as required by law.
Speaker Change: Please refer to our earnings release, and slide presentation issued today and our other SEC filings for further discussion of the Companys risk factors and other important information.
Speaker Change: Our forward looking statements.
Speaker Change: Factors that could cause actual results to differ from those expressed or implied in the forward looking statements.
Speaker Change: All comments made during today's call are subject to that safe Harbor statement.
Speaker Change: At the end of the call, we'll take questions from the research analyst community.
John Asbury: I'll turn the call over to John Thank you Bill and good morning, everyone and thank you for joining US today. It was an eventful and busy first quarter for <unk> with their acquisition.
John Asbury: Position of Sandy spring, having closed on April one a full quarter ahead of our original expectations due to 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.
John Asbury: Franchise, the strength and potential we have a lot to cover today Robyn I will begin by summarizing Abb's first quarter results share perspective on our now expanded franchise and finish by updating you on our financial logic at Sandy Spring acquisition, which we believe remains very much intact.
John Asbury: 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.
John Asbury: Average loan growth was approximately one 3% annualized quarter over quarter and the typically seasonally slow first quarter. Following the typically seasonally high fourth quarter loans held for investment ended the quarter down 9% annualized from the end of the fourth quarter due to some late quarter payoffs and revolving credit pay downs production was good.
John Asbury: The third highest of the past five quarters deposit growth in the first quarter was approximately two 1% annualized point to point, which includes the impact of reducing broker deposits by more than $100 million in the quarter.
John Asbury: We were pleased to see noninterest bearing deposits increased by $194 million during the quarter as a percentage of total deposits noninterest 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.
John Asbury: Credit trends.
John Asbury: We booked a $17 6 million 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 increase the allowance for loan losses as a percentage of loans held for investment to 1.0% to 5% and a total allowance for credit losses to one.
John Asbury: One 3% 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 15, and 25 basis points for the full year of 2025, and we are not forecasting a recession. However, we acknowledge the uncertainty.
John Asbury: The economic forecast any 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 seasonal accounting methodology, we do see varying judgments in the industry on how to account.
John Asbury: For the economic ambiguity this quarter, but this is hours consistent with our operating mantra of soundness profitability and growth in that order of priority.
John Asbury: Here are three reminders for context first quarter's loan loss provision is pre sandy spring acquisition since that did not close until April one.
John Asbury: Second about 12% of our total loan portfolio was marked at 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 AEP franchise at this point nor do we.
John Asbury: Currently expect it to the qualitative.
John Asbury: This 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 that any impact we consider unique to us yet from federal cutbacks or tariffs.
John Asbury: As for our loan growth expectations last quarter for <unk> 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.
John Asbury: The impacts that we expected 2 billion dollar commercial real estate loans held.
John Asbury: This is our wound growth base case.
John Asbury: We will revisit it as the economic outlook clarifies over the next few quarters. We are encouraged that the standalone AED pipeline is 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 poultry timing because we know from experience that <unk>.
John Asbury: Certainly can lead to hesitation in business investment decisions Rob.
John Asbury: 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 Gorman: Well, thank you John and good morning, everyone.
Rob Gorman: I'll now take a few minutes to provide you with some details of Atlantic Union's financial results for the first quarter.
Speaker Change: As Bill mentioned my comments today relate to Atlantic Union's first quarter financial results and do not include the financial results of Sandy Springs since the transaction closed on April one.
Speaker Change: 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 9 million.
Speaker Change: Merger related costs related to our acquisition of Sandy spring.
Speaker Change: It said in the first quarter reported net income available to common shareholders was $46 9 million and.
Speaker Change: And diluted earnings per common share were <unk> 52.
Speaker Change: Adjusted operating earnings available to common shareholders were $51 $6 million or <unk> 57 per diluted common share for the first quarter, resulting in an adjusted operating return on tangible common equity of 13, 2% and.
Speaker Change: And adjusted operating return on assets of 90 basis points and adjusted operating efficiency ratio of 57%.
John Asbury: Turning to credit loss reserves at the end of the first quarter. The total allowance for credit losses was $209 million, which is an increase of approximately $15 3 million from the fourth quarter, primarily due to the increased uncertainty in the economic outlook as John noted.
John Asbury: As a result, the total allowance for credit losses as a percentage of total loans held for investment increased eight basis points to one 3% at the end of the first quarter.
John Asbury: Provision for credit losses of $17 6 million in the first quarter was primarily driven by Moody's quarter to quarter economic forecast change and qualitative factor factor overlays given the increasing recession risks not captured in the March economic forecast published by Moody's.
John Asbury: Now turning to pretax pre provision components of vehicles statement for the first quarter tax equivalent net interest income was $187 9 million, which is an increase of approximately 800 $882000 from the fourth quarter.
John Asbury: The increase from the prior quarter is due primarily to the impact of lower deposit cost indirectly driven by the decrease in the fed funds rate, reflecting the full quarter impact of the fed Federal reserve lowering rates 100 basis points between September and December 2024.
John Asbury: 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.
John Asbury: As John noted the first quarter's tax equivalent net interest margin was 345%, 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 borrowings funding mix shifts.
John Asbury: This favorable impact was partially offset by a six basis point decline in earning asset yields primarily driven by a 30 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.
John Asbury: Noninterest income decreased $6 million to $29 2 million in the first quarter, primarily driven by a $2 7 million decline in loan related interest rate swap fees due to lower transaction volumes and in the seasonally slower first quarter and a $2 $5 million decrease in other operating income primarily due to a decline in.
John Asbury: Equity method investment income and lower gains on the sale of equipment finance lease equipment.
John Asbury: Noninterest expense increased $4 5 million to 100.
John Asbury: $34 2 million for the first quarter.
John Asbury: $129 7 million in the prior quarter.
John Asbury: Adjusted operating noninterest expense, which excludes merger related costs and amortization of intangible assets in both quarters increased $6 8 million to $123 8 million for the quarter up from $117 million in the prior quarter, primarily driven by a $4 $1 million increase in salaries and benefits expense due to seasonally.
John Asbury: <unk> is a $4 $7 million in payroll taxes, and 401K contribution expenses in the first quarter and.
John Asbury: An additional $1 3 million increase in other expenses was driven primarily by Oreo related gains recognized in the prior quarter.
John Asbury: $1 million increase in franchise and other taxes and $1.
John Asbury: 805 million eight.
John Asbury: $805000.
John Asbury: The increase in technology and data processing expense, primarily driven by expense related to an upgrade to the consumer online banking system in the first quarter.
John Asbury: $616000 increase in occupancy expenses, primarily driven by seasonal winter weather related expense. These.
John Asbury: These increases were partially offset by a $666000 decrease in professional fees.
John Asbury: At March 31st loans held for investment net of deferred fees and costs were $18 4 million, which is a decline of $42 9 million or 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 our Mueller.
John Asbury: Family real estate and non owner occupied commercial real estate loan portfolios.
John Asbury: 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.
John Asbury: At March 31, total deposits stood at $25 billion, which was an increase of $105 3 million or two 1% annualized from the prior quarter, primarily due to increases in demand deposits, partially offset by declines in brokered deposits.
John Asbury: At the end of the first quarter Atlantic Union, Bankshares, and Atlantic Union Bank regulatory capital ratios were comfortably above well capitalized levels.
John Asbury: On an adjusted basis, we remain well capitalized as of the end of the first quarter. If you include the negative impact of ALC and held to maturity securities unrealized losses in the calculation of the regulatory capital ratios.
John Asbury: Summary, Atlantic Union delivered solid operating financial results. Despite the challenging banking operating environment, we are effectively managing through.
John Asbury: Driven by our operating mantra of soundness profitability and growth in that order of priority. We took prudent actions to build the allowance for credit losses during the quarter to account for the current economic uncertainty and increasing risk of a recession.
John Asbury: 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.
John Asbury: With that let me turn it back over to John.
John Asbury: After some comments regarding that.
John Asbury: The standard franchise with 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 billion of commercial real estate loans.
John Asbury: Sandy spring franchise, we may be about one third of the combined company by asset size, meaning the <unk> standalone assets would be two thirds of the combined franchise on a pro forma basis as of March 31.
John Asbury: Between our previous acquisition of American National Bank, and now Sandy spring approximately 46% of our pro forma 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.
John Asbury: As is evident from slide 15 of our supplemental presentation pre merger, we view Sandy spring is well distributed across Maryland, with a presence in Washington D C and northern Virginia with a distinguished 156 year history. They were Maryland's bank, a state which ranks as the most affluent in the nation by medium household income is among the most well educated and has <unk>.
John Asbury: Insistently maintain one of the lowest unemployment rates of any state in the country.
John Asbury: There is a significant market focus on the applications of government efficiency related impacts on the greater Washington D. C region. This is the sixth largest metropolitan Statistical area in America with a population of about $6 4 million people. We view the region is resilient, it's been diversifying its economy for decades, and we believe this will continue.
John Asbury: If not accelerate due to the changes underway in government policy today, the greater Washington region is not only the nation's capital. It is also the east coast technology hub, it's projected to be one of the biggest AI growth hubs in the U S has the world's largest number of data centers and has one of the nation's largest clusters defense technology and cyber security.
Sterne: Firms Sterne.
John Asbury: Stepping back to look at the broader franchise as you can see on slide 18.
Sterne: Operates in some of the nation's most affluent counties.
Sterne: 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 a consistently low unemployment rate and historically tight labor market, providing some capacity to absorb federal job cuts.
Sterne: As for the impact of possible reductions in the federal workforce across our franchise. According to research posted by the Federal Reserve Bank of regimen using Bureau of Labor statistics data the share of state unemployment that is federal government is relatively low in North Carolina to add 1%, Virginia at three 5% in Maryland at five 3% of total state.
Sterne: These figures exclude active duty military personnel.
Sterne: 80% 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.
Sterne: About 39% of federal employment in Maryland, as National Security and Defense agency related and compared to 29% of the district of Columbia, where our presence is limited.
Sterne: There is a highly educated workforce in the region and the population is projected to grow steadily over the next five years.
Sterne: On the next few slides will take March 31 data from both companies and combined them using <unk> methodology that these figures do not include the effects of acquisition accounting or our expected sale of $2 billion of commercial real estate loans.
Sterne: Regarding non owner occupied office, neither Sandy spring, nor AED finance large office buildings and as you can see the average non owner occupied office building loan, it's a little under $2 million for the combined loan portfolio.
Sterne: Note the positive asset quality metrics and the lack of regional concentration in the portfolio. There is little exposure to U S government tenants.
Large mostly obsolete property as the government wishes to liquidate our large lease buildings. They may leave are not comparable to what we have financed and the district of Columbia, We have limited exposure of $73 million of non owner occupied office. We do not currently see office is of particular concern in our combined credit portfolio.
Sterne: Turning to the multifamily portfolio you can see that there is a wide geographic dispersion and strong asset quality metrics worth noting is the fundamentals of housing of all types throughout the greater Washington region remained strong due to the scarcity of land and cost of development New development of housing in the region has been constrained.
Sterne: There is also a positive cross current underway due to return to office mandate <unk>. We believe this will benefit the greater Washington economy by supporting local retail establishments Nir in housing demand in ridership on the Metro which has one of the most significant post patent epic ridership recoveries among major U S Transit systems.
Sterne: Regarding government contract finance again, using pro forma data as if the merger closed on March 31, not including any acquisition accounting impacts and using <unk> methodology on a combined basis.
Sterne: <unk> has about $770 million of government contract loans with about 80% of that coming from the AEP side.
Sterne: <unk> has been in this business for over 15 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 their proposed a.
Sterne: Record one trillion dollar 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.
Sterne: 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 North Carolina, We expect the potential impact of changes in federal government policies to be little different from anywhere else in the country.
Speaker Change: Aep's footprint is defined as Maryland, North Carolina, with Virginia is our largest market and the linchpin of the franchise. We have done what we set out to do by intentionally carefully building a franchise that we believe has never existed before and cannot be replicated in our markets. The number one regional bank depository market share in the lower mid Atlantic States of Maryland.
Rob Gorman: The 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.
Rob Gorman: First we are an experienced acquire this is my fourth merger at Atlantic Union and the integration work is on track and going well aided by the two companies similar cultures histories mutual familiarity and adjacency.
Rob Gorman: 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.
Rob Gorman: Given the changing rate environment since we announced the merger we wanted to refresh some of their 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 <unk>.
Rob Gorman: <unk>.
Rob Gorman: Yep.
Rob Gorman: Thanks, John.
Rob Gorman: I noted I will now provide you with an update on the Sandy spring acquisition economics and integration activities to date and take you through a comparison to the original acquisition financial assumptions to our updated projections in short list acquisition acquisition checks all.
Rob Gorman: Our strategic and financial boxes for M&A, just as we said it would.
Rob Gorman: As noted due to the accelerated receipt of regulatory approvals. We closed the deal on April one the ahead of schedule in conjunction with the transaction closing we physically settled the previously announced forward sale of common equity on April 1st by assuming 11 3 million common shares we received approximately $385 million in net proceeds.
Rob Gorman: Before expenses in full settlement of the forward sale.
Rob Gorman: Also on April 1st we launched the $2 billion 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.
Rob Gorman: More expedited closing date for the acquisition allowed us to move forward. Our core systems conversion to October 25 October 2025 from February 2026 were approximately four months earlier than initially scheduled.
Rob Gorman: This is expected to accelerate the achievement of full transaction cost savings of 27% of Sandy Springs expense base in 2026 and provide an additional quarter of savings in 2025.
Rob Gorman: As previously noted as part of the transaction planning, we chose them take proactive actions related to the capital raise and commercial real estate loan sale to better position and de risked the combined company's balance sheet. So that we are poised for future growth with substantial capital liquidity and without any commercial real estate concentration constraints.
Rob Gorman: Now here's a quick snapshot of the combined franchise, which represents a pro forma look at the key measures as if the deal closed on March 31, instead of April 1st and before any acquisition accounting adjustments and before the proposed sale of CRE loans.
Rob Gorman: On a pro forma basis. The combined company has approximately $38 billion of total assets $30 billion of loans.
Rob Gorman: $32 billion of deposits and $13 $5 billion in assets under management as well as 183 branches across the footprint.
Rob Gorman: Given the accelerated closing timeline of current macroeconomic environment, we have outlined the updated key transaction metrics on slide 26.
Rob Gorman: Post financial impacts noted here are substantially in line with the key metrics at the announcement date.
Rob Gorman: We stack up well against our shareholder value proposition elements.
Rob Gorman: We have created the largest regional bank in the mid Atlantic continue to be well capitalized believes we will benefit from significant future capital generation and expect to produce top quartile profitability metrics on a sustainable basis.
Rob Gorman: Turning to slide 27, you can see the full comparison of key metrics at close relative to the transaction announcement date with a closing occurring earlier than originally announced we are projected to realize that this an additional quarters worth final financial benefits from the acquisition in 2025 inch.
Rob Gorman: Interest rates were a bit higher at closing and expected at announcement, which resulted in comparatively 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 one years.
Rob Gorman: <unk>.
Rob Gorman: We've already hit a number of key transaction milestones. In addition to our April 1st closing items. We also repositioned the Sandy spring securities portfolio, which allowed us to be to better position, our pro forma asset liability and interest rate risk management objectives on a combined basis.
Rob Gorman: 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.
Rob Gorman: Targeted amount of the commercial real estate loans being so remains at $2 billion.
Rob Gorman: And our sale perimeter is expected to align with our expectations from the acquisition announcement date.
Rob Gorman: We've added slide 29 to help illustrate our projected pro forma earnings composition and the conversion of acquisition related loan interest rate Mark accretion into core cash earnings over time.
Rob Gorman: As can be seen forecast 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.
Rob Gorman: We distinguish accretion income arising from the acquired loans.
Rob Gorman: Interest rate Mark from accretion income arising from the acquired loans credit Mark If you have the loan interest rate Mark is a built in scheduled accounting tailwind to our GAAP earnings.
Rob Gorman: Interest rate marks are fundamentally different in 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.
Rob Gorman: 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.
Rob Gorman: In short accretion income related to the acquired loan interest rate marks will convert to cash income at market interest rates over time.
Rob Gorman: Therefore, we believe that accretion income related to loan interest rate marks is sustainable to the earnings power of the post acquisition the combined company.
Rob Gorman: Since the Sandy spring transaction closed on April one the effects of the acquisition were not in the first quarters reported capital metrics, but for illustrative purposes, we have projected our pro forma capital metrics as of March 31 is if the fully combined is it fully combined for the acquisition close the full settlement of the forward sale of common equity.
Rob Gorman: The commercial real estate loan sale at a pro forma basis, our CET one ratio would have been approximately 975% at March 31. In addition, we expect that our CET one ratio at the end of the current quarter, including all of the pro forma impacts noted will be approximately 10%.
Rob Gorman: As noted on slide 31, we've updated our full year 2025 financial outlook for AAV to include the estimated post close the impact of the Sandy Spring acquisition, beginning in April and assuming that the proposed commercial real estate loan sale closes by June 30. Please.
Rob Gorman: Please note that the 2025 financial outlook includes preliminary estimates of purchase accounting adjustments that are subject to change.
Rob Gorman: With that we expect loan balances at the end of the year to be between 28 and $29 billion, while year end deposit balances are projected to be within the 31% to $32 billion range.
Rob Gorman: We expect our allowance for credit losses to loans to fall between one 2% and one 3% and our full year net charge off ratio to fall between 15% and 25 basis points.
Rob Gorman: Fully taxable equivalent net interest income for the full year is projected to come in between 115 billion and $1 two 5 billion.
Rob Gorman: As a result, we are projecting that the full year fully tax equivalent net interest margin.
Rob Gorman: We'll follow the range between 375% and 4% for the full year driven by our baseline assumptions at the Federal Reserve Bank will cut the fed funds rate three times in 2025 beginning in June.
We are also assuming that GDP growth was slow, but we are not forecasting a recession in 2025.
Rob Gorman: In addition, we expect that the unemployment rate will rise in our markets, but remained below the national unemployment rate in 2025. In addition to fully tax equivalent net interest margin projection and target ranges include the impact of a preliminary estimate of net accretion income from the series brink transaction, which is subject to change once purchase accounting adjustments are for.
Rob Gorman: Finalized.
Rob Gorman: And which can be volatile quarter to quarter.
Rob Gorman: On a full year basis, adjusted non operating noninterest income is expected to fall between $165 million and $185 million.
Rob Gorman: Operating and <unk> expenses, which excludes amortization of intangible assets expense of approximately $55 million for the full year are estimated to fall in the range of 665 million to $685 million.
Rob Gorman: 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.
Bill: I'll now turn the call over to Bill to see if there are any questions from our research analyst community.
Bill: And Lisa we're ready for our first caller please.
Bill: Lisa we're ready for our first caller.
Speaker Change: Alright, let's see if we can message.
Speaker Change: Alright listen we see your messaging is that Youre speaking, but were not hearing you.
Speaker Change: Okay.
Speaker Change: I Wonder if you are able to just released the first column.
Speaker Change: Okay.
Speaker Change: Kathryn can you hear us.
Kathryn: Oh, Yes can you hear me, yes, great. Thank you.
Speaker Change: All right.
Kathryn: And provided there that's great.
Kathryn: One maybe just on the on the Mark from the SaaS or deal is there any way you can appreciate the kind of updated it looks like it looks like the interest rate marks are coming up just a little bit just given kind of your.
Kathryn: Rob with a little bit more tangible book value dilution that higher accretion and just curious if you can update us on.
Kathryn: What that low mark looks like.
Kathryn: Yes so.
Kathryn: The loan Mark as of $3 31 rates as you know interest rates.
Kathryn: Went up a bit.
Kathryn: Since the announcement date, we're looking at about a 7% of loans, Mark which is about $800 million, which is higher than what we originally had projected which is in the think about the $600 million range at the announcement date. So.
Kathryn: Interest rate fair value adjustment will accrete through income over.
Kathryn: We're saying is it's a seven year some of the year digits accretion income flow.
Speaker Change: Okay, Great and then you are using some of your digits with that as a way to forecast kind of what you are.
Kathryn: Yes, forecasted look like exactly Yep, that's right.
Kathryn: And within that is there an assumption that you'll see kind of accelerated paydowns.
Kathryn: Yes, the nature of the some of the year digits would call for more paydowns earlier than what the maturity schedule might say, but so there is some.
Kathryn: Theres some of that in the projections that we have in that so.
Kathryn: And maybe share because <unk> got a couple of cuts coming in the next few years, maybe that's yes.
Kathryn: That would be it could be faster.
Kathryn: It's kind of unpredictable it can be volatile quarter to quarter as you know.
Kathryn: Depending on what rates where rates are where they are with alone.
Kathryn: Yields are.
Kathryn: Okay great.
Speaker Change: And then was there any change to the credit Mark.
Speaker Change: SaaS Sir actually.
Kathryn: Actually the credit Mark came at a bit better than.
Kathryn: What we had projected.
Kathryn: To date.
Kathryn: So about a one 3% mark.
Kathryn: That entire portfolio.
Kathryn: Versus what we had originally projected to be a bit higher I think in the one 5%. So it came in a little better.
Kathryn: Okay great.
Speaker Change: And now you can I know you are just in the midst of the CRE loan sale, but is there any just given the volatility in the rates is there any.
Speaker Change: Risks do you think that that sale could come at a steeper discount or do you think I think when you announced the deal with you already had about a 10% discount to those lines and just kind of curious how youre thinking about.
Speaker Change: The risk of that being a little bit higher as you get towards the highest.
Speaker Change: Youre right in terms of the projected.
Speaker Change: Projected discount.
Speaker Change: Obviously with all the market turmoil rates this way of that.
Speaker Change: Just a general market turmoil out there we're monitoring it very closely.
Speaker Change: I really can't talk too much specific on that but at this point in time, we don't see there's any major.
Speaker Change: The negative to what we were projecting.
Speaker Change: At the close.
Speaker Change: Okay, great and just as a kind of an update most of the type of credit that you have in that loan sale. Our multifamily retail can you just remind us kind of a composition of what's in that book.
Speaker Change: Yes, the majority of its retail and multifamily to your point.
Speaker Change: And those are the big things I think there is some other general Atlantic previous things, but those are the those.
Speaker Change: Those are big categories and that Hasnt changed.
Speaker Change: Since.
Rob Gorman: When we discussed at the announcement date, Catherine one thing to point out. This is a relatively short duration portfolio would you comment on that Rob.
Speaker Change: Yes, the portfolio is probably.
Speaker Change: The duration of your maturity level maturity of those loans is probably in the 3% to 44 year range at this point so.
Speaker Change: These are good good loans, obviously these are not distressed loans at all so.
Speaker Change: The interest rate.
Speaker Change: Environment does effect.
Speaker Change: That pricing, but again, we feel comfortable in the range that we've talked about but we will see.
Speaker Change: More to come on that I can't talk too much more specifics it because we're in the middle of that process is going well. The reason why I comment on the duration is don't go look at what was the 10 year Treasury on October 21, and what it is today you need to look at like the three year Treasury rate.
Speaker Change: Four in which youre going to find is that it is comparable to or actually a little bit lower that by announcements. So it's been up it's been down it's been Oliver yes, it's moved around quite a bit but we're closely monitoring.
Speaker Change: Yes.
Speaker Change: Okay very helpful. I'll step out. Thank you. Thank you.
Speaker Change: Alright, thanks, Katherine and blending so much private again for our next caller. Please thank you.
Speaker Change: And the next question.
Speaker Change: It will be coming from the line.
David Bishop: David Bishop of Halloween Group. Please go ahead hi.
Speaker Change: David.
Speaker Change: I think Steve that I.
John Asbury: I think she said my name Hey, How're you doing John.
Speaker Change: If we can go with your question.
John Asbury: Just curious.
Speaker Change: Obviously, sandy spring, especially in there.
Speaker Change: Rearview mirror, so to speak but as you integrate the bank and you look at.
Speaker Change: Obviously, a lot of noise with the tariff situation, but on a core loan growth perspective, where do you think the.
Speaker Change: That shakes out from a longer term.
Speaker Change: Perspective is it.
Speaker Change: Mid single digit mid to high single digits, where do you see that trending out over the longer term.
Speaker Change: When things are longer term.
David Bishop: Hey, David we're looking at.
Speaker Change: As we said before describing towards that upper single digit loan growth I think in the.
Speaker Change: The medium term that might be a bit lower in the more in the mid single digits.
Speaker Change: But over the longer term and more normalized environment, we think upper single digits would be the way to go.
Speaker Change: The projections, we would have.
Speaker Change: There's a lot of opportunity up in the Sandy spring footprint and of course, the broader franchise is also upside down.
Speaker Change: North Carolina.
Speaker Change: Virginia does have good growth, but those would allow us to.
Speaker Change: To grow a little faster than we have correct. Some of the key points about sandy we acknowledged 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.
Speaker Change: We fully release the Sandy spring.
Speaker Change: Our former Sandy spring team.
Speaker Change: To go do business there are no constraints here.
Speaker Change: 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.
Speaker Change: 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 it.
Speaker Change: The current disruption.
Speaker Change: Got it and then.
Speaker Change: Turning to credit it looked like there was a little little blip on the CNI side. There was one I think about a $9 million credit by blended 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 I was curious if there was any sort of specific accruals reserves for that C&I credit maybe walk through.
Speaker Change: The Permian gas chatter.
Speaker Change: Part B.
Speaker Change: The increase in the reserve that you saw this quarter $15 million increase was primarily driven by the <unk>.
Speaker Change: Uncertainty in the market as qualitative overlay, we did have a bit of a specific reserve that we added for that particular credit.
Speaker Change: But that wasn't the driver of the material driver of the increase in the reserve, yes. It was related.
Speaker Change: 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.
Speaker Change: Pardon me I meant to say the provision is specifically.
John Asbury: Got it and then final question John obviously.
John Asbury: You noted the disruption we're all aware that usually where there's disruption. There's also some opportunities as well any early reads, where there could be some opportunities that are sort of like Yale unforeseen benefit from the term loan.
Speaker Change: David 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 we have all been up there quite a bit.
John Asbury: What are you what are you safe.
John Asbury: Yes, I mean, there is kind of disruption everywhere, but the up there.
John Asbury: We have done is we've kept.
John Asbury: The overwhelming majority of producers.
Speaker Change: And leadership and so Theres a lot of continuity there to take advantage of what the market has to offer and right now that disruption is helping us with pipeline since the last time I looked at it about three weeks ago doubled.
Speaker Change: And they are definitely motivated to do business. So we think we're going to find some good transactions up there can be various.
Speaker Change: Great appreciate the color.
David: Thank you David.
Speaker Change: And our next caller. Please thank you one moment for the next question is.
Speaker Change: The next question will be coming from Brian <unk> of Morgan Stanley. Your line is open.
Brian: Brian Hello, and welcome.
Speaker Change: Hi, good morning.
Brian: That coverage is.
Speaker Change: It's my pleasure and thank you for taking the question I wanted to just start off on the net interest income guidance can you just walk us through what could get you to the wildland does that range versus the high end.
Brian: Of course, a lot of certainty in the environment from a gross perspective.
Brian: Active and also interest rates, but just wondering how youre thinking about the high end versus a while out there.
Brian: Yes in terms of.
Brian: The low end I think.
Brian: If we see significant.
Brian: We're assuming three cuts from the fed if we if we see multiple war there'll be a fairly large will be an impact on our variable rate loan book, which could drive.
Brian: Which would impact that projected negatively.
Brian: In addition, if term rates came down significantly as well part of the.
Brian: NIM.
Brian: 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 shriek at this point in time, our fixed rate loan book is portfolios.
Brian: Portfolio is about five little over 5% and we're repricing.
Brian: <unk> loans at about a six and a quarter based.
Brian: Based on the current term rates, so that could affect it as well and then of course just.
Brian: Net.
Brian: Loan growth.
Brian: We're not calling for a ton of loan growth this year.
Brian: Got.
Brian: If we see runoff in the loan portfolio that could affect that as well.
Brian: And then the other side of that is if rates Spike then we could see.
Brian: The impact on the ability to lower deposit costs going forward to so Paulo that will come into play.
Brian: On the lower end.
Brian: In terms of.
Brian: Hi, Ann.
Brian: Not to mention Brian.
Brian: There is volatility in our assumption regarding the accretion income that's going to be coming through.
Brian: That can be volatile that could come in lower than our expectations based on what we just talked about in terms of.
Brian: How do we expect that to flow in.
Brian: Over the seven year period.
Brian: This year.
Brian: Just on that.
Brian: Accelerated 70 year somebody year digitally you can get you a quarter to quarter volatility on that yes.
Speaker Change: That's great color. 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 youre seeing any weakness in the portfolio.
Speaker Change: Today, any signs that things could be deteriorating and as is their portfolio or in the geographic footprint in general anything.
Speaker Change: Standing out from a client.
Speaker Change: Client conversations.
Speaker Change: Since the tariffs were announced with just wondering if you had any color there. Thanks.
Speaker Change: Let's start with Doug Woolley, Chief Credit officer sort of macro perspective on overall health of our portfolio, Yes, Brian on.
Speaker Change: On tariffs.
Speaker Change: The big uncertainty no one knows what's going on.
Speaker Change: No one knows what will go on we will spend the next several months.
Speaker Change: Diving into the client base to see what they think is the impact.
Mary: Mary secondary.
Mary: And with the tail of that impact is but there is nothing known right now about tariffs, there's nothing none of that.
Mary: Pockets of credit quality issues or anything like that.
Mary: Like any other bank, we're constantly surveilling the landscape.
Mary: To try to figure out what any given indicator might mean to anything and Theres just nothing that we see right now, yes, obviously, it's great uncertainty everywhere correct, hence the specific reserve and that specific reserve correct correct correction that the use of management judgment to it.
Mary: Use the.
Mary: 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 minutes, Your assessment of the tariff impact.
Mary: When I think about the uncertainty that we're looking at and what we are addressing are attempting to address with the increase in the provision to deal with uncertainty.
Mary: The root cause of it is the tariffs it's not dead.
Mary: Our trade policy, it's not that we think that our portfolio. Our region is somehow disproportionately impacted by tariffs, it's not and we are in the federal Reserve's cap as you can see on slide 33, where no more impacted in this region by tariffs maybe last in many areas.
Mary: But the tariff policies are ultimately creating.
Mary: Creating a.
Mary: A higher risk of 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.
Dave: Dave mentioned, Dave ring.
Dave: 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 and see how unduly impacted versus that one regionally I would say that.
Dave: Certainly the greater Washington region, just because of concern about the various fed cut backs federal cutbacks that are going on out there in the workforce is creating an awful lot of angst.
Dave: And is creating some slowdown in consumer spending and that sort of thing it doesn't show up in the data yet.
Dave: Go look at initial and continuing unemployment claims as we do as recently as last week for a Washington D. C for Maryland, and Virginia. If you look at a couple of year trend line. There is an in perceptible difference nothing has really moved yet Maryland's unemployment rate is still the lowest.
Dave: Three 8% there is no more populous state in America with a lower unemployment rate in Maryland and didn't change in March was three point out. The next most populous state with the lowest unemployment rate is Virginia, which ticked up slightly at three two so these are fundamentally we view these as pretty good economies.
Speaker Change: Is this just a lot of concern and.
Speaker Change: Angst, but we think that as things clarify the opportunities are going to be there greater Washington is a special case, they're going to have to get through whatever the disruption is and let that work its way through.
Speaker Change: That's really helpful. Thank you for taking my questions. Thank.
Speaker Change: Thank you, Brian and Lisa we're ready for our next caller. Please thank you.
Steve Moss: And the next question will be coming from the line of Steve Moss.
Speaker Change: Of Raymond James Your line is open.
Speaker Change: <unk>.
Speaker Change: Hey, John Good morning, everyone, maybe just.
Speaker Change: Maybe this will take Hitachi, but just curious with regard to the commercial real estate loan sale.
Speaker Change: The pricing in this quarter's deck is at least $2 billion.
Speaker Change: Before is kind of up to $2 billion. Just wondering are you guys thinking about upsizing.
Speaker Change: The sale.
Speaker Change: No not at this point.
Speaker Change: Steve.
Speaker Change: $2 billion is basically the number that we are looking at targeting and feel good about that we wouldn't be upsizing that.
Speaker Change: Okay.
Speaker Change: We're ready for any reason at this point in time or for that matter a downsizing it at all.
Speaker Change: So we feel comfortable with that number that's the plan.
Speaker Change: Got you and then in terms of.
The loan mix here this quarter.
Speaker Change: The pullback in construction just wondering is.
Speaker Change: Is that a trend you expect to continue or do you expect to kind of refill that bucket here over time.
Speaker Change: Congrats pipeline.
Speaker Change: Loan balances.
Speaker Change: Just just a nuance on that a lot of that decline you see was basically construction loans completing.
Speaker Change: Construction, completing or going into any firm term.
Speaker Change: Term loans and yet in the real estate buckets that you saw grow but I'll, let Dave.
David Bishop: Talk about what you're seeing in the go forward in general the construction book and pipeline is down.
David Bishop: If you think about what customers have to do to make that project makes sense.
David Bishop: Crist rates the way they are and other things.
David Bishop: Other components of their decision making.
David Bishop: It's a natural for us to slow down a little bit, but what we are seeing now an increase in our in our overall real estate pipeline. So it's kind of going to get offset by some of the other.
David Bishop: Asset classes or some of the other parts of the pipeline that marketing as well.
David Bishop: We have active conversations going on with construction.
David Bishop: Projects I'll give you. One example, we just met with the 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 pipelines behind us, we just arent seeing it yet materialize.
David Bishop: And I just wanted to 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've re code.
David Bishop: As no longer construction line.
What we would call permanent mortgage.
David Bishop: And so it's simply roles to that other category and say refilling the bucket of construction.
David Bishop: As sort of the goal there interestingly, we just held us a fairly large of that with.
Speaker Change: Real estate developer.
David Bishop: Developer clients and centers of influence here in central Virginia and in talking to them.
David Bishop: They were more optimistic than I would've expected network. The room is prone to do <unk>.
David Bishop: Conducted my survey what are you seeing how are you feeling or seeing any tariff impacts and today's point, yes. 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 <unk>.
David Bishop: <unk> that arent in the country right now.
David Bishop: Obviously prices are going to go up so we still see the fundamentals are good it's going to be a timing issue. That's why we question the pull through on our pipeline.
David Bishop: Hope that makes sense.
Speaker Change: Yes, It does and then just with regard to.
David Bishop: And more of the reserve build here.
David Bishop: On the guide 120 to 130 ACL.
Yes.
David Bishop: Rough calculations here it looks like that implies further further qualitative reserve building over time just curious.
David Bishop: How how much do you think.
David Bishop: As you put the overlays here.
David Bishop: If tariffs moderate can you expect the.
David Bishop: The ACL guide to come down.
David Bishop: Or are there areas that you guys are just saying too much uncertainty youre going to.
David Bishop: Probably built burners.
David Bishop: Sure.
David Bishop: Yes, I think if.
David Bishop: From the tariff and the probabilities of recession decline as you know they've increased.
David Bishop: Which is part of it.
David Bishop: The reason, we put the qualitative overlays on it.
David Bishop: We could see that that 120 to 130.
David Bishop: It could be a bit lower.
David Bishop: At this point in time that 120 to 130.
David Bishop: Also includes sandy spring and the.
David Bishop: So double count.
David Bishop: In the PCB allowance impact so it's really related to that.
David Bishop: And.
Speaker Change: Apply what we did at Atlantic Union with qualitative overlays has also.
David Bishop: Found its way into those estimates so.
Speaker Change: To your point.
David Bishop: It could be it could be better than that.
Speaker Change: But it really depends on how the.
Speaker Change: 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 AED.
Speaker Change: Only pre merger because right now at this point, yes. So what you saw today was <unk>, which was one 3% and we believe and we lay on Sandy spring and so we deal with that Youll see that come through this quarter, but just what the point I'm trying to make ends for AAV The reserve Youre looking at.
Speaker Change: Now end of Q1 is the right reserved in our assessment.
Speaker Change: For Atlantic Union correct.
Speaker Change: <unk> will go at it.
Speaker Change: And then we will take during Q2.
Speaker Change: We will go through the work to set the reserves are set the allowance I should say for for Sandy spring. So when we come out and released at the end of Q2.
Speaker Change: 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 at that point in time, yes.
Speaker Change: Yes, and it also will be combined.
Speaker Change: Organizationally as of June 30, when we.
Speaker Change: <unk> results in the allowances.
Speaker Change: There are a lot of this relates to what's the economic forecast, we use Moody's and we have a weighted.
Speaker Change: Moody's scenarios. So if that were to change significantly one way or the other we might see those numbers shift a little yes, Rob one other thing Theres a reason why we keep commenting that 46% of the entire loan portfolio has been marked that's different from the allowance that you have to acknowledge that.
Speaker Change: That's a good thing.
Speaker Change: Okay.
Speaker Change: Yes, Thats, a 46% includes a credit component.
Speaker Change: A lot of that relates to the interest rate rig park due.
Speaker Change: Due to where we are in the rate cycle.
Speaker Change: That's right.
Speaker Change: Right. Okay I appreciate all the color. Thank you very much guys. Okay. Okay. Thank you Steve.
Lisa: And Lisa we're ready for our next caller. Please thank you.
Speaker Change: And the next question will be coming from the line of Stephen Scouten.
Speaker Change: Piper Sandler your line is open.
Speaker Change: Good morning, Steven.
Lisa: Good morning, everyone. Thanks for the time.
Speaker Change: You've covered 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.
Lisa: You mentioned tariffs, but it's also <unk>.
Speaker Change: Ideology here in fear.
Speaker Change: I guess around the government contracting business, which you identified as it's really pretty small and haven't had any net charge offs over the last four quarters, if one of those loans.
Speaker Change: Let's say we're 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.
Speaker Change: Well this is secured lending.
Speaker Change: Doug do you want to take that one had secured lending.
Speaker Change: The.
Speaker Change: A lot of the facilities are margins against contracts.
Speaker Change: That.
Speaker Change: Billings rather.
Speaker Change: And these are normally highly desirable contracts. So the contracts themselves are not going to be the issue it could be how the company is run.
Speaker Change: This is a highly private equity driven market with ownership.
Speaker Change: And there would be.
Speaker Change: There will be a lot of players going after.
Speaker Change: Alcon client it was it was bundling a little bit.
Speaker Change: So we didn't think we would say loss given default would be very low yes, we've actually seen that before one thing I will point out you look at the criticized percentage and you may say, that's high that's not new it looks like that for years.
Speaker Change: The nature of the Beast.
Speaker Change: It's a complex business. The government is slow to approve contracts when contracts are awarded they're often disputes.
Speaker Change: But it is a good business Theres a reason why we are principally focused 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 and the national security or defense related contract portfolio. We have some that are not but that's the minority.
Speaker Change: And it's also important to understand that in many cases the personnel have to have security clearances, which is exceptionally valuable.
Speaker Change: In rare. So this is a really interesting space, it's kind of a niche.
Speaker Change: And we have 15 years, we have never had a charge off I am not saying, we will never have a charge offs I'm simply saying that our experience has been really good and Steven it's a very high variable cost business.
Speaker Change: So the companies can flex up and down a bit lose contracts.
Speaker Change: Their employees are highly desirable.
Speaker Change: So if they happen to lose the contract.
Speaker Change: As often as not those employees go over to whoever won the contract.
Speaker Change: So because of that it's very easy to flex the expenses.
Speaker Change: That's really great color. Thanks, everything else I had has basically been kind of appreciate the Thomson one okay, David Amy we're ready for our last caller. Please.
Speaker Change: And the next question will be coming from the line of Russell Gunther of Stephens. Your line is open.
Russell Gunther: Hi, Russell Hey, good morning, guys, Hey, good morning, John.
Russell Gunther: Appreciate the incremental disclosure this quarter I 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 does really just qualitatively trying to get a sense to the extent for which you think you've ring fence. This overhang for AAV.
Speaker Change: Yes, I would say.
Russell Gunther: Russell that.
Russell Gunther: There is some component of doujin in there, but it's not the big driver of the qualitative factor.
Russell Gunther: The real.
Russell Gunther: Impact is related to a potential recession probabilities of recession going up as a result of tariffs.
Russell Gunther: Yes.
Russell Gunther: Issues related to that that could impact the economic environment going forward negatively so little little impact from a dose perspective, we don't think theres much Doug can comment on this a real big impact from a credit perspective.
Russell Gunther: From dose, we think there may be a potential growth issue with that and the northern point of view.
Russell Gunther: Right.
Russell Gunther: Franchise, but.
Russell Gunther: In the northern Virginia and DC.
Russell Gunther: Areas so.
Russell Gunther: So again not a big factor at all in the overlay so.
Russell Gunther: Again, as we've said the overlay that you saw was for the AED pre merger franchise.
Russell Gunther: And we're we're pretty limited in terms of greater Washington region, and the government contract portfolio. It would be the ones that would I guess, you with most exposed and you've seen our arguments that we're actually in a really good spot and with what could be a trillion dollars of record defense budget, we actually think that that's.
Russell Gunther: Those contractors are going to grow and they're going to have opportunity and there is more capital going into that space.
Russell Gunther: To paint a picture of kind of a window into our world and Virginia.
Speaker Change: You lead Northern Virginia, and you head South and you talked to any business person.
Russell Gunther: It is unlikely anyone's going to mentioned dose it's.
Russell Gunther: It's not a big deal south to the greater Washington region. They will talk about tariffs they will talk about economic uncertainty.
Russell Gunther: So the government cost reduction issues are more regionalized and that greater Washington region.
Russell Gunther: 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 pads, maybe some municipal grants, but theres nothing thats really unique.
Russell Gunther: As it relates to that elsewhere in Virginia, once you really get out of that greater Washington region move over to Hampton roads, where theres. Another large population of federal employees, that's all about defense.
Russell Gunther: And with the <unk>.
Russell Gunther: President's Executive order to increase American Shipbuilding, a big winter is likely going to be captive roads and Newport News shipbuilding in the largest naval base in the world. So on and so forth. So it's really important just to understand that this franchise is very diversified and you do see regional differences hope that helps.
Speaker Change: It does quite a bit I appreciate the color and then just last one for me.
Russell Gunther: Touched on NII guide in.
Russell Gunther: The range of the pro forma 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 <unk> and QQ prior to folding in Sandy spring. Thank you.
Russell Gunther: Yes. So in terms of just B, we do expect some continued.
Russell Gunther: Expansion of the margin.
Russell Gunther: In Q2.
Russell Gunther: If you look back at what we guided to.
Russell Gunther: Full year <unk> Standalone in January we said $3 45 to 360, we think will be.
Russell Gunther: Higher than that.
Russell Gunther: That low and obviously you were at 345 this quarter.
Russell Gunther: That expansion is on the back of continuing deposit costs coming down.
Russell Gunther: We have about $800 million.
Russell Gunther: Per quarter over the next few quarters of Cds re pricing I think.
Russell Gunther: The cost of those CD portfolios about four 3% now.
Russell Gunther: And we are repricing those into 375% to 4% range. So that will continue to help and then we.
Russell Gunther: We are seeing fixed rate loans repriced higher as I mentioned earlier from a.
Russell Gunther: Portfolio of fixed rate loan yield.
Russell Gunther: It's a little over 5%.
Russell Gunther: Repricing in the six in the quarter.
Russell Gunther: <unk> give or take.
Russell Gunther: So those are helpful and that will continue.
Russell Gunther: So in this quarter.
Russell Gunther: Third and fourth quarters.
Russell Gunther: Beyond that we think.
Russell Gunther: Sandy spring.
Russell Gunther: 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 we'll continue to.
Russell Gunther: Their deposit rates down as well so.
Russell Gunther: That's a nice tailwind for us.
Russell Gunther: Going forward.
Russell Gunther: I appreciate it guys great color. Thank you.
Speaker Change: Thanks, Ross and thanks, everybody for joining US today, we look forward to talking with you and our next quarterly update.
Russell Gunther: Good day.
Russell Gunther: Thank you all for joining today's conference call you may now disconnect.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Sure.
Russell Gunther: Okay.
Russell Gunther: Sure.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: So.
Russell Gunther: Ian.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: Sure.
Russell Gunther: Okay.
Russell Gunther: Sure.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Dan.
Russell Gunther: [music].
Russell Gunther: Sure.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Sure.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: And.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: <unk>.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Sure.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: So.
Russell Gunther: Dan.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: <unk>.
Russell Gunther: Uh huh.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: So.
Russell Gunther: And.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Yeah.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: So.
Russell Gunther: Dan.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Uh huh.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Sure.
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: So.
Russell Gunther: Dan.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: Sure.
Russell Gunther: [music].
Russell Gunther: Yeah.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Yeah.
Russell Gunther: So.
Russell Gunther: Dan.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
So.
Russell Gunther: And.
Russell Gunther: [music].
Russell Gunther: Yeah.
Russell Gunther: [music].
Russell Gunther: Andrew.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Sure.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Yeah.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: <unk>.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Dan.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: Sure.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Sure.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Yeah.
Russell Gunther: So.
Russell Gunther: Dan.
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: [music].
Russell Gunther: <unk>.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: Yeah.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: Okay.
[music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: Yes.
Russell Gunther: Dan.
Russell Gunther: [music].
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].
Russell Gunther: Yes.
Russell Gunther: Okay.
Russell Gunther: [music].