Atlantic Union Bankshares - Earnings Call - Q4 2024
January 23, 2025
Executive Summary
- Q4 2024 diluted EPS was $0.60; adjusted diluted operating EPS was $0.67 as higher provision ($17.5M) and merger costs weighed on GAAP results while core trends remained solid.
- Net interest margin (FTE) compressed 5 bps q/q to 3.33% on lower variable loan yields, partially offset by lower cost of funds; deposits rose and FHLB borrowings fell sharply, supporting funding mix improvement.
- Credit quality remained generally benign, but NPAs rose to 0.32% of loans due to a single $27.7M C&I nonaccrual with a $13.1M specific reserve; net charge-offs were 3 bps annualized.
- 2025 standalone outlook guides to NIM (FTE) ~3.45–3.60%, NII (FTE) ~$775–$800M, mid-single digit loan/deposit growth, ACL 100–110 bps, and adjusted OpEx $475–$490M; common dividend increased to $0.34 (+6.3%).
What Went Well and What Went Wrong
What Went Well
- Adjusted operating profitability remained strong: adjusted diluted EPS $0.67, adjusted operating ROA 1.03%, adjusted operating ROTCE 15.30%.
- Funding and NIM setup improved: cost of funds fell 15 bps q/q to 2.41% and management outlined drivers for organic NIM expansion in 2025 (repricing of fixed-rate back book; lowering CD rates as $3.3B matures).
- Strategic progress: Federal Reserve approved the Sandy Spring merger (Jan 13); management expects April 1 close and highlighted cultural/market fit across MD/VA/NC.
What Went Wrong
- Specific credit issue: NPAs increased to 0.32% of LHFI, driven by one $27.7M asset-based C&I loan; provision rose to $17.5M with a $13.1M specific reserve; NIM/FTE declined 5 bps q/q.
- Noninterest expense rose: reported OpEx up $7.1M q/q to $129.7M, primarily from a $5.6M increase in merger costs; adjusted OpEx up $1.6M on salaries/benefits and professional services.
- Securities AFS unrealized losses widened to $402.6M (from $334.5M) as rates moved; total portfolio unrealized loss ~$445.9M (incl. HTM) and investment yield decreased to 3.87%.
Transcript
Operator (participant)
Good day and thank you for standing by. Welcome to the Atlantic Union Bancshares 4th Quarter 20 24 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Bill Cimino, Senior Vice President, Investor Relations. Please go ahead.
Bill Cimino (SVP, Investor Relations)
Thank you, Michelle, and good morning, everyone. I have Atlantic Union Bancshares' President and CEO, John Asturri and Executive Vice President and CFO, Rob Gorman with me today. We also have other members of our executive management team with us for the question and answer period. Please note that today's earnings release and the accompanying slide presentation we are going through on this webcast are available to download on our investor website, investors. Atlanticunionbank.com.
During today's call, we will comment on our financial performance using both GAAP metrics and non GAAP financial measures. Important information about these non GAAP financial measures, including reconciliations to comparable GAAP measures, is included in the appendix to our slide presentation and in our earnings release for the Q4 and full year of 2024. We will also make forward looking statements on today's call, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward looking statements. We undertake no obligation to publicly revise or update any forward looking statement.
And please refer to our earnings release and our slide presentation issued today and our other SEC filings for a further discussion of the company's risk factors and other important information regarding our forward looking statements, including factors that could cause actual results to differ from those expressed or implied in the forward looking statement. All comments made during today's call are subject to that Safe Harbor statement. At the end of the call, we will take questions from the research analyst community. And now I'll turn the call over to John.
John Asbury (President and CEO)
Thank you, Bill. Good morning, everyone, and thank you for joining us today. 2024 was a good year and a consequential year for Atlantic Union. We were excited to close our acquisition of American National Bancshares on April 1, and we continue to be impressed with our new and expanded markets and how well the 2 companies came together as one since closing. And on October 21, we added to the excitement by announcing our proposed acquisition of only Maryland based Sandy Spring Bancorp.
Let me begin with some perspective and the status report on the proposed acquisitions since last quarter. Acquisition of Sandy Spring will join the number 1 regional depository market share bank in Maryland with the number 1 regional depository market share bank in Virginia. In our view, not only has there never been such a regional bank franchise headquartered in the lower Mid Atlantic, but there may also never be another as we believe our combined franchise will not be able to be replicated in our footprint. We believe the proposed acquisition will benefit our customers and markets with an expanded and even more convenient branch network, enhanced product offerings, a robust community benefit plan and access to more capital. We also believe it will benefit our teammates with expanded career opportunities, resources and capabilities.
And finally, we believe it will benefit our shareholders by positioning us well to deliver differentiated financial performance. As for the status of the merger, we were pleased to receive our merger approvals from the Federal Reserve Bank of Richmond on January 13, 7 weeks after filing applications. We are awaiting approval from the Virginia Bureau of Financial Institutions and the Maryland Office of Financial Regulation. Assuming receipt of remaining regulatory approvals, each company's respective shareholder and stockholder approvals as applicable, At the special meetings to be held on February 5 and the satisfaction of other closing conditions, we expect to close the transaction on April 1 this year. Our merger integration planning process is well underway with the Sandy Spring team and from the meetings I've attended, I remain highly confident in our cultural compatibility, the strategic logic of the merger and its potential.
We've been delighted by both teams enthusiasm over what we believe our combined franchise will offer to our customers and our communities. I'll now comment on the macroeconomic conditions in our markets and then share a few thoughts on the Q4. The macroeconomic environment remains favorable in our footprint and we do not expect that to change in the near term. Our markets continue to appear healthy and our lending pipelines imply we should expect mid single digit annualized loan growth in 2025 within the current AUB franchise. We believe that a good indicator of economic health is employment and the 3 states where we operate continue to have unemployment rates better than the last reported national average unemployment rate of 4.1%.
In our case, unemployment rates by state for the last reported period of November are 3.0% for Virginia, 3.1% for Maryland and 3.7% for North Carolina. Virginia is our largest market and our Governor summed up the state economy well recently by saying the economy is strong, very strong. And we agree. We're confident in the economy in all our markets and with our increased presence in North Carolina and our planned expansion in Maryland with the Sandy Spring merger, we believe we do and will operate in some of the most attractive and stable markets in the country. Turning now to quarterly results.
Here are a few financial highlights for the Q4 and the full year 2024. We continue to be on a moderate growth path for both deposits and loans. Point to point loan growth for the 4th quarter was approximately 3% annualized. As you can see by comparing point to point growth to the average for the quarter, loan growth skewed to the back half of the quarter and accelerated following the elections and the Fed rate cut in December. Deposit growth in the 4th quarter was approximately 2% annualized after reducing brokered deposits by more than $200,000,000 Non interest bearing deposit average balances were about even quarter to quarter and point to point decreased modestly to approximately 21% of total deposits.
It's a typical pattern to see a seasonal drop in non interest bearing transaction accounts at year end. With the Federal Reserve rate cuts, we've been fairly aggressive in moving deposit rates lower as you can see from the decline in the cost of deposits. For some of our larger negotiated rate depositors, we were able to reduce deposit rates by more than the latest Fed cut, which we believe will have additional benefits to the net interest margin in the Q1 of 2025. In past quarters, we've been able to pay down overnight FHLB borrowings with surplus funds from some of the larger accounts that have significant fluctuations in the normal course of the cash operating cycles, we can no longer do that since we significantly reduced our overnight FHLB borrowings during the quarter. This funding mix dynamic contributed to some of the quarter's NIM compression.
And speaking of net interest margin, because we're still mildly asset sensitive, the expectation that the Fed may have fewer rate cuts than previously expected or perhaps none bodes well for us and should be a net positive for AUV's margin. Our loan growth was on top of the highest quarterly runoff we've seen since before the pandemic. We saw elevated payoffs or paydowns among both our C and I client base, especially in government contracting and larger businesses and in commercial real estate. We view the elevated commercial real estate payoffs, which we predicted last quarter, is demonstrating that CRE markets in our footprint and that there's ample liquidity and demand for commercial real estate sales and refinances into permanent markets. That's very encouraging to see.
The good news is that total loan production increased 29% quarter over quarter, enough to overcome the spike in payoffs and allow for modest loan growth. C and I utilization this quarter increased slightly from the last quarter and the prior year's Q4. Loan production in the Q4 was weighted nearly 2 thirds from existing clients and about a third from new clients, demonstrating we continue to grow our client base. Production continued to favor C and I over commercial real estate with about 60% of production coming from C and I. We were pleased to see an increase in production and construction and land development for the 3rd consecutive quarter, which we view as another sign of relatively healthy commercial real estate markets in our footprint.
Rob will provide the details around quarterly results, but I will note that the 4th quarter earnings were negatively impacted by a higher provision for loan losses driven by a $13,100,000 specific reserve by a $27,700,000 asset based C and I loan involving an apparent misrepresentation of its borrowing base, which was identified at year end. This individual credit primarily accounted for the increase in non performing assets over the quarter, though NPAs remained low at approximately 0.32% of loans held for investment. Aside from this atypical event, credit remains solid with only 3 basis points of net charge offs this quarter and 5 basis points for the year. As I mentioned every quarter and half for about 8 years, we do not consider the negligible losses we have seen over the past few years to be sustainable. We do expect to have occasional one off losses, but generally not of the type or size we saw this quarter.
We remain confident in our asset quality that we believe some normalization of our long run of historically low losses is inevitable. In sum, we're building out our unique franchise and realizing the financial benefits of the American National combination, which were unfortunately clouded this quarter by the specific credit reserve. As has been the case for some time, we expect economic uncertainty to continue, but we're optimistic in our outlook. I do believe we are well positioned for a successful 2025 and beyond. Atlantic Union is a story of transformation from a Virginia Community Bank to the largest regional bank headquartered in Virginia, to what will be the largest regional bank headquartered in lower mid Atlantic upon closing our proposed acquisition of Sandy Spring.
Meanwhile, we remain more excited than ever about the growth opportunity in our North Carolina markets and we're investing in them. We now have and are continuing to build the franchise we have long sought using our announced strategic plan as our guidepost. Now more than ever, Atlantic Union is a uniquely valuable franchise that is dense, diversified, traditional full service bank with a strong brand and deep client relationships in stable and attractive markets. We also believe we have unmatched scarcity value in this region. I'll now turn the call over to Rob to cover the financial results for the quarter. Rob?
Robert Gorman (Executive VP & CFO)
Thank you, John, and good morning, everyone. I'd now like to take a few minutes to provide you with some details of Atlantic Union's financial results for the Q4 and full year 2024. Please note that for the most part, my commentary will focus on Atlantic Union's 4th quarter and 2024 financial results on a non GAAP adjusted operating basis, which in the 4th quarter excludes $7,000,000 in pre tax merger related costs and for the full year excludes the additional FDIC special assessment of $840,000 in the 1st quarter, the pre tax loss on the sale of American National Securities of $6,500,000 in the 2nd quarter, the effect of the $4,800,000 valuation allowance for deferred taxes that was charged to income tax expense in the 2nd quarter, and the pre tax merger related cost of $40,000,000 incurred in 2024 associated with our merger with American National and our proposed merger with Sandy Spring. As a reminder, the full year 2024 non GAAP adjusted operating results have not been adjusted to exclude the $13,200,000 negative pre tax impact of the CECL initial provision for credit loss expense on purchased non credit deteriorated for non PCD loans acquired from American National, which represents the CECL double count of the non PCD credit mark, does not also include the $1,400,000 negative pre tax impact of unfunded commitments acquired from American National.
It should also be noted that the weighted average diluted common shares outstanding increased during the Q4, driven by the dilutive accounting impact of the forward sale of our common stock in October under the treasury stock method of accounting, which requires the diluted potential common shares related to the forward sale to be included in the diluted weighted average shares, even though the underlying common stock has not been issued to date. This impact is calculated by taking the difference between the average market price of AUB stock in the quarter and the forward stock price multiplied by the number of shares underlying the forward sale and dividing that result by AUB's average market price for the quarter. That said, in the 4th quarter reported net income available to common shareholders was $54,800,000 and diluted earnings per common share was $0.60 For the full year 2024 reported net income available to common shareholders was $197,300,000 and diluted earnings per common share were $2.24 Adjusted operating earnings available to common shareholders were $61,400,000 or $0.67 per diluted common share for the Q4, which resulted in an adjusted operating return on tangible common equity of 15.3 percent and adjusted operating return on assets of 103 basis points and an adjusted operating efficiency ratio of 52.7% in the 4th quarter.
For the full year, adjusted operating earnings available to common shareholders were 2 $141,300,000 or $2.74 per common share, which resulted in an adjusted operating return on common equity of 16.12 percent and adjusted operating return on assets of 106 basis points and an adjusted operating efficiency ratio of 53.3 percent in 2024. Turning to credit loss reserves at the end of the Q4, the total allowance of credit losses was $193,700,000 which was an increase of approximately $16,100,000 from the 3rd quarter, primarily due to the specific reserve John mentioned earlier, continued uncertainty in the economic outlook on certain loan portfolios and organic loan growth in the Q4. The total allowance for credit losses as a percentage of total loans held for investment increased to 105 basis points at the end of the Q4. The provision for credit losses of $17,500,000 in the 4th quarter was up from $2,600,000 in the prior quarter, primarily driven by the specific reserve and slightly higher net charge offs during the quarter. Net charge offs increased to $1,400,000 or only 3 basis points annualized in the 4th quarter, but that was up from $666,000 or 1 basis point annualized in the 3rd quarter.
Now turning to the pre tax pre provision components of the income statement for the Q4. Tax equivalent net interest income was $187,000,000 which was an increase of $208,000 from the 3rd quarter. The increase in net interest income from the prior quarter reflects the net impact of a $5,600,000 decline in interest expense on interest bearing liabilities and a $5,400,000 decrease in interest income on earning assets. The decrease in interest expense is primarily due to a $4,700,000 decrease in borrowings expense as a result of $312,000,000 in lower average short term borrowings and the impact of lower deposit rates in the quarter. The decrease in interest income on earning assets is due primarily to a $9,000,000 decline in income on loans held for investment, driven by lower loan yields on our variable rate loans resulting from the impact of the Federal Reserve interest rate cuts at the end of the Q3 and during the Q4.
The decline in loan interest income was partially offset by a $4,600,000 increase in interest income from other earning assets as a result of a $402,000,000 increase in average cash and other earning asset balances. The 4th quarter's tax equivalent net margin was 3.3%, a decline of 5 basis points from the previous quarter, primarily due to lower core loan yields driven by decreases in variable rate loan yields, partially offset by lower cost of funds and an increase in yields on cash and other earning assets. Additionally, the reversal of accrued interest on the specific reserve loan negatively impacted margin by approximately 1 basis point in the quarter. Earning asset yields for the Q4 decreased 20 basis points to 5.74 percent compared to the Q3 of 2024 and the cost of funds decreased by 15 basis points to 2.41% compared to the prior quarter. 20 basis point decline in earning asset yield is due primarily to the decrease in the loan portfolio yield, which was lower by 21 basis points from 6.35% to 6.14% during the 4th quarter, driven by lower yields on our variable rate loans and a decrease in the securities portfolio yield from 3.92 percent to 3.87%.
These declines were partially offset by an increase in yield on cash and other earning assets, which increased from 3.48% to 4.27% during Q4. 15 basis point decrease in the 4th quarter's cost of funds to 2.41 percent was due primarily to a 42 basis point decline in the cost of borrowings to 4.87 percent, a 9 basis point decline in the cost of deposits to 2.48 percent and a favorable shift in the deposit and short term borrowing funding mix. Non interest income increased $941,000 $35,200,000 for the Q4, primarily driven by a $3,600,000 increase in loan related interest rate swap fees due to an increase in transaction volumes, which was partially offset by a $1,500,000 decrease in bank owned life insurance income driven by debt benefits received in the prior quarter and a $770,000 decrease in other operating income primarily due to a decline in equity method investment income. Reported non interest expense increased 7 point $1,000,000 to $129,700,000 for the 4th quarter, primarily driven by a $5,600,000 increase in pre tax merger related costs associated with the pending Sandy Spring acquisition. Adjusted operating on interest expense, which excludes merger related costs and amortization of intangible assets in both quarters increased $1,600,000 to $117,000,000 for the Q4, driven by a $1,800,000 increase in salaries and benefits expense, primarily due to increases in variable incentive compensation expense and self insured related group insurance costs, as well as a $1,400,000 increase in professional service fees related to strategic projects that occurred during the Q4.
These increases were partially offset by a $1,700,000 decrease in franchise and other taxes. At December 31, 2024, loans held for investment, net of deferred fees and costs were $18,500,000,000 which was an increase of $133,000,000 or 2.9 percent on an annualized basis from September 30, 2024, primarily driven by increases in construction and land development and commercial industrial loan portfolios, partially offset by declines in the multi family real estate loan portfolio. On a pro form a basis, as if the American National balances were acquired on December 31, 2023, loans held from investment increased $661,000,000 or approximately 3.7% for the full year excluding the impact of the acquisitions fair value loan marks. At December 31, 2024, total deposits stood at $20,400,000,000 which was an increase of $92,000,000 or 1.8 percent annualized from the prior quarter due to increases in interest bearing customer deposits, partially offset by decreases in demand deposits and broker deposits. On a pro form a basis, as if the American National balances were required on December 31, 2023, deposits increased $974,000,000 or approximately 5% for the full year.
At the end of the Q4, Atlantic Union Bancshares and Atlantic Union Banks regulatory capital ratios were comfortably above well capitalized levels. In addition, on an adjusted basis, we remain well capitalized as of the end of Q4 if you include the negative impact of AOCI and held to maturity securities unrealized losses in the calculation of the regulatory capital ratios. During the Q4, the company paid a common stock dividend of $0.34 per common share, which was an increase of 6.3% for both the Q3 of 'twenty four and the Q4 of 'twenty 3 dividend amounts. As noted on Slide 13, our full year of 2025 financial outlook for AUV on a standalone basis excluding the financial impact of the pending Sandy Spring acquisition is as follows. We expect mid single digit loan to deposit growth for the full year, Fully taxable equivalent net interest income for the full year is projected to come in between $775,000,000 $800,000,000 We are projecting that the full year fully tax equivalent net interest margin will be in a range between 3.45% and 3.6%, driven by our baseline assumption that the Federal Reserve Bank will cut the Fed funds rate by 25 basis points twice in 2025 and the yield curve will steepen throughout 2025.
The projected expansion of the net interest margin from current levels is expected to be primarily driven by the impact of increasing yields on our fixed rate loan portfolio as the back book continues to reprice higher as well as by the impact of lower time deposit rates is approximately $3,300,000,000 at a current average interest rate of approximately 4.4% will mature over the next 6 months. These favorable NIM impacts will be partially offset by lower variable rate loan yields driven by the Fed funds rate cuts anticipated. On a full year basis, adjusted operating non interest income is expected to be between $125,000,000 and $135,000,000 Adjusted operating and non interest expenses, which excludes the amortization of intangible assets expense of approximately $20,000,000 for the full year are estimated to be in the range of $475,000,000 to $490,000,000 In summary, Atlantic Union delivered solid operating plan of results in the 4th quarter despite challenging banking operating environment we are effectively managing through. As a result, we believe we are well positioned to continue to generate sustainable profitable growth and to build long term value for our shareholders in 2025 beyond. Let me now turn the call back over to Bill Cimino for questions from our analyst community.
Bill Cimino (SVP, Investor Relations)
Thanks, Rob. And Michelle, we're going to be our first caller, please.
Operator (participant)
Thank you. Our first question is going to come from the line of Russell Gunther with Stephens Inc. Your line is open. Please go ahead.
John Asbury (President and CEO)
Good morning, Russell.
Nick Lorenzoni (Research Associate)
Hey, Russell. Hey, good morning, everyone. This is Nick Lorenzoni. I'm just filling in for Russell today. Okay, yes. Good morning.
Hey, good morning. I wanted to start off on the macro side. And with the Department of Government Efficiency, Doge, playing a growing role in streamlining federal operations and even potentially influencing economic activity in Virginia and Maryland. Can you guys provide any insight into how these developments might impact your business model?
John Asbury (President and CEO)
Yes.
Let me I'll give you some big picture perspective. And obviously, we don't know exactly what is going to happen up there. It's certainly been a busy week in Washington with the numerous executive orders coming out. Obviously, we saw the mandate that came out this week to return federal workers to the office and to put a hiring freeze on. A concept of a hiring freeze is something that most private companies understand.
We've done that before ourselves. Having federal workers come back to the office is something that has been long requested by the Mayor of Washington DC and we do believe that that will be an economic benefit to the area. It will help the metro, it will help small businesses, etcetera. Incoming administration has been clear that they are committed to a safe, clean and vibrant Washington DC and we think that will help. Now let me give you some other kind of broad comments.
We are all for improving government efficiency and reducing federal spending. That is a good objective and we wish them much success. If the new administration can reduce the federal workforce in some way, shape or form, which is frankly easier said than done given the essential services provided in the nation's capital, we'd expect to see most of those jobs absorbed into the private sector. And for perspective, the Greater Washington Metropolitan Statistical Area is the 6th largest MSA in the country with a population of 6,300,000 people. Its current unemployment rate is 3.2% and it's one of the most affluent and highly educated regions of the country.
Also to size this, there are 373,000 federal workers in the Washington MSA and we do question as mentioned exactly how many of those can actually go away over time. So the realities of the geopolitical situation and incoming administration's pro national defense stance is likely going to benefit our markets. And I think that's important to understand. And that includes the type of government contractors we finance, which typically provide essential services to what we call the 3 letter agencies such as Department of Defense, National Security Agency, etcetera. We would expect to see more funding for those types of agencies.
And also for anyone who is at all familiar with the Greater Washington region, whether you've spent time there or lived in the area and observed it like we have, there's no question that traditionally a change in administration is an economic stimulus, the Washington region. Go find a hotel in Washington DC right now and you'll find out what I mean. Interestingly, the Washington Business Journal just reported that the sales of high end homes in 2024 and the Greater Washington region hit a record high, which is interesting. And then I think the last point that I'll make, and I'll focus on Sandy Spring for a moment, is to remember, while there's any number of sort of Greater Washington commercial real estate oriented banks, don't confuse that with Sandy Spring, which is the Maryland bank. They are geographically compact franchise that exclusively operates in what's referred to as the Washington Baltimore combined statistical area that has a population of 10,000,000 people.
And that's comparable to Chicago and Northern California, the San Francisco CSAs. The unemployment rate in that combined statistical area is 3.1% and it is broadly one of the most highly educated and affluent markets in the country. So this is a big market. It is a diverse market in terms of its industries. The federal government influences it, but it's not just about the federal government.
Time will tell exactly what's going to go on up there. Clearly, there's a lot of conversation in press around large office buildings and the government liquidating. They're very large old buildings, which are underutilized. That doesn't impact us. We don't perceive that as impacting Sandy Spring because neither of us finance things that look like that.
So we'll see how it plays out over time, but it is the nation's capital and it's not going away.
Nick Lorenzoni (Research Associate)
Okay, got it. That's great color. Thank you. Now just switching gears, I appreciate the organic NIM outlook for 2025, but could you walk us through the cadence and drivers of organic NIM expansion?
And then are there any changes to the pro form a Sandy Springs guide of 3.75% to 3.85%?
Robert Gorman (Executive VP & CFO)
Yes. So in terms of our guidance and how to get there, the expansion that we're suggesting, as we noted in my comments, what we're looking at is that there'll be 2 cuts from the Fed fund in the Fed funds rate in 2025, expect that in the second half of the year. But in terms of between now and then, we are seeing that our back book fixed rate loan portfolios repricing higher and by 1.25 or 150 basis points or so. And we've got about $1,000,000,000 maybe $800,000,000 to $900,000,000 of maturing fixed rate loans per quarter in 2025, repricing at, call it 1.25, 150 on a basis point perspective. So that's helpful.
We do see there's a bit of a lag on our deposit costs coming down in the quarter. But we do expect that we will continue to reduce our CD book from a rate paid perspective. As I mentioned, we have $3,300,000,000 of maturing CDs in the 1st 6 months of 2025. Those maturing CDs paid 4.4% currently. Our current CD offerings are more in the 3.75% to 4 So you'll see a lower cost associated with those maturing CDs.
And there's other factors in that, but those are the big drivers that we expect to see NIM expansion in 2025. As regards to Sandy Spring, we really don't see much change in that outlook in terms of the 2025 impact of Sandy Springs. It might be a bit higher than the numbers you're citing closer to the fore handle if you include purchase accounting accretion, which could be a bit higher based on rates going up a bit since we announced the deal, there should be a bit more accretion. So I would say between 3.75% 4% would be the right numbers on the combined basis.
Nick Lorenzoni (Research Associate)
Rob, could you speak to what we saw NIM do over the course of the quarter? My perspective is that we absorbed 100 basis point decrease in rates because we saw 100 basis points of Fed cuts, 50 in September, which fully impacted us in the quarter, 25 in November, 25 in December. We're still mildly asset sensitive. So when rates are cut, it creates a bit of a lag in terms of half the loan book reprices and then of course we push rates down. So there is a bit of a lag effect. So can you speak to what you saw?
Robert Gorman (Executive VP & CFO)
Yes. Just to comment on the quarter, I should also point out that if you look at net interest spread for the Q4, even though we're down on NIM, the net interest spread was basically flat quarter to quarter. So earning asset yields came down 20 basis points. The interest on interest bearing liabilities came down 20 basis points, kind of so a net even.
We did see some lower levels of free funding related to DDA, which kind of impacted that decline in the margin, impacted that. But in terms of what you just mentioned, John, yes, so if you look at November to December, we're basically flat from a net interest margin perspective. So we're seeing that as rates are coming down and lag on the deposit costs are picking up and that should continue into 2025 as well.
John Asbury (President and CEO)
So I feel like we've got a pretty good running start on this and that should have been bottoming for us. Yes. We also pointed out a couple of technical things like understanding that we had about a basis point of NIM go with the one time reversal of interest on the one credit that had this specific reserve. We did there are a few technical issues I commented on, which is we used to be able to take some larger sort of volatile deposits with larger clients to pay off overnight borrowings. We don't really have that anymore typically.
And so we were able to reduce what we paid on those accounts more than the rate cut. And that happened in December and that actually no impact on them.
Robert Gorman (Executive VP & CFO)
Yes, we have a really good success in engaging our commercial large commercial clients in terms of lowering those exception price deposits and to your point. So that should be picking up as we go into 2025.
John Asbury (President and CEO)
So it's pretty good setup for NIM expansion.
Nick Lorenzoni (Research Associate)
Perfect. Well, that's all I have. Thanks for taking my questions.
John Asbury (President and CEO)
Thank you.
Robert Gorman (Executive VP & CFO)
Thank you.
Bill Cimino (SVP, Investor Relations)
And, Michelle, we're ready for our next caller, please.
Operator (participant)
All right. One moment for our next question. And our next question is going to come from the line of Catherine Mealor with KBW. Your line is open. Please go ahead.
John Asbury (President and CEO)
Hi, Catherine. Good morning.
Catherine Mealor (Managing Director)
Hi, good morning. Just a question back on the margin. Just I think Rob you touched on this a little bit, but just wanted to dig into. Can you talk about just the impact of Sandy Spring, the acquisition and how we should think about the move in rates since that deal was announced to where we are today and that impact on kind of the core margin versus accretable yield and how that might impact the marks?
Robert Gorman (Executive VP & CFO)
Yes.
So, yes, on that question, Catherine, as you know, rates have moved up a bit since we announced the deal. So, if we were to mark those loans in the balance sheet today, you'd see a bit of a higher mark, which will lead into more accretion income as we go forward. So the net impact of that is you might see a bit again, if we were to close the deal today and mark them today, might see a bit of a bit higher tangible book value dilution, but higher earnings, EPS accretion and interest accretion coming through. But the earn back would kind of stay in that 2 to 2.25 range. So in terms of the increase in impact, you'll see more impact, again, based on where rates are today and marking the book than we had projected at the announcement just because of rates have increased.
So, but in terms of the overall net interest margin, I think, as I just mentioned, probably see a bit of a lift in the combined margin with accretion income more closer guiding up to more closer to the 4% range than what we might have guided to at announcement.
Catherine Mealor (Managing Director)
And then how do we think about so the loan mark makes sense to me. So on the other side of the balance sheet with less rate cuts, I would think there would be less ability to lower Sasser's deposit costs as you kind of move through next year. How do you think about that as an offset?
Robert Gorman (Executive VP & CFO)
Yes. Well, one of the offsets there is also on the AUB side. We won't see 50% of our loan book is variable rate. We won't see as much impact on that. So it's kind of washing out, if you will, in terms of those when you combine the balance sheets.
But we'll continue to be aggressive. Once we have the balance sheet combined and we close the transaction, we'll be looking at various deposit rate strategies to continue to bring the overall organization's deposit rates down, but specifically looking at Sandy Springs network or franchise.
John Asbury (President and CEO)
Catherine, two points. We're sort of a natural hedge to each other. They're modestly liability sensitive. We're modestly asset sensitive. So part of the pressure that we always experience when rates go down, they will lead to some extent.
Now clearly, we're larger than they are. But at the same time, when rates don't go down or go up, that pressures them because on the other side of the equation. So it's a very good natural hedge for us both. And I will tell you that selfishly, if you ask us to choose what scenario do you choose for rates to do here with a focus on the net interest margin only, Rob, I would vote for leave them where they are. What would you vote for?
Yes, I would agree. That's a positive scenario for us, but we are planning for 2 cuts from here in terms of the NIM guide that we've given you.
Operator (participant)
Okay. That's very helpful. Thank you so much. And maybe one other is on credit. It seems like the reserve build this quarter was really all related
Catherine Mealor (Managing Director)
to that one C and I loan. It looks like you're building in a little bit of a cushion for modest reserve build on a core basis next year. You just kind of think about that conservatively or anything that you're seeing that would drive that over the next year? Yes.
Robert Gorman (Executive VP & CFO)
Nothing particular is driving that, Catherine. At the end of this quarter, as you mentioned, we're at 1.05, and we've guided to between 1 and 110. That could be closer to the 1 versus the 110. We haven't seen we don't really see anything else at this point in time. But it's basically a conservative assumption in our outlook.
John Asbury (President and CEO)
Assuming the specific reserve works its way onto a charge off, obviously that brings down the reserve because it obviously by definition it's specific to that credit. We guided to 10 to 15 bps of net charge offs in 2024, we were at 5. So my view is we are sort of contemplating an ultimate charge off of whatever it may be associated with that particular credit. But otherwise there's not a lot different in terms of our outlook for everything else.
Robert Gorman (Executive VP & CFO)
Yes, that's right. That's right. In charge off outlook, when we said 15 to 20, that kind of builds in that there's a potential charge off with the specific reserve. We don't know that for a fact yet, but we're anticipating that and that's why the outlook is kind of increased a bit on the charge off. We feel good about that. We feel good about that. We feel good about that. We feel good about that. Yes.
Catherine Mealor (Managing Director)
Okay. Makes sense. Thank you very much.
Robert Gorman (Executive VP & CFO)
Thank you.
John Asbury (President and CEO)
Thanks, Catherine. And Michelle, we're ready for our next caller, please.
Operator (participant)
All right. One moment. Our next question is going to come from the line of Stephen Scouten with Piper Sandler. Your line is open. Please go ahead.
Bill Cimino (SVP, Investor Relations)
Good morning,
Stephen Scouten (MD & Senior Research Analyst)
guys. Just quick clarification on the expected closing of Sandy Springs, I think you said April 1 shareholder vote February 5. Is it possible that depending upon what you hear and the timing from Virginia and Maryland that that could close earlier? Or is it just is that going to stay the plan given conversion dates and other kind of internal plans?
John Asbury (President and CEO)
Good question. We expect that we will hear soon from both Maryland and Virginia. Everything is operating in the normal course. It is kind of interesting, isn't it, just for the record, the Federal Reserve came in faster than the states, which is not typically what we see. But everyone is going through their process.
Let's assume that we get everything in, in short order. I think the question is, could we close in the month of March? Yes, we could. Would we do that? No, we would not.
Why would we not do that? Because it's very complicated to close a merger in the last month of a quarter. We could do it, but we choose not to do it. Do you care to Yes,
Robert Gorman (Executive VP & CFO)
I'd agree with that. Yes, it's a lot cleaner to do it on the first of a new quarter. There's a lot of accounting complexities and reporting requirements associated with a stub period in 1 quarter. So it's just cleaner to do it with the new quarter starting.
Stephen Scouten (MD & Senior Research Analyst)
Yes. That makes perfect sense. And then I know you guys were commenting on higher payoffs within your standalone portfolio. Are you Sandy Springs to your knowledge experienced some of the same dynamics? And do you have any updated commentary on what that could potentially do for the potential needed size of the CRE loan sale?
John Asbury (President and CEO)
I won't comment on Sandy Spring. We can't speak for them. So you'll have to ask them. We presume they will release soon, next week. We'll let them speak to exactly when that will be.
But I will say across the industry, we predicted that we would see elevated commercial real estate sales. Most of what probably payoffs most of what that is, the majority of it is refinances into the term market. So it's kind of interesting that the developers have been waiting. And I think they've decided rates probably aren't going down much from here and they want their capital back to go reinvest into other projects. So they're going into the term markets.
And I think we're likely going to see that across the board. Our agreement is we will sell $2,000,000,000 in terms of our that is our agreement and that's what we will do. And then as I mentioned, we're seeing a rise in construction financing, which is good 3 quarters in a row. We've kind of been waiting on that. Dave, do you want to Dave Ring is here, Head of our commercial businesses.
Do you want to comment on payoffs? Probably the most unusual thing we saw this quarter were elevated commercial and industrial payoffs. We especially saw that in the government contract finance business. Do you have any high level perspective as to what's going on there?
David Ring (Head of Commercial Banking)
Yes. And just thanks, John. Just to comment on what you just said, about 57% of our real estate payoffs were refinancings to the term market
John Asbury (President and CEO)
versus sales, which is Sales.
David Ring (Head of Commercial Banking)
Yes. And there's a portion of them that are just line payoffs, which are not sales either. So we're seeing a nice mix of sales refinancing and line paydowns, which is very good for our portfolio, healthy, very healthy for our portfolio. The rest of the portfolio, we're seeing some payoffs that are normal and then we're seeing payoffs from private credit enterprises that are coming in mostly against our government contracted portfolio. So that's kind of the new dynamic we're seeing in our portfolio, seeing private credit that in our minds looks like pseudo equity because it's not structured very well and it doesn't look like a bank deal.
So we see that and we see that as healthy too. It's a healthy dynamic to help customers grow and take out some of the riskier loans of our portfolio?
John Asbury (President and CEO)
Yes, it's first time we've really seen this in any meaningful way and they tend to deal with sort of the larger middle market types of clients. Frequently, the avenue they use to get in is there's private equity behind a number of these companies and that seems to be sort of the conduit for how they come in. But we saw more of that than we've seen before. So that's kind of interesting.
But we are seeing kind of a rich pipeline coming back in, real estate steady, C and I pipeline has grown year over year by about 31%.
I want to elaborate on GovCon for just a moment. They're going to be winners and losers, we think based on what we're seeing in terms of kind of the focus of the new administration. This administration is pro defense, pro national security. And we actually believe that the types of clients that we finance, which are not large, we're not talking about large global weapons systems contractors, the types of middle market companies that deal with cybersecurity, information security, these are all areas that are going to get more investment. And so you have to pick and choose.
This is sort of a niche operation for us. And I think there's a reason why you see private equity and private credit coming into these companies because they see opportunity.
Stephen Scouten (MD & Senior Research Analyst)
Yes, for sure. It makes a lot of sense. Okay. And then maybe just last thing for me. I mean, there's a lot of moving parts here for sure.
Like you said, some new dynamics around payoffs. You've got the Sandy Springs combination pending. You've got mid single digit growth as the guidance, which can be a fairly wide range. Can you give maybe some thoughts around what would cause you to be maybe at the lower end of that range and what could deliver towards the higher end of that range? And even like where you'd almost want to cap that out?
I know you guys aren't trying to grow 10%, let's say. So just kind of how you think about those dynamics and the ranges that could come about?
John Asbury (President and CEO)
Yes. You don't want to I mean a bank like us, excessive growth would not be a good scenario. That makes me wonder why are you growing excessively. Remember, we deal with we go head to head all day, every single day, particularly with the big guys. And we tend to deal with quality clients.
And so if we had a wider risk box, we would be doing more, but that is not us. Probably I guess I ask you, my gut reaction would be elevated payoffs just like we saw. We would have had much better loan growth in Q4 having not had elevated payoffs because production was very good.
David Ring (Head of Commercial Banking)
Yes. It's hard to say where you'd fall in the loan growth because we kind of stick to our same formula. We don't really want to compete on structure. We like the way we structured transactions and sometimes if a competitor is structuring something, we will a different way, we will let it go. And so that range that we give you really reflects how aggressive the competition is going to be versus how aggressive we are going to be.
John Asbury (President and CEO)
Yes, I would agree. And there's a reason why, I think for every year that I've been here and I've been here 8 years, our investor presentation always begins with the philosophy of soundness, profitability and growth. I'm an old credit officer out of Wachovia by background. That is John Medlin. Sound bank, profitable bank, growing bank.
You do accomplish all 3, that is the correct order. Bad things happen when you get things out of order.
Stephen Scouten (MD & Senior Research Analyst)
Yes, without a doubt. I appreciate all the color and commentary. Very helpful, guys. Thank you.
Bill Cimino (SVP, Investor Relations)
Okay. Thank you, Suji. Thank you. Michelle, we're ready for our next caller, please.
Operator (participant)
And our next question is going to come from the line of Dave Bishop with Hovde Group. Your line is open. Please go ahead.
John Asbury (President and CEO)
Hi, Dave.
David Bishop (Director)
Yes. Good morning, gentlemen.
Robert Gorman (Executive VP & CFO)
Hi, Dave.
David Bishop (Director)
I think, John, maybe I'll sort of holistic question for you. As you get bigger across the lower or mid Atlantic here in Maryland and Virginia and North Carolina, obviously, you're already bumping up and competing against you said sort of the 3 big Ugg lease. Do you think from a deposit pricing and maybe beta perspective, you're more tied to what they do in terms of sort of moving funding cost or you still have the ability to sort of relationship price as you noted and bring down price?
John Asbury (President and CEO)
I would like for the transcript to reflect that it was David Bishop and not John Asbury that referred to large banks as the big uglies. To answer your question, our strategy is not to try to win anything based on pricing. We have to be competitive, Dave, but we do believe that we don't have to match. To me, it's kind of sad when we find ourselves having to match like dollar for dollar anything because you hope that clients will value the relationship and not simply there are people, there's no question, there are segments that go for pricing and pricing only. I will say that across all of these markets, it's really, really important to understand that there's no one quite like us.
We are number 1 in depository market share for regional banks, which means under $100,000,000,000 in Virginia. Sandy has that position in Maryland. The price is set for deposits by these larger players. Yes, there are smaller players that can influence, particularly local markets. But I think overall as a strategy, we tend to sort of follow the big guys and we do the best we can to hopefully differentiate.
Sean O'Brien's head of consumer and business banking. Sean, you probably deal with this more than anyone. What do you say?
Shawn O'Brien (Consumer and Business Banking Group Executive)
I think that there are always smaller banks that are competitors will drive up deposit pricing. But generally, we have the pricing ability to stay very close to the large banks.
So I think that's fair. We may have higher pricing in some markets where we want to compete, So we don't have universal pricing everywhere. But I think, yes, we have the ability to price very close to what those big banks are offering.
John Asbury (President and CEO)
Yes. But we don't have to beat them. And the truth of the matter is that we try to make sure that we get paid for what we deliver. Dave, are you there? Did we lose, Dave?
Bill Cimino (SVP, Investor Relations)
I think we might have gotten cut off. Okay. Michelle, we'll go to the next caller please and then we'll try to circle back to Dave if he can get back on the line.
Operator (participant)
All right. One moment please. And our next question is going to come from the line of Steve Moss with Raymond James. Your line is open. Please go ahead.
John Asbury (President and CEO)
Hi, Steve.
Steve Moss (Director - Banking & Arlington)
Good morning.
John Asbury (President and CEO)
Steve? Operator, we seem to have an issue that's odd that we have 2 in a row that we can't hear. Are you able are you hearing anything? Mr.
Operator (participant)
Mas, is your line muted? Mr. Moss, can you hear us now?
Steve Moss (Director - Banking & Arlington)
I can hear you guys. Can you hear me?
John Asbury (President and CEO)
Yes. Thank you. Good. Glad you're back. Good morning.
Steve Moss (Director - Banking & Arlington)
Okay. Sorry, I had to re dial and the call dropped off. So I missed the last couple of the commentary. Okay. So I guess, maybe just with regard to purchase accounting here and the NII guide, just curious what's the how much accretion do you guys expect for 2025?
Robert Gorman (Executive VP & CFO)
You mean accretion in terms of the interest income side? Yes. Is that what we're talking about? Yes. So overall on the deal that we announced is, which was 25% or 22% accretive.
It's going to go up a bit assuming rates stay where they are, maybe closer to between 25% 30%. So that's what we're expecting out of the gates in terms of accretion income in terms of the impact on the net interest margin.
John Asbury (President and CEO)
Rob, just for absolute clarity, you're talking about the Sandy Spring acquisition, right?
Robert Gorman (Executive VP & CFO)
Yes. Is that what your question was?
Steve Moss (Director - Banking & Arlington)
In terms of the standalone guide, yes.
John Asbury (President and CEO)
Okay. So, AOV standalone guide? Yes.
Robert Gorman (Executive VP & CFO)
In terms of accretion on the margin, yes, it's going to be stable from here. It's about 20 basis points,
22 basis points on the margin, Steve, 23 basis points.
Steve Moss (Director - Banking & Arlington)
Okay. Perfect.
Robert Gorman (Executive VP & CFO)
Yes. When you look at the guide, if that's what you're referring to, I'm sorry, I misinterpreted that question. Yes, think about it in about 20 basis points to 22 basis points of accretion.
Steve Moss (Director - Banking & Arlington)
Okay. Appreciate that. And then not sure if this was asked and answered, but you guys are talking about market dynamics and competition with private credit. But I was just kind of thinking, overall, what are you guys seeing for loan pricing these days? Obviously, moving to 5 year could help, but definitely hearing tighter spreads from a number of people. Dave Ring, would you like to speak to that?
David Ring (Head of Commercial Banking)
Well, it's really on an individual basis. Tighter spreads happen sometimes, but most of the time we're going to get the spread that we require within our pricing model. A lot of banks our size don't even utilize formal pricing models. We do. And so we're really able to monitor and adjust on the fly when we're talking about how competition reacts.
And we have specific people within our group that monitor that every day. Yes.
John Asbury (President and CEO)
But I would say it's a competitive environment for quality credit. I do read comments about surprisingly high yields on things and they're traditionally fixed rate loans on real estate and are things that maybe we wouldn't be willing to do. So we're not going to be sort of a we're not going to have the highest yield on credit because of the credit risk appetite that we have. So and then you're into kind of like the quality realm and it's going to be more competitive. There's nothing new about that.
Steve Moss (Director - Banking & Arlington)
Okay. And then in terms of the non performer, it sounds like it was an active base loan with some fraud. Just kind of curious, is that a what's the prospect for recoveries there? Is that a really a preliminary provision? Can we kind of see a higher provision for that specific credit?
John Asbury (President and CEO)
I would say that the specific reserve by definition reflects to the best of our knowledge what to expect. Doug, do you have Ted Woolies here, Chief Credit Officer? I mean, how else would you say it but that?
Doug Woolley (Chief Credit Officer)
Yes, that's exactly what I'd say it. Happened towards the end of the quarter. So loss unknown, but anticipated using a specific reserve, it was known, it would have been a charge off. So we're working through the process right now.
John Asbury (President and CEO)
Yes. There's a methodology behind the number that we came up with and we believe that is the appropriate reserve based on everything we know at this time and that's about all we can say.
Steve Moss (Director - Banking & Arlington)
Okay. Got it. And then in terms of the Sandy Spring transaction here, rates having backed up a bit, I think John you alluded to, you fully expect to sell the entire $2,000,000,000 of CRE you mentioned before. And therefore, I assume just given where rates are, you guys are also likely taking entire equity raise down as it stands these days?
Robert Gorman (Executive VP & CFO)
Yes, that's right, Steve. We fully expect to take the entire forward issue all of the shares related to that forward.
John Asbury (President and CEO)
The good news is we continue to hear from Morgan Stanley, who is at work on this now, who will actually conduct the commercial real estate portfolio as to how these markets are liquid. Demand is high. They are pleased with the marks, I guess you would say that they're seeing as they're conducting other real estate sales. So we feel good about I guess I would say, Rob, we would stand by all of our original assumptions on the CRE sale.
Robert Gorman (Executive VP & CFO)
Yes. At the moment, we would do that. Even though rates backed up a bit, we still feel we had estimated about $0.90 on the dollar related to those that $2,000,000,000 portfolio sale. We still feel pretty good about that even though rates backed up a bit.
John Asbury (President and CEO)
Okay. As to closing also means less uncertainty, that portfolio sale will happen faster than we would have thought because we weren't expecting to be in a position to close when we hope to close.
Steve Moss (Director - Banking & Arlington)
Right. 100%. Okay, great. Really appreciate all the color. Thank you very much, guys. Thank you.
John Asbury (President and CEO)
Thank you, Steve.
Robert Gorman (Executive VP & CFO)
Thank you, Steve.
John Asbury (President and CEO)
Operator, let's try to get Dave Bishop back, if we can.
Operator (participant)
All right. One moment please. And Dave Bishop with Hovde Group, your line is open. Please proceed with your question.
John Asbury (President and CEO)
Welcome back, Dave.
Bill Cimino (SVP, Investor Relations)
Oh, no. You haven't got them yet. Okay.
David Bishop (Director)
Have you heard can you hear me?
John Asbury (President and CEO)
Yes. There you are. Thank you. We're glad you're back.
David Bishop (Director)
I'm glad I'm back too. I don't know if you heard my question before I got cut off. I'm not sure what happened out there in the ether. But my question, I guess, from a big picture perspective, as you get bigger and you compete with the large, 3 big companies, do you think your deposit beta more mirrors them to be more captive what they're doing in the market from a pricing perspective? Or you can still sort of retain that flexibility to sort of one off price relationship? Yes.
John Asbury (President and CEO)
David, thank you. We gave you a long winded answer to your question, but you couldn't hear it.
So you can read that in the transcript. I guess the summary version is that there's no question that pricing is set by the larger players broadly in these markets. Individual sort of submarkets are influenced by smaller banks, but we think of the price makers as being the large players. Having said that, our strategy, we don't do anything where we try to win anything, deposits, lending, anything else, just based on a pure we're the cheapest strategy or pay the most on deposits. So we always try to be able to gain a premium. So I will say that it's a general strategy.
Yes, we sort of follow the big guys and they kind of set the price and we try to do better. Your key point is relationship. It's negotiated based on relationship wherever possible. Is that a fair summary?
David Bishop (Director)
Okay, great. Yes, I'll have to read the transcript to get the blow by blow, but I appreciate that. And then I guess one final question and maybe you alluded to it in Steve's question, but as it relates to read the press headlines in terms of what Trump wants to do in DC with all the CRK buildings. I know the FBI is already moving out and such and they're pretty old. But do you get the sense there's a decent amount of capital from I know you've been shying away from CRE out there, but do you get the sense that there's a decent amount of sponsors and developers that would like to get their hands on these properties and maybe redevelop it into multifamily housing, housing?
Just curious what you think that in that aspect is?
John Asbury (President and CEO)
With the right incentives, it will be interesting to hear. You can of course ask that. The Sandy leadership will be joining us. It's going to have a very specific view, but I'm pretty familiar. I would tell you that you have to ask yourself, if it's true that the U.
S. Government wants to liquidate a lot of these old large properties that are typically B or C grade that need capital improvement that are underutilized, what becomes of them? The likelihood of them being converted into like Class A plus office space, in my personal opinion, is low. There's a scarcity of housing. There's a serious problem with housing across all of these markets, a shortage.
The highest and best use could potentially be conversion into multifamily. That is expensive. I don't think that could realistically happen in the absence of some sort of incentive program like tax credits. So personally, I look at this and I say to myself, there's a significant opportunity here if this is going to happen, if the right investment and incentives are provided to attract capital to provide more housing. But I don't know what that looks like exactly.
I think that in terms of like the impact on us as I've been clear on whether it's Sandy Spring or AUB, in our opinion, it's sort of irrelevant if you see more old large office buildings going on the market. It doesn't impact us because we don't finance large office buildings nor does Sandy. And they have not much exposure in DC anyway on non owner occupied and we have 0 currently. So I frankly see opportunity. I just hope that whoever the powers that be look at this and ask like what becomes of this?
Is there an opportunity? But I think they'll have to be incentives in some way, shape or form and we'll see what happens. Dave, you live in the area. I know you sit right in the heart of Sandy Springs franchise. You know this market very well. How do you think about things?
David Bishop (Director)
Yes. I mean, I totally agree in terms of the affordability of housing down there. I mean, it's like you hit it on the head, it's a very well educated, a fluid market, a lot of moving parts to it. But the Mayor is trying to clean up the city here as much as can. I think she's doing a pretty decent job here.
But you see some of the numbers floated around. If it's a fire sale price of 20% to 30%, maybe that's enough of a discount to really sort of make the IRR hurdles in terms of the rehab indeed to raise ceiling height and floor height and such to get that to get sort of a floor clearing price to get those properties moved pretty nicely.
John Asbury (President and CEO)
I agree. At the right basis, things can work and that may in and of itself be one of the incentives if the government is willing to put it in the right hands at a price that makes it works, perhaps that could help too. So I do think that again, the administration has been clear, they're committed to a clean, vibrant and safe Washington DC. So it's we'll see what becomes of all of this. I wish them much success in terms of approving government efficiency and reducing regulation that will be good for everyone way beyond the Greater Washington region.
David Bishop (Director)
Totally agree. Thanks for the color.
Bill Cimino (SVP, Investor Relations)
Thanks, Dave. And thanks everyone for calling today. We apologize for the technical difficulties and we'll talk to you next quarter. Have a good day.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.