Executive Summary / Key Takeaways

• Atlantic Union Bankshares (AUB) is strategically transforming into the preeminent regional bank in the Lower Mid-Atlantic through accretive mergers, notably the recently closed Sandy Spring Bancorp (SASR) acquisition, creating a dense, diversified franchise spanning Virginia, Maryland, and North Carolina.
• The company demonstrates solid financial performance, with recent net interest margin expansion driven by lower funding costs and strategic balance sheet management, alongside disciplined expense control and strong asset quality metrics despite increased economic uncertainty.
• Proactive balance sheet actions related to the Sandy Spring merger, including a common equity raise and planned CRE loan sale, are designed to de-risk the combined entity, enhance capital and liquidity, and position it for future organic growth without concentration constraints.
• Management's 2025 outlook projects top-quartile financial returns, supported by expected synergy realization, accretion from acquired loan marks, and organic growth initiatives in attractive markets like North Carolina, assuming a moderate economic environment and anticipated Fed rate cuts.
• Key risks include macroeconomic uncertainty, potential impacts of trade policy on recession risk, and the successful integration of the acquired operations, though management's track record in M&A and prudent credit overlays aim to mitigate these challenges.

Building a Regional Banking Leader

Atlantic Union Bankshares, with roots stretching back 122 years as a Virginia community bank, has embarked on a deliberate and strategic transformation. Far from opportunistic, the company's path has been guided by a clear vision outlined years ago: to evolve into a leading regional bank capable of challenging larger institutions while retaining the responsiveness of a community bank. This journey has involved periods of focused organic growth to build scalable infrastructure and enhance product offerings, punctuated by carefully selected partnerships designed to consolidate its market position and expand its geographic reach.

A pivotal step in this evolution was the acquisition of American National Bankshares Inc. (AMNB), which closed on April 1, 2024. This merger significantly deepened AUB's presence in central and western Virginia and provided critical mass in contiguous markets in southern Virginia and North Carolina, establishing a new platform for future organic growth. The successful integration of American National, including the completion of core systems conversion over Memorial Day weekend in 2024, demonstrated AUB's growing expertise in executing complex transactions.

Building on this foundation, AUB announced the proposed acquisition of Sandy Spring Bancorp, Inc. on October 21, 2024, a merger that closed ahead of original expectations on April 1, 2025, following earlier-than-anticipated regulatory approval. This combination is the culmination of AUB's "Golden Crescent" strategy, uniting the number one regional bank in Virginia with the number one regional bank in Maryland to create the largest regional bank in the Mid-Atlantic. This formidable franchise, spanning Virginia, Maryland, and North Carolina, is viewed by management as unique and difficult to replicate, possessing significant scarcity value in the region.

AUB operates through two primary customer-facing segments: Wholesale Banking and Consumer Banking, supported by a Corporate Other category encompassing central functions and eliminations. The Wholesale Banking segment serves commercial and industrial (C&I) and commercial real estate (CRE) clients, offering a range of services including lending, leasing, treasury management, capital markets, equipment finance (with nationwide exposure), and wealth management. The Consumer Banking segment provides loan and deposit services to consumers and small businesses, including home lending and investment management. This diversified model allows AUB to serve a broad spectrum of clients across its expanding footprint.

Within the competitive landscape, AUB positions itself as a viable alternative to the large national and super-regional banks that dominate market share in the Mid-Atlantic, while also competing effectively with smaller, local institutions. Rivals like Truist Financial (TFC), PNC Financial Services (PNC), Regions Financial (RF), and Fifth Third Bancorp (FITB) bring significant scale, vast branch networks, and often more advanced technological capabilities to bear. For instance, larger peers demonstrate higher efficiency metrics and faster processing speeds, leveraging AI-driven analytics and cloud-based systems that contrast with AUB's more traditional approach, which has faced challenges related to technological gaps and operational lags. However, AUB counters this by focusing on its regional density, community-oriented service model, and leveraging strategic M&A to build scale and enhance capabilities. While AUB is investing in its operational technology, including recent upgrades to its consumer online banking system and building scalable infrastructure, its technological differentiation lies more in the effective deployment of standard banking technology to support its relationship-based model rather than proprietary, cutting-edge innovations that provide a unique moat. While AUB appears to lack proprietary, quantifiable technology differentiators, the "so what" for investors is that AUB's ability to compete on efficiency and customer experience is partly dependent on its ongoing technology investments to narrow the gap with larger, more digitally advanced rivals.

Financial Performance Reflecting Strategic Execution

AUB's financial performance over recent periods reflects the impacts of its strategic M&A activities and the prevailing interest rate environment, demonstrating a trajectory towards enhanced profitability despite integration costs and economic uncertainties.

For the first quarter of 2025, AUB reported net income available to common shareholders of $46.9 million, or $0.52 per diluted common share. Adjusted operating earnings available to common shareholders, which exclude merger-related costs and other non-core items, stood at $51.6 million, or $0.57 per diluted common share. This translated to an adjusted operating return on tangible common equity of 13.2% and an adjusted operating return on assets of 90 basis points.

Net interest income in Q1 2025 was $184.2 million, an increase from $147.8 million in Q1 2024. The fully taxable equivalent net interest income was $187.9 million, resulting in a net interest margin of 3.38% (3.45% FTE), an expansion of 27 basis points from Q1 2024. This margin expansion was primarily driven by a decrease in the cost of funds, benefiting from lower deposit and borrowing costs, which more than offset a slight decline in loan yields. Net accretion income related to acquisition accounting, largely from the American National merger, contributed significantly, increasing to $12.6 million in Q1 2025 from $0.6 million in Q1 2024.

Noninterest income increased to $29.2 million in Q1 2025 from $25.6 million in Q1 2024. This rise was largely attributable to the American National acquisition's impact on fiduciary and asset management fees, service charges on deposit accounts, and interchange fees, supplemented by higher loan-related interest rate swap fees. This growth was partially tempered by a decrease in other operating income, including lower equity method investment income.

Noninterest expense totaled $134.2 million in Q1 2025, up from $105.3 million in Q1 2024. This increase was primarily driven by the American National acquisition's impact on salaries and benefits and amortization of intangible assets, as well as merger-related costs associated with the Sandy Spring acquisition ($4.9 million in Q1 2025). Adjusted operating noninterest expense, excluding these items, also saw an increase due to seasonal payroll taxes, technology upgrades (including a consumer online banking system upgrade), and occupancy costs.

Looking back at 2024, the American National merger significantly impacted Q2-Q4 results. Full-year 2024 reported net income available to common shareholders was $197.3 million, or $2.24 per diluted common share. Adjusted operating earnings were $241.3 million, or $2.74 per share, yielding an adjusted operating return on tangible common equity of 16.12% and ROA of 106 basis points. The Q4 2024 net interest margin was 3.33% (3.33% FTE), a slight decline from Q3 2024, influenced by lower variable loan yields and securities yields, partially offset by lower funding costs. The Q4 2024 results also included a specific reserve for a C&I loan involving an apparent misrepresentation, which impacted nonperforming assets and provision expense.

Asset quality remains a key focus, adhering to AUB's "soundness" priority. While management acknowledges that the historically low net charge-off levels seen in recent years (5 bps annualized in Q1 2025, 3 bps in Q4 2024, 4 bps in Q2 2024) are not sustainable, they see no evidence of a systemic inflection point. The increase in the provision for credit losses in Q1 2025 to $17.6 million was primarily driven by qualitative factor overlays reflecting increased economic uncertainty and recession risk stemming from potential trade policy impacts, rather than specific portfolio deterioration. Nonperforming assets totaled $69.4 million at March 31, 2025, or 0.38% of LHFI, an increase from $58.4 million (0.32% of LHFI) at December 31, 2024, largely due to the specific C&I credit mentioned. The allowance for credit losses stood at $209.0 million, or 1.13% of LHFI, at March 31, 2025, up from $193.7 million (1.05% of LHFI) at December 31, 2024, reflecting the prudent reserve build.

Liquidity and capital resources are robust. Total assets were $24.6 billion at March 31, 2025. Total deposits were $20.5 billion, increasing slightly from December 31, 2024, primarily driven by growth in demand deposits, partially offset by a decrease in brokered deposits. Approximately 70.4% of deposits were estimated to be insured or collateralized at March 31, 2025, with available liquidity sources covering an estimated 140.1% of uninsured/uncollateralized deposits. Total borrowings decreased, reflecting the use of customer deposit growth to repay short-term FHLB advances. Regulatory capital ratios comfortably exceed well-capitalized levels, providing a strong foundation for future growth.

Strategic Outlook and Growth Trajectory

The closing of the Sandy Spring acquisition on April 1, 2025, marks a significant milestone in AUB's strategic journey, positioning the company for enhanced growth and profitability. The combined entity is projected to have approximately $38 billion in assets, $30 billion in loans, and $32 billion in deposits pro forma (pre-acquisition accounting and CRE sale), operating 83 branches across its expanded footprint.

Management's full-year 2025 financial outlook, incorporating the Sandy Spring merger impacts from April 1 and assuming the planned CRE loan sale closes by June 30, projects year-end loan balances between $28 billion and $29 billion and deposit balances between $31 billion and $32 billion. The outlook anticipates a fully taxable equivalent net interest income between $1.15 billion and $1.25 billion, with a net interest margin ranging from 3.75% to 4%. This projection is based on a baseline assumption of three Fed funds rate cuts in 2025, slowing GDP growth without a recession, and rising but below-national-average unemployment in AUB's markets. The projected margin benefits from expected synergy realization and accretion income from the acquired loan interest rate marks, which are viewed as a sustainable tailwind to GAAP earnings.

Proactive balance sheet management is central to the Sandy Spring integration strategy. A common equity raise through forward sale agreements, which settled upon closing, enhanced the pro forma CET1 ratio, projected to be approximately 10% at closing. Furthermore, AUB intends to sell up to $2 billion of Sandy Spring's CRE portfolio post-close. This action is designed to reduce the combined company's CRE concentration ratio below 300%, delever the balance sheet, and improve the loan-to-deposit ratio, thereby providing substantial capital and liquidity for future organic growth without concentration constraints. The targeted CRE loans for sale are primarily high-quality, performing retail and multifamily notes, for which a liquid market exists.

AUB plans to leverage its expanded footprint and enhanced capabilities to drive organic growth. This includes deploying AUB's commercial and industrial banking expertise into Sandy Spring's markets and integrating Sandy Spring's significant wealth management capabilities across the combined franchise. Investments are planned in high-growth areas like North Carolina, building out commercial banking teams in markets such as Wilmington and Charlotte. Management expects the combined entity to generate significant capital internally, supporting these growth initiatives and contributing to positive operating leverage, with revenue growth projected to outpace expense growth.

Risks and Challenges

Despite the optimistic outlook and strategic momentum, AUB faces several key risks and challenges. Macroeconomic uncertainty remains a significant factor, with potential impacts from trade policy and the elevated risk of a national recession influencing credit quality and loan demand. While management uses prudent qualitative overlays in its credit reserving, a severe downturn could lead to higher-than-forecasted credit losses and net charge-offs.

The successful integration of Sandy Spring Bancorp is critical to realizing the projected cost savings and revenue synergies. While AUB has a track record of successful integrations and the Sandy Spring team shares a compatible culture, the complexity of combining two large organizations carries inherent execution risk. The planned CRE loan sale, while intended to de-risk the balance sheet, is subject to market conditions and could impact earnings depending on the final sale price relative to the carrying value.

Competition in the Mid-Atlantic banking market is intense, with larger, more technologically advanced institutions and agile smaller banks vying for market share. AUB's ability to compete effectively will depend on its success in leveraging its expanded scale, enhancing its technological capabilities, and maintaining its relationship-based banking model. The potential for normalization of credit losses from historically low levels also presents a risk, although management's current forecasts incorporate this expectation.

Conclusion

Atlantic Union Bankshares is executing a transformative strategy to become a leading regional banking force in the Lower Mid-Atlantic. The successful integration of American National and the recently closed acquisition of Sandy Spring Bancorp are pivotal steps in building a dense, diversified franchise with significant market power and scarcity value. Supported by a disciplined operating philosophy centered on soundness, profitability, and growth, AUB has demonstrated solid financial performance, characterized by expanding margins, effective expense management, and robust asset quality.

The proactive balance sheet actions undertaken in conjunction with the Sandy Spring merger underscore management's commitment to positioning the combined entity for sustainable, profitable growth. By enhancing capital and liquidity and addressing CRE concentration, AUB is poised to capitalize on organic growth opportunities in attractive markets and leverage its expanded capabilities to compete effectively. While macroeconomic uncertainty and integration challenges persist, AUB's strategic vision, experienced management team, and focus on building a resilient, relationship-based banking model provide a compelling investment thesis for long-term value creation, aiming for top-quartile financial performance in the years ahead.