Atlantic Union Bankshares Corporation

Good day, and thank you for standing by. Welcome to the Atlantic Union Bank Shares 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 to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To answer your question, please press star 11 again. Please be advised that today's conference is being recorded. I will now turn the conference over to Bill Semino, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Lisa, and good morning, everyone. I have Atlantic Union Bank Shares President and CEO, John Asbury, and Executive Vice President and CFO, Rob Foreman, with me today. We also have other members of our Executive Management Team with us for the question and answer period.

Please note that today's earnings release and the accompanying slide presentation we are going through on this webcast are available to download on our investor website, investors.AtlanticUnibank.com.

During today's call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in the appendix for a slide presentation and in our earnings release for the first quarter of 2025. Since our acquisition of Sandy Spring Bank Corp closed in the second quarter, our first quarter financial results do not include Sandy Spring.

We have provided, however, certain pro forma and pro forward looking financial data for the combined company.

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. Please refer to slide four of our presentation issued today for additional information. We've also updated our financial outlook for the full year to include the expected impact of our acquisition of Sandy Spring.

In our remarks on today's call, we will also make forward-looking statements, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements.

We undertake no obligation to publicly revise or update any forward-looking statement except as required by law. Please refer to our earnings release and slide presentation issued today and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ from those expressed or implied in a forward-looking statement.

All comments made during today's call are subject to that safe harbor statement. And at the end of the call, we will take questions from the research analyst community. Now I'll turn the call over to John. Thank you, Bill. Good morning, everyone, and thank you for joining us today. It was an eventful and busy first quarter for AUB, with their acquisition of Sandy Spring having closed on April 1, a full quarter ahead of our original expectations due to our receipt of regulatory approval earlier than anticipated. It was also a quarter when the economic outlook became more uncertain, financial markets became more volatile, and government policies changed abruptly. Nevertheless, we believe we are well positioned to capitalize on the franchise's strength and potential. We have a lot to cover today, and Rob and I will begin by summarizing AUB's first quarter results, share perspective on our now expanded franchise, and finish by updating you on the financial logic of the Sandy Spring acquisition, which we believe remains very much intact. Turning now to quarterly results, here are a few financial highlights from the first quarter. I'll begin with our 12 basis point net interest margin expansion and an 18 basis point reduction in cost of funds consistent with the expectations we set in our comments last quarter. Average loan growth was approximately 1.3% annualized quarter over quarter in the typically seasonally slow first quarter following the typically seasonally high fourth quarter. Loans held for investment ended the quarter down 0.9% annualized from the end of the fourth quarter due to some late quarter payoffs and revolving credit paydowns. Production was good, the third highest of the past five quarters. Deposit growth in the first quarter was approximately 2.1% annualized point-to-point, which includes the impact of reducing broker deposits by more than $100 million in the quarter. We were pleased to see non-interest-bearing deposits increase by $194 million during the quarter, As a percentage of total deposits, non-interest-bearing deposits represented 22% of total deposits, up from 21% at the end of the fourth quarter. Credit remained solid, with five basis points of annualized net charge-offs this quarter and otherwise mild credit trends. 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 increased the allowance for loan losses as a percentage of loans held for investment to 1.05% and the total allowance for credit losses to 1.13% of loans held for investment. I would like to be clear that we remain quite confident in our asset quality and market strength. We currently expect our net charge off ratio to be low between 15 and 25 basis points for the full year 2025, and we are not forecasting a recession. However, We acknowledge the uncertainty in the economic forecast and the unquantifiable potential impacts of new trade policy on the economy. Consequently, we elected to use management judgment and prudently increase qualitative factor overlays consistent with the forward-looking CECL accounting methodology. We do see varying judgments in the industry on how to account for the economic ambiguity this quarter, but this is ours. consistent with our operating mantra of soundness, profitability, and growth in that order of priority. Here are three reminders for context. First, the quarter's loan loss provision is pre-Sandy Spring acquisition, since that did not close until April 1. Second, about 12% of our total loan portfolio was marked to fair value last year in connection with the American National Acquisition, which included estimated credit losses. And third, Despite the well-publicized federal government efficiency initiatives, we see little evidence of it impacting the majority of the AUD franchise at this point, nor do we currently expect it to. The qualitative factor overlay added to our allowance related to economic uncertainty is more about the increased possibility of a national recession and a potential for continued volatility and unintended consequences of trade policy than any impact we consider unique to us, be it from federal cutbacks or tariffs. As for loan growth expectations, last quarter for AUD on a standalone basis, we indicated our expectation of mid-single-digit loan growth for the year. We have updated our loan and deposit outlook this quarter to show expected year-end loan and deposit balances rather than a percentage growth estimate that are inclusive of Sandy Spring for the next nine months and inclusive of the impacts of the expected $2 billion commercial real estate loan sale. This is our loan growth base case. and we'll revisit it as the economic outlook clarifies over the next few quarters. We are encouraged that the standalone AUV pipeline has rebuilt nicely following strong production over the past two quarters, and it is the second highest of the past seven quarters. What remains to be seen, though, is pull-through timing, as we know from experience that uncertainty can lead to hesitation in business investment decisions. Rob will now take you through further detail on the quarter, and then I'll come back with additional perspective on the company and our markets.

Rob? Well, thank you, John. Good morning, everyone. I'll now take a few minutes to provide you with some details of Atlantic Union's financial results for the first quarter. As Bill mentioned, my comments today relate to Atlantic Union's first quarter financial results and do not include the financial results of Sandy Springs since the transaction closed on April 1st. 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 in merger-related costs related to our acquisition of Sandy Spring. That said, in the first quarter, reported net income available to common shareholders was $46.9 million, and diluted earnings per common share were 52 cents. Adjusted operating earnings available to common shareholders were $51.6 million or 57 cents per diluted common share for the first quarter, resulting in an adjusted operating return on tangible common equity of 13.2%, an adjusted operating return on assets of 90 basis points, and an adjusted operating efficiency ratio of 57%. Turning to credit loss reserves at the end of the first quarter, The total allowance for credit losses was $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. As a result, the total allowance for credit losses as a percentage of total loans held for investment increased eight basis points to 1.13% at the end of the first quarter. The provision of credit losses of $17.6 million In the first quarter, it was primarily driven by Moody's quarter-to-quarter economic forecast change and qualitative factor overlays given the increasing recession risk not captured in the March economic forecast published by Moody's. Now charting the pre-tax pre-provision components of the income statement for the first quarter, tax equivalent net interest income was $187.9 million, which is an increase of approximately $882,000 from the fourth quarter. The increase from the prior quarter is due primarily to the impact of lower deposit costs indirectly driven by the decrease in the Fed funds rate, reflecting the full quarter impact of the Federal Reserve lowering rates 100 basis points between September and December 2024. The increase was partially offset by a decrease in interest income on loans held for investment due to lower yields primarily driven by the impact of the Fed funds interest rate cuts on our variable rate loans, as well as the lower day count in the first quarter. As John noted, the first quarter's tax equivalent net interest margin was 3.45%, which is an increase of 12 basis points from the previous quarter due to an 18 basis point decrease in the cost of funds, which was primarily driven by the 23 basis point reduction in the cost of interest-bearing deposits as well as short-term borrowing funding mix shifts. This favorable impact was partially offset by a six basis point decline in earning asset yields, primarily driven by the 13 basis point decline in the loan portfolio yield net of the positive impact from increased securities yields and earning asset mix changes in the first quarter. Non-interest income decreased $6 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 in the seasonally slower first quarter, and a $2.5 million decrease in other operating income, primarily due to a decline in equity method investment income and lower gains on the sale of equipment finance lease equipment. Non-interest expense increased $4.5 million to $134.2 million for the first quarter, from $129.7 million in the prior quarter. Adjusted operating non-interest 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 seasonal increases of $4.7 million in payroll taxes and 401 contribution expenses in the first quarter. In addition, a $1.3 million increase in other expenses was driven primarily by OREO-related gains recognized in the prior quarter, a $1 million increase in franchise and other taxes, and $805,000 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, and a $616,000 increase in occupancy expenses, primarily driven by seasonal winter weather-related expense. These increases were partially offset by a $666,000 decrease in professional fees. At Box 31st, loans held for Investment net deferred fees and costs were 18.4 million, which is the decline of $42.9 million, or 0.9%, on an annualized basis from December 31st, primarily driven by declines in the construction and land development and commercial and industrial loan portfolios, partially offset by increases in the multifamily real estate and non-owner-occupied commercial real estate loan portfolios. The decrease in construction and development loans and increases in multifamily and non-owner-occupied commercial real estate loans During the quarter, we're primarily driven by the completion of construction projects in the quarter and the conversion of the related construction loans into term loans in the multifamily and non-owner-occupied commercial real estate categories. At March 31st, total deposits stood at $20.5 billion, which was an increase of $105.3 million, or 2.1% annualized from the prior quarter, primarily due to increases in demand deposits partially offset by declines in broker deposits. At the end of the first quarter, Atlantic Union Bank shares and Atlantic Union Bank's regulatory capital ratios were comfortably above well-capitalized levels. In addition, on an adjusted basis, we remained well-capitalized as of the end of the first quarter if you include the negative impact of AOCI and held the maturity securities unrealized losses in the calculation of the regulatory capital ratios. In summary, Atlantic Union delivered solid operating financial results despite the challenging banking operating environment we are effectively managing through. Driven by our operating mantra of soundness, profitability, and growth in that order of priority, we took prudent action to build the allowance for credit losses during the quarter to account for the current economic uncertainty and increasing risk of a recession. As a result, we believe we are well-positioned to continue to generate sustainable, profitable growth and to build long-term value for our shareholders in 2025 and beyond. With that, let me turn it back over to John for some comments regarding the expanded franchise of Sandy Spring.

Thank you, Rob. I'll now share some perspective on our expanded franchise post-Sandy Spring acquisition. Let me begin by pointing out that post-merger and assuming we complete our previously disclosed anticipated sale of approximately $2 billion of commercial real estate loans, the Sandy Spring franchise will be about one-third of the combined company by asset size. meaning that AUD standalone assets would be two-thirds of the combined franchise on a pro forma basis as of March 31. 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. As is evident from slide 15, our supplemental presentation, pre-merger, we view Sandy Spring as well-distributed across Maryland with a presence in Washington, 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 median household income, is among those well-educated, and has consistently maintained one of the lowest unemployment rates of any state in the country. There is a significant market focus on the implications 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 as resilient. It's been diversifying its economy for decades, and we believe this will continue, if not accelerate, due to the changes underway in government policy. Today, the greater Washington region is not only the nation's capital. It's also the East Coast technology hub. It's projected to be one of the biggest AI growth hubs in the U.S., has the world's largest number of data centers, and has one of the nation's largest clusters of defense technology and cybersecurity firms. Stepping back to look at the broader franchise, as you can see on slide 18, AV operates in some of the nation's most affluent counties. and in large metro areas with some of the lowest unemployment rates in the country based on the most currently available data. We recognize unemployment numbers in the greater Washington MSA are expected to rise, but the region enters this from a position of strength with a consistently low unemployment rate and historically tight labor market providing some capacity to absorb federal job cuts. As for the impact of possible reductions in the federal workforce across our franchise, According to research posted by the Federal Reserve Bank of Richmond, using Bureau of Labor Statistics data, the share of state unemployment that is federal government is relatively low in North Carolina at 1%, Virginia at 3.5%, and Maryland at 5.3% of total state employment. These figures exclude active duty military personnel. 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. About 39% of federal employment in Maryland is national security or defense agency related, and compared to 29% of the District of Columbia, where our presence is limited. There is a highly educated workforce in the region, and the population is projected to grow steadily over the next five years. On the next few slides, we'll take March 31 data from both companies and combine them using AUB's methodology. Note these figures do not include the effects of acquisition accounting or our expected sale of $2 billion of commercial real estate loans. Regarding non-owner-occupied office, neither Sandy Spring nor AUB finance large office buildings, and as you can see, the average non-owner-occupied office building loan is a little under $2 million for the combined loan portfolio. Note the positive asset quality metrics and the lack of regional concentration in the portfolio. There is little exposure to U.S. government tenants. The large, mostly obsolete properties the government wishes to liquidate or large leased buildings they may leave are not comparable to what we have financed. In the District of Columbia, we have limited exposure of $73 million of non-owner-occupied office. We do not currently see offices of particular concern in our combined credit portfolio. Turning to the multifamily portfolio, you can see that there's a wide geographic dispersion and strong asset quality metrics. Worth noting is the fundamentals of housing of all types throughout the greater Washington region remain strong. Due to the scarcity of land and cost of development, new development of housing in the region has been constrained. There's also a positive cross-current underway due to return to office mandate tailwinds. We believe this will benefit the greater Washington economy by supporting local retail establishments, near-end housing demand, and ridership on the metro, which has one of the most significant post-pandemic ridership recoveries among major U.S. transit systems. Regarding government contract finance, again using pro forma data as if the merger closed on March 31, not including any acquisition accounting impacts, and using AUB's methodology on a combined basis, AUB has about $770 million of government contract loans with about 80% of that coming from the AUB side. AUB 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 the proposed record $1 trillion defense budget, and the spending prioritization of modern technologies, such as in missile defense, drone warfare, unmanned vehicles, artificial intelligence, and secure communications, is expected to bode well for our client base and for the region. All of this means we believe our franchise is well diversified across some of the most attractive markets in the country and is resilient. Moving outside of the greater Washington region, particularly in the rest of Virginia and in North Carolina, we expect the potential impact of changes in federal government policies to be little different from anywhere else in the country. AB's footprint is defined as Maryland to North Carolina, with Virginia as our largest market and the linchpin of the franchise. We have done what we set out to do by intentionally and carefully building a franchise that we believe has never existed before and cannot be replicated in our markets. the number one regional bank by depository market share in the lower mid-Atlantic states of Maryland and Virginia, and we plan to continue to expand our presence in North Carolina over time. We are aware of our market power and scarcity value and will seek to leverage it to serve our customers and communities while creating value for our shareholders. And I want to make two last points about the Sandy Spring acquisition before I turn back to Rob. First, we are an experienced acquirer. This is my fourth merger 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. Second, as we received earlier than planned approval and closed one quarter earlier than expected, we were able to move up our planned core systems conversion to October 2025 from February 2026, which we expect to accelerate our cost savings. Given the change in rate environment since we announced the merger, we wanted to refresh some of the data about the acquisition. Rob will now take you through an update on the merger economics and take you through a comparison of the original merger assumptions to the current expectations. As you will see, the financial logic remains comparable to or, in some cases, better than what we presented in the announcement.

Rob? Thanks, John. As John noted, I'll now provide you with an update on the CNE spring acquisition economics and integration activities to date and take you through a comparison of the original acquisition financial assumptions to our updated projections. In short, this acquisition checks all of our strategic and financial boxes for M&A, just as we said it would. As noted, due to the accelerated receipt of regulatory approvals, we closed the deal on April 1st, ahead of schedule. In conjunction with the transaction closing, we physically settled the previously announced forward sale of common equity on April 1st by issuing 11.3 million common shares. We received approximately $385 million in net proceeds before expenses and full settlement of the forward sale. 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. The more expedited closing date for the acquisition allowed us to move forward our core systems conversion to October 2025 from February 2026, or approximately four months earlier than initially scheduled. This is expected to accelerate the achievement of full transaction cost savings of 27% of Sandy Springs' expense base in 2026, and provide an additional quarter of savings in 2025. As previously noted, as part of the transaction planning, we chose to take proactive actions related to the capital raise and commercial real estate loan sale to better position and de-risk 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. 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 31st instead of April 1st and before any acquisition accounting adjustments and before the proposed sale of CRE loans. On a pro forma basis, the combined company has approximately $38 billion of total assets, $30 billion of loans, $32 billion of deposits, and $13.5 billion in assets under management, as well as 183 branches across the footprint. Given the accelerated closing timeline and current macroeconomic environment, we have outlined the updated key transaction metrics on slide 26. The post-financial impacts noted here are substantially aligned with the key metrics at the announcement date and stack up well against our shareholder value proposition elements. We have created the largest regional bank in the mid-Atlantic, continue to be well capitalized, believe we will benefit from significant future capital generation, and expect to produce top quartile profitability metrics on a sustainable basis. Turning to slide 27, you can see the full comparison of the key metrics at close relative to at the transaction announcement date. With the closing occurring earlier than originally announced, we are projecting to realize that and additional quarters worth financial benefits from the acquisition in 2025. Interest rates were a bit higher at closing than expected at announcement, which resulted in comparatively greater interest rate-related fair market value adjustments, leading to slightly greater tangible book value per share dilution, but greater earnings per share accretion, which results in a relatively unchanged earn-back period of 2.1 years. We've already hit a number of key transaction milestones. In addition to our April 1st closing items, we also repositioned the Sandy Springs securities portfolio, which allowed us to better position our pro forma asset liability and interest rate risk management objectives on a combined basis. Regarding the commercial real estate loan sale, since the process is ongoing, we can't provide much specific commentary, but it is moving along well, and we intend to complete the transaction by the end of the current quarter. The targeted amount of the commercial real estate loans being sold remains at $2 billion, and the sale perimeter is expected to align with our expectations from the acquisition announcement date. We have added slide 29 to help illustrate our projected pro forma earnings composition and the conversion of acquisition-related loan interest rate market creation into core cash earnings over time. As can be seen, core cash earnings will represent the majority of overall projected earnings in 2025, while acquisition-related loan interest rate accretion will represent a smaller component of total projected 2025 GAAP earnings. We distinguish accretion income arising from the acquired loan's interest rate mark from accretion income arising from the acquired loan's credit mark and view the loan interest rate mark as a built-in scheduled accounting tailwind to our GAAP earnings. Interest rate marks are fundamentally different than credit marks And as you can see from this slide, our expected accretion income is nearly all generated from loan interest rate accretion rather than from the credit mark accretion. In addition, we expect the loan fair value mark value adjustment accretion composition to decline as a percentage of total gap earnings on an accelerated basis over time as loans mature and are renewed at market interest rates. In short, accretion income related to the acquired loan interest rate marks will convert to cash income at market interest rates over time. Therefore, we believe that accretion income related to the loan interest rate marks is sustainable to the earnings power of the post-acquisition combined company. Since the standing spring transaction closed on April 1st, the impacts of the acquisition were not in the first quarter's reported capital metrics, but for illustrative purposes, we have projected our pro forma capital metrics as of March 31st as if fully combined for the acquisition close, the full settlement of the forward sale of common equity, and the commercial real estate loan sale. At a pro forma basis, our CET1 ratio would have been approximately 9.75% at March 31st. In addition, we expected our CET1 ratio at the end of the current quarter, including all of the pro forma impacts noted, will be approximately 10%. As noted on slide 31, we've updated our full year 2025 financial outlook for AEB to include the estimated post-closed impact of the Sandy Spring acquisition beginning in April, and assuming that the proposed commercial real estate loan sale closes by June 30th. Please note that the 2025 financial outlook includes preliminary estimates of purchase accounting adjustments that are subject to change. With that, we expect loan balances at the end of the year to be between $28 and $29 billion, while year-end deposit balances are projected to be within the $31 to $32 billion range. We expect our allowance for credit losses to loans to fall between 1.2% and 1.3%, and our full-year net charge-off ratio to fall between 15 and 25 basis points. Fully taxable equivalent net interest income for the full year is projected to come in between $1.15 billion and $1.25 billion. As a result, we are projecting that the full-year fully taxed equivalent net interest margin will fall in the range between 3.75% and 4%, for the full year, driven by our baseline assumption that the Federal Reserve Bank will cut the Fed funds rate three times in 2025, beginning in June. We are also assuming that GDP growth will slow, but we are not forecasting a recession in 2025. In addition, we expect that the unemployment rate will rise in our markets, but remain below the national unemployment rate in 2025. In addition, the fully tax equivalent net interest margin projection and target ranges include the impact of our preliminary estimate of net increasing income from the CME spring transaction, which is subject to change once purchase accounting adjustments are finalized and which can be volatile quarter to quarter. On a full year basis, adjusted operating non-interest income is expected to fall between $165 million and $185 million. Adjusted operating non-interest expenses, which excludes the 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. Based on these projections, we expect to produce financial returns that will place us within the top quartile of our peer group and meet our objective of delivering top-tier financial performance for our shareholders. I'll now turn the call over to Bill to see if there are any questions for our research analyst community.

Hi, Rob and Lisa.

We're ready for our first caller, please.

Lisa, we're ready for our first caller. Alright, let's see if we can message her.

Alright, Lisa, we see you messaging us that you're speaking, but we're not hearing you.

I wonder if you're able to just release the first caller. Catherine, can you hear us?

Oh, yeah. Can you hear me?

Yeah, great. Thank you.

All right. Way to improvise there. That was great. I wanted to maybe start just on the marks from the SASR deal. Is there any way you can... I appreciate the kind of updated, looks like the interest rate marks are coming up just a little bit, just given kind of your note, Rob, with a little bit more tangible book value dilution but higher accretion. And just curious if you can update us on maybe what that low mark looks like.

Yeah, so the low mark as of 3-31 rates, as you know, interest rates went up a bit since the announcement date. We're looking at about a 7% of loans mark, which is about $800 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 that interest rate fair value adjustment will, you know, accrete through income over, we're saying the seven year, some of the year digits, accretion income flow.

Okay, great. And then you are using some of the year digits with that as a way to forecast kind of what your NIM forecast would look like.

Exactly, yeah, that's right.

And within that, is there an assumption that you'll see kind of accelerated paydowns?

Yeah, you know, the nature of the sum of the year digits would call for, you know, more paydowns earlier than what the maturity schedule might say. So there's some... There's some of that in the projections that we have in there. Got it.

It may be fair because we've got a couple cuts coming the next few years.

Maybe that's... Yeah, exactly. It could be faster. It's kind of unpredictable. It can be volatile quarter to quarter, as you know, depending on where rates are, where the loan yields are.

Okay, great. And then was there any change to the credit mark with SASR?

Actually, the credit mark came in a bit better than what we had projected at the announcement date. It's about a 1.3% mark on that entire portfolio versus what we had originally projected to be a bit higher, I think in the 1.5%, so it came in a little better.

Okay, great. And I know you can't, I know you're just in the midst of the CRE loan sale, but Is there any, just given the volatility and moving rates, is there any risk? Do you think that that sale could come at a steeper discount? I think when you announced the deal, you already had about a 10% discount to those loans. I'm just kind of curious how you're thinking about the risk of that being a little bit higher as you get towards the close.

Yeah, you're right in terms of the projected discount. Obviously, with all the market turmoil rates this way and that, Just a general market turmoil up there. We're monitoring it very closely. Really can't talk too much specifically on that, but at this point in time, we don't see there's any major negative to what we were projecting at the close.

Okay, great. And just as kind of an update, most of the type of credit that you have in that loan sale are multifamily, retail. Can you just remind us kind of a composition of what's in that book?

Yeah, the majority of it is retail and multifamily, to your point, and those are the big things. I think there's some other miscellaneous things, but those are the big categories, and that hasn't changed since when we discussed it at the announcement date.

And, Catherine, one thing to point out, this is a relatively short-duration portfolio. Would you comment on that, Rob?

Yeah, the portfolio is probably the duration of the maturity of those loans is probably in the three- to four-year range at this point. So these are good loans. Obviously, these are not distressed loans at all. So the interest rate environment does affect that pricing. But, again, we feel comfortable in the range that we talked about. But we'll see. More to come on that. I can't talk too much more specific because we're in the middle of that.

Yeah, the 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 or four, and what you're going to find is that it's comparable to or actually a little bit lower than upon announcement. So it's been up, it's been down, it's been all over.

Yeah, it's moved around quite a bit, but we're closely monitoring. Yep, yep.

Okay, very helpful. I'll step out of the queue. Thank you.

Okay, thanks, Jaffer. And, Lisa, let's try this again for our next caller, please.

Thank you. And the next question will be coming from the line of David Bishop of Holy Group. Please go ahead.

Hi, David. I think she said my name. Hey, how you doing, John?

Yes, we know it's you.

Hey, just curious, you know, obviously Sandy Spring is freshly in their rear view mirror, so to speak, but as you integrate the bank and you look at, you know, obviously a lot of noise with the tariff situation, but on a core loan growth perspective, where do you think that shakes out from a longer-term perspective? Is it mid-to-high single digits? Where do you see that trending out over the longer term?

Yeah, over the longer term, I would say, David, that we're looking at, you know, as we said before, striving for that upper single-digit loan growth. I think in the medium term, that might be a bit lower in the more in the mid-single-digit. But over the longer term, in a more normalized environment, we think upper single-digits would be the way to go or the projections we would have. There's a lot of opportunity up in the Sandy Spring footprint. And, of course, the broader franchise is also upside down in North Carolina. Not to say that Virginia doesn't have good growth, but those would allow us to grow a little faster than we have.

Correct. So some of the key points about Sandy, we acknowledge the disruption that is going on. It will pass. And so on the other side of this, you still have extremely attractive markets. There is no franchise like us. We fully release the Sandy Spring or former Sandy Spring team to go do business. There are no constraints. We've set the thing up so that we can grow it without being concerned about Siri concentration limits, liquidity ratio, loan-to-deposit ratio, and some of the things that they've had to deal with in the past. We also bring not just more capital and capacity to the table. We have some additional tools too, in terms of commercial industrial banking capabilities in particular. And so we are, nothing has changed in terms of the strategic logic and we see opportunity to gain market share and really grow the franchise there, you know, on the other side of the current disruption.

Got it. And then turn it to credit. Looked like there was a little, Little blip on the CNI side. There was one, I think, about a $9 million credit that led it to not 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 or reserves for that CNI credit. Maybe walk through the provision this quarter.

Yeah, for the most part, the increase in the reserve that you saw this quarter, $15 million increase, was primarily driven by this quarter. Uncertainty in the market is disqualitative overlay. We did have a bit of a specific reserve that we added for that particular credit, but that wasn't the driver of the – or the material driver of the increase in the reserve.

Yeah, it was really – the reason why the reserve looks higher than what you would normally expect is because of the use of management judgment in the overlays. Otherwise, it would look pretty normal. Pardon me, I meant to say the provision is specifically –

Got it. That's a fun question, John. You know, obviously, you noted the disruption. We're all aware that usually where there's disruption, there's also, you know, some opportunities as well. Any early reads where there could be some opportunities that are sort of like, you know, unforeseen benefits, you know, from all the turmoil?

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, we've all been up there quite a bit. What do you save?

Yeah, I mean, there's kind of disruption everywhere. But up there, what we've done is we've kept the overwhelming majority of producers and leadership. And so there's a lot of continuity there to take advantage of what the market has to offer. And right now, that disruption is helping us. The pipeline, since the last time I looked at it about three weeks ago, doubled. And they are definitely motivated to do business. So we think we're going to find some good transactions up there and be very successful.

Great. Appreciate the color. Thank you, David.

Thanks. And Lisa, we're back to our next caller, please. Thank you. One moment for the next question. The next question will be coming from Brian Wachzynski of Morgan Stanley. Your line is open.

Brian, hello and welcome. Hi, good morning.

It's my pleasure, Ed, 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 low end of that range versus the high end? Of course, a lot of certainty in the environment, both from a growth perspective and also interest rates, but just wondering how you're thinking about the high end versus the low end there.

Yeah, in terms of the low end, I think, you know, if we see significant, we're assuming three cuts from the Fed. If we see multiple more, that would be a fairly large, or be an impact on our variable rate loan book, which could drive, which would impact that projection negatively. In addition, if term rates came down significantly as well, part of the NIM, on the core side, part of the NIM expansion we're expecting relates to fixed-rate loans repricing higher than what's on the books. We could see that that could shrink. At this point in time, our fixed-rate loan book's portfolio is a little over 5%, and we're repricing renewing loans at about a 6.25% rate based on the current term rate. So that could affect it as well. And then, of course, just... net loan growth. We're not calling for a ton of loan growth this year, but if we see runoff in the loan portfolio, that could affect that as well. And then the other side of that is if rates spike, then we could see an impact on the ability to lower deposit costs going forward too. So all that will come into play on the lower end. In terms of the high end, and not to mention, Brian, there is volatility in our assumption regarding the accretion income that's going to be coming through. That can be volatile. That could come in lower than our expectations based on what we just talked about in terms of how we expect that to flow in over the seven-year period this year based on the accelerated 70-year digit, you can get your quarter-to-quarter volatility on that.

That's great, Collin. Thank you. And then for my follow-up on the reserve built this quarter, I understand that the main driver was just a more uncertain economic outlook and the overlays that you gave for the quarter. But I was just wondering if you're seeing any weakness in the portfolio today and any signs that things could be deteriorating in either their portfolio or in the geographic footprint in general, anything standing out from client conversations since the tariffs were announced. I was just wondering if you had any color there. Thanks.

Let's start with Doug Woolley, Chief Credit Officer, sort of macro perspective on overall health of portfolio.

Yeah, Brian, on tariffs, that's the big uncertainty. No one knows what's going on. No one knows what will go on. We'll spend the next couple months diving into the client base to see what they think is the impact, primary, secondary, and what the tail of that impact is. But there's nothing known right now about tariffs. There's nothing known about, you know, pockets of credit quality issues or anything like that, like any other bank. We're constantly surveilling the landscape. to try to figure out what any given indicator might mean to anything, and there's just nothing that we see right now. Obviously, it's great uncertainty everywhere.

Correct. Hence, the specific reserve, not specific reserve, correction, the use of management judgment to increase the overlay. Slide 33 of the earnings supplement is a really good slide, and this is put out by the Federal Reserve Bank of Richmond, and it's their assessment of the tariff impact. When I think about the uncertainty that we're looking at and what we're addressing or attempting to address with the increase in the provision to deal with uncertainty, the root cause of it is the tariff. It's not that our trade policy, it's not that we think that our portfolio or our region is somehow disproportionately impacted by tariffs. It's not. And we're in the Federal Reserve's camp, as you can see on slide 33. We're no more impacted in this region by tariffs, maybe less than many areas. But the tariff policies are ultimately creating a higher risk or elevated risk of a recession. And that's our point. And it's very difficult to know how this thing plays out. So it's creating a lot of uncertainty. As Dave mentioned, Dave Ring, pipelines look good. They've been building. We question the pull through. So we do think that uncertainty can often create hesitancy. We know that from experience. But it's difficult to point to any particular segment and say this one's unduly impacted versus that one. Regionally, I would say that certainly the greater Washington region, just because of concern about the various Fed cutbacks, federal cutbacks that are going on there in the workforce, is creating an awful lot of angst and is creating some slowdown in consumer spending and that sort of thing. It doesn't show up in the data yet. You know, go look at initial and continuing unemployment claims as we do as recently as last week for Washington, D.C., for Maryland, and for Virginia. If you look at a couple-year trend line, there's an imperceptible difference. Nothing has really moved yet. Maryland's unemployment rate is still the lowest 3.0%, there was no more populous state in America with a lower unemployment rate than Maryland, and didn't change in March. It's 3.0. The next most populous state with the lowest unemployment rate is Virginia, which ticked up slightly at 3.2. So fundamentally, we view these as pretty good economies. There's just a lot of concern and angst, but we think that as things clarify, the opportunities are going to be there. Greta Washington is a special case. They're going to have to get through whatever the disruption is and let that work its way through.

That's really helpful. Thank you for taking my questions.

Thank you, Brian. And Lisa, we're ready for our next caller, please.

Thank you. And the next question will be coming from the line of Steve Moss. of Raymond James. Your line is open.

Hi, Steve.

Hey, John.

Good morning, everyone. Maybe we're just, maybe it's a little ticky-tacky, but just curious with regard to the commercial real estate loan sale. The phrasing on this quarter's deck is at least $2 billion versus before it was kind of up to $2 billion. Just wondering, are you guys thinking about upsizing the sale?

No, not at this point. Steve, we're $2 billion is basically the number that we are looking at targeting and feel good about that. We wouldn't be upsizing that for any reason at this point in time, or for that matter, downsizing it at all. We feel comfortable with that number. That's the plan.

Got you. And then in terms of the load mix here this quarter, quite the pullback in construction. Just wondering... you know, is that a trend you expect to continue or do you expect to kind of refill that bucket here over time? The pipeline? Construction loan balances.

Steve, just a nuance on that. A lot of that decline you see was basically construction loans completing, construction completing and going into mini-perm term loans in the real estate buckets that you saw grow. But I'll let Dave

talk about what we're seeing in the go forward. In general, the construction book and pipeline is down. You know, if you think about what customers have to do to make that project make sense, you know, with interest rates the way they are and other things, other components of their decision making, it's natural for it to slow down a little bit. But what we are seeing is now an increase in our overall real estate pipelines. So it's kind of going to get offset by some of the other asset classes or some of the other parts of the pipeline that are doing well. We have active conversations going on with construction projects. I'll give you one example. We just met with a developer who has put five projects on pause. of simply waiting for the right time to start them up again. So we have that kind of building pipeline behind this. We just aren't seeing it yet materialize.

And I just want 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 recode as no longer a construction loan, It's what we call permanent mortgage. And so it simply rolls to that other category. And so refilling the bucket of construction is sort of the goal there. Interestingly, we just held a fairly large event with real estate developer clients and centers of influence here in central Virginia. And in talking to them, they were more optimistic than I would have expected. I worked the room, as I'm prone to do, I conducted my survey. What are you seeing? How are you feeling? Are you seeing any tariff impacts? And today's point, you know, 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. They all said it's coming. The materials aren't in the country right now. 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 the pipeline. Hope that makes sense.

Yes, it does. And then just with regard to credit and more the reserve bill here, you know, on the guide 120 to 130 ACL, you know, rough calculation here looks like that implies, you know, further qualitative reserve billing over time. Just curious, you know, How much do you think is, you know, just as you put the overlays here, you know, if tariffs moderate, do we expect the ACL guide to come down? Or are there areas that you guys are just saying too much uncertainty we're going to probably build further?

Yeah, I think if, you know, from the tariff and the probabilities of recession decline, as you know, they've increased significantly. which is part of the reason we put the qualitative overlays on it, we could see that that 120 to 130 could be a bit lower. At this point in time, that 120 to 130 also includes Sandy Spring and the CECL double count and the PCB allowance impact. So it's really related to that. applying what we did at Atlantic Union with qualitative overlays has also found its way into those estimates. So to your point, it could be better than that, but it really depends on how this current tariff situation plays out from the impacts on the economic environment.

And Rob, for absolute clarity, just to break this down, what we're reporting today is AUB Only pre merger because right so at this point.

Yeah, so what you saw today was AUB only, which was 1.13%.

And we believe we lay on Sandy Spring and so we deal with that. You'll see that come through this quarter, but just what I'm the point I'm trying to make is for AUB. The reserve you're looking at. Now end of Q1 is the right reserve in our assessment for Atlantic Union, correct? Correct. And then. we will take during Q2, we'll go through the work to set the reserve or set the allowance, I should say, for Sandy Springs. So when we come out and when we release at the end of Q2, our opinion is that is the right reserve based on everything that we know for the combined company. That is different from saying, and we still have work to do to continue to build it up, so on and so forth. So it's our opinion as of that point in time.

Yeah, and it also will be combined organization as of June 30th when we report results and the allowances. A lot of this relates to what's the economic forecast. We use Moody's and we have awaited Moody's scenarios. If that were to change significantly one way or the other, we might see those numbers shift a little.

Rob, one other thing. There's a reason why we keep commenting that 46% of the entire loan portfolio has been marked. It's different from the allowance, but you have to acknowledge that that's a good thing.

Yeah, the 46% includes a credit component, and a lot of that relates to the interest rate. rate mark due to where we are in the rate cycle.

That's right. Right. Okay. I appreciate all the callers. Thank you very much, guys.

Okay. Thank you, Steve.

And Lisa, we're ready for our next caller, please.

Thank you. And the next question will be coming from the line of Stephen Stoughton of Piper Sandler. Your line is open.

Hi, Stephen. Good morning.

Good morning, Stephen.

Good morning, everyone. Thanks for the time. We'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, you know, you mentioned tariffs, but it's also Doge ideology here and fear. And I guess around the government contracting business, which you identified as really pretty small and hasn't had any net charge-offs over the last four quarters, if one of those loans, let's say, were to go bad, how do you think about loss given default rates on a loan like that? And how do you think about, you know, theoretical loss content if there was weakness there?

Well, this is secured lending. Doug, do you want to take that one?

Secured lending, a lot of the facilities are margined against contracts that, billings rather. And these are normally highly desirable contracts. So the contracts themselves are not going to be the issue. It could be how the company is run. This is a highly private equity group driven market with ownership. And there would be a lot of players going after a Belcon client that was fumbling a little bit. So we would think loss given default would be very low.

Yeah, we've actually seen that before. One thing I'll point out, you look at the criticized percentage, and you may say that's high. That's not new. It's looked like that for years. It's kind of the nature of the beast. It's a complex business. The government is slow. to approve contracts. When contracts are awarded, there are often disputes. But it is a good business. There's a reason why we have principally focused it on national security and defense. There's a reason why we haven't seen, I'm not aware of a single contract termination or stop work in the national security or defense-related contract portfolio. We have some that are not, but that's the minority. And it's also important to understand that in many cases, The personnel have to have security clearances, which is exceptionally valuable and rare. So this is a really interesting space. It's kind of a niche. In 15 years, we have never had a charge-off. I am not saying you will never have a charge-off. I'm simply saying that our experience has been really good.

Steven, it's a very high variable cost business, so the companies can flex up and down if they lose contracts. And again, their employees are highly desirable. So if they happen to lose a contract, as often as not, those employees go over to whoever won the contract.

So because of that, it's very easy to flex the expenses. That's really great, Culler. Thanks. Everything else I had has basically been covered. Appreciate the time this morning.

Okay.

We're ready for our last caller, please.

Thank you. And the next question will be coming from the line of Russell Gunther of Stevens. Your line is open.

Hi, Russell. Hey, good morning, guys. Hey, morning, John. Appreciate the incremental disclosure this quarter. Just wanted to get a sense for how you guys are thinking about the qualitative reserve field relative to the direct and indirect exposure to DOGE. Really just qualitatively trying to get a sense to the extent for which you think you've ring-fenced this overhang for AUB.

Yeah, I would say, Russell, that there's some component of DOGE in there, but it's not the big driver of the qualitative factor. The real impact is related to a potential recession, probabilities of recession going up as a result of tariffs and all the issues related to that that could impact the economic environment going forward negatively. Little impact from a DOGE perspective. We don't really think there's much, Doug can comment on this, a real big impact from a credit perspective from DOGE. We think there may be a potential growth issue with that in the northern, yeah, right, not in our franchise, but in the northern Virginia and D.C. areas. Okay. So again, not a big factor at all in that overlay.

So again, as we've said, the overlay that you saw was for the AUD pre-merger franchise and where we're pretty limited in terms of greater Washington region and the government contract portfolio would be the one that would, I guess you would say, be most exposed. And you've seen our arguments that we're actually in a really good spot. And with what could be a trillion dollar record defense budget, we actually think that Those contractors are going to grow and they're going to have opportunity and there's more capital going into that space. To paint a picture of kind of a window into our world and Virginia, if you leave Northern Virginia and you head south and you talk to any business person, it is unlikely anyone's going to mention Doge. It's not a big deal south of the greater Washington region. They will talk about tariffs. They will talk about economic uncertainty. So the government cost reduction issues are more regionalized in that greater Washington region. Where they show up in Virginia or in North Carolina is no different, in my opinion, than anywhere else in the United States. And it would be in the context of university research cuts, maybe some municipal grants, but there's nothing that's really unique as it relates to that elsewhere in Virginia once you really get out of that greater Washington region. Move over to Hampton Roads where there's another large population of federal employees, that's all about defense. And with the president's executive order to increase American shipbuilding, a big winner is likely going to be Hampton Roads and Newport News Shipbuilding and the largest naval base in the world, so on and so forth. So it's very important just to understand that this franchise is very diversified And you do see regional differences.

Hope that helps. It does quite a bit. I appreciate the color. And then just last one for me, you know, we've touched on NII guide and the range of the proforma NIM, but it would be helpful to get a sense prior to layering all that in, you know, the margin this quarter came in better than guide. Just how are you thinking about legacy AUB and 2Q prior to folding in Sandy spring?

Thank you. Yeah, Russell, so in terms of just AUB, we do expect some continued expansion of the margin in Q2. If you look back at what we guided to for the full year AUB standalone in January, we said 345 to 360. We think we'll be heading higher than that low end. Obviously, we're at 345 this quarter. That expansion is on the back of continuing deposit costs coming down. We have about $800 million per quarter over the next few quarters of CDs repricing. I think the cost of that CD portfolio is about 4.3% now, and we're repricing those in the 375% to 4% range. So that will continue to help. And then we are seeing fixed rate loans repriced higher, as I mentioned earlier, from a portfolio of fixed rate loan yield of a little over 5% repricing in the six and a quarter range, give or take. So those are helpful and that will continue as we go into this quarter and third and fourth quarters. Beyond that, we think Sandy Spring, just for color, have seen their margin expand in nine basis points this quarter. primarily on the backs of lower deposit costs, and we expect that that will continue to adjust their deposit rates down as well. So that's a nice PL win for us going forward. I appreciate it, guys. Great call. Thank you.

Thanks, Russell.

Thanks, everybody, for joining us today. We look forward to talking with you in our next quarterly update. Have a good day.

Thank you all for joining today's conference call. You may now disconnect.