Atlantic Union Bankshares Corporation

Thank you for standing by, and welcome to the Atlantic Union Bank Shares second quarter 2025 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Bill Cimino, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Jonathan, and good morning, everyone. I'm Atlantic Union Bank Chair's President and CEO, John Asbury, 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 gap metrics and non-gap financial measures. Important information about these non-gap measures 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 second quarter of 2025. In our remarks on today's call, we will also make forward-looking statements, which are not statements of historical facts 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 from 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. At the end of the call, we'll take questions from the research analyst community, and now I'll turn the call over to John Asbury. Thank you, Bill. Good morning, everyone. Thank you for joining us today. It was a productive and eventful quarter for Atlantic Union Bank shares marked by the acquisition of Sandy Spring Bank, which closed on April 1. As anticipated, the acquisition introduced some merger accounting noise this quarter, and Q2 will serve as a better starting point for future linked quarter comparisons. We do believe our operating results demonstrate the strong earnings potential of our franchise, as we envisioned when we announced the Sandy Spring acquisition. We are pleased that our operating performance following the merger is meeting our expectations. The integration of Sandy Spring is progressing smoothly, and we benefited from the two companies' strong cultural alignment leading into the merger. The sale of approximately $2 billion of commercial real estate loans acquired from Sandy Spring Bank closed on June 26th and exceeded our initial pricing estimates. We also physically settled in full the forward sales of common equity in April concurrent with the merger closing, receiving approximately $385 million before expenses. We are working diligently on integration activities and are on track for our fourth quarter core systems conversion. Leveraging our experience from past acquisitions, including last year's conversion of American National Bank, we are confident in our integration efforts and systems preparations. Our shareholder value proposition remains unchanged. We believe Atlantic Union is well-positioned to deliver sustainable growth, top-tier financial performance, and long-term shareholder value. The strategic benefits from the Sandy Spring acquisition, along with organic growth opportunities, will bolster our position as the premier regional bank in the Lower Mid-Atlantic with a strong presence in attractive markets. I will summarize key aspects of our second quarter results and provide insights into market conditions before handing over to Rob for a detailed financial review. I will then discuss our organic growth initiatives in North Carolina, which we're excited about, before opening the call for questions. Here are the highlights from our second quarter. Our quarter-end loan-to-deposit ratio was approximately 88%. Our CET1 capital ratio was 9.8%, and our bank-level CRE concentration ratio was 284%. The Sandy Spring acquisition closed one quarter earlier than anticipated, a positive development, though it gave us one quarter less capital accumulation than planned at announcement. I reported FTE net interest margin expanded by 38 basis points to 3.83%. Notably, our core net interest margin, which excludes the impact of accretion income, improved by eight basis points. Assuming the Sandy Spring acquisition closed on March 31 instead of April 1, and excluding the negative loan fair value marks on the acquired loans and the effect of the commercial real estate loan sale, our loan growth was approximately 4.0% annualized quarter over quarter. This exceeded our internal expectations given the economic uncertainties And we observed growing business confidence with a robust loan pipeline and strong production, particularly later in the quarter. Our pipelines indicate that we should have solid loan growth in the second half of the year. We continue to project year-end loan balances between $28 and $28.5 billion, inclusive of the negative impact of loan fair value marks. Deposit growth trends tends to be seasonally slow in the second quarter, and we also paid down broker deposits by approximately $340 million in Q2 and intentionally reduced some higher-cost non-relationship deposits acquired in the Sandy Spring portfolio. The commercial real estate loan sale process was complex, but it yielded a strong outcome, better than planned, and reflected the quality of Sandy Spring's client base and markets. Completion of the sale removes a risk element. We reduced our commercial real estate concentration, lowered the loan-to-deposit ratio, and increased capacity for future growth while providing a positive start to our integration efforts. Credit quality remained solid as we reported only one basis point of annualized net charge-offs, and past due loans remained low. Second quarter NPAs as a percentage of loans held for investment were 0.60%. The increase reflects AUB's more conservative approach to loan rating and marking under acquisition accounting as Sandy Springs loans were added to AUB's loan portfolio. We remain confident in our asset quality and market conditions. We have lowered our forecast for the 2025 net charge-off ratio to be between 15 and 20 basis points for the full year, inclusive of a few non-performing assets with specific reserves that we expect to charge off later this year. We are well distributed across Virginia, Maryland, and North Carolina with a presence in Washington, D.C. These regions are highly attractive to operate in. In the greater Washington, D.C. region, despite continuing headlines about government employment reductions, the economic data and our observations suggest resilience. The region with a population of about 6.4 million people remains robust, and we view changes in government employment to date as manageable, although there continues to be uncertainty about where it may all end up. For perspective, approximately 23% of our total loans are in the Washington metro area, with the remaining 77% across other parts of our footprint. As we stated last quarter, the credit exposures that have been most in focus in the greater Washington region are government contractors and office buildings. We updated disclosures on these categories on pages 22, 23, and 24 of our supplemental presentation. Our government contractor finance portfolio, primarily national security and defense related, is performing well, as you can see on slide 24 of our supplemental presentation. Of note, the recent budget reconciliation bill will increase defense spending to a record level. and we believe defense modernization spending will be an overall benefit to our government contract portfolio. Regarding the office loan portfolio, AUB does not and Sandy Spring did not finance large office properties as evidenced by our $1.9 million average loan size, and we have only $71 million of exposure in the District of Columbia. The portfolio is performing well, as you can see on slide 22 of the supplemental presentation. More broadly, it is also worth pointing out that as of the most current unemployment data for June, there remains no more populous state in America with a lower unemployment rate than Maryland at 3.3%. Virginia is the third most populous state in the country with the lowest unemployment rate at 3.5%. For strong pipelines and an expanded footprint in attractive markets supplemented by our specialty lines, we believe we are positioned well for solid organic growth in the second half of 2025. Rob will now provide further details on the quarter, and I will then return with comments on our future direction before opening the call for questions.

Rob? Well, thank you, John, and good morning, everyone. Thanks for joining us today. I'll now take a few minutes to provide you with some details of Atlantic Union's financial results for the second quarter. Here are some key data points related to Sandy Spring acquisition that should be kept in mind as we review the second quarter's results. The fair value of assets acquired totaled $13 billion and included loans held for investment of $8.6 billion and loans held for sale of $1.9 billion, which primarily consisted of the CRE loans sold during the quarter subsequent to the acquisition. The total loan portfolio fair value mark discount was $789.7 million, comprised of a credit mark of $162.8 million and an interest rate mark of $626.8 million. The fair value of liabilities assumed totaled $12.2 billion and included total deposits of $11.2 billion. Core deposit intangibles and other intangibles acquired totaled $290.7 million, and the preliminary goodwill arising from the transaction totaled $496.9 million. Also, please note that for the most part, my commentary will focus on Atlantic Union second quarter financial results on a non-GAAP adjusted operating basis, which excludes the following items. The $89.5 million negative pre-tax impact of the CECL Day 1 initial provision for credit loss expense on purchased non-credit deteriorated or non-PCD loans acquired from Sandy Spring, which represents the CECL double count of the non-PCD loan credit mark. And the $11.4 million negative pre-tax impact of provision expense on unfunded commitments acquired from Sandy Spring. Also excludes pre-tax merger related costs of $78.9 million in the second quarter associated with the merger. And the $15.7 million pre-tax gain on the sale of $2 billion of CRE loan sales acquired in the Sandy Spring acquisition. as well as the $14.3 million pre-tax gain on the sale of our equity interest in Cary Street Partners. That said, in the second quarter, reported net income available to common shareholders was $16.8 million, and earnings per common share were 12 cents. Adjusted operating earnings available to common shareholders were $135.1 million, or 95 cents per common share for the second quarter, resulting in an adjusted operating return on tangible common equity of 23.8%, an adjusted operating return on assets of 1.46%, and an adjusted operating efficiency ratio of 48.3% in the second quarter. Now turning to credit loss reserves at the end of the second quarter, the total allowance for credit losses was $342.4 million, which was an increase of approximately $133 million from the first quarter, primarily due to the initial allowance related to the Sandy Springs acquired loans of $129.2 million, which includes a $28.3 million loan loss reserve on PCD loans and the CECL double count of the non-PCD loan credit mark and provision expense on acquired unfunded commitments totaling $100.9 million. The total allowance for credit losses as a percentage of total loans held for investment increased to 125 basis points at the end of the second quarter, and that was up from 113 basis points at the end of the first quarter. Provision for credit losses of $105.7 million in the second quarter includes the acquisition-related CECL double count of $100.9 million. Excluding the day one initial provision recorded on non-PCD loans and unfunded commitments acquired from Sandy, spring, the second quarter provision for credit losses was down from the prior quarter, primarily reflecting the impact of the overall bill and the allowance for loan losses due to heightened uncertainty in the economic outlook in the prior quarter, as well as lower net charge-offs in the second quarter. Net charge-offs decreased to $666,000, or one basis point annualized in the second quarter, down from $2.3 million, or five basis points annualized in the first quarter. Now turning to the pre-tax pre-provision components of the income statement for the second quarter, tax equivalent net interest income was $325.7 million, which was an increase of $137.8 million from the first quarter, primarily driven by the addition of Sandy Spring acquired loans and deposits, merger-related net accretion interest income related to acquisition accounting, as well as by organic loan growth. As John noted, the second quarter's tax equivalent net interest margin was 3.83%, And that was an increase of 38 basis points from the previous quarter, primarily driven by the incremental net increase accretion of purchase accounting adjustments on loans, deposits, and long-term borrowings related to the Sandy Spring acquisition. Earning asset yields for the second quarter increased 37 basis points to 6.05% compared to the first quarter, and the cost of funds decreased by one basis point to 2.2% compared to the prior quarter. The loan portfolio yield increased 47 basis points to 6.48% in the second quarter from 6.01% in the first quarter, primarily driven by the incremental merger-related loan increase in income of $32.5 million, which added approximately 39 basis points to the loan yield from the prior quarter, which was in addition to an increase in linked quarter core loan yields of nine basis points, driven by back-book fixed-rate loans repricing higher. Securities and other earning asset yield increases in the second quarter added one basis point to the earning asset yield, primarily driven by the restructuring of C&E Springs investment portfolio and fair value accounting adjustments arising from the acquisition. These earning asset yield increases were partially offset by a two basis point decline due to shifts in the earning asset mix. One basis point decline in the second quarter's cost of funds to 2.22% was due primarily to the nine basis points decrease in the cost of deposits at 2.2%, partially offset by higher borrowing costs, primarily due to increased long-term subordinated debt as a result of the CME spring acquisition. Non-interest income increased $52.3 million to $81.5 million for the second quarter, primarily driven by the $15.7 million free tax gain on the sale of the $2 billion of CRE loans and the $14.5 $3 million pre-tax gain on the sale of our equity interest in Cary Street Partners, as well as the full quarter impact of the Sandy Spring acquisition. Excluding the realized gains on sale during the quarter, adjusted operating non-interest income increased $22.2 million from the first quarter of $51.5 million, primarily due to the impact of the Sandy Spring acquisition, which drove the majority of increases in fiduciary and asset management fees, service charges on deposit accounts, and interchange fees. In addition to acquisition impacts, the quarterly bank-owned life insurance income increase of $3.8 million included $2.4 million in death benefits received in the second quarter, and a mortgage banking income increase of $1.8 million included the impact of Sandy Springs Mortgage Business, as well as a seasonal increase in mortgage loan origination volumes. In addition, other operating income increased $2.4 million, primarily due to an increase in equity method investment income. Reported non-interest expense increased $145.5 million to $279.7 million for the second quarter of 2025, primarily driven by a $74 million increase in merger-related costs, as well as other increases in non-interest expense due to the full quarter impact of the Sandy Spring acquisition. Adjusted operating non-interest expense, which excludes merger-related costs in the first and second quarters, and amortization of intangible assets in both quarters increased $58.6 million to $182.4 million for the second quarter, up from $123.8 million in the prior quarter, primarily due to the impact of the Sandy Spring acquisition, which drove the majority of the increases in several non-interest expense categories compared to the prior quarter. The company's effective tax rate in the second quarter was a negative 13.2%, reflecting the impact of an $8 million income tax benefit recorded during the quarter related to the company's re-evaluation of its state-preferred tax asset as a result of the Sandy Spring acquisition. Going forward, the company's estimated annual effective tax rate is projected to increase within a range of 21% to 22% from approximately 19.5% in the prior year, reflecting the impact of the Sandy Spring acquisition as Sandy Spring operated in a higher state tax jurisdiction, which now impacts a large proportion of the company's consolidated pre-tax income. At June 30th, loans held for investment, net of deferred fees and costs were $27.3 billion, which was an increase of $8.9 billion from the prior quarter, again, primarily driven by the Sandy Spring acquisition. Assuming the Sandy Spring acquisition closed on March 31st instead of April 1st, and excluding both the negative loan fair value marks on the acquired loans and the effect of the CRE loan sale transaction, pro forma loan growth was approximately 4% annualized. At June 30th, total deposits stood at $31 billion, which was an increase of $10.5 billion from the prior quarter due to increases in interest-bearing customer deposits and demand deposits primarily related to the addition of Sandy Spring acquired deposits. Assuming the Sandy Spring acquisition closed on March 31st instead of April 1st, home form of deposits decreased $752.8 million, or approximately 9.5% annualized from the prior quarter, which was primarily due to lower broker deposits, which declined by approximately $340 million, as well as declines in time deposit balances of approximately $143 million, as we intentionally let maturing higher-cost non-relationship time deposits acquired from Sandy Spring to run off during the second quarter. At the end of the second quarter, Atlantic Union Bank's years and Atlantic Union Bank's regulatory capital ratios were comfortably above well-capitalized levels. In addition, on an adjusted basis, we remain well capitalized as of the end of the second quarter if you include the negative impact of ALCI and health to maturity securities unrealized losses in the calculation of the regulatory capital ratios. During the second quarter, the company paid a common stock dividend of 34 cents per share, which was an increase of 6.3% for the previous year's second quarter dividend amount. As noted on slide 16, we've updated our full year 2025 financial outlook for AUB, which includes estimates of purchase accounting adjustments with respect to Sandy Spring that are subject to change. We expect loan balances to end the year between $28 billion and $28.5 billion, while year-end deposit balances are projected to be between $31 billion and $31.5 billion. The allowance for credit losses to loans is expected to fall between 1.2% and 1.3%, and our full-year net charge-off ratio is projected to be between 15 and 20 basic points. Fully taxed equivalent net interest income for the full year is projected to come in between $1,150,000,000 and $1.2 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%. driven by our baseline assumption that the Federal Reserve Bank will cut the Fed funds rate by 25 basis points in September, November, and December. In addition, the fully tax equivalent net interest margin projection includes the impact of our estimate of net accretion income from the C&E spring acquisition, which can be volatile and subject to change. On a full year basis, adjusted operating non-interest income is expected to fall between $175 and $185 million And the adjusted operating non-interest expenses for the full year, which includes amortization of intangible assets expense of approximately $60 million, are estimated to fall in the range of $670 million to $680 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. In summary, Atlantic Union delivered solid operating results in the second quarter, inclusive of Sandy Spring, despite the noise of acquisition accounting. We are on track and confident that we will achieve the anticipated financial benefits of the combination with Sandy Spring, some of which were evident in the second quarter financial results. 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. I'll now turn the call back over to John.