Atlantic Union Bankshares Corporation (AUB)

Executive Summary / Key Takeaways

• A Regional Banking Moat in the Making: Atlantic Union Bankshares is executing a deliberate strategy to build the premier lower Mid-Atlantic franchise, combining the #1 regional bank in Virginia with the #1 in Maryland through the Sandy Spring acquisition, creating a uniquely dense and valuable footprint that competitors cannot replicate.

• Sandy Spring as Transformation Catalyst: The April 2025 acquisition adds $11.6 billion in assets and removes prior constraints on CRE concentration and liquidity, enabling the former Sandy Spring team to be "fully open for business" while providing new capabilities in interest rate swaps, treasury management, and wealth services that immediately augment earnings power.

• Credit Normalization, Not Deterioration: The $15 million charge-off on a misrepresented borrowing base and increased provision reflect expected normalization from historically low loss levels, not systemic weakness. Leading indicators remain encouraging, with nonperforming assets at just 0.49% and criticized loans improving 16% in Q3 2025.

• Chapter 3: North Carolina as Growth Engine: Building on the American National acquisition, AUB plans to open 10 new branches in North Carolina starting 2026 (7 in Research Triangle, 3 in Wilmington), targeting critical mass in some of the country's best population growth markets while leveraging a government contractor finance portfolio that has never experienced a charge-off in 15 years.

• Valuation Hinges on Execution: Trading at 19.4x earnings and 1.0x book value, the stock prices in successful integration and mid-single-digit loan growth. The key variable is whether management can deliver the mid-40s efficiency ratio by 2026 while maintaining asset quality in an uncertain economic environment.

Setting the Scene: Building a Lower Mid-Atlantic Powerhouse

Atlantic Union Bankshares Corporation, founded in 1902 and headquartered in Richmond, Virginia, has spent the past nine years executing a methodical transformation from a community bank into the largest regional bank headquartered in Virginia. This journey reached an inflection point in May 2019 when the company changed its name from Union Bankshares Corporation, signaling a strategic evolution beyond its Virginia roots. The business model operates through two distinct segments: Wholesale Banking, which serves commercial real estate and commercial & industrial clients across Virginia, Maryland, North Carolina, South Carolina, and Washington D.C., and Consumer Banking, which provides retail and small business services throughout the same footprint.

The regional banking industry in the Mid-Atlantic presents a unique structural opportunity. The Greater Washington region boasts the world's largest concentration of data centers, one of the nation's largest clusters of defense technology and cybersecurity firms, and is projected to become one of the biggest AI growth hubs in the United States. These dynamics create durable demand for commercial banking services, particularly from government contractors and technology firms. AUB's strategy exploits this by building density—establishing deep relationships and market share in stable, attractive markets rather than pursuing geographic breadth.

This approach directly confronts the competitive landscape. Super-regional banks like Truist Financial (TFC) and PNC Financial (PNC) operate across the Southeast and Mid-Atlantic with assets exceeding $500 billion each, leveraging scale for lower funding costs and advanced digital platforms. M&T Bank (MTB) and Huntington Bancshares (HBAN) compete aggressively in Maryland and Virginia, with Huntington recently expanding into North Carolina's Research Triangle. Fintech disruptors and big tech entrants pressure deposit pricing and consumer lending. Yet AUB's relationship-driven model, built over 120 years of community presence, creates switching costs that digital-only competitors cannot easily replicate. The company's dense branch network—now over 200 locations post-Sandy Spring—provides a physical presence that remains valuable for commercial clients and wealth management customers who require personalized service.

Strategic Differentiation: The Density Advantage

AUB's core competitive moat is strategic density, not technological innovation. The Sandy Spring acquisition, which closed on April 1, 2025, exemplifies this strategy. By joining the #1 regional bank by depository market share in Maryland with the #1 in Virginia, AUB created what management calls "unmatched scarcity value in this region." Post-merger, Sandy Spring represents about one-third of the combined company's asset size, but the real value lies in the removal of constraints. The acquisition eliminated Sandy Spring's commercial real estate concentration issues and liquidity pressures, allowing the former team to be "fully open for business" immediately.

This density translates into tangible financial benefits. The combined franchise can now offer interest rate swaps, foreign exchange, and enhanced treasury management capabilities that neither bank could provide at scale previously. In Q3 2025, approximately $1 million of swap income came from the former Sandy Spring Bank, with management noting that opportunities in swaps and wealth management were "augmented by the Sandy Spring acquisition." The equipment finance subsidiary, with nationwide exposure, benefits from a larger capital base, while the wealth management business gains access to a broader client base.

The company's operating mantra—"soundness, profitability, and growth" in that order—reinforces this strategic focus. Unlike competitors chasing digital-first strategies or national scale, AUB invests in deepening relationships within its footprint. This is evident in the government contractor finance portfolio, which has operated for over 15 years without a single charge-off. With 80% of federal government employment in Virginia tied to national security or defense agencies, and defense spending at record levels, this portfolio provides stable, low-risk earnings that competitors cannot easily replicate without decades of relationship building.

Financial Performance: Sandy Spring's Transformative Impact

The financial results for the nine months ended September 30, 2025, provide clear evidence of the Sandy Spring acquisition's impact while revealing the challenges of integration. Total assets reached $37.1 billion, an increase of $12.5 billion from year-end 2024, driven primarily by the acquisition and organic loan growth. This scale change is fundamental, not incremental.

Wholesale Banking Segment: Income before income taxes increased $21.4 million for Q3 2025 and $2.7 million year-to-date compared to 2024. The driver is higher net interest income, fueled by the Sandy Spring acquisition and loan accretion income. Net interest income for the segment jumped to $160.9 million in Q3 2025 from $101.1 million in Q3 2024. Noninterest income rose due to increased fiduciary and asset management fees and service charges on deposit accounts—all Sandy Spring contributions. Loans held for investment grew to $22.9 billion from $15.5 billion at year-end, while deposits increased to $11.5 billion from $7.2 billion.

However, the provision for credit losses increased to $14.4 million in Q3 2025 from just $0.2 million in Q3 2024, reflecting higher net charge-offs including two individually assessed C&I loans. This is the "normalization" management has warned about for eight years—historically low losses were never sustainable, and occasional one-off losses are inevitable. The key question is whether this remains episodic or becomes systemic.

Consumer Banking Segment: Income before income taxes decreased $3.8 million in Q3 2025 and $22.9 million year-to-date, primarily due to higher noninterest expense from the Sandy Spring acquisition. Net interest income increased to $114.7 million in Q3 2025 from $79.1 million in Q3 2024, but noninterest expense jumped to $108.9 million from $64.7 million. The efficiency challenge is real: integrating systems, consolidating branches (5 overlapping branches closed in October 2025), and aligning operations creates near-term cost pressure. Yet deposits surged to $18.0 billion from $11.9 billion, providing low-cost funding that will support future earnings as integration costs fade.

Net Interest Margin and Balance Sheet: The reported FTE net interest margin held steady at 3.83% in Q3 2025, but excluding accretion income, the core margin improved. Management projects full-year NIM of 3.75-3.8% and fourth quarter NIM of 3.85-3.9%, assuming two additional Fed rate cuts. This expansion potential stems from deposit beta assumptions—mid-50s on interest-bearing deposits and mid-40s on total deposits through the cycle—combined with loan repricing opportunities as fixed-rate portfolios yielding 5.1-5.15% reprice to 6.1-6.2%. The $2 billion CRE loan sale completed on June 26, 2025, reduced concentration risk and lowered the loan-to-deposit ratio, creating capacity for higher-yielding growth.

Outlook and Execution: The Path to Mid-40s Efficiency

Management's guidance for 2025 and 2026 reveals the execution roadmap. For full-year 2025, they project:

• Loan balances: $27.7-28.0 billion (mid-single digit Q4 growth)
• Deposit balances: $30.8-31.0 billion (low-single digit Q4 growth)
• Net charge-off ratio: 15-20 basis points
• Fully tax-equivalent NIM: 3.75-3.8%
• Adjusted operating noninterest income: $185-190 million
• Adjusted operating noninterest expense: $675-680 million

The fourth quarter 2025 run-rate targets are more aggressive: NIM of 3.85-3.9%, noninterest income of $50-55 million, and noninterest expense of $183-188 million. This implies the company expects to achieve most Sandy Spring cost savings by year-end, with the core systems conversion completed in October 2025 accelerating the timeline.

For 2026, management targets a mid-40s efficiency ratio, inclusive of investments in North Carolina expansion and technology. This is the critical variable. Achieving this requires holding expense growth below revenue growth while funding 10 new branches and expanded commercial teams. The company expects mid-single digit loan growth for the total company, with potential for high single-digit growth in a normalized environment. The key assumption is that the Sandy Spring acquisition will be fully integrated, with enhanced earnings power visible on a reported basis absent merger-related noise.

The North Carolina strategy—"Chapter 3"—builds on the American National acquisition's Piedmont Triad presence and Raleigh office. Starting in 2026, AUB will open 10 branches over three years, targeting the Research Triangle and Wilmington. This is not a scattershot expansion but a focused density play in markets with strong population growth and economic fundamentals. The company will simultaneously expand commercial banking, wealth, and mortgage teams to achieve critical mass. This mirrors the successful Virginia strategy: deep presence creates relationship moats that national competitors cannot easily penetrate.

Capital deployment priorities reflect this execution focus. Management is comfortable with CET1 between 10% and 10.5%, expecting to generate 25-30 basis points per quarter internally. Anything beyond 10.5% would be available for buybacks, likely in the second half of 2026. This disciplined approach—reinvesting in the business first, returning capital only when excess is clear—aligns with the "soundness, profitability, growth" mantra.

Risks: Integration, Credit, and Competition

The investment thesis faces three primary risks, all tied to execution.

Integration Execution Risk: The Sandy Spring acquisition must deliver promised cost savings while maintaining revenue momentum. Q3 2025 noninterest expense of $238.4 million (up 94.5% year-over-year) includes $33.5 million in merger-related costs. If integration proves more complex than anticipated, expense efficiency could lag, preventing achievement of the mid-40s efficiency ratio target. The accelerated core systems conversion—completed in October 2025 versus the original February 2026 timeline—reduces this risk but increases the probability of near-term operational disruptions.

Credit Normalization Risk: Management has been explicit that historically low losses are unsustainable. The $15 million charge-off on a misrepresented borrowing base and the $17.6 million provision in Q1 2025 due to "increased uncertainty in the economic outlook and elevated risk of a national recession" reflect this reality. While leading indicators remain strong—nonperforming assets at 0.49%, criticized loans down 16%—a broader economic downturn could push net charge-offs above the 15-20 basis point guidance. The CRE portfolio, with average loan sizes of $1.9 million and limited Washington D.C. exposure, is granular and conservative, but concentration remains at 276.9% of capital, well above regulatory comfort levels.

Competitive and Market Risk: The North Carolina expansion enters a competitive market where Huntington Bancshares is already expanding in the Research Triangle. AUB's relationship model differentiates from Huntington's digital-first approach, but success requires executing on multiple fronts simultaneously: building brand recognition, hiring teams, and winning clients in a new market. Additionally, the "turn it on" environment—where banks that had pulled back are now fully open for business—creates pricing pressure. Management acknowledges they must be competitive on price but believes their relationship value justifies premium pricing. If competitors aggressively undercut on loan rates or deposit pricing, AUB's growth and margin targets could prove elusive.

Valuation Context: Pricing Integration Success

At $34.54 per share, Atlantic Union Bankshares trades at 19.4x trailing earnings and 1.0x book value, with a price-to-free-cash-flow ratio of 2.2x. These multiples sit in the middle of the regional bank peer group but require context.

Peer Comparison:

• Truist (TFC): 12.8x P/E, 1.0x P/B, 15.7x P/FCF, operating margin 39.3%
• PNC (PNC): 12.8x P/E, 1.5x P/B, 14.4x P/FCF, operating margin 39.8%
• M&T Bank (MTB): 12.1x P/E, 1.2x P/B, 7.7x P/FCF, operating margin 43.9%
• Huntington (HBAN): 11.9x P/E, 1.3x P/B, 9.3x P/FCF, operating margin 38.6%

AUB's 19.4x P/E multiple reflects the market's expectation that Sandy Spring integration will drive earnings growth, not current profitability. The 1.0x P/B ratio suggests the market is not ascribing significant premium to the franchise value created through acquisitions. The exceptionally low 2.2x P/FCF ratio indicates strong cash generation relative to market cap, providing strategic flexibility.

The valuation spread versus peers is justified by AUB's smaller scale and integration risk. Super-regionals like PNC and Truist trade at lower multiples due to their scale and diversification, while AUB's premium reflects growth potential. The key metric to monitor is the efficiency ratio: if AUB achieves the mid-40s target by 2026, the current multiple will compress rapidly as earnings grow. If integration stumbles, the premium will evaporate.

Balance sheet strength supports the valuation. With CET1 expected to reach 10.5-11% by second half 2026, AUB will have excess capital for buybacks or additional M&A. The $2 billion CRE loan sale demonstrates proactive risk management, reducing concentration while generating liquidity for higher-yielding opportunities. This disciplined approach to capital allocation differentiates AUB from peers that may be slower to optimize their balance sheets.

Conclusion: Execution Determines Premium

Atlantic Union Bankshares has built a compelling strategic narrative: create unmatched density in the lower Mid-Atlantic through disciplined M&A, then leverage that footprint for organic expansion into high-growth North Carolina markets. The Sandy Spring acquisition provides the scale and capabilities to execute this vision, but the stock's valuation leaves no margin for error.

The central thesis hinges on three variables. First, integration must deliver the mid-40s efficiency ratio by 2026 while maintaining the relationship-driven culture that defines AUB's moat. Second, credit quality must remain manageable through normalization, with net charge-offs staying within the 15-20 basis point guidance. Third, the North Carolina expansion must achieve critical mass without excessive drag on near-term profitability.

If management executes, AUB will emerge as the premier regional franchise in one of the country's most attractive banking markets, justifying a valuation premium through superior growth and returns. The 2.2x P/FCF multiple suggests the market hasn't yet priced this success, creating potential upside. However, any stumble on integration, credit, or competitive positioning will compress the multiple toward peer levels, eliminating the premium. For investors, the story is clear: AUB is building a banking moat, but the stock is priced for perfect execution.