KBRA Affirms Ratings for Atlantic Union Bankshares Corporation and Sandy Spring Bancorp, Inc. Following Acquisition Announcement

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, the preferred shares rating of BBB-, and the short-term debt rating of K2 for Richmond, Virginia based Atlantic Union Bankshares Corporation (NASDAQ: AUB) following its recently announced proposed acquisition of Sandy Spring Bancorp, Inc. (NASDAQ: SASR). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the lead subsidiary, Atlantic Union Bank. The Outlook for the long-term ratings is Stable. KBRA also affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Olney, Maryland based Sandy Spring Bancorp, Inc. In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the subsidiary, Sandy Spring Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

On October 21, 2024, Atlantic Union Bankshares Corporation and Sandy Spring Bancorp, Inc. announced that they have entered into a definitive merger agreement for Atlantic Union to acquire Sandy Spring in an all-stock transaction valued at approximately $1.6 billion. The pending deal (expected to close in 3Q25) will create a pro-forma institution with $39 billion of assets, $32 billion of deposits, and $30 billion of loans. The combined company will operate 180+ branch locations principally centered in the contiguous states Virginia and Maryland, as well as with a smaller presence in North Carolina. With the exception of a single existing branch and an LPO in the outskirts of Baltimore, the proposed transaction marks AUB’s physical entrance into Maryland via SASR’s 53 branch network in the state.

In conjunction with the deal announcement, AUB also announced that it priced an underwritten public offering of nearly 9.9 million shares of common stock at a price of $35.50 per share for an aggregate offering amount of $350 million (net proceeds are expected to be closer to $336 million). In connection with the offering, AUB has entered into a forward sale agreement with Morgan Stanley. Rather than initially receiving proceeds from the issuance, AUB will sell shares of its common stock to Morgan Stanley, with Morgan Stanley then selling (or “underwriting”) the shares in the planned offering. Over the course of the next 18 months, Morgan Stanley will then deliver the proceeds of the common stock sale to AUB. The precise amounts and timing of these uses of proceeds will depend on the funding requirements of AUB and its subsidiaries.

With respect to other deal terms, the $1.6 billion transaction is valued at approximately or 1.28x P/TBV. Pro forma ownership is estimated to be comprised of roughly 63% AUB shareholders, 29% SASR, and 8% equity raise investors. AUB is recording a gross credit loan mark of 1.50% on SASR’s loan portfolio - a conservative mark, in our view, given SASR’s 3Q24 LLR of 1.14%. Additionally, the deal includes $625 million of negative fair value marks (-$575 million on SASR’s loan portfolio and an additional -$43 million on its HTM securities book). Transaction due diligence appears to be adequate with 70% of SASR’s $9.0 billion in commercial loans reviewed, including 93% of commercial loans rated special mention or substandard. Additionally, 82% of SASR’s non-owner-occupied office exposure, including all segment criticized loans, were reviewed.

KBRA believes the acquisition to be a natural extension of AUB’s existing footprint and upon closing the combined institution will create the largest regional bank headquartered in the lower Mid-Atlantic. Furthermore, the deal is expected to combine two long-standing franchises that each hold leading deposit market shares in their respective home states. Resultingly, we estimate the go-forward institution to have a pro-forma deposit market share across Virginia and Maryland of 6.2% - a figure nearly three times larger than that of the next closest regional bank peer.

Enhanced deposit market share and scale aside, we think the proposed transaction has a number of additional positive aspects as it relates to AUB’s financial profile, albeit modest in nature. Importantly, the combined company’s 10.0% pro-forma CET1 ratio (KBRA’s preferred metric in which to gauge core capital adequacy) expected at deal close is marginally higher than AUB’s standalone ratio of 9.8% as of 3Q24, and a forecasted 87% loan-to-deposit ratio is lower than the 90% AUB reflects today. We also view the transaction positively as it relates to earnings diversity from AUB’s perspective. More specifically, the deal will onboard SASR’s larger wealth management unit to AUB’s existing platform and nearly double the company’s AUM. With pro-forma AUM of $13 billion, the combined institution will house one of the largest wealth management platforms in our rated bank universe. While the addition of SASR’s funding base will modestly dilute some aspects of AUB’s cheaper, more core-funded profile, we think it an appropriate trade to gain near immediate density and scale in the Washington, D.C. and Baltimore MSAs. Elsewhere, though SASR brings with it a loan portfolio more concentrated in non-owner-occupied lending (42% of total loans) than AUB’s (27%), we highlight that both institutions have a history of extremely strong asset quality (recognizing that credit quality across the banking industry in general has been rather strong since the global financial crisis).

From SASR’s perspective, we think the proposed deal offers the company an opportunity to merge into a larger institution with a more diversified loan portfolio, de-lever its comparatively more “loaned up” balance sheet, and take advantage of AUB’s more attractive funding profile (both in terms of composition and cost).

With the positive characteristics of the proposed deal noted above, we continue to view AUB’s core capital ratios, both as they exist today and on a pro-forma basis, as relative rating constraints. In this regard, AUB’s 2Q24 CET1 and TCE ratios of 9.5% and 6.7% were ~270 and 170 bps, respectively, below rating category medians (note: 2Q24 metrics referenced as complete 3Q24 peer data was unavailable at the time of this writing; AUB’s TCE ratio, like most peers, experienced a notable uplift in 3Q24 given lower AOCI impact). With pro-forma CET1 and TCE ratios of 10.0% and 7.5% expected at deal close, we think it likely that the company’s core capital metrics will continue to trail peers.

Rating Sensitivities

The Stable Outlook and affirmation of AUB’s ratings at the current levels reflect our continued favorable opinion of the company’s core operating performance, strong market share in its attractive home state of Virginia, and solid asset quality performance. Most important to AUB’s ratings being maintained at the current levels is, in our opinion, core capital ratios being maintained at levels equal to or higher than those forecasted by management at deal close. Degradation in the company’s earnings performance, credit quality, or a failure to smoothly integrate SASR would also be viewed negatively.

SASR’s ratings and Outlook are currently fully aligned with AUB’s, and we would expect them to remain so upon deal close. Should the deal be terminated (not our base case expectation) we would likely not take any additional ratings actions on SASR unless there were to be materially weaker financial performance or greater than peer deterioration in credit quality.

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