UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2019

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-20293

ATLANTIC UNION BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)


Virginia	54-1598552
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

1051 East Cary Street

Suite 1200

Richmond, Virginia 23219

(Address of principal executive offices) (Zip Code)

(804) 633-5031

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.33 per share	AUB	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐
		Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


	Yes ☐ No ☒

The number of shares of common stock outstanding as of October 30, 2019 was 80,649,088.

Table of Contents

ATLANTIC UNION BANKSHARES CORPORATION

FORM 10-Q

INDEX


ITEM		PAGE

	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 (audited)	2

	Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2019 and 2018	3

	Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2019 and 2018	4

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the nine months ended September 30, 2019 and 2018	5

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2019 and 2018	7

	Notes to Consolidated Financial Statements (unaudited)	9

	Review Report of Independent Registered Public Accounting Firm	55

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	56

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	82

Item 4.	Controls and Procedures	84

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	85

Item 1A.	Risk Factors	85

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	85

Item 6.	Exhibits	86

	Signatures	87

Table of Contents

Glossary of Acronyms and Defined Terms


2018 Form 10-K	–	Annual Report on Form 10-K for the year ended December 31, 2018
Access	–	Access National Corporation and its subsidiaries
AFS	–	Available for sale
ALCO	–	Asset Liability Committee
ALL	–	Allowance for loan losses
AOCI	–	Accumulated other comprehensive income (loss)
ASC	–	Accounting Standards Codification
ASU	–	Accounting Standards Update
ATM	–	Automated teller machine
the Bank	–	Atlantic Union Bank (formerly, Union Bank & Trust)
BOLI	–	Bank-owned life insurance
bps	–	Basis points
CCPs	–	Central Counterparty Clearinghouses
CECL	–	Current expected credit losses
CME	–	Chicago Mercantile Exchange
the Company	–	Atlantic Union Bankshares Corporation (formerly, Union Bankshares Corporation) and its subsidiaries
DHFB	–	Dixon, Hubard, Feinour, & Brown, Inc.
Dodd-Frank Act	–	Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EPS	–	Earnings per share
Exchange Act	–	Securities Exchange Act of 1934, as amended
FASB	–	Financial Accounting Standards Board
FCMs	–	Futures Commission Merchants
FDIC	–	Federal Deposit Insurance Corporation
Federal Reserve	–	Board of Governors of the Federal Reserve System
Federal Reserve Act	–	Federal Reserve Act of 1913, as amended
Federal Reserve Bank		Federal Reserve Bank of Richmond
FHLB	–	Federal Home Loan Bank of Atlanta
FTE	–	Fully taxable equivalent
GAAP or U.S. GAAP	–	Accounting principles generally accepted in the United States
HELOC	–	Home equity line of credit
HTM	–	Held to maturity
IDC	–	Interactive Data Corporation
LCH	–	London Clearing House
LIBOR	–	London Interbank Offered Rate
MBS	–	Mortgage Backed Securities
MD&A	–	Management’s Discussion and Analysis of Financial Condition and Results of Operations
NOW	–	Negotiable order of withdrawal
NPA	–	Nonperforming assets
OAL	–	Outfitter Advisors, Ltd.
OCI	–	Other comprehensive income
OREO	–	Other real estate owned
OTTI	–	Other than temporary impairment
PCI	–	Purchased credit impaired
ROA	–	Return on average assets
ROE	–	Return on average common equity
ROTCE	–	Return on average tangible common equity

Table of Contents

ROU Asset	–	Right of Use Asset
SEC	–	Securities and Exchange Commission
Shore Premier	–	Shore Premier Finance, a division of the Bank
Shore Premier sale	–	The sale of substantially all of the assets and certain specific liabilities of Shore Premier
TDR	–	Troubled debt restructuring
Topic 606	–	ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606”
TFSB	–	The Federal Savings Bank
UMG	–	Union Mortgage Group, Inc.
Xenith	–	Xenith Bankshares, Inc.

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)


	September 30,		December 31,
	2019		2018
ASSETS		(unaudited)		(audited)
Cash and cash equivalents:
Cash and due from banks	$	218,584	$	166,927
Interest-bearing deposits in other banks		370,673		94,056
Federal funds sold		2,663		216
Total cash and cash equivalents		591,920		261,199
Securities available for sale, at fair value		1,918,859		1,774,821
Securities held to maturity, at carrying value		556,579		492,272
Restricted stock, at cost		132,310		124,602
Loans held for sale, at fair value		72,208		—
Loans held for investment, net of deferred fees and costs		12,306,997		9,716,207
Less allowance for loan losses		43,820		41,045
Net loans held for investment		12,263,177		9,675,162
Premises and equipment, net		168,122		146,967
Goodwill		929,815		727,168
Amortizable intangibles, net		78,241		48,685
Bank owned life insurance		320,779		263,034
Other assets		408,162		250,210
Assets of discontinued operations		863		1,479
Total assets	$	17,441,035	$	13,765,599
LIABILITIES
Noninterest-bearing demand deposits	$	3,155,174	$	2,094,607
Interest-bearing deposits		9,889,538		7,876,353
Total deposits		13,044,712		9,970,960
Securities sold under agreements to repurchase		67,260		39,197
Other short-term borrowings		344,600		1,048,600
Long-term borrowings		1,137,321		668,481
Other liabilities		321,348		112,093
Liabilities of discontinued operations		763		1,687
Total liabilities		14,916,004		11,841,018
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Common stock, $1.33 par value; shares authorized of 200,000,000 and 100,000,000 at September 30, 2019 and December 31, 2018, respectively; 81,147,896 and 65,977,149 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively.		107,330		87,250
Additional paid-in capital		1,831,667		1,380,259
Retained earnings		545,665		467,345
Accumulated other comprehensive income (loss)		40,369		(10,273)
Total stockholders' equity		2,525,031		1,924,581
Total liabilities and stockholders' equity	$	17,441,035	$	13,765,599

See accompanying notes to consolidated financial statements.

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ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands, except share and per share data)


	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2019		2018		2019		2018
Interest and dividend income:
Interest and fees on loans	$	156,651	$	115,817	$	459,603	$	348,009
Interest on deposits in other banks		1,030		492		2,047		1,815
Interest and dividends on securities:
Taxable		12,625		10,145		39,059		25,229
Nontaxable		8,039		4,909		24,413		13,098
Total interest and dividend income		178,345		131,363		525,122		388,151
Interest expense:
Interest on deposits		30,849		15,928		84,088		40,187
Interest on short-term borrowings		2,200		3,379		14,313		12,794
Interest on long-term borrowings		8,695		6,093		23,978		17,568
Total interest expense		41,744		25,400		122,379		70,549
Net interest income		136,601		105,963		402,743		317,602
Provision for credit losses		9,100		3,340		18,192		9,011
Net interest income after provision for credit losses		127,501		102,623		384,551		308,591
Noninterest income:
Service charges on deposit accounts		7,675		6,483		22,331		18,566
Other service charges and fees		1,513		1,625		4,879		4,137
Interchange fees, net		2,108		4,882		12,765		14,163
Fiduciary and asset management fees		6,082		4,411		16,834		11,507
Mortgage banking income, net		3,374		—		7,614		—
Gains (losses) on securities transactions, net		7,104		97		7,306		222
Bank owned life insurance income		2,062		1,732		6,191		5,126
Loan-related interest rate swap fees, net		5,480		562		10,656		2,178
Gain on Shore Premier sale		—		(933)		—		19,966
Other operating income		12,708		1,028		15,045		4,887
Total noninterest income		48,106		19,887		103,621		80,752
Noninterest expenses:
Salaries and benefits		49,718		39,279		148,116		120,797
Occupancy expenses		7,493		6,551		22,427		18,778
Furniture and equipment expenses		3,719		2,983		10,656		9,024
Printing, postage, and supplies		1,268		1,183		3,763		3,525
Communications expense		1,037		872		3,199		2,976
Technology and data processing		5,787		4,841		17,203		13,722
Professional services		2,681		2,875		8,269		8,101
Marketing and advertising expense		2,600		3,109		7,891		7,834
FDIC assessment premiums and other insurance		381		1,363		5,620		5,430
Other taxes		3,971		2,878		11,779		8,660
Loan-related expenses		2,566		1,939		7,250		5,097
OREO and credit-related expenses		1,005		452		3,162		3,106
Amortization of intangible assets		4,764		3,490		13,919		9,885
Training and other personnel costs		1,618		1,024		4,240		3,155
Merger-related costs		2,435		1,429		26,928		37,414
Rebranding expense		1,133		—		5,553		—
Loss on debt extinguishment		16,397		—		16,397		—
Other expenses		3,114		2,081		7,650		5,730
Total noninterest expenses		111,687		76,349		324,022		263,234
Income from continuing operations before income taxes		63,920		46,161		164,150		126,109
Income tax expense		10,724		7,399		26,330		20,973
Income from continuing operations	$	53,196	$	38,762	$	137,820	$	105,136
Discontinued operations:
Income (loss) from operations of discontinued mortgage segment	$	56	$	(761)	$	(173)	$	(3,768)
Income tax expense (benefit)		14		(196)		(45)		(795)
Income (loss) on discontinued operations		42		(565)		(128)		(2,973)
Net income		53,238		38,197		137,692		102,163
Basic earnings per common share	$	0.65	$	0.58	$	1.72	$	1.55
Diluted earnings per common share	$	0.65	$	0.58	$	1.72	$	1.55
Dividends declared per common share	$	0.25	$	0.23	$	0.71	$	0.65
Basic weighted average number of common shares outstanding		81,769,193		65,974,702		80,120,725		65,817,668
Diluted weighted average number of common shares outstanding		81,832,868		66,013,152		80,183,113		65,873,202

See accompanying notes to consolidated financial statements.

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ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net income	$	53,238	$	38,197	$	137,692	$	102,163
Other comprehensive income (loss):
Cash flow hedges:
Change in fair value of cash flow hedges		6,025		575		1,970		3,214
Reclassification adjustment for losses included in net income (net of tax, $42 and $60 for the three months and $120 and $205 for the nine months ended September 30, 2019 and 2018, respectively)⁽¹⁾		158		227		451		770
AFS securities:
Unrealized holding gains (losses) arising during period (net of tax, $3,287 and $3,007 for the three months and $14,513 and $7,200 for the nine months ended September 30, 2019 and 2018, respectively)		12,364		(11,310)		54,598		(27,087)
Reclassification adjustment for losses (gains) included in net income (net of tax, $1,492 and $20 for the three months and $1,534 and $46 for the nine months ended September 30, 2019 and 2018, respectively) ⁽²⁾		(5,612)		(77)		(5,772)		(176)
HTM securities:
Reclassification adjustment for accretion of unrealized gain on AFS securities transferred to HTM (net of tax, $1 and $1 for the three months and $4 and $107 for the nine months ended September 30, 2019 and 2018, respectively)⁽³⁾		(5)		(5)		(15)		(403)
Bank owned life insurance:
Unrealized holding losses arising during the period		(647)		—		(647)		—
Reclassification adjustment for losses included in net income ⁽⁴⁾		19		19		57		57
Other comprehensive income (loss)		12,302		(10,571)		50,642		(23,625)
Comprehensive income	$	65,540	$	27,626	$	188,334	$	78,538

(1)	The gross amounts reclassified into earnings are reported in the interest income and interest expense sections of the Company’s Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense.

(2)	The gross amounts reclassified into earnings are reported as "Gains (losses) on securities transactions, net" on the Company’s Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense.

(3)	The gross amounts reclassified into earnings are reported within interest income on the Company’s Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense.

(4)	Reclassifications in earnings are reported in "Salaries and benefits" expense on the Company’s Consolidated Statements of Income.

See accompanying notes to consolidated financial statements.

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ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2019

(Dollars in thousands, except share and per share amounts)

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

Stock

Capital

Earnings

Income (Loss)

Total

Balance - December 31, 2018

87,250

1,380,259

467,345

(10,273)

1,924,581

Net Income

35,631

Other comprehensive income (net of taxes of $5,346)

18,670

Issuance of common stock in regard to acquisition (15,842,026 shares)

21,070

478,904

499,974

Dividends on common stock ($0.23 per share)

(18,838)

Issuance of common stock under Equity Compensation Plans (6,127 shares)

130

138

Issuance of common stock for services rendered (6,085 shares)

211

219

Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (104,151 shares)

139

(1,786)

(1,647)

Impact of adoption of new guidance⁽¹⁾

(1,133)

Stock-based compensation expense

1,870

Balance - March 31, 2019

108,475

1,859,588

483,005

8,397

2,459,465

Net Income

48,823

Other comprehensive income (net of taxes of $5,913)

19,670

Dividends on common stock ($0.23 per share)

(18,876)

Issuance of common stock under Equity Compensation Plans (36,551 shares)

938

986

Issuance of common stock for services rendered (6,192 shares)

192

200

Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (21,447 shares)

(336)

(307)

Stock-based compensation expense

2,334

Balance - June 30, 2019

108,560

1,862,716

512,952

28,067

2,512,295

Net Income

53,238

Other comprehensive income (net of taxes of $1,836)

12,302

Dividends on common stock ($0.25 per share)

(20,525)

Stock purchased under stock repurchase plan (969,265 shares)

(1,289)

(33,995)

(35,284)

Issuance of common stock under Equity Compensation Plans (28,253 shares)

656

694

Issuance of common stock for services rendered (7,840 shares)

269

279

Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (8,247 shares)

(138)

(127)

Stock-based compensation expense

2,159

Balance - September 30, 2019

107,330

1,831,667

545,665

40,369

2,525,031

(1) Adoption of ASU No. 2016-02, "Leases (Topic 842)" in the first quarter of 2019.

See accompanying notes to consolidated financial statements.

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ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2018

(Dollars in thousands, except share and per share amounts)

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

Stock

Capital

Earnings

Income (Loss)

Total

Balance - December 31, 2017

57,744

610,001

379,468

(884)

1,046,329

Net Income

16,639

Other comprehensive income (net of taxes of $3,565)

(11,426)

Issuance of common stock in regard to acquisition (21,922,077 shares)⁽¹⁾

29,156

765,653

794,809

Dividends on common stock ($0.21 per share)

(13,808)

Issuance of common stock under Equity Compensation Plans (68,495 shares)

836

927

Issuance of common stock for services rendered (4,914 shares)

177

184

Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (69,562 shares)

(2,363)

(2,270)

Cancellation of warrants

(1,530)

Stock-based compensation expense

1,223

Balance- March 31, 2018

87,091

1,373,997

382,299

(12,310)

1,831,077

Net Income

47,327

Other comprehensive income (net of taxes of $617)

(1,628)

Dividends on common stock ($0.21 per share)

(13,841)

Issuance of common stock under Equity Compensation Plans (17,058 shares)

416

439

Issuance of common stock for services rendered (5,259 shares)

205

212

Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (6,664 shares)

(136)

(128)

Impact of adoption of new guidance

(293)

(107)

(400)

Stock-based compensation expense

1,812

Balance- June 30, 2018

87,129

1,376,294

415,492

(14,045)

1,864,870

Net Income

38,197

Other comprehensive income (net of taxes of $2,966)

(10,571)

Dividends on common stock ($0.23 per share)

(15,176)

Issuance of common stock under Equity Compensation Plans (34,477 shares)

918

964

Issuance of common stock for services rendered (7,248 shares)

292

301

Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (5,606 shares)

(111)

(103)

Impact of adoption of new guidance

—

Stock-based compensation expense

1,547

Balance - September 30, 2018

87,192

1,378,940

438,513

(24,616)

1,880,029

(1) Includes conversion of Xenith warrants to the Company’s warrants.

See accompanying notes to consolidated financial statements.

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ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018


(Dollars in thousands)	2019		2018
Operating activities ⁽¹⁾:
Net income	$	137,692	$	102,163
Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities:
Depreciation of premises and equipment		11,138		10,411
Writedown of foreclosed properties and former bank premises		1,162		1,184
Amortization, net		19,033		9,333
Amortization (accretion) related to acquisitions, net		(5,200)		(6,014)
Provision for credit losses		18,192		8,830
Gains on securities transactions, net		(7,306)		(222)
BOLI income		(6,191)		(5,126)
Decrease (increase) in loans held for sale, net		(50,981)		40,302
Losses (gains) on sales of foreclosed properties and bank premises, net		144		(413)
Losses on debt extinguishment		16,397		—
Gain on sale of Shore Premier loans		—		(19,966)
Goodwill impairment losses		—		864
Stock-based compensation expenses		6,363		4,582
Issuance of common stock for services		698		697
Net decrease (increase) in other assets		(76,118)		(16,270)
Net increase in other liabilities		44,312		16,283
Net cash and cash equivalents provided by (used in) operating activities		109,335		146,638
Investing activities:
Purchases of AFS securities and restricted stock		(312,120)		(926,764)
Purchases of HTM securities		(47,217)		(228,104)
Proceeds from sales of AFS securities and restricted stock		486,925		337,109
Proceeds from maturities, calls and paydowns of AFS securities		176,824		117,813
Proceeds from maturities, calls and paydowns of HTM securities		2,523		—
Proceeds from sale of loans held for investment		—		581,324
Net increase in loans held for investment		(371,260)		(397,725)
Net increase in premises and equipment		(11,547)		(4,334)
Proceeds from sales of foreclosed properties and former bank premises		5,329		3,617
Cash paid in acquisitions		(12)		(14,284)
Cash acquired in acquisitions		46,164		174,515
Net cash and cash equivalents provided by (used in) investing activities		(24,391)		(356,833)
Financing activities:
Net increase in noninterest-bearing deposits		376,160		176,308
Net increase in interest-bearing deposits		471,204		119,095
Net increase (decrease) in short-term borrowings		(896,622)		27,722
Cash paid for contingent consideration		(565)		(565)
Proceeds from issuance of long-term debt		550,000		25,000
Repayments of long-term debt		(160,614)		(10,000)
Cash dividends paid - common stock		(58,239)		(42,825)
Cancellation of warrants		—		(1,530)
Repurchase of common stock		(35,284)		—
Issuance of common stock		1,818		2,330
Vesting of restricted stock, net of shares held for taxes		(2,081)		(2,501)
Net cash and cash equivalents provided by (used in) financing activities		245,777		293,034
Increase (decrease) in cash and cash equivalents		330,721		82,839
Cash and cash equivalents at beginning of the period		261,199		199,373
Cash and cash equivalents at end of the period	$	591,920	$	282,212

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ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Dollars in thousands)


	2019		2018
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest	$	118,067	$	67,214
Income taxes		20,416		10,830

Supplemental schedule of noncash investing and financing activities
Transfers from loans (foreclosed properties) to foreclosed properties (loans)		1,816		106
Stock received as consideration for sale of loans held for investment		—		28,193
Securities transferred from HTM to AFS		—		187,425
Issuance of common stock in exchange for net assets in acquisitions		499,974		794,809

Transactions related to acquisitions
Assets acquired		2,855,993		3,252,377
Liabilities assumed ⁽²⁾		2,558,638		2,873,318

(1) Discontinued operations have an immaterial impact to the Company’s Consolidated Statement of Cash Flows. The change in loans held for sale included in the Operating Activities section for the nine months ended September 30, 2018 are fully attributable to discontinued operations.

(2) 2018 includes contingent consideration related to DHFB and OAL acquisitions.

See accompanying notes to consolidated financial statements.

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ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

1. ACCOUNTING POLICIES

The Company

Headquartered in Richmond, Virginia, Atlantic Union Bankshares Corporation (formerly, Union Bankshares Corporation) (Nasdaq: AUB) is the holding company for Atlantic Union Bank (formerly, Union Bank & Trust). Atlantic Union Bank has 149 branches and approximately 170 ATMs located throughout Virginia and in portions of Maryland and North Carolina. Middleburg Financial is a brand name used by Atlantic Union Bank and certain affiliates when providing trust, wealth management, private banking, and investment advisory products and services. Certain non-bank affiliates of Atlantic Union Bank include: Old Dominion Capital Management, Inc., and its subsidiary Outfitter Advisors, Ltd., Dixon, Hubard, Feinour & Brown, Inc., and Middleburg Investment Services, LLC, which provide investment advisory and/or brokerage services; and Union Insurance Group, LLC, which offers various lines of insurance products.

Effective May 17, 2019 (after market close), Union Bankshares Corporation changed its name to Atlantic Union Bankshares Corporation and Union Bank & Trust changed its name to Atlantic Union Bank. The name change was approved by the Board of Directors at the Company’s January 23, 2019 Board meeting and a related amendment to the Company’s articles of incorporation was approved by the Company’s shareholders at its 2019 Annual Meeting on May 2, 2019. The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant inter-company transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements; however, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other period.

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s 2018 Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation.

Business Combinations and Divestitures

On February 1, 2019, the Company completed the acquisition of Access, a bank holding company based in Reston, Virginia for a purchase price of approximately $500.0 million. Access’s common stockholders received 0.75 shares of the Company’s common stock in exchange for each share of Access’s common stock, resulting in the Company issuing 15,842,026 shares of common stock. In addition, the Company paid cash of approximately $12,000 in lieu of fractional shares.

In connection with the transaction, the Company recorded $202.6 million in goodwill and $43.5 million of amortizable intangible assets, which primarily relate to core deposit intangibles. The Company currently estimates that these other intangible assets will be amortized over 5 to 10 years using various methods. The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition.

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Affordable Housing Entities

The Company invests in private investment funds that make equity investments in multifamily affordable housing properties that provide affordable housing and historic tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt. For the three and nine months ended September 30, 2019, the Company recognized amortization of $624,000 and $1.8 million, respectively, and tax credits of $806,000 and $2.1 million, respectively, associated with these investments within “Income tax expense” on the Company’s Consolidated Statements of Income. For the three and nine months ended September 30, 2018, the Company recognized amortization of $227,000 and $699,000, respectively, and tax credits of $275,000 and $839,000, respectively. The carrying value of the Company’s investments in these qualified affordable housing projects was $29.9 million and $10.8 million as of September 30, 2019 and December 31, 2018, respectively. At September 30, 2019 and December 31, 2018, the Company’s recorded liability totaled $12.8 million and $9.9 million, respectively, for the related unfunded commitments, which are expected to be paid throughout the years 2019 - 2033.

Adoption of New Accounting Standards

On January 1, 2019, the Company adopted ASU No. 2016-02, "Leases (Topic 842)." The adoption of this standard required lessees to recognize right of use assets and lease liabilities on the Consolidated Balance Sheets and disclose key information about leasing arrangements. The Company adopted this ASU on January 1, 2019 under the modified retrospective approach. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to not reassess the lease classification of existing leases, as well as not reassess whether any expired or existing contracts are or contain a lease; and maintain consistent treatment of initial direct costs on existing leases. In addition, the Company elected the short-term lease exemption practical expedient in which leases with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheets. The Company also elected the practical expedient related to accounting for lease and non-lease components as a single lease component. Adoption of this standard resulted in the Company recording a lease liability of $53.2 million and right of use assets of $48.9 million as of January 1, 2019. Operating leases have been included within other assets and other liabilities on the Company’s Consolidated Balance Sheets. The implementation of this standard resulted in a $1.1 million decrease to Retained Earnings. There was no impact on the Company’s Consolidated Statement of Cash Flows. Refer to Note 6 "Leases" for further discussion regarding the adoption.

In August 2018, the FASB issued ASU No. 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." This ASU amends the Intangibles—Goodwill and Other Topic of the Accounting Standards Codification to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU will be effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company adopted this standard in the first quarter of 2019 using the prospective approach. The adoption of ASU 2018-15 did not have a material impact on the Company’s consolidated financial statements.

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2. ACQUISITIONS

Access Acquisition

On February 1, 2019, the Company completed its acquisition of Access National Corporation (and its subsidiaries), a bank holding company based in Reston, Virginia. Holders of shares of Access’s common stock received 0.75 shares of the Company’s common stock in exchange for each share of Access’s common stock, resulting in the Company issuing 15,842,026 shares of the Company’s common stock at a fair value of approximately $500.0 million. In addition, the Company paid cash of approximately $12,000 in lieu of fractional shares.

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition, in accordance with ASC 350, Intangibles-Goodwill and Other. Measurement period adjustments that were made in the third quarter of 2019 include immaterial changes to the fair value of deferred tax assets and other assets. The Company will continue to keep the measurement period open for certain accounts, including loans, real estate, and deferred tax assets, where its review procedures of any updated information related to the transaction are ongoing. If considered necessary, additional adjustments to the fair value measurement of these accounts will be made until all information is finalized, the Company’s review procedures are complete, and the measurement period is closed. The goodwill is not expected to be deductible for tax purposes.

The following table provides a preliminary assessment of the consideration transferred, assets acquired, and liabilities assumed as of the date of the acquisition (dollars in thousands):


Purchase Price:
Fair value of shares of the Company's common stock issued			$	499,974
Cash paid for fractional shares				12
Total purchase price			$	499,986

Fair value of assets acquired:
Cash and cash equivalents	$	46,164
Investments		464,742
Loans		2,173,481
Premises and equipment		28,001
Core deposit intangibles		40,860
Other assets		102,745
Total assets	$	2,855,993

Fair value of liabilities assumed:
Deposits	$	2,227,073
Short-term borrowings		220,685
Long-term borrowings		70,535
Other liabilities		40,345
Total liabilities	$	2,558,638

Net assets acquired			$	297,355
Preliminary goodwill			$	202,631

The acquired loans were recorded at fair value at the acquisition date without carryover of Access’s previously established ALL. The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and leases and then applying a market-based discount rate to those cash flows. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, purpose, and lien position. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans) and past due status. For

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valuation purposes, these pools were further disaggregated by maturity, pricing characteristics (e.g., fixed-rate, adjustable-rate) and re-payment structure (e.g., interest only, fully amortizing, balloon). If new information is obtained about facts and circumstances about expected cash flows that existed as of the acquisition date, management will adjust fair values in accordance with accounting for business combinations.

The acquired loans were divided into loans with evidence of credit quality deterioration which are accounted for under ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality, (acquired impaired) and loans that do not meet these criteria, which are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs, (acquired performing). The fair values of the acquired performing loans were $2.1 billion and the fair values of the acquired impaired loans were $33.1 million. The gross contractually required principal and interest payments receivable for acquired performing loans was $2.5 billion. The best estimate of contractual cash flows not expected to be collected related to the acquired performing loans is $17.9 million.

The following table presents the acquired impaired loans receivable at the acquisition date (dollars in thousands):


Contractually required principal and interest payments	$	44,232
Nonaccretable difference		(6,062)
Cash flows expected to be collected		38,170
Accretable difference		(5,060)
Fair value of loans acquired with a deterioration of credit quality	$	33,110

The following table presents certain pro forma information as if Access had been acquired on January 1, 2018. These results combine the historical results of Access in the Company’s Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2018. In particular, no adjustments have been made to eliminate the amount of Access’s provision for credit losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2018. Pro forma adjustments below include the net impact of accretion for 2018 and the elimination of merger-related costs for 2019.

The Company expects to achieve further operating cost savings and other business synergies, including branch closures, as a result of the acquisition which are not reflected in the pro forma amounts below (dollars in thousands):


	Pro forma for the three				Pro forma for the nine
	months ended				months ended
	September 30,				September 30,
	2019		2018		2019		2018
Total revenues ⁽¹⁾	$	184,707	$	159,128	$	517,016	$	500,505
Net income	$	54,847	$	47,625	$	160,635	$	130,201
EPS	$	0.67	$	0.58	$	1.99	$	1.60

(1)	Includes net interest income and noninterest income.

The revenue and earnings amounts specific to Access since the acquisition date that are included in the consolidated results for 2019 are not readily determinable. The disclosures of these amounts are impracticable due to the merging of certain processes and systems at the acquisition date.

Merger-related costs associated with the acquisition of Access were $2.0 million and $25.6 for the three and nine months ended September 30, 2019 respectively; there were no merger-related costs associated with the acquisition of Access during the first nine months of 2018. Such costs include legal and accounting fees, lease and contract termination expenses, system conversion, and employee severances, which have been expensed as incurred.

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3. SECURITIES

Available for Sale

The amortized cost, gross unrealized gains and losses, and estimated fair values of AFS securities as of September 30, 2019 and December 31, 2018 are summarized as follows (dollars in thousands):


	Amortized		Gross Unrealized				Estimated
	Cost		Gains		(Losses)		Fair Value
September 30, 2019
U.S. government and agency securities	$	4,475	$	15	$	—	$	4,490
Obligations of states and political subdivisions		411,690		26,935		(12)		438,613
Corporate and other bonds ⁽¹⁾		224,854		5,044		(374)		229,524
Mortgage-backed securities		1,215,263		28,872		(970)		1,243,165
Other securities		3,067		—		—		3,067
Total AFS securities	$	1,859,349	$	60,866	$	(1,356)	$	1,918,859

December 31, 2018
Obligations of states and political subdivisions	$	466,588	$	3,844	$	(1,941)	$	468,491
Corporate and other bonds ⁽¹⁾		167,561		1,118		(983)		167,696
Mortgage-backed securities		1,138,034		4,452		(12,621)		1,129,865
Other securities		8,769		—		—		8,769
Total AFS securities	$	1,780,952	$	9,414	$	(15,545)	$	1,774,821

(1)	Other bonds includes asset-backed securities.

The following table shows the gross unrealized losses and fair value of the Company’s AFS securities with unrealized losses that are not deemed to be other-than-temporarily impaired as of September 30, 2019 and December 31, 2018 (dollars in thousands). These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.


	Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
September 30, 2019
Obligations of states and political subdivisions	$	2,296	$	(12)	$	—	$	—	$	2,296	$	(12)
Corporate bonds and other securities		25,341		(149)		25,306		(225)		50,647		(374)
Mortgage-backed securities		89,649		(390)		74,540		(580)		164,189		(970)
Total AFS securities	$	117,286	$	(551)	$	99,846	$	(805)	$	217,132	$	(1,356)

December 31, 2018
Obligations of states and political subdivisions	$	133,513	$	(1,566)	$	10,145	$	(375)	$	143,658	$	(1,941)
Corporate bonds and other securities		35,478		(315)		33,888		(668)		69,366		(983)
Mortgage-backed securities		306,038		(3,480)		341,400		(9,141)		647,438		(12,621)
Total AFS securities	$	475,029	$	(5,361)	$	385,433	$	(10,184)	$	860,462	$	(15,545)

As of September 30, 2019, there were $99.9 million, or 56 issues, of individual AFS securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of $805,000. As of December 31, 2018, there were $385.4 million, or 138 issues, of individual securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of $10.2 million. The Company has determined that these securities were temporarily impaired at September 30, 2019 and December 31, 2018 for the reasons set out below:

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Obligations of state and political subdivisions. This category’s unrealized losses are primarily the result of interest rate fluctuations and ratings downgrades for a limited number of securities. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.

Corporate and other bonds. This category’s unrealized losses are the result of interest rate fluctuations and ratings downgrades for a limited number of securities. The majority of these securities remain investment grade and the Company’s analysis did not indicate the existence of a credit loss. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.

Mortgage-backed securities. This category’s unrealized losses are primarily the result of interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not intend to sell the investments, and the accounting standard of "more likely than not" has not been met for the Company to be required to sell any of the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired. Also, the majority of the Company’s mortgage-backed securities are agency-backed securities, which have a government guarantee.

The following table presents the amortized cost and estimated fair value of AFS securities as of September 30, 2019 and December 31, 2018, by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2019				December 31, 2018
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	22,682	$	22,805	$	22,653	$	22,789
Due after one year through five years		161,289		163,908		191,003		188,999
Due after five years through ten years		263,488		269,757		218,211		217,304
Due after ten years		1,411,890		1,462,389		1,349,085		1,345,729
Total AFS securities	$	1,859,349	$	1,918,859	$	1,780,952	$	1,774,821

Refer to Note 8 "Commitments and Contingencies" for information regarding the estimated fair value of AFS securities that were pledged to secure public deposits, repurchase agreements, and for other purposes as permitted or required by law as of September 30, 2019 and December 31, 2018.

Held to Maturity

The Company reports HTM securities on the Company’s Consolidated Balance Sheets at carrying value. Carrying value is amortized cost which includes any unamortized unrealized gains and losses recognized in accumulated other comprehensive income prior to reclassifying the securities from AFS securities to HTM securities. Investment securities transferred into the HTM category from the AFS category are recorded at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in accumulated other comprehensive income and in the carrying value of the HTM securities. Such unrealized gains or losses are accreted over the remaining life of the security with no impact on future net income.

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The carrying value, gross unrealized gains and losses, and estimated fair values of HTM securities as of September 30, 2019 and December 31, 2018 are summarized as follows (dollars in thousands):


	Carrying		Gross Unrealized				Estimated
	Value		Gains		(Losses)		Fair Value
September 30, 2019
Obligations of states and political subdivisions	$	546,515	$	51,002	$	—	$	597,517
Mortgage-backed securities		10,064		135		—		10,199
Total held-to-maturity securities	$	556,579	$	51,137	$	—	$	607,716
December 31, 2018
Obligations of states and political subdivisions	$	492,272	$	7,375	$	(146)	$	499,501

The following table shows the gross unrealized losses and fair value (dollars in thousands) of the Company’s HTM securities with unrealized losses that are not deemed to be other-than-temporarily impaired as of September 30, 2019 and December 31, 2018 (dollars in thousands). These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.


	Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
September 30, 2019
Obligations of states and political subdivisions	$	—	$	—	$	—	$	—	$	—	$	—

December 31, 2018
Obligations of states and political subdivisions	$	43,206	$	(146)	$	—	$	—	$	43,206	$	(146)

As of September 30, 2019 there were no unrealized losses for individual HTM securities. As of December 31, 2018 there were no issues of individual HTM securities that had been in a continuous loss position for more than 12 months.

The following table presents the amortized cost and estimated fair value of HTM securities as of September 30, 2019 and December 31, 2018, by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2019				December 31, 2018
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
Due in one year or less	$	504	$	507	$	—	$	—
Due after one year through five years		8,934		9,165		3,893		3,900
Due after five years through ten years		3,160		3,247		3,480		3,507
Due after ten years		543,981		594,797		484,899		492,094
Total HTM securities	$	556,579	$	607,716	$	492,272	$	499,501

Refer to Note 8 "Commitments and Contingencies" for information regarding the estimated fair value of HTM securities that were pledged to secure public deposits as permitted or required by law as of September 30, 2019 and December 31, 2018.

Restricted Stock, at cost

Due to restrictions placed upon the Bank’s common stock investment in the Federal Reserve Bank and FHLB, these securities have been classified as restricted equity securities and carried at cost. These restricted securities are not subject to the investment security classifications and are included as a separate line item on the Company’s Consolidated Balance Sheets. At September 30, 2019 and December 31, 2018, the FHLB required the Bank to maintain stock in an amount equal to 4.25% of outstanding borrowings and a specific percentage of the Bank’s total assets. The Federal Reserve Bank required the Bank to maintain stock with a par value equal to 6% of the Bank’s outstanding capital at both September 30, 2019 and December 31, 2018. Restricted equity securities consist of Federal Reserve Bank stock in the

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amount of $67.0 million and $52.6 million for September 30, 2019 and December 31, 2018 and FHLB stock in the amount of $65.4 million and $72.0 million as of September 30, 2019 and December 31, 2018, respectively.

Other-Than-Temporary-Impairment

During each quarter, the Company conducts an assessment of the securities portfolio for OTTI consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis. An impairment is other-than-temporary if any of the following conditions exist: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss. Based on the assessment for the three and nine months ended September 30, 2019, and in accordance with accounting guidance, no OTTI was recognized.

Realized Gains and Losses

The following table presents the gross realized gains and losses on and the proceeds from the sale of securities during the three and nine months ended September 30, 2019 and 2018 (dollars in thousands).


	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Realized gains (losses):
Gross realized gains	$	7,104	$	9,161
Gross realized losses		—		(1,855)
Net realized gains	$	7,104	$	7,306

Proceeds from sales of securities	$	98,975	$	486,925


	Three Months Ended		Nine Months Ended
	September 30, 2018		September 30, 2018
Realized gains (losses):
Gross realized gains	$	97	$	2,890
Gross realized losses		—		(2,668)
Net realized gains	$	97	$	222

Proceeds from sales of securities	$	27,593	$	337,109

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4. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are stated at their face amount, net of deferred fees and costs, and consist of the following at September 30, 2019 and December 31, 2018 (dollars in thousands):


	September 30, 2019		December 31, 2018
Construction and Land Development	$	1,201,149	$	1,194,821
Commercial Real Estate - Owner Occupied		1,979,052		1,337,345
Commercial Real Estate - Non-Owner Occupied		3,198,580		2,467,410
Multifamily Real Estate		659,946		548,231
Commercial & Industrial		2,058,133		1,317,135
Residential 1-4 Family - Commercial		721,185		640,419
Residential 1-4 Family - Consumer		913,245		673,909
Auto		328,456		301,943
HELOC		660,963		613,383
Consumer		386,848		379,694
Other Commercial		199,440		241,917
Total loans held for investment, net ⁽¹⁾	$	12,306,997	$	9,716,207

(1)	Loans, as presented, are net of deferred fees and costs totaling $8.1 million and $5.1 million as of September 30, 2019 and December 31, 2018, respectively.

The following table shows the aging of the Company’s loan portfolio, by segment, at September 30, 2019 (dollars in thousands):


					Greater than
	30-59 Days		60-89 Days		90 Days and
	Past Due		Past Due		still Accruing		PCI		Nonaccrual		Current		Total Loans
Construction and Land Development	$	1,062	$	351	$	171	$	8,387	$	7,785	$	1,183,393	$	1,201,149
Commercial Real Estate - Owner Occupied		4,977		—		2,571		27,817		5,684		1,938,003		1,979,052
Commercial Real Estate - Non-Owner Occupied		5,757		1,878		36		17,285		381		3,173,243		3,198,580
Multifamily Real Estate		107		164		1,212		93		—		658,370		659,946
Commercial & Industrial		2,079		1,946		265		3,262		1,585		2,048,996		2,058,133
Residential 1-4 Family - Commercial		1,842		3,081		916		12,237		3,879		699,230		721,185
Residential 1-4 Family - Consumer		1,527		5,182		3,815		14,977		8,292		879,452		913,245
Auto		1,787		407		183		7		604		325,468		328,456
HELOC		4,965		1,747		1,674		4,275		1,641		646,661		660,963
Consumer		2,000		1,666		1,163		682		84		381,253		386,848
Other Commercial		579		9		30		713		97		198,012		199,440
Total loans held for investment	$	26,682	$	16,431	$	12,036	$	89,735	$	30,032	$	12,132,081	$	12,306,997

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The following table shows the aging of the Company’s loan portfolio, by segment, at December 31, 2018 (dollars in thousands):


					Greater than
	30-59 Days		60-89 Days		90 Days and
	Past Due		Past Due		still Accruing		PCI		Nonaccrual		Current		Total Loans
Construction and Land Development	$	759	$	6	$	180	$	8,654	$	8,018	$	1,177,204	$	1,194,821
Commercial Real Estate - Owner Occupied		8,755		1,142		3,193		25,644		3,636		1,294,975		1,337,345
Commercial Real Estate - Non-Owner Occupied		338		41		—		17,335		1,789		2,447,907		2,467,410
Multifamily Real Estate		—		146		—		88		—		547,997		548,231
Commercial & Industrial		3,353		389		132		2,156		1,524		1,309,581		1,317,135
Residential 1-4 Family - Commercial		6,619		1,577		1,409		13,601		2,481		614,732		640,419
Residential 1-4 Family - Consumer		12,049		5,143		2,437		16,872		7,276		630,132		673,909
Auto		3,320		403		195		7		576		297,442		301,943
HELOC		4,611		1,644		440		5,115		1,518		600,055		613,383
Consumer		1,504		1,096		870		32		135		376,057		379,694
Other Commercial		126		—		—		717		—		241,074		241,917
Total loans held for investment	$	41,434	$	11,587	$	8,856	$	90,221	$	26,953	$	9,537,156	$	9,716,207

The following table shows the PCI loan portfolios, by segment and their delinquency status, at September 30, 2019 (dollars in thousands):


	30-89 Days		Greater than
	Past Due		90 Days		Current		Total
Construction and Land Development	$	126	$	399	$	7,862	$	8,387
Commercial Real Estate - Owner Occupied		526		3,262		24,029		27,817
Commercial Real Estate - Non-Owner Occupied		137		980		16,168		17,285
Multifamily Real Estate		—		—		93		93
Commercial & Industrial		—		1,043		2,219		3,262
Residential 1-4 Family - Commercial		421		479		11,337		12,237
Residential 1-4 Family - Consumer		844		1,912		12,221		14,977
Auto		—		—		7		7
HELOC		208		287		3,780		4,275
Consumer		4		15		663		682
Other Commercial		—		—		713		713
Total	$	2,266	$	8,377	$	79,092	$	89,735

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The following table shows the PCI loan portfolios, by segment and their delinquency status, at December 31, 2018 (dollars in thousands):


	30-89 Days		Greater than
	Past Due		90 Days		Current		Total
Construction and Land Development	$	108	$	1,424	$	7,122	$	8,654
Commercial Real Estate - Owner Occupied		658		4,281		20,705		25,644
Commercial Real Estate - Non-Owner Occupied		61		1,810		15,464		17,335
Multifamily Real Estate		—		—		88		88
Commercial & Industrial		47		1,092		1,017		2,156
Residential 1-4 Family - Commercial		871		3,454		9,276		13,601
Residential 1-4 Family - Consumer		1,959		2,422		12,491		16,872
Auto		—		—		7		7
HELOC		498		252		4,365		5,115
Consumer		5		9		18		32
Other Commercial		57		—		660		717
Total	$	4,264	$	14,744	$	71,213	$	90,221

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The Company measures the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. The following table shows the Company’s impaired loans, excluding PCI loans, by segment at September 30, 2019 and December 31, 2018 (dollars in thousands):


	September 30, 2019						December 31, 2018
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
Loans without a specific allowance
Construction and Land Development	$	9,776	$	14,131	$	—	$	10,290	$	12,038	$	—
Commercial Real Estate - Owner Occupied		9,362		9,966		—		8,386		9,067		—
Commercial Real Estate - Non-Owner Occupied		2,028		2,578		—		6,578		6,929		—
Multifamily Real Estate		1,212		1,212		—		—		—		—
Commercial & Industrial		2,205		2,221		—		3,059		3,251		—
Residential 1-4 Family - Commercial		4,330		4,598		—		3,378		3,439		—
Residential 1-4 Family - Consumer		9,432		10,006		—		9,642		10,317		—
HELOC		864		867		—		1,150		1,269		—
Consumer		—		—		—		30		102		—
Other Commercial		—		—		—		478		478		—
Total impaired loans without a specific allowance	$	39,209	$	45,579	$	—	$	42,991	$	46,890	$	—
Loans with a specific allowance
Construction and Land Development	$	829	$	868	$	78	$	372	$	491	$	63
Commercial Real Estate - Owner Occupied		3,570		3,685		234		4,304		4,437		359
Commercial Real Estate - Non-Owner Occupied		336		384		3		391		391		1
Commercial & Industrial		1,783		1,810		866		1,183		1,442		752
Residential 1-4 Family - Commercial		1,763		1,807		170		2,120		2,152		89
Residential 1-4 Family - Consumer		10,047		10,631		805		6,389		6,645		470
Auto		605		905		239		576		830		231
HELOC		1,177		1,312		262		724		807		188
Consumer		180		345		50		178		467		64
Other Commercial		565		569		27		—		—		—
Total impaired loans with a specific allowance	$	20,855	$	22,316	$	2,734	$	16,237	$	17,662	$	2,217
Total impaired loans	$	60,064	$	67,895	$	2,734	$	59,228	$	64,552	$	2,217

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The following tables show the average recorded investment and interest income recognized for the Company’s impaired loans, excluding PCI loans, by segment for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):


	Three Months Ended				Nine Months Ended
	September 30, 2019				September 30, 2019
			Interest				Interest
	Average		Income		Average		Income
	Investment		Recognized		Investment		Recognized
Construction and Land Development	$	13,581	$	40	$	13,601	$	351
Commercial Real Estate - Owner Occupied		13,301		85		13,436		339
Commercial Real Estate - Non-Owner Occupied		2,748		26		3,543		82
Multifamily Real Estate		1,217		15		1,234		46
Commercial & Industrial		3,986		41		4,046		129
Residential 1-4 Family - Commercial		6,334		41		6,521		125
Residential 1-4 Family - Consumer		19,802		75		20,007		264
Auto		691		—		781		9
HELOC		2,125		5		2,242		31
Consumer		184		2		192		5
Other Commercial		570		7		579		21
Total impaired loans	$	64,539	$	337	$	66,182	$	1,402


	Three Months Ended				Nine Months Ended
	September 30, 2018				September 30, 2018
			Interest				Interest
	Average		Income		Average		Income
	Investment		Recognized		Investment		Recognized
Construction and Land Development	$	12,481	$	63	$	12,083	$	203
Commercial Real Estate - Owner Occupied		11,873		102		11,966		322
Commercial Real Estate - Non-Owner Occupied		6,932		57		7,141		175
Commercial & Industrial		2,607		15		2,713		57
Residential 1-4 Family - Commercial		4,233		29		4,322		105
Residential 1-4 Family - Consumer		16,570		48		16,693		162
Auto		609		—		685		12
HELOC		1,800		4		1,871		14
Consumer		180		—		218		—
Other Commercial		509		7		538		22
Total impaired loans	$	57,794	$	325	$	58,230	$	1,072

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The Company considers TDRs to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession that it would not otherwise consider to the borrower for economic or legal reasons related to the borrower’s financial difficulties. All loans that are considered to be TDRs are evaluated for impairment in accordance with the Company’s allowance for loan loss methodology and are included in the preceding impaired loan tables. For the three and nine months ended September 30, 2019, the recorded investment in TDRs prior to modifications was not materially impacted by the modifications.

The following table provides a summary, by segment, of TDRs that continue to accrue interest under the terms of the applicable restructuring agreement, which are considered to be performing, and TDRs that have been placed on nonaccrual status, which are considered to be nonperforming, as of September 30, 2019 and December 31, 2018 (dollars in thousands):


	September 30, 2019					December 31, 2018
	No. of	Recorded		Outstanding		No. of	Recorded		Outstanding
	Loans	Investment		Commitment		Loans	Investment		Commitment
Performing
Construction and Land Development	4	$	1,130	$	—	5	$	2,496	$	—
Commercial Real Estate - Owner Occupied	6		2,228		—	8		2,783		—
Commercial Real Estate - Non-Owner Occupied	1		1,089		—	4		4,438		—
Commercial & Industrial	5		1,123		—	4		978		—
Residential 1-4 Family - Commercial	5		293		—	8		1,075		—
Residential 1-4 Family - Consumer	64		8,738		—	52		6,882		—
HELOC	2		56		—	2		58		—
Consumer	4		31		—	1		13		—
Other Commercial	1		468		—	1		478		—
Total performing	92	$	15,156	$	—	85	$	19,201	$	—
Nonperforming
Construction and Land Development	—	$	—	$	—	2	$	3,474	$	—
Commercial Real Estate - Owner Occupied	2		180		—	2		198		—
Commercial & Industrial	1		56		—	6		461		—
Residential 1-4 Family - Commercial	—		—		—	1		60		—
Residential 1-4 Family - Consumer	18		3,288		—	15		3,135		—
HELOC	2		58		—	2		62		—
Consumer	—		—		—	1		7		—
Total nonperforming	23	$	3,582	$	—	29	$	7,397	$	—
Total performing and nonperforming	115	$	18,738	$	—	114	$	26,598	$	—

The Company considers a default of a TDR to occur when the borrower is 90 days past due following the restructure or a foreclosure and repossession of the applicable collateral occurs. During the three and nine months ended September 30, 2019 and 2018, the Company did not have any material loans that went into default that had been restructured in the twelve-month period prior to the time of default.

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The following table shows, by segment and modification type, TDRs that occurred during the three and nine months ended September 30, 2019 (dollars in thousands):


	All Restructurings
	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
		Recorded			Recorded
	No. of	Investment at		No. of	Investment at
	Loans	Period End		Loans	Period End
Modified to interest only, at a market rate
Total interest only at market rate of interest	—	$	—	—	$	—

Term modification, at a market rate
Commercial & Industrial	1	$	376	1	$	376
Residential 1-4 Family - Commercial	—		—	1		73
Residential 1-4 Family - Consumer	1		461	4		761
Consumer	2		18	3		26
Total loan term extended at a market rate	4	$	855	9	$	1,236

Term modification, below market rate
Construction and Land Development	2	$	164	2	$	164
Residential 1-4 Family - Consumer	5		883	17		2,211
Consumer	—		—	1		5
Total loan term extended at a below market rate	7	$	1,047	20	$	2,380

Total	11	$	1,902	29	$	3,616

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The following table shows, by segment and modification type, TDRs that occurred during the three and nine months ended September 30, 2018 (dollars in thousands):


	All Restructurings
	Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018
		Recorded			Recorded
	No. of	Investment at		No. of	Investment at
	Loans	Period End		Loans	Period End
Modified to interest only, at a market rate
Total interest only at market rate of interest	—	$	—	—	$	—

Term modification, at a market rate
Construction and Land Development	2	$	3,545	4	$	4,809
Commercial Real Estate - Owner Occupied	—		—	5		1,371
Commercial Real Estate - Non-Owner Occupied	1		1,089	1		1,089
Commercial & Industrial	2		278	3		339
Residential 1-4 Family - Commercial	—		—	1		71
Residential 1-4 Family - Consumer	—		—	6		759
Consumer	1		14	1		14
Total loan term extended at a market rate	6	$	4,926	21	$	8,452

Term modification, below market rate
Commercial Real Estate - Non-Owner Occupied	1	$	2,782	1	$	2,782
Residential 1-4 Family - Consumer	9		1,598	16		2,612
HELOC	2		46	2		46
Total loan term extended at a below market rate	12	$	4,426	19	$	5,440

Total	18	$	9,352	40	$	13,892

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The following tables show the ALL activity by segment for the nine months ended September 30, 2019 and 2018. The tables below include the provision for loan losses. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories (dollars in thousands):


	Nine Months Ended September 30, 2019
	Allowance for loan losses
	Balance,		Recoveries		Loans		Provision		Balance,
	beginning of		credited to		charged		charged to		end of
	the year		allowance		off		operations		period
Construction and Land Development	$	6,803	$	269	$	(4,028)	$	2,863	$	5,907
Commercial Real Estate - Owner Occupied		4,023		118		(483)		361		4,019
Commercial Real Estate - Non-Owner Occupied		8,865		95		(270)		996		9,686
Multifamily Real Estate		649		85		—		46		780
Commercial & Industrial		7,636		936		(2,162)		2,739		9,149
Residential 1-4 Family - Commercial		1,692		244		(397)		50		1,589
Residential 1-4 Family - Consumer		1,492		256		(108)		158		1,798
Auto		1,443		452		(957)		614		1,552
HELOC		1,297		589		(570)		(179)		1,137
Consumer and all other⁽¹⁾		7,145		1,896		(12,215)		11,377		8,203
Total	$	41,045	$	4,940	$	(21,190)	$	19,025	$	43,820

⁽¹⁾Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.


	Nine Months Ended September 30, 2018
	Allowance for loan losses
	Balance,		Recoveries		Loans		Provision		Balance,
	beginning of		credited to		charged		charged to		end of
	the year		allowance		off		operations		period
Construction and Land Development	$	9,709	$	400	$	(703)	$	(1,218)	$	8,188
Commercial Real Estate - Owner Occupied		2,931		488		(174)		(300)		2,945
Commercial Real Estate - Non-Owner Occupied		7,544		82		(94)		806		8,338
Multifamily Real Estate		1,092		5		—		525		1,622
Commercial & Industrial		4,552		413		(692)		2,429		6,702
Residential 1-4 Family - Commercial		4,437		306		(137)		(2,512)		2,094
Residential 1-4 Family - Consumer		1,524		235		(640)		770		1,889
Auto		975		365		(759)		760		1,341
HELOC		1,360		554		(488)		(70)		1,356
Consumer and all other⁽¹⁾		4,084		1,234		(6,412)		7,913		6,819
Total	$	38,208	$	4,082	$	(10,099)	$	9,103	$	41,294

⁽¹⁾Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.

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The following tables show the loan and ALL balances based on impairment methodology by segment as of September 30, 2019 and December 31, 2018 (dollars in thousands):


	September 30, 2019
	Loans individually				Loans collectively				Loans acquired with
	evaluated for				evaluated for				deteriorated credit
	impairment				impairment				quality				Total
	Loans		ALL		Loans		ALL		Loans		ALL		Loans		ALL
Construction and Land Development	$	10,605	$	78	$	1,182,157	$	5,829	$	8,387	$	—	$	1,201,149	$	5,907
Commercial Real Estate - Owner Occupied		12,932		234		1,938,303		3,785		27,817		—		1,979,052		4,019
Commercial Real Estate - Non-Owner Occupied		2,364		3		3,178,931		9,683		17,285		—		3,198,580		9,686
Multifamily Real Estate		1,212		—		658,641		780		93		—		659,946		780
Commercial & Industrial		3,988		866		2,050,883		8,066		3,262		217		2,058,133		9,149
Residential 1-4 Family - Commercial		6,093		170		702,855		1,419		12,237		—		721,185		1,589
Residential 1-4 Family - Consumer		19,479		805		878,789		993		14,977		—		913,245		1,798
Auto		605		239		327,844		1,313		7		—		328,456		1,552
HELOC		2,041		262		654,647		875		4,275		—		660,963		1,137
Consumer and all other⁽¹⁾		745		77		584,148		8,126		1,395		—		586,288		8,203
Total loans held for investment, net	$	60,064	$	2,734	$	12,157,198	$	40,869	$	89,735	$	217	$	12,306,997	$	43,820

⁽¹⁾Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.

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	December 31, 2018
	Loans individually				Loans collectively				Loans acquired with
	evaluated for				evaluated for				deteriorated credit
	impairment				impairment				quality				Total
	Loans		ALL		Loans		ALL		Loans		ALL		Loans		ALL
Construction and Land Development	$	10,662	$	63	$	1,175,505	$	6,740	$	8,654	$	—	$	1,194,821	$	6,803
Commercial Real Estate - Owner Occupied		12,690		359		1,299,011		3,664		25,644		—		1,337,345		4,023
Commercial Real Estate - Non-Owner Occupied		6,969		1		2,443,106		8,864		17,335		—		2,467,410		8,865
Multifamily Real Estate		—		—		548,143		649		88		—		548,231		649
Commercial & Industrial		4,242		752		1,310,737		6,884		2,156		—		1,317,135		7,636
Residential 1-4 Family - Commercial		5,498		89		621,320		1,603		13,601		—		640,419		1,692
Residential 1-4 Family - Consumer		16,031		470		641,006		1,022		16,872		—		673,909		1,492
Auto		576		231		301,360		1,212		7		—		301,943		1,443
HELOC		1,874		188		606,394		1,109		5,115		—		613,383		1,297
Consumer and all other⁽¹⁾		686		64		620,176		7,081		749		—		621,611		7,145
Total loans held for investment, net	$	59,228	$	2,217	$	9,566,758	$	38,828	$	90,221	$	—	$	9,716,207	$	41,045

⁽¹⁾Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.

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The Company uses a risk rating system and past due status as the primary credit quality indicators for the loan categories. The risk rating system on a scale of 0 through 9 is used to determine risk level as used in the calculation of the ALL; on those loans without a risk rating, the Company uses past due status to determine risk level. The risk levels, as described below, do not necessarily follow the regulatory definitions of risk levels with the same name. A general description of the characteristics of the risk levels follows:

Pass is determined by the following criteria:

●

Risk rated 0 loans have little or no risk and are with General Obligation Municipal Borrowers;

●

Risk rated 1 loans have little or no risk and are generally secured by cash or cash equivalents;

●

Risk rated 2 loans have minimal risk to well qualified borrowers and no significant questions as to safety;

●

Risk rated 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;

●

Risk rated 4 loans are satisfactory loans with borrowers not as strong as risk rated 3 loans and may exhibit a greater degree of financial risk based on the type of business supporting the loan; or

●

Loans that are not risk rated but that are 0 to 29 days past due.

Watch & Special Mention is determined by the following criteria:

●

Risk rated 5 loans are watch loans that warrant more than the normal level of supervision and have the possibility of an event occurring that may weaken the borrower’s ability to repay;

●

Risk rated 6 loans have increasing potential weaknesses beyond those at which the loan originally was granted and if not addressed could lead to inadequately protecting the Company’s credit position; or

●

Loans that are not risk rated but that are 30 to 89 days past due.

Substandard is determined by the following criteria:

●

Risk rated 7 loans are substandard loans and are inadequately protected by the current sound worth or paying capacity of the obligor or the collateral pledged; these have well defined weaknesses that jeopardize the liquidation of the debt with the distinct possibility the Company will sustain some loss if the deficiencies are not corrected; or

●

Loans that are not risk rated but that are 90 to 149 days past due.

Doubtful is determined by the following criteria:

●

Risk rated 8 loans are doubtful of collection and the possibility of loss is high but pending specific borrower plans for recovery, its classification as a loss is deferred until its more exact status is determined;

●

Risk rated 9 loans are loss loans which are considered uncollectable and of such little value that their continuance as bankable assets is not warranted; or

●

Loans that are not risk rated but that are over 149 days past due.

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The following table shows the recorded investment in all loans, excluding PCI loans, by segment with their related risk level as of September 30, 2019 (dollars in thousands):


	Pass		Watch & Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	1,148,732	$	33,136	$	10,894	$	—	$	1,192,762
Commercial Real Estate - Owner Occupied		1,850,909		78,451		21,730		145		1,951,235
Commercial Real Estate - Non-Owner Occupied		3,124,018		54,884		2,297		96		3,181,295
Multifamily Real Estate		645,193		13,448		1,212		—		659,853
Commercial & Industrial		1,949,546		99,337		5,988		—		2,054,871
Residential 1-4 Family - Commercial		679,023		22,772		7,153		—		708,948
Residential 1-4 Family - Consumer		871,391		4,584		22,293		—		898,268
Auto		324,396		1,990		2,063		—		328,449
HELOC		644,019		6,529		6,140		—		656,688
Consumer		384,744		1,182		240		—		386,166
Other Commercial		196,511		2,057		159		—		198,727
Total	$	11,818,482	$	318,370	$	80,169	$	241	$	12,217,262

The following table shows the recorded investment in all loans, excluding PCI loans, by segment with their related risk level as of December 31, 2018 (dollars in thousands):


	Pass		Watch & Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	1,130,577	$	43,894	$	11,696	$	—	$	1,186,167
Commercial Real Estate - Owner Occupied		1,231,422		50,939		29,340		—		1,311,701
Commercial Real Estate - Non-Owner Occupied		2,425,500		17,648		6,927		—		2,450,075
Multifamily Real Estate		537,572		10,571		—		—		548,143
Commercial & Industrial		1,273,549		34,864		6,566		—		1,314,979
Residential 1-4 Family - Commercial		606,955		14,876		4,987		—		626,818
Residential 1-4 Family - Consumer		624,346		17,065		15,626		—		657,037
Auto		296,907		3,590		1,439		—		301,936
HELOC		598,444		6,316		3,508		—		608,268
Consumer		378,873		547		242		—		379,662
Other Commercial		239,857		864		479		—		241,200
Total	$	9,344,002	$	201,174	$	80,810	$	—	$	9,625,986

The following table shows the recorded investment in only PCI loans by segment with their related risk level as of September 30, 2019 (dollars in thousands):


	Pass		Watch & Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	1,233	$	3,993	$	3,161	$	—	$	8,387
Commercial Real Estate - Owner Occupied		8,273		10,845		8,699		—		27,817
Commercial Real Estate - Non-Owner Occupied		3,855		9,533		3,897		—		17,285
Multifamily Real Estate		—		93		—		—		93
Commercial & Industrial		115		57		3,090		—		3,262
Residential 1-4 Family - Commercial		6,490		2,780		2,967		—		12,237
Residential 1-4 Family - Consumer		10,074		233		4,670		—		14,977
Auto		3		—		4		—		7
HELOC		3,092		607		576		—		4,275
Consumer		660		4		18		—		682
Other Commercial		122		591		—		—		713
Total	$	33,917	$	28,736	$	27,082	$	—	$	89,735

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The following table shows the recorded investment in only PCI loans by segment with their related risk level as of December 31, 2018 (dollars in thousands):


	Pass		Watch & Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	1,835	$	1,308	$	5,511	$	—	$	8,654
Commercial Real Estate - Owner Occupied		8,347		6,685		10,612		—		25,644
Commercial Real Estate - Non-Owner Occupied		4,789		7,992		4,554		—		17,335
Multifamily Real Estate		—		88		—		—		88
Commercial & Industrial		762		134		1,260		—		2,156
Residential 1-4 Family - Commercial		6,476		2,771		4,354		—		13,601
Residential 1-4 Family - Consumer		9,930		1,030		5,912		—		16,872
Auto		7		—		—		—		7
HELOC		3,438		1,031		646		—		5,115
Consumer		17		—		15		—		32
Other Commercial		57		660		—		—		717
Total	$	35,658	$	21,699	$	32,864	$	—	$	90,221

Loans acquired are originally recorded at fair value, with certain loans being identified as impaired at the date of purchase. The fair values were determined based on the credit quality of the portfolio, expected future cash flows, and timing of those expected future cash flows.

The following shows changes in the accretable yield for loans accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality, for the periods presented (dollars in thousands):


	For the Nine Months Ended September 30,
	2019		2018
Balance at beginning of period	$	31,201	$	14,563
Additions		2,432		12,225
Accretion		(9,830)		(6,666)
Reclass of nonaccretable difference due to improvement in expected cash flows		1,372		360
Measurement period adjustment		2,629		2,981
Other, net ⁽¹⁾		5,083		1,845
Balance at end of period	$	32,887	$	25,308

(1)	This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate PCI loans, and discounted payoffs that occurred in the quarter.

The carrying value of the Company’s PCI loan portfolio, accounted for under ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality, totaled $89.7 million at September 30, 2019 and $90.2 million at December 31, 2018. The outstanding balance of the Company’s PCI loan portfolio totaled $113.8 million at September 30, 2019 and $113.5 million at December 31, 2018. The carrying value of the Company’s acquired performing loan portfolio, accounted for under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, totaled $3.3 billion at September 30, 2019 and $2.0 billion at December 31, 2018; the remaining discount on these loans totaled $54.1 million at September 30, 2019 and $30.3 million at December 31, 2018.

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5. INTANGIBLE ASSETS

The Company’s intangible assets consist of core deposits, goodwill, and other intangibles arising from acquisitions. The Company has determined that core deposit intangibles have finite lives and amortizes them over their estimated useful lives. Core deposit intangibles are being amortized over the period of expected benefit, which ranges from 5 to 10 years, using an accelerated method. Other amortizable intangible assets are being amortized over the period of expected benefit, which ranges from 5 to 10 years, using various methods. Refer to Note 2 "Acquisitions" for further information regarding intangible assets.

In accordance with ASC 350, Intangibles-Goodwill and Other, the Company reviews the carrying value of indefinite lived intangible assets at least annually or more frequently if certain impairment indicators exist. The Company performed its annual impairment testing in the second quarter of 2019 and determined that there was no impairment to its goodwill or intangible assets. In the second quarter of 2018 the Company wrote off goodwill in the amount of $864,000 in connection with the wind down of UMG, which is included in discontinued operations.

Amortization expense of intangibles for the three and nine months ended September 30, 2019 totaled $4.8 million and $13.9 million, respectively; and for the three and nine months ended September 30, 2018 totaled $3.5 million and $9.9 million, respectively.

As of September 30, 2019, the estimated remaining amortization expense of intangibles is as follows for the years ending (dollars in thousands):


For the remaining three months of 2019	$	4,573
2020		16,483
2021		13,874
2022		11,490
2023		9,687
Thereafter		22,134
Total estimated amortization expense	$	78,241

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6. LEASES

The Company leases branch locations, office space, land, and equipment. The Company determines if an arrangement is a lease at inception. As of September 30, 2019, all leases have been classified as operating leases with approximately 160 non-cancellable operating leases where the Company is the lessee. The Company does not have any material arrangements where the Company is the lessor or in a sublease contract.

Leases where the Company is a lessee are primarily for real estate leases with remaining lease terms of up to 30 years. The Company’s real estate lease agreements do not contain residual value guarantees and most agreements do not contain restrictive covenants. At September 30, 2019, the total ROU Asset was $57.0 million and total operating lease liabilities were $68.8 million. Total operating lease expenses for the three and nine months ended September 30, 2019 were $2.9 million and $8.9 million, respectively.

Operating leases have been reported on the Company’s Consolidated Balance Sheets as an operating ROU Asset within Other Assets and an operating lease liability within Other Liabilities. The ROU Asset represents the Company’s right to use an underlying asset over the course of the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments, discounted using the incremental borrowing rate. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating ROU Asset is recognized at commencement date based on the initial measurement of the lease liability, any lease payments made excluding lease incentives, and any initial direct costs incurred.

Total lease expenses are recorded in Occupancy Expense within noninterest expense on the Company’s Consolidated Statement of Income. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Most of the Company’s leases include one or more options to renew, however, the Company is not reasonably certain to exercise those options and therefore does not include the renewal options in the measurement of the ROU Asset and lease liabilities

As of September 30, 2019, the Company had no material operating leases that have not yet commenced that create significant rights and obligations, and no sales leaseback transactions.

Maturities of operating lease liabilities as of September 30, 2019 are as follows for the years ending (dollars in thousands):


For the remaining three months of 2019	$	3,335
2020		12,392
2021		10,713
2022		9,934
2023		9,022
2024		7,741
Thereafter		19,588
Total future lease payments		72,725
Less: Interest		3,917
Present value of lease liabilities	$	68,808

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Other lease information is as follows (dollars in thousands):


	September 30, 2019
Lease Term and Discount Rate of Operating leases:
Weighted-average remaining lease term (years)		8.56
Weighted-average discount rate ⁽¹⁾		2.78	%
Cash paid for amounts included in measurement of lease liabilities:
Operating Cash Flows from Operating Leases	$	10,327
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		5,979

(1)	An incremental borrowing rate is used based on information available at commencement date of lease.

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7. BORROWINGS

Short-term Borrowings

The Company classifies all borrowings that will mature within a year from the date on which the Company enters into them as short-term borrowings. Total short-term borrowings consist primarily of advances from the FHLB, federal funds purchased (which are secured overnight borrowings from other financial institutions), and other lines of credit. Also included in total short-term borrowings are securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the date sold.

Total short-term borrowings consist of the following as of September 30, 2019 and December 31, 2018 (dollars in thousands):


	September 30,			December 31,
	2019			2018
Securities sold under agreements to repurchase	$	67,260		$	39,197
Federal Funds Purchased		—			—
FHLB Advances		344,600			1,043,600
Other short-term borrowings		—			5,000
Total short-term borrowings	$	411,860		$	1,087,797

Maximum month-end outstanding balance	$	509,949		$	1,087,797
Average outstanding balance during the period		804,644			968,014
Average interest rate (during the period)		2.38	%		1.91	%
Average interest rate at end of period		1.97	%		2.43	%

The Bank maintains federal funds lines with several correspondent banks, the remaining available balance of which was $647.0 million and $382.0 million at September 30, 2019 and December 31, 2018, respectively. The Company maintains an alternate line of credit at a correspondent bank, the available balance of which was $25.0 million at both September 30, 2019 and December 31, 2018. The Company has certain restrictive covenants related to certain asset quality, capital, and profitability metrics associated with these lines and is considered to be in compliance with such covenants as of September 30, 2019. Additionally, the Company had a collateral dependent line of credit with the FHLB of up to $5.1 billion and $4.0 billion at September 30, 2019 and December 31, 2018, respectively.

Long-term Borrowings

In connection with several previous bank acquisitions, the Company issued and acquired trust preferred capital notes of $58.5 million and $87.0 million, respectively. Most recently, in connection with the acquisition of Access on February 1, 2019, the Company acquired additional trust preferred capital notes totaling $5.0 million. The remaining fair value discount on all acquired trust preferred capital notes was $15.1 million at September 30, 2019.

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The trust preferred capital notes currently qualify for Tier 2 capital of the Company for regulatory purposes. Trust preferred capital notes consist of the following as of September 30, 2019:


	Trust
	Preferred
	Capital				Spread to
	Securities ⁽¹⁾		Investment ⁽¹⁾		3-Month LIBOR		Rate ⁽²⁾		Maturity
Trust Preferred Capital Note - Statutory Trust I	$	22,500,000	$	696,000	2.75	%	4.84	%	6/17/2034
Trust Preferred Capital Note - Statutory Trust II		36,000,000		1,114,000	1.40	%	3.49	%	6/15/2036
VFG Limited Liability Trust I Indenture		20,000,000		619,000	2.73	%	4.82	%	3/18/2034
FNB Statutory Trust II Indenture		12,000,000		372,000	3.10	%	5.19	%	6/26/2033
Gateway Capital Statutory Trust I		8,000,000		248,000	3.10	%	5.19	%	9/17/2033
Gateway Capital Statutory Trust II		7,000,000		217,000	2.65	%	4.74	%	6/17/2034
Gateway Capital Statutory Trust III		15,000,000		464,000	1.50	%	3.59	%	5/30/2036
Gateway Capital Statutory Trust IV		25,000,000		774,000	1.55	%	3.64	%	7/30/2037
MFC Capital Trust II		5,000,000		155,000	2.85	%	4.94	%	1/23/2034
Total	$	150,500,000	$	4,659,000

(1)

The total of the trust preferred capital securities and investments in the respective trusts represents the principal asset of the Company’s junior subordinated debt securities with like maturities and like interest rates to the capital securities. The Company’s investment in the trusts is reported in "Other Assets" on the Company’s Consolidated Balance Sheets.

(2)	Rate as of September 30, 2019.

During the fourth quarter of 2016, the Company issued $150.0 million of fixed-to-floating rate subordinated notes with an initial fixed interest rate of 5.00% through December 15, 2021. The interest rate then changes to a floating rate of LIBOR plus 3.175% through its maturity date on December 15, 2026. In connection with the acquisition of Xenith on January 1, 2018, the Company acquired $8.5 million of subordinated notes with a fair value premium of $259,000, which was $77,000 at September 30, 2019. The acquired subordinated notes have a fixed interest rate of 6.75% and a maturity date of June 30, 2025. At September 30, 2019 and December 31, 2018, the contractual principal reported for subordinated notes was $158.5 million; remaining issuance discount as of September 30, 2019 and December 31, 2018 is $1.4 million and $1.6 million, respectively. The subordinated notes qualify as Tier 2 capital for the Company for regulatory purposes. The Company has certain restrictive covenants related to certain asset quality, capital, and profitability metrics associated with the acquired subordinated notes and is considered to be in compliance with these covenants as of September 30, 2019.

On August 23, 2012, the Company modified its fixed rate FHLB advances to floating rate advances, which resulted in reducing the Company’s FHLB borrowing costs. In connection with this modification, the Company incurred a prepayment penalty of $19.6 million on the original advances. On August 29, 2019, the Company repaid the floating rate FHLB advances. In connection with this repayment, the remaining unamortized prepayment penalty of $7.4 million was immediately recognized as a component of noninterest expense.

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As of September 30, 2019, the Company had long-term advances from the FHLB consisting of the following (dollars in thousands):


	Spread to
	3-Month		Interest
Long-term Type	LIBOR		Rate ⁽¹⁾		Maturity Date	Advance Amount
Convertible Flipper	(0.75)	%	1.34	%	8/17/2029	$	50,000
Convertible Flipper	(0.50)	%	1.59	%	5/15/2024		200,000
Convertible Flipper	(0.75)	%	1.34	%	5/22/2029		150,000
Convertible Flipper	(0.75)	%	1.34	%	5/30/2029		50,000
Convertible Flipper	(0.75)	%	1.34	%	6/21/2029		100,000
Fixed Rate Convertible	-		1.78	%	10/26/2028		200,000
Fixed Rate Hybrid	-		2.37	%	10/10/2019		25,000
Fixed Rate Hybrid	-		1.58	%	5/18/2020		20,000
Fixed Rate Hybrid	-		2.65	%	10/24/2019		25,000
Fixed Rate Credit	-		1.54	%	10/2/2020		10,000
Fixed Rate Credit	-		1.32	%	10/2/2019		10,000
						$	840,000

(1)	Interest rates calculated using non-rounded numbers.

As of December 31, 2018, the Company had long-term advances from the FHLB consisting of the following (dollars in thousands):


	Spread to
	3-Month		Interest
Long-term Type	LIBOR		Rate ⁽¹⁾		Maturity Date	Advance Amount
Adjustable Rate Credit	0.44	%	3.25	%	8/23/2022	$	55,000
Adjustable Rate Credit	0.45	%	3.26	%	11/23/2022		65,000
Adjustable Rate Credit	0.45	%	3.26	%	11/23/2022		10,000
Adjustable Rate Credit	0.45	%	3.26	%	11/23/2022		10,000
Fixed Rate Convertible	-		1.78	%	10/26/2028		200,000
Fixed Rate Hybrid	-		2.37	%	10/10/2019		25,000
Fixed Rate Hybrid	-		1.58	%	5/18/2020		20,000
						$	385,000

(1)	Interest rates calculated using non-rounded numbers.

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For information on the carrying value of loans and securities pledged as collateral on FHLB advances as of September 30, 2019 and December 31, 2018, refer to Note 8 "Commitments and Contingencies."

As of September 30, 2019, the contractual maturities of long-term debt are as follows for the years ending (dollars in thousands):


	Trust
	Preferred						Fair Value
	Capital		Subordinated		FHLB		Premium		Total Long-term
	Notes		Debt		Advances		(Discount) ⁽¹⁾		Borrowings
For the remaining three months of 2019	$	—	$	—	$	60,000	$	(174)	$	59,826
2020		—		—		30,000		(834)		29,166
2021		—		—		—		(1,008)		(1,008)
2022		—		—		—		(1,030)		(1,030)
2023		—		—		—		(1,053)		(1,053)
Thereafter		155,159		158,500		750,000		(12,239)		1,051,420
Total long-term borrowings	$	155,159	$	158,500	$	840,000	$	(16,338)	$	1,137,321

(1)	Includes discount on issued subordinated notes.

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8. COMMITMENTS AND CONTINGENCIES

Litigation Matters

In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized on the Company’s Consolidated Balance Sheets. The contractual amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk. The Company considers credit losses related to off-balance sheet commitments by undergoing a similar process in evaluating losses for loans that are carried on the balance sheet. The Company considers historical loss rates, current economic conditions, risk ratings, and past due status among other factors in the consideration of whether credit losses are inherent in the Company’s off-balance sheet commitments to extend credit. The Company also records an indemnification reserve that includes balances relating to mortgage loans previously sold based on historical statistics and loss rates. As of September 30, 2019 and December 31, 2018, the Company’s reserves for off-balance sheet credit risk and indemnification were $2.8 million and $1.4 million, respectively. Commitments to extend credit are agreements to lend to customers as long as there are no violations of any conditions established in the contracts. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Letters of credit are conditional commitments issued by the Company to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

The following table presents the balances of commitments and contingencies (dollars in thousands):


	September 30, 2019		December 31, 2018
Commitments with off-balance sheet risk:
Commitments to extend credit ⁽¹⁾	$	4,143,637	$	3,167,085
Standby letters of credit		199,928		167,597
Total commitments with off-balance sheet risk	$	4,343,565	$	3,334,682

(1) Includes unfunded overdraft protection.

The Company must maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. For the final weekly reporting period in the period ended September 30, 2019, the aggregate amount of daily average required reserves was approximately $5.5 million and was satisfied by deposits maintained with the Federal Reserve Bank.

As of September 30, 2019, the Company had approximately $243.7 million in deposits in other financial institutions, of which $133.7 million served as collateral for cash flow and loan swap derivatives. The Company had approximately $107.5 million in deposits in other financial institutions that were uninsured at September 30, 2019. At least annually, the Company’s management evaluates the loss risk of its uninsured deposits in financial counterparties.

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For asset/liability management purposes, the Company uses interest rate swap agreements to hedge various exposures or to modify the interest rate characteristics of various balance sheet accounts. Refer to Note 9 “Derivatives” for additional information.

As part of the Company’s liquidity management strategy, it pledges collateral to secure various financing and other activities that occur during the normal course of business. The following tables present the types of collateral pledged, at September 30, 2019 and December 31, 2018 (dollars in thousands):


	Pledged Assets as of September 30, 2019
			AFS		HTM
	Cash		Securities ⁽¹⁾		Securities ⁽¹⁾		Loans ⁽²⁾		Total
Public deposits	$	—	$	474,155	$	291,865	$	—	$	766,020
Repurchase agreements		—		81,419		7,633		—		89,052
FHLB advances		—		65,329		—		3,828,487		3,893,816
Derivatives		133,679		1,433		—		—		135,112
Fed Funds		—		—		—		263,604		263,604
Other purposes		—		126,213		10,772		—		136,985
Total pledged assets	$	133,679	$	748,549	$	310,270	$	4,092,091	$	5,284,589

(1) Balance represents market value.
(2) Balance represents book value.


	Pledged Assets as of December 31, 2018
			AFS		HTM
	Cash		Securities ⁽¹⁾		Securities ⁽¹⁾		Loans ⁽²⁾		Total
Public deposits	$	—	$	293,169	$	7,407	$	—	$	300,576
Repurchase agreements		—		55,269		—		—		55,269
FHLB advances		—		488		—		3,337,289		3,337,777
Derivatives		13,509		1,938		—		—		15,447
Other purposes		—		23,217		—		—		23,217
Total pledged assets	$	13,509	$	374,081	$	7,407	$	3,337,289	$	3,732,286

(1) Balance represents book value.
(2) Balance represents market value.

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9. DERIVATIVES

The Company is exposed to economic risks arising from its business operations and uses derivatives primarily to manage risk associated with changing interest rates, and to assist customers with their risk management objectives. The Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value hedge). The remaining are classified as free-standing derivatives consisting of customer accommodation loan swaps and interest rate lock commitments that do not qualify for hedge accounting.

Derivatives Counterparty Credit Risk

Derivative instruments contain an element of credit risk that arises from the potential failure of a counterparty to perform according to the terms of the contract. The Company’s exposure to derivative counterparty credit risk, at any point in time, is equal to the amount reported as a derivative asset on the Company’s Consolidated Balance Sheets, assuming no recoveries of underlying collateral.

Effective January 1, 2019, as required under the Dodd-Frank Act, the Company clears eligible derivative transactions through CCPs such as the CME and LCH, which are often referred to as “central clearinghouses”. The Company clears certain OTC derivatives with central clearinghouses through FCMs as part of the regulatory requirement. The use of the CCPs and the FCMs reduces the Company’s bilateral counterparty credit exposures while it increases the Company’s credit exposures to CCPs and FCMs. The Company is required by CCPs to post initial and variation margin to mitigate the risk of non-payment through the Company’s FCMs. The Company’s FCM agreements governing these derivative transactions generally include provisions that may require the Company to post more collateral or otherwise change terms in the Company’s agreements under certain circumstances. For CME and LCH-cleared OTC derivatives, the Company characterizes variation margin cash payments as settlements.

The Company also enters into legally enforceable master netting agreements and collateral agreements, where possible, with certain derivative counterparties to mitigate the risk of default on a bilateral basis. These bilateral agreements typically provide the right to offset exposures and require one counterparty to post collateral on derivative instruments in a net liability position to the other counterparty.

Cash Flow Hedges

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate financial instruments. The Company uses interest rate swap agreements as part of its hedging strategy by exchanging a notional amount, equal to the principal amount of the borrowings or commercial loans, for fixed-rate interest based on benchmarked interest rates. The original terms and conditions of the interest rate swaps vary and range in length with a maximum hedging time through January 2021. Amounts receivable or payable are recognized as accrued under the terms of the agreements.

All swaps were entered into with counterparties that met the Company’s credit standards, and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant.

The Company assesses the effectiveness of each hedging relationship on a periodic basis using statistical regression analysis. The Company also measures the ineffectiveness of each hedging relationship using the change in variable cash flows method which compares the cumulative changes in cash flows of the hedging instrument relative to cumulative changes in the hedged item’s cash flows. In accordance with ASC 815, Derivatives and Hedging, the effective portions of the derivatives’ unrealized gains or losses are recorded as a component of other comprehensive income. Based on the Company’s assessment, its cash flow hedges are highly effective.

During the quarter ended September 30, 2019, the Company terminated four interest rate swaps designated as cash flow hedges prior to their respective maturity dates. The net amount of losses reclassified into earnings totaled $9.0 million for the quarter ended September 30, 2019. This loss is immediately recognized into earnings as the forecasted transaction will not occur.

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Fair Value Hedge

Derivatives are designated as fair value hedges when they are used to manage exposure to changes in the fair value of certain financial assets and liabilities, referred to as the hedged items, which fluctuate in value as a result of movements in interest rates.

Loans: During the normal course of business, the Company enters into swap agreements to convert certain long-term fixed-rate loans to floating rates to hedge the Company’s exposure to interest rate risk. The Company pays a fixed interest rate to the counterparty and receives a floating rate from the same counterparty calculated on the aggregate notional amount. For the periods ended September 30, 2019 and December 31, 2018, the aggregate notional amount of the related hedged items for certain long-term fixed rate loans totaled $84.1 million and $87.6 million, respectively, and the fair value of the related hedged items was an unrealized loss of $3.3 million and $1.6 million, respectively.

AFS Securities: The Company has entered into a swap agreement to hedge the interest rate risk on a portion of its fixed rate available for sale securities. For the periods ended September 30, 2019 and December 31, 2018, the aggregate notional amount of the related hedged items of the available for sale securities totaled $50 million and the fair value of the related hedged items was an unrealized loss of $5.2 million and $1.4 million, respectively.

The Company applies hedge accounting in accordance with ASC 815, Derivatives and Hedging, and the fair value hedge and the underlying hedged item, attributable to the risk being hedged, are recorded at fair value with unrealized gains and losses being recorded on the Company’s Consolidated Statements of Income. Statistical regression analysis is used to assess hedge effectiveness, both at inception of the hedging relationship and on an ongoing basis. The regression analysis involves regressing the periodic change in fair value of the hedging instrument against the periodic changes in fair value of the asset being hedged due to changes in the hedged risk. The Company’s fair value hedges continue to be highly effective and had no material impact on the Consolidated Statements of Income, but if any ineffectiveness exists, portions of the unrealized gains or losses would be recorded in interest income or interest expense on the Company’s Consolidated Statements of Income.

Loan Swaps

During the normal course of business, the Company enters into interest rate swap loan relationships (“loan swaps”) with borrowers to meet their financing needs. Upon entering into the loan swaps, the Company enters into offsetting positions with a third party in order to minimize interest rate risk. These back-to-back loan swaps qualify as financial derivatives with fair values as reported in “Other Assets” and “Other Liabilities” on the Company’s Consolidated Balance Sheets.

Mortgage Banking Derivatives

During the normal course of business, the Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (“rate lock commitments”). The Company commits to deliver the loan if settlement occurs ("best efforts") or commits to deliver the locked loan in a binding ("mandatory") delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of MBS. Rate lock commitments on mortgage loans that are intended to be sold in the secondary market and commitments to deliver loans to investors are considered to be derivatives. The Company uses these derivatives as part of an overall strategy to manage market risk primarily due to fluctuations in interest rates, and to capture improved margins resulting from the mandatory delivery of loans. Mortgage banking derivatives as of September 30, 2019 did not have a material impact on the Company’s Consolidated Financial Statements.

The market values of rate lock commitments and best efforts forward delivery commitments is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments, delivery contracts, and forward sales contracts of MBS by measuring the change in the value of the underlying asset, while taking into consideration the probability that the rate lock commitments will close or will be funded. Certain risks arise from the forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. Additional risks inherent in mandatory delivery programs include the risk that, if the Company does not close the loans subject to rate lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement.

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The following table summarizes key elements of the Company’s derivative instruments as of September 30, 2019 and December 31, 2018, segregated by derivatives that are considered accounting hedges and those that are not (dollars in thousands):

September 30, 2019

December 31, 2018

Derivative ⁽²⁾

Notional or

Contractual

Amount ⁽¹⁾

Assets

Liabilities

Amount ⁽¹⁾

Assets

Liabilities

Derivatives designated as accounting hedges:

Interest rate contracts:

Cash flow hedges

100,000

—

1,323

152,500

—

4,786

Fair value hedges

134,175

—

8,527

137,596

1,872

1,684

Derivatives not designated as accounting hedges:

Loan Swaps :

Pay fixed - receive floating interest rate swaps

1,392,662

105

74,317

878,446

10,120

9,306

Pay floating - receive fixed interest rate swaps

1,392,662

74,317

105

878,446

9,306

10,120

(1)	Notional amounts are not recorded on the Company’s Consolidated Balance Sheets and are generally used only as a basis on which interest and other payments are determined.

(2)	Balances represent fair value of derivative financial instruments.

The following table summarizes the carrying value of the Company’s hedged assets in fair value hedges and the associated cumulative basis adjustments included in those carrying values as of September 30, 2019 and December 31, 2018 (dollars in thousands):

September 30, 2019

December 31, 2018

Cumulative

Amount of Basis

Adjustments

Included in the

Carrying Amount

Carrying

Carrying Amount

Carrying

of Hedged

Amount of the

of Hedged

Amount of the

Assets/(Liabilities)

Hedged

Assets/(Liabilities)

Hedged

Amount ⁽¹⁾

Assets/(Liabilities)

Amount ⁽¹⁾

Assets/(Liabilities)

Line items on the Consolidated Balance Sheets in which the hedged item is included:

Securities available-for-sale ^{(1) (2)}

213,177

5,236

224,241

1,399

Loans

84,175

3,285

87,596

(1,572)

(1)

These amounts include the amortized cost basis of the investment securities designated in hedging relationships for which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. For the periods ended September 30, 2019 and December 31, 2018, the amortized cost basis of this portfolio was $213 million and $224 million, respectively and the cumulative basis adjustment associated with this hedge was $5.2 million and $1.4 million, respectively. The amount of the designated hedged item was $50 million.

(2)	Carrying value represents amortized cost.

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10. STOCKHOLDERS’ EQUITY

Serial Preferred Stock

The Company has the authority to issue up to 500,000 shares of serial preferred stock with a par value of $10.00 per share. As of September 30, 2019 and December 31, 2018, the Company had no shares issued or outstanding.

Accumulated Other Comprehensive Income (Loss)

The change in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2019 is summarized as follows, net of tax (dollars in thousands):


			Unrealized Gains
			(Losses)
	Unrealized		for AFS				Unrealized
	Gains (Losses)		Securities		Change in Fair		Gains
	on AFS		Transferred to		Value of Cash		(Losses) on
	Securities		HTM		Flow Hedge		BOLI		Total
Balance - June 30, 2019	$	36,125	$	85	$	(7,155)	$	(988)	$	28,067
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassification		12,364		—		6,025		(647)		17,742
Amounts reclassified from AOCI into earnings		(5,612)		(5)		158		19		(5,440)
Net current period other comprehensive income (loss)		6,752		(5)		6,183		(628)		12,302
Balance - September 30, 2019	$	42,877	$	80	$	(972)	$	(1,616)	$	40,369


			Unrealized Gains
			(Losses)
	Unrealized		for AFS				Unrealized
	Gains (Losses)		Securities		Change in Fair		Gains
	on AFS		Transferred to		Value of Cash		(Losses) on
	Securities		HTM		Flow Hedge		BOLI		Total
Balance - December 31, 2018	$	(5,949)	$	95	$	(3,393)	$	(1,026)	$	(10,273)
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassification		54,598		—		1,970		(647)		55,921
Amounts reclassified from AOCI into earnings		(5,772)		(15)		451		57		(5,279)
Net current period other comprehensive income (loss)		48,826		(15)		2,421		(590)		50,642
Balance - September 30, 2019	$	42,877	$	80	$	(972)	$	(1,616)	$	40,369

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The change in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2018 is summarized as follows, net of tax (dollars in thousands):


			Unrealized Gain
			(Losses)
	Unrealized		for AFS				Unrealized
	Gains (Losses)		Securities		Change in Fair		Gains
	on AFS		Transferred to		Value of Cash		(Losses)
	Securities		HTM		Flow Hedge		on BOLI		Total
Balance - June 30, 2018	$	(10,813)	$	105	$	(2,273)	$	(1,064)	$	(14,045)
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassification		(11,310)		—		575		—		(10,735)
Amounts reclassified from AOCI into earnings		(77)		(5)		227		19		164
Net current period other comprehensive income (loss)		(11,387)		(5)		802		19		(10,571)
Balance - September 30, 2018	$	(22,200)	$	100	$	(1,471)	$	(1,045)	$	(24,616)


			Unrealized Gain
			(Losses)
	Unrealized		for AFS				Unrealized
	Gains (Losses)		Securities		Change in Fair		Gains
	on AFS		Transferred to		Value of Cash		(Losses)
	Securities		HTM		Flow Hedge		on BOLI		Total
Balance - December 31, 2017	$	1,874	$	2,705	$	(4,361)	$	(1,102)	$	(884)
Transfers of HTM securities to AFS securities ⁽¹⁾		2,785		(2,785)		—		—		—
Cumulative effects from adoption of new accounting standard ⁽²⁾		404		583		(1,094)		—		(107)
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassification ⁽¹⁾		(27,087)		—		3,214		—		(23,873)
Amounts reclassified from AOCI into earnings		(176)		(403)		770		57		248
Net current period other comprehensive income (loss)		(27,263)		(403)		3,984		57		(23,625)
Balance - September 30, 2018	$	(22,200)	$	100	$	(1,471)	$	(1,045)	$	(24,616)

(1) During the second quarter of 2018, the Company adopted ASU No. 2017-12,"Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". As part of this adoption, the Company made a one-time election to transfer eligible HTM securities to the AFS category. The transfer of these securities resulted in an increase of approximately $400,000 to AOCI and is included as unrealized gains (losses) on AFS securities above.

(2) During the second quarter of 2018, the Company adopted ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." As part of this adoption, the Company reclassified approximately $107,000 from AOCI to retained earnings.

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11. FAIR VALUE MEASUREMENTS

The Company follows ASC 820, Fair Value Measurements and Disclosures, to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. ASC 820 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants.

ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under ASC 820 based on these two types of inputs are as follows:

Level 1 Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2 Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the markets.

Level 3 Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. These unobservable inputs reflect the Company’s assumptions about what market participants would use and information that is reasonably available under the circumstances without undue cost and effort.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements.

Derivative instruments

As discussed in Note 9 “Derivatives”, the Company records derivative instruments at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. Third party valuations are validated by the Company using Bloomberg Valuation Service’s derivative pricing functions. No material differences were identified during the validation as of September 30, 2019 and December 31, 2018. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities. Mortgage banking derivatives as of September 30, 2019 did not have a material impact on the Company’s Consolidated Financial Statements.

During the ordinary course of business, the Company enters into interest rate lock commitments related to the origination of mortgage loans held for sale, as well as best efforts or mandatory delivery programs and forward sales contracts of MBS. These instruments are used to mitigate interest rate risk. The Company determines the fair value of these instruments by measuring the fair value of the underlying asset, which in turn is based on quoted prices for similar loans in the secondary market. This value, however, is adjusted by a pull-through rate applied at the loan level, which considers the likelihood that the loan in a lock position will ultimately close. The pull-through rate is derived from the Company’s internal data, as well as input from third party sources, and is adjusted using significant management judgment. It is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. As such, interest rate lock commitments are classified as Level 3. An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in positive fair value adjustments, while a decrease in the pull-through rate will result in a negative fair value adjustment. As of September 30, 2019, the weighted average pull-through rate was approximately 90%. As a result of the UMG wind-down, at December 31, 2018, the Company had no interest rate locks.

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AFS Securities

AFS securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3).

The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third party portfolio accounting service vendor for valuation of its securities portfolio. The vendor’s primary source for security valuation is IDC, which evaluates securities based on market data. IDC utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

The vendor utilizes proprietary valuation matrices for valuing all municipals securities. The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk. The securities are further broken down according to issuer, credit support, state of issuance, and rating to incorporate additional spreads to the industry benchmark curves.

The carrying value of restricted Federal Reserve Bank and FHLB stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the table below.

Loans Held for Sale

Loans held for sale are carried at fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded in current period earnings as a component of "Mortgage banking income, net" on the Company’s Consolidated Statements of Income.

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The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018 (dollars in thousands):

Fair Value Measurements at September 30, 2019 using

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Level 1

Level 2

Level 3

Balance

ASSETS

AFS securities:

U.S. government and agency securities

—

4,490

—

4,490

Obligations of states and political subdivisions

—

438,613

—

438,613

Corporate and other bonds

—

229,524

—

229,524

Mortgage-backed securities

—

1,243,165

—

1,243,165

Other securities

—

3,067

—

3,067

Loans held for sale

—

72,208

—

72,208

Derivatives:

Interest rate swap

—

74,422

—

74,422

LIABILITIES

Derivatives:

Interest rate swap

—

74,422

—

74,422

Cash flow hedges

—

1,323

—

1,323

Fair value hedges

—

8,527

—

8,527


	Fair Value Measurements at December 31, 2018 using
			Significant
	Quoted Prices in		Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	Level 1		Level 2		Level 3		Balance
ASSETS
AFS securities:
Obligations of states and political subdivisions	$	—	$	468,491	$	—	$	468,491
Corporate and other bonds		—		167,696		—		167,696
Mortgage-backed securities		—		1,129,865		—		1,129,865
Other securities		—		8,769		—		8,769
Derivatives:
Interest rate swap		—		19,426		—		19,426
Fair value hedges		—		1,872		—		1,872

LIABILITIES
Derivatives:
Interest rate swap	$	—	$	19,426	$	—	$	19,426
Cash flow hedges		—		4,786		—		4,786
Fair value hedges		—		1,684		—		1,684

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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements.

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral dependent loans are reported at the fair value of the underlying collateral if repayment is solely from the underlying value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data. When evaluating the fair value, management may discount the appraisal further if, based on their understanding of the market conditions, it is determined the collateral is further impaired below the appraised value (Level 3). At September 30, 2019 and December 31, 2018, the Level 3 weighted average adjustments related to impaired loans were 0.0% and 5.3%, respectively. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Collateral dependent impaired loans allocated to the ALL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Company’s Consolidated Statements of Income.

Foreclosed Properties & Former Bank Premises

Foreclosed properties and former bank premises are evaluated for impairment at least quarterly by the Bank’s Special Asset Loan Committee and any necessary write downs to fair values are recorded as impairment and included as a component of noninterest expense. Foreclosed properties and former bank premises are carried at fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as Level 3 valuation. The Level 3 weighted average adjustments related to foreclosed property were approximately 3.7% for both September 30, 2019 and December 31, 2018. At September 30, 2019 and December 31, 2018, there were no Level 3 weighted average adjustments related to former bank premises.

Total valuation expenses related to foreclosed properties for the three and nine months ended September 30, 2019 and 2018 totaled $62,000, $546,000, $42,000 and $1.2 million, respectively. Total valuation expenses related to former bank premises for the three and nine months ended September 30, 2019 totaled $247,000 and $615,000. There were no valuation expenses related to former bank premises for the three and nine months ended September 30, 2018.

The following tables summarize the Company’s financial assets that were measured at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018 (dollars in thousands):

Fair Value Measurements at September 30, 2019 using

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Level 1

Level 2

Level 3

Balance

ASSETS

Impaired loans

—

1,837

Foreclosed properties

—

6,385

Former bank premises

—

5,533

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	Fair Value Measurements at December 31, 2018 using
			Significant
	Quoted Prices in		Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	Level 1		Level 2		Level 3		Balance
ASSETS
Impaired loans	$	—	$	—	$	3,734	$	3,734
Foreclosed properties		—		—		6,722		6,722
Former bank premises		—		—		2,090		2,090

Fair Value of Financial Instruments

ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Cash and Cash Equivalents

For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

HTM Securities

The Company primarily uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of September 30, 2019 and December 31, 2018. The Company’s level 3 securities are a result of the Access acquisition and are comprised of asset-backed securities and municipal bonds. Valuations of the asset-backed securities are provided by a third party vendor specializing in the SBA markets, and are based on underlying loan pool information, market data, and recent trading activity for similar securities. Valuations of the municipal bonds are provided by a third party vendor that specializes in hard-to-value securities, and are based on a discounted cash flow model and considerations for the complexity of the instrument, likelihood it will be called and credit ratings. The Company reviews the valuation of both security types for reasonableness in the context of market conditions and to similar bonds in the Company’s portfolio. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of September 30, 2019.

Loans

With the adoption of ASU No. 2016-01 in 2018, the fair value of loans at September 30, 2019 were estimated using an exit price, representing the amount that would be expected to be received if the Company sold the loans. Beginning in the first quarter of 2019, the fair value of performing loans were estimated by utilizing two data sources for the selection of discount rates: either the recent origination rates from the Company over a 12-month period or an index to use recent originations from the market over a three-month period. At December 31, 2018, the fair value of performing loans were estimated by discounting expected future cash flows using a yield curve that was constructed by adding a loan spread to a market yield curve. Loan spreads were based on spreads observed in the market for loans of similar type and structure.

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Fair value for impaired loans and their respective level within the fair value hierarchy are described in the previous disclosure related to fair value measurements of assets that are measured on a nonrecurring basis.

BOLI

The carrying value of BOLI approximates fair value. The Company records these policies at their cash surrender value, which is estimated using information provided by insurance carriers.

Deposits

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposits were valued using a discounted cash flow calculation that includes a market rate analysis of the current rates offered by market participants for certificates of deposits that mature in the same period.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

The carrying values and estimated fair values of the Company’s financial instruments at September 30, 2019 and December 31, 2018 are as follows (dollars in thousands):

Fair Value Measurements at September 30, 2019 using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Total Fair

Identical Assets

Inputs

Value

Carrying

Value

Level 1

Level 2

Level 3

Balance

ASSETS

Cash and cash equivalents

591,920

—

591,920