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 March 31, 2020

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 April 30, 2020 was 78,709,196.

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 March 31, 2020 (unaudited) and December 31, 2019 (audited)	2

	Consolidated Statements of Income (unaudited) for the three months ended March 31, 2020 and 2019	3

	Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2020 and 2019	4

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2020 and 2019	5

	Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2020 and 2019	6

	Notes to Consolidated Financial Statements (unaudited)	8

	Review Report of Independent Registered Public Accounting Firm	53

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	54

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	87

Item 6.	Exhibits	88

	Signatures	89

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Glossary of Acronyms and Defined Terms


2019 Form 10-K	–	Annual Report on Form 10-K for the year ended December 31, 2019
Access	–	Access National Corporation and its subsidiaries
ACL	–	Allowance for credit losses
AFS	–	Available for sale
ALCO	–	Asset Liability Committee
ALLL	–	Allowance for loan and lease losses
AOCI	–	Accumulated other comprehensive income (loss)
ASC	–	Accounting Standards Codification
ASC 326	–	ASU 2016-13, Financial Instruments and Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
ASC 820	–	ASC 820, Fair Value Measurements and Disclosures
ASC 842	–	ASU 2016-02, Leases (Topic 842)
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
BSA	–	Bank Secrecy Act
CARES Act	–	Coronavirus Aid, Relief, and Economic Security Act
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
COVID-19	–	Novel strain of coronavirus first identified in December 2019 in Wuhan, China
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
FinCEN	–	Financial Crimes Enforcement Network
FOMC	–	Federal Open Markets Committee
FTE	–	Fully taxable equivalent
GAAP or U.S. GAAP	–	Accounting principles generally accepted in the United States
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

Table of Contents

OREO	–	Other real estate owned
OTTI	–	Other than temporary impairment
PCD	–	Purchased credit deteriorated
PCI	–	Purchased credit impaired
PD/LGD	–	Probability of default/loss given default
PPP	–	Paycheck Protection Program
Quarterly Report	–	Quarterly Report on Form 10-Q for the quarter ended March 31, 2020
ROA	–	Return on average assets
ROE	–	Return on average common equity
ROTCE	–	Return on average tangible common equity
ROU Asset	–	Right of Use Asset
RUC	–	Reserve for unfunded commitments
SBA	–	Small Business Administration
SEC	–	Securities and Exchange Commission
SSFA	–	Simplified supervisory formula approach
Tax Act	–	Tax Cuts and Jobs Act of 2017
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)


	March 31,		December 31,
	2020		2019
ASSETS		(unaudited)		(audited)
Cash and cash equivalents:
Cash and due from banks	$	197,521	$	163,050
Interest-bearing deposits in other banks		292,154		234,810
Federal funds sold		15,284		38,172
Total cash and cash equivalents		504,959		436,032
Securities available for sale, at fair value		1,972,903		1,945,445
Securities held to maturity, at carrying value		552,176		555,144
Restricted stock, at cost		130,227		130,848
Loans held for sale, at fair value		76,690		55,405
Loans held for investment, net of deferred fees and costs		12,768,841		12,610,936
Less allowance for loan and lease losses		141,043		42,294
Total loans held for investment, net		12,627,798		12,568,642
Premises and equipment, net		161,139		161,073
Goodwill		935,560		935,560
Amortizable intangibles, net		69,298		73,669
Bank owned life insurance		324,980		322,917
Other assets		491,646		377,587
Assets of discontinued operations		—		668
Total assets	$	17,847,376	$	17,562,990
LIABILITIES
Noninterest-bearing demand deposits	$	3,067,573	$	2,970,139
Interest-bearing deposits		10,485,462		10,334,842
Total deposits		13,553,035		13,304,981
Securities sold under agreements to repurchase		56,781		66,053
Other short-term borrowings		380,000		370,200
Long-term borrowings		1,077,683		1,077,495
Other liabilities		354,427		230,519
Liabilities of discontinued operations		—		640
Total liabilities		15,421,926		15,049,888
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Common stock, $1.33 par value; shares authorized of 200,000,000 and 100,000,000 at March 31, 2020 and December 31, 2019, respectively; 78,710,448 and 80,001,185 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively.		104,086		105,827
Additional paid-in capital		1,743,429		1,790,305
Retained earnings		529,606		581,395
Accumulated other comprehensive income (loss)		48,329		35,575
Total stockholders' equity		2,425,450		2,513,102
Total liabilities and stockholders' equity	$	17,847,376	$	17,562,990

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
	March 31,		March 31,
	2020		2019
	(Unaudited)		(Unaudited)
Interest and dividend income:
Interest and fees on loans	$	151,127	$	144,115
Interest on deposits in other banks		862		473
Interest and dividends on securities:
Taxable		11,627		13,081
Nontaxable		7,709		7,983
Total interest and dividend income		171,325		165,652
Interest expense:
Interest on deposits		28,513		24,430
Interest on short-term borrowings		1,340		6,551
Interest on long-term borrowings		6,464		7,124
Total interest expense		36,317		38,105
Net interest income		135,008		127,547
Provision for credit losses		60,196		3,792
Net interest income after provision for credit losses		74,812		123,755
Noninterest income:
Service charges on deposit accounts		7,578		7,158
Other service charges, commissions and fees		1,624		1,664
Interchange fees		1,625		5,045
Fiduciary and asset management fees		5,984		5,054
Mortgage banking income		2,022		1,454
Gains (losses) on securities transactions		1,936		151
Bank owned life insurance income		2,049		2,055
Loan-related interest rate swap fees		3,948		1,460
Other operating income		2,141		897
Total noninterest income		28,907		24,938
Noninterest expenses:
Salaries and benefits		50,117		48,007
Occupancy expenses		7,133		7,399
Furniture and equipment expenses		3,741		3,396
Printing, postage, and supplies		1,290		1,242
Technology and data processing		6,169		5,676
Professional services		3,307		2,958
Marketing and advertising expense		2,739		2,383
FDIC assessment premiums and other insurance		2,861		2,639
Other taxes		4,120		3,764
Loan-related expenses		2,697		2,289
OREO and credit-related expenses		688		684
Amortization of intangible assets		4,401		4,218
Training and other personnel costs		1,571		1,144
Merger-related costs		—		18,122
Rebranding expense		—		407
Other expenses		4,811		2,400
Total noninterest expenses		95,645		106,728
Income from continuing operations before income taxes		8,074		41,965
Income tax expense		985		6,249
Income from continuing operations	$	7,089	$	35,716
Discontinued operations:
Income (loss) from operations of discontinued mortgage segment	$	—	$	(115)
Income tax expense (benefit)		—		(30)
Income (loss) on discontinued operations		—		(85)
Net income		7,089		35,631
Basic earnings per common share	$	0.09	$	0.47
Diluted earnings per common share	$	0.09	$	0.47
Dividends declared per common share	$	0.25	$	0.23
Basic weighted average number of common shares outstanding		79,290,352		76,472,189
Diluted weighted average number of common shares outstanding		79,317,382		76,533,066

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
	March 31,
	2020		2019
Net income	$	7,089	$	35,631
Other comprehensive income (loss):
Cash flow hedges:
Change in fair value of cash flow hedges		(699)		(1,460)
Reclassification adjustment for losses included in net income (net of tax, $394 and $32 for the three months ended March 31, 2020 and 2019, respectively)⁽¹⁾		1,481		120
AFS securities:
Unrealized holding gains arising during period (net of tax, $3,904 and $5,338 for the three months ended March 31, 2020 and 2019, respectively)		14,687		20,081
Reclassification adjustment for gains included in net income (net of tax, $407 and $23 for the three months ended March 31, 2020 and 2019, respectively) ⁽²⁾		(1,529)		(85)
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 ended March 31, 2020 and 2019, respectively)⁽³⁾		(5)		(5)
Bank owned life insurance:
Unrealized holding losses arising during the period		(1,289)		—
Reclassification adjustment for losses included in net income ⁽⁴⁾		108		19
Other comprehensive income (loss)		12,754		18,670
Comprehensive income	$	19,843	$	54,301

(1)

The gross amounts reclassified into earnings for the three months ended March 31, 2020 included a $1.8 million loss related to the termination of a cash flow hedge that is reported in “Other operating income” with the corresponding income tax effect being reflected as a component of income tax expense. The remaining gross amounts 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 " 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)

THREE MONTHS ENDED MARCH 31, 2020 AND 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 ASC 842

(1,133)

Stock-based compensation expense

1,870

Balance - March 31, 2019

108,475

1,859,588

483,005

8,397

2,459,465

Balance - December 31, 2019

105,827

1,790,305

581,395

35,575

2,513,102

Net Income

7,089

Other comprehensive income (net of taxes of $3,890)

12,754

Dividends on common stock ($0.25 per share)

(19,825)

Stock purchased under stock repurchase plan (1,493,472 shares)

(1,985)

(47,894)

(49,879)

Issuance of common stock under Equity Compensation Plans (34,714 shares)

731

777

Issuance of common stock for services rendered (6,860 shares)

195

204

Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (142,176 shares)

189

(2,199)

(2,010)

Impact of adoption of ASC 326

(39,053)

Stock-based compensation expense

2,291

Balance - March 31, 2020

104,086

1,743,429

529,606

48,329

2,425,450

See accompanying notes to consolidated financial statements.

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ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2020 AND 2019


(Dollars in thousands)	2020		2019
Operating activities ⁽¹⁾:
Net income	$	7,089	$	35,631
Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities:
Depreciation of premises and equipment		3,831		3,638
Writedown of foreclosed properties and former bank premises		95		52
Amortization, net		6,164		4,780
Amortization (accretion) related to acquisitions, net		(5,262)		(1,624)
Provision for credit losses		60,196		3,792
Gains on securities transactions, net		(1,936)		(151)
BOLI income		(2,049)		(2,055)
Decrease (increase) in loans held for sale, net		(21,285)		(7,485)
Losses (gains) on sales of foreclosed properties and former bank premises, net		141		47
Stock-based compensation expenses		2,291		1,870
Issuance of common stock for services		204		219
Net decrease (increase) in other assets		(111,854)		(17,681)
Net increase in other liabilities		110,731		(7,943)
Net cash and cash equivalents provided by (used in) operating activities		48,356		13,090
Investing activities:
Purchases of AFS securities and restricted stock		(208,318)		(146,193)
Purchases of HTM securities		—		(47,217)
Proceeds from sales of AFS securities and restricted stock		120,701		208,249
Proceeds from maturities, calls and paydowns of AFS securities		81,240		53,439
Proceeds from maturities, calls and paydowns of HTM securities		2,042		1,320
Net increase in loans held for investment		(150,890)		(81,391)
Net increase in premises and equipment		(3,994)		(1,460)
Proceeds from sales of foreclosed properties and former bank premises		2,095		171
Cash paid in acquisitions		—		(12)
Cash acquired in acquisitions		—		46,164
Net cash and cash equivalents provided by (used in) investing activities		(157,124)		33,070
Financing activities:
Net increase in noninterest-bearing deposits		97,434		185,099
Net increase in interest-bearing deposits		150,670		106,490
Net increase (decrease) in short-term borrowings		528		(295,008)
Cash dividends paid - common stock		(19,825)		(18,838)
Repurchase of common stock		(49,879)		—
Issuance of common stock		777		138
Vesting of restricted stock, net of shares held for taxes		(2,010)		(1,647)
Net cash and cash equivalents provided by (used in) financing activities		177,695		(23,766)
Increase (decrease) in cash and cash equivalents		68,927		22,394
Cash and cash equivalents at beginning of the period		436,032		261,199
Cash and cash equivalents at end of the period	$	504,959	$	283,593

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ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(Dollars in thousands)


	2020		2019
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest	$	34,755	$	34,871
Income taxes		—		—

Supplemental schedule of noncash investing and financing activities
Transfers from loans (foreclosed properties) to foreclosed properties (loans)		615		900
Issuance of common stock in exchange for net assets in acquisitions		—		499,974

Transactions related to acquisitions
Assets acquired		—		2,858,048
Liabilities assumed		—		2,558,638

(1) Discontinued operations have an immaterial impact to the Company’s Consolidated Statement of Cash Flows.

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 (Nasdaq: AUB) is the holding company for Atlantic Union Bank. 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.

On March 13, 2020, the United States President declared a national emergency in the face of a growing public health and economic crisis due to the COVID-19 global pandemic. Within a few days of the declaration of a national emergency, governors of states comprising the Company’s geographic footprint issued states of emergency in response to the novel COVID-19. As a result of this pandemic, actions were taken around the world to help mitigate the spread of COVID 19, which have impacted the economies and financial markets of many countries, including the geographical area in which the Company operates. On March 27, 2020, the CARES Act was signed into law. The CARES Act is designated to provide financial relief to the American people and American businesses in response to the economic fallout from COVID-19. The CARES Act, as well as other interagency guidance, provide enhanced guidelines and accounting for COVID-19 related modifications.

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 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 2019 Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation.

Adoption of New Accounting Standards

On January 1, 2020, the Company adopted ASC 326. This ASU updates the existing guidance to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to unfunded credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and unfunded credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. As a result of adopting ASC 326, the Company recorded a net decrease to retained earnings of $39.1 million.

ASC 326 also replaced the Company’s current accounting for PCI loans. With the adoption of ASC 326, previously classified PCI loans are now classified as PCD loans. The Company adopted ASC 326 using the prospective transition approach for financial assets with PCD that were previously identified as PCI and accounted for under ASC 310-30. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $2.4 million to the ACL. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2020.

The Company’s adoption of ASC 326 resulted in a change in the accounting and reporting related to PCI loans which are now defined as PCD and evaluated at the loan level instead of being evaluated in pools under PCI accounting. In accordance with

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ASC 326, the Company did not re-assess whether individual modifications were needed to individual acquired financial assets accounted for in the pools with troubled debt restructurings as of the date of adoption.

The Company adopted ASC 326 using the prospective transition approach for debt securities. The effective interest rate on these debt securities was not changed. Upon adoption of ASC 326, the Company did not have any securities included in its portfolio where OTTI had previously been recognized.

The following table illustrates the impact of ASC 326.


		December 31,		January 1,		January 1,
		2019		2020		2020
		As Previously Reported (Incurred Loss)		Impact of CECL Adoption		As Reported Under CECL
Assets:
Loans
Commercial	$	30,941	$	6,184	$	37,125
Consumer		11,353		41,300		52,653
Allowance for loan and lease losses		42,294		47,484		89,778
Liabilities:
Allowance for credit losses on unfunded credit exposure		900		4,160		5,060
Total Allowance for credit losses	$	43,194	$	51,644	$	94,838

Allowance for Loan and Lease Losses

The provision for loan losses charged to operations is an amount sufficient to bring the allowance to an estimated balance that management considers adequate to absorb expected losses in the Company’s loan portfolio. The ALLL is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Amortized cost is the principal balance outstanding, net of any purchase premiums and discounts and net of any deferred loan fees and costs.

The ALLL represents management’s estimate of credit losses over the remaining life of the loan portfolio. Loans are charged off against the ALLL when management believes the loan balance is no longer collectible. Subsequent recoveries of previously charged off amounts are recorded as increases to the ALLL.

Management’s determination of the adequacy of the ALLL is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, reasonable and supportable forecasts, and other risk factors. The ALLL is estimated by pooling loans by call code and credit risk indicator and applying a loan-level PD/LGD method for all loans with the exception of its auto and third party consumer lending portfolios. For auto and third party consumer portfolios, the Company has elected to pool those loans based on similar risk characteristics to determine the ALLL using vintage and loss rate methods. The Company utilizes a forecast period of two years and then reverts to the mean of historical loss rates on a straight-line basis over the following two-year period. The Company considers economic forecasts and recession probabilities from highly recognized third-parties to inform the model for loss estimation. Management also considers qualitative factors when estimating loan losses to take into account model limitations. The Company’s Allowance Committee approves the key methodologies and assumptions, as well as the final ALLL on a quarterly basis. While management uses available information to estimate expected losses on loans, future changes in the ALLL may be necessary based on changes in portfolio composition, portfolio credit quality, and/or economic conditions.

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Loans that do not share risk characteristics are evaluated on an individual basis. The individual reserve component relates to loans that have shown substantial credit deterioration as measured by risk rating and/or delinquency status. In addition, the Company has elected the practical expedient that would include loans for individual assessment consideration if the repayment of the loan is expected substantially through the operation or sale of collateral because the borrower is experiencing financial difficulty. Where the source of repayment is the sale of collateral, the ALLL is based on the fair value of the underlying collateral, less selling costs, compared to the amortized cost basis of the loan. If the ALLL is based on the operation of the collateral, the reserve is calculated based on the fair value of the collateral calculated as the present value of expected cash flows from the operation of the collateral, compared to the amortized cost basis. If the Company determines that the value of a collateral dependent loan is less than the recorded investment in the loan, the Company charges off the deficiency if it is determined that such amount is deemed to be a confirmed loss. Typically, a loss is confirmed when the Company is moving towards foreclosure (or final disposition).

In situations where, for economic or legal reasons related to a borrower’s financial condition, the Company grants a concession in the loan structure to the borrower that is would not otherwise consider, the related loan is classified as a TDR. With the exception of loans with interest rate concessions, the ALLL on a TDR is measured using the same method as all other loans held for investment. For loans with interest rate concessions, the Company uses a discounted cash flow approach using the original interest rate.

Reserve for Unfunded Commitments

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The reserve for unfunded commitments is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded and is included in “Other Liabilities” within the Company’s Consolidated Balance Sheets.

Accrued Interest Receivable

The Company has elected to exclude accrued interest from the amortized cost basis in its determination of the ACL reserve for both loans and HTM securities, as well as elected the policy to write-off accrued interest receivable directly through the reversal of interest income. Accrued interest receivable totaled $31.1 million on loans held for investment and, $5.2 million on HTM securities at March 31, 2020 and is included in “Other Assets” on the Company’s consolidated balance sheet.

Acquired Loans

The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. Acquired loans are recorded at their fair value at acquisition date without carryover of the acquiree’s previously established ALLL, as credit discounts are included in the determination of fair value. The fair value of the loans is 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 then applying a market-based discount rate to those cash flows. During evaluation upon acquisition, acquired loans are also classified as either PCD or acquired performing.

The purchase discount on acquired performing loans is accounted for under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs. The difference between the fair value and unpaid principal balance of the loan at acquisition date (premium or discount) is amortized or accreted into interest income over the life of the loans. If the acquired performing loan has revolving privileges, it is accounted for using the straight-line method; otherwise, the effective interest method is used.

PCD loans reflect loans that have experienced more-than-insignificant credit deterioration since origination. These PCD loans are accounted for under ASC 326. Credit risk characteristics include risk rating groups, nonaccrual status, and past due status. For valuation purposes, these pools are further disaggregated by maturity, pricing characteristics, and re-payment structure.

PCD loans are recorded at the amount paid. An ALLL is determined using the same methodology as other loans held for investment. For PCD loans not individually assessed, the initial ALLL is determined on a collective basis and is allocated to individual loans. The sum of the loan's purchase price and ALLL becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the ALLL are recorded through provision expense.

The PCD loans are and will continue to be subject to the Company’s internal and external credit review and monitoring.

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Allowance for Credit Losses on HTM Securities

The Company evaluates the credit risk of its securities on at least a quarterly basis. Management estimates expected credit losses on held-to-maturity debt securities based on an individual basis based on the PD/LGD methodology primarily using security-level credit ratings. Management recorded an immaterial ACL on HTM securities as a result of the adoption of ASC 326, and no additional changes were needed at March 31, 2020.

Allowance for Credit Losses on AFS Securities

For AFS securities, the Company evaluates the fair value and credit quality of its AFS securities on at least a quarterly basis. In the event the fair value of a security falls below its amortized cost basis, the security will be evaluated to determine whether the decline in value was caused by changes in market interest rates or security credit quality. The primary indicators of credit quality for the Company’s AFS portfolio are security type and credit rating, which is influenced by a number of security-specific factors that may include obligor cash flow, geography, seniority, and others. There is currently no ACL held against the Company’s AFS securities portfolio at March 31, 2020. See Note 3 “Securities,” for additional information on the Company’s ACL analysis. If unrealized losses are related to credit quality, the Company estimates the credit related loss by evaluating the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security and a credit loss exists, an ACL shall be recorded for the credit loss, limited by the amount that the fair value is less than amortized cost basis.

Business Combinations and Divestitures

On February 1, 2019, the Company completed the acquisition of Access. Refer to the Note 2 “Acquisitions” for additional information.

Goodwill and Intangible Assets

The Company has an aggregate goodwill balance of $935.6 million associated with previous merger transactions, which is primarily associated with commercial and consumer banking.

Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company has selected April 30th as the date to perform the annual impairment test. The Company performed its annual goodwill impairment testing as of April 30, 2019 and determined that there was no impairment to its goodwill.

The Company performed an interim impairment review as of March 31, 2020 and considered various factors including, the results of the prior year impairment test, the Company’s most recent forecasts, and the Company’s recent stock price movements, and concluded that no impairment existed as of the balance sheet date.

Intangible assets with definite useful lives are amortized over their estimated useful lives, which range from 4 to 10 years, to their estimated residual values. Goodwill is the only intangible asset with an indefinite life included on the Company’s Consolidated Balance Sheets.

Long-lived assets, including purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented on the Company's Consolidated Balance Sheets and reported at the lower of the carrying amount or fair value less costs to sell, would no longer depreciated. Management performed a review of impairment through March 31, 2020, and concluded no impairment of these assets existed as of the balance sheet date.

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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. The measurement period was formally closed as of February 1, 2020, and the Company did not make any measurement period adjustments in January of 2020.

Merger-related costs associated with the acquisition of Access were $0 and $17.8 million for the three months ended March 31, 2020 and 2019, respectively. 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

On January 1, 2020, the Company adopted ASC 326, which made changes to the accounting for AFS debt securities whereby credit losses should be presented as an allowance, rather than as a write-down when management does not intend to sell and does not believe that it is more likely than not they will be required to sell prior to maturity. In addition, ASC 326 requires financial assets measured at amortized cost, including held-to-maturity debt securities, to measure an expected credit loss under the CECL methodology that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For further discussion on the Company’s accounting policies and policy elections related to the accounting standard update refer to Note 1 “Accounting Policies”.

All securities information presented as of March 31, 2020 is in accordance with ASC 326. All securities information presented prior to March 31, 2020 is in accordance with previous applicable GAAP. See the Company’s prior accounting policies in Note 1 “Summary of Significant Accounting Policies” of the 2019 Form 10-K.

Available for Sale

The Company’s AFS investment portfolio is generally highly-rated, and all AFS securities were current with no securities past due or on non-accrual as March 31, 2020.

The amortized cost, gross unrealized gains and losses, and estimated fair values of AFS securities as of March 31, 2020 are summarized as follows (dollars in thousands):

Amortized

Gross Unrealized

Estimated

Cost

Gains

(Losses)

Fair Value

March 31, 2020

U.S. government and agency securities

17,631

365

(34)

17,962

Obligations of states and political subdivisions

515,914

31,367

(555)

546,726

Corporate and other bonds ⁽¹⁾

122,232

2,185

(3,449)

120,968

Mortgage-backed securities

Commercial

353,684

13,819

(56)

367,447

Residential

887,762

33,820

(4,872)

916,710

Total mortgage-backed securities

1,241,446

47,639

(4,928)

1,284,157

Other securities

3,090

—

3,090

Total AFS securities

1,900,313

81,556

(8,966)

1,972,903

(1)	Other bonds include asset-backed securities.

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


	Amortized		Gross Unrealized				Estimated
December 31, 2019	Cost		Gains		(Losses)		Fair Value
U.S. government and agency securities	$	21,149	$	209	$	(38)	$	21,320
Obligations of states and political subdivisions		421,344		25,776		(29)		447,091
Corporate and other bonds ⁽¹⁾		134,342		1,991		(374)		135,959
Mortgage-backed securities
Commercial		416,904		8,786		(643)		425,047
Residential		896,609		17,156		(816)		912,949
Total mortgage-backed securities		1,313,513		25,942		(1,459)		1,337,996
Other securities		3,079		—		—		3,079
Total AFS securities	$	1,893,427	$	53,918	$	(1,900)	$	1,945,445

(1) Other bonds include asset-backed securities

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The following table shows the gross unrealized losses and fair value of the Company’s AFS securities with unrealized losses for which an allowance for credit losses has not been recorded at March 31, 2020 and that are not deemed to be other than temporarily impaired as of December 31, 2019. These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position (dollars in thousands).


	Less than 12 months				More than 12 months				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
March 31, 2020
U.S. government and agency securities	$	5,338	$	(23)	$	1,619	$	(11)	$	6,957		(34)
Obligations of states and political subdivisions		24,757		(555)		—		—		24,757	$	(555)
Corporate and other bonds⁽¹⁾		40,409		(2,854)		19,922		(595)		60,331		(3,449)
Mortgage-backed securities
Commercial		14,667		(56)		—		—		14,667		(56)
Residential		135,577		(4,436)		14,880		(436)		150,457		(4,872)
Total mortgage-backed securities		150,244		(4,492)		14,880		(436)		165,124		(4,928)
Total AFS securities	$	220,748	$	(7,924)	$	36,421	$	(1,042)	$	257,169	$	(8,966)

December 31, 2019
U.S. government and agency securities	$	7,638	$	(38)	$	—	$	—	$	7,638	$	(38)
Obligations of states and political subdivisions		4,526		(29)		—		—		4,526		(29)
Corporate and other bonds⁽¹⁾		17,323		(83)		19,901		(291)		37,224		(374)
Mortgage-backed securities
Commercial		54,714		(554)		14,966		(89)		69,680		(643)
Residential		114,147		(500)		40,168		(316)		154,315		(816)
Total mortgage-backed securities		168,861		(1,054)		55,134		(405)		223,995		(1,459)
Total AFS securities	$	198,348	$	(1,204)	$	75,035	$	(696)	$	273,383	$	(1,900)

(1) Other bonds includes asset-backed securities.

As of March 31, 2020, there were $36.4 million, or 20 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 $1.0 million. As of December 31, 2019, there were $75.0 million, or 47 issues, of individual securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of $696,000.

The Company has determined the securities that were in an unrealized loss position with no allowance for credit loss as of March 31, 2020 and December 31, 2019 were based on the reasons set out below:

Obligations of state and political subdivisions. This category’s unrealized losses are primarily the result of market volatility. The majority of the securities are of high credit quality (rated A- or higher) and the issuers continue to make timely principal and interest payments on the bonds. The contractual terms of the investments do not permit the issuer(s) to settle the securities at a price less than the cost basis of each investment. 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.

Corporate and other bonds. This category’s unrealized losses are the result of market volatility. 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(s) to settle the securities at a price less than the cost basis of each investment. 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.

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Mortgage-backed securities. The majority of these securities are of high credit quality (rated A or higher) or are issued by FNMA, FHLMC, and GNMA and do not have credit risk given the implicit and explicit government guarantees associated with these agencies. In addition, the issuers continue to make timely principal and interest payments. Current market volatility has caused certain securities to experience a non-credit related decline in value. The majority of the securities in an unrealized loss position are guaranteed with implicit and explicit government guarantees associated. In addition, the Company does not intend to sell the investments before recovery of their amortized cost, which may be maturity.

The Company’s mortgage-backed securities portfolio includes non-agency collateralized mortgage obligations with a fair value of $40.6 million which had unrealized losses of approximately $1.3 million at March 31, 2020. These non-agency mortgage-backed securities were generally rated AAA or equivalent at purchase and generally received a 20% SSFA rating. 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 issuer(s) continues to make timely principal and interest payments. As such, the Company does not consider these investments to have credit related impairment as of March 31, 2020.

The following table presents the amortized cost of AFS securities as of March 31, 2020 by security type and credit rating (dollars in thousands):


	Three Months Ended March 31, 2020
	U.S. Government and Agency		Obligations of states and political		Corporate and		Mortgage-backed		Other		Total AFS
	securities		subdivisions		other bonds		securities		securities		securities
Credit Rating:
AAA/AA/A	$	2,497	$	514,374	$	32,288	$	38,859	$	—	$	588,018
BBB/BB/B		—		1,033		22,853		—		—		23,886
Not Rated - Agency⁽¹⁾		15,134		—		—		1,153,495		1,608		1,170,237
Not Rated - Non-Agency		—		507		67,091		49,092		1,482		118,172
Total	$	17,631	$	515,914	$	122,232	$	1,241,446	$	3,090	$	1,900,313

(1) Generally considered not to have credit risk given the government guarantees associated with these agencies

The following table presents the amortized cost and estimated fair value of AFS securities as of March 31, 2020 and December 31, 2019, by contractual maturity. 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 (dollars in thousands).


	March 31, 2020				December 31, 2019
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	24,916	$	25,080	$	35,177	$	35,329
Due after one year through five years		157,141		162,774		164,605		166,873
Due after five years through ten years		221,929		228,121		249,713		254,790
Due after ten years		1,496,327		1,556,928		1,443,932		1,488,453
Total AFS securities	$	1,900,313	$	1,972,903	$	1,893,427	$	1,945,445

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 March 31, 2020 and December 31, 2019.

Held to Maturity

The Company’s HTM investment portfolio primarily consists of highly-rated municipal securities and the estimated credit loss inherent in the portfolio is currently immaterial. The Company’s HTM securities were all current, with no securities past due or on non-accrual at March 31, 2020.

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

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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.

The carrying value, gross unrealized gains and losses, and estimated fair values of HTM securities as of March 31, 2020 are summarized as follows (dollars in thousands):


	Carrying		Gross Unrealized				Estimated
	Value		Gains		(Losses)		Fair Value
March 31, 2020
U.S. government and agency securities	$	2,797	$	—	$	(69)	$	2,728
Obligations of states and political subdivisions		543,517		52,815		—		596,332
Mortgage-backed securities
Commercial		5,862		—		(142)		5,720
Residential		—		—		—		—
Total mortgage-backed securities		5,862		—		(142)		5,720
Total held-to-maturity securities	$	552,176	$	52,815	$	(211)	$	604,780

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


	Carrying		Gross Unrealized				Estimated
	Value		Gains		(Losses)		Fair Value
December 31, 2019
U.S. government and agency securities	$	2,813	$	26	$	—	$	2,839
Obligations of states and political subdivisions		545,148		48,274		—		593,422
Mortgage-backed securities
Commercial		7,183		59		—		7,242
Residential		—		—		—		—
Total mortgage-backed securities		7,183		59		—		7,242
Total held-to-maturity securities	$	555,144	$	48,359	$	—	$	603,503

Credit Quality Indicators & Allowance for Credit Losses - HTM

For HTM securities, the Company evaluates the credit risk of its securities on at least a quarterly basis. The Company

estimates expected credit losses on HTM debt securities on an individual basis based on the PD/LGD methodology primarily using security-level credit ratings. The Company’s HTM securities ACL was immaterial at the adoption of ASC 326. The Company re-evaluated the HTM securities ACL at March 31, 2020 and concluded no additional reserve was needed at March 31, 2020. The primary indicators of credit quality for the Company’s HTM portfolio are security type and credit rating, which is influenced by a number of factors including obligor cash flow, geography, seniority, and others. The Company’s only credit risk HTM securities are obligations of states and political subdivisions.

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The following table presents the amortized cost of HTM securities as of March 31, 2020 by security type and credit rating (dollars in thousands):


	Three Months Ended March 31, 2020
	U.S. Government and Agency		Obligations of states and political		Mortgage-backed		Total HTM
	securities		subdivisions		securities		securities
Credit Rating:
AAA/AA/A	$	—	$	536,747	$	—	$	536,747
Not Rated - Agency⁽¹⁾		2,797		—		5,862		8,659
Not Rated - Non-Agency		—		6,770		—		6,770
Total	$	2,797	$	543,517	$	5,862	$	552,176

(1) Generally considered not to have credit risk given the government guarantees associated with these agencies

The following table presents the amortized cost and estimated fair value of HTM securities as of March 31, 2020 and December 31, 2019, by contractual maturity. 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 (dollars in thousands).


	March 31, 2020				December 31, 2019
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Value		Value		Fair Value
Due in one year or less	$	—	$	—	$	502	$	504
Due after one year through five years		10,198		10,411		10,258		10,539
Due after five years through ten years		1,760		1,767		1,768		1,800
Due after ten years		540,218		592,602		542,616		590,660
Total HTM securities	$	552,176	$	604,780	$	555,144	$	603,503

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 March 31, 2020 and December 31, 2019.

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 March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019. Restricted equity securities consist of Federal Reserve Bank stock in the amount of $67.0 million for both March 31, 2020 and December 31, 2019 and FHLB stock in the amount of $63.2 million and $63.9 million as of March 31, 2020 and December 31, 2019, respectively.

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 months ended March 31, 2020 and 2019 (dollars in thousands).


	Three Months Ended		Three Months Ended
	March 31, 2020		March 31, 2019
Realized gains (losses):
Gross realized gains	$	2,164	$	1,213
Gross realized losses		(228)		(1,062)
Net realized gains	$	1,936	$	151

Proceeds from sales of securities	$	120,701	$	208,249

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4. LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

On January 1, 2020, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the Company’s accounting policies and policy elections related to the accounting standard update refer to Note 1 “Accounting Policies” in this Quarterly Report. All loan information presented as of March 31, 2020 is in accordance with ASC 326. All loan information presented prior to March 31, 2020 is in accordance with previous applicable GAAP.

The Company’s loans are stated at their face amount, net of deferred fees and costs, and consist of the following at March 31, 2020 and December 31, 2019 (dollars in thousands):


	March 31, 2020		December 31, 2019
Construction and Land Development	$	1,318,252	$	1,250,924
Commercial Real Estate - Owner Occupied		2,051,904		2,041,243
Commercial Real Estate - Non-Owner Occupied		3,328,012		3,286,098
Multifamily Real Estate		679,390		633,743
Commercial & Industrial		2,177,932		2,114,033
Residential 1-4 Family - Commercial		721,800		724,337
Residential 1-4 Family - Consumer		854,550		890,503
Residential 1-4 Family - Revolving		652,135		659,504
Auto		358,039		350,419
Consumer		352,572		372,853
Other Commercial		274,255		287,279
Total loans held for investment, net	$	12,768,841	$	12,610,936

The following table shows the aging of the Company’s loan portfolio, by class, at March 31, 2020 (dollars in thousands):


					Greater than
			30-59 Days		60-89 Days		90 Days and
	Current		Past Due		Past Due		still Accruing		Nonaccrual		Total Loans
Construction and Land Development	$	1,311,599	$	2,786	$	316	$	317	$	3,234	$	1,318,252
Commercial Real Estate - Owner Occupied		2,026,741		10,779		1,444		1,690		11,250		2,051,904
Commercial Real Estate - Non-Owner Occupied		3,319,481		2,087		2,765		2,037		1,642		3,328,012
Multifamily Real Estate		676,343		623		1,994		377		53		679,390
Commercial & Industrial		2,167,873		4,893		1,218		517		3,431		2,177,932
Residential 1-4 Family - Commercial		708,772		4,145		1,066		777		7,040		721,800
Residential 1-4 Family - Consumer		820,818		15,667		570		4,407		13,088		854,550
Residential 1-4 Family - Revolving		640,989		4,308		1,286		2,005		3,547		652,135
Auto		355,084		1,967		311		127		550		358,039
Consumer		348,953		1,612		1,294		622		91		352,572
Other Commercial		273,090		1		1,068		—		96		274,255
Total loans held for investment	$	12,649,743	$	48,868	$	13,332	$	12,876	$	44,022	$	12,768,841

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The following table shows the Company’s amortized cost basis of loans on nonaccrual status as of January 1, 2020 as well as amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of March 31, 2020 (dollars in thousands):


	Nonaccrual
	January 1, 2020		March 31, 2020		Nonaccrual With No ALLL		90 Days and still Accruing
Construction and Land Development	$	4,060	$	3,234	$	1,985	$	317
Commercial Real Estate - Owner Occupied		13,889		11,250		3,591		1,690
Commercial Real Estate - Non-Owner Occupied		1,368		1,642		—		2,037
Multifamily Real Estate		—		53		—		377
Commercial & Industrial		3,037		3,431		93		517
Residential 1-4 Family - Commercial		6,492		7,040		1,739		777
Residential 1-4 Family - Consumer		13,117		13,088		1,069		4,407
Residential 1-4 Family - Revolving		2,490		3,547		60		2,005
Auto		565		550		—		127
Consumer		88		91		—		622
Other Commercial		98		96		—		—
Total loans held for investment	$	45,204	$	44,022	$	8,537	$	12,876

There was no interest income recognized on nonaccrual loans during the three months ended March 31, 2020. See Note 1 “Summary of Significant Accounting Policies” in the Company’s 2019 Form 10-K for additional information on the Company’s policies for nonaccrual loans.

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Troubled Debt Restructurings

As of March 31, 2020, the Company has TDRs totaling $20.4 million with an estimated $1.9 million of allowance for those loans for the current period.

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 credit losses in accordance with the Company’s ALLL methodology. For the three months ended March 31, 2020, the recorded investment in TDRs prior to modifications was not materially impacted by the modifications.

The CARES Act permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs. In addition, federal bank regulatory authorities have issued guidance to encourage financial institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically categorize COVID-19-related loan modifications as TDRs. During the quarter ended March 31, 2020, the Company had made loan modifications of this nature totaling approximately $75 million.

The following table provides a summary, by class, 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 March 31, 2020 (dollars in thousands):


	March 31, 2020
	No. of	Recorded		Outstanding
	Loans	Investment		Commitment
Performing
Construction and Land Development	4	$	226	$	—
Commercial Real Estate - Owner Occupied	6		2,223		—
Commercial Real Estate - Non-Owner Occupied	1		1,089		—
Commercial & Industrial	4		995		—
Residential 1-4 Family - Commercial	5		287		—
Residential 1-4 Family - Consumer	74		9,502		—
Residential 1-4 Family - Revolving	2		55		—
Consumer	4		26		—
Other Commercial	1		462		—
Total performing	101	$	14,865	$	—
Nonperforming
Commercial Real Estate - Owner Occupied	2	$	172	$	—
Commercial & Industrial	1		517		—
Residential 1-4 Family - Consumer	22		4,747		—
Residential 1-4 Family - Revolving	2		55		—
Total nonperforming	27	$	5,491	$	—
Total performing and nonperforming	128	$	20,356	$	—

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 months ended March 31, 2020, 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 class and modification type, TDRs that occurred during the three months ended March 31, 2020 (dollars in thousands):


	All Restructurings
	Three Months Ended March 31, 2020
		Recorded
	No. of	Investment at
	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	$	517
Total loan term extended at a market rate	1	$	517

Term modification, below market rate
Construction and Land Development	1	$	35
Residential 1-4 Family - Consumer	10		1,763
Total loan term extended at a below market rate	11	$	1,798

Interest rate modification, below market rate
Total interest only at below market rate of interest	—	$	—

Total	12	$	2,315

Allowance for Loan and Lease Losses

ALLL on the loan portfolio is a material estimate for the Company. The Company estimates its ALLL on its loan portfolio on a quarterly basis. The Company models the ALLL using two primary segments, Commercial and Consumer. Within each segment, loan classes are further identified based on similar risk characteristics. The Company has identified the following classes within each segment:

●

Commercial: Construction and Land Development, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-Owner Occupied, Multifamily Real Estate, Commercial & Industrial, Residential 1-4 Family – Commercial, and Other Commercial

●

Consumer: Residential 1-4 Family – Consumer, Residential 1-4 Family – Revolving, Auto, and Consumer

The following tables show the ALLL activity by segment for the three months ended March 31, 2020 (dollars in thousands):





	Three Months Ended March 31, 2020
	Commercial		Consumer		Total
Balance, beginning of year	$	30,941	$	11,353	$	42,294
Impact of ASC 326 adoption on non-PCD loans		4,432		40,666		45,098
Impact of ASC 326 adoption on PCD loans		1,752		634		2,386
Impact of ASC 326 adoption		6,184		41,300		47,484
Loans charged-off		(2,968)		(4,183)		(7,151)
Recoveries credited to allowance		1,154		1,006		2,160
Provision charged to operations		42,532		13,724		56,256
Balance, end of period	$	77,843	$	63,200	$	141,043

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Credit Quality Indicators

Credit quality indicators are utilized to help estimate the collectability of each loan class within the Commercial and Consumer segments. For classes of loans within the Commercial segment, the primary credit quality indicator used for evaluating credit quality and estimating the ALLL is risk rating categories of Pass, Watch & Special Mention, Substandard, and Doubtful. For classes of loans within the Consumer segment, the primary credit quality indicator used for evaluating credit quality and estimating the ALLL is delinquency bands of Current, 30-59, 60-89, 90+, and Nonaccrual. While other credit quality indicators are evaluated and analyzed as part of the Company’s credit risk management activities, these indicators are primarily used in estimating the ALLL. The Company evaluates the credit risk of its loan portfolio on at least a quarterly basis.

Commercial Loans

The Company uses a risk rating system as the primary credit quality indicator for classes of loans within the Commercial segment. The risk rating system on a scale of 0 through 9 is used to determine risk level as used in the calculation of the allowance for credit loss; 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;

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;

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;

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

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The table below details the amortized cost of the classes of loans within the Commercial segment by risk level and year of origination as of March 31, 2020 (dollars in thousands):


		March 31, 2020
		Term Loans Amortized Cost Basis by Origination Year
																	Revolving
																	Loans
	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total		Converted to Term
Construction and Land Development
Pass	$	69,552	$	467,635	$	434,210	$	132,703	$	53,894	$	81,829	$	30,573	$	1,270,396	$	—
Watch & Special Mention		1,200		8,607		1,566		865		6,615		15,627		1,848		36,328		—
Substandard		—		—		732		736		2,405		7,655		—		11,528		—
Total Construction and Land Development	$	70,752	$	476,242	$	436,508	$	134,304	$	62,914	$	105,111	$	32,421	$	1,318,252	$	—

Commercial Real Estate - Owner Occupied
Pass	$	79,743	$	391,157	$	312,340	$	266,525	$	147,239	$	681,938	$	37,492	$	1,916,434	$	—
Watch & Special Mention		—		5,726		16,831		15,683		25,211		47,288		3,551		114,290		—
Substandard		—		—		1,115		1,333		2,730		15,628		374		21,180		—
Total Commercial Real Estate - Owner Occupied	$	79,743	$	396,883	$	330,286	$	283,541	$	175,180	$	744,854	$	41,417	$	2,051,904	$	—

Commercial Real Estate - Non-Owner Occupied
Pass	$	100,998	$	501,212	$	490,930	$	472,440	$	480,363	$	1,159,966	$	44,949	$	3,250,858	$	—
Watch & Special Mention		—		1,061		8,838		13,449		16,707		29,450		838		70,343		—
Substandard		—		—		164		—		25		6,330		200		6,719		—
Doubtful		—		—		—		—		—		—		92		92		—
Total Commercial Real Estate - Non-Owner Occupied	$	100,998	$	502,273	$	499,932	$	485,889	$	497,095	$	1,195,746	$	46,079	$	3,328,012	$	—

Commercial & Industrial
Pass	$	127,407	$	445,967	$	280,399	$	90,466	$	90,219	$	176,554	$	894,146	$	2,105,158	$	353
Watch & Special Mention		457		3,817		7,987		1,520		3,900		4,367		40,039		62,087		49
Substandard		—		505		1,015		253		900		3,222		4,792		10,687		—
Total Commercial & Industrial	$	127,864	$	450,289	$	289,401	$	92,239	$	95,019	$	184,143	$	938,977	$	2,177,932	$	402

Multifamily Real Estate
Pass	$	60,276	$	78,954	$	63,329	$	129,106	$	64,831	$	254,868	$	7,286	$	658,650	$	—
Watch & Special Mention		—		—		—		8,286		1,134		10,551		339		20,310		—
Substandard		—		—		—		—		—		430		—		430		—
Total Multifamily Real Estate	$	60,276	$	78,954	$	63,329	$	137,392	$	65,965	$	265,849	$	7,625	$	679,390	$	—

Residential 1-4 Family - Commercial
Pass	$	29,989	$	112,509	$	79,932	$	104,116	$	86,412	$	264,081	$	1,911	$	678,950	$	810
Watch & Special Mention		880		2,720		8,378		3,617		2,159		13,689		—		31,443		2,762
Substandard		—		—		310		632		1,846		8,002		617		11,407		76
Total Residential 1-4 Family - Commercial	$	30,869	$	115,229	$	88,620	$	108,365	$	90,417	$	285,772	$	2,528	$	721,800	$	3,648

Other Commercial
Pass	$	1,468	$	116,582	$	9,904	$	43,520	$	17,802	$	59,403	$	19,049	$	267,728	$	—
Watch & Special Mention		—		—		636		1,337		—		4,344		54		6,371		—
Substandard		—		—		—		60		—		96		—		156		—
Total Other Commercial	$	1,468	$	116,582	$	10,540	$	44,917	$	17,802	$	63,843	$	19,103	$	274,255	$	—

Total Commercial
Pass	$	469,433	$	2,114,016	$	1,671,044	$	1,238,876	$	940,760	$	2,678,639	$	1,035,406	$	10,148,174	$	1,163
Watch & Special Mention		2,537		21,931		44,236		44,757		55,726		125,316		46,669		341,172		2,811
Substandard		—		505		3,336		3,014		7,906		41,363		5,983		62,107		76
Doubtful		—		—		—		—		—		—		92		92		—
Total Commercial	$	471,970	$	2,136,452	$	1,718,616	$	1,286,647	$	1,004,392	$	2,845,318	$	1,088,150	$	10,551,545	$	4,050

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Consumer Loans

For Consumer loans, the Company evaluates credit quality based on the delinquency status of the loan. The following table details the amortized cost of the classes of loans within the Consumer segment based on their delinquency status and year of origination as of March 31, 2020 (dollars in thousands):


		March 31, 2020
		Term Loans Amortized Cost Basis by Origination Year
																	Revolving
																	Loans
	2020		2019		2018		2017		2016		Prior		Revolving Loans		Total		Converted to Term
Residential 1-4 Family - Consumer
Current	$	21,273	$	95,266	$	105,226	$	99,655	$	129,032	$	370,353	$	13	$	820,818	$	—
30-59 Days Past Due		—		1,268		1,537		2,566		453		9,843		—		15,667		—
60-89 Days Past Due		—		—		109		77		—		384		—		570		—
90+ Days Past Due		—		728		125		445		276		2,833		—		4,407		—
Nonaccrual		—		—		888		891		797		10,512		—		13,088		—
Total Residential 1-4 Family - Consumer	$	21,273	$	97,262	$	107,885	$	103,634	$	130,558	$	393,925	$	13	$	854,550	$	—

Residential 1-4 Family - Revolving
Current	$	6,463	$	7,732	$	2,641	$	21	$	—	$	661	$	623,471	$	640,989	$	—
30-59 Days Past Due		—		49		—		—		—		—		4,259		4,308		—
60-89 Days Past Due		—		—		—		—		—		—		1,286		1,286		—
90+ Days Past Due		—		—		—		—		—		—		2,005		2,005		—
Nonaccrual		—		—		—		—		—		314		3,233		3,547		—
Total Residential 1-4 Family - Revolving	$	6,463	$	7,781	$	2,641	$	21	$	—	$	975	$	634,254	$	652,135	$	—

Consumer
Current	$	25,016	$	106,175	$	110,825	$	34,857	$	14,995	$	20,293	$	36,792	$	348,953	$	—
30-59 Days Past Due		—		329		692		198		11		342		40		1,612		—
60-89 Days Past Due		—		193		699		84		28		288		2		1,294		—
90+ Days Past Due		—		139		368		94		13		—		8		622		—
Nonaccrual		—		—		—		—		3		88		—		91		—
Total Consumer	$	25,016	$	106,836	$	112,584	$	35,233	$	15,050	$	21,011	$	36,842	$	352,572	$	—

Auto
Current	$	35,381	$	149,149	$	77,698	$	48,701	$	28,777	$	15,378	$	—	$	355,084	$	—
30-59 Days Past Due		—		463		528		447		347		182		—		1,967		—
60-89 Days Past Due		—		63		52		92		40		64		—		311		—
90+ Days Past Due		—		77		24		12		—		14		—		127		—
Nonaccrual		—		117		81		106		148		98		—		550		—
Total Auto	$	35,381	$	149,869	$	78,383	$	49,358	$	29,312	$	15,736	$	—	$	358,039	$	—

Total Consumer
Current	$	88,133	$	358,322	$	296,390	$	183,234	$	172,804	$	406,685	$	660,276	$	2,165,844	$	—
30-59 Days Past Due		—		2,109		2,757		3,211		811		10,367		4,299		23,554		—
60-89 Days Past Due		—		256		860		253		68		736		1,288		3,461		—
90+ Days Past Due		—		944		517		551		289		2,847		2,013		7,161		—
Nonaccrual		—		117		969		997		948		11,012		3,233		17,276		—
Total Consumer	$	88,133	$	361,748	$	301,493	$	188,246	$	174,920	$	431,647	$	671,109	$	2,217,296	$	—

Acquired Loans

The Company has purchased loans that, at the time of acquisition, exhibited more than insignificant credit deterioration since origination. The Company has elected to treat all loans that were previously identified as PCI as PCD. As of March 31, 2020, the amortized cost of the Company’s PCD loans totaled $84.7 million, which had an estimated ALLL of $3.8 million.

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Prior to the adoption of ASC 326

The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 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	$	4,563	$	482	$	189	$	10,944	$	3,703	$	1,231,043	$	1,250,924
Commercial Real Estate - Owner Occupied		3,482		2,184		1,062		27,438		6,003		2,001,074		2,041,243
Commercial Real Estate - Non-Owner Occupied		457		—		1,451		14,565		381		3,269,244		3,286,098
Multifamily Real Estate		223		—		474		94		—		632,952		633,743
Commercial & Industrial		8,698		1,598		449		1,579		1,735		2,099,974		2,114,033
Residential 1-4 Family - Commercial		1,479		2,207		674		12,205		4,301		703,471		724,337
Residential 1-4 Family - Consumer		16,244		3,072		4,515		14,713		9,292		842,667		890,503
Residential 1-4 Family - Revolving		10,190		1,784		3,357		4,127		2,080		637,966		659,504
Auto		2,525		236		272		4		563		346,819		350,419
Consumer		2,128		1,233		953		668		77		367,794		372,853
Other Commercial		464		—		—		344		97		286,374		287,279
Total loans held for investment	$	50,453	$	12,796	$	13,396	$	86,681	$	28,232	$	12,419,378	$	12,610,936

The following table shows the PCI loan portfolios, by class and their delinquency status, at December 31, 2019 (dollars in thousands):


	30-89 Days		Greater than
	Past Due		90 Days		Current		Total
Construction and Land Development	$	136	$	343	$	10,465	$	10,944
Commercial Real Estate - Owner Occupied		480		6,884		20,074		27,438
Commercial Real Estate - Non-Owner Occupied		848		987		12,730		14,565
Multifamily Real Estate		—		—		94		94
Commercial & Industrial		—		989		590		1,579
Residential 1-4 Family - Commercial		543		1,995		9,667		12,205
Residential 1-4 Family - Consumer		927		1,781		12,005		14,713
Residential 1-4 Family - Revolving		287		205		3,635		4,127
Auto		—		—		4		4
Consumer		—		9		659		668
Other Commercial		—		—		344		344
Total	$	3,221	$	13,193	$	70,267	$	86,681

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Table of Contents

As of December 31, 2019, the Company measured the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. The following table shows the Company’s loans, excluding PCI loans, by class at December 31, 2019 (dollars in thousands):


	December 31, 2019
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
Loans without a specific allowance
Construction and Land Development	$	5,877	$	7,174	$	—
Commercial Real Estate - Owner Occupied		8,801		9,296		—
Commercial Real Estate - Non-Owner Occupied		3,510		4,059		—
Commercial & Industrial		3,668		3,933		—
Residential 1-4 Family - Commercial		4,047		4,310		—
Residential 1-4 Family - Consumer		8,420		9,018		—
Residential 1-4 Family - Revolving		862		865		—
Total impaired loans without a specific allowance	$	35,185	$	38,655	$	—
Loans with a specific allowance
Construction and Land Development	$	984	$	1,032	$	49
Commercial Real Estate - Owner Occupied		2,820		3,093		146
Commercial Real Estate - Non-Owner Occupied		335		383		2
Commercial & Industrial		2,568		2,590		619
Residential 1-4 Family - Commercial		1,726		1,819		162
Residential 1-4 Family - Consumer		12,026		12,670		1,242
Residential 1-4 Family - Revolving		2,186		2,369		510
Auto		563		879		221
Consumer		168		336		46
Other Commercial		562		567		30
Total impaired loans with a specific allowance	$	23,938	$	25,738	$	3,027
Total impaired loans	$	59,123	$	64,393	$	3,027

The following table shows the average recorded investment and interest income recognized for the Company’s loans, excluding PCI loans, by class for the three months ended March 31, 2019 (dollars in thousands):


	Three Months Ended
	March 31, 2019
			Interest
	Average		Income
	Investment		Recognized
Construction and Land Development	$	9,425	$	39
Commercial Real Estate - Owner Occupied		11,554		105
Commercial Real Estate - Non-Owner Occupied		6,956		59
Commercial & Industrial		2,224		14
Residential 1-4 Family - Commercial		6,475		32
Residential 1-4 Family - Consumer		18,257		114
Residential 1-4 Family - Revolving		3,472		40
Auto		600		—
Consumer		215		2
Other Commercial		588		8
Total impaired loans	$	59,766	$	413

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At December 31, 2019, the Company considered 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 credit loss methodology.


	December 31, 2019
	No. of	Recorded		Outstanding
	Loans	Investment		Commitment
Performing
Construction and Land Development	4	$	1,114	$	—
Commercial Real Estate - Owner Occupied	6		2,228		26
Commercial Real Estate - Non-Owner Occupied	1		1,089		—
Commercial & Industrial	4		1,020		—
Residential 1-4 Family - Commercial	5		290		—
Residential 1-4 Family - Consumer	69		9,396		—
Residential 1-4 Family - Revolving	2		56		—
Consumer	4		29		—
Other Commercial	1		464		—
Total performing	96	$	15,686	$	26
Nonperforming
Commercial Real Estate - Owner Occupied	2	$	176	$	—
Commercial & Industrial	1		55		—
Residential 1-4 Family - Consumer	19		3,522		—
Residential 1-4 Family - Revolving	2		57		—
Total nonperforming	24	$	3,810	$	—
Total performing and nonperforming	120	$	19,496	$	26

The Company considers a default of a TDR to occur when the borrower is 90 days past due following the restructuring or a foreclosure and repossession of the applicable collateral occurs. During the three months ended March 31, 2019, 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 class and modification type, TDRs that occurred during the three months ended March 31, 2019 (dollars in thousands):


	All Restructurings
	Three Months Ended March 31, 2019
		Recorded
	No. of	Investment at
	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	$	441
Residential 1-4 Family - Commercial	1		75
Residential 1-4 Family - Consumer	2		263
Consumer	1		10
Total loan term extended at a market rate	5	$	789

Term modification, below market rate
Residential 1-4 Family - Consumer	5	$	937
Consumer	1		6
Total loan term extended at a below market rate	6	$	943

Total	11	$	1,732

Allowance for Loan and Lease Losses

The following table shows the ALLL activity by class for the three months ended March 31, 2019. The table below includes 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):


	Three Months Ended March 31, 2019
	Allowance for loan and lease 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	$	27	$	(732)	$	126	$	6,224
Commercial Real Estate - Owner Occupied		4,023		25		(47)		29		4,030
Commercial Real Estate - Non-Owner Occupied		8,865		89		—		82		9,036
Multifamily Real Estate		649		85		—		(74)		660
Commercial & Industrial		7,636		360		(980)		395		7,411
Residential 1-4 Family - Commercial		1,692		87		(66)		47		1,760
Residential 1-4 Family - Consumer		1,492		155		(32)		117		1,732
Residential 1-4 Family - Revolving		1,297		87		(216)		238		1,406
Auto		1,443		186		(399)		216		1,446
Consumer and all other⁽¹⁾		7,145		595		(3,467)		2,849		7,122
Total	$	41,045	$	1,696	$	(5,939)	$	4,025	$	40,827

⁽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 ALLL balances based on impairment methodology by class as of December 31, 2019 (dollars in thousands):


	December 31, 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	$	6,861	$	49	$	1,233,119	$	5,709	$	10,944	$	—	$	1,250,924	$	5,758
Commercial Real Estate - Owner Occupied		11,621		146		2,002,184		3,773		27,438		—		2,041,243		3,919
Commercial Real Estate - Non-Owner Occupied		3,845		2		3,267,688		9,541		14,565		—		3,286,098		9,543
Multifamily Real Estate		—		—		633,649		632		94		—		633,743		632
Commercial & Industrial		6,236		619		2,106,218		7,768		1,579		217		2,114,033		8,604
Residential 1-4 Family - Commercial		5,773		162		706,359		1,203		12,205		—		724,337		1,365
Residential 1-4 Family - Consumer		20,446		1,242		855,344		771		14,713		—		890,503		2,013
Residential 1-4 Family - Revolving		3,048		510		652,329		813		4,127		—		659,504		1,323
Auto		563		221		349,852		1,232		4		—		350,419		1,453
Consumer and all other⁽¹⁾		730		76		658,390		7,608		1,012		—		660,132		7,684
Total loans held for investment, net	$	59,123	$	3,027	$	12,465,132	$	39,050	$	86,681	$	217	$	12,610,936	$	42,294

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

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 allowance for loan loss; 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.

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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;

●

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

Substandard is determined by the following criteria:

●

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

Doubtful is determined by the following criteria:

●

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.

The following table shows the recorded investment in all loans, excluding PCI loans, by segment with their related risk level as of December 31, 2019 (dollars in thousands):


	Pass		Watch & Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	1,197,066	$	37,182	$	5,732	$	—	$	1,239,980
Commercial Real Estate - Owner Occupied		1,916,492		87,004		10,309		—		2,013,805
Commercial Real Estate - Non-Owner Occupied		3,205,463		62,368		3,608		94		3,271,533
Multifamily Real Estate		613,844		19,396		409		—		633,649
Commercial & Industrial		2,043,903		60,495		8,048		8		2,112,454
Residential 1-4 Family - Commercial		680,894		24,864		6,374		—		712,132
Residential 1-4 Family - Consumer		841,408		13,592		20,534		256		875,790
Residential 1-4 Family - Revolving		641,069		6,373		7,935		—		655,377
Auto		345,960		2,630		1,825		—		350,415
Consumer		371,315		550		320		—		372,185
Other Commercial		284,914		1,863		158		—		286,935
Total	$	12,142,328	$	316,317	$	65,252	$	358	$	12,524,255

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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, 2019 (dollars in thousands):


	Pass		Watch & Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	1,092	$	3,692	$	6,160	$	—	$	10,944
Commercial Real Estate - Owner Occupied		8,264		10,524		8,650		—		27,438
Commercial Real Estate - Non-Owner Occupied		3,826		9,415		1,324		—		14,565
Multifamily Real Estate		—		94		—		—		94
Commercial & Industrial		127		25		1,427		—		1,579
Residential 1-4 Family - Commercial		6,000		2,693		3,512		—		12,205
Residential 1-4 Family - Consumer		9,947		557		4,209		—		14,713
Residential 1-4 Family - Revolving		2,887		707		533		—		4,127
Auto		2		—		2		—		4
Consumer		657		—		11		—		668
Other Commercial		120		224		—		—		344
Total	$	32,922	$	27,931	$	25,828	$	—	$	86,681

Acquired Loans

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, as of March 31, 2019 (dollars in thousands):


	For the Three Months Ended March 31,
	2019
Balance at beginning of period	$	31,201
Additions		2,432
Accretion		(2,385)
Reclass of nonaccretable difference due to improvement in expected cash flows		465
Other, net ⁽¹⁾		1,508
Balance at end of period	$	33,221

(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 $86.7 million at December 31, 2019. The outstanding balance of the Company’s PCI loan portfolio totaled $104.9 million at December 31, 2019. The carrying value of the Company’s acquired performing loan portfolio, accounted for under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, totaled $3.0 billion at December 31, 2019; the remaining discount on these loans totaled $50.1 million at December 31, 2019.

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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 4 to 10 years, using an accelerated method. Other amortizable intangible assets are being amortized over the period of expected benefit, which ranges from 4 to 10 years, using various methods.

Amortization expense of intangibles for the three months ended March 31, 2020 and 2019 totaled $4.4 million and $4.2 million, respectively.

As of March 31, 2020, the estimated remaining amortization expense of intangibles is as follows for the years ending (dollars in thousands):


For the remaining nine months of 2020	$	12,113
2021		13,874
2022		11,490
2023		9,687
2024		7,818
Thereafter		14,316
Total estimated amortization expense	$	69,298

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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. At March 31, 2020 all leases were 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 14 years. The Company’s real estate lease agreements do not contain residual value guarantees and most agreements do not contain restrictive covenants.

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. At March 31, 2020 and December 31, 2019, the total ROU Asset were $53.6 million and $54.9 million, respectively, and total operating lease liabilities were $64.2 million and $66.1 million, respectively. 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.

Total lease expenses are recorded in Occupancy Expense within noninterest expense on the Company’s Consolidated Statements of Income. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Total operating lease expenses for the three months ended March 31, 2020 and 2019, were $2.9 million and $3.2 million, respectively.

As of March 31, 2020, the Company had no material operating leases that have not yet commenced that create significant rights and obligations, and no material sales leaseback transactions.

Maturities of operating lease liabilities as of March 31, 2020 are as follows for the years ending (dollars in thousands):


For the remaining nine months of 2020	$	9,714
2021		11,523
2022		10,545
2023		9,561
2024		8,232
2025		6,040
Thereafter		15,088
Total future lease payments		70,703
Less: Interest		6,533
Present value of lease liabilities	$	64,171

Other lease information is as follows as of March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019 (dollars in thousands):


	March 31, 2020			December 31, 2019
Lease Term and Discount Rate of Operating leases:
Weighted-average remaining lease term (years)		7.20			7.36
Weighted-average discount rate ⁽¹⁾		2.56	%		2.69	%

	Three Months Ended March 31,
Cash paid for amounts included in measurement of lease liabilities:	2020			2019
Operating Cash Flows from Operating Leases	$	3,517		$	3,468
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		1,216			4,346

(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 March 31, 2020 and December 31, 2019 (dollars in thousands):


	March 31,			December 31,
	2020			2019
Securities sold under agreements to repurchase	$	56,781		$	66,053
Federal Funds Purchased		25,000			—
FHLB advances		355,000			370,200
Total short-term borrowings	$	436,781		$	436,253

Average outstanding balance during the period	$	364,931		$	673,116
Average interest rate (during the period)		1.48	%		2.30	%
Average interest rate at end of period		1.30	%		1.52	%

The Bank maintains federal funds lines with several correspondent banks, the remaining available balance of which was $787.0 million and $682.0 million at March 31, 2020 and December 31, 2019, respectively. The Company maintains an alternate line of credit at a correspondent bank, the available balance was $25.0 million at both March 31, 2020 and December 31, 2019. 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 March 31, 2020. Additionally, the Company had a collateral dependent line of credit with the FHLB of up to $5.3 billion and $5.2 billion at March 31, 2020 and December 31, 2019, 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 $14.7 million at March 31, 2020.

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The trust preferred capital notes currently qualify for Tier 2 capital of the Company for regulatory purposes. The Company’s trust preferred capital notes consist of the following as of March 31, 2020:


	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	%	4.20	%	6/17/2034
Trust Preferred Capital Note - Statutory Trust II		36,000,000		1,114,000	1.40	%	2.85	%	6/15/2036
VFG Limited Liability Trust I Indenture		20,000,000		619,000	2.73	%	4.18	%	3/18/2034
FNB Statutory Trust II Indenture		12,000,000		372,000	3.10	%	4.55	%	6/26/2033
Gateway Capital Statutory Trust I		8,000,000		248,000	3.10	%	4.55	%	9/17/2033
Gateway Capital Statutory Trust II		7,000,000		217,000	2.65	%	4.10	%	6/17/2034
Gateway Capital Statutory Trust III		15,000,000		464,000	1.50	%	2.95	%	5/30/2036
Gateway Capital Statutory Trust IV		25,000,000		774,000	1.55	%	3.00	%	7/30/2037
MFC Capital Trust II		5,000,000		155,000	2.85	%	4.30	%	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 March 31, 2020.

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 $25,000 at March 31, 2020. The acquired subordinated notes have a fixed interest rate of 6.75% and a maturity date of June 30, 2025. At March 31, 2020 and December 31, 2019, the contractual principal reported for subordinated notes was $158.5 million; remaining issuance discount as of March 31, 2020 and December 31, 2019 is $1.3 million and $1.4 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 was considered to be in compliance with these covenants as of March 31, 2020.

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 which was deferred and to be amortized over the term of the modified advances using the effective rate method. The amortization expense is included as a component of interest expense on long-term borrowings on the Company’s Consolidated Statements of Income and was $493,000 for the three months ended March 31, 2019. On August 29, 2019, the Company repaid the floating rate FHLB advances.

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As of March 31, 2020, 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)	%	0.70	%	8/17/2029	$	50,000
Convertible Flipper	(0.50)	%	0.95	%	5/15/2024		200,000
Convertible Flipper	(0.75)	%	0.70	%	5/22/2029		150,000
Convertible Flipper	(0.75)	%	0.70	%	5/30/2029		50,000
Convertible Flipper	(0.75)	%	0.70	%	6/21/2029		100,000
Fixed Rate Convertible	-		1.78	%	10/26/2028		200,000
Fixed Rate Hybrid	-		1.58	%	5/18/2020		20,000
Fixed Rate Credit	-		1.54	%	10/2/2020		10,000
						$	780,000

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

As of December 31, 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)	%	1.16	%	8/17/2029	$	50,000
Convertible Flipper	(0.50)	%	1.41	%	5/15/2024		200,000
Convertible Flipper	(0.75)	%	1.16	%	5/22/2029		150,000
Convertible Flipper	(0.75)	%	1.16	%	5/30/2029		50,000
Convertible Flipper	(0.75)	%	1.16	%	6/21/2029		100,000
Fixed Rate Convertible	-		1.78	%	10/26/2028		200,000
Fixed Rate Hybrid	-		1.58	%	5/18/2020		20,000
Fixed Rate Credit	-		1.54	%	10/2/2020		10,000
						$	780,000

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

For information on the carrying value of loans and securities pledged as collateral on FHLB advances as of March 31, 2020 and December 31, 2019, refer to Note 8 "Commitments and Contingencies."

As of March 31, 2020, 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 nine months of 2020	$	—	$	—	$	30,000	$	(646)	$	29,354
2021		—		—		—		(1,008)		(1,008)
2022		—		—		—		(1,030)		(1,030)
2023		—		—		—		(1,053)		(1,053)
2024		—		—		200,000		(1,078)		198,922
Thereafter		155,159		158,500		550,000		(11,161)		852,498
Total long-term borrowings	$	155,159	$	158,500	$	780,000	$	(15,976)	$	1,077,683

(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 and funding information, current and future economic conditions, risk ratings, and past due status among other factors in the consideration of expected credit losses 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 March 31, 2020 and December 31, 2019, the Company’s reserves for off-balance sheet credit risk and indemnification were $10.7 million and $2.6 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):


	March 31, 2020		December 31, 2019
Commitments with off-balance sheet risk:
Commitments to extend credit ⁽¹⁾	$	4,605,213	$	4,691,272
Standby letters of credit		165,371		209,658
Total commitments with off-balance sheet risk	$	4,770,584	$	4,900,930

(1) Includes unfunded overdraft protection.

Prior to the first quarter of 2020, the Company was required to maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. On March 15, 2020, the Federal Reserve Board announced that reserve requirement ratios would be reduced to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.

As of March 31, 2020, the Company had approximately $261.7 million in deposits in other financial institutions, of which $246.4 million served as collateral for cash flow and loan swap derivatives. The Company had approximately $12.1 million in deposits in other financial institutions that were uninsured at March 31, 2020. 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 March 31, 2020 and December 31, 2019 (dollars in thousands):


	Pledged Assets as of March 31, 2020
			AFS		HTM
	Cash		Securities ⁽¹⁾		Securities ⁽¹⁾		Loans ⁽²⁾		Total
Public deposits	$	—	$	455,201	$	314,953	$	—	$	770,154
Repurchase agreements		—		98,445		—		—		98,445
FHLB advances		—		61,129		—		4,107,411		4,168,540
Derivatives		246,430		1,091		—		—		247,521
Fed Funds		—		—		—		319,914		319,914
Other purposes		—		118,597		9,037		—		127,634
Total pledged assets	$	246,430	$	734,463	$	323,990	$	4,427,325	$	5,732,208

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


	Pledged Assets as of December 31, 2019
			AFS		HTM
	Cash		Securities ⁽¹⁾		Securities ⁽¹⁾		Loans ⁽²⁾		Total
Public deposits	$	—	$	467,266	$	292,096	$	—	$	759,362
Repurchase agreements		—		79,299		7,602		—		86,901
FHLB advances		—		63,812		—		3,846,934		3,910,746
Derivatives		116,839		1,260		—		—		118,099
Fed Funds		—		—		—		292,738		292,738
Other purposes		—		122,358		10,654		—		133,012
Total pledged assets	$	116,839	$	733,995	$	310,352	$	4,139,672	$	5,300,858

(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. 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 concluded 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 March 31, 2020, the Company terminated one interest rate swap designated as a cash flow hedge prior to its respective maturity date. The net loss reclassified into earnings totaled $1.8 million for the quarter ended March 31, 2020. This loss is immediately recognized into earnings as the forecasted transaction will not occur.

The Company did not have any derivatives designated as cash flow hedges outstanding at March 31, 2020.

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.

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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. At March 31, 2020 and December 31, 2019, the aggregate notional amount of the related hedged items for certain long-term fixed rate loans totaled $82.0 million and $83.1 million, respectively, and the fair value of the related hedged items was an unrealized loss of $6.8 million and $2.0 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. At March 31, 2020 and December 31, 2019, the aggregate notional amount of the related hedged items of the AFS securities totaled $50 million and the fair value of the related hedged items was an unrealized loss of $8.0 million and $4.1 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 offers interest rate swap loan relationships (“loan swaps”) to its borrowers to help 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.

The following table summarizes key elements of the Company’s derivative instruments as of March 31, 2020 and December 31, 2019, segregated by derivatives that are considered accounting hedges and those that are not (dollars in thousands):


	March 31, 2020						December 31, 2019
			Derivative ⁽²⁾						Derivative ⁽²⁾
	Notional or						Notional or
	Contractual						Contractual
	Amount ⁽¹⁾		Assets		Liabilities		Amount ⁽¹⁾		Assets		Liabilities
Derivatives designated as accounting hedges:
Interest rate contracts:
Cash flow hedges	$	—	$	—	$	—	$	100,000	$	—	$	1,147
Fair value hedges		131,961		1		14,769		133,078		182		6,256
Derivatives not designated as accounting hedges:
Loan Swaps :
Pay fixed - receive floating interest rate swaps		1,800,795		—		174,704		1,575,149		753		53,592
Pay floating - receive fixed interest rate swaps		1,800,795		174,704		—		1,575,149		53,592		753

(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.

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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 March 31, 2020 and December 31, 2019 (dollars in thousands):

March 31, 2020

December 31, 2019

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)}

194,899

7,990

206,799

4,072

Loans

81,961

6,734

83,078

1,972

(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. At March 31, 2020 and December 31, 2019, the amortized cost basis of this portfolio was $195 million and $207 million, respectively and the cumulative basis adjustment associated with this hedge was $8.0 million and $4.1 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 March 31, 2020 and December 31, 2019, the Company had no shares issued or outstanding.

Accumulated Other Comprehensive Income (Loss)

The change in accumulated other comprehensive income (loss) for the three months ended March 31, 2020 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 - December 31, 2019	$	37,877	$	75	$	(782)	$	(1,595)	$	35,575
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassification		14,687		—		(699)		(1,289)		12,699
Amounts reclassified from AOCI into earnings		(1,529)		(5)		1,481		108		55
Net current period other comprehensive income (loss)		13,158		(5)		782		(1,181)		12,754
Balance - March 31, 2020	$	51,035	$	70	$	—	$	(2,776)	$	48,329

The change in accumulated other comprehensive income (loss) for the three months ended March 31, 2019 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 - December 31, 2018	$	(5,949)	$	95	$	(3,393)	$	(1,026)	$	(10,273)
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassification		20,081		—		(1,460)		—		18,621
Amounts reclassified from AOCI into earnings		(85)		(5)		120		19		49
Net current period other comprehensive income (loss)		19,996		(5)		(1,340)		19		18,670
Balance - March 31, 2019	$	14,047	$	90	$	(4,733)	$	(1,007)	$	8,397

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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 March 31, 2020 and December 31, 2019. 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 March 31, 2020 did not have a material impact on the Company’s Consolidated Financial Statements.

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.

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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" on the Company’s Consolidated Statements of Income.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at March 31, 2020 and December 31, 2019 (dollars in thousands):

Fair Value Measurements at March 31, 2020 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

—

17,962

—

17,962

Obligations of states and political subdivisions

—

546,726

—

546,726

Corporate and other bonds⁽¹⁾

—

120,968

—

120,968

Mortgage-backed securities

—

1,284,157

—

1,284,157

Other securities

—

3,090

—

3,090

Loans held for sale

—

76,690

—

76,690

Derivatives:

Interest rate swap

—

174,704

—

174,704

Fair value hedges

—

LIABILITIES

Derivatives:

Interest rate swap

—

174,704

—

174,704

Fair value hedges

—

14,769

—

14,769

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	Fair Value Measurements at December 31, 2019 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:
U.S. government and agency securities	$	—	$	21,320	$	—	$	21,320
Obligations of states and political subdivisions		—		447,091		—		447,091
Corporate and other bonds⁽¹⁾		—		135,959		—		135,959
Mortgage-backed securities		—		1,337,996		—		1,337,996
Other securities		—		3,079		—		3,079
Loans held for sale		—		55,405		—		55,405
Derivatives:
Interest rate swap		—		54,345		—		54,345
Fair value hedges		—		182		—		182

LIABILITIES
Derivatives:
Interest rate swap	$	—	$	54,345	$	—	$	54,345
Cash flow hedges		—		1,147		—		1,147
Fair value hedges		—		6,256		—		6,256

(1)

Other bonds include asset-backed securities.

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 after they are evaluated for impairment. The primary assets accounted for at fair value on a nonrecurring basis are related to foreclosed properties, former bank premises, and collateral-dependent loans that are individually assessed. When the asset is secured by real estate, the Company measures the fair value utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data. Management may discount the value from the appraisal in determining the fair value if, based on its understanding of the market conditions, the collateral had been impaired below the appraised value (Level 3). The assets for which a nonrecurring fair value measurement was recorded during the period ended March 31, 2020 and December 31, 2019 was $6.6 million and $11.9 million, respectively. The nonrecurring valuation adjustments for these assets did not have a material impact on the Company’s consolidated financial statements.

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

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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 March 31, 2020 and December 31, 2019. 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 March 31, 2020.

Loans

The fair value of loans was estimated using an exit price, representing the amount that would be expected to be received if the Company sold the loans. The fair value of performing loans was estimated through use of discounted cash flows. Credit loss assumptions were based on market PD/LGD for loan cohorts. The discount rate was based primarily on recent market origination rates. Fair value of loans individually assessed for impairment and their respective levels within the fair value hierarchy are described in the previous section related to fair value measurements of assets that are measured on a nonrecurring basis.

Bank owned life insurance

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 March 31, 2020 and December 31, 2019 are as follows (dollars in thousands):

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Fair Value Measurements at March 31, 2020 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

504,959

—

504,959

AFS securities

1,972,903

—

1,972,903

—

1,972,903

HTM securities

552,176

—

588,984

15,796

604,780

Restricted stock

130,227

—

130,227

—

130,227

Loans held for sale

76,690

—

76,690

—

76,690

Net loans

12,627,798

—

12,413,731

Derivatives:

Interest rate swap

174,704

—

174,704

—

174,704

Fair value hedges

—

Accrued interest receivable

46,678

—

46,678

—

46,678

BOLI

324,980

—

324,980

—

324,980

LIABILITIES

Deposits

13,553,035

—

13,610,143

—

13,610,143

Borrowings

1,514,464

—

1,501,474

—

1,501,474

Accrued interest payable

7,532

—

7,532

—

7,532

Derivatives:

Interest rate swap

174,704

—

174,704

—

174,704

Fair value hedges

14,769

—

14,769

—

14,769


	Fair Value Measurements at December 31, 2019 using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable		Total Fair
			Identical Assets		Inputs		Inputs		Value
	Carrying
	Value		Level 1		Level 2		Level 3		Balance
ASSETS
Cash and cash equivalents	$	436,032	$	436,032	$	—	$	—	$	436,032
AFS securities		1,945,445		—		1,945,445		—		1,945,445
HTM securities		555,144		—		585,820		17,683		603,503
Restricted stock		130,848		—		130,848		—		130,848
Loans held for sale		55,405		—		55,405		—		55,405
Net loans		12,568,642		—		—		12,449,505		12,449,505
Derivatives:
Interest rate swap		54,345		—		54,345		—		54,345
Fair value hedges		182		—		182		—		182
Accrued interest receivable		52,721		—		52,721		—		52,721
BOLI		322,917		—		322,917		—		322,917

LIABILITIES
Deposits	$	13,304,981	$	—	$	13,349,943	$	—	$	13,349,943
Borrowings		1,513,748		—		1,479,606		—		1,479,606
Accrued interest payable		6,108		—		6,108		—		6,108
Derivatives:
Interest rate swap		54,345		—		54,345		—		54,345
Cash flow hedges		1,147		—		1,147		—