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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2020

OR

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

Commission File Number: 001-39325

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

Depositary Shares, Each Representing a 1/400th Interest in a Share of 6.875% Perpetual Non-Cumulative Preferred Stock, Series A

AUBAP

The NASDAQ Global Select Market

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

Yes No

The number of shares of common stock outstanding as of October 28, 2020 was 78,718,695.

Table of Contents

ATLANTIC UNION BANKSHARES CORPORATION

FORM 10-Q

INDEX

ITEM

    

    

PAGE

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019 (audited)

2

Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2020 and 2019

3

Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2020 and 2019

4

Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2020 and 2019

5

Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2020 and 2019

7

Notes to Consolidated Financial Statements (unaudited)

9

Review Report of Independent Registered Public Accounting Firm

60

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

61

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

95

Item 4.

Controls and Procedures

97

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

98

Item 1A.

Risk Factors

98

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

98

Item 6.

Exhibits

99

Signatures

100

Table of Contents

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, a component of ACL

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

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 that has spread worldwide

depositary shares

Depositary shares, each representing a 1/400th ownership interest in a share of the Company’s Series A preferred stock , with a liquidation preference of $10,000 per share of Series A preferred stock (equivalent to $25 per depositary share)

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

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

ICE Data Services

Intercontinental Exchange Data Services

LCH

London Clearing House

LIBOR

London Interbank Offered Rate

March 22 Joint Guidance

The five federal bank regulatory agencies and the Conference of State Bank Supervisors guidance issued on March 22, 2020 (subsequently revised on April 7, 2020)

MSLP

Main Street Lending Program

MBS

Mortgage Backed Securities

MD&A

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Table of Contents

NOW

Negotiable order of withdrawal

NPA

Nonperforming assets

NSF

Nonsufficient funds

OCI

Other comprehensive income

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

PPPLF

Paycheck Protection Program Liquidity Facility

PPP

Paycheck Protection Program

Quarterly Report

Quarterly Report on Form 10-Q for the quarter ended September 30, 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

RVI

Residual value insurance

SBA

Small Business Administration

SEC

Securities and Exchange Commission

Series A preferred stock

6.875% Perpetual Non-Cumulative Preferred Stock, Series A, par value $10.00 per share

SSFA

Simplified supervisory formula approach

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.

WHO

World Health Organization

Xenith

Xenith Bankshares, Inc. and its subsidiaries

Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

September 30,

December 31,

2020

    

2019

ASSETS

(unaudited)

(audited)

Cash and cash equivalents:

Cash and due from banks

$

178,563

$

163,050

Interest-bearing deposits in other banks

335,111

234,810

Federal funds sold

7,292

38,172

Total cash and cash equivalents

520,966

436,032

Securities available for sale, at fair value

2,443,340

1,945,445

Securities held to maturity, at carrying value

546,661

555,144

Restricted stock, at cost

112,216

130,848

Loans held for sale, at fair value

52,607

55,405

Loans held for investment, net of deferred fees and costs

14,383,215

12,610,936

Less allowance for loan and lease losses

174,122

42,294

Total loans held for investment, net

14,209,093

12,568,642

Premises and equipment, net

156,934

161,073

Goodwill

935,560

935,560

Amortizable intangibles, net

61,068

73,669

Bank owned life insurance

325,538

322,917

Other assets

566,667

378,255

Total assets

$

19,930,650

$

17,562,990

LIABILITIES

Noninterest-bearing demand deposits

$

4,420,665

$

2,970,139

Interest-bearing deposits

11,155,433

10,334,842

Total deposits

15,576,098

13,304,981

Securities sold under agreements to repurchase

91,086

66,053

Other short-term borrowings

175,200

370,200

Long-term borrowings

1,048,036

1,077,495

Other liabilities

379,345

231,159

Total liabilities

17,269,765

15,049,888

Commitments and contingencies (Note 8)

STOCKHOLDERS' EQUITY

Preferred stock, $10.00 par value

173

Common stock, $1.33 par value

104,141

105,827

Additional paid-in capital

1,914,640

1,790,305

Retained earnings

579,269

581,395

Accumulated other comprehensive income (loss)

62,662

35,575

Total stockholders' equity

2,660,885

2,513,102

Total liabilities and stockholders' equity

$

19,930,650

$

17,562,990

Common shares outstanding

78,718,850

80,001,185

Common shares authorized

200,000,000

200,000,000

Preferred shares outstanding

17,250

Preferred shares authorized

500,000

500,000

See accompanying notes to consolidated financial statements.

-2-

Table of Contents

ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2020

    

2019

    

2020

    

2019

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Interest and dividend income:

Interest and fees on loans

$

138,402

$

156,651

$

432,763

$

459,603

Interest on deposits in other banks

137

1,030

1,154

2,047

Interest and dividends on securities:

Taxable

10,275

12,625

33,170

39,059

Nontaxable

8,600

8,039

24,520

24,413

Total interest and dividend income

157,414

178,345

491,607

525,122

Interest expense:

Interest on deposits

15,568

30,849

63,943

84,088

Interest on short-term borrowings

72

2,200

1,598

14,313

Interest on long-term borrowings

4,393

8,695

16,372

23,978

Total interest expense

20,033

41,744

81,913

122,379

Net interest income

137,381

136,601

409,694

402,743

Provision for credit losses

6,558

9,100

100,954

18,192

Net interest income after provision for credit losses

130,823

127,501

308,740

384,551

Noninterest income:

Service charges on deposit accounts

6,041

7,675

18,549

22,331

Other service charges, commissions and fees

1,621

1,513

4,600

4,879

Interchange fees

1,979

2,108

5,300

12,765

Fiduciary and asset management fees

6,045

6,082

17,543

16,834

Mortgage banking income

8,897

3,374

16,744

7,614

Gains on securities transactions

18

7,104

12,293

7,306

Bank owned life insurance income

3,421

2,062

7,498

6,191

Loan-related interest rate swap fees

3,170

5,480

12,602

10,656

Other operating income

3,215

12,708

4,116

15,045

Total noninterest income

34,407

48,106

99,245

103,621

Noninterest expenses:

Salaries and benefits

49,000

49,718

149,013

148,116

Occupancy expenses

7,441

7,493

21,798

22,427

Furniture and equipment expenses

3,895

3,719

11,042

10,656

Printing, postage, and supplies

904

1,268

3,194

3,763

Technology and data processing

6,564

5,787

19,187

17,203

Professional services

2,914

2,681

9,211

8,269

Marketing and advertising expense

2,631

2,600

7,413

7,891

FDIC assessment premiums and other insurance

1,811

381

7,578

5,620

Other taxes

4,124

3,971

12,364

11,779

Loan-related expenses

2,314

2,566

7,512

7,250

OREO and credit-related expenses

413

1,005

1,512

3,162

Amortization of intangible assets

4,053

4,764

12,676

13,919

Training and other personnel costs

746

1,618

3,192

4,240

Merger-related costs

2,435

26,928

Rebranding expense

1,133

5,553

Loss on debt extinguishment

16,397

10,306

16,397

Other expenses

6,412

4,151

15,683

10,849

Total noninterest expenses

93,222

111,687

291,681

324,022

Income from continuing operations before income taxes

72,008

63,920

116,304

164,150

Income tax expense

11,008

10,724

17,506

26,330

Income from continuing operations

$

61,000

$

53,196

$

98,798

$

137,820

Discontinued operations:

Income (loss) from operations of discontinued mortgage segment

$

$

56

$

$

(173)

Income tax expense (benefit)

14

(45)

Income (loss) on discontinued operations

42

(128)

Net income

61,000

53,238

98,798

137,692

Dividends on preferred stock

2,691

-

2,691

-

Net income available to common shareholders

$

58,309

$

53,238

$

96,107

$

137,692

Basic earnings per common share

$

0.74

$

0.65

$

1.22

$

1.72

Diluted earnings per common share

$

0.74

$

0.65

$

1.22

$

1.72

Dividends declared per common share

$

0.25

$

0.25

$

0.75

$

0.71

Basic weighted average number of common shares outstanding

78,714,353

81,769,193

78,904,792

80,120,725

Diluted weighted average number of common shares outstanding

78,725,346

81,832,868

78,921,108

80,183,113

See accompanying notes to consolidated financial statements.

-3-

Table of Contents

ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)

Three Months Ended

 

Nine Months Ended

September 30, 

 

September 30, 

    

2020

    

2019

 

2020

    

2019

Net income

$

61,000

$

53,238

$

98,798

$

137,692

Other comprehensive income (loss):

 

  

 

  

 

  

 

Cash flow hedges:

 

  

 

  

 

  

 

  

Change in fair value of cash flow hedges

 

 

6,025

 

(699)

 

1,970

Reclassification adjustment for losses included in net income (net of tax, $0 and $42 for the three months and $394 and $120 for the nine months ended September 30, 2020 and 2019, respectively) (1)

 

 

158

 

1,481

 

451

AFS securities:

 

 

 

  

 

Unrealized holding gains arising during period (net of tax, $332 and $3,287 for the three months and $9,824 and $14,513 for the nine months ended September 30, 2020 and 2019, respectively)

 

1,250

 

12,364

 

36,956

 

54,598

Reclassification adjustment for gains included in net income (net of tax, $4 and $1,492 for the three months and $2,582 and $1,534 for the nine months ended September 30, 2020 and 2019, respectively) (2)

 

(14)

 

(5,612)

 

(9,711)

 

(5,772)

HTM securities:

 

  

 

  

 

  

 

Reclassification adjustment for accretion of unrealized gain on AFS securities transferred to HTM (net of tax, $1 and $1 for the three months and $4 and $4 for the nine months ended September 30, 2020 and 2019, respectively) (3)

 

(5)

 

(5)

 

(15)

 

(15)

Bank owned life insurance:

 

  

 

  

 

Unrealized holding losses arising during the period

(647)

(1,289)

(647)

Reclassification adjustment for losses included in net income (4)

 

127

 

19

 

364

 

57

Other comprehensive income (loss)

 

1,358

 

12,302

 

27,087

 

50,642

Comprehensive income

$

62,358

$

65,540

$

125,885

$

188,334

(1)The gross amounts reclassified into earnings for the nine months ended September 30, 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 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 AND NINE MONTHS ENDED SEPTEMBER 30, 2020

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

  

  

  

  

  

Accumulated

  

Additional

Other

Common

Preferred

Paid-In

Retained

Comprehensive

Stock

Stock

Capital

Earnings

Income (Loss)

Total

Balance - December 31, 2019

$

105,827

$

$

1,790,305

$

581,395

$

35,575

$

2,513,102

Net Income

 

 

7,089

 

 

7,089

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

 

 

 

12,754

 

12,754

Dividends on common stock ($0.25 per share)

 

 

(19,825)

 

 

(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)

 

46

 

 

731

 

777

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

 

9

 

 

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)

 

(39,053)

Stock-based compensation expense

 

 

 

2,291

 

 

2,291

Balance - March 31, 2020

$

104,086

$

$

1,743,429

$

529,606

$

48,329

$

2,425,450

Net Income

 

30,709

30,709

Other comprehensive income (net of taxes of $3,415)

 

12,975

12,975

Issuance of preferred stock (17,250 shares)

173

166,190

166,363

Dividends on common stock ($0.25 per share)

 

(19,677)

(19,677)

Issuance of common stock under Equity Compensation Plans (1,632 shares)

 

2

22

24

Issuance of common stock for services rendered (8,640 shares)

 

11

189

200

Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (19,848)

 

27

(206)

(179)

Stock-based compensation expense

 

2,361

2,361

Balance - June 30, 2020

$

104,126

$

173

$

1,911,985

$

540,638

$

61,304

$

2,618,226

Net Income

61,000

61,000

Other comprehensive income (net of taxes of $327)

1,358

1,358

Net proceeds from preferred stock

(7)

(7)

Dividends on common stock ($0.25 per share)

(19,678)

(19,678)

Dividends on preferred stock ($156.60 per share)

(2,691)

(2,691)

Issuance of common stock for services rendered (8,592 shares)

11

189

200

Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (3,009 shares)

4

(27)

(23)

Stock-based compensation expense

2,500

2,500

Balance - September 30, 2020

$

104,141

$

173

$

1,914,640

$

579,269

$

62,662

$

2,660,885

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 AND NINE MONTHS ENDED SEPTEMBER 30, 2019

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

    

    

    

    

Accumulated

    

Additional

Other

Common

Paid-In

Retained

Comprehensive

Stock

Capital

Earnings

Income (Loss)

Total

Balance - December 31, 2018

$

87,250

$

1,380,259

$

467,345

$

(10,273)

$

1,924,581

Net Income

 

 

  

 

35,631

 

  

 

35,631

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

 

  

 

  

 

  

 

18,670

 

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)

 

  

 

(18,838)

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

 

8

 

130

 

  

 

  

 

138

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

 

8

 

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)

(1,133)

Stock-based compensation expense

 

  

 

1,870

 

  

 

  

 

1,870

Balance- March 31, 2019

$

108,475

$

1,859,588

$

483,005

$

8,397

$

2,459,465

Net Income

 

  

 

  

 

48,823

 

  

 

48,823

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

 

  

 

  

 

  

 

19,670

 

19,670

Dividends on common stock ($0.23 per share)

 

 

 

(18,876)

 

  

 

(18,876)

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

 

48

 

938

 

 

  

 

986

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

 

8

 

192

 

  

 

  

 

200

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

 

29

 

(336)

 

 

  

 

(307)

Stock-based compensation expense

 

  

 

2,334

 

 

  

 

2,334

Balance- June 30, 2019

$

108,560

$

1,862,716

$

512,952

$

28,067

$

2,512,295

Net Income

 

  

 

  

 

53,238

 

  

 

53,238

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

12,302

12,302

Dividends on common stock ($0.25 per share)

(20,525)

(20,525)

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

(1,289)

(33,995)

(35,284)

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

38

656

694

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

10

269

279

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

11

(138)

(127)

Stock-based compensation expense

2,159

2,159

Balance - September 30, 2019

$

107,330

$

1,831,667

$

545,665

$

40,369

$

2,525,031

See accompanying notes to consolidated financial statements.

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ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Dollars in thousands)

    

2020

    

2019

Operating activities (1):

 

  

 

  

Net income

$

98,798

$

137,692

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

  

 

  

Depreciation of premises and equipment

 

11,311

 

11,138

Writedown of foreclosed properties and former bank premises

 

4,847

 

1,162

Amortization, net

 

20,151

 

19,033

Amortization (accretion) related to acquisitions, net

 

(7,736)

 

(5,200)

Provision for credit losses

 

100,954

 

18,192

Gains on securities transactions, net

 

(12,293)

 

(7,306)

BOLI income

 

(7,498)

 

(6,191)

Decrease (increase) in loans held for sale, net

 

2,798

 

(50,981)

Losses (gains) on sales of foreclosed properties and former bank premises, net

 

37

 

144

Losses on debt extinguishment

10,306

16,397

Stock-based compensation expenses

 

7,152

 

6,363

Issuance of common stock for services

 

604

 

698

Net decrease (increase) in other assets

 

(180,310)

 

(76,118)

Net increase in other liabilities

 

128,298

 

44,312

Net cash provided by (used in) operating activities

 

177,419

 

109,335

Investing activities:

 

  

 

  

Purchases of AFS securities and restricted stock

 

(940,745)

 

(312,120)

Purchases of HTM securities

 

 

(47,217)

Proceeds from sales of AFS securities and restricted stock

 

232,946

 

486,925

Proceeds from maturities, calls and paydowns of AFS securities

 

271,986

 

176,824

Proceeds from maturities, calls and paydowns of HTM securities

 

5,996

 

2,523

Net increase in loans held for investment

 

(1,761,350)

 

(371,260)

Net increase in premises and equipment

 

(18,557)

 

(11,547)

Cash proceeds from BOLI settlements

439

Proceeds from sales of foreclosed properties and former bank premises

 

2,706

 

5,329

Cash paid in acquisitions

 

 

(12)

Cash acquired in acquisitions

 

 

46,164

Net cash provided by (used in) investing activities

 

(2,206,579)

 

(24,391)

Financing activities:

 

  

 

  

Net increase in noninterest-bearing deposits

 

1,450,526

 

376,160

Net increase in interest-bearing deposits

 

820,701

 

471,204

Net increase (decrease) in short-term borrowings

 

(169,967)

 

(896,622)

Cash paid for contingent consideration

(565)

Proceeds from issuance of long-term debt

189,945

550,000

Repayments of long-term debt

(230,306)

(160,614)

Cash dividends paid - common stock

 

(59,180)

 

(58,239)

Cash dividends paid - preferred stock

(2,691)

Repurchase of common stock

(49,879)

(35,284)

Issuance of common stock

 

801

 

1,818

Issuance of preferred stock, net

166,356

Vesting of restricted stock, net of shares held for taxes

 

(2,212)

 

(2,081)

Net cash provided by (used in) financing activities

 

2,114,094

 

245,777

Increase (decrease) in cash and cash equivalents

 

84,934

 

330,721

Cash, cash equivalents and restricted cash at beginning of the period

 

436,032

 

261,199

Cash, cash equivalents and restricted cash at end of the period

$

520,966

$

591,920

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ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Dollars in thousands)

    

2020

    

2019

Supplemental Disclosure of Cash Flow Information

 

  

 

  

Cash payments for:

 

  

 

  

Interest

$

82,409

$

118,067

Income taxes

 

13,649

 

20,416

Supplemental schedule of noncash investing and financing activities

 

  

 

  

Transfers from loans (foreclosed properties) to foreclosed properties (loans)

 

615

 

1,816

Transfers from bank premises to OREO

7,949

Issuance of common stock in exchange for net assets in acquisitions

 

 

499,974

Transactions related to acquisitions

 

  

 

  

Assets acquired

 

 

2,855,993

Liabilities assumed

 

 

2,558,638

(1) Discontinued operations have an immaterial impact to the Company’s Consolidated Statements 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 135 branches and approximately 155 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., and Dixon, Hubard, Feinour, & Brown, Inc., which provide investment advisory services, Middleburg Investment Services, LLC, which provides brokerage services; and Union Insurance Group, LLC, which offers various lines of insurance products.

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.

Impact of COVID-19

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. On March 22, 2020, the five federal bank regulatory agencies and the Conference of State Bank Supervisors issued joint guidance (subsequently revised on April 7, 2020) with respect to loan modifications for borrowers affected by COVID-19. The CARES Act, as well as the March 22 Joint Guidance, provide enhanced guidelines and accounting for COVID-19 related modifications.

The federal banking regulators have confirmed with the FASB that short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current (i.e., less than 30 days past due on contractual payments) when the modification program was implemented are not considered TDRs. In addition, Section 4013 of the CARES Act provides banks, savings associations, and credit unions with the ability to make loan modifications related to COVID-19 without categorizing the loan as a TDR or conducting the analysis to make the determination, which is intended to streamline the loan modification process. Any such suspension is effective for the term of the loan modification; however, the suspension is only permitted for loan modifications made during the effective period of Section 4013 and only for those loans that were not more than thirty days past due as of December 31, 2019. The Company has made $1.8 billion of loan modifications pursuant to the March 22 Joint Guidance or Section 4013 of the CARES Act and as of September 30, 2020 approximately $769.6 million remain under their modified terms. The majority of the Company’s modifications as of September 30, 2020 were in the commercial real estate portfolios.

The Bank processed over 11,000 PPP loans, which totaled $1.7 billion with a recorded investment of $1.6 billion as of September 30, 2020, which included unamortized deferred fees of $32.6 million. The loans carry a 1% interest rate.

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

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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 established a cross-functional governance structure to oversee the Company’s implementation of the CECL methodology, which included evaluating key assumptions used and assessing the internal controls over financial reporting related to the adoption of ASC 326. 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. In accordance with 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 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 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.

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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 factors 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. The Company’s ALLL estimate is particularly impacted by the unemployment rate forecast in its geographic footprint. In the current quarter forecast, the unemployment rate in the Company’s geographic footprint is projected to remain significantly elevated through the forecast period. Management also considers qualitative factors when estimating loan losses to take into account model limitations. For the current quarter, the largest qualitative additions were related to industries that are particularly impacted by the COVID-19 pandemic and uncertainty regarding the extent and duration of the pandemic and the timing and efficacy of any potential future government stimulus. These qualitative factors were partially offset by qualitative reductions meant to account for enhanced unemployment benefits, bank deferrals, the PPP loan program and other factors. 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.

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 it 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 and is measured using the same measurement objectives as the ALLL. 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 $55.4 million on loans held for investment and, $5.1 million on HTM securities at September 30, 2020 and is included in “Other Assets” on the Company’s Consolidated Balance Sheets.

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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.

Cash and Cash Equivalents

For purposes of reporting cash flows, the Company defines cash and cash equivalents as cash, cash due from banks, interest-bearing deposits in other banks, money market investments, other interest-bearing deposits, and federal funds sold.

Restricted cash is disclosed in Note 8 “Commitments and Contingencies” and is comprised of cash maintained at various correspondent banks as collateral for the Company’s derivative portfolio and is included in interest-bearing deposits in other banks in the Company’s Consolidated Balance Sheets. In addition, the Company is required to maintain reserve balances with the Federal Reserve Bank based on the type and amount of deposits; however, on March 15, 2020 the Federal Reserve Board announced that reserve requirement ratios would be reduced to zero percent effective March 26, 2020 due to economic conditions, which eliminated the reserve requirement for all depository institutions.

Investment Securities

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are generally amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Premiums on callable debt securities are amortized to their earliest call date. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

The Company regularly evaluates all securities whose values have declined below amortized cost to assess whether the decline in fair value is the result of credit impairment. 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 are influenced by a number of security-specific factors that may include obligor cash flow, geography, seniority, structure, credit enhancement and other factors.

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There is currently no ACL held against the Company’s AFS securities portfolio at September 30, 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. Non-credit related declines in fair value are recognized in other comprehensive income, net of applicable taxes. Changes in the ACL are recorded as provision for (or reversal of) credit loss expense. Charge-offs are recorded against the ACL when management believes the AFS security is no longer collectible. Currently, the Company does not have an ACL on its AFS debt securities portfolio. A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent.

The Company evaluates the credit risk of its HTM 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 September 30, 2020.

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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 2020.

There were no merger-related costs associated with the acquisition of Access during the first nine months of 2020. Merger- related costs associated with the acquisition of Access were $2.0 million and $25.6 million for the three and nine months ended September 30, 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 September 30, 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 or agency backed. All AFS securities were current with no securities past due or on non-accrual as of September 30, 2020.

The amortized cost, gross unrealized gains and losses, and estimated fair values of AFS securities as of September 30, 2020 are summarized as follows (dollars in thousands):

Amortized

Gross Unrealized

Estimated

    

Cost

    

Gains

    

(Losses)

    

Fair Value

September 30, 2020

 

  

 

  

 

  

  

U.S. government and agency securities

$

13,463

$

465

$

(50)

$

13,878

Obligations of states and political subdivisions

 

759,936

 

39,033

 

(2,113)

 

796,856

Corporate and other bonds (1)

 

147,438

 

2,217

 

(737)

 

148,918

Commercial mortgage-backed securities

 

 

Agency

340,706

 

17,945

 

(116)

358,535

Non-agency

30,359

 

71

 

30,430

Total commercial mortgage-backed securities

371,065

 

18,016

 

(116)

388,965

Residential mortgage-backed securities

Agency

960,141

 

35,275

 

(1,410)

994,006

Non-agency

99,252

 

587

 

(743)

99,096

Total residential mortgage-backed securities

1,059,393

 

35,862

 

(2,153)

1,093,102

Other securities

 

1,621

 

 

 

1,621

Total AFS securities

$

2,352,916

$

95,593

$

(5,169)

$

2,443,340

(1)Other bonds include asset-backed securities.

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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

Commercial mortgage-backed securities

 

 

 

 

Agency

405,731

8,786

(619)

413,898

Non-agency

11,173

(24)

11,149

Total commercial mortgage-backed securities

416,904

8,786

(643)

425,047

Residential mortgage-backed securities

Agency

852,300

16,680

(816)

868,164

Non-agency

44,309

476

44,785

Total residential mortgage-backed securities

896,609

17,156

(816)

912,949

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 September 30, 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

September 30, 2020

 

  

 

  

 

  

 

  

 

  

 

  

U.S. government and agency securities

$

$

$

5,956

$

(50)

$

5,956

(50)

Obligations of states and political subdivisions

175,282

(2,113)

175,282

$

(2,113)

Corporate and other bonds(1)

 

38,137

 

(477)

 

20,283

 

(260)

 

58,420

 

(737)

Commercial mortgage-backed securities

 

Agency

33,827

(115)

446

(1)

34,273

(116)

Non-agency

Total commercial mortgage-backed securities

33,827

(115)

446

(1)

34,273

(116)

Residential mortgage-backed securities

Agency

198,687

(1,407)

1,121

(3)

199,808

(1,410)

Non-agency

57,044

(743)

57,044

(743)

Total residential mortgage-backed securities

255,731

(2,150)

1,121

(3)

256,852

(2,153)

Total AFS securities

$

502,977

$

(4,855)

$

27,806

$

(314)

$

530,783

$

(5,169)

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)

Commercial mortgage-backed securities

 

 

 

 

 

Agency

43,552

(530)

14,966

(89)

58,518

(619)

Non-agency

11,162

(24)

11,162

(24)

Total commercial mortgage-backed securities

54,714

(554)

14,966

(89)

69,680

(643)

Residential mortgage-backed securities

Agency

114,147

(500)

40,168

(316)

154,315

(816)

Non-agency

Total residential mortgage-backed securities

114,147

(500)

40,168

(316)

154,315

(816)

Total AFS securities

$

198,348

$

(1,204)

$

75,035

$

(696)

$

273,383

$

(1,900)

(1) Other bonds includes asset-backed securities.

As of September 30, 2020, there were $27.8 million, or 18 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 $314,000. 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 evaluated AFS securities in an unrealized loss position for credit related impairment at September 30, 2020 and December 31, 2019 and concluded no impairment existed based on several factors which included: (1) the majority of these securities are of high credit quality, (2) unrealized losses are primarily the result of market volatility, (3) 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, (4) issuers continue to make timely principal and interest payments, and (5) 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.

Additionally, the majority of the Company’s mortgage-backed securities 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 non-agency mortgage-backed securities generally received a 20% SSFA rating.

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The following table presents the amortized cost and estimated fair value of AFS securities as of September 30, 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).

September 30, 2020

December 31, 2019

    

Amortized

    

Estimated

    

Amortized

    

Estimated

Cost

Fair Value

Cost

Fair Value

Due in one year or less

$

28,581

$

28,834

$

35,177

$

35,329

Due after one year through five years

 

140,844

 

148,114

 

164,605

 

166,873

Due after five years through ten years

 

251,501

 

258,806

 

249,713

 

254,790

Due after ten years

 

1,931,990

 

2,007,586

 

1,443,932

 

1,488,453

Total AFS securities

$

2,352,916

$

2,443,340

$

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 September 30, 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 September 30, 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 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 September 30, 2020 are summarized as follows (dollars in thousands):

Carrying

Gross Unrealized

Estimated

    

Value

    

Gains

    

(Losses)

Fair Value

September 30, 2020

 

  

 

  

 

  

  

U.S. government and agency securities

$

2,767

$

$

(14)

$

2,753

Obligations of states and political subdivisions

538,352

67,561

605,913

Commercial mortgage-backed securities

 

Agency

5,542

5

(40)

5,507

Non-agency

Total commercial mortgage-backed securities

5,542

5

(40)

5,507

Total held-to-maturity securities

$

546,661

$

67,566

$

(54)

$

614,173

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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

Commercial mortgage-backed securities

 

 

 

Agency

7,183

59

7,242

Non-agency

Total commercial 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 and concluded no additional reserve was needed at September 30, 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 HTM securities with credit risk are obligations of states and political subdivisions.

The following table presents the amortized cost of HTM securities as of September 30, 2020 by security type and credit rating (dollars in thousands):

Three Months Ended September 30, 2020

    

U.S. Government and Agency

    

Obligations of states and political

    

Mortgage-backed

Total HTM

securities

subdivisions

securities

securities

Credit Rating:

 

 

AAA/AA/A

$

$

533,742

$

$

533,742

Not Rated - Agency(1)

2,767

5,542

8,309

Not Rated - Non-Agency

 

4,610

4,610

Total

$

2,767

$

538,352

$

5,542

$

546,661

(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 September 30, 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).

September 30, 2020

December 31, 2019

    

Carrying

    

Estimated

    

Carrying

    

Estimated

Value

Fair Value

Value

Fair Value

Due in one year or less

$

1,005

$

1,024

$

502

$

504

Due after one year through five years

 

9,076

 

9,436

 

10,258

 

10,539

Due after five years through ten years

 

1,749

 

1,796

 

1,768

 

1,800

Due after ten years

 

534,831

 

601,917

 

542,616

 

590,660

Total HTM securities

$

546,661

$

614,173

$

555,144

$

603,503

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Refer to Note 8 "Commitments and Contingencies" for information regarding the estimated fair value of HTM securities that were pledged to secure public deposits as permitted or required by law as of September 30, 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 September 30, 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 September 30, 2020 and December 31, 2019. Restricted equity securities consist of Federal Reserve Bank stock in the amount of $67.0 million for September 30, 2020 and December 31, 2019 and FHLB stock in the amount of $45.2 million and $63.9 million as of September 30, 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 and nine months ended September 30, 2020 and 2019 (dollars in thousands).

    

Three Months Ended

    

Nine Months Ended

September 30, 2020

September 30, 2020

Realized gains (losses):

 

  

 

  

Gross realized gains

$

18

$

12,522

Gross realized losses

 

 

(229)

Net realized gains

$

18

$

12,293

Proceeds from sales of securities

$

4,675

$

232,946

    

Three Months Ended

    

Nine Months Ended

September 30, 2019

September 30, 2019

Realized gains (losses):

 

  

 

  

Gross realized gains

$

7,104

$

9,161

Gross realized losses

 

 

(1,855)

Net realized gains

$

7,104

$

7,306

Proceeds from sales of securities

$

98,975

$

486,925

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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 September 30, 2020 is in accordance with ASC 326. All loan information presented prior to January 1, 2020 is in accordance with previous applicable GAAP. During March 2020, in response to the economic fallout from the COVID-19 pandemic, the CARES Act was passed by Congress and signed into law by the President along with the March 22 Joint Guidance that provided enhanced guidelines and accounting for COVID-19 related modifications. For further discussion on the CARES Act and the March 22 Joint Guidance and related loan impact refer to Note 1 “Accounting Polices” in this Quarterly Report. The information included below reflects the impact of the CARES Act and the March 22 Joint Guidance.

The Company’s loans are stated at their face amount, net of deferred fees and costs, and consist of the following at September 30, 2020 and December 31, 2019 (dollars in thousands):

September 30, 2020

    

December 31, 2019

Construction and Land Development

$

1,207,190

$

1,250,924

Commercial Real Estate - Owner Occupied

 

2,107,333

 

2,041,243

Commercial Real Estate - Non-Owner Occupied

 

3,497,929

 

3,286,098

Multifamily Real Estate

 

731,582

 

633,743

Commercial & Industrial(1)

 

3,536,249

 

2,114,033

Residential 1-4 Family - Commercial

 

696,944

 

724,337

Residential 1-4 Family - Consumer

 

830,144

 

890,503

Residential 1-4 Family - Revolving

 

618,320

 

659,504

Auto

 

387,417

 

350,419

Consumer

 

276,023

 

372,853

Other Commercial(1)

 

494,084

 

287,279

Total loans held for investment, net of deferred fees and costs

14,383,215

12,610,936

Allowance for loan and lease losses

(174,122)

(42,294)

Total loans held for investment, net

$

14,209,093

$

12,568,642

(1)Commercial & industrial and other commercial loans include approximately $1.6 billion and $21.3 million, respectively, in new loans from the PPP loan program at September 30, 2020.

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The following table shows the aging of the Company’s loan portfolio, by class, at September 30, 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

$

1,200,729

$

2,625

$

223

$

93

$

3,520

$

1,207,190

Commercial Real Estate - Owner Occupied

 

2,090,106

 

4,924

 

1,310

 

1,726

 

9,267

 

2,107,333

Commercial Real Estate - Non-Owner Occupied

 

3,493,107

 

1,291

 

1,371

 

168

 

1,992

 

3,497,929

Multifamily Real Estate

 

731,190

 

 

 

359

 

33

 

731,582

Commercial & Industrial

 

3,528,283

 

4,322

 

1,448

 

604

 

1,592

 

3,536,249

Residential 1-4 Family - Commercial

 

683,730

 

1,236

 

937

 

5,298

 

5,743

 

696,944

Residential 1-4 Family - Consumer

 

806,055

 

2,998

 

3,976

 

4,495

 

12,620

 

830,144

Residential 1-4 Family - Revolving

 

608,570

 

2,669

 

1,141

 

2,276

 

3,664

 

618,320

Auto

 

384,619

 

1,513

 

453

 

315

 

517

 

387,417

Consumer

 

273,829

 

1,020

 

772

 

327

 

75

 

276,023

Other Commercial

493,044

613

427

494,084

Total loans held for investment

$

14,293,262

$

23,211

$

12,058

$

15,661

$

39,023

$

14,383,215

These balances reflect the impact of the CARES Act and the March 22 Joint Guidance which provides relief for TDR designations and also provides guidance on past due reporting for modified loans.

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 September 30, 2020 (dollars in thousands):

Nonaccrual

January 1, 2020

September 30, 2020

Nonaccrual With No ALLL

90 Days and still Accruing

Construction and Land Development

$

4,060

$

3,520

$

1,985

$

93

Commercial Real Estate - Owner Occupied

13,889

9,267

1,994

1,726

Commercial Real Estate - Non-Owner Occupied

1,368

1,992

168

Multifamily Real Estate

33

359

Commercial & Industrial

3,037

1,592

604

Residential 1-4 Family - Commercial

6,492

5,743

1,738

5,298

Residential 1-4 Family - Consumer

13,117

12,620

1,069

4,495

Residential 1-4 Family - Revolving

2,490

3,664

60

2,276

Auto

565

517

315

Consumer

88

75

327

Other Commercial

98

Total loans held for investment

$

45,204

$

39,023

$

6,846

$

15,661

There was no interest income recognized on nonaccrual loans during the three or nine months ended September 30, 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

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 and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. 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. As of September 30, 2020, the Company had approximately $769.6 million in loans still under their modified terms. The Company’s modification program primarily included payment deferrals and interest only modifications.

In addition to the above mentioned modifications, as of September 30, 2020, the Company has TDRs totaling $21.6 million with an estimated $2.7 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 and nine months ended September 30, 2020, the recorded investment in TDRs prior to modifications was not materially impacted by the modifications.

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 September 30, 2020 (dollars in thousands):

September 30, 2020

    

No. of

    

Recorded

    

Outstanding

Loans

Investment

Commitment

Performing

 

  

 

  

 

  

Construction and Land Development

 

4

$

219

$

Commercial Real Estate - Owner Occupied

 

6

 

2,140

 

101

Commercial Real Estate - Non-Owner Occupied

 

1

 

1,089

 

Commercial & Industrial

 

5

 

1,117

 

Residential 1-4 Family - Commercial

 

3

 

247

 

Residential 1-4 Family - Consumer

 

80

 

9,165

 

Residential 1-4 Family - Revolving

 

2

 

55

 

Consumer

 

5

 

31

 

Other Commercial

1

452

Total performing

 

107

$

14,515

$

101

Nonperforming

 

  

 

  

 

  

Commercial Real Estate - Owner Occupied

 

2

$

293

$

Commercial Real Estate - Non-Owner Occupied

1

137

Commercial & Industrial

 

3

 

261

 

Residential 1-4 Family - Commercial

 

4

 

1,313

 

Residential 1-4 Family - Consumer

 

23

 

4,937

 

Residential 1-4 Family - Revolving

 

3

 

104

 

Total nonperforming

 

36

$

7,045

$

Total performing and nonperforming

 

143

$

21,560

$

101

The Company considers a default of a TDR to occur when the borrower is 90 days past due following the restructure or a foreclosure and repossession of the applicable collateral occurs. During the three and nine months ended September 30, 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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Table of Contents

The following table shows, by class and modification type, TDRs that occurred during the three and nine months ended September 30, 2020 (dollars in thousands):

All Restructurings

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

    

    

Recorded

    

    

Recorded

No. of

Investment at

No. of

Investment at

Loans

Period End

Loans

Period End

Modified to interest only, at a market rate

 

  

 

  

 

  

 

  

Commercial Real Estate - Owner Occupied

$

1

$

272

Residential 1-4 Family - Commercial

1

652

1

652

Total interest only at market rate of interest

 

1

$

652

 

2

$

924

Term modification, at a market rate

 

  

 

  

 

  

 

  

Commercial & Industrial

 

$

 

3

$

127

Residential 1-4 Family - Commercial

 

1

299

 

1

299

Residential 1-4 Family - Consumer

 

 

 

4

 

324

Consumer

1

10

Total loan term extended at a market rate

 

1

$

299

 

9

$

760

Term modification, below market rate

 

  

 

  

 

  

 

  

Construction and Land Development

$

1

$

34

Commercial & Industrial

 

1

 

143

 

2

 

358

Residential 1-4 Family - Commercial

1

290

1

290

Residential 1-4 Family - Consumer

 

4

423

 

17

2,387

Residential 1-4 Family - Revolving

 

 

 

1

 

52

Total loan term extended at a below market rate

 

6

$

856

 

22

$

3,121

Interest rate modification, below market rate

 

  

 

  

 

  

 

  

Total interest only at below market rate of interest

 

$

 

$

Total

 

8

$

1,807

 

33

$

4,805

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Table of Contents

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 and nine months ended September 30, 2020 (dollars in thousands):

 

 

    

    

 

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

Commercial

Consumer

Total

Commercial

Consumer

Total

Balance at beginning of period

$

111,954

$

58,023

$

169,977

$

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 adopting ASC 326

 

 

 

 

6,184

 

41,300

 

47,484

Loans charged-off

 

(995)

 

(1,983)

 

(2,978)

 

(5,553)

 

(9,253)

 

(14,806)

Recoveries credited to allowance

 

718

 

848

 

1,566

 

2,580

 

2,557

 

5,137

Provision charged to operations

 

14,978

 

(9,421)

 

5,557

 

92,503

 

1,510

 

94,013

Balance at end of period

$

126,655

$

47,467

$

174,122

$

126,655

$

47,467

$

174,122

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Table of Contents

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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Table of Contents

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 September 30, 2020 (dollars in thousands):

September 30, 2020

Term Loans Amortized Cost Basis by Origination Year

2020

2019

2018

2017

2016

Prior

Revolving Loans

Total

Construction and Land Development

Pass

$

236,949

$

346,840

$

304,768

$

41,015

$

42,268

$

63,632

$

29,674

$

1,065,146

Watch & Special Mention

2,268

67,572

40,714

347

5,863

16,549

1,645

134,958

Substandard

368

710

2,040

3,968

7,086

Total Construction and Land Development

$

239,217

$

414,412

$

345,850

$

42,072

$

50,171

$

84,149

$

31,319

$

1,207,190

Commercial Real Estate - Owner Occupied

Pass

$

226,090

$

369,661

$

304,296

$

243,299

$

143,786

$

616,113

$

23,577

$

1,926,822

Watch & Special Mention

2,002

17,684

23,479

17,770

31,406

64,728

2,599

159,668

Substandard

118

1,099

1,113

1,039

17,175

299

20,843

Total Commercial Real Estate - Owner Occupied

$

228,092

$

387,463

$

328,874

$

262,182

$

176,231

$

698,016

$

26,475

$

2,107,333

Commercial Real Estate - Non-Owner Occupied

Pass

$

275,008

$

439,081

$

401,551

$

442,151

$

356,256

$

862,293

$

24,467

$

2,800,807

Watch & Special Mention

27,599

104,352

97,973

71,618

107,934

259,591

18,318

687,385

Substandard

6,464

25

3,248

9,737

Total Commercial Real Estate - Non-Owner Occupied

$

302,607

$

543,433

$

505,988

$

513,769

$

464,215

$

1,125,132

$

42,785

$

3,497,929

Commercial & Industrial

Pass

$

1,979,209

$

401,385

$

221,417

$

79,734

$

76,145

$

149,692

$

524,960

$

3,432,542

Watch & Special Mention

5,081

29,405

16,889

4,163

5,170

6,443

28,156

95,307

Substandard

37

928

396

129

623

2,710

3,577

8,400

Total Commercial & Industrial

$

1,984,327

$

431,718

$

238,702

$

84,026

$

81,938

$

158,845

$

556,693

$

3,536,249

Multifamily Real Estate

Pass

$

131,434

$

80,234

$

69,881

$

120,758

$

70,127

$

239,525

$

2,499

$

714,458

Watch & Special Mention

2,283

1,018

4,894

2,490

621

5,427

16,733

Substandard

391

391

Total Multifamily Real Estate

$

133,717

$

81,252

$

74,775

$

123,248

$

70,748

$

245,343

$

2,499

$

731,582

Residential 1-4 Family - Commercial

Pass

$

78,631

$

100,919

$

76,284

$

87,277

$

76,710

$

226,118

$

1,251

$

647,190

Watch & Special Mention

592

4,625

8,739

4,420

4,186

15,798

38,360

Substandard

652

810

272

2,060

993

6,119

488

11,394

Total Residential 1-4 Family - Commercial

$

79,875

$

106,354

$

85,295

$

93,757

$

81,889

$

248,035

$

1,739

$

696,944

Other Commercial

Pass

$

221,801

$

115,346

$

9,972

$

39,542

$

16,602

$

47,858

$

31,730

$

482,851

Watch & Special Mention

22

621

1,312

927

8,351

11,233

Total Other Commercial

$

221,823

$

115,346

$

10,593

$

40,854

$

17,529

$

56,209

$

31,730

$

494,084

Total Commercial

Pass

$

3,149,122

$

1,853,466

$

1,388,169

$

1,053,776

$

781,894

$

2,205,231

$

638,158

$

11,069,816

Watch & Special Mention(1)

39,847

224,656

193,309

102,120

156,107

376,887

50,718

1,143,644

Substandard

689

1,856

8,599

4,012

4,720

33,611

4,364

57,851

Total Commercial

$

3,189,658

$

2,079,978

$

1,590,077

$

1,159,908

$

942,721

$

2,615,729

$

693,240

$

12,271,311

(1)Approximately 85.0% was comprised of Watch, which increased from December 31, 2019 due to the continued uncertainty of the COVID-19 pandemic on impacted industries.

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Table of Contents

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 September 30, 2020 (dollars in thousands):

September 30, 2020

Term Loans Amortized Cost Basis by Origination Year

2020

2019

2018

2017

2016

Prior

Revolving Loans

Total

Residential 1-4 Family - Consumer

Current

$

143,716

$

83,309

$

78,957

$

77,910

$

111,043

$

311,108

$

12

$

806,055

30-59 Days Past Due

156

1,648

43

263

888

2,998

60-89 Days Past Due

708

1,138

67

2,063

3,976

90+ Days Past Due

646

1,574

313

388

1,574

4,495

Nonaccrual

708

870

774

10,268

12,620

Total Residential 1-4 Family - Consumer

$

144,362

$

85,039

$

82,021

$

80,274

$

112,535

$

325,901

$

12

$

830,144

Residential 1-4 Family - Revolving

Current

$

11,456

$

4,160

$

2,019

$

$

$

644

$

590,291

$

608,570

30-59 Days Past Due

36

2,633

2,669

60-89 Days Past Due

1,141

1,141

90+ Days Past Due

2,276

2,276

Nonaccrual

314

3,350

3,664

Total Residential 1-4 Family - Revolving

$

11,456

$

4,196

$

2,019

$

$

$

958

$

599,691

$

618,320

Consumer

Current

$

26,520

$

79,119

$

79,878

$

25,836

$

11,163

$

18,017

$

33,296

$

273,829

30-59 Days Past Due

37

261

444

87

24

41

126

1,020

60-89 Days Past Due

38

126

273

20

25

186

104

772

90+ Days Past Due

19

253

32

21

2

327

Nonaccrual

1

74

75

Total Consumer

$

26,595

$

79,525

$

80,848

$

25,975

$

11,234

$

18,318

$

33,528

$

276,023

Auto

Current

$

129,176

$

126,243

$

62,569

$

37,390

$

20,505

$

8,736

$

$

384,619

30-59 Days Past Due

145

490

265

288

195

130

1,513

60-89 Days Past Due

39

132

118

116

26

22

453

90+ Days Past Due

29

99

62

45

53

27

315

Nonaccrual

33

128

61

107

111

77

517

Total Auto

$

129,422

$

127,092

$

63,075

$

37,946

$

20,890

$

8,992

$

$

387,417

Total Consumer

Current

$

310,868

$

292,831

$

223,423

$

141,136

$

142,711

$

338,505

$

623,599

$

2,073,073

30-59 Days Past Due

182

943

2,357

418

482

1,059

2,759

8,200

60-89 Days Past Due

77

258

1,099

1,274

118

2,271

1,245

6,342

90+ Days Past Due

675

1,692

315

390

462

1,601

2,278

7,413

Nonaccrual

33

128

769

977

886

10,733

3,350

16,876

Total Consumer

$

311,835

$

295,852

$

227,963

$

144,195

$

144,659

$

354,169

$

633,231

$

2,111,904

The Company did not have any material revolving loans convert to term during the three and nine months ended September 30, 2020.

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Table of Contents

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 September 30, 2020, the amortized cost of the Company’s PCD loans totaled $68.8 million, which had an estimated ALLL of $4.7 million.

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 and nine months ended September 30, 2019 (dollars in thousands):

Three Months Ended

Nine Months Ended

September 30, 2019

September 30, 2019

    

    

Interest

    

    

Interest

Average

Income

Average

Income

Investment

Recognized

Investment

Recognized

Construction and Land Development

$

13,581

$

40

$

13,601

$

351

Commercial Real Estate - Owner Occupied

 

13,301

 

85

 

13,436

 

339

Commercial Real Estate - Non-Owner Occupied

 

2,748

 

26

 

3,543

 

82

Multifamily Real Estate

1,217

15

1,234

46

Commercial & Industrial

 

3,986

 

41

 

4,046

 

129

Residential 1-4 Family - Commercial

 

6,334

 

41

 

6,521

 

125

Residential 1-4 Family - Consumer

 

19,802

 

75

 

20,007

 

264

Residential 1-4 Family - Revolving

 

2,125

 

5

 

2,242

 

31

Auto

 

691

 

 

781

 

9

Consumer

 

184

 

2

 

192

 

5

Other Commercial

570

7

579

21

Total impaired loans

$

64,539

$

337

$

66,182

$

1,402

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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.

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 December 31, 2019 (dollars in thousands):

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 and nine months ended September 30, 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 and nine months ended September 30, 2019 (dollars in thousands):

All Restructurings

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

    

    

Recorded

    

    

Recorded

No. of

Investment at

No. of

Investment at

Loans

Period End

Loans

Period End

Modified to interest only, at a market rate

 

  

 

  

 

  

 

  

Total interest only at market rate of interest

 

$

 

$

Term modification, at a market rate

 

  

 

  

 

  

 

  

Commercial & Industrial

1

$

376

 

1

$

376

Residential 1-4 Family - Commercial

 

 

1

73

Residential 1-4 Family - Consumer

 

1

 

461

 

4

 

761

Consumer

 

2

 

18

 

3

 

26

Total loan term extended at a market rate

 

4

$

855

 

9

$

1,236

Term modification, below market rate

 

  

 

  

 

  

 

  

Construction and Land Development

2

$

164

2

$

164

Residential 1-4 Family - Consumer

 

5

883

 

17

2,211

Consumer

1

5

Total loan term extended at a below market rate

 

7

$

1,047

 

20

$

2,380

Total

 

11

$

1,902

 

29

$

3,616

Allowance for Loan and Lease Losses

The following table shows the ALLL activity by class for the nine months ended September 30, 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):

Nine Months Ended September 30, 2019

Allowance for loan losses

    

Balance,

    

Recoveries

    

Loans

    

Provision

    

Balance,

beginning of

credited to

charged

charged to

end of

the year

allowance

off

operations

period

Construction and Land Development

$

6,803

$

269

$

(4,028)

$

2,863

$

5,907

Commercial Real Estate - Owner Occupied

 

4,023

 

118

 

(483)

 

361

 

4,019

Commercial Real Estate - Non-Owner Occupied

 

8,865

 

95

 

(270)

 

996

 

9,686

Multifamily Real Estate

 

649

 

85

 

 

46

 

780

Commercial & Industrial

 

7,636

 

936

 

(2,162)

 

2,739

 

9,149

Residential 1-4 Family - Commercial

 

1,692

 

244

 

(397)

 

50

 

1,589

Residential 1-4 Family - Consumer

 

1,492

 

256

 

(108)

 

158

 

1,798

Residential 1-4 Family - Revolving

 

1,297

 

589

 

(570)

 

(179)

 

1,137

Auto

 

1,443

 

452

 

(957)

 

614

 

1,552

Consumer and all other(1)

 

7,145

 

1,896

 

(12,215)

 

11,377

 

8,203

Total

$

41,045

$

4,940

$

(21,190)

$

19,025

$

43,820

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

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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.

Watch & Special Mention is determined by the following criteria:

Risk rated 5 loans are watch loans that warrant more than the normal level of supervision and have the possibility of an event occurring that may weaken the borrower’s ability to repay;
Risk rated 6 loans have increasing potential weaknesses beyond those at which the loan originally was granted and if not addressed could lead to inadequately protecting the Company’s credit position; or
Loans that are not risk rated but that are 30 to 89 days past due.

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Substandard is determined by the following criteria:

Risk rated 7 loans are substandard loans and are inadequately protected by the current sound worth or paying capacity of the obligor or the collateral pledged; these have well defined weaknesses that jeopardize the liquidation of the debt with the distinct possibility the Company will sustain some loss if the deficiencies are not corrected; or
Loans that are not risk rated but that are 90 to 149 days past due.

Doubtful is determined by the following criteria:

Risk rated 8 loans are doubtful of collection and the possibility of loss is high but pending specific borrower plans for recovery, its classification as a loss is deferred until its more exact status is determined;
Risk rated 9 loans are loss loans which are considered uncollectable and of such little value that their continuance as bankable assets is not warranted; or
Loans that are not risk rated but that are over 149 days past due.

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

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

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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 September 30, 2019 (dollars in thousands):

For the Nine Months Ended September 30, 

    

2019

Balance at beginning of period

$

31,201

Additions

 

2,432

Accretion

 

(9,830)

Reclass of nonaccretable difference due to improvement in expected cash flows

 

1,372

Measurement period adjustment

 

2,629

Other, net (1)

 

5,083

Balance at end of period

$

32,887

(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.

In accordance with ASC 350, Intangibles-Goodwill and Other, the Company reviews the carrying value of indefinite lived intangible assets at least annually or more frequently if certain impairment indicators exist. The COVID-19 pandemic has disrupted the economy and created significant volatility in the financial markets.  The volatility in the financial markets has adversely affected the Company’s expected future cash flows, due to the lower interest rate environment and other factors, and resulted in a decline in the market price of the Company’s common stock, along with others in the financial services industry. The Company performed its annual impairment testing in the second quarter of 2020 and, while the fair value of the reporting unit declined from the prior test, the Company determined that there was no impairment to its goodwill or intangible assets. In the normal course of business, the Company routinely monitors the impact of the changes in the financial markets and includes these assessments in the Company’s goodwill impairment process.

Amortization expense of intangibles for the three and nine months ended September 30, 2020 totaled $4.1 million and $12.7 million, respectively; and for the three and nine months ended September 30, 2019 totaled $4.8 million and $13.9 million, respectively.

As of September 30, 2020, the estimated remaining amortization expense of intangibles is as follows for the years ending (dollars in thousands):

For the remaining three months of 2020

    

$

3,883

2021

13,874

2022

11,490

2023

9,687

2024

7,819

Thereafter

14,315

Total estimated amortization expense

$

61,068

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6. LEASES

The Company enters into both lessor and lessee arrangements and determines if an arrangement is a lease at inception. As both a lessee and lessor, the Company elected the practical expedient permitted under the transition guidance within the standard to account for lease and non-lease components as a single lease component for all asset classes.

Lessor Arrangements

The Company’s lessor arrangements consist of sales-type and direct financing leases for equipment. Lease payment terms are fixed and are typically payable in monthly installments with terms ranging from 31 to 125 months. The lease arrangements may contain renewal options and purchase options that allow the lessee to purchase the leased equipment at the end of the lease term. The leases generally do not contain non-lease components. The Company has no lease transactions with related parties.

At lease inception the Company estimates the expected residual value of the leased property at the end of the lease term by considering both internal and third-party appraisals. In certain cases, the Company obtains lessee-provided residual value guarantees and third-party RVI to reduce its residual asset risk. At September 30, 2020 the carrying value of residual assets covered by residual value guarantees and RVI was $14.2 million.

The net investment in sales-type and direct financing leases consists of the carrying amount of the lease receivables plus unguaranteed residual assets, net of unearned income and any deferred selling profit on direct financing leases. The lease receivables include the lessor’s right to receive lease payments and the guaranteed residual asset value the lessor expects to derive from the underlying assets at the end of the lease term. At September 30, 2020, the total net investment in sales-type and direct financing leases was $146.5 million, comprised of $142.1 million in lease receivables and $4.4 million in unguaranteed residuals. There were no significant changes in the balance of the Company’s unguaranteed residual assets for the period ending September 30, 2020. The Company’s net investment in sales-type and direct financing leases are included in Loans Held for Investment (net of deferred fees and costs) on the Company’s Consolidated Balance Sheets. For the three and nine months ended September 30, 2020, total lease income was $782,000 and $1.1 million, respectively, and is recorded within Interest Income on the Company’s Consolidated Statements of Income. There was no lease income for the three and nine months ended September 30, 2019.

Lessee Arrangements

The Company’s lessee arrangements consist of operating and finance leases; however, the majority of the leases have been classified as non-cancellable operating leases and are primarily for real estate leases with remaining lease terms of up to 25 years. The Company’s real estate lease agreements do not contain residual value guarantees and most agreements do not contain restrictive covenants. The Company does not have any material arrangements where the Company is in a sublease contract.

Lessee arrangements with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheets. The ROU Assets and lease liabilities associated with operating and finance leases greater than twelve months are recorded in the Company’s Consolidated Balance Sheets; ROU Assets within Other Assets and lease liabilities within Other Liabilities. ROU Assets represent the Company’s right to use an underlying asset over the course of the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The initial measurement of lease liabilities and ROU Assets are the same for operating and finance leases. 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. ROU Assets are 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. Most of the Company’s operating leases include one or more options to renew. The Company is reasonably certain to exercise those options, they are included in the measurement of the operating ROU Assets and lease liabilities.

Lease expense for operating lease payments is recognized on a straight-line basis over the lease term and recorded in Occupancy Expense within noninterest expense on the Company’s Consolidated Statements of Income. Finance lease expenses consist of straight-line amortization expense of the ROU Assets recognized over the lease term and interest expense on the lease liability. Total finance lease expenses for the amortization of the ROU Assets are recorded in Occupancy Expense within noninterest expense on the Company’s Consolidated Statements of Income and interest expense on the finance lease liability is recorded in Interest Expense on Long-Term Borrowings within total interest expense on the Company’s Consolidated Statements of Income.

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As of September 30, 2020, the Company had no sales leaseback transactions or leases that have not yet commenced that create significant rights and obligations.

The tables below provide information about the Company’s lessee lease portfolio and other supplemental lease information (dollars in thousands):

    

September 30, 2020

December 31, 2019

Operating

Finance

Operating

Right-of-use-assets

$

53,948

$

7,654

$

54,941

Lease liabilities

64,757

10,590

66,052

Lease Term and Discount Rate of Operating leases:

 

Weighted-average remaining lease term (years)

 

7.41

8.33

7.36

Weighted-average discount rate (1)

 

2.26

%

1.17

%

2.69

%

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

Nine months ended September 30, 

 

2020

2019

Cash paid for amounts included in measurement of lease liabilities:

Operating Cash Flows from Finance Leases

$

41

$

-

Operating Cash Flows from Operating Leases

 

10,398

10,327

Right-of-use assets obtained in exchange for lease obligations:

  

Operating leases

 

7,566

5,979

Finance leases

10,549

-

Three months ended September 30, 

Nine months ended September 30, 

2020

2019

2020

2019

Net Operating Lease Cost

$

2,536

$

2,928

$

8,383

$

8,940

Finance Lease Cost:

Amortization of right-of-use assets

230

-

306

-

Interest on lease liabilities

31

-

41

-

Total Lease Cost

$

2,797

$

2,928

$

8,730

$

8,940

The maturities of lessor and lessee arrangements outstanding at September 30, 2020 are presented in the tables below (dollars in thousands):

September 30, 2020

Lessor

Lessee

Sales-type and Direct Financing

Operating

Finance

For the remaining three months of 2020

    

$

7,416

$

3,193

$

2021

 

28,883

12,500

1,261

2022

 

29,799

11,289

1,292

2023

 

28,136

10,324

1,325

2024

 

26,185

9,007

1,358

2025

17,780

6,712

1,392

Thereafter

 

13,594

17,701

4,515

Total undiscounted cash flows

 

151,793

70,726

11,143

Less: Adjustments (1)

 

9,645

5,969

553

Total (2)

$

142,148

$

64,757

$

10,590

(1) Lessor – unearned income and unearned guaranteed residual value; Lessee – imputed interest.
(2) Represents lease receivables for lessor arrangements and lease liabilities for lessee arrangements

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Table of Contents

7. BORROWINGS

Short-term Borrowings

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

Total short-term borrowings consist of the following as of September 30, 2020 and December 31, 2019 (dollars in thousands):

    

September 30, 

December 31, 

 

2020

2019

 

Securities sold under agreements to repurchase

$

91,086

$

66,053

Federal Funds Purchased

25,000

FHLB Advances

 

150,200

 

370,200

Total short-term borrowings

$

266,286

$

436,253

Average outstanding balance during the period

$

223,068

$

673,116

Average interest rate (during the period)

 

0.96

%  

 

2.30

%

Average interest rate at end of period

 

0.25

%  

 

1.52

%

The Bank maintains federal funds lines with several correspondent banks, the remaining available balance was $942.0 million and $682.0 million at September 30, 2020 and December 31, 2019, respectively. The Company maintains an alternate line of credit at a correspondent bank, which had an available balance of $25.0 million at both September 30, 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 September 30, 2020. Additionally, the Company had a collateral dependent line of credit with the FHLB of up to $5.9 billion and $5.2 billion at September 30, 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 $14.3 million at September 30, 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. On August 29, 2019, the Company repaid the floating rate FHLB advances. In connection with this repayment, the remaining unamortized prepayment penalty of $7.4 million was immediately recognized as a component of noninterest expense during the third quarter of 2019.

During the second quarter of 2020, in connection with the loans originated as part of the PPP, the Company borrowed under the Federal Reserve’s PPPLF. Under the terms of the PPPLF, the Company can borrow funds which are secured by the Company’s PPP loans, and the interest rate on these borrowings is fixed.

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Table of Contents

Total long-term borrowings consist of the following as of September 30, 2020 (dollars in thousands):

Spread to

Principal

3-Month LIBOR

Rate (1)

Maturity

Investment (2)

Trust Preferred Capital Securities

Trust Preferred Capital Note - Statutory Trust I

$

22,500

 

2.75

%  

2.98

%  

6/17/2034

$

696

Trust Preferred Capital Note - Statutory Trust II

 

36,000

 

1.40

%  

1.63

%  

6/15/2036

 

1,114

VFG Limited Liability Trust I Indenture

 

20,000

 

2.73

%  

2.96

%  

3/18/2034

 

619

FNB Statutory Trust II Indenture

 

12,000

 

3.10

%  

3.33

%  

6/26/2033

 

372

Gateway Capital Statutory Trust I

 

8,000

 

3.10

%  

3.33

%  

9/17/2033

 

248

Gateway Capital Statutory Trust II

 

7,000

 

2.65

%  

2.88

%  

6/17/2034

 

217

Gateway Capital Statutory Trust III

 

15,000

 

1.50

%  

1.73

%  

5/30/2036

 

464

Gateway Capital Statutory Trust IV

 

25,000

 

1.55

%  

1.78

%  

7/30/2037

 

774

MFC Capital Trust II

 

5,000

 

2.85

%  

3.08

%  

1/23/2034

 

155

Total Trust Preferred Capital Securities

$

150,500

 

  

 

  

 

  

$

4,659

FHLB Advances(3)

Convertible Flipper

$

50,000

-

%

0.85

%

8/17/2029

Convertible Flipper

150,000

(0.75)

%

-

%

5/22/2029

Convertible Flipper

50,000

(0.75)

%

-

%

5/30/2029

Convertible Flipper

100,000

(0.75)

%

-

%

6/21/2029

Fixed Rate Convertible

200,000

-

%

1.78

%

10/26/2028

Fixed Rate Credit

10,000

-

%

1.54

%

10/2/2020

Total FHLB Advances

$

560,000

Subordinated Debt(4)(5)

2025 Subordinated Debt

$

8,500

-

%

6.75

%

6/30/2025

2026 Subordinated Debt(6)

150,000

-

%

5.00

%

12/15/2026

Total Subordinated Debt

$

158,500

PPPLF Advances(7)

PPPLF Advance 4/8/2022

$

55,422

-

%

0.35

%

4/8/2022

PPPLF Advance 4/11/2022

134,523

-

%

0.35

%

4/11/2022

Total PPPLF Advances

$

189,945

Fair Value Premium (Discount)(8)

(15,568)

Investment in Trust Preferred Capital Securities

4,659

Total Long-term Borrowings

$

1,048,036

(1)Rate as of September 30, 2020. Calculated using non-rounded numbers.
(2)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.
(3)Convertible Flippers have interest rate floors of 0%.
(4)The remaining issuance discount as of September 30, 2020 is $1.2 million.
(5)Subordinated notes qualify as Tier 2 capital for the Company for regulatory purposes.
(6)Fixed-to-floating rate notes. On December 15, 2021, the interest rate will change to a floating rate of LIBOR plus 3.175% through its maturity date.
(7)The Company’s available borrowing capacity under the PPPLF as of September 30, 2020 was $1.4 billion.
(8)Includes discount on issued subordinated notes.

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Total long-term borrowings consist of the following as of December 31, 2019 (dollars in thousands):

Spread to

Principal

3-Month LIBOR

Rate (1)

Maturity

Investment (2)

Trust Preferred Capital Securities

Trust Preferred Capital Note - Statutory Trust I

$

22,500

 

2.75

%  

4.66

%  

6/17/2034

$

696

Trust Preferred Capital Note - Statutory Trust II

 

36,000

 

1.40

%  

3.31

%  

6/15/2036

 

1,114

VFG Limited Liability Trust I Indenture

 

20,000

 

2.73

%  

4.64

%  

3/18/2034

 

619

FNB Statutory Trust II Indenture

 

12,000

 

3.10

%  

5.01

%  

6/26/2033

 

372

Gateway Capital Statutory Trust I

 

8,000

 

3.10

%  

5.01

%  

9/17/2033

 

248

Gateway Capital Statutory Trust II

 

7,000

 

2.65

%  

4.56

%  

6/17/2034

 

217

Gateway Capital Statutory Trust III

 

15,000

 

1.50

%  

3.41

%  

5/30/2036

 

464

Gateway Capital Statutory Trust IV

 

25,000

 

1.55

%  

3.46

%  

7/30/2037

 

774

MFC Capital Trust II

 

5,000

 

2.85

%  

4.76

%  

1/23/2034

 

155

Total Trust Preferred Capital Securities

$

150,500

 

  

 

  

 

  

$

4,659

FHLB Advances(3)

Convertible Flipper

$

50,000

(0.75)

%

1.16

%

8/17/2029

Convertible Flipper

200,000

(0.50)

%

1.41

%

5/15/2024

Convertible Flipper

150,000

(0.75)

%

1.16

%

5/22/2029

Convertible Flipper

50,000

(0.75)

1.16

5/30/2029

Convertible Flipper

100,000

(0.75)

%

1.16

%

6/21/2029

Fixed Rate Convertible

200,000

-

%

1.78

%

10/26/2028

Fixed Rate Hybrid

20,000

-

%

1.58

%

5/18/2020

Fixed Rate Credit

10,000

-

%

1.54

%

10/2/2020

Total FHLB Advances

$

780,000

Subordinated Debt(4)(5)

2025 Subordinated Debt

$

8,500

-

%

6.75

%

6/30/2025

2026 Subordinated Debt(6)

150,000

-

%

5.00

%

12/15/2026

Total Subordinated Debt

$

158,500

Fair Value Premium (Discount)(7)

(16,164)

Investment in Trust Preferred Capital Securities

4,659

Total Long-term Borrowings

$

1,077,495

(1)Rate as of December 31, 2019. Calculated using non-rounded numbers.
(2)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.
(3)Convertible Flippers have interest rate floors of 0%.
(4)The remaining issuance discount as of December 31, 2019 is $1.4 million.
(5)Subordinated notes qualify as Tier 2 capital for the Company for regulatory purposes.
(6)Fixed-to-floating rate notes. On December 15, 2021, the interest rate will change to a floating rate of LIBOR plus 3.175% through its maturity date.
(7)Includes discount on issued subordinated notes.

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As of September 30, 2020, the contractual maturities of long-term debt are as follows for the years ending (dollars in thousands):

  

Trust

  

  

  

  

  

  

Preferred

  

  

  

  

Fair Value

  

Total

  

Capital

  

Subordinated

  

PPPLF

  

FHLB

  

Premium

  

 Long-term

  

Notes

  

Debt

  

Advances

  

Advances

  

(Discount) (1)

  

Borrowings

For the remaining three months of 2020

$

$

$

$

10,000

$

(238)

$

9,762

2021

 

 

 

 

(1,008)

 

(1,008)

2022

 

 

189,945

 

 

(1,030)

 

188,915

2023

 

 

 

 

(1,053)

 

(1,053)

2024

 

 

 

 

(1,078)

 

(1,078)

Thereafter

 

155,159

 

158,500

 

550,000

 

(11,161)

 

852,498

Total long-term borrowings

$

155,159

$

158,500

$

189,945

$

560,000

$

(15,568)

$

1,048,036

(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 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 September 30, 2020 and December 31, 2019, the Company’s reserves for off-balance sheet credit risk and indemnification were $14.0 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):

    

September 30, 2020

    

December 31, 2019

Commitments with off-balance sheet risk:

 

  

 

  

Commitments to extend credit (1)

$

4,631,361

$

4,691,272

Letters of credit

 

164,303

 

209,658

Total commitments with off-balance sheet risk

$

4,795,664

$

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 September 30, 2020, the Company had approximately $296.2 million in deposits in other financial institutions, of which $276.8 million served as collateral for cash flow and loan swap derivatives. The Company had approximately $16.3 million in deposits in other financial institutions that were uninsured at September 30, 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 September 30, 2020 and December 31, 2019 (dollars in thousands):

Pledged Assets as of September 30, 2020

    

    

AFS

    

HTM

    

    

Cash

Securities (1)

Securities (1)

Loans (2)

Total

Public deposits

$

$

476,167

$

432,791

$

$

908,958

Repurchase agreements

 

 

111,781

 

 

 

111,781

FHLB advances

 

 

54,195

 

 

4,354,063

 

4,408,258

Derivatives

 

276,786

 

939

 

 

 

277,725

Fed Funds

316,561

316,561

PPP Loans

189,945

189,945

Other purposes

 

124,517

8,862

133,379

Total pledged assets

$

276,786

$

767,599

$

441,653

$

4,860,569

$

6,346,607

(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. For the period ended December 31, 2019, the Company’s cash flow hedges were highly effective.

The Company did not have any derivatives designated as cash flow hedges outstanding at September 30, 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 September 30, 2020 and December 31, 2019, the aggregate notional amount of the related hedged items for certain long-term fixed rate loans totaled $75.9 million and $83.1 million, respectively, and the fair value of the swaps associated with the derivative related to hedged items was an unrealized loss of $5.9 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 September 30, 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 swaps associated with the derivative related to 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 September 30, 2020 and December 31, 2019, segregated by derivatives that are considered accounting hedges and those that are not (dollars in thousands):

    

September 30, 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

 

125,856

 

 

13,912

 

133,078

 

182

 

6,256

Derivatives not designated as accounting hedges:

Loan Swaps :

 

  

 

  

 

  

 

  

 

  

 

  

Pay fixed - receive floating interest rate swaps

 

2,192,085

 

 

187,299

 

1,575,149

 

753

 

53,592

Pay floating - receive fixed interest rate swaps

 

2,192,085

 

187,299

 

 

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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Table of Contents

The following table summarizes the carrying value of the Company’s hedged assets in fair value hedges and the associated cumulative basis adjustments included in those carrying values as of September 30, 2020 and December 31, 2019 (dollars in thousands):

September 30, 2020

December 31, 2019

    

    

Cumulative

    

    

Cumulative

Amount of Basis

Amount of Basis

Adjustments

Adjustments

Included in the

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)

$

179,908

$

7,992

$

206,799

$

4,072

Loans

 

75,856

 

5,830

 

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 September 30, 2020 and December 31, 2019, the amortized cost basis of this portfolio was $180 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

Series A Preferred Stock

On June 9, 2020, the Company issued and sold 6,900,000 depositary shares, each representing a 1/400th ownership interest in a share of its 6.875% Perpetual Non-Cumulative Preferred Stock, Series A, par value $10.00 per share (the “Series A preferred stock”), with a liquidation preference of $10,000 per share of Series A preferred stock (equivalent to $25 per depositary share), including 900,000 depositary shares pursuant to the exercise in full by the underwriters of their option to purchase additional depositary shares. The total net proceeds to the Company were approximately $166.4 million, after deducting the underwriting discount and other offering expenses payable by the Company. The Company intends to use the net proceeds of the offering for general corporate purposes in the ordinary course of its business. General corporate purposes may include repayment of debt, loan funding, acquisitions, additions to working capital, capital expenditures and investments in the Company’s subsidiaries.

Accumulated Other Comprehensive Income (Loss)

The change in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 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 - June 30, 2020

$

63,886

$

65

$

$

(2,647)

$

61,304

Other comprehensive income (loss):

 

 

  

Other comprehensive income (loss) before reclassification

 

1,250

 

1,250

Amounts reclassified from AOCI into earnings

 

(14)

(5)

127

 

108

Net current period other comprehensive income (loss)

 

1,236

 

(5)

 

 

127

 

1,358

Balance - September 30, 2020

$

65,122

$

60

$

$

(2,520)

$

62,662

    

    

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

 

36,956

(699)

(1,289)

 

34,968

Amounts reclassified from AOCI into earnings

 

(9,711)

(15)

1,481

364

 

(7,881)

Net current period other comprehensive income (loss)

 

27,245

 

(15)

 

782

 

(925)

 

27,087

Balance - September 30, 2020

$

65,122

$

60

$

$

(2,520)

$

62,662

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Table of Contents

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

    

    

Unrealized Gain

    

    

    

(Losses)

Unrealized

for AFS

Unrealized

Gains (Losses)

Securities

Change in Fair

Gains

on AFS

Transferred to

Value of Cash

(Losses)

Securities

HTM

Flow Hedge

on BOLI

Total

Balance - June 30, 2019

$

36,125

$

85

$

(7,155)

$

(988)

$

28,067

Other comprehensive income (loss):

 

Other comprehensive income (loss) before reclassification

 

12,364

6,025

(647)

17,742

Amounts reclassified from AOCI into earnings

 

(5,612)

(5)

158

19

(5,440)

Net current period other comprehensive income (loss)

 

6,752

 

(5)

 

6,183

 

(628)

 

12,302

Balance - September 30, 2019

$

42,877

$

80

$

(972)

$

(1,616)

$

40,369

    

    

Unrealized 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

 

54,598

1,970

(647)

55,921

Amounts reclassified from AOCI into earnings

 

(5,772)

(15)

451

57

(5,279)

Net current period other comprehensive income (loss)

 

48,826

 

(15)

 

2,421

 

(590)

 

50,642

Balance - September 30, 2019

$

42,877

$

80

$

(972)

$

(1,616)

$

40,369

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Table of Contents

11. FAIR VALUE MEASUREMENTS

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

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

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Derivative instruments

As discussed in Note 9 “Derivatives”, the Company records derivative instruments at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. Third party valuations are validated by the Company using Bloomberg Valuation Service’s derivative pricing functions. No material differences were identified during the validation as of September 30, 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 September 30, 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 ICE Data Services, which evaluates securities based on market data. ICE Data Services 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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Table of Contents

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 Company primarily uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of September 30, 2020 and December 31, 2019.

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 September 30, 2020 and December 31, 2019 (dollars in thousands):

    

Fair Value Measurements at September 30, 2020 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

$

$

13,878

$

$

13,878

Obligations of states and political subdivisions

 

 

796,856

 

 

796,856

Corporate and other bonds(1)

 

 

148,918

 

 

148,918

Mortgage-backed securities

 

 

1,482,067

 

 

1,482,067

Other securities

 

 

1,621

 

 

1,621

Loans held for sale

 

 

52,607

 

 

52,607

Derivatives:

 

  

 

  

 

  

 

  

Interest rate swap

 

 

187,299

 

 

187,299

LIABILITIES

 

  

 

  

 

  

 

  

Derivatives:

 

  

 

  

 

  

 

  

Interest rate swap

$

$

187,299

$

$

187,299

Fair value hedges

 

 

13,912

 

 

13,912

(1)Other bonds include asset-backed securities.

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Table of Contents

    

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 September 30, 2020 and December 31, 2019 was $14.0 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

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 ICE Data Services, which evaluates securities based on market data. ICE Data Services 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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Table of Contents

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 Company primarily uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of September 30, 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 September 30, 2020 and December 31, 2019.

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.

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The carrying values and estimated fair values of the Company’s financial instruments at September 30, 2020 and December 31, 2019 are as follows (dollars in thousands):

Fair Value Measurements at September 30, 2020 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

$

520,966

$

520,966

$

$

$

520,966

AFS securities

 

2,443,340

 

 

2,443,340

 

 

2,443,340

HTM securities

 

546,661

 

 

600,679

 

13,494

 

614,173

Restricted stock

 

112,216

 

 

112,216

 

 

112,216

Loans held for sale

 

52,607

 

 

52,607

 

 

52,607

Net loans

 

14,209,093

 

 

 

14,102,010

 

14,102,010

Derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate swap

 

187,299

 

 

187,299

 

 

187,299

Accrued interest receivable

 

71,475

 

 

71,475

 

 

71,475

BOLI

 

325,538

 

 

325,538

 

 

325,538

LIABILITIES

 

  

 

  

 

  

 

  

 

  

Deposits

$

15,576,098

$

$

15,624,786

$

$

15,624,786

Borrowings

 

1,314,322

 

 

1,279,838

 

 

1,279,838

Accrued interest payable

 

5,126

 

 

5,126

 

 

5,126

Derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate swap

 

187,299

 

 

187,299

 

 

187,299

Fair value hedges

 

13,912

 

 

13,912

 

 

13,912

    

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

 

 

1,147

Fair value hedges

 

6,256

 

 

6,256

 

 

6,256

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Table of Contents

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Borrowers with fixed rate obligations, however, are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

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Table of Contents

12. REVENUE

The majority of the Company’s noninterest income comes from short term contracts associated with fees for services provided on deposit accounts, credit cards, and wealth management accounts and is being accounted for in accordance with Topic 606. Typically, the duration of a contract does not extend beyond the services performed; therefore, the Company concluded that discussion regarding contract balances is immaterial.

The Company’s performance obligations on revenue from interchange fees and deposit accounts are generally satisfied immediately, when the transaction occurs, or by month-end. Performance obligations on revenue from fiduciary and asset management fees are generally satisfied monthly or quarterly. For a majority of fee income on deposit accounts the Company is a principal, controlling the promised good or service before transferring it to the customer. For the majority of income related to wealth management income, the Company is an agent, responsible for arranging for the provision of goods and services by another party.

Noninterest income disaggregated by major source, for the three and nine months ended September 30, 2020 and 2019, consisted of the following (dollars in thousands):

    

Three Months Ended

 

Nine Months Ended

September 30, 

September 30, 

 

September 30, 

September 30, 

2020

2019

 

2020

2019

Noninterest income:

 

  

 

  

  

 

  

Deposit Service Charges (1):

 

  

 

  

  

 

  

Overdraft fees

$

4,231

$

6,021

$

13,240

$

17,847

Maintenance fees & other

 

1,810

 

1,654

 

5,309

 

4,484

Other service charges, commissions, and fees (1)

 

1,621

 

1,513

 

4,600

 

4,879

Interchange fees(1)

 

1,979

 

2,108

 

5,300

 

12,765

Fiduciary and asset management fees (1):

 

 

 

 

Trust asset management fees

 

2,729

 

2,661

 

8,026

 

5,977

Registered advisor management fees

 

2,224

 

2,219

 

6,402

 

7,919

Brokerage management fees

 

1,092

 

1,202

 

3,115

 

2,938

Mortgage banking income

 

8,897

 

3,374

 

16,744

 

7,614

Gains on securities transactions

 

18

 

7,104

 

12,293

 

7,306

Bank owned life insurance income

 

3,421

 

2,062

 

7,498

 

6,191

Loan-related interest rate swap fees

 

3,170

 

5,480

 

12,602

 

10,656

Other operating income (2)(3)

 

3,215

 

12,708

 

4,116

 

15,045

Total noninterest income (4)

$

34,407

$

48,106

$

99,245

$

103,621

(1)    Income within scope of Topic 606.

(2)    Includes income within the scope of Topic 606 of $1.2 million and $343,000 for the three months ended September 30, 2020 and 2019, respectively, and $2.4 million and $2.2 million for the nine months ended September 30, 2020 and 2019, respectively. The remaining balance is outside the scope of Topic 606.

(3) For the three and nine months ended September 30, 2019, the remaining balance outside the scope of Topic 606 includes $9.3 million from life insurance proceeds received during that period related to a Xenith acquired loan that had been charged off prior to the Company’s acquisition of Xenith.

(4)   Noninterest income for the discontinued mortgage segment is reported in Note 14 "Segment Reporting & Discontinued Operations."

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13. EARNINGS PER SHARE

Basic EPS is computed by dividing net income to common shareholders, after deducting dividends on preferred stock by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares outstanding attributable to stock awards.

The following table presents EPS from continuing operations, discontinued operations and total net income available to common shareholders for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands except per share data):

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

2020

2019

2020

2019

Net Income:

Income from continuing operations

$

61,000

$

53,196

$

98,798

$

137,820

Income (loss) from discontinued operations

 

 

42

 

 

(128)

Net Income

61,000

53,238

98,798

137,692

Preferred Stock Dividends

2,691

2,691

Net income available to common shareholders

$

58,309

$

53,238

$

96,107

$

137,692

Weighted average shares outstanding, basic

 

78,714

 

81,769

 

78,905

 

80,121

Dilutive effect of stock awards and warrants

 

11

 

64

 

16

 

63

Weighted average shares outstanding, diluted

 

78,725

 

81,833

 

78,921

 

80,184

Basic EPS:

 

 

 

 

EPS from continuing operations

$

0.74

$

0.65

$

1.22

$

1.72

EPS from discontinued operations

 

 

 

 

EPS available to common shareholders

$

0.74

$

0.65

$

1.22

$

1.72

Diluted EPS:

 

 

 

 

EPS from continuing operations

$

0.74

$

0.65

$

1.22

$

1.72

EPS from discontinued operations

 

 

 

 

EPS available to common shareholders

$

0.74

$

0.65

$

1.22

$

1.72

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14. SEGMENT REPORTING & DISCONTINUED OPERATIONS

On May 23, 2018, the Bank announced that it had entered into an agreement with a third-party mortgage company TFSB to allow TFSB to offer residential mortgages from certain Bank locations on the terms and conditions set forth in the agreement. Concurrently with that arrangement, the Bank began the process of winding down the operations of UMG, the Company’s reportable mortgage segment. Effective at the close of business June 1, 2018, UMG was no longer originating mortgages in its name. The decision to wind down the operations of UMG was based on a number of strategic priorities and other factors, including the additional investment in the business required to achieve the necessary scale to be competitive. As a result of this decision, the community bank segment is the only remaining reportable segment and does not require separate reporting disclosures.

On May 30, 2019, the Bank notified TFSB that the Bank was terminating its primary agreement with TFSB and will no longer allow TFSB to offer residential mortgages from Bank locations. UMG operations remain discontinued, although the Company continues to offer residential mortgages through a division of the Bank.

As of and for the three and nine months ended September 30, 2020, the assets and liabilities, as well as the operating results, of the discontinued mortgage segment were not considered material. As of December 31, 2019, the Company’s Consolidated Balance Sheets included assets and liabilities from discontinued operations of $668,000 and $640,000, respectively. Management believes there are no material on-going obligations with respect to UMG’s business that have not been recorded in the Company’s consolidated financial statements.

The following table presents summarized operating results of the discontinued mortgage segment for the three and nine months ended September 30, 2019 (dollars in thousands):

Three Months Ended

Nine Months Ended

September 30, 2019

    

September 30, 2019

Net interest income

$

$

Provision for credit losses

Net interest income after provision for credit losses

Noninterest income

1

Noninterest expenses

(56)

174

Income before income taxes

56

(173)

Income tax expense (benefit)

14

(45)

Net income (loss) on discontinued operations

$

42

$

(128)

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15. SUBSEQUENT EVENTS

On October 29, 2020, the Company’s Board of Directors declared a quarterly dividend of $0.25 per share of common stock. The common stock dividend amount is the same as that paid in the prior quarter and the fourth quarter of 2019. The common stock dividend is payable on November 27, 2020 to common shareholders of record as of November 13, 2020.

The Board also declared a quarterly dividend on the outstanding shares of its Series A preferred stock. The Series A preferred stock is represented by depositary shares, each representing a 1/400th ownership interest in a share of Series A preferred stock. The dividend of $171.88 per share (equivalent to $0.43 per outstanding depositary share) is payable on December 1, 2020 to preferred shareholders of record as of November 16, 2020.

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Atlantic Union Bankshares Corporation

Results of Review of Interim Financial Statements

We have reviewed the accompanying consolidated balance sheet of Atlantic Union Bankshares Corporation (the Company) as of September 30, 2020, the related consolidated statements of income and comprehensive income for the three and nine-month periods ended September 30, 2020 and 2019, the consolidated statements of changes in stockholders’ equity and cash flows for the nine-month periods ended September 30, 2020 and 2019, and the related notes (collectively referred to as the “consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated February 25, 2020, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Adoption of ASC 326

As discussed in Note 1 to the consolidated interim financial statements, the Company changed its method of accounting for the allowance for credit losses effective January 1, 2020 due to the adoption of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326 in the Accounting Standards Codification).

Basis for Review Results

These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Ernst & Young LLP

Richmond, Virginia

November 3, 2020

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of the Company. This discussion and analysis should be read with the Company’s consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company’s 2019 Form 10-K, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section therein. Highlighted in the discussion are material changes from prior reporting periods and identifiable trends materially affecting the Company. Results of operations for the interim periods are not necessarily indicative of results that may be expected for the full year or for any other period. Amounts are rounded for presentation purposes; however, some of the percentages presented are computed based on unrounded amounts.

FORWARD-LOOKING STATEMENTS

Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include, without limitation, projections, predictions, expectations, or beliefs about future events or results that are not statements of historical fact. Such forward-looking statements are based on various assumptions as of the time they are made, and are inherently subject to known and unknown risks, uncertainties, and other factors, some of which cannot be predicted or quantified, that may cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Forward-looking statements are often accompanied by words that convey projected future events or outcomes such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate,” “intend,” “will,” “may,” “view,” “opportunity,” “potential,” or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of, or trends affecting, the Company will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to:

changes in interest rates;
general economic and financial market conditions, in the United States generally and particularly in the markets in which the Company operates and which its loans are concentrated, including the effects of declines in real estate values, an increase in unemployment levels and slowdowns in economic growth, including as a result of the COVID-19 pandemic;
the quality or composition of the loan or investment portfolios and changes therein;
demand for loan products and financial services in the Company’s market area;
the Company’s ability to manage its growth or implement its growth strategy;
the effectiveness of expense reduction plans;
the introduction of new lines of business or new products and services;
the Company’s ability to recruit and retain key employees;
the incremental cost and/or decreased revenues associated with exceeding $10 billion in assets;
real estate values in the Bank’s lending area;
an insufficient ACL;
changes in accounting principles relating to the CECL methodology;
the Company’s liquidity and capital positions;
concentrations of loans secured by real estate, particularly commercial real estate;
the effectiveness of the Company’s credit processes and management of the Company’s credit risk;
the Company’s ability to compete in the market for financial services and increased competition from fintech companies;
technological risks and developments, and cyber threats, attacks, or events;
the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the COVID-19 pandemic), and of governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on supply chains and methods used to distribute products and

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services, on incidents of cyberattack and fraud, on the Company’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth;
the effect of steps the Company takes in response to the COVID-19 pandemic, the severity and duration of the pandemic, including whether there is a resurgence of COVID-19 infections, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein;
performance by the Company’s counterparties or vendors;
deposit flows;
the availability of financing and the terms thereof;
the level of prepayments on loans and mortgage-backed securities;
legislative or regulatory changes and requirements, including the impact of the CARES Act and other legislative and regulatory reactions to the COVID-19 pandemic;
potential claims, damages, and fines related to litigation or government actions, including litigation or actions arising from the Company’s participation in and administration of programs related to the COVID-19 pandemic, including, among other things, the CARES Act;
legislative or regulatory changes and requirements;
the effects of changes in federal, state or local tax laws and regulations;
monetary and fiscal policies of the U.S. government including policies of the U.S. Department of the Treasury and the Federal Reserve;
changes to applicable accounting principles and guidelines; and
other factors, many of which are beyond the control of the Company.

Please refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the Company’s 2019 Form 10-K and comparable sections of this Quarterly Report and related disclosures in other filings, including the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020,

which have been filed with the SEC and are available on the SEC’s website at www.sec.gov. All of the forward-looking statements made in this Quarterly Report are expressly qualified by the cautionary statements contained or referred to in this Quarterly Report. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences or effects on the Company or its businesses or operations. Readers are cautioned not to rely too heavily on the forward-looking statements contained in this Quarterly Report. Forward-looking statements speak only as of the date they are made and the Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company are in accordance with U.S. GAAP and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them, as needed. Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors of the Company.

The critical accounting and reporting policies include the Company’s accounting for the ACL, acquired loans, business combinations and divestitures, and goodwill and intangible assets. The Company’s accounting policies are fundamental to understanding the Company’s consolidated financial position and consolidated results of operations. Accordingly, the Company’s significant accounting policies are discussed in detail in Note 1 “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” contained in Item 8 "Financial Statements and Supplementary Data" of the Company’s 2019 Form 10-K.

The Company provides additional information on its critical accounting policies and estimates listed above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in its 2019 Form 10-K and in Note 1 “Accounting Policies” within Part I of Item I of this Quarterly Report.

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RECENT ACCOUNTING PRONOUNCEMENTS (ISSUED BUT NOT ADOPTED)

In August 2020, the FASB issued ASU No. 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40: Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” This guidance was issued to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The amendments are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those years. The Company is still evaluating the impacts from this standard.

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This guidance was issued to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company evaluated the impacts from this standard and does not expect a material financial statement impact.

ABOUT ATLANTIC UNION BANKSHARES CORPORATION

Headquartered in Richmond, Virginia, Atlantic Union Bankshares Corporation (Nasdaq: AUB) is the holding company for Atlantic Union Bank. Atlantic Union Bank has 135 branches and approximately 155 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., and Dixon, Hubard, Feinour, & Brown, Inc., which provide investment advisory services; Middleburg Investment Services, LLC, which provides brokerage services; and Union Insurance Group, LLC, which offers various lines of insurance products.

Shares of the Company’s common stock are traded on the Nasdaq Global Select Market under the symbol "AUB". Additional information is available on the Company’s website at https://investors.atlanticunionbank.com. The information contained on the Company’s website is not a part of or incorporated into this Quarterly Report.

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RESULTS OF OPERATIONS

Executive Overview

On February 1, 2019, the Company completed the acquisition of Access, a bank holding company based in Reston, Virginia. The Company’s results for the first quarter of 2019 include two months of financial results of Access.

On May 20, 2019, the Company re-branded to Atlantic Union Bankshares Corporation and successfully completed the integration of Access National Bank branches and operations into Atlantic Union Bank. Rebranding-related costs amounted to $1.1 million and $5.6 million during the three and nine months ended September 30, 2019, respectively. There were no rebranding costs during the nine months ended September 30, 2020.

On January 1, 2020, the Company adopted ASC 326, which resulted in an increase of $51.7 million in the ACL on January 1, 2020. The impact of the worsening economic forecast related to COVID-19 subsequent to the adoption of ASC 326 has further increased the ACL by $91.3 million to $186.1 million at September 30, 2020. The ACL included an ALLL of $174.1 million and an RUC of $12.0 million at September 30, 2020.

On June 9, 2020, the Company announced the closing of an offering of 6,900,000 depositary shares, each representing a 1/400th ownership interest in a share of its Series A preferred stock, with a liquidation preference of $10,000 per share of Series A preferred stock (equivalent to $25 per depositary share), including 900,000 depositary shares pursuant to the exercise in full by the underwriters of their option to purchase additional depositary shares. The total net proceeds to the Company were approximately $166.4 million, after deducting the underwriting discount and other offering expenses payable by the Company. The Company intends to use the net proceeds of the offering for general corporate purposes in the ordinary course of its business. General corporate purposes may include repayment of debt, loan funding, acquisitions, additions to working capital, capital expenditures and investments in the Company’s subsidiaries.

During 2020, the Company undertook several expense reduction actions, including the consolidation of 14 branches, which was completed in September 2020, to reduce expenses in light of the current and expected operating environment. These actions resulted in expenses of $2.6 million, primarily related to real estate related write-downs, during the three months ended September 30, 2020, and expenses of $6.0 million, primarily related to real estate related write-downs and severance, during the nine months ended September 30, 2020.

Third Quarter Net Income and Performance Metrics

Net income available to common shareholders was $58.3 million and EPS was $0.74 for the third quarter of 2020 compared to net income of $53.2 million and EPS of $0.65 for the third quarter of 2019.
Pre-tax pre-provision operating earnings(1), which exclude provision for credit losses, merger and rebranding-related costs, and income tax expense, were $78.6 million for the third quarter of 2020 compared to $76.6 million for the third quarter of 2019.

Nine Month Net Income and Performance Metrics

Net income available to common shareholders was $96.1 million and EPS was $1.22 for the nine months ended September 30, 2020 compared to net income of $137.7 million and EPS of $1.72 for the nine months ended September 30, 2019.
Pre-tax pre-provision operating earnings(1) were $217.3 million for the nine months ended September 30, 2020 compared to $214.7 million for the nine months ended September 30, 2019.

Balance Sheet

Loans held for investment (net of deferred fees and costs) were $14.4 billion at September 30, 2020, an increase of $1.8 billion, or 18.8% (annualized), from December 31, 2019. Excluding the impact of the PPP(1), loans held for investment grew $171.7 million, or 1.8% (annualized).
Total deposits were $15.6 billion at September 30, 2020, an increase of $2.3 billion, or 22.8% (annualized), from December 31, 2019.

(1) Refer to the “Non-GAAP Financial Measures” section within this Item 2 for more information about these non-GAAP financial measures, including a reconciliation of these measures to the most directly comparable financial measures in accordance with GAAP.

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Recent Developments

COVID-19 Pandemic. The Company’s financial performance generally, and in particular the ability of its borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services the Company offers, is highly dependent on the business environment in its primary markets where it operates and in the United States as a whole.

In December 2019, COVID-19 was reported in Wuhan, China. The WHO declared the COVID-19 outbreak to constitute a Public Health Emergency of International Concern on January 30, 2020. Over the course of the first quarter of 2020, COVID-19 developed into a worldwide outbreak and, on March 11, 2020, the WHO characterized COVID-19 as a pandemic. On March 13, 2020, the President of the United States issued a proclamation declaring a national state of emergency in response to COVID-19. During the final two weeks of March 2020, the governors of multiple U.S. states, including Virginia, where the Company has its principal place of business, issued stay-at-home orders that directed the closing of non-essential businesses and restricted public gatherings. Beginning in the second quarter of 2020, businesses began to re-open in many areas of the United States under government social distancing and other restrictions. However, the COVID-19 pandemic will likely continue to be a significant health concern in the Company’s areas of operation, the United States and across the globe.

The pandemic is having a wide range of economic impacts, involving the possibility of an extended economic recession. The pandemic has severely disrupted supply chains and adversely affected production, demand, sales, and employee productivity across a range of industries. It has dramatically increased unemployment in the Company’s areas of operation and nationally. It is expected that the national economy and economies in the Company’s areas of operations will continue to be affected throughout the remainder of fiscal year 2020, despite the fact that many businesses have opened to one degree or another. In addition, the pandemic may have social and other impacts that are not yet known but may affect the Company’s customers, employees, and vendors. These events have adversely affected the Company’s operations during the first nine months of 2020 and are expected to impact its business, financial condition, and results of operations throughout the remainder of fiscal year 2020. The duration, nature, and severity of the impact of the COVID-19 pandemic on the Company’s operational and financial performance will depend on certain developments, including the duration, spread, and severity of the outbreak, the pandemic’s impact on its customers, employees, and vendors and the nature and effect of past and future federal and state governmental and private sector responses to the pandemic, all of which are uncertain and cannot be predicted. New information may emerge concerning the severity of the outbreak and the actions taken to contain COVID-19 infections or treat its impact may change or become more restrictive if a resurgence of COVID-19 infections occurs as a result of the loosening of governmental restrictions or otherwise.

Future developments with respect to COVID-19 remain highly uncertain and cannot be predicted and new information may emerge concerning the nature and severity of the outbreak, short- and long-term health impacts, the actions to contain the outbreak or treat its impact, and unforeseen effects of the pandemic, among others. Other national health concerns, including the outbreak of other contagious diseases or pandemics, may adversely affect the Company in the future.

During 2020, the Bank participated in the SBA PPP under the CARES Act, which was intended to provide economic relief to small businesses that have been adversely impacted by COVID-19. The Bank processed over 11,000 PPP loans, which totaled $1.7 billion with a recorded investment of $1.6 billion as of September 30, 2020, which included unamortized deferred fees of $32.6 million.

Loans under the PPP generally have a two-year term, earn interest at 1.00%, and are forgivable to the extent that the proceeds are used for payroll costs and other qualifying expenses in accordance with the terms of the program. Lenders participating in the program are scheduled to receive loan processing fees from the SBA ranging from 1.00% to 5.00% of the initial principal amount of the loan. Beginning in the third quarter of 2020, the Bank began to work with these borrowers and the SBA to achieve forgiveness and repayment of these loans.

The Bank has also implemented a short-term loan modification program that is intended to provide temporary relief for certain of our borrowers who expected to be or may have already been adversely affected by the outbreak of COVID-19 by providing short-term deferrals of loan payments on amortizing loans. The Bank offered a three- to six-month full payment deferral option or a three- to six-month interest-only payment option. In accordance with the March 22 Guidance and the CARES Act, these short-term deferrals are not deemed to be TDRs to the extent they meet the terms of such guidance.

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As of September 30, 2020, approximately $769.6 million remained under their modified loan terms. As of October 16, 2020, the loans that remained under their modified terms declined from September 30, 2020 by approximately 32% to approximately $522.6 million, over 90% of which were related to the commercial portfolio. The significant majority of the commercial loans that rolled off of their initial modification did not require a subsequent modification.  Subsequent modification requests have been primarily concentrated in the Company’s hotel portfolio.

Additionally, the Bank has offered a greater than six-month interest-only payment option, although the Bank currently expects minimal use of that option by customers.

The Bank has not registered as a lender under the MSLP but continues to monitor developments related thereto.

Net Interest Income

For the Three Months Ended

September 30, 

    

2020

    

2019

    

Change

    

(Dollars in thousands)

Average interest-earning assets

$

17,748,152

$

15,191,792

$

2,556,360

 

  

Interest and dividend income

$

157,414

$

178,345

$

(20,931)

 

  

Interest and dividend income (FTE) (1)

$

160,315

$

181,149

$

(20,834)

 

  

Yield on interest-earning assets

 

3.53

%  

 

4.66

%  

 

(113)

 

bps

Yield on interest-earning assets (FTE) (1)

 

3.59

%  

 

4.73

%  

 

(114)

 

bps

Average interest-bearing liabilities

$

12,444,083

$

11,427,305

$

1,016,778

 

  

Interest expense

$

20,033

$

41,744

$

(21,711)

 

  

Cost of interest-bearing liabilities

 

0.64

%  

 

1.45

%  

 

(81)

 

bps

Cost of funds

 

0.45

%  

 

1.09

%  

 

(64)

 

bps

Net interest income

$

137,381

$

136,601

$

780

 

  

Net interest income (FTE) (1)

$

140,282

$

139,405

$

877

 

  

Net interest margin

 

3.08

%  

 

3.57

%  

 

(49)

 

bps

Net interest margin (FTE) (1)

 

3.14

%  

 

3.64

%  

 

(50)

 

bps

(1) Refer to the “Non-GAAP Financial Measures” section within this Item 2 for more information about these measures, including a reconciliation of these measures to the most directly comparable financial measures calculated in accordance with GAAP.

For the third quarter of 2020, net interest income was $137.4 million, an increase of $780,000 from the third quarter of 2019. For the third quarter of 2020, net interest income (FTE) was $140.3 million, an increase of $877,000 from the third quarter of 2019. The increases in both net interest income and net interest income (FTE) were primarily driven by higher average loan balances partially offset by lower purchased loan discount accretion. Net accretion related to acquisition accounting decreased $1.4 million from the third quarter of 2019 to $3.7 million in the third quarter of 2020. In the third quarter of 2020, net interest margin decreased 49 basis points to 3.08% from 3.57% in the third quarter of 2019, and net interest margin (FTE) decreased 50 basis points compared to the third quarter of 2019. The net decline in net interest margin and net interest margin (FTE) measures were primarily driven by a decrease in the yield on interest-earning assets, partially offset by a decrease in the Bank’s cost of funds. The decline in the Company’s earning asset yields was driven by lower loan accretion income, an increase in the earning asset mix of lower yielding investment securities and the impact of the lower interest rate environment. The cost of funds decline was driven by lower deposit costs and wholesale borrowing costs driven by lower market interest rates and a favorable funding mix.

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For the Nine Months Ended

September 30, 

    

2020

    

2019

    

Change

    

(Dollars in thousands)

Average interest-earning assets

$

16,809,423

$

14,700,019

$

2,109,404

 

  

Interest and dividend income

$

491,607

$

525,122

$

(33,515)

 

  

Interest and dividend income (FTE) (1)

$

500,069

$

533,590

$

(33,521)

 

  

Yield on interest-earning assets

 

3.91

%  

 

4.78

%  

 

(87)

 

bps

Yield on interest-earning assets (FTE) (1)

 

3.97

%  

 

4.85

%  

 

(88)

 

bps

Average interest-bearing liabilities

$

12,200,209

$

11,161,458

$

1,038,751

 

  

Interest expense

$

81,913

$

122,379

$

(40,466)

 

  

Cost of interest-bearing liabilities

 

0.90

%  

 

1.47

%  

 

(57)

 

bps

Cost of funds

 

0.65

%  

 

1.11

%  

 

(46)

 

bps

Net interest income

$

409,694

$

402,743

$

6,951

 

  

Net interest income (FTE) (1)

$

418,156

$

411,211

$

6,945

 

  

Net interest margin

 

3.26

%  

 

3.66

%  

 

(40)

 

bps

Net interest margin (FTE) (1)

 

3.32

%  

 

3.74

%  

 

(42)

 

bps

(1) Refer to the “Non-GAAP Financial Measures” section within this Item 2 for more information about these measures, including a reconciliation of these measures to the most directly comparable financial measures calculated in accordance with GAAP.

For the first nine months of 2020, net interest income was $409.7 million, an increase of $7.0 million from the same period of 2019. For the first nine months of 2020, net interest income (FTE) was $418.2 million, an increase of $6.9 million from the same period of 2019. The increases in both net interest income and net interest income (FTE) were primarily driven by higher average loan balances and higher purchased loan discount accretion. Net accretion related to acquisition accounting increased $769,000 from the first nine months of 2019 to $19.5 million in the first nine months of 2020. In the first nine months of 2020, net interest margin decreased 40 basis points to 3.26% from 3.66% in the first nine months of 2019, and net interest margin (FTE) decreased 42 basis points compared to the first nine months of 2019. The net decline in net interest margin and net interest margin (FTE) measures were primarily driven by a decrease in the yield on interest-earning assets, partially offset by a decrease in cost of funds. The decline in the Company’s earning asset yields was driven by an increase in the earning asset mix of lower yielding investment securities and the impact of the lower interest rate environment. The cost of funds decline was driven by lower deposit costs and wholesale borrowing costs driven by lower market interest rates and a favorable funding mix.

The Federal Open Markets Committee lowered Federal Funds target rates for the first time in 11 years on July 31, 2019 and then again in September 2019 and October 2019, for a combined decrease of 75 basis points during 2019. In response to market volatility related to the COVID-19 pandemic, the FOMC again lowered Federal Funds target rates twice in March 2020, for a combined decrease of 150 basis points. The FOMC’s current Federal Funds target rate range is currently 0% to 0.25%. As a consequence, long-term interest rates have decreased. The Company anticipates that these actions by the FOMC will continue to put downward pressure on its net interest margin.

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The following tables show interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated:

AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)

For the Three Months Ended September 30, 

 

2020

2019

 

    

    

Interest

    

    

    

Interest

    

 

Average

Income /

Yield /

Average

Income /

Yield /

 

Balance

Expense (1)

Rate (1)(2)

Balance

Expense (1)

Rate (1)(2)

 

 

(Dollars in thousands)

Assets:

 

  

 

  

 

  

 

  

 

  

 

  

Securities:

 

  

 

  

 

  

 

  

 

  

 

  

Taxable

$

1,738,033

$

10,275

 

2.35

%  

$

1,670,270

$

12,625

 

3.00

%

Tax-exempt

 

1,153,177

 

10,886

 

3.76

%  

 

990,000

 

10,181

 

4.08

%

Total securities

 

2,891,210

 

21,161

 

2.91

%  

 

2,660,270

 

22,806

 

3.40

%

Loans, net (3) (4)

 

14,358,666

 

138,635

 

3.84

%  

 

12,240,254

 

156,471

 

5.07

%

Other earning assets

 

498,276

 

519

 

0.41

%  

 

291,268

 

1,872

 

2.55

%

Total earning assets

 

17,748,152

$

160,315

 

3.59

%  

 

15,191,792

$

181,149

 

4.73

%

Allowance for credit losses

 

(174,171)

 

  

 

(46,229)

 

  

 

  

Total non-earning assets

 

2,211,186

 

  

 

2,057,765

 

  

 

  

Total assets

$

19,785,167

 

  

$

17,203,328

 

  

 

  

Liabilities and Stockholders' Equity:

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

 

  

 

  

 

  

Transaction and money market accounts

$

7,834,317

$

4,684

 

0.24

%  

$

6,290,112

$

16,389

 

1.03

%

Regular savings

 

845,936

 

128

 

0.06

%  

 

743,938

 

266

 

0.14

%

Time deposits (5)

 

2,579,991

 

10,756

 

1.66

%  

 

2,769,574

 

14,194

 

2.03

%

Total interest-bearing deposits

 

11,260,244

 

15,568

 

0.55

%  

 

9,803,624

 

30,849

 

1.25

%

Other borrowings (6)

 

1,183,839

 

4,465

 

1.50

%  

 

1,623,681

 

10,895

 

2.66

%

Total interest-bearing liabilities

 

12,444,083

$

20,033

 

0.64

%  

 

11,427,305

$

41,744

 

1.45

%

Noninterest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Demand deposits

 

4,320,225

 

  

 

3,008,587

 

  

 

  

Other liabilities

 

372,082

 

  

 

239,001

 

  

 

  

Total liabilities

 

17,136,390

 

  

 

14,674,893

 

  

 

  

Stockholders' equity

 

2,648,777

 

  

 

2,528,435

 

  

 

  

Total liabilities and stockholders' equity

$

19,785,167

 

  

$

17,203,328

 

  

 

  

Net interest income

$

140,282

 

  

 

  

$

139,405

 

  

Interest rate spread

 

2.95

%  

 

  

 

  

 

3.28

%  

Cost of funds

 

0.45

%  

 

  

 

  

 

1.09

%  

Net interest margin

 

3.14

%  

 

  

 

  

 

3.64

%  

(1) Income and yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 21% .

(2) Rates and yields are annualized and calculated from actual, not rounded amounts in thousands, which appear above.

(3) Nonaccrual loans are included in average loans outstanding.

(4) Interest income on loans includes $3.8 million and $5.0 million for the three months ended September 30, 2020 and 2019, respectively, in accretion of the fair market value adjustments related to acquisitions.

(5) Interest expense on time deposits includes $26,000 and $179,000 for the three months ended September 30, 2020 and 2019, respectively, in accretion of the fair market value adjustments related to acquisitions.

(6) Interest expense on borrowings includes $167,000 and $97,000 for the three months ended September 30, 2020 and 2019, respectively, in amortization of the fair market value adjustments related to acquisitions.

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AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)

For the Nine Months Ended September 30, 

 

2020

2019

 

    

    

Interest

    

    

    

Interest

    

 

Average

Income /

Yield /

Average

Income /

Yield /

 

Balance

Expense (1)

Rate (1)(2)

Balance

Expense (1)

Rate (1)(2)

 

 

(Dollars in thousands)

Assets:

 

  

 

  

 

  

 

  

 

  

 

  

Securities:

 

  

 

  

 

  

 

  

 

  

 

  

Taxable

$

1,676,528

$

33,170

 

2.64

%  

$

1,680,570

$

39,059

 

3.11

%

Tax-exempt

 

1,044,633

 

31,038

 

3.97

%  

 

1,000,893

 

30,916

 

4.13

%

Total securities

 

2,721,161

 

64,208

 

3.15

%  

 

2,681,463

 

69,975

 

3.49

%

Loans, net (3) (4)

 

13,639,401

 

433,286

 

4.24

%  

 

11,821,612

 

459,905

 

5.20

%

Other earning assets

 

448,861

 

2,575

 

0.77

%  

 

196,944

 

3,710

 

2.52

%

Total earning assets

 

16,809,423

$

500,069

 

3.97

%  

 

14,700,019

$

533,590

 

4.85

%

Allowance for loan losses

 

(138,524)

 

  

 

(43,480)

 

  

 

  

Total non-earning assets

 

2,166,681

 

  

 

1,982,502

 

  

 

  

Total assets

$

18,837,580

 

  

$

16,639,041

 

  

 

  

Liabilities and Stockholders' Equity:

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

 

  

 

  

 

  

Transaction and money market accounts

$

7,415,491

$

26,508

 

0.48

%  

$

6,102,783

$

46,895

 

1.03

%

Regular savings

 

792,994

 

409

 

0.07

%  

 

751,341

 

1,083

 

0.19

%

Time deposits (5)

 

2,667,267

 

37,026

 

1.85

%  

 

2,554,058

 

36,110

 

1.89

%

Total interest-bearing deposits

 

10,875,752

 

63,943

 

0.79

%  

 

9,408,182

 

84,088

 

1.19

%

Other borrowings (6)

 

1,324,457

 

17,970

 

1.81

%  

 

1,753,276

 

38,291

 

2.92

%

Total interest-bearing liabilities

 

12,200,209

$

81,913

 

0.90

%  

 

11,161,458

$

122,379

 

1.47

%

Noninterest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Demand deposits

 

3,756,957

 

  

 

2,842,017

 

  

 

  

Other liabilities

 

338,558

 

  

 

205,654

 

  

 

  

Total liabilities

 

16,295,724

 

  

 

14,209,129

 

  

 

  

Stockholders' equity

 

2,541,856

 

  

 

2,429,912

 

  

 

  

Total liabilities and stockholders' equity

$

18,837,580

 

  

$

16,639,041

 

  

 

  

Net interest income

$

418,156

 

  

 

  

$

411,211

 

  

Interest rate spread

 

3.07

%  

 

  

 

  

 

3.38

%  

Cost of funds

 

0.65

%  

 

  

 

  

 

1.11

%  

Net interest margin

 

3.32

%  

 

  

 

  

 

3.74

%  

(1) Income and yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 21%.

(2) Rates and yields are annualized and calculated from actual, not rounded amounts in thousands, which appear above.

(3) Nonaccrual loans are included in average loans outstanding.

(4) Interest income on loans includes $19.8 million and $18.2 million for the nine months ended September 30, 2020 and 2019, respectively, in accretion of the fair market value adjustments related to acquisitions.

(5) Interest expense on time deposits includes $110,000 and $684,000 the nine months ended September 30, 2020 and 2019, respectively, in accretion of the fair market value adjustments related to acquisitions.

(6) Interest expense on borrowings includes $445,000 and $237,000 for the nine months ended September 30, 2020 and 2019, respectively, in amortization of the fair market value adjustments related to acquisitions.

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The table below presents changes in interest income and interest expense and distinguishes between the changes related to increases or decreases in average outstanding balances of interest-earning assets and interest-bearing liabilities (volume), and the changes related to increases or decreases in average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionally. Results, on a taxable equivalent basis, are as follows (dollars in thousands):

Three Months Ended

 

Nine Months Ended

September 30, 2020 vs. September 30, 2019

 

September 30, 2020 vs. September 30, 2019

Increase (Decrease) Due to Change in:

 

Increase (Decrease) Due to Change in:

    

Volume

    

Rate

    

Total

 

Volume

    

Rate

    

Total

Earning Assets:

Securities:

Taxable

$

494

$

(2,844)

$

(2,350)

$

(94)

$

(5,795)

$

(5,889)

Tax-exempt

 

1,587

 

(882)

 

705

 

1,324

 

(1,202)

 

122

Total securities

 

2,081

 

(3,726)

 

(1,645)

 

1,230

 

(6,997)

 

(5,767)

Loans, net (1)

 

24,335

 

(42,171)

 

(17,836)

 

64,803

 

(91,422)

 

(26,619)

Other earning assets

 

819

 

(2,172)

 

(1,353)

 

2,608

 

(3,743)

 

(1,135)

Total earning assets

$

27,235

$

(48,069)

$

(20,834)

$

68,641

$

(102,162)

$

(33,521)

Interest-Bearing Liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

 

  

 

  

 

  

Transaction and money market accounts

$

3,274

$

(14,979)

$

(11,705)

$

8,540

$

(28,927)

$

(20,387)

Regular savings

 

32

 

(170)

 

(138)

 

56

 

(730)

 

(674)

Time Deposits (2)

 

(923)

 

(2,515)

 

(3,438)

 

1,580

 

(664)

 

916

Total interest-bearing deposits

 

2,383

 

(17,664)

 

(15,281)

 

10,176

 

(30,321)

 

(20,145)

Other borrowings (3)

 

(2,457)

 

(3,973)

 

(6,430)

 

(7,973)

 

(12,348)

 

(20,321)

Total interest-bearing liabilities

 

(74)

 

(21,637)

 

(21,711)

 

2,203

 

(42,669)

 

(40,466)

Change in net interest income

$

27,309

$

(26,432)

$

877

$

66,438

$

(59,493)

$

6,945

(1) The rate-related change in interest income on loans includes the impact of lower accretion of the acquisition-related fair market value adjustments of $1.2 million for the three month change, and higher accretion of $1.6 million for the nine month change, respectively.

(2) The rate-related change in interest expense on deposits includes the impact of lower accretion of the acquisition-related fair market value adjustments of $153,000 and $574,000 for the three-and-nine-month change, respectively.

(3) The rate-related change in interest expense on other borrowings includes the impact of higher amortization of the acquisition-related fair market value adjustments of $70,000 and $208,000 for the three-and-nine-month change, respectively.

The Company’s net interest margin (FTE) includes the impact of acquisition accounting fair value adjustments. The impact of net accretion for the first three quarters of 2019, and the first three quarters of 2020 are reflected in the following table (dollars in thousands):

    

    

Deposit

    

Borrowings

    

Loan

Accretion

Accretion

Accretion

(Amortization)

(Amortization)

Total

For the quarter ended March 31, 2019

$

5,557

$

292

$

(70)

$

5,779

For the quarter ended June 30, 2019

7,659

213

(70)

7,802

For the quarter ended September 30, 2019

5,018

179

(97)

5,100

For the quarter ended March 31, 2020

9,528

50

(138)

9,440

For the quarter ended June 30, 2020

6,443

34

(140)

6,337

For the quarter ended September 30, 2020

3,814

26

(167)

3,673

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Noninterest Income

For the Three Months Ended

 

September 30, 

Change

 

    

2020

    

2019(1)

    

$

%

 

(Dollars in thousands)

 

Noninterest income:

Service charges on deposit accounts

$

6,041

$

7,675

$

(1,634)

(21.3)

%

Other service charges, commissions, and fees

 

1,621

 

1,513

 

108

7.1

%

Interchange fees

 

1,979

 

2,108

 

(129)

(6.1)

%

Fiduciary and asset management fees

 

6,045

 

6,082

 

(37)

(0.6)

%

Mortgage banking income

 

8,897

 

3,374

 

5,523

163.7

%

Gains on securities transactions

 

18

 

7,104

 

(7,086)

(99.7)

%

Bank owned life insurance income

 

3,421

 

2,062

 

1,359

65.9

%

Loan-related interest rate swap fees

 

3,170

 

5,480

 

(2,310)

(42.2)

%

Other operating income

 

3,215

 

12,708

 

(9,493)

(74.7)

%

Total noninterest income

$

34,407

$

48,106

$

(13,699)

(28.5)

%

(1) Amounts exclude discontinued operations. Refer to Note 14 "Segment Reporting & Discontinued Operations" in Item 1 "Financial Statements", of this Quarterly Report for further discussion regarding discontinued operations.

Noninterest income decreased $13.7 million, or 28.5%, to $34.4 million for the quarter ended September 30, 2020 compared to $48.1 million for the quarter ended September 30, 2019. The decrease in the third quarter of 2020 was primarily driven by approximately $9.3 million in life insurance proceeds received during the third quarter of 2019 related to a Xenith-acquired loan that had been charged off prior to the Company’s acquisition of Xenith. In addition, there was a decline of $7.1 million in gains on securities transactions, a decline of $2.3 million in loan-related interest rate swap income due to lower transaction volumes, and a decline in service charges on deposit accounts of $1.6 million primarily due to lower NSF and overdraft fees. Partially offsetting these decreases was an increase in mortgage banking income of $5.5 million primarily due to increased mortgage loan origination volumes due to the current low interest rate environment, and an increase in bank owned life insurance income of $1.4 million primarily related to death benefit proceeds received during the third quarter of 2020.

For the Nine Months Ended

 

September 30, 

Change

 

    

2020

    

2019(1)

    

$

%

 

(Dollars in thousands)

 

Noninterest income:

Service charges on deposit accounts

$

18,549

$

22,331

$

(3,782)

(16.9)

%

Other service charges, commissions, and fees

 

4,600

 

4,879

 

(279)

(5.7)

%

Interchange fees

 

5,300

 

12,765

 

(7,465)

(58.5)

%

Fiduciary and asset management fees

 

17,543

 

16,834

 

709

4.2

%

Mortgage banking income

 

16,744

 

7,614

 

9,130

119.9

%

Gains on securities transactions

 

12,293

 

7,306

 

4,987

68.3

%

Bank owned life insurance income

 

7,498

 

6,191

 

1,307

21.1

%

Loan-related interest rate swap fees

 

12,602

10,656

1,946

18.3

%

Other operating income

 

4,116

15,045

(10,929)

(72.6)

%

Total noninterest income

$

99,245

$

103,621

$

(4,376)

(4.2)

%

(1) Amounts exclude discontinued operations. Refer to Note 14 "Segment Reporting & Discontinued Operations" in Item 1 "Financial Statements", of this Quarterly Report for further discussion regarding discontinued operations.

Noninterest income decreased $4.4 million, or 4.2%, to $99.2 million for the nine months ended September 30, 2020 compared to $103.6 million for the nine months ended September 30, 2019. The decrease was primarily driven by approximately $9.3 million in life insurance proceeds received during the third quarter of 2019 related to a Xenith-acquired loan that had been charged off prior to the Company’s acquisition of Xenith. In addition, there was a decline in service charges on deposit accounts of $3.8 million primarily due to lower NSF and overdraft fees, and a decline of $7.5 million in interchange fees

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primarily due to reduced debit card interchange transaction fees as a result of the Durbin Amendment which was effective for the Company on July 1, 2019. Partially offsetting these decreases was a $5.0 million increase in gains on securities transactions, an increase of $1.9 million in loan related interest rate swap income, and an increase in bank owned life insurance income of $1.3 million primarily related to death benefit proceeds received during the third quarter of 2020. In addition, mortgage banking income increased $9.1 million primarily due to increased mortgage loan origination volumes due to the current low interest rate environment.

Noninterest Expense

For the Three Months Ended

 

September 30, 

Change

 

    

2020

    

2019(1)

    

$

%

 

(Dollars in thousands)

 

Noninterest expense:

Salaries and benefits

$

49,000

$

49,718

$

(718)

(1.4)

%

Occupancy expenses

 

7,441

 

7,493

 

(52)

(0.7)

%

Furniture and equipment expenses

 

3,895

 

3,719

 

176

4.7

%

Printing, postage, and supplies

 

904

 

1,268

 

(364)

(28.7)

%

Technology and data processing

 

6,564

 

5,787

 

777

13.4

%

Professional services

 

2,914

 

2,681

 

233

8.7

%

Marketing and advertising expense

 

2,631

 

2,600

 

31

1.2

%

FDIC assessment premiums and other insurance

 

1,811

 

381

 

1,430

375.3

%

Other taxes

 

4,124

 

3,971

 

153

3.9

%

Loan-related expenses

 

2,314

 

2,566

 

(252)

(9.8)

%

OREO and credit-related expenses

 

413

 

1,005

 

(592)

(58.9)

%

Amortization of intangible assets

 

4,053

 

4,764

 

(711)

(14.9)

%

Training and other personnel costs

 

746

 

1,618

 

(872)

(53.9)

%

Merger-related costs

 

 

2,435

 

(2,435)

(100.0)

%

Rebranding expense

1,133

(1,133)

(100.0)

%

Loss on debt extinguishment

16,397

(16,397)

(100.0)

%

Other expenses

 

6,412

 

4,151

 

2,261

54.5

%

Total noninterest expense

$

93,222

$

111,687

$

(18,465)

(16.5)

%

(1) Amounts exclude discontinued operations. Refer to Note 14 "Segment Reporting & Discontinued Operations" in Item 1 "Financial Statements", of this Quarterly Report for further discussion regarding discontinued operations.

Noninterest expense decreased $18.5 million, or 16.5%, to $93.2 million for the quarter ended September 30, 2020 compared to $111.7 million for the quarter ended September 30, 2019. Excluding merger-related costs, amortization of intangible assets, and rebranding-related costs, operating noninterest expense(2) for the quarter ended September 30, 2020 decreased $14.2 million, or 13.7%, compared to the third quarter of 2019. The decrease in the third quarter of 2020 was primarily driven by the recognition of an approximately $16.4 million loss on debt extinguishment resulting from the repayment of approximately $140.0 million in FHLB advances and the termination of the related cash flow hedges in the third quarter of 2019. This decrease was partially offset by an increase in FDIC assessment premiums of $1.4 million. Noninterest expense also included approximately $2.6 million in costs related to the Company’s expense reduction plans, including the closure of 14 branches in September 2020, approximately $639,000 in costs related to the Company’s response to COVID-19, and marketing expenses related to donations made by the Company to support organizations that fight the injustices of inequality and contribute to change in our communities.

(2) Refer to the “Non-GAAP Financial Measures” section within this Item 2 for more information about this non-GAAP financial measure, including a reconciliation of these measures to the most directly comparable financial measures calculated in accordance with GAAP.

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Table of Contents

For the Nine Months Ended

 

September 30, 

Change

 

    

2020

    

2019(1)

    

$

%

 

(Dollars in thousands)

 

Noninterest expense:

Salaries and benefits

$

149,013

$

148,116

$

897

0.6

%

Occupancy expenses

 

21,798

 

22,427

 

(629)

(2.8)

%

Furniture and equipment expenses

 

11,042

 

10,656

 

386

3.6

%

Printing, postage, and supplies

 

3,194

 

3,763

 

(569)

(15.1)

%

Technology and data processing

 

19,187

 

17,203

 

1,984

11.5

%

Professional services

 

9,211

 

8,269

 

942

11.4

%

Marketing and advertising expense

 

7,413

 

7,891

 

(478)

(6.1)

%

FDIC assessment premiums and other insurance

 

7,578

 

5,620

 

1,958

34.8

%

Other taxes

 

12,364

 

11,779

 

585

5.0

%

Loan-related expenses

 

7,512

 

7,250

 

262

3.6

%

OREO and credit-related expenses

 

1,512

 

3,162

 

(1,650)

(52.2)

%

Amortization of intangible assets

 

12,676

 

13,919

 

(1,243)

(8.9)

%

Training and other personnel costs

 

3,192

 

4,240

 

(1,048)

(24.7)

%

Merger-related costs

 

 

26,928

 

(26,928)

(100.0)

%

Rebranding expense

 

 

5,553

 

(5,553)

(100.0)

%

Loss on debt extinguishment

10,306

16,397

(6,091)

(37.1)

%

Other expenses

 

15,683

 

10,849

 

4,834

44.6

%

Total noninterest expense

$

291,681

$

324,022

$

(32,341)

(10.0)

%

(1) Amounts exclude discontinued operations. Refer to Note 14 "Segment Reporting & Discontinued Operations" in Item 1 "Financial Statements", of this Quarterly Report for further discussion regarding discontinued operations.

Noninterest expense decreased $32.3 million, or 10.0%, to $291.7 million for the nine months ended September 30, 2020 compared to $324.0 million for the nine months ended September 30, 2019. Excluding merger-related costs, amortization of intangible assets, and rebranding-related costs, operating noninterest expense(2) for the nine months ended September 30, 2020 increased $1.4 million, or 0.5%, compared to the same period in 2019. The increase was primarily driven by $6.0 million in costs related to the Company’s expense reduction plans, including the closure of 14 branches in September 2020, and approximately $1.6 million in costs related to the Company’s response to COVID-19 incurred during the nine months ended September 30, 2020. In addition, both technology and data processing costs and FDIC assessment premiums increased by $2.0 million. Noninterest expense also included the recognition of an approximately $10.3 million loss on debt extinguishment during the nine months ended September 30, 2020, resulting from the prepayment of approximately $200.0 million in long-term FHLB advances.The increases were partially offset by a decline in OREO and credit-related expenses of approximately $1.7 million due to lower OREO valuation adjustments, and a decline in training and personnel costs of $1.0 million.

(2)  Refer to the “Non-GAAP Financial Measures” section within this Item 2 for more information about this non-GAAP

financial measure, including a reconciliation of these measures to the most directly comparable financial measures

calculated in accordance with GAAP.

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Income Taxes

The provision for income taxes is based upon the results of operations, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.

The Bank is not subject to a state income tax in its primary place of business (Virginia). The Company’s other subsidiaries are subject to state income taxes and have historically generated losses for state income tax purposes. State net operating loss carryovers will begin to expire after 2026.

The effective tax rate for the three months ended September 30, 2020 and 2019 was 15.3% and 16.8%, respectively. The effective tax rate for the nine months ended September 30, 2020 and 2019 was 15.1% and 16.0%, respectively. The decrease in the effective tax rates is primarily due to the proportion of tax-exempt income to pre-tax income.

DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

Overview

Assets

At September 30, 2020, total assets were $19.9 billion, an increase of $2.4 billion, or approximately 18.0% (annualized), from $17.5 billion at December 31, 2019. The increase in assets was primarily a result of both organic and PPP loan growth.

Loans held for investment (net of deferred fees and costs) were $14.4 billion at September 30, 2020, an increase of $1.8 billion, or 18.8% (annualized), from December 31, 2019.  Excluding the effects of the PPP, loans held for investment (net of deferred fees and costs) increased $171.7 million, or 1.8% (annualized) during this period. Quarterly average loans increased $2.1 billion, or 17.3%, for the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019. Excluding the effects of the PPP, quarterly average loans increased $480.2 million, or 3.9% from the prior year. Refer to "Loan Portfolio" within Item 2 and Note 4 "Loans and Allowance for Loan and Lease Losses" in Part I of Item I for additional information on the Company’s loan activity. Refer to "Non-GAAP Financial Measures" within Item 2 for additional information on PPP adjusted impacts, including a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated in accordance with GAAP.

Liabilities and Stockholders’ Equity

At September 30, 2020, total liabilities were $17.3 billion, an increase of $2.2 billion from $15.1 billion at December 31, 2019.

Total deposits were $15.6 billion at September 30, 2020, an increase of $2.3 billion, or approximately 22.8% (annualized), from December 31, 2019. Quarterly average deposits increased $2.8 billion, or 21.6%, for the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019 primarily due to the impact of PPP loan related deposits and government stimulus. Refer to “Deposits” within this Item 2 for further discussion on this topic.

At September 30, 2020, stockholders’ equity was $2.7 billion, an increase of $147.8 million from December 31, 2019. The increase in stockholders’ equity is primarily related to the issuance and sale of Series A preferred stock that took place on June 9, 2020. Refer to “Capital Resources” within this Item 2 and Note 10 "Stockholders’ Equity" in Part I of Item I for additional information on the Company’s capital ratios.

The Company declared and paid a cash dividend of $0.25 per share during both the third quarter of 2020 and the third quarter of 2019.  Dividends for the nine months ended September 30, 2020 were $0.75, an increase of $0.04 per share, or 5.6% compared to the nine months ended September 30, 2019. During the third quarter of 2020, the Board also declared and paid a quarterly dividend on the outstanding shares of Series A Preferred Stock of $156.60 per share (equivalent to $0.39 per outstanding depositary share).

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Securities

At September 30, 2020, the Company had total investments in the amount of $3.1 billion, or 15.6% of total assets, as compared to $2.6 billion, or 15.0% of total assets, at December 31, 2019. The Company seeks to diversify its portfolio to minimize risk. It focuses on purchasing mortgage-backed securities for cash flow and reinvestment opportunities and securities issued by states and political subdivisions due to the tax benefits and the higher yield offered from these securities. The majority of the Company’s mortgage-backed securities are agency-backed securities, which have a government guarantee. The investment portfolio has a high percentage of municipal securities; therefore, the Company earns a higher taxable equivalent yield on its portfolio as compared to many of its peers. For information regarding the hedge transaction related to available for sale securities, see Note 9 "Derivatives" in Part I of Item I of this Quarterly Report.

The table below sets forth a summary of the AFS securities, HTM securities, and restricted stock as of the dates indicated (dollars in thousands):

    

September 30, 

    

December 31, 

2020

2019

Available for Sale:

 

  

 

  

U.S. government and agency securities

$

13,878

$

21,320

Obligations of states and political subdivisions

 

796,856

 

447,091

Corporate and other bonds

 

148,918

 

135,959

Mortgage-backed securities

 

 

Commercial

388,965

425,047

Residential

1,093,102

912,949

Total mortgage-back securities

1,482,067

1,337,996

Other securities

 

1,621

 

3,079

Total AFS securities, at fair value

 

2,443,340

 

1,945,445

Held to Maturity:

 

  

 

  

U.S. government and agency securities

2,767

2,813

Obligations of states and political subdivisions, at carrying value

 

538,352

 

545,148

Mortgage-backed securities

 

 

Commercial

5,542

7,183

Residential

Total mortgage-back securities

5,542

7,183

Total held to maturity securities

 

546,661

 

555,144

Restricted Stock:

 

  

 

  

Federal Reserve Bank stock

 

67,032

 

66,964

FHLB stock

 

45,184

 

63,884

Total restricted stock, at cost

 

112,216

 

130,848

Total investments

$

3,102,217

$

2,631,437

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The following table summarizes the contractual maturity of AFS securities at fair value and their weighted average yields as of September 30, 2020 (dollars in thousands):

    

1 Year or

    

    

5 – 10

    

Over 10

    

 

Less

1 - 5 Years

Years

Years

Total

 

U.S. government and agency securities

 

  

 

  

 

  

 

  

 

  

Amortized cost

$

$

$

13,463

$

$

13,463

Fair value

 

 

 

13,878

 

 

13,878

Weighted average yield (1)

 

%  

 

%  

 

2.29

%  

%  

 

2.29

%  

Obligations of states and political subdivisions:

 

 

Amortized cost

$

2,484

$

9,030

$

47,380

$

701,042

$

759,936

Fair value

 

2,505

 

9,401

 

49,785

 

735,165

 

796,856

Weighted average yield (1)

 

5.27

%  

 

4.02

%  

 

2.66

%  

 

3.00

%  

 

2.99

%

Corporate bonds and other securities:

 

 

Amortized cost

$

1,621

$

5,208

$

103,292

$

38,938

$

149,059

Fair value

 

1,621

 

5,155

 

105,178

 

38,585

 

150,539

Weighted average yield (1)

 

1.48

%  

 

2.28

%  

 

4.50

%  

 

1.80

%  

 

3.68

%

Mortgage backed securities:

 

 

Commercial

Amortized cost

$

24,445

$

113,359

$

26,713

$

206,548

$

371,065

Fair value

 

24,676

 

120,246

 

27,757

 

216,286

 

388,965

Weighted average yield (1)

 

2.66

%  

 

2.68

%  

 

2.72

%  

 

2.86

%  

 

2.78

%

Residential

Amortized cost

$

31

$

13,247

$

60,653

$

985,462

$

1,059,393

Fair value

32

13,312

62,208

1,017,550

1,093,102

Weighted average yield (1)

2.90

%  

2.74

%  

2.54

%  

2.21

%  

2.23

%  

Total mortgage-backed securities

Amortized cost

$

24,476

$

126,606

$

87,366

$

1,192,010

$

1,430,458

Fair value

24,708

133,558

89,965

1,233,836

1,482,067

Weighted average yield (1)

2.66

%  

2.69

%  

2.60

%  

2.32

%  

2.38

%  

Total AFS securities:

 

 

Amortized cost

$

28,581

$

140,844

$

251,501

$

1,931,990

$

2,352,916

Fair value

 

28,834

 

148,114

 

258,806

 

2,007,586

 

2,443,340

Weighted average yield (1)

 

2.82

%  

 

2.76

%  

 

3.37

%  

 

2.55

%  

 

2.66

%

(1)Yields on tax-exempt securities have been computed on a tax-equivalent basis.

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The following table summarizes the contractual maturity of HTM securities at carrying value and their weighted average yields as of September 30, 2020 (dollars in thousands):

    

1 Year or

    

    

5 – 10

    

Over 10

    

 

Less

1 - 5 Years

Years

Years

Total

 

U.S. government and agency securities

Carrying value

$

$

1,580

$

1,187

$

$

2,767

Fair value

1,571

1,182

2,753

Weighted average yield (1)

%

4.60

%

4.17

%

%

4.41

%

Obligations of states and political subdivisions:

Carrying value

$

1,005

$

7,496

$

562

$

529,289

$

538,352

Fair value

 

1,024

 

7,865

 

614

 

596,410

 

605,913

Weighted average yield (1)

 

3.35

%  

 

2.49

%  

 

3.16

%  

 

4.10

%  

 

4.07

%

Mortgage backed securities:

 

Commercial

Amortized cost

$

$

$

$

5,542

$

5,542

Fair value

5,507

5,507

Weighted average yield (1)

%

%

%

4.98

%

4.98

%

Residential

Amortized cost

$

$

$

$

$

Fair value

Weighted average yield (1)

%

%

%

%

%

Total mortgage-backed securities

Amortized cost

$

$

$

$

5,542

$

5,542

Fair value

 

 

 

 

5,507

 

5,507

Weighted average yield (1)

 

%

 

%  

 

%  

 

4.98

%  

 

4.98

%

Total HTM securities:

 

Carrying value

$

1,005

$

9,076

$

1,749

$

534,831

$

546,661

Fair value

 

1,024

 

9,436

 

1,796

 

601,917

 

614,173

Weighted average yield (1)

 

3.35

%  

 

2.86

%  

 

3.84

%  

 

4.11

%  

 

4.09

%

(1)Yields on tax-exempt securities have been computed on a tax-equivalent basis.

As of September 30, 2020, the Company maintained a diversified municipal bond portfolio with approximately 74% of its holdings in general obligation issues and the majority of the remainder backed by revenue bonds. Issuances within the states of Texas and Virginia represented 25% and 22% of the municipal portfolio, respectively; no other state had a concentration above 10%. Substantially all municipal holdings are considered investment grade. When purchasing municipal securities, the Company focuses on strong underlying ratings for general obligation issuers or bonds backed by essential service revenues.

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Liquidity

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, money market investments, federal funds sold, loans held for sale, and securities and loans maturing or re-pricing within one year. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary through federal funds lines with several correspondent banks, a line of credit with the FHLB, the Federal Reserve Discount Window, the purchase of brokered certificates of deposit, corporate line of credit with a large correspondent bank, and debt and capital issuance. Management considers the Company’s overall liquidity to be sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.

On June 9, 2020, the Company announced the closing of an offering of 6,900,000 depositary shares, each representing a 1/400th ownership interest in a share of its Series A preferred stock, with a liquidation preference of $10,000 per share of Series A preferred stock (equivalent to $25 per depositary share), including 900,000 depositary shares pursuant to the exercise in full by the underwriters of their option to purchase additional depositary shares. The total net proceeds to the Company were approximately $166.4 million, after deducting the underwriting discount and other offering expenses payable by the Company. The Company intends to use the net proceeds of the offering for general corporate purposes in the ordinary course of its business. General corporate purposes may include repayment of debt, loan funding, acquisitions, additions to working capital, capital expenditures and investments in the Company’s subsidiaries.

As a result of adverse market conditions including the impacts of COVID-19, the Company has continued to see elevated customer deposit balances. These increased balances are due primarily to the combination of government stimulus programs, and customer expense and savings habits in response to the pandemic. As a result of the increases in customer deposits, the Company has reduced its wholesale borrowings during 2020.  The Company considers a portion of the increases in customer deposits to be temporary which it expects will result in outflows in subsequent quarters

During the second quarter of 2020, in connection with the loans originated as part of the PPP, the Company borrowed under the Federal Reserve’s PPPLF.  Under the terms of the PPPLF, the Company can borrow funds which are secured by the Company’s PPP loans. As of September 30, 2020 the Company’s outstanding advances under the PPPLF, were $189.9 million. The interest rate on the advances is fixed at a rate of 0.35% through the advance maturities in April 2022.  The Company’s available borrowing capacity under the PPPLF as of September 30, 2020 was $1.4 billion.

During the second quarter of 2020, in response to the rate environment, the Company prepaid approximately $200.0 million in long-term FHLB advances, which resulted in a prepayment penalty of approximately $10.3 million, and sold several securities, which resulted in a gain of approximately $10.3 million.

As of September 30, 2020, liquid assets totaled $6.2 billion, or 31.3%, of total assets, and liquid earning assets totaled $6.1 billion, or 34.0% of total earning assets. Asset liquidity is also provided by managing loan and securities maturities and cash flows. As of September 30, 2020, approximately $5.2 billion, or 36.4% of total loans, are scheduled to mature within one year based on contractual maturity, adjusted for expected prepayments, and approximately $441.7 million, or 14.2% of total securities, are scheduled to mature within one year.

Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary. Refer to Note 7 “Borrowings” in Part I of Item 1 for additional information and the available balances on various lines of credit. In addition to lines of credit, the Bank may also borrow additional funds by purchasing certificates of deposit through a nationally recognized network of financial institutions. Refer to “Deposits” within this Item 2 for additional information and outstanding balances on purchased certificates of deposits.

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Loan Portfolio

Loans held for investment, net of deferred fees and costs, were $14.4 billion at September 30, 2020, $12.6 billion at December 31, 2019, and $12.3 billion at September 30, 2019. Commercial & industrial loans and commercial real estate loans represented the Company’s largest categories at September 30, 2020. Commercial and industrial loans included approximately $1.6 billion in loans from the PPP loan program. When adjusting for the impact of PPP loans, commercial real estate – non-owner occupied loans remained the largest category.

The following table presents the Company’s composition of loans held for investment, net of deferred fees and costs, in dollar amounts and as a percentage of total gross loans as of the quarter ended (dollars in thousands):

September 30, 2020

June 30, 2020

March 31, 2020

December 31, 2019

September 30, 2019

 

Construction and Land Development

    

$

1,207,190

    

8.4

%  

$

1,247,939

    

8.7

%  

$

1,318,252

    

10.3

%  

$

1,250,924

    

9.9

%  

$

1,201,149

    

9.8

%

Commercial Real Estate - Owner Occupied

 

2,107,333

 

14.7

%  

 

2,067,087

 

14.4

%  

 

2,051,904

 

16.1

%  

 

2,041,243

 

16.2

%  

 

1,979,052

 

16.1

%

Commercial Real Estate - Non-Owner Occupied

 

3,497,929

 

24.3

%  

 

3,455,125

 

24.1

%  

 

3,328,012

 

26.1

%  

 

3,286,098

 

26.1

%  

 

3,198,580

 

26.0

%

Multifamily Real Estate

 

731,582

 

5.1

%  

 

717,719

 

5.0

%  

 

679,390

 

5.3

%  

 

633,743

 

5.0

%  

 

659,946

 

5.4

%

Commercial & Industrial

 

3,536,249

 

24.6

%  

 

3,555,971

 

24.9

%  

 

2,177,932

 

17.1

%  

 

2,114,033

 

16.8

%  

 

2,058,133

 

16.7

%

Residential 1-4 Family - Commercial

 

696,944

 

4.8

%  

 

715,384

 

5.0

%  

 

721,800

 

5.7

%  

 

724,337

 

5.7

%  

 

721,185

 

5.9

%

Residential 1-4 Family - Consumer

 

830,144

 

5.8

%  

 

841,051

 

5.9

%  

 

854,550

 

6.7

%  

 

890,503

 

7.1

%  

 

913,245

 

7.4

%

Residential 1-4 Family - Revolving

 

618,320

 

4.3

%  

 

627,765

 

4.4

%  

 

652,135

 

5.1

%  

 

659,504

 

5.2

%  

 

660,963

 

5.4

%

Auto

 

387,417

 

2.7

%  

 

380,053

 

2.7

%  

 

358,039

 

2.8

%  

 

350,419

 

2.8

%  

 

328,456

 

2.7

%

Consumer

 

276,023

 

1.9

%  

 

311,362

 

2.2

%  

 

352,572

 

2.8

%  

 

372,853

 

3.0

%  

 

386,848

 

3.1

%

Other Commercial

 

494,084

 

3.4

%  

 

389,190

 

2.7

%  

 

274,255

 

2.0

%  

 

287,279

 

2.2

%  

 

199,440

 

1.5

%

Total loans held for investment

$

14,383,215

 

100.0

%  

$

14,308,646

 

100.0

%  

$

12,768,841

 

100.0

%  

$

12,610,936

 

100.0

%  

$

12,306,997

 

100.0

%

The following table presents the remaining maturities, based on contractual maturity, by loan type and by rate type (variable or fixed), as of September 30, 2020 (dollars in thousands):

    

    

    

Variable Rate

    

Fixed Rate

    

Total

    

Less than 1

    

    

    

More than 5

    

    

    

More than 5

Maturities

year

Total

1-5 years

years

Total

1-5 years

years

Construction and Land Development

$

1,207,190

$

536,238

$

417,054

$

288,204

$

128,850

$

253,898

$

163,324

$

90,574

Commercial Real Estate - Owner Occupied

 

2,107,333

 

172,574

 

620,319

 

120,517

 

499,802

 

1,314,440

 

633,692

 

680,748

Commercial Real Estate - Non-Owner Occupied

 

3,497,929

 

414,575

 

1,590,183

 

603,718

 

986,465

 

1,493,171

 

1,095,756

 

397,415

Multifamily Real Estate

 

731,582

 

74,989

 

397,660

 

78,449

 

319,211

 

258,933

 

196,620

 

62,313

Commercial & Industrial

 

3,536,249

 

431,867

 

857,897

 

679,191

 

178,706

 

2,246,485

 

1,959,064

 

287,421

Residential 1-4 Family - Commercial

 

696,944

 

108,451

 

150,064

 

21,226

 

128,838

 

438,429

 

354,419

 

84,010

Residential 1-4 Family - Consumer

 

830,144

 

5,213

 

326,391

 

2,357

 

324,034

 

498,540

 

15,809

 

482,731

Residential 1-4 Family - Revolving

 

618,320

 

52,370

 

551,420

 

61,693

 

489,727

 

14,530

 

1,190

 

13,340

Auto

 

387,417

 

2,707

 

 

 

 

384,710

 

162,898

 

221,812

Consumer

 

276,023

 

23,932

 

19,369

 

16,243

 

3,126

 

232,722

 

107,253

 

125,469

Other Commercial

 

494,084

 

41,676

 

82,574

 

7,611

 

74,963

 

369,834

 

209,030

 

160,804

Total loans held for investment

$

14,383,215

$

1,864,592

$

5,012,931

$

1,879,209

$

3,133,722

$

7,505,692

$

4,899,055

$

2,606,637

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The Company remains committed to originating soundly underwritten loans to qualifying borrowers within its markets. The Company is focused on providing community-based financial services and discourages the origination of portfolio loans outside of its principal trade areas. As reflected in the loan table, at September 30, 2020, the largest components of the Company’s loan portfolio consisted of commercial real estate, commercial & industrial, and construction and land development loans. The risks attributable to these concentrations are mitigated by the Company’s credit underwriting and monitoring processes, including oversight by a centralized credit administration function and credit policy and risk management committee, as well as seasoned bankers focusing their lending to borrowers with proven track records in markets with which the Company is familiar.

The majority of the Company’s loan portfolio is comprised of segments not disrupted by the COVID-19 pandemic. Of those segments disrupted by COVID-19, the hospitality segment makes up the largest portion of the Company’s portfolio (less than 5% of total loans), followed by health care, retail trade, senior living, and restaurants. The Company has no significant exposure to the energy, cruise, or passenger aviation sectors.

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Asset Quality

Overview

At September 30, 2020, the Company experienced increases in NPAs compared to December 31, 2019, primarily due to the inclusion of assets not previously reported as nonperforming that are now considered such under the CECL methodology. Total past due loan levels as a percentage of total loans held for investment at September 30, 2020 were down from total past due loan levels at December 31, 2019.

Net charge-offs decreased for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Total net charge-offs as a percentage of total average loans on an annualized basis also decreased for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The allowance for credit losses increased from December 31, 2019, as a result of the adoption of ASC 326 as well as a worsening economic forecast due to the impact of COVID-19, which also led to an increase in the provision for credit losses.

As discussed under “Recent Developments” within this Item 2, the pandemic is having a wide range of economic impacts, including impacts in the Company’s area of operations and on the Company’s clients and borrowers. While the Company has not yet experienced deterioration in asset quality as compared to pre-pandemic performance, the Company does expect that at some point asset quality will be adversely affected to some degree due to pandemic-related bankruptcies, business closures, unemployment, and other effects. At this time, it is impossible for the Company to estimate either the timing or the magnitude of any such adverse changes in asset quality.

Troubled Debt Restructurings

The total recorded investment in TDRs as of September 30, 2020 was $21.6 million, an increase of $2.1 million, or 10.6%, from $19.5 million at December 31, 2019 and an increase of $2.8 million, or 15.1%, from $18.7 million at September 30, 2019. Of the $21.6 million of TDRs at September 30, 2020, $14.5 million, or 67.3%, were considered performing while the remaining $7.1 million were considered nonperforming.

Loan Modifications for Borrowers Affected by COVID-19

On March 22, 2020, the five federal bank regulatory agencies and the Conference of State Bank Supervisors issued joint

guidance (subsequently revised on April 7, 2020) with respect to loan modifications for borrowers affected by COVID-19 (the “March 22 Joint Guidance”). The March 22 Joint Guidance encourages banks, savings associations, and credit unions to make loan modifications for borrowers affected by COVID-19 and, importantly, assures those financial institutions that they will not (i) receive supervisory criticism for such prudent loan modifications and (ii) be required by examiners to automatically categorize COVID-19-related loan modifications as TDRs. The federal banking regulators have confirmed with the FASB that short-term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current (i.e., less than 30 days past due on contractual payments) when the modification program was implemented are not considered TDRs.

In addition, Section 4013 of the CARES Act, provides banks, savings associations, and credit unions with the ability to make loan modifications related to COVID-19 without categorizing the loan as a TDR or conducting the analysis to make the determination, which is intended to streamline the loan modification process. Any such suspension is effective for the term of the loan modification; however, the suspension is only permitted for loan modifications made during the effective period of Section 4013 and only for those loans that were not more than thirty days past due as of December 31, 2019.

The Company has made certain loan modifications pursuant to the March 22 Joint Guidance or Section 4013 of the CARES Act and as of September 30, 2020 approximately $769.6 million remain under their modified terms. The majority of the Company’s modifications as of September 30, 2020 were in the commercial real estate portfolios.

The Company’s modification program included payment deferrals and interest only modifications. A majority of the modifications were three-month deferrals.

Nonperforming Assets

At September 30, 2020, NPAs totaled $43.2 million, an increase of $10.2 million from December 31, 2019. NPAs as a percentage of total outstanding loans at September 30, 2020 were 0.30%, an increase of 4 basis points from 0.26% at December 31, 2019. Excluding the impact of the PPP loans(2), NPAs as a percentage of total outstanding loans were 0.34%, an

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increase of 8 basis points from December 31, 2019. 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. All prior period nonaccrual and past due loan metrics discussed herein have not been restated for CECL accounting and exclude PCI-related loan balances.

The following table shows a summary of asset quality balances and related ratios as of and for the quarters ended (dollars in thousands):

    

September 30, 

    

June 30, 

    

March 31, 

    

December 31, 

    

September 30, 

 

 

2020

 

2020

 

2020

 

2019

 

2019

Nonaccrual loans(1)

$

39,023

$

39,624

$

44,022

$

28,232

$

30,032

Foreclosed properties

 

4,159

 

4,397

 

4,444

 

4,708

 

6,385

Total NPAs

 

43,182

 

44,021

 

48,466

 

32,940

 

36,417

Loans past due 90 days and accruing interest(1)

 

15,661

 

19,255

 

12,876

 

13,396

 

12,036

Total NPAs and loans past due 90 days and accruing interest

$

58,843

$

63,276

$

61,342

$

46,336

$

48,453

Performing TDRs

$

14,515

$

15,303

$

14,865

$

15,686

$

15,156

Balances

 

  

 

  

 

  

 

  

 

  

Allowance for loan and lease losses

$

174,122

$

169,977

$

141,043

$

42,294

$

43,820

Average loans, net of deferred fees and costs

 

14,358,666

 

13,957,711

 

12,593,923

 

12,327,692

 

12,240,254

Loans, net of deferred fees and costs

 

14,383,215

 

14,308,646

 

12,768,841

 

12,610,936

 

12,306,997

Ratios

 

  

 

  

 

  

 

  

 

  

NPAs to total loans

 

0.30

%  

 

0.31

%  

 

0.38

%  

 

0.26

%  

 

0.30

%

NPAs to total adjusted loans(2)

0.34

%  

0.35

%  

0.38

%  

0.26

%  

0.30

%  

NPAs & loans 90 days past due to total loans

 

0.41

%  

 

0.44

%  

 

0.48

%  

 

0.37

%  

 

0.39

%

NPAs to total loans & foreclosed property

 

0.30

%  

 

0.31

%  

 

0.38

%  

 

0.26

%  

 

0.30

%

NPAs & loans 90 days past due to total loans & foreclosed property

 

0.41

%  

 

0.44

%  

 

0.48

%  

 

0.37

%  

 

0.39

%

ALL to nonaccrual loans

 

446.20

%  

 

428.97

%  

 

320.39

%  

 

149.81

%  

 

145.91

%

ALL to nonaccrual loans & loans 90 days past due

 

318.41

%  

 

288.69

%  

 

247.89

%  

 

101.60

%  

 

104.16

%

(1)Amounts are not directly comparable due to the Company’s adoption of ASC 326 on January 1, 2020. Prior to January 1, 2020, nonaccrual and past due loan information excluded PCI-related loan balances. These balances also reflect the impact of Section 4013 of the CARES Act and the March 22 Guidance.
(2)Refer to the “Non-GAAP Financial Measures” section within this Item 2 for more information about these non-GAAP financial measures, including a reconciliation of these measures to the most directly comparable financial measures in accordance with GAAP.

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The following table shows the activity in nonaccrual loans for the quarters ended (dollars in thousands):

    

September 30, 

    

June 30, 

    

March 31, 

    

December 31, 

    

September 30, 

2020

 

2020

 

2020

 

2019

 

2019

Beginning Balance

$

39,624

$

44,022

$

28,232

$

30,032

$

27,462

Impact of ASC 326 adoption

14,381

Additions

 

2,790

 

3,206

 

6,059

 

5,631

 

8,327

Net customer payments

 

(2,803)

 

(6,524)

 

(3,451)

 

(5,741)

 

(3,612)

Charge-offs

 

(588)

 

(1,088)

 

(1,199)

 

(1,690)

 

(884)

Loans returning to accruing status

 

 

8

 

 

 

(1,103)

Transfers to foreclosed property

 

 

 

 

 

(158)

Ending Balance

$

39,023

$

39,624

$

44,022

$

28,232

$

30,032

The following table presents the composition of nonaccrual loans at the quarters ended (dollars in thousands):

    

September 30, 

    

June 30, 

    

March 31, 

    

December 31, 

    

September 30, 

2020

 

2020

 

2020

 

2019

 

2019

Construction and Land Development

$

3,520

$

3,977

$

3,234

$

3,703

$

7,785

Commercial Real Estate - Owner Occupied

 

9,267

 

8,924

 

11,250

 

6,003

 

5,684

Commercial Real Estate - Non-owner Occupied

 

1,992

 

1,877

 

1,642

 

381

 

381

Multifamily Real Estate

33

33

53

Commercial & Industrial

 

1,592

 

2,708

 

3,431

 

1,735

 

1,585

Residential 1-4 Family - Commercial

 

5,743

 

5,784

 

7,040

 

4,301

 

3,879

Residential 1-4 Family - Consumer

 

12,620

 

12,029

 

13,088

 

9,292

 

8,292

Residential 1-4 Family - Revolving

 

3,664

 

3,626

 

3,547

 

2,080

 

1,641

Auto

 

517

 

584

 

550

 

563

 

604

Consumer

75

81

91

77

84

Other Commercial

 

 

1

 

96

 

97

 

97

Total

$

39,023

$

39,624

$

44,022

$

28,232

$

30,032

NPAs at September 30, 2020 also included $4.2 million in foreclosed property, a decrease of $549,000, or 11.7%, from December 31, 2019. The following table shows the activity in foreclosed property for the quarters ended (dollars in thousands):

    

September 30, 

    

June 30, 

    

March 31, 

    

December 31, 

    

September 30, 

2020

 

2020

 

2020

 

2019

 

2019

Beginning Balance

$

4,397

$

4,444

$

4,708

$

6,385

$

6,506

Additions of foreclosed property

 

 

 

615

 

62

 

645

Valuation adjustments

 

 

 

(44)

 

(375)

 

(62)

Proceeds from sales

 

(254)

 

(55)

 

(854)

 

(1,442)

 

(737)

Gains (losses) from sales

 

16

 

8

 

19

 

78

 

33

Ending Balance

$

4,159

$

4,397

$

4,444

$

4,708

$

6,385

The following table presents the composition of the foreclosed property portfolio at the quarter ended (dollars in thousands):

    

September 30, 

    

June 30, 

    

March 31, 

    

December 31, 

    

September 30, 

2020

 

2020

 

2020

 

2019

 

2019

Land

$

1,238

$

1,245

$

1,251

$

1,615

$

1,842

Land Development

 

1,965

 

1,965

 

1,965

 

1,978

 

2,788

Residential Real Estate

 

793

 

793

 

834

 

721

 

1,214

Commercial Real Estate

 

163

 

394

 

394

 

394

 

541

Total

$

4,159

$

4,397

$

4,444

$

4,708

$

6,385

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Past Due Loans

At September 30, 2020, total accruing past due loans were $50.9 million, or 0.35% of total loans held for investment, compared to $76.6 million, or 0.61% of total loans held for investment, at December 31, 2019 and $55.1 million, or 0.45% of total loans held for investment, at September 30, 2019. Excluding the impact of the PPP loans(1), past due loans still accruing interest were 0.40% of total loans held for investment at September 30, 2020. Of the total past due loans still accruing interest at September 30, 2020, $15.6 million, or 0.11% of total loans held for investment, were past due 90 days or more, compared to $13.4 million, or 0.11% of total loans held for investment, at December 31, 2019 and $12.0 million, or 0.10% of total loans held for investment, at September 30, 2019.

Net Charge-offs

For the quarter ended September 30, 2020, net charge-offs were $1.4 million, or 0.04% of total average loans on an annualized basis, compared to $7.7 million, or 0.25%, for the same quarter last year. Excluding the impact of the PPP loans(1), net charge-offs were 0.04% of total average loans on an annualized basis. For the nine months ended September 30, 2020, net charge-offs were $9.7 million, or 0.09% of total average loans on annualized basis, compared to $16.2 million, or 0.18%, for the same period in 2019. Excluding the impact of the PPP loans(1), net charge-offs were 0.11% of total average loans on an annualized basis. The majority of net charge-offs in 2020 were related to the third-party consumer loan portfolio.

Provision for Credit Losses

The provision for credit losses for the quarter ended September 30, 2020 was $6.6 million, a decline of $2.5 million compared with the same quarter last year. The provision for credit losses for the third quarter of 2020 included $5.6 million in provision for loan losses and $1.0 million in provision for unfunded commitments. The provision for credit losses for the nine months ended September 30, 2020 was $100.9 million compared to $18.2 million for the nine months ended September 30, 2019. The provision for credit losses for the nine months ended September 30, 2020 included $94.0 million in provision for loan losses and $6.9 million in provision for unfunded commitments. The increase in the provision for credit losses for the nine months ended September 30, 2020 compared to the same period in 2019 was due to the impact of the worsening economic forecast due to the impact of COVID-19 under CECL accounting for credit losses.

Allowance for Credit Losses

At September 30, 2020, the ACL was $186.1 million and included an ALLL of $174.1 million and an RUC of $12.0 million. The ACL increased $142.9 million from December 31, 2019, primarily due to the adoption of CECL (the “CECL Day 1 impact”) as well as the impact of the worsening economic forecast related to COVID-19 subsequent to the adoption of CECL (the “CECL Day 2 impact”).

The ALLL increased $131.8 million from December 31, 2019, due to the CECL Day 1 impact of $47.5 million and the CECL Day 2 impact of $84.3 million. The ALLL as a percentage of the total loan portfolio was 1.21% at September 30, 2020 and 0.34% at December 31, 2019. When excluding PPP loans(1), which are 100% guaranteed by the SBA, the ALLL as a percentage of adjusted loans increased 102 bps to 1.36% from December 31, 2019. The ratio of the ALLL to nonaccrual loans was 446.20% at September 30, 2020 and 149.81% at December 31, 2019.

The ACL as a percentage of the total loan portfolio was 1.29% at September 30, 2020 and 0.34% at December 31, 2019. The ACL as a percentage of adjusted loans(1) increased 112 bps to 1.46% from December 31, 2019.

The RUC increased $11.1 million from December 31, 2019, due to the CECL Day 1 impact of $4.2 million and the CECL Day 2 impact of $6.9 million.

(1) Refer to the “Non-GAAP Financial Measures” section within this Item 2 for more information about these non-GAAP financial measures, including a reconciliation of these measures to the most directly comparable financial measures in accordance with GAAP.

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The following table summarizes activity in the ALLL during the quarters ended (dollars in thousands):

    

September 30, 

    

June 30, 

    

March 31, 

    

December 31, 

    

September 30, 

 

2020

 

2020

 

2020

 

2019

 

2019

 

Balance, beginning of period

$

169,977

$

141,043

$

42,294

$

43,820

$

42,463

Day 1 impact from adoption of CECL

47,484

Loans charged-off:

 

  

 

  

 

  

 

  

 

  

Commercial

 

995

 

1,590

 

2,968

 

2,092

 

4,184

Consumer

 

1,983

 

3,087

 

4,183

 

4,826

 

5,133

Total loans charged-off

 

2,978

 

4,677

 

7,151

 

6,918

 

9,317

Recoveries:

 

  

 

  

 

  

 

  

 

  

Commercial

 

718

 

708

 

1,154

 

1,096

 

611

Consumer

 

848

 

703

 

1,006

 

1,196

 

963

Total recoveries

 

1,566

 

1,411

 

2,160

 

2,292

 

1,574

Net charge-offs

 

1,412

 

3,266

 

4,991

 

4,626

 

7,743

Provision for loan losses

 

5,557

 

32,200

 

56,256

 

3,100

 

9,100

Balance, end of period

$

174,122

$

169,977

$

141,043

$

42,294

$

43,820

Total ACL

$

186,122

$

180,977

$

150,043

$

43,194

$

44,920

ACL to loans

1.29

%  

1.26

%  

1.18

%  

0.34

%  

0.36

%  

ACL to adjusted loans(1)

1.46

%  

1.42

%  

1.18

%  

0.34

%  

0.36

%  

ALLL to loans

 

1.21

%  

 

1.19

%  

 

1.10

%  

 

0.34

%  

 

0.36

%

ALLL to adjusted loans(1)

1.36

%  

1.34

%  

1.10

%  

0.34

%  

0.36

%  

Net charge-offs to average loans

 

0.04

%  

 

0.09

%  

 

0.16

%  

 

0.15

%  

 

0.25

%

Net charge-offs to adjusted average loans(1)

0.04

%  

0.10

%  

0.16

%  

0.15

%  

0.25

%  

Provision for loan losses to average loans

 

0.15

%  

 

0.93

%  

 

1.80

%  

 

0.10

%  

 

0.29

%

Provision for loan losses to adjusted average loans(1)

0.17

%  

 

1.02

%  

 

1.80

%  

 

0.10

%  

 

0.29

%

The following table shows both an allocation of the ALLL among loan categories based upon the loan portfolio’s composition and the ratio of the related outstanding loan balances to total loans held for investment as of the quarters ended (dollars in thousands):

September 30, 

    

June 30, 

    

March 31, 

    

December 31, 

    

September 30, 

 

2020

2020

2020

2019

2019

 

    

$

    

% (2)

    

$

% (2)

    

$

% (2)

    

$

% (2)

    

$

% (2)

 

Commercial

$

126,655

85.3

%  

$

111,954

84.8

%  

$

77,843

82.6

%  

$

30,941

81.9

%  

$

31,936

81.4

%

Consumer

 

47,467

14.7

%  

 

58,023

15.2

%  

 

63,200

17.4

%  

 

11,353

18.1

%  

 

11,884

18.6

%

Total

$

174,122

100.0

%  

$

169,977

100.0

%  

$

141,043

100.0

%  

$

42,294

100.0

%  

$

43,820

100.0

%

(1)Refer to the “Non-GAAP Financial Measures” section within this Item 2 for more information about these non-GAAP financial measures, including a reconciliation of these measures to the most directly comparable financial measures in accordance with GAAP.
(2)Represents the loan balance divided by total loans held for investment.

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Deposits

As of September 30, 2020, total deposits were $15.6 billion, an increase of $2.3 billion, or 22.8% annualized, from December 31, 2019. Total interest-bearing deposits consist of NOW, money market, savings, and time deposit account balances. Total time deposit balances of $2.6 billion accounted for 23.0% of total interest-bearing deposits at September 30, 2020.

The following table presents the deposit balances by major category as of the quarters ended (dollars in thousands):

September 30, 2020

    

December 31, 2019

 

    

    

% of total

    

    

% of total

 

Deposits:

Amount

deposits

Amount

deposits

 

Non-interest bearing

$

4,420,665

 

28.4

%  

$

2,970,139

 

22.3

%

NOW accounts

 

3,460,480

 

22.2

%  

 

2,905,714

 

21.8

%

Money market accounts

 

4,269,696

 

27.4

%  

 

3,951,856

 

29.7

%

Savings accounts

 

861,685

 

5.5

%  

 

727,847

 

5.5

%

Time deposits of $100,000 and over(1)

 

1,474,171

 

9.5

%  

 

1,618,637

 

12.2

%

Other time deposits

 

1,089,401

 

7.0

%  

 

1,130,788

 

8.5

%

Total Deposits

$

15,576,098

 

100.0

%  

$

13,304,981

 

100.0

%

(1)Includes time deposits of $250,000 and over of $633.3 million and $684.8 million as of September 30, 2020 and December 31, 2019, respectively.

The Company may also borrow additional funds by purchasing certificates of deposit through a nationally recognized network of financial institutions. The Company utilizes this funding source when rates are more favorable than other funding sources. As of September 30, 2020 and December 31, 2019, there were $86.4 million and $190.7 million, respectively, purchased certificates of deposit included in certificates of deposit on the Company’s Consolidated Balance Sheets.

Maturities of time deposits of $100,000 or more as of September 30, 2020 were as follows (dollars in thousands):

    

Amount

Within 3 Months

$

273,681

3 - 6 Months

 

230,818

6 - 12 Months

530,793

Over 12 Months

 

438,879

Total

$

1,474,171

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Capital Resources

Capital resources represent funds, earned or obtained, over which financial institutions can exercise greater or longer control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company’s resources and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allow management to effectively leverage its capital to maximize return to shareholders.

On June 9, 2020, the Company announced the closing of an offering of 6,900,000 depositary shares, each representing a 1/400th ownership interest in a share of its Series A preferred stock, with a liquidation preference of $10,000 per share of Series A preferred stock (equivalent to $25 per depositary share), including 900,000 depositary shares pursuant to the exercise in full by the underwriters of their option to purchase additional depositary shares. The total net proceeds to the Company were approximately $166.4 million, after deducting the underwriting discount and other offering expenses payable by the Company. The Company intends to use the net proceeds of the offering for general corporate purposes in the ordinary course of its business. General corporate purposes may include repayment of debt, loan funding, acquisitions, additions to working capital, capital expenditures and investments in the Company’s subsidiaries.

On October 29, 2020 the Company announced that its Board of Directors declared a quarterly dividend of $0.25 per share of common stock. The common stock dividend is payable on November 27, 2020 to common shareholders on record as of November 13, 2020. The Board also declared a quarterly dividend on the outstanding shares of its Series A preferred stock. The Series A preferred stock is represented by depositary shares, each representing a 1/400th ownership interest in a share of Series A preferred stock. The dividend of $171.88 per share (equivalent to $0.43 per outstanding depositary share) is payable on December 1, 2020 to preferred shareholders of record as of November 16, 2020.

The Federal Reserve requires the Company and the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 7.0% of risk-weighted assets; (ii) a Tier 1 capital ratio of 8.5% of risk-weighted assets; (iii) a total capital ratio of 10.5% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. These ratios, with the exception of the leverage ratio, include a 2.5% capital conservation buffer, which is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

On July 10, 2019, the Company announced that its Board of Directors has authorized a share repurchase program to purchase up to $150.0 million of the Company’s common stock through June 30, 2021 in open market transactions or privately negotiated transactions. On March 20, 2020, the Company suspended its share repurchase program, which had approximately $20 million remaining in authorization at the time. The Company repurchased an aggregate of approximately 3.7 million shares, at an average price of $35.48 per share, under the authorization prior to suspension.

On March 27, 2020, the banking agencies issued an interim final rule that allows the Company to phase in the impact of adopting the CECL methodology up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay.  The Company is allowed to include the impact of the CECL transition, which is defined as the CECL Day 1 impact to capital plus 25% of the Company’s provision for credit losses during 2020, in regulatory capital through 2021.  Beginning in 2022, the transition amount will begin to impact regulatory capital by phasing it in over a three-year period ending in 2024.

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The table summarizes the Company’s capital and related ratios for the periods presented (3) (dollars in thousands):

September 30, 

December 31, 

September 30, 

2020

2019

2019

Common equity Tier 1 capital

$ 1,470,639

$ 1,437,908

$ 1,441,259

Tier 1 capital

1,636,995

1,437,908

1,441,259

Tier 2 capital

401,456

335,927

337,436

Total risk-based capital

2,038,451

1,773,835

1,778,695

Risk-weighted assets

14,644,960

14,042,949

13,751,401

Capital ratios:

Common equity Tier 1 capital ratio

10.04%

10.24%

10.48%

Tier 1 capital ratio

11.18%

10.24%

10.48%

Total capital ratio

13.92%

12.63%

12.93%

Leverage ratio (Tier 1 capital to average assets)

8.82%

8.79%

8.94%

Capital conservation buffer ratio (1)

5.18%

4.24%

4.48%

Common equity to total assets

12.52%

14.31%

14.48%

Tangible common equity to tangible assets (2)

7.91%

9.08%

9.23%

(1)Calculated by subtracting the regulatory minimum capital ratio requirements from the Company’s actual ratio results for Common equity, Tier 1, and Total risk based capital. The lowest of the three measures represents the Company’s capital conservation buffer ratio.
(2)Refer to “Non-GAAP Financial Measures” section within this Item 2 for more information about this non-GAAP financial measure, including a reconciliation of this measure to the most directly comparable financial measure calculated in accordance with GAAP.
(3)All ratios and amounts at September 30, 2020 are estimates and subject to change pending the Company’s filing of its FR Y9-C. All other periods are presented as filed.

SUPERVISION AND REGULATION

The following information is intended to update, and should be read in conjunction with, the information contained under the caption “Supervision and Regulation” in the Company’s 2019 Form 10-K and the supplemental disclosure related thereto contained under the same caption in the Company’s first quarter Form 10-Q filed on May 8, 2020 and the Company’s second quarter Form 10-Q filed on August 4, 2020.

The CARES Act

On March 27, 2020, the CARES Act was passed by Congress and signed into law by the President. The CARES Act provided approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Many of the CARES Act’s programs are, and remain, dependent upon the direct involvement of U.S. financial institutions like the Company and the Bank. These programs have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve, and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including new bills comparable in scope to the CARES Act, prior to the end of 2020.

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Set forth below is a brief overview of select provisions of the CARES Act and other regulations and supervisory guidance related to the COVID-19 pandemic that are applicable to the operations and activities of the Company and its subsidiaries, including the Bank. The following description is qualified in its entirety by reference to the full text of the CARES Act and the statutes, regulations, and policies described herein. Future legislation and/or amendments to the provisions of the CARES Act or changes to any of the statutes, regulations, or regulatory policies applicable to the Company and its subsidiaries could have a material effect on the Company. Such legislation and related regulations and supervisory guidance will be implemented over time and will remain subject to review by Congress and the implementing regulations issued by federal regulatory authorities. The Company continues to assess the impact of the CARES Act, the potential impact of new COVID-19 legislation, and other statutes, regulations, and supervisory guidance related to the COVID-19 pandemic.

Paycheck Protection Program. A principal provision of the CARES Act amended the SBA’s loan program, in which the Bank participates, to create a guaranteed, unsecured loan program, the PPP, to fund operational costs of eligible businesses, organizations, and self-employed persons during COVID-19. On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act into law, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. Shortly thereafter, and due to the evolving impact of the COVID-19 pandemic, the President signed additional legislation authorizing the SBA to resume accepting PPP applications on July 6, 2020 and extending the PPP application deadline to August 8, 2020. It is anticipated that additional revisions to the SBA’s interim final rules on forgiveness and loan review procedures will be forthcoming to address these and related changes. As a participating lender in the PPP, the Bank continues to monitor legislative, regulatory, and supervisory developments related thereto.

Troubled Debt Restructuring and Loan Modifications for Affected Borrowers. The CARES Act permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 and to assure banks that they will not be criticized by examiners for doing so. The Company is applying this guidance to qualifying loan modifications.

Regulatory Capital Rule for Revised Transition of the Current Expected Credit Losses Methodology.  The federal banking agencies have issued a final rule that allows institutions that adopt the current expected credit losses or "CECL" accounting standard in 2020 to mitigate the estimated effects of the CECL methodology on regulatory capital for two years.  The CECL final rule is substantially similar to the interim final rule issued in March 2020 in connection with other CARES Act related regulatory relief.  The final rule gives eligible institutions the option to mitigate the estimated capital effects of  the CECL methodology for two years, followed by a three-year transition period. Taken together, these measures offer a transition period of up to five years. In a change from the interim rule, the final rule expands the pool of eligible institutions to include any institution adopting the CECL methodology in 2020. The Company elected the relief provided under the final rule.

Federal Reserve Programs and Other Recent Initiatives

Main Street Lending Program. The CARES Act encouraged the Federal Reserve, in coordination with the Secretary of the Treasury, to establish or implement various programs to help midsize businesses, nonprofits, and municipalities. On April 9, 2020, the Federal Reserve proposed the creation of the MSLP to implement certain of these recommendations. On June 15, 2020, the Federal Reserve Bank of Boston opened the MSLP for lender registration. The MSLP supports lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. The MSLP operates through five facilities: the Main Street New Loan Facility (“MSNLF”), the Main Street Priority Loan Facility (“MSPLF”), the Main Street Expanded Loan Facility (“MSELF”), the Nonprofit Organization New Loan Facility (“NONLF”), and the Nonprofit Organization Expanded Loan Facility (“NOELF”). The Federal Reserve Bank of Boston maintains the necessary legal forms and agreements for eligible borrowers and eligible lenders to participate in the MSNLF, MSELF, MSPLF, NONLF, and NOELF, and is working to refine the MSLP’s operational infrastructure and facilities. The Bank has not registered as a lender under the MSLP, but continues to monitor developments related thereto.

Supervisory Developments.

On June 23, 2020, the federal banking agencies released guidance to promote consistency in the supervision and examination of financial institutions affected by the COVID-19 pandemic. The federal banking agencies – including the Federal Reserve – will continue to assess institutions in accordance with existing policies and procedures. However, in

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conducting their supervisory assessment, federal bank examiners will consider whether institution management has managed risk appropriately, including taking appropriate actions in response to stress caused by COVID-19-related impacts. The interagency guidance instructs examiners to consider the unique, evolving, and potential long-term nature of the issues confronting institutions and to exercise appropriate flexibility in their supervisory response

In addition, on June 25, 2020, the Federal Reserve announced that it would take several actions to ensure large banks,  remain resilient despite the ongoing economic impact of COVID-19. Specifically, in the third quarter, the Federal Reserve required large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income. On October 6, 2020 the Federal Reserve extended these measures through the end of 2020. The Company and the Bank continue to monitor the Federal Reserve’s evolving supervisory and regulatory responses to the COVID-19 pandemic.

Modification of the Volcker Rule. Also on June 25, 2020, the Federal Reserve – along with the Commodity Futures Trading Commission, FDIC, the Office of the Comptroller of the Currency, and the SEC – issued a final rule modifying the Volcker Rule’s prohibition on banking entities investing in or sponsoring hedge funds or private equity funds (“covered funds”). The Volcker Rule generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring or having certain relationships with a hedge fund or private equity fund. The final rule modifies three areas of the Volcker Rule by: (1) streamlining the covered funds portion of the rule; (2) addressing the extraterritorial treatment of certain foreign funds; and (3) permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker Rule was intended to address. The new rule became effective October 1, 2020 but did not have a material impact on the Company or the Bank.

NON-GAAP FINANCIAL MEASURES

In reporting the results of the three and nine months ended September 30, 2020 and 2019, the Company has provided supplemental performance measures on a tax-equivalent, tangible, operating, adjusted and/or pre-tax pre-provision basis. These non-GAAP financial measures are a supplement to GAAP used to prepare the Company’s financial statements and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Company uses the non-GAAP measures discussed herein in its analysis of the Company’s performance.

Net interest income (FTE) and total revenue (FTE), which are used in computing net interest margin (FTE) and operating efficiency ratio (FTE), respectively, provide valuable additional insight into the net interest margin and the efficiency ratio by adjusting for differences in tax treatment of interest income sources. The entire FTE adjustment is attributable to interest income on earning assets, which is used in computing yield on earning assets. Interest expense and the related cost of interest-bearing liabilities and cost of funds ratios are not affected by the FTE components.

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The following table reconciles non-GAAP financial measures from the most directly comparable GAAP financial measures for each of the periods presented (dollars in thousands):

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

Interest Income (FTE)

Interest and dividend income (GAAP)

$

157,414

$

178,345

$

491,607

$

525,122

FTE adjustment

 

2,901

 

2,804

 

8,462

 

8,468

Interest and dividend income FTE (non-GAAP)

$

160,315

$

181,149

$

500,069

$

533,590

Average earning assets

$

17,748,152

$

15,191,792

$

16,809,423

$

14,700,019

Yield on interest-earning assets (GAAP)

 

3.53

%  

 

4.66

%

 

3.91

%  

 

4.78

%

Yield on interest-earning assets (FTE) (non-GAAP)

 

3.59

%  

 

4.73

%

 

3.97

%  

 

4.85

%

Net Interest Income (FTE)

 

  

 

  

 

  

 

  

Net Interest Income (GAAP)

$

137,381

$

136,601

$

409,694

$

402,743

FTE adjustment

 

2,901

 

2,804

 

8,462

 

8,468

Net Interest Income FTE (non-GAAP)

 

140,282

 

139,405

 

418,156

 

411,211

Noninterest income (GAAP)

34,407

48,106

99,245

103,621

Total Revenue (FTE) (non-GAAP)

$

174,689

$

187,511

$

517,401

$

514,832

Average earning assets

$

17,748,152

$

15,191,792

$

16,809,423

$

14,700,019

Net interest margin (GAAP)

 

3.08

%  

 

3.57

%

 

3.26

%  

 

3.66

%

Net interest margin (FTE) (non-GAAP)

 

3.14

%  

 

3.64

%

 

3.32

%  

 

3.74

%

The Company believes tangible common equity is an important indication of its ability to grow organically and through business combinations as well as its ability to pay dividends and to engage in various capital management strategies. Tangible common equity is used in the calculation of certain profitability, capital, and per share ratios. The Company believes tangible common equity and related ratios are meaningful measures of capital adequacy because they provide a meaningful base for period-to-period and company-to-company comparisons, which the Company believes will assist investors in assessing the capital of the Company and its ability to absorb potential losses.

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The following table reconciles non-GAAP financial measures from the most directly comparable GAAP financial measures for each of the periods presented (dollars in thousands):

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

Tangible Assets

 

  

 

  

 

  

 

  

Ending Assets (GAAP)

$

19,930,650

$

17,441,035

$

19,930,650

$

17,441,035

Less: Ending goodwill

 

935,560

 

929,815

 

935,560

 

929,815

Less: Ending amortizable intangibles

 

61,068

 

78,241

 

61,068

 

78,241

Ending tangible assets (non-GAAP)

$

18,934,022

$

16,432,979

$

18,934,022

$

16,432,979

Tangible Common Equity

 

  

 

  

 

  

 

  

Ending Equity (GAAP)

$

2,660,885

$

2,525,031

$

2,660,885

$

2,525,031

Less: Ending goodwill

 

935,560

 

929,815

 

935,560

 

929,815

Less: Ending amortizable intangibles

 

61,068

 

78,241

 

61,068

 

78,241

Less: Perpetual preferred stock

166,357

166,357

Ending tangible common equity (non-GAAP)

$

1,497,900

$

1,516,975

$

1,497,900

$

1,516,975

Average equity (GAAP)

$

2,648,777

$

2,528,435

$

2,541,856

$

2,429,912

Less: Average goodwill

 

935,560

 

930,525

 

935,560

 

906,476

Less: Average amortizable intangibles

 

63,016

 

80,510

 

67,130

 

80,605

Less: Average perpetual preferred stock

166,353

69,248

Average tangible common equity (non-GAAP)

$

1,483,848

$

1,517,400

$

1,469,918

$

1,442,831

ROE (GAAP)

 

9.16

%  

 

8.35

%

 

5.19

%  

 

7.58

%

Common equity to assets (GAAP)

 

12.52

%  

 

14.48

%

 

12.52

%  

 

14.48

%

Tangible common equity to tangible assets (non-GAAP)

 

7.91

%  

 

9.23

%

 

7.91

%  

 

9.23

%

Book value per share (GAAP)

$

31.86

$

31.29

$

31.86

$

31.29

Tangible book value per share (non-GAAP)

$

19.13

$

18.80

$

19.13

$

18.80

Operating measures exclude merger-related and rebranding-related costs unrelated to the Company’s normal operations. The Company believes these measures are useful to investors as they exclude certain costs resulting from acquisition activity and allow investors to more clearly see the combined economic results of the organization's operations.

The following table reconciles non-GAAP financial measures from the most directly comparable GAAP financial measures for each of the periods presented (dollars in thousands, except per share amounts):

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

Operating Measures

Net income (GAAP)

$

61,000

$

53,238

$

98,798

$

137,692

Merger and rebranding-related costs, net of tax

 

 

2,819

 

 

25,973

Net operating earnings (non-GAAP)

$

61,000

$

56,057

$

98,798

$

163,665

Less: Dividends on preferred stock

2,691

2,691

Net operating earnings available to common shareholders (non-GAAP)

$

58,309

$

56,057

$

96,107

$

163,665

Weighted average common shares outstanding, diluted

 

78,725,346

 

81,832,868

 

78,921,108

 

80,183,113

Earnings per common share, diluted (GAAP)

$

0.74

$

0.65

$

1.22

$

1.72

Operating earnings per share, diluted (non-GAAP)

$

0.74

$

0.69

$

1.22

$

2.04

Average assets (GAAP)

$

19,785,167

$

17,203,328

$

18,837,580

$

16,639,041

ROA (GAAP)

 

1.23

%  

 

1.23

%

 

0.70

%  

 

1.11

%

Operating ROA (non-GAAP)

 

1.23

%  

 

1.29

%

 

0.70

%  

 

1.32

%

Average common equity (GAAP)

$

2,648,777

$

2,528,435

$

2,541,856

$

2,429,912

ROE (GAAP)

 

9.16

%  

 

8.35

%

 

5.19

%  

 

7.58

%

Operating ROE (non-GAAP)

 

9.16

%  

 

8.80

%

 

5.19

%  

 

9.01

%

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The operating efficiency ratio (FTE) excludes the amortization of intangible assets and merger-related costs. This measure is similar to the measure utilized by the Company when analyzing corporate performance and is also similar to the measure utilized for incentive compensation. The Company believes this measure is useful to investors as it excludes certain costs resulting from acquisition activity allowing for greater comparability with others in the industry and allowing investors to more clearly see the combined economic results of the organization’s operations. In prior periods, the Company has not excluded the amortization of intangibles from noninterest expense when calculating the operating efficiency ratio (FTE). The Company has adjusted its presentation for all periods in this release to exclude the amortization of intangibles from noninterest expense.

The following table reconciles non-GAAP financial measures from the most directly comparable GAAP financial measures for each of the periods presented (dollars in thousands):

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

Noninterest expense (GAAP)

$

93,222

$

111,687

$

291,681

$

324,022

Less: Merger-related costs

 

 

2,435

 

 

26,928

Less: Rebranding-related costs

1,133

5,553

Less: Amortization of intangible assets

 

4,053

 

4,764

 

12,676

 

13,919

Operating noninterest expense (non-GAAP)

$

89,169

$

103,355

$

279,005

$

277,622

Net interest income (GAAP)

$

137,381

$

136,601

$

409,694

$

402,743

Net interest income (FTE) (non-GAAP)

$

140,282

$

139,405

$

418,156

$

411,211

Noninterest income (GAAP)

$

34,407

$

48,106

$

99,245

$

103,621

Efficiency ratio (GAAP)

 

54.27

%  

 

60.47

%

 

57.31

%  

 

63.99

%

Operating efficiency ratio (FTE) (non-GAAP)

 

51.04

%  

 

55.12

%

 

53.92

%  

 

53.92

%

The Company believes that operating ROTCE is a meaningful supplement to GAAP financial measures and useful to investors because it measures the performance of a business consistently across time without regard to whether components of the business were acquired or developed internally.

The following table reconciles non-GAAP financial measures from the most directly comparable GAAP financial measures for each of the periods presented (dollars in thousands):

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

    

2020

    

2019

 

Operating ROTCE

Net operating earnings available to common shareholders (non-GAAP)

$

58,309

$

56,057

$

96,107

$

163,665

Plus: Amortization of intangibles, tax effected

 

3,202

 

3,764

 

10,014

 

10,996

Net operating earnings available to common shareholders before amortization of intangibles (non-GAAP)

$

61,511

$

59,821

$

106,121

$

174,661

Average tangible common equity (non-GAAP)

$

1,483,848

$

1,517,400

$

1,469,918

$

1,442,831

Operating return on average tangible common equity (non-GAAP)

16.49

%  

15.64

%

9.64

%  

16.18

%

Pre-tax pre-provision operating earnings exclude the provision for credit losses, which can fluctuate significantly from period-to-period under the recently adopted CECL methodology, merger and rebranding-related costs unrelated to the Company’s normal operations, and income tax expense. The Company believes this measure is useful to investors as it excludes certain costs resulting from acquisition activity as well as the potentially volatile provision measure, allowing for greater comparability with others in the industry and allowing investors to more clearly see the combined economic results of the organization’s operations.

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PPP adjustment impact excludes the SBA guaranteed PPP loans funded during the first nine months of 2020. The Company believes loans held for investment (net of deferred fees and costs), excluding PPP is useful to investors as it provides more clarity on the Company’s organic growth. The Company also believes that the related non-GAAP financial measures of past due loans still accruing interest as a percentage of total loans held for investment (net of deferred fees and costs), and net charge-offs as a percentage of average loans held for investment (net of deferred fees and costs), in each case excluding impacts from the PPP, are useful to investors as loans originated under the PPP carry an SBA guarantee. The Company believes that the ALLL as a percentage of loans held for investment (net of deferred fees and costs), excluding impacts from the PPP, is useful to investors because of the size of the Company’s PPP loan originations and the impact of the embedded credit enhancement provided by the SBA guarantee.

The following table reconciles non-GAAP financial measures from the most directly comparable GAAP financial measures for each of the periods presented (dollars in thousands, except per share amounts):

Three Months Ended

 

Nine Months Ended

September 30, 

 

September 30, 

    

2020

    

2019

 

    

2020

    

2019

Pre-tax pre-provision operating earnings

Net Income (GAAP)

$

61,000

$

53,238

$

98,798

$

137,692

Plus: Provision for credit losses

 

6,558

 

9,100

 

100,954

 

18,192

Plus: Income tax expenses

 

11,008

 

10,724

 

17,506

 

26,330

Plus: Merger and rebranding-related costs

 

 

3,568

 

 

32,481

Pre-tax pre-provision operating earnings (non-GAAP)

$

78,566

$

76,630

$

217,258

$

214,695

Three Months Ended

Nine Months Ended

September 30, 

June 30, 

March 31,

December 31,

September 30, 

September 30, 

September 30, 

2020

2020

2020

2019

2019

2020

2019

PPP adjustment impact

Loans held for investment (net of deferred fees and costs)(GAAP)

$

14,383,215

$

14,308,646

$

12,768,841

$

12,610,936

$

12,306,997

$

14,383,215

$

12,306,997

Less: PPP adjustments

1,600,577

1,598,718

1,600,577

Loans held for investment (net of deferred fees and costs),net adjustments, excluding PPP (non-GAAP)

$

12,782,638

$

12,709,928

$

12,768,841

$

12,610,936

$

12,306,997

$

12,782,638

$

12,306,997

Average loans held for investment (GAAP)

$

14,358,666

$

13,957,711

$

12,593,923

$

12,327,692

$

12,240,254

$

13,639,401

$

11,821,612

Less: Average PPP adjustments

1,638,204

1,273,883

1,457,091

Average loans held for investment, net adjustments, excluding PPP (non-GAAP)

$

12,720,462

$

12,683,828

$

12,593,923

$

12,327,692

$

12,240,254

$

12,182,310

$

11,821,612

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. The Company’s market risk is composed primarily of interest rate risk. The ALCO of the Company is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to this risk. The Company’s Board of Directors reviews and approves the guidelines established by ALCO.

Interest rate risk is monitored through the use of three complementary modeling tools: static gap analysis, earnings simulation modeling, and economic value simulation (net present value estimation). Each of these models measures changes in a variety of interest rate scenarios. While each of the interest rate risk models has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Static gap, which measures aggregate re-pricing values, is less utilized because it does not effectively measure the options risk impact on the Company and is not addressed here. Earnings simulation and economic value models, which more effectively measure the cash flow and optionality impacts, are utilized by management on a regular basis and are explained below.

The Company determines the overall magnitude of interest sensitivity risk and then formulates policies and practices governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, the states of the national, regional and local economies, and other financial and business risk factors. The Company uses simulation modeling to measure and monitor the effect of various interest rate scenarios and business strategies on net interest income. This modeling reflects interest rate changes and the related impact on net interest income and net income over specified time horizons.

Earnings Simulation Analysis

Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analyses, such as the static gap analysis discussed above.

Assumptions used in the model are derived from historical trends and management’s outlook and include loan and deposit growth rates and projected yields and rates. These assumptions may not materialize and unanticipated events and circumstances may occur. The model also does not take into account any future actions of management to mitigate the impact of interest rate changes. Such assumptions are monitored by management and periodically adjusted as appropriate. All maturities, calls, and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage-backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are reflected in the different rate scenarios.

The Company uses its simulation model to estimate earnings in rate environments where rates are instantaneously shocked up or down around a “most likely” rate scenario, based on implied forward rates and futures curves. The analysis assesses the impact on net interest income over a 12-month time horizon after an immediate increase or “shock” in rates, of 100 basis points up to 300 basis points. The model, under all scenarios, does not drop the index below zero.

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The following table represents the interest rate sensitivity on net interest income for the Company across the rate paths modeled for balances as of September 30, 2020 and 2019 (dollars in thousands):

Change In Net Interest Income

September 30, 

2020

2019

    

%

    

$

    

%

    

$

Change in Yield Curve:

 

  

 

  

  

 

  

+300 basis points

 

11.39

 

61,649

13.16

73,140

+200 basis points

 

8.26

 

44,678

8.71

48,405

+100 basis points

 

4.37

 

23,637

4.48

24,893

Most likely rate scenario

 

 

-100 basis points

 

(0.97)

 

(5,244)

(5.39)

(29,980)

-200 basis points

 

(1.19)

 

(6,454)

(8.71)

(48,423)

Asset sensitivity indicates that in a rising interest rate environment, the Company’s net interest income would increase and in a decreasing interest rate environment, the Company’s net interest income would decrease. Liability sensitivity indicates that in a rising interest rate environment, the Company’s net interest income would decrease and in a decreasing interest rate environment, the Company’s net interest income would increase.

From a net interest income perspective, the Company was less asset sensitive as of September 30, 2020, compared to its position as of September 30, 2019. This shift is in part due to the changing market characteristics of certain loan and deposit products and in part due to various other balance sheet strategies. The Company would expect net interest income to increase with an immediate increase or shock in market rates. In the decreasing interest rate environments, the Company would expect a decline in net interest income as interest-earning assets re-price at lower rates and interest-bearing deposits remain near their floors.

Economic Value Simulation

Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term earnings capability of the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The economic value simulation uses instantaneous rate shocks to the balance sheet.

The following chart reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the quarterly periods ended September 30, 2020 and 2019 (dollars in thousands):

Change In Economic Value of Equity

September 30, 

2020

2019

    

%

    

$

    

%

    

$

Change in Yield Curve:

 

  

  

  

  

+300 basis points

 

(1.30)

(38,815)

(4.13)

(132,210)

+200 basis points

 

0.49

14,551

(2.44)

(78,042)

+100 basis points

 

1.39

41,643

(0.97)

(31,031)

Most likely rate scenario

 

-100 basis points

 

(5.24)

(156,742)

(3.43)

(109,752)

-200 basis points

 

(1.96)

(58,650)

(9.63)

(307,914)

As of September 30, 2020, the Company’s economic value of equity is less sensitive in a rising interest rate environment compared to September 30, 2019 primarily due to the composition of the Consolidated Balance Sheets and due in part to the market characteristics of certain loans and deposits.

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ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2020. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act, means controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2020, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Control Over Financial Reporting

Management has taken measures to maintain the internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2020. There have been no changes that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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 or the financial condition or results of operations of the Company.

ITEM 1A – RISK FACTORS

During the quarter ended September 30, 2020, there have been no material changes from the risk factors previously disclosed under Part I, Item 1A. “Risk Factors” in the Company’s 2019 Annual Report and Part II, Item 1A. “Risk Factors” in the Company’s second quarter Form 10-Q filed on August 4, 2020.

An investment in the Company’s securities involves risks. In addition to the other information set forth in this Quarterly Report, including the information addressed under “Forward-Looking Statements,” investors in the Company’s securities should carefully consider the factors discussed below, as well as the factors discussed in the Company’s 2019 Annual Report and second quarter Form 10-Q filed on August 4, 2020. These factors could materially and adversely affect the Company’s business, financial condition, liquidity, results of operations, and capital position and could cause the Company’s actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this report, in which case the trading price of the Company’s securities could decline.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Sales of Unregistered Securities – None

(b) Use of Proceeds – Not Applicable.

(c) Issuer Purchases of Securities 

Stock Repurchase Program; Other

On July 8, 2019, the Company’s Board of Directors authorized a share repurchase program to purchase up to $150 million worth of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act. The repurchase program was authorized through June 30, 2021, but, on March 20, 2020, the Company announced the suspension of the program.

The following information describes the Company’s common stock repurchases for the three months ended September 30, 2020:

Period

Total number of shares purchased(1)

Average price paid per share ($)

Total number of shares purchased as part of publicly announced plans or programs(2)

Approximate dollar value of shares that may yet be purchased under the plans or programs ($)

July 1 - July 31, 2020

294

22.02

-

19,951,000

August 1 - August 31, 2020

450

25.04

-

19,951,000

September 1 - September 30, 2020

281

22.03

-

19,951,000

Total

1,025

23.35

-

(1)For the three months ended September 30, 2020, 1,025 shares were withheld upon vesting of restricted shares granted to employees of the Company in order to satisfy tax withholding obligations.
(2)On March 20, 2020, the Company announced the suspension of its share repurchase program, which had approximately $20 million of shares authorized to be purchased under the program remaining when it was suspended.

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ITEM 6 – EXHIBITS

The following exhibits are filed as part of this Quarterly Report and this list includes the Exhibit Index:

Exhibit No.

    

Description

2.1

Agreement and Plan of Reorganization, dated as of May 19, 2017, by and between Union Bankshares Corporation and Xenith Bankshares, Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed on May 23, 2017).

2.2

Agreement and Plan of Reorganization, dated as of October 4, 2018, as amended on December 7, 2018, by and between Union Bankshares Corporation and Access National Corporation (incorporated by reference to Annex A to Form S-4/A Registration Statement filed on December 10, 2018; SEC file no. 333-228455).

3.1

Amended and Restated Articles of Incorporation of Atlantic Union Bankshares Corporation, effective May 7, 2020 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on May 7, 2020).

3.1.1

Articles of Amendment designating the 6.875% Perpetual Non-Cumulative Preferred Stock, Series A, effective June 9, 2020 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 9, 2020).

3.2

Amended and Restated Bylaws of Atlantic Union Bankshares Corporation, effective as of December 5, 2019 (incorporated by reference to Exhibit 3.3 to Annual Report on Form 10-K filed on February 25, 2020).

15.1

Letter regarding unaudited interim financial information.

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.0

Interactive data files formatted in Inline eXtensible Business Reporting Language for the quarter ended September 30, 2020 pursuant to Rule 405 of Regulation S-T (1): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited) and (vi) the Notes to Consolidated Financial Statements (unaudited).

104.0

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Atlantic Union Bankshares Corporation

(Registrant)

Date: November 3, 2020

By:

/s/ John C. Asbury

John C. Asbury,

President and Chief Executive Officer

(principal executive officer)

Date: November 3, 2020

By:

/s/ Robert M. Gorman

Robert M. Gorman,

Executive Vice President and Chief Financial Officer

(principal financial and accounting officer)

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