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 1/400^th 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.

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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.

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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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Table of Contents

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

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

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

12,754

Dividends on common stock ($0.25 per share)

(19,825)

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

(1,985)

(47,894)

(49,879)

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

731

777

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

195

204

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

189

(2,199)

(2,010)

Impact of adoption of ASC 326

(39,053)

Stock-based compensation expense

2,291

Balance - March 31, 2020

104,086

—

1,743,429

529,606

48,329

2,425,450

Net Income

30,709

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

12,975

Issuance of preferred stock (17,250 shares)

173

166,190

166,363

Dividends on common stock ($0.25 per share)

(19,677)

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

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

189

200

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

(206)

(179)

Stock-based compensation expense

2,361

Balance - June 30, 2020

104,126

173

1,911,985

540,638

61,304

2,618,226

Net Income

61,000

Other comprehensive income (net of taxes of $327)

1,358

Net proceeds from preferred stock

(7)

Dividends on common stock ($0.25 per share)

(19,678)

Dividends on preferred stock ($156.60 per share)

(2,691)

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

189

200

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

(27)

(23)

Stock-based compensation expense

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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Table of Contents

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

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

18,670

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

21,070

478,904

499,974

Dividends on common stock ($0.23 per share)

(18,838)

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

130

138

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

211

219

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

139

(1,786)

(1,647)

Impact of adoption of ASC 842

(1,133)

Stock-based compensation expense

1,870

Balance- March 31, 2019

108,475

1,859,588

483,005

8,397

2,459,465

Net Income

48,823

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

19,670

Dividends on common stock ($0.23 per share)

(18,876)

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

938

986

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

192

200

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

(336)

(307)

Stock-based compensation expense

2,334

Balance- June 30, 2019

108,560

1,862,716

512,952

28,067

2,512,295

Net Income

53,238

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

12,302

Dividends on common stock ($0.25 per share)

(20,525)

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

(1,289)

(33,995)

(35,284)

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

656

694

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

269

279

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

(138)

(127)

Stock-based compensation expense

2,159

Balance - September 30, 2019

107,330

1,831,667

545,665

40,369

2,525,031

See accompanying notes to consolidated financial statements.

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Table of Contents

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

—

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

(40)

5,507

Non-agency

—

Total commercial mortgage-backed securities

5,542

(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

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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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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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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Credit Quality Indicators

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

Commercial Loans

The Company uses a risk rating system as the primary credit quality indicator for classes of loans within the Commercial segment. The risk rating system on a scale of 0 through 9 is used to determine risk level as used in the calculation of the allowance for credit loss. The risk levels, as described below, do not necessarily follow the regulatory definitions of risk levels with the same name. A general description of the characteristics of the risk levels follows:

Pass is determined by the following criteria:

●

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

●

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

●

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

●

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

●

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

Watch & Special Mention is determined by the following criteria:

●

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

●

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

Substandard is determined by the following criteria:

●

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

Doubtful is determined by the following criteria:

●

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

●

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

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The table below details the amortized cost of the classes of loans within the Commercial segment by risk level and year of origination as of 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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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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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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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.


	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;

●

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:

●

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

Doubtful is determined by the following criteria:

●

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

●

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

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


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

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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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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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