0000883948us-gaap:~~AccountingStandardsUpdate201712Member2018-05-01~~FairValueMeasurementsRecurringMemberus-gaap:CorporateBondSecuritiesMember2019-12-31

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 EndedSeptember 30, ~~2019~~2020

OR

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

Commission File Number: ~~000-20293~~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 ~~30, 2019~~28, 2020 was ~~80,649,088.~~78,718,695.

Table of Contents

Glossary of Acronyms and Defined Terms


~~2018~~2019 Form 10-K	–	Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019
Access	–	Access National Corporation and its subsidiaries
~~AFS~~ACL	–	~~Available~~Allowance for ~~sale~~credit losses
~~ALCO~~AFS	–	~~Asset Liability Committee~~Available for sale
~~ALL~~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
~~ASU~~ASC 326	–	~~Accounting Standards Update~~ASU 2016-13, Financial Instruments and Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
~~ATM~~ASC 820	–	~~Automated teller machine~~ASC 820, Fair Value Measurements and Disclosures
~~the Bank~~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
~~CCPs~~CARES Act	–	~~Central Counterparty Clearinghouses~~Coronavirus Aid, Relief, and Economic Security Act
~~CECL~~CCPs	–	Central Counterparty Clearinghouses
CECL	–	Current expected credit losses
CME	–	Chicago Mercantile Exchange
the Company	–	Atlantic Union Bankshares Corporation (formerly, Union Bankshares Corporation) and its subsidiaries
~~DHFB~~COVID-19	–	~~Dixon, Hubard, Feinour, & Brown, Inc.~~Novel strain of coronavirus first identified in December 2019 in Wuhan, China that has spread worldwide
~~Dodd-Frank Act~~ 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
~~FTE~~FOMC	–	~~Fully taxable equivalent~~Federal Open Markets Committee
FTE	–	Fully taxable equivalent
GAAP or U.S. GAAP	–	Accounting principles generally accepted in the United States
~~HELOC~~HTM	–	~~Home equity line of credit~~Held to maturity
~~HTM~~ICE Data Services	–	~~Held to maturity~~Intercontinental Exchange Data Services
~~IDC~~LCH	–	~~Interactive Data Corporation~~London Clearing House
~~LCH~~LIBOR	–	~~London Clearing House~~
~~LIBOR~~	–	London Interbank Offered Rate
~~MBS~~March 22 Joint Guidance	–	~~Mortgage Backed Securities~~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)
~~MD&A~~MSLP	–	Main Street Lending Program
MBS	–	Mortgage Backed Securities
MD&A	–	Management’s Discussion and Analysis of Financial Condition and Results of Operations
~~NOW~~	–	~~Negotiable order of withdrawal~~
~~NPA~~	–	~~Nonperforming assets~~
~~OAL~~	–	~~Outfitter Advisors, Ltd.~~
~~OCI~~	–	~~Other comprehensive income~~
~~OREO~~	–	~~Other real estate owned~~
~~OTTI~~	–	~~Other than temporary impairment~~
~~PCI~~	–	~~Purchased credit impaired~~
~~ROA~~	–	~~Return on average assets~~
~~ROE~~	–	~~Return on average common equity~~
~~ROTCE~~	–	~~Return on average tangible common equity~~

Table of Contents

~~ROU Asset~~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
~~SEC~~RUC	–	Reserve for unfunded commitments
RVI	–	Residual value insurance
SBA	–	Small Business Administration
SEC	–	Securities and Exchange Commission
~~Shore Premier~~Series A preferred stock	–	~~Shore Premier Finance, a division of the Bank~~6.875% Perpetual Non-Cumulative Preferred Stock, Series A, par value $10.00 per share
~~Shore Premier sale~~SSFA	–	~~The sale of substantially all of the assets and certain specific liabilities of Shore Premier~~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.
~~Xenith~~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,

2019

2018
ASSETS

(unaudited)

(audited)
Cash and cash equivalents:

Cash and due from banks
$
218,584

$
166,927
Interest-bearing deposits in other banks

370,673

94,056
Federal funds sold

2,663

216
Total cash and cash equivalents

591,920

261,199
Securities available for sale, at fair value

1,918,859

1,774,821
Securities held to maturity, at carrying value

556,579

492,272
Restricted stock, at cost

132,310

124,602
Loans held for sale, at fair value

72,208

—
Loans held for investment, net of deferred fees and costs

12,306,997

9,716,207
Less allowance for loan losses

43,820

41,045
Net loans held for investment

12,263,177

9,675,162
Premises and equipment, net

168,122

146,967
Goodwill

929,815

727,168
Amortizable intangibles, net

78,241

48,685
Bank owned life insurance

320,779

263,034
Other assets

408,162

250,210
Assets of discontinued operations

863

1,479
Total assets
$
17,441,035

$
13,765,599
LIABILITIES

Noninterest-bearing demand deposits
$
3,155,174

$
2,094,607
Interest-bearing deposits

9,889,538

7,876,353
Total deposits

13,044,712

9,970,960
Securities sold under agreements to repurchase

67,260

39,197
Other short-term borrowings

344,600

1,048,600
Long-term borrowings

1,137,321

668,481
Other liabilities

321,348

112,093
Liabilities of discontinued operations

763

1,687
Total liabilities

14,916,004

11,841,018
Commitments and contingencies (Note 8)

STOCKHOLDERS' EQUITY

Common stock, $1.33 par value; shares authorized of 200,000,000 and 100,000,000 at September 30, 2019 and December 31, 2018, respectively; 81,147,896 and 65,977,149 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively.

107,330

87,250
Additional paid-in capital

1,831,667

1,380,259
Retained earnings

545,665

467,345
Accumulated other comprehensive income (loss)

40,369

(10,273)
Total stockholders' equity

2,525,031

1,924,581
Total liabilities and stockholders' equity
$
17,441,035

$
13,765,599


	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		0
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		0
Preferred shares authorized		500,000		500,000

See accompanying notes to consolidated financial statements.

-2-

Table of Contents

ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME ~~(UNAUDITED)~~

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2019

2018

2019

2018
Interest and dividend income:

Interest and fees on loans
$
156,651

$
115,817

$
459,603

$
348,009
Interest on deposits in other banks

1,030

492

2,047

1,815
Interest and dividends on securities:

Taxable

12,625

10,145

39,059

25,229
Nontaxable

8,039

4,909

24,413

13,098
Total interest and dividend income

178,345

131,363

525,122

388,151
Interest expense:

Interest on deposits

30,849

15,928

84,088

40,187
Interest on short-term borrowings

2,200

3,379

14,313

12,794
Interest on long-term borrowings

8,695

6,093

23,978

17,568
Total interest expense

41,744

25,400

122,379

70,549
Net interest income

136,601

105,963

402,743

317,602
Provision for credit losses

9,100

3,340

18,192

9,011
Net interest income after provision for credit losses

127,501

102,623

384,551

308,591
Noninterest income:

Service charges on deposit accounts

7,675

6,483

22,331

18,566
Other service charges and fees

1,513

1,625

4,879

4,137
Interchange fees, net

2,108

4,882

12,765

14,163
Fiduciary and asset management fees

6,082

4,411

16,834

11,507
Mortgage banking income, net

3,374

—

7,614

—
Gains (losses) on securities transactions, net

7,104

97

7,306

222
Bank owned life insurance income

2,062

1,732

6,191

5,126
Loan-related interest rate swap fees, net

5,480

562

10,656

2,178
Gain on Shore Premier sale

—

(933)

—

19,966
Other operating income

12,708

1,028

15,045

4,887
Total noninterest income

48,106

19,887

103,621

80,752
Noninterest expenses:

Salaries and benefits

49,718

39,279

148,116

120,797
Occupancy expenses

7,493

6,551

22,427

18,778
Furniture and equipment expenses

3,719

2,983

10,656

9,024
Printing, postage, and supplies

1,268

1,183

3,763

3,525
Communications expense

1,037

872

3,199

2,976
Technology and data processing

5,787

4,841

17,203

13,722
Professional services

2,681

2,875

8,269

8,101
Marketing and advertising expense

2,600

3,109

7,891

7,834
FDIC assessment premiums and other insurance

381

1,363

5,620

5,430
Other taxes

3,971

2,878

11,779

8,660
Loan-related expenses

2,566

1,939

7,250

5,097
OREO and credit-related expenses

1,005

452

3,162

3,106
Amortization of intangible assets

4,764

3,490

13,919

9,885
Training and other personnel costs

1,618

1,024

4,240

3,155
Merger-related costs

2,435

1,429

26,928

37,414
Rebranding expense

1,133

—

5,553

—
Loss on debt extinguishment

16,397

—

16,397

—
Other expenses

3,114

2,081

7,650

5,730
Total noninterest expenses

111,687

76,349

324,022

263,234
Income from continuing operations before income taxes

63,920

46,161

164,150

126,109
Income tax expense

10,724

7,399

26,330

20,973
Income from continuing operations
$
53,196

$
38,762

$
137,820

$
105,136
Discontinued operations:

Income (loss) from operations of discontinued mortgage
segment
$
56

$
(761)

$
(173)

$
(3,768)
Income tax expense (benefit)

14

(196)

(45)

(795)
Income (loss) on discontinued operations

42

(565)

(128)

(2,973)
Net income

53,238

38,197

137,692

102,163
Basic earnings per common share
$
0.65

$
0.58

$
1.72

$
1.55
Diluted earnings per common share
$
0.65

$
0.58

$
1.72

$
1.55
Dividends declared per common share
$
0.25

$
0.23

$
0.71

$
0.65
Basic weighted average number of common shares outstanding

81,769,193

65,974,702

80,120,725

65,817,668
Diluted weighted average number of common shares outstanding

81,832,868

66,013,152

80,183,113

65,873,202


	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		0		2,435		0		26,928
Rebranding expense		0		1,133		0		5,553
Loss on debt extinguishment		0		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	$	0	$	56	$	0	$	(173)
Income tax expense (benefit)		0		14		0		(45)
Income (loss) on discontinued operations		0		42		0		(128)
Net income		61,000		53,238		98,798		137,692
Dividends on preferred stock		2,691		-		2,691		-
Net income available to common shareholders	$	58,309	$	53,238	$	96,107	$	137,692

Basic earnings per common share	$	0.74	$	0.65	$	1.22	$	1.72
Diluted earnings per common share	$	0.74	$	0.65	$	1.22	$	1.72
Dividends declared per common share	$	0.25	$	0.25	$	0.75	$	0.71
Basic weighted average number of common shares outstanding		78,714,353		81,769,193		78,904,792		80,120,725
Diluted weighted average number of common shares outstanding		78,725,346		81,832,868		78,921,108		80,183,113

See accompanying notes to consolidated financial statements.

-3-

Table of Contents

ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2019

2018

2019

2018
Net income

$
53,238

$
38,197

$
137,692

$
102,163
Other comprehensive income (loss):








Cash flow hedges:








Change in fair value of cash flow hedges

6,025

575

1,970

3,214
Reclassification adjustment for losses included in net income (net of tax, $42 and $60 for the three months and $120 and $205 for the nine months ended September 30, 2019 and 2018, respectively)⁽¹⁾

158

227

451

770
AFS securities:






Unrealized holding gains (losses) arising during period (net of tax, $3,287 and $3,007 for the three months and $14,513 and $7,200 for the nine months ended September 30, 2019 and 2018, respectively)

12,364

(11,310)

54,598

(27,087)
Reclassification adjustment for losses (gains) included in net income (net of tax, $1,492 and $20 for the three months and $1,534 and $46 for the nine months ended September 30, 2019 and 2018, respectively) ⁽²⁾

(5,612)

(77)

(5,772)

(176)
HTM securities:







Reclassification adjustment for accretion of unrealized gain on AFS securities transferred to HTM (net of tax, $1 and $1 for the three months and $4 and $107 for the nine months ended September 30, 2019 and 2018, respectively)⁽³⁾

(5)

(5)

(15)

(403)
Bank owned life insurance:








Unrealized holding losses arising during the period

(647)

—

(647)

—
Reclassification adjustment for losses included in net income ⁽⁴⁾

19

19

57

57
Other comprehensive income (loss)

12,302

(10,571)

50,642

(23,625)
Comprehensive income

$
65,540

$
27,626

$
188,334

$
78,538


	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		0		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⁾		0		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		0		(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 ~~(losses)~~ on securities ~~transactions, net"~~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.

-4-

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~~2020

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

~~-5-~~

~~Table of Contents~~

~~ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2018~~

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

Accumulated


Additional

Other

Common

Paid-In

Retained

Comprehensive

Stock

Capital

Earnings

Income (Loss)

Total
Balance - December 31, 2017

$
57,744

$
610,001

$
379,468

$
(884)

$
1,046,329
Net Income



16,639



16,639
Other comprehensive income (net of taxes of $3,565)







(11,426)

(11,426)
Issuance of common stock in regard to acquisition (21,922,077 shares)⁽¹⁾

29,156

765,653





794,809
Dividends on common stock ($0.21 per share)





(13,808)



(13,808)
Issuance of common stock under Equity Compensation Plans (68,495 shares)

91

836





927
Issuance of common stock for services rendered (4,914 shares)

7

177





184
Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (69,562 shares)

93

(2,363)





(2,270)
Cancellation of warrants



(1,530)





(1,530)
Stock-based compensation expense



1,223





1,223
Balance- March 31, 2018

$
87,091

$
1,373,997

$
382,299

$
(12,310)

$
1,831,077
Net Income





47,327



47,327
Other comprehensive income (net of taxes of $617)







(1,628)

(1,628)
Dividends on common stock ($0.21 per share)

(13,841)



(13,841)
Issuance of common stock under Equity Compensation Plans (17,058 shares)

23

416



439
Issuance of common stock for services rendered (5,259 shares)

7

205





212
Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (6,664 shares)

8

(136)



(128)
Impact of adoption of new guidance

(293)

(107)

(400)
Stock-based compensation expense



1,812



1,812
Balance- June 30, 2018

$
87,129

$
1,376,294

$
415,492

$
(14,045)

$
1,864,870
Net Income





38,197



38,197
Other comprehensive income (net of taxes of $2,966)

(10,571)

(10,571)
Dividends on common stock ($0.23 per share)

(15,176)

(15,176)
Issuance of common stock under Equity Compensation Plans (34,477 shares)

46

918

964
Issuance of common stock for services rendered (7,248 shares)

9

292

301
Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (5,606 shares)

8

(111)

(103)
Impact of adoption of new guidance

—
Stock-based compensation expense

1,547

1,547
Balance - September 30, 2018

$
87,192

$
1,378,940

$
438,513

$
(24,616)

$
1,880,029










Accumulated


Additional

Other

Common

Preferred

Paid-In

Retained

Comprehensive

Stock

Stock

Capital

Earnings

Income (Loss)

Total
Balance - December 31, 2019

$
105,827

$
—

$
1,790,305

$
581,395

$
35,575

$
2,513,102
Net Income

7,089

7,089
Other comprehensive income (net of taxes of $3,890)

12,754

12,754
Dividends on common stock ($0.25 per share)

(19,825)

(19,825)
Stock purchased under stock repurchase plan (1,493,472 shares)

(1,985)

(47,894)

(49,879)
Issuance of common stock under Equity Compensation Plans (34,714 shares)

46

731

777
Issuance of common stock for services rendered (6,860 shares)

9

195

204
Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (142,176 shares)

189

(2,199)

(2,010)
Impact of adoption of ASC 326

(39,053)

(39,053)
Stock-based compensation expense

2,291

2,291
Balance - March 31, 2020

$
104,086

$
—

$
1,743,429

$
529,606

$
48,329

$
2,425,450
Net Income

30,709

30,709
Other comprehensive income (net of taxes of $3,415)

12,975

12,975
Issuance of preferred stock (17,250 shares)

173

166,190

166,363
Dividends on common stock ($0.25 per share)

(19,677)

(19,677)
Issuance of common stock under Equity Compensation Plans (1,632 shares)

2

22

24
Issuance of common stock for services rendered (8,640 shares)

11

189

200
Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (19,848)

27

(206)

(179)
Stock-based compensation expense

2,361

2,361
Balance - June 30, 2020

$
104,126

$
173

$
1,911,985

$
540,638

$
61,304

$
2,618,226
Net Income

61,000

61,000
Other comprehensive income (net of taxes of $327)

1,358

1,358
Net proceeds from preferred stock

(7)

(7)
Dividends on common stock ($0.25 per share)

(19,678)

(19,678)
Dividends on preferred stock ($156.60 per share)

(2,691)

(2,691)
Issuance of common stock for services rendered (8,592 shares)

11

189

200
Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (3,009 shares)

4

(27)

(23)
Stock-based compensation expense

2,500

2,500
Balance - September 30, 2020

$
104,141

$
173

$
1,914,640

$
579,269

$
62,662

$
2,660,885
~~(1) Includes conversion of Xenith warrants to the Company’s warrants.~~
See accompanying notes to consolidated financial statements.

~~-6-~~-5-

Table of Contents

ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 ~~AND 2018~~
(Dollars in thousands, except share and per share amounts)

(Dollars in thousands)

2019

2018
Operating activities ⁽¹⁾:




Net income

$
137,692

$
102,163
Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities:




Depreciation of premises and equipment

11,138

10,411
Writedown of foreclosed properties and former bank premises

1,162

1,184
Amortization, net

19,033

9,333
Amortization (accretion) related to acquisitions, net

(5,200)

(6,014)
Provision for credit losses

18,192

8,830
Gains on securities transactions, net

(7,306)

(222)
BOLI income

(6,191)

(5,126)
Decrease (increase) in loans held for sale, net

(50,981)

40,302
Losses (gains) on sales of foreclosed properties and bank premises, net

144

(413)
Losses on debt extinguishment

16,397

—
Gain on sale of Shore Premier loans

—

(19,966)
Goodwill impairment losses

—

864
Stock-based compensation expenses

6,363

4,582
Issuance of common stock for services

698

697
Net decrease (increase) in other assets

(76,118)

(16,270)
Net increase in other liabilities

44,312

16,283
Net cash and cash equivalents provided by (used in) operating activities

109,335

146,638
Investing activities:




Purchases of AFS securities and restricted stock

(312,120)

(926,764)
Purchases of HTM securities

(47,217)

(228,104)
Proceeds from sales of AFS securities and restricted stock

486,925

337,109
Proceeds from maturities, calls and paydowns of AFS securities

176,824

117,813
Proceeds from maturities, calls and paydowns of HTM securities

2,523

—
Proceeds from sale of loans held for investment

—

581,324
Net increase in loans held for investment

(371,260)

(397,725)
Net increase in premises and equipment

(11,547)

(4,334)
Proceeds from sales of foreclosed properties and former bank premises

5,329

3,617
Cash paid in acquisitions

(12)

(14,284)
Cash acquired in acquisitions

46,164

174,515
Net cash and cash equivalents provided by (used in) investing activities

(24,391)

(356,833)
Financing activities:




Net increase in noninterest-bearing deposits

376,160

176,308
Net increase in interest-bearing deposits

471,204

119,095
Net increase (decrease) in short-term borrowings

(896,622)

27,722
Cash paid for contingent consideration

(565)

(565)
Proceeds from issuance of long-term debt

550,000

25,000
Repayments of long-term debt

(160,614)

(10,000)
Cash dividends paid - common stock

(58,239)

(42,825)
Cancellation of warrants

—

(1,530)
Repurchase of common stock

(35,284)

—
Issuance of common stock

1,818

2,330
Vesting of restricted stock, net of shares held for taxes

(2,081)

(2,501)
Net cash and cash equivalents provided by (used in) financing activities

245,777

293,034
Increase (decrease) in cash and cash equivalents

330,721

82,839
Cash and cash equivalents at beginning of the period

261,199

199,373
Cash and cash equivalents at end of the period

$
591,920

$
282,212








Accumulated


Additional

Other

Common

Paid-In

Retained

Comprehensive

Stock

Capital

Earnings

Income (Loss)

Total
Balance - December 31, 2018

$
87,250

$
1,380,259

$
467,345

$
(10,273)

$
1,924,581
Net Income



35,631



35,631
Other comprehensive income (net of taxes of $5,346)







18,670

18,670
Issuance of common stock in regard to acquisition (15,842,026 shares)

21,070

478,904





499,974
Dividends on common stock ($0.23 per share)





(18,838)



(18,838)
Issuance of common stock under Equity Compensation Plans (6,127 shares)

8

130





138
Issuance of common stock for services rendered (6,085 shares)

8

211





219
Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (104,151 shares)

139

(1,786)





(1,647)
Impact of adoption of ASC 842

(1,133)

(1,133)
Stock-based compensation expense



1,870





1,870
Balance- March 31, 2019

$
108,475

$
1,859,588

$
483,005

$
8,397

$
2,459,465
Net Income





48,823



48,823
Other comprehensive income (net of taxes of $5,913)







19,670

19,670
Dividends on common stock ($0.23 per share)

(18,876)



(18,876)
Issuance of common stock under Equity Compensation Plans (36,551 shares)

48

938



986
Issuance of common stock for services rendered (6,192 shares)

8

192





200
Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (21,447 shares)

29

(336)



(307)
Stock-based compensation expense



2,334



2,334
Balance- June 30, 2019

$
108,560

$
1,862,716

$
512,952

$
28,067

$
2,512,295
Net Income





53,238



53,238
Other comprehensive income (net of taxes of $1,836)

12,302

12,302
Dividends on common stock ($0.25 per share)

(20,525)

(20,525)
Stock purchased under stock repurchase plan (969,265 shares)

(1,289)

(33,995)

(35,284)
Issuance of common stock under Equity Compensation Plans (28,253 shares)

38

656

694
Issuance of common stock for services rendered (7,840 shares)

10

269

279
Vesting of restricted stock, net of shares held for taxes, under Equity Compensation Plans (8,247 shares)

11

(138)

(127)
Stock-based compensation expense

2,159

2,159
Balance - September 30, 2019

$
107,330

$
1,831,667

$
545,665

$
40,369

$
2,525,031

See accompanying notes to consolidated financial statements.

~~-7-~~-6-

Table of Contents

ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ~~2019~~2020 AND ~~2018~~2019
~~(Dollars in thousands)~~


2019

2018
Supplemental Disclosure of Cash Flow Information




Cash payments for:




Interest

$
118,067

$
67,214
Income taxes

20,416

10,830

Supplemental schedule of noncash investing and financing activities




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

1,816

106
Stock received as consideration for sale of loans held for investment

—

28,193
Securities transferred from HTM to AFS

—

187,425
Issuance of common stock in exchange for net assets in acquisitions

499,974

794,809

Transactions related to acquisitions




Assets acquired

2,855,993

3,252,377
Liabilities assumed ⁽²⁾

2,558,638

2,873,318
~~(1)~~Discontinued operations have an immaterial impact to the Company’s Consolidated Statement of Cash Flows. The change in loans held for sale included in the Operating Activities section for the nine months ended September 30, 2018 are fully attributable to discontinued operations.
~~(2)~~~~2018 includes contingent consideration related to DHFB and OAL acquisitions.~~

~~See accompanying notes to consolidated financial statements.~~

(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

0

(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

0
Proceeds from sales of foreclosed properties and former bank premises

2,706

5,329
Cash paid in acquisitions

0

(12)
Cash acquired in acquisitions

0

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

0

(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)

0
Repurchase of common stock

(49,879)

(35,284)
Issuance of common stock

801

1,818
Issuance of preferred stock, net

166,356

0
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

~~-8-~~-7-

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
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

0

499,974

Transactions related to acquisitions




Assets acquired

0

2,855,993
Liabilities assumed

0

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.

-8-

Table of Contents

ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)
1. ACCOUNTING POLICIES
The Company
Headquartered in Richmond, Virginia, Atlantic Union Bankshares Corporation ~~(formerly, Union Bankshares Corporation)~~ (Nasdaq: AUB) is the holding company for Atlantic Union ~~Bank (formerly, Union Bank & Trust).~~Bank. Atlantic Union Bank has ~~149~~135 branches and approximately ~~170~~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., ~~and~~which provide investment advisory services, Middleburg Investment Services, LLC, which ~~provide investment advisory and/or~~provides brokerage services; and Union Insurance Group, LLC, which offers various lines of insurance products.
~~Effective May 17, 2019~~ (after market close), Union Bankshares Corporation changed its name to Atlantic Union Bankshares Corporation and Union Bank & Trust changed its name to Atlantic Union Bank. The name change was approved by the Board of Directors at the Company’s January 23, 2019 Board meeting and a related amendment to the Company’s articles of incorporation was approved by the Company’s shareholders at its 2019 Annual Meeting on May 2, 2019. The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant inter-company transactions have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements; however, in the opinion of management, all adjustments ~~(consisting only of normal recurring accruals)~~ necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other period.

These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s ~~2018~~2019 Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation.
~~Business Combinations~~
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 ~~Divestitures~~
~~On February 1, 2019,~~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 ~~completed~~operates. On March 27, 2020, the ~~acquisition~~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 ~~Access,~~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 ~~bank holding company based~~good faith basis in ~~Reston, Virginia for a purchase price of approximately $500.0~~ ~~million. Access’s common stockholders received~~ ~~0.75 shares~~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 ~~Company’s common stock in exchange for each share of Access’s common stock, resulting in the Company issuing 15,842,026~~ ~~shares of common stock. In addition, the Company paid cash of approximately~~ ~~$12,000 in lieu of fractional shares.~~
~~In connection~~CARES Act provides banks, savings associations, and credit unions with the ~~transaction,~~ability to make loan modifications related to COVID-19 without categorizing the ~~Company recorded $202.6 million in goodwill~~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 ~~$43.5~~ ~~million~~only for those loans that were not more than thirty days past due as of ~~amortizable intangible assets, which primarily relate to core deposit intangibles.~~December 31, 2019. The Company ~~currently estimates that these other intangible assets will be amortized over~~has made 5$1.8 billion of loan modifications pursuant to ~~10 years~~ ~~using various methods. The transaction was accounted for using~~ the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing dateMarch 22 Joint Guidance or Section 4013 of the ~~acquisition.~~

~~-9-~~

~~Table of Contents~~

~~Affordable Housing Entities~~
~~The Company invests in private investment funds that make equity investments in multifamily affordable housing properties that provide affordable housing~~CARES Act and historic tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt. For the three and nine months ended September 30, 2019, the Company recognized amortization of $624,000 and $1.8 million, respectively, and tax credits of $806,000 and $2.1 million, respectively, associated with these investments within “Income tax expense” on the Company’s Consolidated Statements of Income. For the three and nine months ended September 30, 2018, the Company recognized amortization of $227,000 and $699,000, respectively, and tax credits of $275,000 and $839,000, respectively. The carrying value of the Company’s investments in these qualified affordable housing projects was $29.9 million and $10.8 million as of September 30, ~~2019 and December 31, 2018, respectively. At~~2020 approximately $769.6 million remain under their modified terms. The majority of the Company’s modifications as of September 30, ~~2019 and December 31, 2018,~~2020 were in the ~~Company’s~~commercial real estate portfolios.

The Bank processed over 11,000 PPP loans, which totaled $1.7 billion with a recorded ~~liability totaled $12.8 million and $9.9 million, respectively, for the related unfunded commitments,~~investment of $1.6 billion as of September 30, 2020, which ~~are expected to be paid throughout the years 2019 - 2033.~~included unamortized deferred fees of $32.6 million. The loans carry a 1% interest rate.

Adoption of New Accounting Standards
On January 1, ~~2019,~~2020, the Company adopted ASC 326. This ASU ~~No. 2016-02,~~ ~~"Leases (Topic 842)."~~ ~~The adoption of this standard required lessees~~updates the existing guidance to ~~recognize right of use assets and lease liabilities on the Consolidated Balance Sheets and disclose key~~provide financial statement users with more decision-useful information about ~~leasing arrangements. The Company adopted this ASU~~the expected credit losses on January 1, 2019 under the modified retrospective approach. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to not reassess the lease classification of existing leases, as well as not reassess whether any expired or existing contracts are or contain a lease; and maintain consistent treatment of initial direct costs on existing leases. In addition, the Company elected the short-term lease exemption practical expedient in which leases with an initial term of twelve months or less are not recorded on the Consolidated Balance Sheets. The Company also elected the practical expedient related to accounting for lease and non-lease components as a single lease component. Adoption of this standard resulted in the Company recording a lease liability of ~~$53.2 million and right of use assets of $48.9 million as of January��1, 2019. Operating leases have been included within other assets~~financial instruments and other ~~liabilities on the Company’s Consolidated Balance Sheets. The implementation of this standard resulted in~~commitments to extend credit held by a ~~$1.1 million decrease to Retained Earnings. There was no impact on the Company’s Consolidated Statement of Cash Flows. Refer to Note 6 "Leases" for further discussion regarding the adoption.~~
~~In August 2018, the FASB issued ASU No. 2018-15,~~ ~~"Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract."~~reporting entity at each reporting date. This ASU ~~amends~~replaces the ~~Intangibles—Goodwill and Other Topic of the Accounting Standards Codification to align the requirements for capitalizing implementation costs~~ incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU will be effective for the Company for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company adopted this standard in the first quarter of 2019 using the prospective approach. The adoption of ASU 2018-15 did not have a material impact on the Company’s consolidated financial statements.

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 beenrecognized.
The following table illustrates the impact of ASC326.

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 theALLL.

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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.

ThePCDloansareandwillcontinuetobesubjecttotheCompany’sinternalandexternalcreditreviewandmonitoring.

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 securitieswhere 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 0 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. ~~Measurement~~The measurement period was formally closed as of February 1, 2020, and the Company did not make any measurement period adjustments ~~that~~in 2020.

There were made in the third quarter of 2019 include immaterial changes to the fair value of deferred tax assets and other assets. The Company will continue to keep the measurement period open for certain accounts, including loans, real estate, and deferred tax assets, where its review procedures of any updated information related to the transaction are ongoing. If considered necessary, additional adjustments to the fair value measurement of these accounts will be made until all information is finalized, the Company’s review procedures are complete, and the measurement period is closed. The goodwill is not expected to be deductible for tax purposes.

~~The following table provides a preliminary assessment of the consideration transferred, assets acquired, and liabilities assumed as of the date of~~0 merger-related costs associated with the acquisition ~~(dollars in thousands):~~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.

Purchase Price:






Fair value of shares of the Company's common stock issued



$
499,974
Cash paid for fractional shares



12
Total purchase price



$
499,986

Fair value of assets acquired:




Cash and cash equivalents

$
46,164


Investments

464,742


Loans

2,173,481


Premises and equipment

28,001


Core deposit intangibles

40,860


Other assets

102,745


Total assets

$
2,855,993



Fair value of liabilities assumed:




Deposits

$
2,227,073


Short-term borrowings

220,685


Long-term borrowings

70,535


Other liabilities

40,345


Total liabilities

$
2,558,638



Net assets acquired



$
297,355
Preliminary goodwill



$
202,631

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

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~~valuation purposes, these pools were~~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 ~~disaggregated by maturity, pricing characteristics (e.g., fixed-rate, adjustable-rate)~~discussion on the Company’s accounting policies and ~~re-payment structure (e.g., interest only, fully amortizing, balloon)~~policy elections related to the accounting standard update refer to Note 1 “Accounting Policies”. ~~If new~~

All securities information ~~is obtained about facts and circumstances about expected cash flows that existed~~presented as of ~~the acquisition date, management will adjust fair values~~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 ~~for business combinations.~~
~~The acquired loans were divided into loans with evidence~~policies in Note 1 “Summary of ~~credit quality deterioration which are accounted for under ASC 310-30,~~ ~~Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality~~~~, (acquired impaired) and loans that do not meet these criteria, which are accounted for under ASC 310-20,~~ ~~Receivables - Nonrefundable Fees and Other Costs~~~~, (acquired performing). The fair values~~Significant Accounting Policies” of the acquired performing loans were $2.1 billion and the fair values of the acquired impaired loans were $33.1 million. The gross contractually required principal and interest payments receivable for acquired performing loans was $2.5 billion. The best estimate of contractual cash flows not expected to be collected related to the acquired performing loans is $17.9 million.
~~The following table presents the acquired impaired loans receivable at the acquisition date (dollars in thousands):~~

Contractually required principal and interest payments

$
44,232
Nonaccretable difference

(6,062)
Cash flows expected to be collected

38,170
Accretable difference

(5,060)
Fair value of loans acquired with a deterioration of credit quality

$
33,110
2019 Form 10-K.
The following table presents certain pro forma information as if Access had been acquired on January 1, 2018. These results combine the historical results of Access in the Company’s Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2018. In particular, no adjustments have been made to eliminate the amount of Access’s provision for credit losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2018. Pro forma adjustments below include the net impact of accretion for 2018 and the elimination of merger-related costs for 2019.
The Company expects to achieve further operating cost savings and other business synergies, including branch closures, as a result of the acquisition which are not reflected in the pro forma amounts below (dollars in thousands):

Pro forma for the three

Pro forma for the nine

months ended

months ended

September 30,

September 30,


2019

2018

2019

2018
Total revenues ⁽¹⁾

$
184,707

$
159,128

$
517,016

$
500,505
Net income

$
54,847

$
47,625

$
160,635

$
130,201
EPS

$
0.67

$
0.58

$
1.99

$
1.60
~~(1)~~ ~~Includes net interest income and noninterest income.~~
The revenue and earnings amounts specific to Access since the acquisition date that are included in the consolidated results for 2019 are not readily determinable. The disclosures of these amounts are impracticable due to the merging of certain processes and systems at the acquisition date.
Merger-related costs associated with the acquisition of Access were $2.0 million and $25.6 for the three and nine months ended September 30, 2019 respectively; there were 0 merger-related costs associated with the acquisition of Access during the first nine months of 2018. Such costs include legal and accounting fees, lease and contract termination expenses, system conversion, and employee severances, which have been expensed as incurred.

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~~3. SECURITIES~~
Available for Sale

The Company’s AFS investment portfolio is generally highly-rated or agency backed. All AFS securities were current with 0 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, ~~2019 and December 31, 2018~~2020 are summarized as follows (dollars in thousands):

Amortized

Gross Unrealized

Estimated


Cost

Gains

(Losses)

Fair Value
September 30, 2019








U.S. government and agency securities

$
4,475

$
15

$
—

$
4,490
Obligations of states and political subdivisions

411,690

26,935

(12)

438,613
Corporate and other bonds ⁽¹⁾

224,854

5,044

(374)

229,524
Mortgage-backed securities

1,215,263

28,872

(970)

1,243,165
Other securities

3,067

—

—

3,067
Total AFS securities

$
1,859,349

$
60,866

$
(1,356)

$
1,918,859

December 31, 2018








Obligations of states and political subdivisions

$
466,588

$
3,844

$
(1,941)

$
468,491
Corporate and other bonds ⁽¹⁾

167,561

1,118

(983)

167,696
Mortgage-backed securities

1,138,034

4,452

(12,621)

1,129,865
Other securities

8,769

—

—

8,769
Total AFS securities

$
1,780,952

$
9,414

$
(15,545)

$
1,774,821

Amortized

Gross Unrealized

Estimated


Cost

Gains

(Losses)

Fair Value
September 30, 2020








U.S. government and agency securities

$
13,463

$
465

$
(50)

$
13,878
Obligations of states and political subdivisions

759,936

39,033

(2,113)

796,856
Corporate and other bonds ⁽¹⁾

147,438

2,217

(737)

148,918
Commercial mortgage-backed securities

Agency

340,706

17,945

(116)

358,535
Non-agency

30,359

71

—

30,430
Total commercial mortgage-backed securities

371,065

18,016

(116)

388,965
Residential mortgage-backed securities

Agency

960,141

35,275

(1,410)

994,006
Non-agency

99,252

587

(743)

99,096
Total residential mortgage-backed securities

1,059,393

35,862

(2,153)

1,093,102
Other securities

1,621

0

0

1,621
Total AFS securities

$
2,352,916

$
95,593

$
(5,169)

$
2,443,340
(1) Other bonds ~~includes~~include asset-backed securities.
The following table shows the gross unrealized losses and fair value of the Company’s AFS securities with unrealized losses that are not deemed to be other-than-temporarily impaired as of September 30, 2019 and December 31, 2018 (dollars in thousands). These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

Less than 12 months

More than 12 months

Total


Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses
September 30, 2019












Obligations of states and political subdivisions

$
2,296

$
(12)

$
—

$
—

$
2,296

$
(12)
Corporate bonds and other securities

25,341

(149)

25,306

(225)

50,647

(374)
Mortgage-backed securities

89,649

(390)

74,540

(580)

164,189

(970)
Total AFS securities

$
117,286

$
(551)

$
99,846

$
(805)

$
217,132

$
(1,356)

December 31, 2018












Obligations of states and political subdivisions

$
133,513

$
(1,566)

$
10,145

$
(375)

$
143,658

$
(1,941)
Corporate bonds and other securities

35,478

(315)

33,888

(668)

69,366

(983)
Mortgage-backed securities

306,038

(3,480)

341,400

(9,141)

647,438

(12,621)
Total AFS securities

$
475,029

$
(5,361)

$
385,433

$
(10,184)

$
860,462

$
(15,545)

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

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~~Obligations~~The amortized cost, gross unrealized gains and losses, and estimated fair values of ~~state~~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

0

0

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 ~~political subdivisions.~~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). ~~This category’s~~

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

$
0

$
0

$
5,956

$
(50)

$
5,956

(50)
Obligations of states and political subdivisions

175,282

(2,113)

0

0

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

0

0

0

0

0

0
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)

0

0

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)

$
0

$
0

$
7,638

$
(38)
Obligations of states and political subdivisions

4,526

(29)

0

0

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)

0

0

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

0

0

0

0

0

0
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 0 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 ~~interest rate fluctuations and ratings downgrades for a limited number of securities. The~~market volatility, (3) the contractual terms of the investments do not permit the ~~issuer~~issuer(s) to settle the securities at a price less than the cost basis of each ~~investment. Because~~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, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.~~basis.
~~Corporate and other bonds.~~ This category’s unrealized losses are the result of interest rate fluctuations and ratings downgrades for a limited number of securities. The majority of these securities remain investment grade and the Company’s analysis did not indicate the existence of a credit loss. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.
~~Mortgage-backed securities.~~ This category’s unrealized losses are primarily the result of interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not intend to sell the investments, and the accounting standard of "more likely than not" has not been met for the Company to be required to sell any of the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired. Also,Additionally, the majority of the Company’s mortgage-backed securities are ~~agency-backed~~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 ~~which have~~generally received a ~~government guarantee.~~20% SSFA rating.

-17-

Table of Contents

The following table presents the amortized cost and estimated fair value of AFS securities as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, by contractual ~~maturity (dollars in thousands).~~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.~~penalties (dollars in thousands).

September 30, 2019
December 31, 2018

September 30, 2020

December 31, 2019


Amortized

Estimated

Amortized

Estimated

Amortized

Estimated

Amortized

Estimated

Cost

Fair Value

Cost

Fair Value

Cost

Fair Value

Cost

Fair Value
Due in one year or less

$
22,682

$
22,805

$
22,653

$
22,789

$
28,581

$
28,834

$
35,177

$
35,329
Due after one year through five years

161,289

163,908

191,003

188,999

140,844

148,114

164,605

166,873
Due after five years through ten years

263,488

269,757

218,211

217,304

251,501

258,806

249,713

254,790
Due after ten years

1,411,890

1,462,389

1,349,085

1,345,729

1,931,990

2,007,586

1,443,932

1,488,453
Total AFS securities

$
1,859,349

$
1,918,859

$
1,780,952

$
1,774,821

$
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, ~~2019~~2020 and December 31, ~~2018.~~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 0 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

$
0

$
(14)

$
2,753
Obligations of states and political subdivisions

538,352

67,561

0

605,913
Commercial mortgage-backed securities

Agency

5,542

5

(40)

5,507
Non-agency

0

0

0

0
Total commercial mortgage-backed securities

5,542

5

(40)

5,507
Total held-to-maturity securities

$
546,661

$
67,566

$
(54)

$
614,173

~~-14-~~-18-

Table of Contents

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

Carrying

Gross Unrealized

Estimated


Value

Gains

(Losses)

Fair Value
September 30, 2019








Obligations of states and political subdivisions

$
546,515

$
51,002

$
—

$
597,517
Mortgage-backed securities

10,064

135

—

10,199
Total held-to-maturity securities

$
556,579

$
51,137

$
—

$
607,716
December 31, 2018








Obligations of states and political subdivisions

$
492,272

$
7,375

$
(146)

$
499,501

Carrying

Gross Unrealized

Estimated


Value

Gains

(Losses)

Fair Value
December 31, 2019








U.S. government and agency securities

$
2,813

$
26

$
0

$
2,839
Obligations of states and political subdivisions

545,148

48,274

0

593,422
Commercial mortgage-backed securities

Agency

7,183

59

0

7,242
Non-agency

0

0

0

0
Total commercial mortgage-backed securities

7,183

59

0

7,242
Total held-to-maturity securities

$
555,144

$
48,359

$
0

$
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 0 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 ~~shows~~presents the ~~gross unrealized losses and fair value (dollars in thousands)~~amortized cost of ~~the Company’s~~ HTM securities ~~with unrealized losses that are not deemed to be other-than-temporarily impaired~~ as of September 30, ~~2019~~2020 by security type and ~~December 31, 2018~~credit rating (dollars in thousands)~~. These are aggregated by investment category and length of time that~~:

Three Months Ended September 30, 2020


U.S. Government and Agency

Obligations of states and political

Mortgage-backed

Total HTM

securities

subdivisions

securities

securities
Credit Rating:

AAA/AA/A

$
0

$
533,742

$
0

$
533,742
Not Rated - Agency⁽¹⁾

2,767

0

5,542

8,309
Not Rated - Non-Agency

0

4,610

0

4,610
Total

$
2,767

$
538,352

$
5,542

$
546,661
(1) Generally considered not to have credit risk given the ~~individual securities have been in a continuous unrealized loss position.~~government guarantees associated with these agencies

Less than 12 months

More than 12 months

Total


Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses
September 30, 2019












Obligations of states and political subdivisions

$
—

$
—

$
—

$
—

$
—

$
—

December 31, 2018












Obligations of states and political subdivisions

$
43,206

$
(146)

$
—

$
—

$
43,206

$
(146)

As of September 30, 2019 there were 0 unrealized losses for individual HTM securities. As of December 31, 2018 there were 0 issues of individual HTM securities that had been in a continuous loss position for more than 12 months.
The following table presents the amortized cost and estimated fair value of HTM securities as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, by contractual ~~maturity (dollars in thousands).~~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.~~penalties (dollars in thousands).

September 30, 2019

December 31, 2018


Carrying

Estimated

Carrying

Estimated

Value

Fair Value

Value

Fair Value
Due in one year or less

$
504

$
507

$
—

$
—
Due after one year through five years

8,934

9,165

3,893

3,900
Due after five years through ten years

3,160

3,247

3,480

3,507
Due after ten years

543,981

594,797

484,899

492,094
Total HTM securities

$
556,579

$
607,716

$
492,272

$
499,501

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

-19-

Table of Contents

Refer to Note 8 "Commitments and Contingencies" for information regarding the estimated fair value of HTM securities that were pledged to secure public deposits as permitted or required by law as of September 30, ~~2019~~2020 and December 31, ~~2018.~~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, ~~2019~~2020 and December 31, ~~2018,~~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, ~~2019~~2020 and December 31, ~~2018.~~2019. Restricted equity securities consist of Federal Reserve Bank stock in the

~~-15-~~

~~Table of Contents~~

amount of $67.0 million ~~and $52.6 million~~ for September 30, ~~2019~~2020 and December 31, ~~2018~~2019 and FHLB stock in the amount of ~~$65.4~~$45.2 million and ~~$72.0~~$63.9 million as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.
~~Other-Than-Temporary-Impairment~~
During each quarter, the Company conducts an assessment of the securities portfolio for OTTI consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis. An impairment is other-than-temporary if any of the following conditions exist: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss. Based on the assessment for the three and nine months ended September 30, 2019, and in accordance with accounting guidance, 0 OTTI was recognized.
Realized Gains and Losses
The following table presents the gross realized gains and losses on and the proceeds from the sale of securities during the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 (dollars in thousands).


Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30, 2019

September 30, 2019

September 30, 2020

September 30, 2020
Realized gains (losses):








Gross realized gains

$
7,104

$
9,161

$
18

$
12,522
Gross realized losses

—

(1,855)

0

(229)
Net realized gains

$
7,104

$
7,306

$
18

$
12,293

Proceeds from sales of securities

$
98,975

$
486,925

$
4,675

$
232,946


Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30, 2018

September 30, 2018

September 30, 2019

September 30, 2019
Realized gains (losses):








Gross realized gains

$
97

$
2,890

$
7,104

$
9,161
Gross realized losses

—

(2,668)

0

(1,855)
Net realized gains

$
97

$
222

$
7,104

$
7,306

Proceeds from sales of securities

$
27,593

$
337,109

$
98,975

$
486,925

~~-16-~~-20-

Table of Contents

4. LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
~~Loans~~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, ~~2019~~2020 and December 31, ~~2018 (dollars in thousands):~~

September 30, 2019

December 31, 2018
Construction and Land Development

$
1,201,149

$
1,194,821
Commercial Real Estate - Owner Occupied

1,979,052

1,337,345
Commercial Real Estate - Non-Owner Occupied

3,198,580

2,467,410
Multifamily Real Estate

659,946

548,231
Commercial & Industrial

2,058,133

1,317,135
Residential 1-4 Family - Commercial

721,185

640,419
Residential 1-4 Family - Consumer

913,245

673,909
Auto

328,456

301,943
HELOC

660,963

613,383
Consumer

386,848

379,694
Other Commercial

199,440

241,917
Total loans held for investment, net ⁽¹⁾

$
12,306,997

$
9,716,207
~~(1)~~ ~~Loans, as presented, are net of deferred fees and costs totaling~~ ~~$8.1~~ ~~million and~~ ~~$5.1~~ ~~million as of September 30, 2019 and December 31, 2018, respectively.~~
~~The following table shows the aging of the Company’s loan portfolio, by segment, at September 30,~~ 2019 (dollars in thousands):

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






Greater than








30-59 Days

60-89 Days

90 Days and

Past Due

Past Due

still Accruing

PCI

Nonaccrual

Current

Total Loans
Construction and Land Development

$
1,062

$
351

$
171

$
8,387

$
7,785

$
1,183,393

$
1,201,149
Commercial Real Estate - Owner Occupied

4,977

—

2,571

27,817

5,684

1,938,003

1,979,052
Commercial Real Estate - Non-Owner Occupied

5,757

1,878

36

17,285

381

3,173,243

3,198,580
Multifamily Real Estate

107

164

1,212

93

—

658,370

659,946
Commercial & Industrial

2,079

1,946

265

3,262

1,585

2,048,996

2,058,133
Residential 1-4 Family - Commercial

1,842

3,081

916

12,237

3,879

699,230

721,185
Residential 1-4 Family - Consumer

1,527

5,182

3,815

14,977

8,292

879,452

913,245
Auto

1,787

407

183

7

604

325,468

328,456
HELOC

4,965

1,747

1,674

4,275

1,641

646,661

660,963
Consumer

2,000

1,666

1,163

682

84

381,253

386,848
Other Commercial

579

9

30

713

97

198,012

199,440
Total loans held for investment

$
26,682

$
16,431

$
12,036

$
89,735

$
30,032

$
12,132,081

$
12,306,997
⁽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.

~~-17-~~-21-

Table of Contents

The following table shows the aging of the Company’s loan portfolio, by ~~segment,~~class, at ~~December 31, 2018~~September 30, 2020 (dollars in thousands):






Greater than








30-59 Days

60-89 Days

90 Days and

Past Due

Past Due

still Accruing

PCI

Nonaccrual

Current

Total Loans
Construction and Land Development

$
759

$
6

$
180

$
8,654

$
8,018

$
1,177,204

$
1,194,821
Commercial Real Estate - Owner Occupied

8,755

1,142

3,193

25,644

3,636

1,294,975

1,337,345
Commercial Real Estate - Non-Owner Occupied

338

41

—

17,335

1,789

2,447,907

2,467,410
Multifamily Real Estate

—

146

—

88

—

547,997

548,231
Commercial & Industrial

3,353

389

132

2,156

1,524

1,309,581

1,317,135
Residential 1-4 Family - Commercial

6,619

1,577

1,409

13,601

2,481

614,732

640,419
Residential 1-4 Family - Consumer

12,049

5,143

2,437

16,872

7,276

630,132

673,909
Auto

3,320

403

195

7

576

297,442

301,943
HELOC

4,611

1,644

440

5,115

1,518

600,055

613,383
Consumer

1,504

1,096

870

32

135

376,057

379,694
Other Commercial

126

—

—

717

—

241,074

241,917
Total loans held for investment

$
41,434

$
11,587

$
8,856

$
90,221

$
26,953

$
9,537,156

$
9,716,207








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 ~~PCI loan portfolios, by segment~~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 ~~their delinquency status, at~~loans past due 90 days and still accruing as of September 30, ~~2019~~2020 (dollars in thousands):


30-89 Days

Greater than




Past Due

90 Days

Current

Total
Construction and Land Development

$
126

$
399

$
7,862

$
8,387
Commercial Real Estate - Owner Occupied

526

3,262

24,029

27,817
Commercial Real Estate - Non-Owner Occupied

137

980

16,168

17,285
Multifamily Real Estate

—

—

93

93
Commercial & Industrial

—

1,043

2,219

3,262
Residential 1-4 Family - Commercial

421

479

11,337

12,237
Residential 1-4 Family - Consumer

844

1,912

12,221

14,977
Auto

—

—

7

7
HELOC

208

287

3,780

4,275
Consumer

4

15

663

682
Other Commercial

—

—

713

713
Total

$
2,266

$
8,377

$
79,092

$
89,735

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

0

168
Multifamily Real Estate

0

33

0

359
Commercial & Industrial

3,037

1,592

0

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

0

315
Consumer

88

75

0

327
Other Commercial

98

—

0

0
Total loans held for investment

$
45,204

$
39,023

$
6,846

$
15,661

There was 0 interest income recognized on nonaccrual loans during the three or nine months endedSeptember 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.

~~-18-~~-22-

Table of Contents

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

$
0
Commercial Real Estate - Owner Occupied

6

2,140

101
Commercial Real Estate - Non-Owner Occupied

1

1,089

0
Commercial & Industrial

5

1,117

0
Residential 1-4 Family - Commercial

3

247

0
Residential 1-4 Family - Consumer

80

9,165

0
Residential 1-4 Family - Revolving

2

55

0
Consumer

5

31

0
Other Commercial

1

452

0
Total performing

107

$
14,515

$
101
Nonperforming






Commercial Real Estate - Owner Occupied

2

$
293

$
0
Commercial Real Estate - Non-Owner Occupied

1

137

0
Commercial & Industrial

3

261

0
Residential 1-4 Family - Commercial

4

1,313

0
Residential 1-4 Family - Consumer

23

4,937

0
Residential 1-4 Family - Revolving

3

104

0
Total nonperforming

36

$
7,045

$
0
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.

-23-

Table of Contents

The following table shows, by class and modification type, TDRs that occurred during the ~~PCI loan portfolios, by segment~~three and ~~their delinquency status, at December 31, 2018~~nine months ended September 30, 2020 (dollars in thousands):


30-89 Days

Greater than




Past Due

90 Days

Current

Total
Construction and Land Development

$
108

$
1,424

$
7,122

$
8,654
Commercial Real Estate - Owner Occupied

658

4,281

20,705

25,644
Commercial Real Estate - Non-Owner Occupied

61

1,810

15,464

17,335
Multifamily Real Estate

—

—

88

88
Commercial & Industrial

47

1,092

1,017

2,156
Residential 1-4 Family - Commercial

871

3,454

9,276

13,601
Residential 1-4 Family - Consumer

1,959

2,422

12,491

16,872
Auto

—

—

7

7
HELOC

498

252

4,365

5,115
Consumer

5

9

18

32
Other Commercial

57

—

660

717
Total

$
4,264

$
14,744

$
71,213

$
90,221

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

0

$
0

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

0

$
0

3

$
127
Residential 1-4 Family - Commercial

1

299

1

299
Residential 1-4 Family - Consumer

0

0

4

324
Consumer

0

0

1

10
Total loan term extended at a market rate

1

$
299

9

$
760

Term modification, below market rate








Construction and Land Development

0

$
0

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

0

0

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

0

$
0

0

$
0

Total

8

$
1,807

33

$
4,805

~~-19-~~-24-

Table of Contents

Allowance for Loan and Lease Losses

ALLL on the loan portfolio is a material estimate for the Company. The Company estimates its ALLL on its loan portfolio on a quarterly basis. The Company models the ALLL using two primary segments, Commercial and Consumer. Within each segment, loan classes are further identified based on similar risk characteristics. The Company has identified the following classes within each segment:
● Commercial: Construction and Land Development, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-Owner Occupied, Multifamily Real Estate, Commercial & Industrial, Residential 1-4 Family – Commercial, and Other Commercial
● Consumer: Residential 1-4 Family – Consumer, Residential 1-4 Family – Revolving, Auto, and Consumer

The following tables show the ALLL activity by segment for the three and nine months ended September 30, 2020 (dollars in thousands):

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

Commercial

Consumer

Total

Commercial

Consumer

Total
Balance at beginning of period

$
111,954

$
58,023

$
169,977

$
30,941

$
11,353

$
42,294
Impact of ASC 326 adoption on non-PCD loans

—

—

—

4,432

40,666

45,098
Impact of ASC 326 adoption on PCD loans

—

—

—

1,752

634

2,386
Impact of adopting ASC 326

—

—

—

6,184

41,300

47,484
Loans charged-off

(995)

(1,983)

(2,978)

(5,553)

(9,253)

(14,806)
Recoveries credited to allowance

718

848

1,566

2,580

2,557

5,137
Provision charged to operations

14,978

(9,421)

5,557

92,503

1,510

94,013
Balance at end of period

$
126,655

$
47,467

$
174,122

$
126,655

$
47,467

$
174,122

-25-

Table of Contents

Credit Quality Indicators

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

Commercial Loans

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

Pass is determined by the following criteria:

●

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

●

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

●

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

●

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

●

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

Watch & Special Mention is determined by the following criteria:

●

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

●

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

Substandard is determined by the following criteria:

●

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

Doubtful is determined by the following criteria:

●

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

●

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

-26-

Table of Contents

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

September 30, 2019

December 31, 2018




Unpaid





Unpaid


Recorded

Principal

Related

Recorded

Principal

Related

Investment

Balance

Allowance

Investment

Balance

Allowance
Loans without a specific allowance












Construction and Land Development

$
9,776

$
14,131

$
—

$
10,290

$
12,038

$
—
Commercial Real Estate - Owner Occupied

9,362

9,966

—

8,386

9,067

—
Commercial Real Estate - Non-Owner Occupied

2,028

2,578

—

6,578

6,929

—
Multifamily Real Estate

1,212

1,212

—

—

—

—
Commercial & Industrial

2,205

2,221

—

3,059

3,251

—
Residential 1-4 Family - Commercial

4,330

4,598

—

3,378

3,439

—
Residential 1-4 Family - Consumer

9,432

10,006

—

9,642

10,317

—
HELOC

864

867

—

1,150

1,269

—
Consumer

—

—

—

30

102

—
Other Commercial

—

—

—

478

478

—
Total impaired loans without a specific allowance

$
39,209

$
45,579

$
—

$
42,991

$
46,890

$
—
Loans with a specific allowance












Construction and Land Development

$
829

$
868

$
78

$
372

$
491

$
63
Commercial Real Estate - Owner Occupied

3,570

3,685

234

4,304

4,437

359
Commercial Real Estate - Non-Owner Occupied

336

384

3

391

391

1
Commercial & Industrial

1,783

1,810

866

1,183

1,442

752
Residential 1-4 Family - Commercial

1,763

1,807

170

2,120

2,152

89
Residential 1-4 Family - Consumer

10,047

10,631

805

6,389

6,645

470
Auto

605

905

239

576

830

231
HELOC

1,177

1,312

262

724

807

188
Consumer

180

345

50

178

467

64
Other Commercial

565

569

27

—

—

—
Total impaired loans with a specific allowance

$
20,855

$
22,316

$
2,734

$
16,237

$
17,662

$
2,217
Total impaired loans

$
60,064

$
67,895

$
2,734

$
59,228

$
64,552

$
2,217

~~-20-~~

~~Table of Contents~~

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

Three Months Ended

Nine Months Ended

September 30, 2019

September 30, 2019




Interest



Interest

Average

Income

Average

Income

Investment

Recognized

Investment

Recognized
Construction and Land Development

$
13,581

$
40

$
13,601

$
351
Commercial Real Estate - Owner Occupied

13,301

85

13,436

339
Commercial Real Estate - Non-Owner Occupied

2,748

26

3,543

82
Multifamily Real Estate

1,217

15

1,234

46
Commercial & Industrial

3,986

41

4,046

129
Residential 1-4 Family - Commercial

6,334

41

6,521

125
Residential 1-4 Family - Consumer

19,802

75

20,007

264
Auto

691

—

781

9
HELOC

2,125

5

2,242

31
Consumer

184

2

192

5
Other Commercial

570

7

579

21
Total impaired loans

$
64,539

$
337

$
66,182

$
1,402

Three Months Ended

Nine Months Ended

September 30, 2018

September 30, 2018




Interest



Interest

Average

Income

Average

Income

Investment

Recognized

Investment

Recognized
Construction and Land Development

$
12,481

$
63

$
12,083

$
203
Commercial Real Estate - Owner Occupied

11,873

102

11,966

322
Commercial Real Estate - Non-Owner Occupied

6,932

57

7,141

175
Commercial & Industrial

2,607

15

2,713

57
Residential 1-4 Family - Commercial

4,233

29

4,322

105
Residential 1-4 Family - Consumer

16,570

48

16,693

162
Auto

609

—

685

12
HELOC

1,800

4

1,871

14
Consumer

180

—

218

—
Other Commercial

509

7

538

22
Total impaired loans

$
57,794

$
325

$
58,230

$
1,072

~~-21-~~

~~Table of Contents~~

The Company considers TDRs to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession that it would not otherwise consider to the borrower for economic or legal reasons related to the borrower’s financial difficulties. All loans that are considered to be TDRs are evaluated for impairment in accordance with the Company’s allowance for loan loss methodology and are included in the preceding impaired loan tables. For the three and nine months ended September 30, 2019, the recorded investment in TDRs prior to modifications was not materially impacted by the modifications.
~~The following table provides a summary, by segment, of TDRs that continue to accrue interest under the terms~~amortized cost of the ~~applicable restructuring agreement, which are considered to be performing,~~classes of loans within the Commercial segment by risk level and ~~TDRs that have been placed on nonaccrual status, which are considered to be nonperforming,~~year of origination as of September 30, ~~2019 and December 31, 2018~~2020 (dollars in thousands):

September 30, 2019

December 31, 2018


No. of

Recorded

Outstanding

No. of

Recorded

Outstanding

Loans

Investment

Commitment

Loans

Investment

Commitment
Performing












Construction and Land Development

4

$
1,130

$
—

5

$
2,496

$
—
Commercial Real Estate - Owner Occupied

6

2,228

—

8

2,783

—
Commercial Real Estate - Non-Owner Occupied

1

1,089

—

4

4,438

—
Commercial & Industrial

5

1,123

—

4

978

—
Residential 1-4 Family - Commercial

5

293

—

8

1,075

—
Residential 1-4 Family - Consumer

64

8,738

—

52

6,882

—
HELOC

2

56

—

2

58

—
Consumer

4

31

—

1

13

—
Other Commercial

1

468

—

1

478

—
Total performing

92

$
15,156

$
—

85

$
19,201

$
—
Nonperforming












Construction and Land Development

—

$
—

$
—

2

$
3,474

$
—
Commercial Real Estate - Owner Occupied

2

180

—

2

198

—
Commercial & Industrial

1

56

—

6

461

—
Residential 1-4 Family - Commercial

—

—

—

1

60

—
Residential 1-4 Family - Consumer

18

3,288

—

15

3,135

—
HELOC

2

58

—

2

62

—
Consumer

—

—

—

1

7

—
Total nonperforming

23

$
3,582

$
—

29

$
7,397

$
—
Total performing and nonperforming

115

$
18,738

$
—

114

$
26,598

$
—

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

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

0

0

368

710

2,040

3,968

0

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

0

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

0

0

6,464

0

25

3,248

0

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

0

16,733
Substandard

0

0

0

0

0

391

0

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

0

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

0

621

1,312

927

8,351

0

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.

~~-22-~~

~~Table of Contents~~-27-

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

All Restructurings

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019




Recorded



Recorded

No. of

Investment at

No. of

Investment at

Loans

Period End

Loans

Period End
Modified to interest only, at a market rate








Total interest only at market rate of interest

—

$
—

—

$
—

Term modification, at a market rate








Commercial & Industrial

1

$
376

1

$
376
Residential 1-4 Family - Commercial

—

—

1

73
Residential 1-4 Family - Consumer

1

461

4

761
Consumer

2

18

3

26
Total loan term extended at a market rate

4

$
855

9

$
1,236

Term modification, below market rate








Construction and Land Development

2

$
164

2

$
164
Residential 1-4 Family - Consumer

5

883

17

2,211
Consumer

—

—

1

5
Total loan term extended at a below market rate

7

$
1,047

20

$
2,380

Total

11

$
1,902

29

$
3,616

~~-23-~~

~~Table of Contents~~

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

All Restructurings

Three Months Ended September 30, 2018

Nine Months Ended September 30, 2018




Recorded



Recorded

No. of

Investment at

No. of

Investment at

Loans

Period End

Loans

Period End
Modified to interest only, at a market rate








Total interest only at market rate of interest

—

$
—

—

$
—

Term modification, at a market rate








Construction and Land Development

2

$
3,545

4

$
4,809
Commercial Real Estate - Owner Occupied

—

—

5

1,371
Commercial Real Estate - Non-Owner Occupied

1

1,089

1

1,089
Commercial & Industrial

2

278

3

339
Residential 1-4 Family - Commercial

—

—

1

71
Residential 1-4 Family - Consumer

—

—

6

759
Consumer

1

14

1

14
Total loan term extended at a market rate

6

$
4,926

21

$
8,452

Term modification, below market rate








Commercial Real Estate - Non-Owner Occupied

1

$
2,782

1

$
2,782
Residential 1-4 Family - Consumer

9

1,598

16

2,612
HELOC

2

46

2

46
Total loan term extended at a below market rate

12

$
4,426

19

$
5,440

Total

18

$
9,352

40

$
13,892

~~-24-~~

Table of Contents

Consumer Loans

For Consumer loans, the Company evaluates credit quality based on the delinquency status of the loan. The following ~~tables show~~table details the ~~ALL~~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

0

156

1,648

43

263

888

0

2,998
60-89 Days Past Due

0

0

708

1,138

67

2,063

0

3,976
90+ Days Past Due

646

1,574

0

313

388

1,574

0

4,495
Nonaccrual

0

0

708

870

774

10,268

0

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

$
0

$
0

$
644

$
590,291

$
608,570
30-59 Days Past Due

0

36

0

0

0

0

2,633

2,669
60-89 Days Past Due

0

0

0

0

0

0

1,141

1,141
90+ Days Past Due

0

0

0

0

0

0

2,276

2,276
Nonaccrual

0

0

0

0

0

314

3,350

3,664
Total Residential 1-4 Family - Revolving

$
11,456

$
4,196

$
2,019

$
0

$
0

$
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

0

19

253

32

21

0

2

327
Nonaccrual

0

0

0

0

1

74

0

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

$
0

$
384,619
30-59 Days Past Due

145

490

265

288

195

130

0

1,513
60-89 Days Past Due

39

132

118

116

26

22

0

453
90+ Days Past Due

29

99

62

45

53

27

0

315
Nonaccrual

33

128

61

107

111

77

0

517
Total Auto

$
129,422

$
127,092

$
63,075

$
37,946

$
20,890

$
8,992

$
0

$
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.

-28-

Table of Contents

Acquired Loans

The Company has purchased loans that, at the time of acquisition, exhibited more than insignificant credit deterioration since origination. The Company has elected to treat all loans that were previously identified as PCI as PCD. As of September 30, 2020, the amortized cost of the Company’s PCD loans totaled $68.8 million, which had an estimated ALLL of $4.7 million.

Prior to the adoption of ASC 326
The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2019 (dollars in thousands):






Greater than








30-59 Days

60-89 Days

90 Days and

Past Due

Past Due

still Accruing

PCI

Nonaccrual

Current

Total Loans
Construction and Land Development

$
4,563

$
482

$
189

$
10,944

$
3,703

$
1,231,043

$
1,250,924
Commercial Real Estate - Owner Occupied

3,482

2,184

1,062

27,438

6,003

2,001,074

2,041,243
Commercial Real Estate - Non-Owner Occupied

457

0

1,451

14,565

381

3,269,244

3,286,098
Multifamily Real Estate

223

0

474

94

0

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

0

0

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

0

0

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

0

0

344

344
Total

$
3,221

$
13,193

$
70,267

$
86,681

-29-

Table of Contents

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

December 31, 2019




Unpaid


Recorded

Principal

Related

Investment

Balance

Allowance
Loans without a specific allowance






Construction and Land Development

$
5,877

$
7,174

$
—
Commercial Real Estate - Owner Occupied

8,801

9,296

—
Commercial Real Estate - Non-Owner Occupied

3,510

4,059

—
Commercial & Industrial

3,668

3,933

—
Residential 1-4 Family - Commercial

4,047

4,310

—
Residential 1-4 Family - Consumer

8,420

9,018

—
Residential 1-4 Family - Revolving

862

865

—
Total impaired loans without a specific allowance

$
35,185

$
38,655

$
—
Loans with a specific allowance






Construction and Land Development

$
984

$
1,032

$
49
Commercial Real Estate - Owner Occupied

2,820

3,093

146
Commercial Real Estate - Non-Owner Occupied

335

383

2
Commercial & Industrial

2,568

2,590

619
Residential 1-4 Family - Commercial

1,726

1,819

162
Residential 1-4 Family - Consumer

12,026

12,670

1,242
Residential 1-4 Family - Revolving

2,186

2,369

510
Auto

563

879

221
Consumer

168

336

46
Other Commercial

562

567

30
Total impaired loans with a specific allowance

$
23,938

$
25,738

$
3,027
Total impaired loans

$
59,123

$
64,393

$
3,027

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

Three Months Ended

Nine Months Ended

September 30, 2019

September 30, 2019




Interest



Interest

Average

Income

Average

Income

Investment

Recognized

Investment

Recognized
Construction and Land Development

$
13,581

$
40

$
13,601

$
351
Commercial Real Estate - Owner Occupied

13,301

85

13,436

339
Commercial Real Estate - Non-Owner Occupied

2,748

26

3,543

82
Multifamily Real Estate

1,217

15

1,234

46
Commercial & Industrial

3,986

41

4,046

129
Residential 1-4 Family - Commercial

6,334

41

6,521

125
Residential 1-4 Family - Consumer

19,802

75

20,007

264
Residential 1-4 Family - Revolving

2,125

5

2,242

31
Auto

691

—

781

9
Consumer

184

2

192

5
Other Commercial

570

7

579

21
Total impaired loans

$
64,539

$
337

$
66,182

$
1,402

-30-

Table of Contents

At December 31, 2019, the Company considered TDRs to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession that it would not otherwise consider to the borrower for economic or legal reasons related to the borrower’s financial difficulties. All loans that are considered to be TDRs are evaluated for impairment in accordance with the Company’s allowance for credit loss methodology.
The following table provides a summary, by class, of TDRs that continue to accrue interest under the terms of the applicable restructuring agreement, which are considered to be performing, and TDRs that have been placed on nonaccrual status, which are considered to be nonperforming, as of December 31, 2019 (dollars in thousands):

December 31, 2019


No. of

Recorded

Outstanding

Loans

Investment

Commitment
Performing






Construction and Land Development

4

$
1,114

$
0
Commercial Real Estate - Owner Occupied

6

2,228

26
Commercial Real Estate - Non-Owner Occupied

1

1,089

0
Commercial & Industrial

4

1,020

0
Residential 1-4 Family - Commercial

5

290

0
Residential 1-4 Family - Consumer

69

9,396

0
Residential 1-4 Family - Revolving

2

56

0
Consumer

4

29

0
Other Commercial

1

464

0
Total performing

96

$
15,686

$
26
Nonperforming






Commercial Real Estate - Owner Occupied

2

$
176

$
0
Commercial & Industrial

1

55

0
Residential 1-4 Family - Consumer

19

3,522

0
Residential 1-4 Family - Revolving

2

57

0
Total nonperforming

24

$
3,810

$
0
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.

-31-

Table of Contents

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 ~~segment~~class for the nine months ended September 30, ~~2019 and 2018.~~2019. The ~~tables~~table below ~~include~~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

Nine Months Ended September 30, 2019

Allowance for loan losses

Allowance for loan losses


Balance,

Recoveries

Loans

Provision

Balance,

Balance,

Recoveries

Loans

Provision

Balance,

beginning of

credited to

charged

charged to

end of

beginning of

credited to

charged

charged to

end of

the year

allowance

off

operations

period

the year

allowance

off

operations

period
Construction and Land Development

$
6,803

$
269

$
(4,028)

$
2,863

$
5,907

$
6,803

$
269

$
(4,028)

$
2,863

$
5,907
Commercial Real Estate - Owner Occupied

4,023

118

(483)

361

4,019

4,023

118

(483)

361

4,019
Commercial Real Estate - Non-Owner Occupied

8,865

95

(270)

996

9,686

8,865

95

(270)

996

9,686
Multifamily Real Estate

649

85

—

46

780

649

85

0

46

780
Commercial & Industrial

7,636

936

(2,162)

2,739

9,149

7,636

936

(2,162)

2,739

9,149
Residential 1-4 Family - Commercial

1,692

244

(397)

50

1,589

1,692

244

(397)

50

1,589
Residential 1-4 Family - Consumer

1,492

256

(108)

158

1,798

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

1,443

452

(957)

614

1,552
HELOC

1,297

589

(570)

(179)

1,137
Consumer and all other⁽¹⁾

7,145

1,896

(12,215)

11,377

8,203

7,145

1,896

(12,215)

11,377

8,203
Total

$
41,045

$
4,940

$
(21,190)

$
19,025

$
43,820

$
41,045

$
4,940

$
(21,190)

$
19,025

$
43,820
⁽¹⁾Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.

Nine Months Ended September 30, 2018

Allowance for loan losses


Balance,

Recoveries

Loans

Provision

Balance,

beginning of

credited to

charged

charged to

end of

the year

allowance

off

operations

period
Construction and Land Development

$
9,709

$
400

$
(703)

$
(1,218)

$
8,188
Commercial Real Estate - Owner Occupied

2,931

488

(174)

(300)

2,945
Commercial Real Estate - Non-Owner Occupied

7,544

82

(94)

806

8,338
Multifamily Real Estate

1,092

5

—

525

1,622
Commercial & Industrial

4,552

413

(692)

2,429

6,702
Residential 1-4 Family - Commercial

4,437

306

(137)

(2,512)

2,094
Residential 1-4 Family - Consumer

1,524

235

(640)

770

1,889
Auto

975

365

(759)

760

1,341
HELOC

1,360

554

(488)

(70)

1,356
Consumer and all other⁽¹⁾

4,084

1,234

(6,412)

7,913

6,819
Total

$
38,208

$
4,082

$
(10,099)

$
9,103

$
41,294
⁽¹⁾~~Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.~~

~~-25-~~-32-

Table of Contents

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

September 30, 2019

Loans individually

Loans collectively

Loans acquired with

evaluated for

evaluated for

deteriorated credit

impairment

impairment

quality

Total


Loans

ALL

Loans

ALL

Loans

ALL

Loans

ALL
Construction and Land Development

$
10,605

$
78

$
1,182,157

$
5,829

$
8,387

$
—

$
1,201,149

$
5,907
Commercial Real Estate - Owner Occupied

12,932

234

1,938,303

3,785

27,817

—

1,979,052

4,019
Commercial Real Estate - Non-Owner Occupied

2,364

3

3,178,931

9,683

17,285

—

3,198,580

9,686
Multifamily Real Estate

1,212

—

658,641

780

93

—

659,946

780
Commercial & Industrial

3,988

866

2,050,883

8,066

3,262

217

2,058,133

9,149
Residential 1-4 Family - Commercial

6,093

170

702,855

1,419

12,237

—

721,185

1,589
Residential 1-4 Family - Consumer

19,479

805

878,789

993

14,977

—

913,245

1,798
Auto

605

239

327,844

1,313

7

—

328,456

1,552
HELOC

2,041

262

654,647

875

4,275

—

660,963

1,137
Consumer and all other⁽¹⁾

745

77

584,148

8,126

1,395

—

586,288

8,203
Total loans held for investment, net

$
60,064

$
2,734

$
12,157,198

$
40,869

$
89,735

$
217

$
12,306,997

$
43,820
⁽¹⁾~~Consumer and Other Commercial are grouped together as Consumer and all other for reporting purposes.~~

~~-26-~~

~~Table of Contents~~

December 31, 2018

December 31, 2019

Loans individually

Loans collectively

Loans acquired with

Loans individually

Loans collectively

Loans acquired with

evaluated for

evaluated for

deteriorated credit

evaluated for

evaluated for

deteriorated credit

impairment

impairment

quality

Total

impairment

impairment

quality

Total


Loans

ALL

Loans

ALL

Loans

ALL

Loans

ALL

Loans

ALL

Loans

ALL

Loans

ALL

Loans

ALL
Construction and Land Development

$
10,662

$
63

$
1,175,505

$
6,740

$
8,654

$
—

$
1,194,821

$
6,803

$
6,861

$
49

$
1,233,119

$
5,709

$
10,944

$
0

$
1,250,924

$
5,758
Commercial Real Estate - Owner Occupied

12,690

359

1,299,011

3,664

25,644

—

1,337,345

4,023

11,621

146

2,002,184

3,773

27,438

0

2,041,243

3,919
Commercial Real Estate - Non-Owner Occupied

6,969

1

2,443,106

8,864

17,335

—

2,467,410

8,865

3,845

2

3,267,688

9,541

14,565

0

3,286,098

9,543
Multifamily Real Estate

—

—

548,143

649

88

—

548,231

649

0

0

633,649

632

94

0

633,743

632
Commercial & Industrial

4,242

752

1,310,737

6,884

2,156

—

1,317,135

7,636

6,236

619

2,106,218

7,768

1,579

217

2,114,033

8,604
Residential 1-4 Family - Commercial

5,498

89

621,320

1,603

13,601

—

640,419

1,692

5,773

162

706,359

1,203

12,205

0

724,337

1,365
Residential 1-4 Family - Consumer

16,031

470

641,006

1,022

16,872

—

673,909

1,492

20,446

1,242

855,344

771

14,713

0

890,503

2,013
Residential 1-4 Family - Revolving

3,048

510

652,329

813

4,127

0

659,504

1,323
Auto

576

231

301,360

1,212

7

—

301,943

1,443

563

221

349,852

1,232

4

0

350,419

1,453
HELOC

1,874

188

606,394

1,109

5,115

—

613,383

1,297
Consumer and all other⁽¹⁾

686

64

620,176

7,081

749

—

621,611

7,145

730

76

658,390

7,608

1,012

0

660,132

7,684
Total loans held for investment, net

$
59,228

$
2,217

$
9,566,758

$
38,828

$
90,221

$
—

$
9,716,207

$
41,045

$
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.

~~-27-~~

~~Table of Contents~~

The Company uses a risk rating system and past due status as the primary credit quality indicators for the loan categories. The risk rating system on a scale of 0 through 9 is used to determine risk level as used in the calculation of the ~~ALL; on those loans without a risk rating, the Company uses past due status to determine risk level.~~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.

-33-

Table of Contents

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

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

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


Pass

Watch & Special Mention

Substandard

Doubtful

Total
Construction and Land Development

$
1,197,066

$
37,182

$
5,732

$
0

$
1,239,980
Commercial Real Estate - Owner Occupied

1,916,492

87,004

10,309

0

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

0

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

0

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

0

655,377
Auto

345,960

2,630

1,825

0

350,415
Consumer

371,315

550

320

0

372,185
Other Commercial

284,914

1,863

158

0

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

$
0

$
10,944
Commercial Real Estate - Owner Occupied

8,264

10,524

8,650

0

27,438
Commercial Real Estate - Non-Owner Occupied

3,826

9,415

1,324

0

14,565
Multifamily Real Estate

0

94

0

0

94
Commercial & Industrial

127

25

1,427

0

1,579
Residential 1-4 Family - Commercial

6,000

2,693

3,512

0

12,205
Residential 1-4 Family - Consumer

9,947

557

4,209

0

14,713
Residential 1-4 Family - Revolving

2,887

707

533

0

4,127
Auto

2

0

2

0

4
Consumer

657

0

11

—

668
Other Commercial

120

224

0

0

344
Total

$
32,922

$
27,931

$
25,828

$
0

$
86,681

-34-

Table of Contents

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.

~~-28-~~-35-

Table of Contents

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 0 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

-36-

Table of Contents

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 0 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.

-37-

Table of Contents

~~The following table shows the recorded investment in all loans, excluding PCI loans, by segment with their related risk level as~~
As of September 30, ~~2019~~2020, the Company had 0 sales leaseback transactions or leases that have 0t 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):


Pass

Watch & Special Mention

Substandard

Doubtful

Total
Construction and Land Development

$
1,148,732

$
33,136

$
10,894

$
—

$
1,192,762
Commercial Real Estate - Owner Occupied

1,850,909

78,451

21,730

145

1,951,235
Commercial Real Estate - Non-Owner Occupied

3,124,018

54,884

2,297

96

3,181,295
Multifamily Real Estate

645,193

13,448

1,212

—

659,853
Commercial & Industrial

1,949,546

99,337

5,988

—

2,054,871
Residential 1-4 Family - Commercial

679,023

22,772

7,153

—

708,948
Residential 1-4 Family - Consumer

871,391

4,584

22,293

—

898,268
Auto

324,396

1,990

2,063

—

328,449
HELOC

644,019

6,529

6,140

—

656,688
Consumer

384,744

1,182

240

—

386,166
Other Commercial

196,511

2,057

159

—

198,727
Total

$
11,818,482

$
318,370

$
80,169

$
241

$
12,217,262


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 ~~following table shows~~maturities of lessor and lessee arrangements outstanding at September 30, 2020 are presented in the ~~recorded investment in all loans, excluding PCI loans, by segment with their related risk level as of December 31, 2018~~tables below (dollars in thousands):


Pass

Watch & Special Mention

Substandard

Doubtful

Total
Construction and Land Development

$
1,130,577

$
43,894

$
11,696

$
—

$
1,186,167
Commercial Real Estate - Owner Occupied

1,231,422

50,939

29,340

—

1,311,701
Commercial Real Estate - Non-Owner Occupied

2,425,500

17,648

6,927

—

2,450,075
Multifamily Real Estate

537,572

10,571

—

—

548,143
Commercial & Industrial

1,273,549

34,864

6,566

—

1,314,979
Residential 1-4 Family - Commercial

606,955

14,876

4,987

—

626,818
Residential 1-4 Family - Consumer

624,346

17,065

15,626

—

657,037
Auto

296,907

3,590

1,439

—

301,936
HELOC

598,444

6,316

3,508

—

608,268
Consumer

378,873

547

242

—

379,662
Other Commercial

239,857

864

479

—

241,200
Total

$
9,344,002

$
201,174

$
80,810

$
—

$
9,625,986

September 30, 2020

Lessor

Lessee

Sales-type and Direct Financing

Operating

Finance
For the remaining three months of 2020

$
7,416

$
3,193

$
0
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) Representslease receivables for lessor arrangements and lease liabilities for lessee arrangements

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


Pass

Watch & Special Mention

Substandard

Doubtful

Total
Construction and Land Development

$
1,233

$
3,993

$
3,161

$
—

$
8,387
Commercial Real Estate - Owner Occupied

8,273

10,845

8,699

—

27,817
Commercial Real Estate - Non-Owner Occupied

3,855

9,533

3,897

—

17,285
Multifamily Real Estate

—

93

—

—

93
Commercial & Industrial

115

57

3,090

—

3,262
Residential 1-4 Family - Commercial

6,490

2,780

2,967

—

12,237
Residential 1-4 Family - Consumer

10,074

233

4,670

—

14,977
Auto

3

—

4

—

7
HELOC

3,092

607

576

—

4,275
Consumer

660

4

18

—

682
Other Commercial

122

591

—

—

713
Total

$
33,917

$
28,736

$
27,082

$
—

$
89,735

~~-29-~~-38-

Table of Contents

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


Pass

Watch & Special Mention

Substandard

Doubtful

Total
Construction and Land Development

$
1,835

$
1,308

$
5,511

$
—

$
8,654
Commercial Real Estate - Owner Occupied

8,347

6,685

10,612

—

25,644
Commercial Real Estate - Non-Owner Occupied

4,789

7,992

4,554

—

17,335
Multifamily Real Estate

—

88

—

—

88
Commercial & Industrial

762

134

1,260

—

2,156
Residential 1-4 Family - Commercial

6,476

2,771

4,354

—

13,601
Residential 1-4 Family - Consumer

9,930

1,030

5,912

—

16,872
Auto

7

—

—

—

7
HELOC

3,438

1,031

646

—

5,115
Consumer

17

—

15

—

32
Other Commercial

57

660

—

—

717
Total

$
35,658

$
21,699

$
32,864

$
—

$
90,221

Loans acquired are originally recorded at fair value, with certain loans being identified as impaired at the date of purchase. The fair values were determined based on the credit quality of the portfolio, expected future cash flows, and timing of those expected future cash flows.
~~The following shows changes in the accretable yield for loans accounted for under ASC 310-30,~~ ~~Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality,~~ ~~for the periods presented (dollars in thousands):~~

For the Nine Months Ended September 30,


2019

2018
Balance at beginning of period

$
31,201

$
14,563
Additions

2,432

12,225
Accretion

(9,830)

(6,666)
Reclass of nonaccretable difference due to improvement in expected cash flows

1,372

360
Measurement period adjustment

2,629

2,981
Other, net ⁽¹⁾

5,083

1,845
Balance at end of period

$
32,887

$
25,308
~~(1)~~ This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate PCI loans, and discounted payoffs that occurred in the quarter.
~~The carrying value of the Company’s PCI loan portfolio, accounted for under ASC 310-30, Receivables -~~ ~~Loans and Debt Securities Acquired with Deteriorated Credit Quality~~, totaled $89.7 million at September 30, 2019 and $90.2 million at December 31, 2018. The outstanding balance of the Company’s PCI loan portfolio totaled $113.8 million at September 30, 2019 and $113.5 million at December 31, 2018. The carrying value of the Company’s acquired performing loan portfolio, accounted for under ASC 310-20, ~~Receivables – Nonrefundable Fees and Other Costs~~, totaled $3.3 billion at September 30, 2019 and $2.0 billion at December 31, 2018; the remaining discount on these loans totaled $54.1 million at September 30, 2019 and $30.3 million at December 31, 2018.

~~-30-~~

~~Table of Contents~~

~~5. INTANGIBLE ASSETS~~
The Company’s intangible assets consist of core deposits, goodwill, and other intangibles arising from acquisitions. The Company has determined that core deposit intangibles have finite lives and amortizes them over their estimated useful lives. Core deposit intangibles are being amortized over the period of expected benefit, which ranges from 5 to 10 years, using an accelerated method. Other amortizable intangible assets are being amortized over the period of expected benefit, which ranges from 5 to 10 years, using various methods. Refer to Note 2 "Acquisitions" for further information regarding intangible assets.
~~In accordance with ASC 350,~~ ~~Intangibles-Goodwill and Other,~~ the Company reviews the carrying value of indefinite lived intangible assets at least annually or more frequently if certain impairment indicators exist. The Company performed its annual impairment testing in the second quarter of 2019 and determined that there was no impairment to its goodwill or intangible assets. In the second quarter of 2018 the Company wrote off goodwill in the amount of $864,000 in connection with the wind down of UMG, which is included in discontinued operations.
Amortization expense of intangibles for the three and nine months ended September 30, 2019 totaled $4.8 million and $13.9 million, respectively; and for the three and nine months ended September 30, 2018 totaled $3.5 million and $9.9 million, respectively.
~~As of September 30, 2019, the estimated remaining amortization expense of intangibles is as follows for the years ending (dollars in thousands):~~

For the remaining three months of 2019

$
4,573
2020

16,483
2021

13,874
2022

11,490
2023

9,687
Thereafter

22,134
Total estimated amortization expense

$
78,241

~~-31-~~

~~Table of Contents~~

~~6. LEASES~~
The Company leases branch locations, office space, land, and equipment. The Company determines if an arrangement is a lease at inception. As of September 30, 2019, all leases have been classified as operating leases with approximately 160 non-cancellable operating leases where the Company is the lessee. The Company does not have any material arrangements where the Company is the lessor or in a sublease contract.
Leases where the Company is a lessee are primarily for real estate leases with remaining lease terms of up to 30 years. The Company’s real estate lease agreements do not contain residual value guarantees and most agreements do not contain restrictive covenants. At September 30, 2019, the total ROU Asset was $57.0 million and total operating lease liabilities were $68.8 million. Total operating lease expenses for the three and nine months ended September 30, 2019 were $2.9 million and $8.9 million, respectively.
Operating leases have been reported on the Company’s Consolidated Balance Sheets as an operating ROU Asset within Other Assets and an operating lease liability within Other Liabilities. The ROU Asset represents the Company’s right to use an underlying asset over the course of the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments, discounted using the incremental borrowing rate. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating ROU Asset is recognized at commencement date based on the initial measurement of the lease liability, any lease payments made excluding lease incentives, and any initial direct costs incurred.
Total lease expenses are recorded in Occupancy Expense within noninterest expense on the Company’s Consolidated Statement of Income. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Most of the Company’s leases include one or more options to renew, however, the Company is not reasonably certain to exercise those options and therefore does not include the renewal options in the measurement of the ROU Asset and lease liabilities
~~As of September 30, 2019, the Company had 0 material operating leases that have not yet commenced that create significant rights and obligations, and 0 sales leaseback transactions.~~
~~Maturities of operating lease liabilities as of September 30, 2019 are as follows for the years ending (dollars in thousands):~~

For the remaining three months of 2019

$
3,335
2020

12,392
2021

10,713
2022

9,934
2023

9,022
2024

7,741
Thereafter

19,588
Total future lease payments

72,725
Less: Interest

3,917
Present value of lease liabilities

$
68,808

~~-32-~~

~~Table of Contents~~

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


September 30, 2019

Lease Term and Discount Rate of Operating leases:



Weighted-average remaining lease term (years)

8.56

Weighted-average discount rate ⁽¹⁾

2.78
%
Cash paid for amounts included in measurement of lease liabilities:



Operating Cash Flows from Operating Leases

$
10,327

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



Operating leases

5,979

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

~~-33-~~

~~Table of Contents~~

7. BORROWINGS
Short-term Borrowings
The Company classifies all borrowings that will mature within a year from the date on which the Company enters into them as short-term borrowings. Total short-term borrowings consist primarily of advances from the FHLB, federal funds purchased (which are secured overnight borrowings from other financial institutions), and other lines of credit. Also included in total short-term borrowings are securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the date sold.
Total short-term borrowings consist of the following as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 (dollars in thousands):


September 30,

December 31,


September 30,

December 31,

2019

2018

2020

2019

Securities sold under agreements to repurchase

$
67,260

$
39,197

$
91,086

$
66,053

Federal Funds Purchased

—

—

25,000

0

FHLB Advances

344,600

1,043,600

150,200

370,200

Other short-term borrowings

—

5,000

Total short-term borrowings

$
411,860

$
1,087,797

$
266,286

$
436,253

Maximum month-end outstanding balance

$
509,949

$
1,087,797

Average outstanding balance during the period

804,644

968,014

$
223,068

$
673,116

Average interest rate (during the period)

2.38
%

1.91
%

0.96
%

2.30
%
Average interest rate at end of period

1.97
%

2.43
%

0.25
%

1.52
%

The Bank maintains federal funds lines with several correspondent banks, the remaining available balance ~~of which~~ was ~~$647.0~~$942.0 million and ~~$382.0~~$682.0 million at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. The Company maintains an alternate line of credit at a correspondent bank, ~~the~~which had an available balance of ~~which was~~ $25.0 million at both September 30, ~~2019~~2020 and December 31, ~~2018.~~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, ~~2019.~~2020. Additionally, the Company had a collateral dependent line of credit with the FHLB of up to ~~$5.1~~$5.9 billion and ~~$4.0~~$5.2 billion at September 30, ~~2019~~2020 and December 31, ~~2018,~~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 ~~$15.1~~$14.3 million at September 30, ~~2019.~~

~~-34-~~

~~Table of Contents~~2020.

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


Trust








Preferred

Capital

Spread to

Securities ⁽¹⁾

Investment ⁽¹⁾

3-Month LIBOR

Rate ⁽²⁾

Maturity
Trust Preferred Capital Note - Statutory Trust I

$
22,500,000

$
696,000

2.75
%
4.84
%
6/17/2034
Trust Preferred Capital Note - Statutory Trust II

36,000,000

1,114,000

1.40
%
3.49
%
6/15/2036
VFG Limited Liability Trust I Indenture

20,000,000

619,000

2.73
%
4.82
%
3/18/2034
FNB Statutory Trust II Indenture

12,000,000

372,000

3.10
%
5.19
%
6/26/2033
Gateway Capital Statutory Trust I

8,000,000

248,000

3.10
%
5.19
%
9/17/2033
Gateway Capital Statutory Trust II

7,000,000

217,000

2.65
%
4.74
%
6/17/2034
Gateway Capital Statutory Trust III

15,000,000

464,000

1.50
%
3.59
%
5/30/2036
Gateway Capital Statutory Trust IV

25,000,000

774,000

1.55
%
3.64
%
7/30/2037
MFC Capital Trust II

5,000,000

155,000

2.85
%
4.94
%
1/23/2034
Total

$
150,500,000

$
4,659,000






~~(1)~~ The total of the trust preferred capital securities and investments in the respective trusts represents the principal asset of the Company’s junior subordinated debt securities with like maturities and like interest rates to the capital securities. The Company’s investment in the trusts is reported in "Other Assets" on the Company’s Consolidated Balance Sheets.
~~(2)~~ ~~Rate as of September 30, 2019.~~
During the fourth quarter of 2016, the Company issued $150.0 million of fixed-to-floating rate subordinated notes with an initial fixed interest rate of 5.00% through December 15, 2021. The interest rate then changes to a floating rate of LIBOR plus 3.175% through its maturity date on December 15, 2026. In connection with the acquisition of Xenith on January 1, 2018, the Company acquired $8.5 million of subordinated notes with a fair value premium of $259,000, which was $77,000 at September 30, 2019. The acquired subordinated notes have a fixed interest rate of 6.75% and a maturity date of June 30, 2025. At September 30, 2019 and December 31, 2018, the contractual principal reported for subordinated notes was $158.5 million; remaining issuance discount as of September 30, 2019 and December 31, 2018 is $1.4 million and $1.6 million, respectively. The subordinated notes qualify as Tier 2 capital for the Company for regulatory purposes. The Company has certain restrictive covenants related to certain asset quality, capital, and profitability metrics associated with the acquired subordinated notes and is considered to be in compliance with these covenants as of September 30, 2019.
On August 23, 2012, the Company modified its fixed rate FHLB advances to floating rate advances, which resulted in reducing the Company’s FHLB borrowing costs. In connection with this modification, the Company incurred a prepayment penalty of $19.6 million on the original ~~advances.~~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.~~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.

~~-35-~~-39-

Table of Contents

AsTotal long-term borrowings consist of the following as of September 30, ~~2019, the Company had long-term advances from the FHLB consisting of the following~~2020 (dollars in thousands):


Spread to






3-Month

Interest

Long-term Type

LIBOR

Rate ⁽¹⁾

Maturity Date

Advance Amount
Convertible Flipper

(0.75)
%
1.34
%
8/17/2029

$
50,000
Convertible Flipper

(0.50)
%
1.59
%
5/15/2024

200,000
Convertible Flipper

(0.75)
%
1.34
%
5/22/2029

150,000
Convertible Flipper

(0.75)
%
1.34
%
5/30/2029

50,000
Convertible Flipper

(0.75)
%
1.34
%
6/21/2029

100,000
Fixed Rate Convertible

-

1.78
%
10/26/2028

200,000
Fixed Rate Hybrid

-

2.37
%
10/10/2019

25,000
Fixed Rate Hybrid

-

1.58
%
5/18/2020

20,000
Fixed Rate Hybrid

-

2.65
%
10/24/2019

25,000
Fixed Rate Credit

-

1.54
%
10/2/2020

10,000
Fixed Rate Credit

-

1.32
%
10/2/2019

10,000

$
840,000

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) ~~Interest rates calculated~~Rate as of September 30, 2020. Calculated using non-rounded numbers.
~~As of December 31, 2018, the Company had long-term advances from the FHLB consisting of the following (dollars in thousands):~~


Spread to






3-Month

Interest

Long-term Type

LIBOR

Rate ⁽¹⁾

Maturity Date

Advance Amount
Adjustable Rate Credit

0.44
%
3.25
%
8/23/2022

$
55,000
Adjustable Rate Credit

0.45
%
3.26
%
11/23/2022

65,000
Adjustable Rate Credit

0.45
%
3.26
%
11/23/2022

10,000
Adjustable Rate Credit

0.45
%
3.26
%
11/23/2022

10,000
Fixed Rate Convertible

-

1.78
%
10/26/2028

200,000
Fixed Rate Hybrid

-

2.37
%
10/10/2019

25,000
Fixed Rate Hybrid

-

1.58
%
5/18/2020

20,000

$
385,000
~~(1)~~(2) ~~Interest~~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 ~~calculated using non-rounded numbers.~~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.

~~-36-~~-40-

Table of Contents

~~For information on~~Total long-term borrowings consist of the ~~carrying value of loans and securities pledged as collateral on FHLB advances~~following as of ~~September 30, 2019 and~~ December 31, ~~2018, refer to Note 8 "Commitments and Contingencies."~~
~~As of September 30,~~ 2019 ~~the contractual maturities of long-term debt are as follows for the years ending~~ (dollars in thousands):


Trust








Preferred

Fair Value

Capital

Subordinated

FHLB

Premium

Total Long-term

Notes

Debt

Advances

(Discount) ⁽¹⁾

Borrowings
For the remaining three months of 2019

$
—

$
—

$
60,000

$
(174)

$
59,826
2020

—

—

30,000

(834)

29,166
2021

—

—

—

(1,008)

(1,008)
2022

—

—

—

(1,030)

(1,030)
2023

—

—

—

(1,053)

(1,053)
Thereafter

155,159

158,500

750,000

(12,239)

1,051,420
Total long-term borrowings

$
155,159

$
158,500

$
840,000

$
(16,338)

$
1,137,321

Spread to

Principal

3-Month LIBOR

Rate ⁽¹⁾

Maturity

Investment ⁽²⁾
Trust Preferred Capital Securities

Trust Preferred Capital Note - Statutory Trust I

$
22,500

2.75
%
4.66
%
6/17/2034

$
696
Trust Preferred Capital Note - Statutory Trust II

36,000

1.40
%
3.31
%
6/15/2036

1,114
VFG Limited Liability Trust I Indenture

20,000

2.73
%
4.64
%
3/18/2034

619
FNB Statutory Trust II Indenture

12,000

3.10
%
5.01
%
6/26/2033

372
Gateway Capital Statutory Trust I

8,000

3.10
%
5.01
%
9/17/2033

248
Gateway Capital Statutory Trust II

7,000

2.65
%
4.56
%
6/17/2034

217
Gateway Capital Statutory Trust III

15,000

1.50
%
3.41
%
5/30/2036

464
Gateway Capital Statutory Trust IV

25,000

1.55
%
3.46
%
7/30/2037

774
MFC Capital Trust II

5,000

2.85
%
4.76
%
1/23/2034

155
Total Trust Preferred Capital Securities

$
150,500







$
4,659
FHLB Advances⁽³⁾

Convertible Flipper

$
50,000

(0.75)
%
1.16
%
8/17/2029

Convertible Flipper

200,000

(0.50)
%
1.41
%
5/15/2024

Convertible Flipper

150,000

(0.75)
%
1.16
%
5/22/2029

Convertible Flipper

50,000

(0.75)

1.16

5/30/2029

Convertible Flipper

100,000

(0.75)
%
1.16
%
6/21/2029

Fixed Rate Convertible

200,000

-
%
1.78
%
10/26/2028

Fixed Rate Hybrid

20,000

-
%
1.58
%
5/18/2020

Fixed Rate Credit

10,000

-
%
1.54
%
10/2/2020

Total FHLB Advances

$
780,000

Subordinated Debt⁽⁴⁾⁽⁵⁾

2025 Subordinated Debt

$
8,500

-
%
6.75
%
6/30/2025

2026 Subordinated Debt⁽⁶⁾

150,000

-
%
5.00
%
12/15/2026

Total Subordinated Debt

$
158,500

Fair Value Premium (Discount)⁽⁷⁾

(16,164)

Investment in Trust Preferred Capital Securities

4,659

Total Long-term Borrowings

$
1,077,495

(1) Rate as of December 31, 2019. Calculated using non-rounded numbers.
(2) The total of the trust preferred capital securities and investments in the respective trusts represents the principal asset of the Company’s junior subordinated debt securities with like maturities and like interest rates to the capital securities. The Company’s investment in the trusts is reported in "Other Assets" on the Company’s Consolidated Balance Sheets.
(3) Convertible Flippers have interest rate floors of 0%.
(4) The remaining issuance discount as of December 31, 2019 is $1.4 million.
(5) Subordinated notes qualify as Tier 2 capital for the Company for regulatory purposes.
(6) Fixed-to-floating rate notes. On December 15, 2021, the interest rate will change to a floating rate of LIBOR plus 3.175% through its maturity date.
(7) Includes discount on issued subordinated notes.

~~-37-~~-41-

Table of Contents

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


Trust











Preferred







Fair Value

Total


Capital

Subordinated

PPPLF

FHLB

Premium

Long-term


Notes

Debt

Advances

Advances

(Discount) ⁽¹⁾

Borrowings
For the remaining three months of 2020

$
0

$
0

$
—

$
10,000

$
(238)

$
9,762
2021

0

0

—

0

(1,008)

(1,008)
2022

0

0

189,945

0

(1,030)

188,915
2023

0

0

—

0

(1,053)

(1,053)
2024

0

0

—

0

(1,078)

(1,078)
Thereafter

155,159

158,500

—

550,000

(11,161)

852,498
Total long-term borrowings

$
155,159

$
158,500

$
189,945

$
560,000

$
(15,568)

$
1,048,036

(1) Includes discount on issued subordinated notes.

-42-

Table of Contents

8. COMMITMENTS AND CONTINGENCIES
Litigation Matters
In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and ~~standby~~ letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized on the Company’s Consolidated Balance Sheets. The contractual amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk. The Company considers credit losses related to off-balance sheet commitments by undergoing a similar process in evaluating losses for loans that are carried on the balance sheet. The Company considers historical loss ~~rates,~~and funding information, current and future economic conditions, risk ratings, and past due status among other factors in the consideration of ~~whether~~expected credit losses ~~are inherent~~ in the Company’s off-balance sheet commitments to extend credit. The Company also records an indemnification reserve that includes balances relating to mortgage loans previously sold based on historical statistics and loss rates. As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company’s reserves for off-balance sheet credit risk and indemnification were ~~$2.8~~$14.0 million and ~~$1.4~~$2.6 million, respectively.
Commitments to extend credit are agreements to lend to customers as long as there are no violations of any conditions established in the contracts. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Letters of credit are conditional commitments issued by the Company to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
The following table presents the balances of commitments and contingencies (dollars in thousands):


September 30, 2019

December 31, 2018

September 30, 2020

December 31, 2019
Commitments with off-balance sheet risk:








Commitments to extend credit ⁽¹⁾

$
4,143,637

$
3,167,085

$
4,631,361

$
4,691,272
Standby letters of credit

199,928

167,597
Letters of credit

164,303

209,658
Total commitments with off-balance sheet risk

$
4,343,565

$
3,334,682

$
4,795,664

$
4,900,930

(1) Includes unfunded overdraft protection.

~~The~~Prior to the first quarter of 2020, the Company ~~must~~was required to maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. For the final weekly reporting period in the period ended September 30, 2019, the aggregate amount of daily average required reserves was approximately $5.5 million and was satisfied by deposits maintained withOn March 15, 2020, the Federal Reserve ~~Bank.~~Board announced that reserve requirement ratios would be reduced to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
As of September 30, ~~2019,~~2020, the Company had approximately ~~$243.7~~$296.2 million in deposits in other financial institutions, of which ~~$133.7~~$276.8 million served as collateral for cash flow and loan swap derivatives. The Company had approximately ~~$107.5~~$16.3 million in deposits in other financial institutions that were uninsured at September 30, ~~2019.~~2020. At least annually, the Company’s management evaluates the loss risk of its uninsured deposits in financial counterparties.

~~-38-~~-43-

Table of Contents

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

As part of the Company’s liquidity management strategy, it pledges collateral to secure various financing and other activities that occur during the normal course of business. The following tables present the types of collateral pledged, at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 (dollars in thousands):

Pledged Assets as of September 30, 2019

Pledged Assets as of September 30, 2020




AFS

HTM







AFS

HTM




Cash

Securities ⁽¹⁾

Securities ⁽¹⁾

Loans ⁽²⁾

Total

Cash

Securities ⁽¹⁾

Securities ⁽¹⁾

Loans ⁽²⁾

Total
Public deposits

$
—

$
474,155

$
291,865

$
—

$
766,020

$
0

$
476,167

$
432,791

$
0

$
908,958
Repurchase agreements

—

81,419

7,633

—

89,052

0

111,781

0

0

111,781
FHLB advances

—

65,329

—

3,828,487

3,893,816

0

54,195

0

4,354,063

4,408,258
Derivatives

133,679

1,433

—

—

135,112

276,786

939

0

0

277,725
Fed Funds

—

—

—

263,604

263,604

0

0

0

316,561

316,561
PPP Loans

0

0

0

189,945

189,945
Other purposes

—

126,213

10,772

—

136,985

0

124,517

8,862

0

133,379
Total pledged assets

$
133,679

$
748,549

$
310,270

$
4,092,091

$
5,284,589

$
276,786

$
767,599

$
441,653

$
4,860,569

$
6,346,607

(1) Balance represents market value.

(2) Balance represents book value.

Pledged Assets as of December 31, 2018

Pledged Assets as of December 31, 2019




AFS

HTM







AFS

HTM




Cash

Securities ⁽¹⁾

Securities ⁽¹⁾

Loans ⁽²⁾

Total

Cash

Securities ⁽¹⁾

Securities ⁽¹⁾

Loans ⁽²⁾

Total
Public deposits

$
—

$
293,169

$
7,407

$
—

$
300,576

$
0

$
467,266

$
292,096

$
0

$
759,362
Repurchase agreements

—

55,269

—

—

55,269

0

79,299

7,602

0

86,901
FHLB advances

—

488

—

3,337,289

3,337,777

0

63,812

0

3,846,934

3,910,746
Derivatives

13,509

1,938

—

—

15,447

116,839

1,260

0

0

118,099
Fed Funds

0

0

0

292,738

292,738
Other purposes

—

23,217

—

—

23,217

0

122,358

10,654

0

133,012
Total pledged assets

$
13,509

$
374,081

$
7,407

$
3,337,289

$
3,732,286

$
116,839

$
733,995

$
310,352

$
4,139,672

$
5,300,858

(1) Balance represents book value.

(2) Balance represents market value.

~~-39-~~-44-

Table of Contents

9. DERIVATIVES

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

Derivatives Counterparty Credit Risk

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

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

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

Cash Flow Hedges

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

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

The Company assesses the effectiveness of each hedging relationship on a periodic basis using statistical regression analysis. The Company also measures the ineffectiveness of each hedging relationship using the change in variable cash flows method which compares the cumulative changes in cash flows of the hedging instrument relative to cumulative changes in the hedged item’s cash flows. In accordance with ASC 815, Derivatives and Hedging, the effective portions of the derivatives’ unrealized gains or losses are recorded as a component of other comprehensive income. ~~Based on~~For the period ended December 31, 2019, the Company’s ~~assessment, its~~ cash flow hedges ~~are~~were highly effective.

~~During the quarter ended September 30, 2019, the~~The Company ~~terminated 4~~ ~~interest rate swaps~~did 0t have any derivatives designated as cash flow hedges ~~prior to their respective maturity dates. The net amount of losses reclassified into earnings totaled~~ ~~$9.0~~ ~~million for the quarter ended~~outstanding at September 30, ~~2019. This loss is immediately recognized into earnings as the forecasted transaction will not occur.~~2020.

~~-40-~~

~~Table of Contents~~

Fair Value Hedge

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

-45-

Table of Contents

Loans: During the normal course of business, the Company enters into swap agreements to convert certain long-term fixed-rate loans to floating rates to hedge the Company’s exposure to interest rate risk. The Company pays a fixed interest rate to the counterparty and receives a floating rate from the same counterparty calculated on the aggregate notional amount. ~~For the periods ended~~At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the aggregate notional amount of the related hedged items for certain long-term fixed rate loans totaled ~~$84.1~~$75.9 million and ~~$87.6~~$83.1 million, respectively, and the fair value of the swaps associated with the derivative related to hedged items was an unrealized loss of ~~$3.3~~$5.9 million and ~~$1.6~~$2.0 million, respectively.
AFS Securities: The Company has entered into a swap agreement to hedge the interest rate risk on a portion of its fixed rate available for sale securities. ~~For the periods ended~~At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the aggregate notional amount of the related hedged items of the ~~available for sale~~AFS securities totaled $50 million and the fair value of the swaps associated with the derivative related to hedged items was an unrealized loss of ~~$5.2~~$8.0 million and ~~$1.4~~$4.1 million, respectively.
The Company applies hedge accounting in accordance with ASC 815, Derivatives and Hedging, and the fair value hedge and the underlying hedged item, attributable to the risk being hedged, are recorded at fair value with unrealized gains and losses being recorded on the Company’s Consolidated Statements of Income. Statistical regression analysis is used to assess hedge effectiveness, both at inception of the hedging relationship and on an ongoing basis. The regression analysis involves regressing the periodic change in fair value of the hedging instrument against the periodic changes in fair value of the asset being hedged due to changes in the hedged risk. The Company’s fair value hedges continue to be highly effective and had no material impact on the Consolidated Statements of Income, but if any ineffectiveness exists, portions of the unrealized gains or losses would be recorded in interest income or interest expense on the Company’s Consolidated Statements of Income.
Loan Swaps
During the normal course of business, the Company ~~enters into~~offers interest rate swap loan relationships (“loan swaps”) ~~with~~to its borrowers to help meet their financing needs. Upon entering into the loan swaps, the Company enters into offsetting positions with a third party in order to minimize interest rate risk. These back-to-back loan swaps qualify as financial derivatives with fair values as reported in “Other Assets” and “Other Liabilities” on the Company’s Consolidated Balance Sheets.
~~Mortgage Banking Derivatives~~
During the normal course of business, the Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (“rate lock commitments”). The Company commits to deliver the loan if settlement occurs ("best efforts") or commits to deliver the locked loan in a binding ("mandatory") delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of MBS. Rate lock commitments on mortgage loans that are intended to be sold in the secondary market and commitments to deliver loans to investors are considered to be derivatives. The Company uses these derivatives as part of an overall strategy to manage market risk primarily due to fluctuations in interest rates, and to capture improved margins resulting from the mandatory delivery of loans. Mortgage banking derivatives as of September 30, 2019 did not have a material impact on the Company’s Consolidated Financial Statements.
The market values of rate lock commitments and best efforts forward delivery commitments is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments, delivery contracts, and forward sales contracts of MBS by measuring the change in the value of the underlying asset, while taking into consideration the probability that the rate lock commitments will close or will be funded. Certain risks arise from the forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. Additional risks inherent in mandatory delivery programs include the risk that, if the Company does not close the loans subject to rate lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement.

~~-41-~~

~~Table of Contents~~

The following table summarizes key elements of the Company’s derivative instruments as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, segregated by derivatives that are considered accounting hedges and those that are not (dollars in thousands):


September 30, 2019

December 31, 2018

Derivative ⁽²⁾

Derivative ⁽²⁾


Notional or





Notional or




Contractual

Contractual

Amount ⁽¹⁾

Assets

Liabilities

Amount ⁽¹⁾

Assets

Liabilities
Derivatives designated as accounting hedges:

Interest rate contracts:








Cash flow hedges

$
100,000

$
—

$
1,323

$
152,500

$
—

$
4,786
Fair value hedges

134,175

—

8,527

137,596

1,872

1,684
Derivatives not designated as accounting hedges:

Loan Swaps :












Pay fixed - receive floating interest rate swaps

1,392,662

105

74,317

878,446

10,120

9,306
Pay floating - receive fixed interest rate swaps

1,392,662

74,317

105

878,446

9,306

10,120


September 30, 2020

December 31, 2019

Derivative ⁽²⁾

Derivative ⁽²⁾


Notional or





Notional or




Contractual

Contractual

Amount ⁽¹⁾

Assets

Liabilities

Amount ⁽¹⁾

Assets

Liabilities
Derivatives designated as accounting hedges:

Interest rate contracts:








Cash flow hedges

$
0

$
0

$
0

$
100,000

$
0

$
1,147
Fair value hedges

125,856

—

13,912

133,078

182

6,256
Derivatives not designated as accounting hedges:

Loan Swaps :












Pay fixed - receive floating interest rate swaps

2,192,085

—

187,299

1,575,149

753

53,592
Pay floating - receive fixed interest rate swaps

2,192,085

187,299

—

1,575,149

53,592

753

(1) Notional amounts are not recorded on the Company’s Consolidated Balance Sheets and are generally used only as a basis on which interest and other payments are determined.
(2) Balances represent fair value of derivative financial instruments.

-46-

Table of Contents

The following table summarizes the carrying value of the Company’s hedged assets in fair value hedges and the associated cumulative basis adjustments included in those carrying values as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 (dollars in thousands):

September 30, 2019

December 31, 2018

September 30, 2020

December 31, 2019




Cumulative



Cumulative



Cumulative



Cumulative

Amount of Basis

Amount of Basis

Amount of Basis

Amount of Basis

Adjustments

Adjustments

Adjustments

Adjustments

Included in the

Included in the

Included in the

Included in the

Carrying Amount

Carrying

Carrying Amount

Carrying

Carrying Amount

Carrying

Carrying Amount

Carrying

of Hedged

Amount of the

of Hedged

Amount of the

of Hedged

Amount of the

of Hedged

Amount of the

Assets/(Liabilities)

Hedged

Assets/(Liabilities)

Hedged

Assets/(Liabilities)

Hedged

Assets/(Liabilities)

Hedged

Amount ⁽¹⁾

Assets/(Liabilities)

Amount ⁽¹⁾

Assets/(Liabilities)

Amount ⁽¹⁾

Assets/(Liabilities)

Amount ⁽¹⁾

Assets/(Liabilities)
Line items on the Consolidated Balance Sheets in which the hedged item is included:
















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

$
213,177

$
5,236

$
224,241

$
1,399

$
179,908

$
7,992

$
206,799

$
4,072
Loans

84,175

3,285

87,596

(1,572)

75,856

5,830

83,078

1,972

(1) These amounts include the amortized cost basis of the investment securities designated in hedging relationships for which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. ~~For the periods ended~~At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the amortized cost basis of this portfolio was $~~213~~180 million and $~~224~~207 million, respectively and the cumulative basis adjustment associated with this hedge was $~~5.2~~8.0 million and $~~1.4~~4.1 million, respectively. The amount of the designated hedged item was $50 million.
(2) Carrying value represents amortized cost.

~~-42-~~-47-

Table of Contents

10. STOCKHOLDERS’ EQUITY
~~Serial~~Series A Preferred Stock
On June 9, 2020, the Company issued and sold 6,900,000 depositary shares, each representing a 1/400th ownership interest in a share of its 6.875% Perpetual Non-Cumulative Preferred Stock, Series A, par value $10.00 per share (the “Series A preferred stock”), with a liquidation preference of $10,000 per share of Series A preferred stock (equivalent to $25 per depositary share), including 900,000 depositary shares pursuant to the exercise in full by the underwriters of their option to purchase additional depositary shares. The total net proceeds to the Company were approximately $166.4 million, after deducting the underwriting discount and other offering expenses payable by the Company. The Company ~~has~~intends to use the ~~authority~~net proceeds of the offering for general corporate purposes in the ordinary course of its business. General corporate purposes may include repayment of debt, loan funding, acquisitions, additions to ~~issue up to 500,000 shares of serial preferred stock with a par value of $10.00 per share. As of September 30, 2019~~working capital, capital expenditures and ~~December 31, 2018,~~investments in the ~~Company had 0 shares issued or outstanding.~~Company’s subsidiaries.

Accumulated Other Comprehensive Income (Loss)
The change in accumulated other comprehensive income (loss) for the three and nine months ended September 30, ~~2019~~2020 is summarized as follows, net of tax (dollars in thousands):




Unrealized Gains









Unrealized Gains






(Losses)

(Losses)

Unrealized

for AFS

Unrealized

Unrealized

for AFS

Unrealized

Gains (Losses)

Securities

Change in Fair

Gains

Gains (Losses)

Securities

Change in Fair

Gains

on AFS

Transferred to

Value of Cash

(Losses) on

on AFS

Transferred to

Value of Cash

(Losses) on

Securities

HTM

Flow Hedge

BOLI

Total

Securities

HTM

Flow Hedge

BOLI

Total
Balance - June 30, 2019

$
36,125

$
85

$
(7,155)

$
(988)

$
28,067
Balance - June 30, 2020

$
63,886

$
65

$
0

$
(2,647)

$
61,304
Other comprehensive income (loss):












Other comprehensive income (loss) before reclassification

12,364

—

6,025

(647)

17,742

1,250

0

0

0

1,250
Amounts reclassified from AOCI into earnings

(5,612)

(5)

158

19

(5,440)

(14)

(5)

0

127

108
Net current period other comprehensive income (loss)

6,752

(5)

6,183

(628)

12,302

1,236

(5)

0

127

1,358
Balance - September 30, 2019

$
42,877

$
80

$
(972)

$
(1,616)

$
40,369
Balance - September 30, 2020

$
65,122

$
60

$
0

$
(2,520)

$
62,662




Unrealized Gains









Unrealized Gains






(Losses)

(Losses)

Unrealized

for AFS

Unrealized

Unrealized

for AFS

Unrealized

Gains (Losses)

Securities

Change in Fair

Gains

Gains (Losses)

Securities

Change in Fair

Gains

on AFS

Transferred to

Value of Cash

(Losses) on

on AFS

Transferred to

Value of Cash

(Losses) on

Securities

HTM

Flow Hedge

BOLI

Total

Securities

HTM

Flow Hedge

BOLI

Total
Balance - December 31, 2018

$
(5,949)

$
95

$
(3,393)

$
(1,026)

$
(10,273)
Balance - December 31, 2019

$
37,877

$
75

$
(782)

$
(1,595)

$
35,575
Other comprehensive income (loss):












Other comprehensive income (loss) before reclassification

54,598

—

1,970

(647)

55,921

36,956

0

(699)

(1,289)

34,968
Amounts reclassified from AOCI into earnings

(5,772)

(15)

451

57

(5,279)

(9,711)

(15)

1,481

364

(7,881)
Net current period other comprehensive income (loss)

48,826

(15)

2,421

(590)

50,642

27,245

(15)

782

(925)

27,087
Balance - September 30, 2019

$
42,877

$
80

$
(972)

$
(1,616)

$
40,369
Balance - September 30, 2020

$
65,122

$
60

$
0

$
(2,520)

$
62,662

~~-43-~~-48-

Table of Contents

The change in accumulated other comprehensive income (loss) for the three and nine months ended September 30, ~~2018~~2019 is summarized as follows, net of tax (dollars in thousands):




Unrealized Gain









Unrealized Gain






(Losses)

(Losses)

Unrealized

for AFS

Unrealized

Unrealized

for AFS

Unrealized

Gains (Losses)

Securities

Change in Fair

Gains

Gains (Losses)

Securities

Change in Fair

Gains

on AFS

Transferred to

Value of Cash

(Losses)

on AFS

Transferred to

Value of Cash

(Losses)

Securities

HTM

Flow Hedge

on BOLI

Total

Securities

HTM

Flow Hedge

on BOLI

Total
Balance - June 30, 2018

$
(10,813)

$
105

$
(2,273)

$
(1,064)

$
(14,045)
Balance - June 30, 2019

$
36,125

$
85

$
(7,155)

$
(988)

$
28,067
Other comprehensive income (loss):









Other comprehensive income (loss) before reclassification

(11,310)

—

575

—

(10,735)

12,364

0

6,025

(647)

17,742
Amounts reclassified from AOCI into earnings

(77)

(5)

227

19

164

(5,612)

(5)

158

19

(5,440)
Net current period other comprehensive income (loss)

(11,387)

(5)

802

19

(10,571)

6,752

(5)

6,183

(628)

12,302
Balance - September 30, 2018

$
(22,200)

$
100

$
(1,471)

$
(1,045)

$
(24,616)
Balance - September 30, 2019

$
42,877

$
80

$
(972)

$
(1,616)

$
40,369




Unrealized Gain






(Losses)

Unrealized

for AFS

Unrealized

Gains (Losses)

Securities

Change in Fair

Gains

on AFS

Transferred to

Value of Cash

(Losses)

Securities

HTM

Flow Hedge

on BOLI

Total
Balance - December 31, 2017

$
1,874

$
2,705

$
(4,361)

$
(1,102)

$
(884)
Transfers of HTM securities to AFS securities ⁽¹⁾

2,785

(2,785)

—

—

—
Cumulative effects from adoption of new accounting standard ⁽²⁾

404

583

(1,094)

—

(107)
Other comprehensive income (loss):










Other comprehensive income (loss) before reclassification ⁽¹⁾

(27,087)

—

3,214

—

(23,873)
Amounts reclassified from AOCI into earnings

(176)

(403)

770

57

248
Net current period other comprehensive income (loss)

(27,263)

(403)

3,984

57

(23,625)
Balance - September 30, 2018

$
(22,200)

$
100

$
(1,471)

$
(1,045)

$
(24,616)
~~(1)~~ During the second quarter of 2018, the Company adopted ASU No. 2017-12,"Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". As part of this adoption, the Company made a one-time election to transfer eligible HTM securities to the AFS category. The transfer of these securities resulted in an increase of approximately ~~$400,000~~ ~~to AOCI and is included as unrealized gains (losses) on AFS securities above.~~
~~(2)~~ During the second quarter of 2018, the Company adopted ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." As part of this adoption, the Company reclassified approximately ~~$107,000~~ ~~from AOCI to retained earnings.~~




Unrealized Gain






(Losses)

Unrealized

for AFS

Unrealized

Gains (Losses)

Securities

Change in Fair

Gains

on AFS

Transferred to

Value of Cash

(Losses)

Securities
��
HTM

Flow Hedge

on BOLI

Total
Balance - December 31, 2018

$
(5,949)

$
95

$
(3,393)

$
(1,026)

$
(10,273)
Other comprehensive income (loss):

Other comprehensive income (loss) before reclassification

54,598

0

1,970

(647)

55,921
Amounts reclassified from AOCI into earnings

(5,772)

(15)

451

57

(5,279)
Net current period other comprehensive income (loss)

48,826

(15)

2,421

(590)

50,642
Balance - September 30, 2019

$
42,877

$
80

$
(972)

$
(1,616)

$
40,369

~~-44-~~-49-

Table of Contents

11. FAIR VALUE MEASUREMENTS

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

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

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Derivative instruments

As discussed in Note 9 “Derivatives”, the Company records derivative instruments at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. Third party valuations are validated by the Company using Bloomberg Valuation Service’s derivative pricing functions. No material differences were identified during the validation as of September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities. Mortgage banking derivatives as of September 30, ~~2019~~2020 did not have a material impact on the Company’s Consolidated Financial Statements.

During the ordinary course of business, the Company enters into interest rate lock commitments related to the origination of mortgage loans held for sale, as well as best efforts or mandatory delivery programs and forward sales contracts of MBS. These instruments are used to mitigate interest rate risk. The Company determines the fair value of these instruments by measuring the fair value of the underlying asset, which in turn is based on quoted prices for similar loans in the secondary market. This value, however, is adjusted by a pull-through rate applied at the loan level, which considers the likelihood that the loan in a lock position will ultimately close. The pull-through rate is derived from the Company’s internal data, as well as input from third party sources, and is adjusted using significant management judgment. It is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. As such, interest rate lock commitments are classified as Level 3. An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in positive fair value adjustments, while a decrease in the pull-through rate will result in a negative fair value adjustment. As of September 30, 2019, the weighted average pull-through rate was approximately 90%. As a result of the UMG wind-down, at December 31, 2018, the Company had 0 interest rate locks.

~~-45-~~

~~Table of Contents~~

AFS Securities

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

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

-50-

Table of Contents

The vendor utilizes proprietary valuation matrices for valuing all municipals securities. The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk. The securities are further broken down according to issuer, credit support, state of issuance, and rating to incorporate additional spreads to the industry benchmark curves.
The Company primarily uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of September 30, ~~2019~~2020 and December 31, ~~2018.~~2019.
The carrying value of restricted Federal Reserve Bank and FHLB stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the table below.
Loans Held for Sale
Loans held for sale are carried at fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded in current period earnings as a component of "Mortgage banking ~~income, net"~~income" on the Company’s Consolidated Statements of Income.
The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019 (dollars in thousands):


Fair Value Measurements at September 30, 2020 using




Significant




Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Level 1

Level 2

Level 3

Balance
ASSETS








AFS securities:








U.S. government and agency securities

$
0

$
13,878

$
0

$
13,878
Obligations of states and political subdivisions

0

796,856

0

796,856
Corporate and other bonds⁽¹⁾

0

148,918

0

148,918
Mortgage-backed securities

0

1,482,067

0

1,482,067
Other securities

0

1,621

0

1,621
Loans held for sale

0

52,607

0

52,607
Derivatives:








Interest rate swap

0

187,299

0

187,299

LIABILITIES








Derivatives:








Interest rate swap

$
0

$
187,299

$
0

$
187,299
Fair value hedges

0

13,912

0

13,912
(1) Other bonds include asset-backed securities.

~~-46-~~-51-

Table of Contents

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


Fair Value Measurements at September 30, 2019 using

Fair Value Measurements at December 31, 2019 using




Significant







Significant




Quoted Prices in

Other

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Identical Assets

Inputs

Inputs

Level 1

Level 2

Level 3

Balance

Level 1

Level 2

Level 3

Balance
ASSETS
















AFS securities:
















U.S. government and agency securities

$
—

$
4,490

$
—

$
4,490

$
—

$
21,320

$
—

$
21,320
Obligations of states and political subdivisions

—

438,613

—

438,613

0

447,091

0

447,091
Corporate and other bonds(1)

—

229,524

—

229,524

0

135,959

0

135,959
Mortgage-backed securities

—

1,243,165

—

1,243,165

0

1,337,996

0

1,337,996
Other securities

—

3,067

—

3,067

0

3,079

0

3,079
Loans held for sale

—

72,208

—

72,208

0

55,405

0

55,405
Derivatives:
















Interest rate swap

—

74,422

—

74,422

0

54,345

0

54,345
Fair value hedges

0

182

0

182

LIABILITIES
















Derivatives:
















Interest rate swap

$
—

$
74,422

$
—

$
74,422

$
0

$
54,345

$
0

$
54,345
Cash flow hedges

—

1,323

—

1,323

0

1,147

0

1,147
Fair value hedges

—

8,527

—

8,527

0

6,256

0

6,256
(1) Other bonds include asset-backed securities.


Fair Value Measurements at December 31, 2018 using




Significant




Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Level 1

Level 2

Level 3

Balance
ASSETS








AFS securities:








Obligations of states and political subdivisions

$
—

$
468,491

$
—

$
468,491
Corporate and other bonds

—

167,696

—

167,696
Mortgage-backed securities

—

1,129,865

—

1,129,865
Other securities

—

8,769

—

8,769
Derivatives:








Interest rate swap

—

19,426

—

19,426
Fair value hedges

—

1,872

—

1,872

LIABILITIES








Derivatives:








Interest rate swap

$
—

$
19,426

$
—

$
19,426
Cash flow hedges

—

4,786

—

4,786
Fair value hedges

—

1,684

—

1,684

~~-47-~~

~~Table of Contents~~

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual ~~assets.~~assets after they are evaluated for impairment. The ~~following describes the valuation techniques used by the Company to measure certain~~primary assets ~~recorded~~accounted for at fair value on a nonrecurring basis inare related to foreclosed properties, former bank premises, and collateral-dependent loans that are individually assessed. When the ~~financial statements.~~
~~Impaired loans~~
~~Loans are designated as impaired when, in~~asset is secured by real estate, the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan orCompany measures the fair value of the collateral. Collateral dependent loans are reported at the fair value of the underlying collateral if repayment is solely from the underlying value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data. ~~When evaluating~~Management may discount the value from the appraisal in determining the fair value ~~management may discount the appraisal further~~ if, based on ~~their~~its understanding of the market conditions, ~~it is determined~~ the collateral ~~is further~~had been impaired below the appraised value (Level 3). AtThe assets for which a nonrecurring fair value measurement was recorded during the period ended September 30, ~~2019~~2020 and December 31, ~~2018, the Level 3 weighted average adjustments related to impaired loans were 0.0%~~2019 was $14.0 million and ~~5.3%,~~$11.9 million, respectively. The ~~value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if~~nonrecurring valuation adjustments for these assets did not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Collateral dependent impaired loans allocated to the ALL are measured at fair value onhave a ~~nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses~~material impact on the Company’s ~~Consolidated Statements of Income.~~
~~Foreclosed Properties & Former Bank Premises~~
Foreclosed properties and former bank premises are evaluated for impairment at least quarterly by the Bank’s Special Asset Loan Committee and any necessary write downs to fair values are recorded as impairment and included as a component of noninterest expense. Foreclosed properties and former bank premises are carried at fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as Level 3 valuation. The Level 3 weighted average adjustments related to foreclosed property were approximately ~~3.7% for both September 30, 2019 and December 31, 2018. At September 30, 2019 and December 31, 2018, there were 0 Level 3 weighted average adjustments related to former bank premises.~~
Total valuation expenses related to foreclosed properties for the three and nine months ended September 30, 2019 and 2018 totaled $62,000, $546,000, $42,000 and $1.2 million, respectively. Total valuation expenses related to former bank premises for the three and nine months ended September 30, 2019 totaled $247,000 and $615,000. There were 0 valuation expenses related to former bank premises for the three and nine months ended September 30, 2018.
~~The following tables summarize the Company’s~~consolidated financial ~~assets that were measured at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018 (dollars in thousands):~~


Fair Value Measurements at September 30, 2019 using




Significant




Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Level 1

Level 2

Level 3

Balance
ASSETS

Impaired loans

$
—

$
—

$
1,837

$
1,837
Foreclosed properties

—

—

6,385

6,385
Former bank premises

—

—

5,533

5,533

~~-48-~~

~~Table of Contents~~

Fair Value Measurements at December 31, 2018 using




Significant




Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Level 1

Level 2

Level 3

Balance
ASSETS

Impaired loans

$
—

$
—

$
3,734

$
3,734
Foreclosed properties

—

—

6,722

6,722
Former bank premises

—

—

2,090

2,090
statements.
Fair Value of Financial Instruments
ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
Cash and Cash Equivalents
For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
HTM Securities
The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third party portfolio accounting service vendor for valuation of its securities portfolio. The vendor’s primary source for security valuation is ~~IDC,~~ICE Data Services, which evaluates securities based on market data. ~~IDC~~ICE Data Services utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

-52-

Table of Contents

The Company primarily uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. The Company’s level 3 securities are a result of the Access acquisition and are comprised of asset-backed securities and municipal bonds. Valuations of the asset-backed securities are provided by a third party vendor specializing in the SBA markets, and are based on underlying loan pool information, market data, and recent trading activity for similar securities. Valuations of the municipal bonds are provided by a third party vendor that specializes in hard-to-value securities, and are based on a discounted cash flow model and considerations for the complexity of the instrument, likelihood it will be called and credit ratings. The Company reviews the valuation of both security types for reasonableness in the context of market conditions and to similar bonds in the Company’s portfolio. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of September 30, 2020 and December 31, 2019.

Loans

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

~~-49-~~

~~Table of Contents~~

loan cohorts. The discount rate was based primarily on recent market origination rates. Fair value of loans individually assessed for ~~impaired loans~~impairment and their respective ~~level~~levels within the fair value hierarchy are described in the previous ~~disclosure~~section related to fair value measurements of assets that are measured on a nonrecurring basis.
~~BOLI~~
Bank owned life insurance
The carrying value of BOLI approximates fair value. The Company records these policies at their cash surrender value, which is estimated using information provided by insurance carriers.
Deposits
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposits were valued using a discounted cash flow calculation that includes a market rate analysis of the current rates offered by market participants for certificates of deposits that mature in the same period.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
~~The carrying values and estimated fair values of the Company’s financial instruments at September 30, 2019 and December 31, 2018 are as follows (dollars in thousands):~~

Fair Value Measurements at September 30, 2019 using




Quoted Prices

Significant




in Active

Other

Significant

Markets for

Observable

Unobservable

Total Fair

Identical Assets

Inputs

Inputs

Value

Carrying

Value

Level 1

Level 2

Level 3

Balance
ASSETS

Cash and cash equivalents

$
591,920

$
591,920

$
—

$
—

$
591,920
AFS securities

1,918,859

—

1,918,859

—

1,918,859
HTM securities

556,579

—

589,884

17,832

607,716
Restricted stock

132,310

—

132,310

—

132,310
Loans held for sale

72,208

—

72,208

—

72,208
Net loans

12,263,177

—

—

12,112,840

12,112,840
Derivatives:










Interest rate swap

74,422

—

74,422

—

74,422
Accrued interest receivable

51,606

—

51,606

—

51,606
BOLI

320,779

—

320,779

—

320,779

LIABILITIES










Deposits

$
13,044,712

$
—

$
13,083,351

$
—

$
13,083,351
Borrowings

1,549,181

—

1,520,708

—

1,520,708
Accrued interest payable

8,919

—

8,919

—

8,919
Derivatives:










Interest rate swap

74,422

—

74,422

—

74,422
Cash flow hedges

1,323

—

1,323

—

1,323
Fair value hedges

8,527

—

8,527

—

8,527

~~-50-~~-53-

Table of Contents

Fair Value Measurements at December 31, 2018 using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Total Fair

Identical Assets

Inputs

Inputs

Value

Carrying

Value

Level 1

Level 2

Level 3

Balance
ASSETS

Cash and cash equivalents

$
261,199

$
261,199

$
—

$
—

$
261,199
AFS securities

1,774,821

—

1,774,821

—

1,774,821
HTM securities

492,272

—

499,501

—

499,501
Restricted stock

124,602

—

124,602

—

124,602
Net loans

9,675,162

—

—

9,534,717

9,534,717
Derivatives:










Interest rate swap

19,426

—

19,426

—

19,426
Fair value hedges

1,872

—

1,872

—

1,872
Accrued interest receivable

46,062

—

46,062

—

46,062
BOLI

263,034

—

263,034

—

263,034

LIABILITIES










Deposits

$
9,970,960

$
—

$
9,989,788

$
—

$
9,989,788
Borrowings

1,756,278

—

1,742,038

—

1,742,038
Accrued interest payable

5,284

—

5,284

—

5,284
Derivatives:










Interest rate swap

19,426

—

19,426

—

19,426
Cash flow hedges

4,786

—

4,786

—

4,786
Fair value hedges

1,684

—

1,684

—

1,684
The carrying values and estimated fair values of the Company’s financial instruments at September 30, 2020 and December 31, 2019 are as follows (dollars in thousands):

Fair Value Measurements at September 30, 2020 using




Quoted Prices

Significant




in Active

Other

Significant

Markets for

Observable

Unobservable

Total Fair

Identical Assets

Inputs

Inputs

Value

Carrying

Value

Level 1

Level 2

Level 3

Balance
ASSETS

Cash and cash equivalents

$
520,966

$
520,966

$
0

$
0

$
520,966
AFS securities

2,443,340

0

2,443,340

0

2,443,340
HTM securities

546,661

0

600,679

13,494

614,173
Restricted stock

112,216

0

112,216

0

112,216
Loans held for sale

52,607

0

52,607

0

52,607
Net loans

14,209,093

0

0

14,102,010

14,102,010
Derivatives:










Interest rate swap

187,299

0

187,299

0

187,299
Accrued interest receivable

71,475

0

71,475

0

71,475
BOLI

325,538

0

325,538

0

325,538

LIABILITIES










Deposits

$
15,576,098

$
0

$
15,624,786

$
0

$
15,624,786
Borrowings

1,314,322

0

1,279,838

0

1,279,838
Accrued interest payable

5,126

0

5,126

0

5,126
Derivatives:










Interest rate swap

187,299

0

187,299

0

187,299
Fair value hedges

13,912

0

13,912

0

13,912


Fair Value Measurements at December 31, 2019 using

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Total Fair

Identical Assets

Inputs

Inputs

Value

Carrying

Value

Level 1

Level 2

Level 3

Balance
ASSETS

Cash and cash equivalents

$
436,032

$
436,032

$
0

$
0

$
436,032
AFS securities

1,945,445

0

1,945,445

0

1,945,445
HTM securities

555,144

0

585,820

17,683

603,503
Restricted stock

130,848

0

130,848

0

130,848
Loans held for sale

55,405

0

55,405

0

55,405
Net loans

12,568,642

0

0

12,449,505

12,449,505
Derivatives:










Interest rate swap

54,345

0

54,345

0

54,345
Fair value hedges

182

0

182

0

182
Accrued interest receivable

52,721

0

52,721

0

52,721
BOLI

322,917

0

322,917

0

322,917

LIABILITIES










Deposits

$
13,304,981

$
0

$
13,349,943

$
0

$
13,349,943
Borrowings

1,513,748

0

1,479,606

0

1,479,606
Accrued interest payable

6,108

0

6,108

0

6,108
Derivatives:










Interest rate swap

54,345

0

54,345

0

54,345
Cash flow hedges

1,147

0

1,147

0

1,147
Fair value hedges

6,256

0

6,256

0

6,256

-54-

Table of Contents

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

~~-51-~~-55-

Table of Contents

12. REVENUE
The majority of the Company’s noninterest income comes from short term contracts associated with fees for services provided on deposit accounts, credit cards, and wealth management accounts and is being accounted for in accordance with Topic 606. Typically, the duration of a contract does not extend beyond the services performed; therefore, the Company concluded that discussion regarding contract balances is immaterial.
The Company’s performance obligations on revenue from interchange fees and deposit accounts are generally satisfied immediately, when the transaction occurs, or by month-end. Performance obligations on revenue from fiduciary and asset management fees are generally satisfied monthly or quarterly. For a majority of fee income on deposit accounts the Company is a principal, controlling the promised good or service before transferring it to the customer. ~~However, for~~For the majority of income related to ~~most~~ wealth management income, the Company is an agent, responsible for arranging for the provision of goods and services by another party.
Noninterest income disaggregated by major source, for the three and nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, consisted of the following (dollars in thousands):


Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2019

2018

2019

2018
Noninterest income:








Deposit Service Charges ⁽¹⁾:








Overdraft fees, net

$
6,021

$
5,345

$
17,847

$
15,338
Maintenance fees & other

1,654

1,138

4,484

3,228
Other service charges and fees ⁽¹⁾

1,513

1,625

4,879

4,137
Interchange fees, net ⁽¹⁾

2,108

4,882

12,765

14,163
Fiduciary and asset management fees ⁽¹⁾:

Trust asset management fees

2,661

1,321

5,977

4,102
Registered advisor management fees, net

2,219

2,110

7,919

4,435
Brokerage management fees, net

1,202

980

2,938

2,970
Mortgage banking income, net

3,374

—

7,614

—
Gains (losses) on securities transactions, net

7,104

97

7,306

222
Bank owned life insurance income

2,062

1,732

6,191

5,126
Loan-related interest rate swap fees, net

5,480

562

10,656

2,178
Gain on Shore Premier sale

—

(933)

—

19,966
Other operating income ⁽²⁾

12,708

1,028

15,045

4,887
Total noninterest income⁽³⁾

$
48,106

$
19,887

$
103,621

$
80,752


Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2020

2019

2020

2019
Noninterest income:








Deposit Service Charges ⁽¹⁾:








Overdraft fees

$
4,231

$
6,021

$
13,240

$
17,847
Maintenance fees & other

1,810

1,654

5,309

4,484
Other service charges, commissions, and fees ⁽¹⁾

1,621

1,513

4,600

4,879
Interchange fees⁽¹⁾

1,979

2,108

5,300

12,765
Fiduciary and asset management fees ⁽¹⁾:

Trust asset management fees

2,729

2,661

8,026

5,977
Registered advisor management fees

2,224

2,219

6,402

7,919
Brokerage management fees

1,092

1,202

3,115

2,938
Mortgage banking income

8,897

3,374

16,744

7,614
Gains on securities transactions

18

7,104

12,293

7,306
Bank owned life insurance income

3,421

2,062

7,498

6,191
Loan-related interest rate swap fees

3,170

5,480

12,602

10,656
Other operating income ⁽²⁾⁽³⁾

3,215

12,708

4,116

15,045
Total noninterest income ⁽⁴⁾

$
34,407

$
48,106

$
99,245

$
103,621
(1)   Income within scope of Topic 606.
(2)   Includes income within the scope of Topic 606 of $1.2 million and $343,000 ~~and $~~~~946,000~~ for the three months ended September 30, ~~2019~~2020 and ~~2018~~,2019, respectively, and $~~2.2~~2.4 million and $~~2.5~~2.2 million for the nine months ended September 30, ~~2019~~2020 and ~~2018~~,2019, respectively. The remaining balance is outside the scope of Topic 606.
(3) For the three and nine months ended September 30, 2019, the remaining balance outside the scope of Topic 606 ~~and~~ includes $9.3 million from life insurance proceeds received during ~~the three months ended September 30, 2019~~that period related to a Xenith acquired loan that had been charged off prior to the Company’s acquisition of Xenith.
~~(3)~~   (4)   Noninterest income for the discontinued mortgage segment is reported in Note 14 "Segment Reporting & Discontinued Operations."

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

The following table presents EPS from continuing operations, discontinued operations and total net income available to common shareholders for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 (dollars in thousands except per share data):

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2019

2018

2019

2018

2020

2019

2020

2019
Net Income:

Income from continuing operations

$
53,196

$
38,762

$
137,820

$
105,136

$
61,000

$
53,196

$
98,798

$
137,820
Income (loss) from discontinued operations

42

(565)

(128)

(2,973)

0

42

0

(128)
Net Income

61,000

53,238

98,798

137,692
Preferred Stock Dividends

2,691

—

2,691

—
Net income available to common shareholders

$
53,238

$
38,197

$
137,692

$
102,163

$
58,309

$
53,238

$
96,107

$
137,692

Weighted average shares outstanding, basic

81,769

65,975

80,121

65,818

78,714

81,769

78,905

80,121
Dilutive effect of stock awards and warrants

64

38

63

55

11

64

16

63
Weighted average shares outstanding, diluted

81,833

66,013

80,184

65,873

78,725

81,833

78,921

80,184

Basic EPS:









EPS from continuing operations

$
0.65

$
0.59

$
1.72

$
1.60

$
0.74

$
0.65

$
1.22

$
1.72
EPS from discontinued operations

—

(0.01)

—

(0.05)

0

0

0

0
EPS available to common shareholders

$
0.65

$
0.58

$
1.72

$
1.55

$
0.74

$
0.65

$
1.22

$
1.72

Diluted EPS:









EPS from continuing operations

$
0.65

$
0.59

$
1.72

$
1.60

$
0.74

$
0.65

$
1.22

$
1.72
EPS from discontinued operations

—

(0.01)

—

(0.05)

0

0

0

0
EPS available to common shareholders

$
0.65

$
0.58

$
1.72

$
1.55

$
0.74

$
0.65

$
1.22

$
1.72

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14. SEGMENT REPORTING & DISCONTINUED OPERATIONS
On May 23, 2018, the Bank announced that it had entered into an agreement with a ~~third party~~third-party mortgage company TFSB to allow TFSB to offer residential mortgages from certain Bank locations on the terms and conditions set forth in the agreement. Concurrently with ~~this~~that arrangement, the Bank began the process of winding down the operations of UMG, the Company’s reportable mortgage segment. Effective at the close of business June 1, 2018, UMG was no longer originating mortgages in its name. The decision to wind down the operations of UMG was based on a number of strategic priorities and other factors, including the additional investment in the business required to achieve the necessary scale to be competitive. As a result of this decision, the community bank segment is the only remaining reportable segment and does not require separate reporting disclosures.
On May 30, 2019, the Bank notified TFSB that the Bank was terminating its primary agreement with TFSB and ~~would~~will no longer allow TFSB to offer residential mortgages from Bank locations. UMG operations remain discontinued, although the Company continues to offer residential mortgages through a division of the Bank.

As of and for the three and nine months ended September 30, 2020, the assets and liabilities, as well as the operating results, of the discontinued mortgage segment were not considered material. As of December 31, 2019, the Company’s Consolidated Balance Sheets included assets and liabilities from discontinued operations of ~~$863,000~~$668,000 and ~~$763,000, respectively. As of December 31, 2018, the Company’s Consolidated Balance Sheets included assets and liabilities from discontinued operations of $1.5 million and $1.7 million,~~$640,000, respectively. Management believes there are no material on-going obligations with respect to UMG’s business that have not been recorded in the Company’s consolidated financial statements.
The following table presents summarized operating results of the discontinued mortgage segment for the three and nine months ended September 30, 2019 ~~and 2018, respectively~~ (dollars in thousands):

Three Months Ended

Nine Months Ended


September 30,

September 30,
Three Months Ended

Nine Months Ended

2019

2018

2019

2018
September 30, 2019

September 30, 2019
Net interest income

$
—

$
207

$
—

$
850
$
0

$
0
Provision for credit losses

—

83

—

(181)

0

0
Net interest income after provision for credit losses

—

124

—

1,031

0

0
Noninterest income

—

181

1

3,891

0

1
Noninterest expenses

(56)

1,066

174

8,690

(56)

174
Income before income taxes

56

(761)

(173)

(3,768)

56

(173)
Income tax expense (benefit)

14

(196)

(45)

(795)

14

(45)
Net income (loss) on discontinued operations

$
42

$
(565)

$
(128)

$
(2,973)
$
42

$
(128)

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15. SUBSEQUENT EVENTS

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

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

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Report of Independent Registered ~~Public~~Public Accounting Firm
To the Stockholders and the Board of Directors of Atlantic Union Bankshares Corporation

Results of Review of Interim Financial Statements

We have reviewed the accompanying consolidated balance sheet of Atlantic Union Bankshares Corporation (the Company) as of September 30, ~~2019,~~2020, the related consolidated statements of income and comprehensive income for the three and nine-month periods ended September 30, ~~2019~~2020 and ~~2018,~~2019, the consolidated statements of changes in stockholders’ equity and cash flows for the nine-month periods ended September 30, ~~2019~~2020 and ~~2018,~~2019, and the related notes (collectively referred to as the “consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, ~~2018,~~2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated February ~~27, 2019,~~25, 2020, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, ~~2018,~~2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Adoption of ASC 326

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

Basis for Review Results

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

/s/ Ernst & Young LLP

Richmond, Virginia
November ~~5, 2019~~3, 2020

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of the Company. This discussion and analysis should be read with the Company’s consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company’s ~~2018~~2019 Form 10-K, including ~~management’s discussion~~the “Management’s Discussion and ~~analysis.~~Analysis of Financial Condition and Results of Operations” section therein. Highlighted in the discussion are material changes from prior reporting periods and ~~any~~ identifiable trends materially affecting the Company. Results of operations for the interim periods are not necessarily indicative of results that may be expected for the full year or for any other period. Amounts are rounded for presentation purposes; however, some of the percentages presented are computed based on unrounded amounts.
FORWARD-LOOKING STATEMENTS
Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include, without limitation, projections, predictions, expectations, or beliefs about future events or results that are not statements of historical fact. Such forward-looking statements are based on various assumptions as of the time they are made, and are inherently subject to known and unknown risks, uncertainties, and other factors, some of which cannot be predicted or quantified, that may cause actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Forward-looking statements are often accompanied by words that convey projected future events or outcomes such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate,” “intend,” “will,” “may,” “view,” “opportunity,” “potential,” or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of, or trends affecting, the Company will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to:
● changes in interest rates;
● general economic and financial market conditions, in the United States generally and particularly in the markets in which the Company operates and which its loans are concentrated, including the effects of declines in real estate values, an increase in unemployment levels and slowdowns in economic ~~growth;~~growth, including as a result of the COVID-19 pandemic;
● the quality or composition of the loan or investment portfolios and changes therein;
● demand for loan products and financial services in the Company’s market area;
● the Company’s ability to manage its growth or implement its growth strategy;
● the effectiveness of expense reduction plans;
● the introduction of new lines of business or new products and services;
● the possibility that any of the anticipated benefits of the acquisition of Access will not be realized or will not be realized within the expected time period, the expected revenue synergies and cost savings from the acquisition may not be fully realized or realized within the expected time frame, revenues following the acquisition may be lower than expected, or customer and employee relationships and business operations may be disrupted by the acquisition;
● the Company’s ability to recruit and retain key employees;
● the incremental cost and/or decreased revenues associated with exceeding $10 billion in assets;
● real estate values in the Bank’s lending area;
● an insufficient ~~ALL;~~ACL;
● changes in accounting principles relating to the CECL methodology;
● the ~~quality or composition of the loan or investment portfolios;~~Company’s liquidity and capital positions;
● concentrations of loans secured by real estate, particularly commercial real estate;
● the effectiveness of the Company’s credit processes and management of the Company’s credit risk;
● ~~demand for loan products and financial services in the Company’s market area;~~
● the Company’s ability to compete in the market for financial ~~services;~~services and increased competition from fintech companies;
● technological risks and developments, and cyber threats, attacks, or events;
● the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as the COVID-19 pandemic), and of governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on supply chains and methods used to distribute products and

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services, on incidents of cyberattack and fraud, on the Company’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth;

●

the effect of steps the Company takes in response to the COVID-19 pandemic, the severity and duration of the pandemic, including whether there is a resurgence of COVID-19 infections, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein;

●

performance by the Company’s counterparties or vendors;

●

deposit flows;

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●

the availability of financing and the terms thereof;

●

the level of prepayments on loans and mortgage-backed securities;

●

legislative or regulatory changes and requirements, including the impact of the CARES Act and other legislative and regulatory reactions to the COVID-19 pandemic;

●

potential claims, damages, and fines related to litigation or government actions, including litigation or actions arising from the Company’s participation in and administration of programs related to the COVID-19 pandemic, including, among other things, the CARES Act;

●

legislative or regulatory changes and requirements;

●

the effects of changes in federal, state or local tax laws and regulations;

●

monetary and fiscal policies of the U.S. government including policies of the U.S. Department of the Treasury and the Federal Reserve;

●

changes to applicable accounting principles and guidelines; and

●

other factors, many of which are beyond the control of the Company.

Please refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the Company’s ~~Annual Report on~~2019 Form 10-K ~~for the year ended December 31, 2018~~ and comparable sections of this Quarterly Report and related disclosures in other filings, including the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2019 and related disclosures in other filings,~~ 2020,

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

CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company are in accordance with U.S. GAAP and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them, as needed. Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors of the Company.
The critical accounting and reporting policies include the Company’s accounting for the ~~ALL,~~ACL, acquired loans, business combinations and divestitures, and goodwill and intangible assets. The Company’s accounting policies are fundamental to understanding the Company’s consolidated financial position and consolidated results of operations. Accordingly, the Company’s significant accounting policies are discussed in detail in Note 1 “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” contained in Item 8 "Financial Statements and Supplementary Data" of the Company’s ~~2018~~2019 Form 10-K.
The Company provides additional information on its critical accounting policies and estimates listed above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in its ~~2018~~2019 Form ~~10-K.~~10-K and in Note 1 “Accounting Policies” within Part I of Item I of this Quarterly Report.

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RECENT ACCOUNTING PRONOUNCEMENTS (ISSUED BUT NOT ADOPTED)

In ~~June 2016,~~August 2020, the FASB issued ASU No. ~~2016-13,~~ 2020-06, “~~Financial~~Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40: Accounting for Convertible Instruments ~~- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.~~and Contracts in an Entity’s Own Equity.” ” This ~~ASU contains significant differences from existing GAAP~~guidance was issued to improve financial reporting associated with accounting for convertible instruments and iscontracts in an entity’s own equity. The amendments are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those years. The Company is still evaluating the impacts from this standard.

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This guidance was issued to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company ~~on January 1, 2020. This ASU updates~~evaluated the ~~existing guidance to provide~~impacts from this standard and does not expect a material financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. This ASU replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The CECL model will replace the Company’s current accounting for PCI and impaired loans. This ASU also amends the AFS debt securities OTTI model. The lifetime expected credit losses will be determined using macroeconomic forecast

~~-57-~~

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assumptions and management judgements applicable to and through the expected lives of the portfolios. While the implementation of the standard changes the measurement of the allowance for credit losses, it does not change the credit risk of the Company’s lending portfolios or the losses of these portfolios.

The Company has established a cross-functional governance structure for the implementation of CECL. Upon adoption of the standard, assuming the economic outlook and portfolio characteristic are consistent with recent periods, the Company estimates that the allowance for credit losses will increase to approximately ~~$90 million to $100~~ million. A majority of the estimated increase is driven by the acquired loan portfolio and the consumer loan portfolio. The ultimate impact on the Company’s allowance for credit losses will depend on the characteristics of the Company’s portfolios as well as the macroeconomic conditions and forecasts upon adoption, the ultimate validation of the models and methodologies, and other management judgments.impact.

ABOUT ATLANTIC UNION BANKSHARES CORPORATION
Headquartered in Richmond, Virginia, Atlantic Union Bankshares Corporation (Nasdaq: AUB) is the holding company for Atlantic Union Bank. Atlantic Union Bank has ~~149~~135 branches and approximately ~~170~~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., ~~and~~which provide investment advisory services; Middleburg Investment Services, LLC, which ~~provide investment advisory and/or~~provides brokerage services; and Union Insurance Group, LLC, which offers various lines of insurance products.
Shares of the Company’s common stock are traded on the Nasdaq Global Select Market under the symbol "AUB". Additional information is available on the Company’s website at https://investors.atlanticunionbank.com. The information contained on the Company’s website is not a part of or incorporated into this ~~report.~~Quarterly Report.

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RESULTS OF OPERATIONS

Executive Overview

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

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

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

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

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

Third Quarter Net Income and Performance Metrics

●

Net income available to common shareholders was ~~$53.2~~$58.3 million and EPS was ~~$0.65~~$0.74 for the third quarter of ~~2019~~2020 compared to net income of ~~$38.2~~$53.2 million and EPS of ~~$0.58~~$0.65 for the third quarter of ~~2018.~~2019.

●

~~Net~~Pre-tax pre-provision operating earnings⁽¹⁾, which ~~excluded $1.9 million in after-tax~~exclude provision for credit losses, merger and ~~$895,000 in after-tax~~ rebranding-related costs, and income tax expense, were ~~$56.1~~$78.6 million ~~and operating EPS~~⁽¹⁾~~was $0.69~~ for the third quarter of ~~2019~~2020 compared to ~~$39.3~~$76.6 million ~~or $0.60,~~ for the third quarter of ~~2018.~~

●

~~ROA was 1.23% for the third quarter of 2019 compared to 1.17% for the third quarter of 2018; operating ROA~~⁽¹⁾~~was 1.29% for the third quarter of 2019 compared to 1.21% for the third quarter of 2018.~~

●

~~ROE was 8.35% for the third quarter of 2019 compared to 8.06% for the third quarter of 2018; operating ROE~~⁽¹⁾~~was 8.80% for the third quarter of 2019 compared to 8.30% for the third quarter of 2018.~~

●

~~Operating ROTCE~~⁽¹⁾~~was 15.64% for the third quarter of 2019 compared to 15.13% for the third quarter of 2018.~~2019.

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Nine Month Net Income and Performance Metrics

●

Net income available to common shareholders was $96.1 million and EPS was $1.22 for the nine months ended September 30, 2020 compared to net income of $137.7 million and EPS ~~was~~of $1.72 for the nine months ended September 30, ~~2019 compared to net income of $102.2~~2019.

●

Pre-tax pre-provision operating earnings⁽¹⁾ were $217.3 million ~~and EPS of $1.55~~ for the nine months ended September 30, ~~2018.~~

●

~~Net operating earnings~~⁽¹⁾~~, which excluded $21.6~~2020 compared to $214.7 million ~~in after-tax merger and $4.4 million in after-tax rebranding-related costs, were $163.7 million and operating EPS~~⁽¹⁾~~was $2.04~~ for the nine months ended September 30, ~~2019 compared to $132.1 million, or $2.01, for the nine months ended September 30, 2018.~~

●

~~ROA was 1.11% for the nine months ended September 30, 2019 compared to 1.05% for the nine months ended September 30, 2018; operating ROA~~⁽¹⁾~~was 1.32% for the nine months ended September 30, 2019 compared to 1.35% for the nine months ended September 30, 2018.~~

●

~~ROE was 7.58% for the nine months ended September 30, 2019 compared to 7.38% for the nine months ended September 30, 2018; operating ROE~~⁽¹⁾~~was 9.01% for the nine months ended September 30, 2019 compared to 9.54% for the nine months ended September 30, 2018.~~

●

~~Operating ROTCE~~⁽¹⁾~~was 16.18% for the nine months ended September 30, 2019 compared to 17.41% for the nine months ended September 30, 2018.~~2019.

Balance Sheet

●

Loans held for investment (net of deferred fees and costs) were ~~$12.3~~$14.4 billion at September 30, ~~2019,~~2020, an increase of ~~$2.6~~$1.8 billion, or ~~26.7%~~18.8% (annualized), from December 31, ~~2018.~~2019. Excluding the impact of the PPP⁽¹⁾, loans held for investment grew $171.7 million, or 1.8% (annualized).

●

Total deposits were ~~$13.0~~$15.6 billion at September 30, ~~2019,~~2020, an increase of ~~$3.1~~$2.3 billion, or ~~30.8%~~22.8% (annualized), from December 31, ~~2018.~~2019.

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

~~-59-~~-64-

Table of Contents

Recent Developments

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

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

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

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

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

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

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

-65-

Table of Contents

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

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

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

Net Interest Income

For the Three Months Ended

For the Three Months Ended

September 30,

September 30,


2019

2018

Change



2020

2019

Change


(Dollars in thousands)

(Dollars in thousands)

Average interest-earning assets

$
15,191,792

$
11,383,320

$
3,808,472



$
17,748,152

$
15,191,792

$
2,556,360


Interest and dividend income

$
178,345

$
131,363

$
46,982



$
157,414

$
178,345

$
(20,931)


Interest and dividend income (FTE) ⁽¹⁾

$
181,149

$
133,377

$
47,772



$
160,315

$
181,149

$
(20,834)


Yield on interest-earning assets

4.66
%

4.58
%

8

bps

3.53
%

4.66
%

(113)

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

4.73
%

4.65
%

8

bps

3.59
%

4.73
%

(114)

bps
Average interest-bearing liabilities

$
11,427,305

$
8,790,803

$
2,636,502



$
12,444,083

$
11,427,305

$
1,016,778


Interest expense

$
41,744

$
25,400

$
16,344



$
20,033

$
41,744

$
(21,711)


Cost of interest-bearing liabilities

1.45
%

1.15
%

30

bps

0.64
%

1.45
%

(81)

bps
Cost of funds

1.09
%

0.89
%

20

bps

0.45
%

1.09
%

(64)

bps
Net interest income

$
136,601

$
105,963

$
30,638



$
137,381

$
136,601

$
780


Net interest income (FTE) ⁽¹⁾

$
139,405

$
107,977

$
31,428



$
140,282

$
139,405

$
877


Net interest margin

3.57
%

3.69
%

(12)

bps

3.08
%

3.57
%

(49)

bps
Net interest margin (FTE) ⁽¹⁾

3.64
%

3.76
%

(12)

bps

3.14
%

3.64
%

(50)

bps
(1) Refer to the “Non-GAAP Financial Measures” section within this Item 2 for more information about these measures, including a reconciliation of these measures to the most directly comparable financial measures calculated in accordance with GAAP.
For the third quarter of ~~2019,~~2020, net interest income was ~~$136.6~~$137.4 million, an increase of ~~$30.6 million~~$780,000 from the third quarter of ~~2018.~~2019. For the third quarter of ~~2019,~~2020, net interest income (FTE) was ~~$139.4~~$140.3 million, an increase of ~~$31.4 million~~$877,000 from the third quarter of ~~2018.~~2019. The increases in both net interest income and net interest income (FTE) were primarily ~~the result of a $3.8 billion increase in~~driven by higher average ~~interest-earning assets and a $2.6 billion increase in average interest-bearing liabilities from the impact of the Access acquisition during the first quarter of 2019.~~ loan balances partially offset by lower purchased loan discount accretion. Net accretion related to acquisition accounting ~~increased $1.2~~decreased $1.4 million from the third quarter of ~~2018~~2019 to ~~$5.1~~$3.7 million in the third quarter of ~~2019.~~2020. In the third quarter of ~~2019,~~2020, net interest margin decreased 1249 basis points to ~~3.57%~~3.08% from ~~3.69%~~3.57% in the third quarter of ~~2018,~~2019, and net interest margin (FTE) decreased 1250 basis points compared to the third quarter of ~~2018.~~2019. The net decline in net interest margin and net interest margin (FTE) measures were primarily driven by a decrease in the yield on interest-earning assets, partially offset by a decrease in the Bank’s cost of funds. The decline in the Company’s earning asset yields was driven by lower loan accretion income, an increase in the earning asset mix of lower yielding investment securities and the impact of the lower interest rate environment. The cost of funds ~~partially offset~~decline was driven by lower deposit costs and wholesale borrowing costs driven by lower market interest rates and a ~~smaller increase in interest-earning asset yields.~~

favorable funding mix.

~~-60-~~-66-

Table of Contents


	For the Nine Months Ended									For the Nine Months Ended
	September 30,									September 30,
	2019			2018			Change			2020			2019			Change

	(Dollars in thousands)									(Dollars in thousands)
Average interest-earning assets	$	14,700,019		$	11,506,200		$	3,193,819		$	16,809,423		$	14,700,019		$	2,109,404
Interest and dividend income	$	525,122		$	388,151		$	136,971		$	491,607		$	525,122		$	(33,515)
Interest and dividend income (FTE) ⁽¹⁾	$	533,590		$	394,011		$	139,579		$	500,069		$	533,590		$	(33,521)
Yield on interest-earning assets		4.78	%		4.51	%		27	bps		3.91	%		4.78	%		(87)	bps
Yield on interest-earning assets (FTE) ⁽¹⁾		4.85	%		4.58	%		27	bps		3.97	%		4.85	%		(88)	bps
Average interest-bearing liabilities	$	11,161,458		$	9,019,738		$	2,141,720		$	12,200,209		$	11,161,458		$	1,038,751
Interest expense	$	122,379		$	70,549		$	51,830		$	81,913		$	122,379		$	(40,466)
Cost of interest-bearing liabilities		1.47	%		1.05	%		42	bps		0.90	%		1.47	%		(57)	bps
Cost of funds		1.11	%		0.82	%		29	bps		0.65	%		1.11	%		(46)	bps
Net interest income	$	402,743		$	317,602		$	85,141		$	409,694		$	402,743		$	6,951
Net interest income (FTE) ⁽¹⁾	$	411,211		$	323,462		$	87,749		$	418,156		$	411,211		$	6,945
Net interest margin		3.66	%		3.69	%		(3)	bps		3.26	%		3.66	%		(40)	bps
Net interest margin (FTE) ⁽¹⁾		3.74	%		3.76	%		(2)	bps		3.32	%		3.74	%		(42)	bps

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

For the first nine months of ~~2019,~~2020, net interest income was ~~$402.7~~$409.7 million, an increase of ~~$85.1~~$7.0 million from the same period of ~~2018.~~2019. For the first nine months of ~~2019,~~2020, net interest income (FTE) was ~~$411.2~~$418.2 million, an increase of ~~$87.7~~$6.9 million from the same period of ~~2018.~~2019. The increases in both net interest income and net interest income (FTE) were primarily ~~the result of a $3.2 billion increase in~~driven by higher average ~~interest-earning assets~~loan balances and ~~a $2.1 billion increase in average interest-bearing liabilities from the impact of the Access acquisition.~~higher purchased loan discount accretion. Net accretion related to acquisition accounting increased ~~$3.3 million~~$769,000 from the first nine months of ~~2018~~2019 to ~~$18.7~~$19.5 million ~~for~~in the first nine months of ~~2019.~~2020. In the first nine months of ~~2019,~~2020, net interest margin decreased 340 basis points to ~~3.66%~~3.26% from ~~3.69%~~3.66% in the first nine months of ~~2018,~~2019, and net interest margin (FTE) decreased 242 basis points compared to the first nine months of ~~2018.~~2019. The net ~~decreases~~decline in net interest margin and net interest margin (FTE) measures were primarily driven by ~~increase~~a decrease in the ~~cost of funds,~~yield on interest-earning assets, partially offset by a ~~smaller~~decrease in cost of funds. The decline in the Company’s earning asset yields was driven by an increase in ~~interest-earning~~the earning asset ~~yields.~~mix of lower yielding investment securities and the impact of the lower interest rate environment. The cost of funds decline was driven by lower deposit costs and wholesale borrowing costs driven by lower market interest rates and a favorable funding mix.

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

~~-61-~~-67-

Table of Contents

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

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


	For the Three Months Ended September 30,												For the Three Months Ended September 30,
	2019						2018						2020						2019
			Interest						Interest						Interest						Interest
	Average		Income /		Yield /		Average		Income /		Yield /		Average		Income /		Yield /		Average		Income /		Yield /
	Balance		Expense ⁽¹⁾		Rate ⁽¹⁾⁽²⁾		Balance		Expense⁽¹⁾		Rate ⁽¹⁾⁽²⁾		Balance		Expense ⁽¹⁾		Rate ⁽¹⁾⁽²⁾		Balance		Expense⁽¹⁾		Rate ⁽¹⁾⁽²⁾

	(Dollars in thousands)												(Dollars in thousands)
Assets:
Securities:
Taxable	$	1,670,270	$	12,625	3.00	%	$	1,333,960	$	10,145	3.02	%	$	1,738,033	$	10,275	2.35	%	$	1,670,270	$	12,625	3.00	%
Tax-exempt		990,000		10,181	4.08	%		632,050		6,214	3.90	%		1,153,177		10,886	3.76	%		990,000		10,181	4.08	%
Total securities		2,660,270		22,806	3.40	%		1,966,010		16,359	3.30	%		2,891,210		21,161	2.91	%		2,660,270		22,806	3.40	%
Loans, net ^{(3) (4)}		12,240,254		156,471	5.07	%		9,297,213		116,266	4.96	%		14,358,666		138,635	3.84	%		12,240,254		156,471	5.07	%
Other earning assets		291,268		1,872	2.55	%		120,097		752	2.49	%		498,276		519	0.41	%		291,268		1,872	2.55	%
Total earning assets		15,191,792	$	181,149	4.73	%		11,383,320	$	133,377	4.65	%		17,748,152	$	160,315	3.59	%		15,191,792	$	181,149	4.73	%
Allowance for loan losses		(46,229)						(41,799)
Allowance for credit losses														(174,171)						(46,229)
Total non-earning assets		2,057,765						1,605,831						2,211,186						2,057,765
Total assets	$	17,203,328					$	12,947,352					$	19,785,167					$	17,203,328
Liabilities and Stockholders' Equity:						��
Interest-bearing deposits:
Transaction and money market accounts	$	6,290,112	$	16,389	1.03	%	$	4,915,070	$	8,789	0.71	%	$	7,834,317	$	4,684	0.24	%	$	6,290,112	$	16,389	1.03	%
Regular savings		743,938		266	0.14	%		640,954		209	0.13	%		845,936		128	0.06	%		743,938		266	0.14	%
Time deposits ⁽⁵⁾		2,769,574		14,194	2.03	%		2,079,686		6,930	1.32	%		2,579,991		10,756	1.66	%		2,769,574		14,194	2.03	%
Total interest-bearing deposits		9,803,624		30,849	1.25	%		7,635,710		15,928	0.83	%		11,260,244		15,568	0.55	%		9,803,624		30,849	1.25	%
Other borrowings ⁽⁶⁾		1,623,681		10,895	2.66	%		1,155,093		9,472	3.25	%		1,183,839		4,465	1.50	%		1,623,681		10,895	2.66	%
Total interest-bearing liabilities		11,427,305	$	41,744	1.45	%		8,790,803	$	25,400	1.15	%		12,444,083	$	20,033	0.64	%		11,427,305	$	41,744	1.45	%
Noninterest-bearing liabilities:
Demand deposits		3,008,587						2,167,765						4,320,225						3,008,587
Other liabilities		239,001						108,202						372,082						239,001
Total liabilities		14,674,893						11,066,770						17,136,390						14,674,893
Stockholders' equity		2,528,435						1,880,582						2,648,777						2,528,435
Total liabilities and stockholders' equity	$	17,203,328					$	12,947,352					$	19,785,167					$	17,203,328
Net interest income			$	139,405					$	107,977					$	140,282					$	139,405
Interest rate spread					3.28	%					3.50	%					2.95	%					3.28	%
Cost of funds					1.09	%					0.89	%					0.45	%					1.09	%
Net interest margin					3.64	%					3.76	%					3.14	%					3.64	%

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

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

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

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

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

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

-68-

Table of Contents

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

For the Nine Months Ended September 30,

2020

2019




Interest





Interest


Average

Income /

Yield /

Average

Income /

Yield /

Balance

Expense ⁽¹⁾

Rate ⁽¹⁾⁽²⁾

Balance

Expense⁽¹⁾

Rate ⁽¹⁾⁽²⁾

(Dollars in thousands)

Assets:













Securities:













Taxable

$
1,676,528

$
33,170

2.64
%
$
1,680,570

$
39,059

3.11
%
Tax-exempt

1,044,633

31,038

3.97
%

1,000,893

30,916

4.13
%
Total securities

2,721,161

64,208

3.15
%

2,681,463

69,975

3.49
%
Loans, net ^{(3) (4)}

13,639,401

433,286

4.24
%

11,821,612

459,905

5.20
%
Other earning assets

448,861

2,575

0.77
%

196,944

3,710

2.52
%
Total earning assets

16,809,423

$
500,069

3.97
%

14,700,019

$
533,590

4.85
%
Allowance for loan losses

(138,524)



(43,480)





Total non-earning assets

2,166,681



1,982,502





Total assets

$
18,837,580



$
16,639,041





Liabilities and Stockholders' Equity:













Interest-bearing deposits:













Transaction and money market accounts

$
7,415,491

$
26,508

0.48
%
$
6,102,783

$
46,895

1.03
%
Regular savings

792,994

409

0.07
%

751,341

1,083

0.19
%
Time deposits ⁽⁵⁾

2,667,267

37,026

1.85
%

2,554,058

36,110

1.89
%
Total interest-bearing deposits

10,875,752

63,943

0.79
%

9,408,182

84,088

1.19
%
Other borrowings ⁽⁶⁾

1,324,457

17,970

1.81
%

1,753,276

38,291

2.92
%
Total interest-bearing liabilities

12,200,209

$
81,913

0.90
%

11,161,458

$
122,379

1.47
%
Noninterest-bearing liabilities:













Demand deposits

3,756,957



2,842,017





Other liabilities

338,558



205,654





Total liabilities

16,295,724



14,209,129





Stockholders' equity

2,541,856



2,429,912





Total liabilities and stockholders' equity

$
18,837,580



$
16,639,041





Net interest income

$
418,156





$
411,211



Interest rate spread

3.07
%





3.38
%
Cost of funds

0.65
%





1.11
%
Net interest margin

3.32
%





3.74
%
(1) Income and yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 21%.
(2) Rates and yields are annualized and calculated from actual, not rounded amounts in thousands, which appear above.
(3) Nonaccrual loans are included in average loans outstanding.
(4) Interest income on loans includes ~~$5.0~~$19.8 million and ~~$3.5~~$18.2 million for the ~~three~~nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, in accretion of the fair market value adjustments related to acquisitions.
(5) Interest expense on time deposits includes ~~$179,000~~$110,000 and ~~$592,000 for~~$684,000 the ~~three~~nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, in accretion of the fair market value adjustments related to acquisitions.
(6) Interest expense on borrowings includes ~~$97,000~~$445,000 and ~~$143,000~~$237,000 for the ~~three~~nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, in amortization of the fair market value adjustments related to acquisitions.

~~-62-~~-69-

Table of Contents

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

For the Nine Months Ended September 30,

2019

2018




Interest





Interest


Average

Income /

Yield /

Average

Income /

Yield /

Balance

Expense ⁽¹⁾

Rate ⁽¹⁾⁽²⁾

Balance

Expense⁽¹⁾

Rate ⁽¹⁾⁽²⁾

(Dollars in thousands)

Assets:













Securities:













Taxable

$
1,680,570

$
39,059

3.11
%
$
1,145,250

$
25,229

2.95
%
Tax-exempt

1,000,893

30,916

4.13
%

575,728

16,580

3.85
%
Total securities

2,681,463

69,975

3.49
%

1,720,978

41,809

3.25
%
Loans, net ^{(3) (4)}

11,821,612

459,905

5.20
%

9,594,094

349,439

4.87
%
Other earning assets

196,944

3,710

2.52
%

191,128

2,763

1.93
%
Total earning assets

14,700,019

$
533,590

4.85
%

11,506,200

$
394,011

4.58
%
Allowance for loan losses

(43,480)



(41,104)





Total non-earning assets

1,982,502



1,596,357





Total assets

$
16,639,041



$
13,061,453





Liabilities and Stockholders' Equity:













Interest-bearing deposits:













Transaction and money market accounts

$
6,102,783

$
46,895

1.03
%
$
4,837,648

$
21,135

0.58
%
Regular savings

751,341

1,083

0.19
%

645,084

636

0.13
%
Time deposits ⁽⁵⁾

2,554,058

36,110

1.89
%

2,076,321

18,416

1.19
%
Total interest-bearing deposits

9,408,182

84,088

1.19
%

7,559,053

40,187

0.71
%
Other borrowings ⁽⁶⁾

1,753,276

38,291

2.92
%

1,460,685

30,362

2.78
%
Total interest-bearing liabilities

11,161,458

$
122,379

1.47
%

9,019,738

$
70,549

1.05
%
Noninterest-bearing liabilities:













Demand deposits

2,842,017



2,079,645





Other liabilities

205,654



110,998





Total liabilities

14,209,129



11,210,381





Stockholders' equity

2,429,912



1,851,072





Total liabilities and stockholders' equity

$
16,639,041



$
13,061,453





Net interest income

$
411,211





$
323,462



Interest rate spread

3.38
%





3.53
%
Cost of funds

1.11
%





0.82
%
Net interest margin

3.74
%





3.76
%

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

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

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

~~(4)~~ Interest income on loans includes $18.2 million and $13.7 million for the nine months ended September 30, 2019 and 2018, respectively, in accretion of the fair market value adjustments related to acquisitions.

~~(5)~~ Interest expense on time deposits includes $684,000 and $2.1 million for the nine months ended September 30, 2019 and 2018, respectively, in accretion of the fair market value adjustments related to acquisitions.

~~(6)~~ Interest expense on borrowings includes $237,000 and $345,000 for the nine months ended September 30, 2019 and 2018, respectively, in amortization of the fair market value adjustments related to acquisitions.

~~-63-~~

~~Table of Contents~~

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


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30, 2019 vs. September 30, 2018						September 30, 2019 vs. September 30, 2018						September 30, 2020 vs. September 30, 2019						September 30, 2020 vs. September 30, 2019
	Increase (Decrease) Due to Change in:						Increase (Decrease) Due to Change in:						Increase (Decrease) Due to Change in:						Increase (Decrease) Due to Change in:
	Volume		Rate		Total		Volume		Rate		Total		Volume		Rate		Total		Volume		Rate		Total
Earning Assets:
Securities:
Taxable	$	2,542	$	(62)	$	2,480	$	12,373	$	1,457	$	13,830	$	494	$	(2,844)	$	(2,350)	$	(94)	$	(5,795)	$	(5,889)
Tax-exempt		3,669		298		3,967		13,053		1,283		14,336		1,587		(882)		705		1,324		(1,202)		122
Total securities		6,211		236		6,447		25,426		2,740		28,166		2,081		(3,726)		(1,645)		1,230		(6,997)		(5,767)
Loans, net ⁽¹⁾		37,568		2,637		40,205		85,405		25,061		110,466		24,335		(42,171)		(17,836)		64,803		(91,422)		(26,619)
Other earning assets		1,100		20		1,120		87		860		947		819		(2,172)		(1,353)		2,608		(3,743)		(1,135)
Total earning assets	$	44,879	$	2,893	$	47,772	$	110,918	$	28,661	$	139,579	$	27,235	$	(48,069)	$	(20,834)	$	68,641	$	(102,162)	$	(33,521)
Interest-Bearing Liabilities:
Interest-bearing deposits:
Transaction and money market accounts	$	2,886	$	4,714	$	7,600	$	6,602	$	19,158	$	25,760	$	3,274	$	(14,979)	$	(11,705)	$	8,540	$	(28,927)	$	(20,387)
Regular savings		35		22		57		118		329		447		32		(170)		(138)		56		(730)		(674)
Time Deposits ⁽²⁾		2,771		4,493		7,264		4,940		12,754		17,694		(923)		(2,515)		(3,438)		1,580		(664)		916
Total interest-bearing deposits		5,692		9,229		14,921		11,660		32,241		43,901		2,383		(17,664)		(15,281)		10,176		(30,321)		(20,145)
Other borrowings ⁽³⁾		3,361		(1,938)		1,423		6,328		1,601		7,929		(2,457)		(3,973)		(6,430)		(7,973)		(12,348)		(20,321)
Total interest-bearing liabilities		9,053		7,291		16,344		17,988		33,842		51,830		(74)		(21,637)		(21,711)		2,203		(42,669)		(40,466)
Change in net interest income	$	35,826	$	(4,398)	$	31,428	$	92,930	$	(5,181)	$	87,749	$	27,309	$	(26,432)	$	877	$	66,438	$	(59,493)	$	6,945

(1) The rate-related change in interest income on loans includes the impact of ~~higher~~lower accretion of the acquisition-related fair market value adjustments of ~~$1.5 million and $4.6~~$1.2 million for the ~~three-~~three month change, and ~~nine-month~~higher accretion of $1.6 million for the nine month change, respectively.

(2) The rate-related change in interest expense on deposits includes the impact of lower accretion of the acquisition-related fair market value adjustments of ~~$413,000~~$153,000 and ~~$1.4 million~~$574,000 for the ~~three- and nine-month~~three-and-nine-month change, respectively.

(3) The rate-related change in interest expense on other borrowings includes the impact of ~~lower~~higher amortization of the acquisition-related fair market value adjustments of ~~$46,000~~$70,000 and ~~$108,000~~$208,000 for the ~~three- and nine-month~~three-and-nine-month change, respectively.

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

Deposit

Borrowings


Loan

Accretion

Accretion

Accretion

(Amortization)

(Amortization)

Total
For the quarter ended March 31, 2019

$
5,557

$
292

$
(70)

$
5,779
For the quarter ended June 30, 2019

7,659

213

(70)

7,802
For the quarter ended September 30, 2019

5,018

179

(97)

5,100
For the remaining three months of 2019 (estimated)

4,596

149

(123)

4,622
For the years ending (estimated):








2020

16,737

132

(633)

16,236
2021

11,914

14

(807)

11,121
2022

9,560

(43)

(829)

8,688
2023

6,777

(32)

(852)

5,893
2024

4,973

(4)

(877)

4,092
Thereafter

18,176

(1)

(10,773)

7,402

Deposit

Borrowings


Loan

Accretion

Accretion

Accretion

(Amortization)

(Amortization)

Total
For the quarter ended March 31, 2019

$
5,557

$
292

$
(70)

$
5,779
For the quarter ended June 30, 2019

7,659

213

(70)

7,802
For the quarter ended September 30, 2019

5,018

179

(97)

5,100
For the quarter ended March 31, 2020

9,528

50

(138)

9,440
For the quarter ended June 30, 2020

6,443

34

(140)

6,337
For the quarter ended September 30, 2020

3,814

26

(167)

3,673

~~-64-~~-70-

Table of Contents

Noninterest Income

For the Three Months Ended

September 30,

Change


2020

2019⁽¹⁾

$

%

(Dollars in thousands)

Noninterest income:

Service charges on deposit accounts

$
6,041

$
7,675

$
(1,634)

(21.3)
%
Other service charges, commissions, and fees

1,621

1,513

108

7.1
%
Interchange fees

1,979

2,108

(129)

(6.1)
%
Fiduciary and asset management fees

6,045

6,082

(37)

(0.6)
%
Mortgage banking income

8,897

3,374

5,523

163.7
%
Gains on securities transactions

18

7,104

(7,086)

(99.7)
%
Bank owned life insurance income

3,421

2,062

1,359

65.9
%
Loan-related interest rate swap fees

3,170

5,480

(2,310)

(42.2)
%
Other operating income

3,215

12,708

(9,493)

(74.7)
%
Total noninterest income

$
34,407

$
48,106

$
(13,699)

(28.5)
%
(1)
~~The following table excludes~~ Amounts exclude discontinued operations. Refer to Note 14 "Segment Reporting & Discontinued Operations" in Item 1 "Financial Statements", of this ~~Form 10-Q~~Quarterly Report for further discussion regarding discontinued operations.
~~Noninterest Income~~

For the Three Months Ended

September 30,

Change


2019

2018

$

%

(Dollars in thousands)

Noninterest income:

Service charges on deposit accounts

$
7,675

$
6,483

$
1,192

18.4
%
Other service charges and fees

1,513

1,625

(112)

(6.9)
%
Interchange fees, net

2,108

4,882

(2,774)

(56.8)
%
Fiduciary and asset management fees

6,082

4,411

1,671

37.9
%
Mortgage banking income, net

3,374

—

3,374

NM

Gains (losses) on securities transactions, net

7,104

97

7,007

7,223.7
%
Bank owned life insurance income

2,062

1,732

330

19.1
%
Loan-related interest rate swap fees, net

5,480

562

4,918

875.1
%
Gain on Shore Premier sale

—

(933)

933

(100.0)
%
Other operating income

12,708

1,028

11,680

1,136.2
%
Total noninterest income

$
48,106

$
19,887

$
28,219

141.9
%
~~NM - Not meaningful~~

Noninterest income ~~increased $28.2~~decreased $13.7 million, or ~~141.9%~~28.5%, to $34.4 million for the quarter ended September 30, 2020 compared to $48.1 million for the quarter ended September 30, ~~2019 compared to~~2019. The decrease in the third quarter ~~ended September 30,~~ ~~2018. The increase in noninterest income~~of 2020 was primarily driven by approximately $9.3 million in life insurance proceeds received during the quarter related to a Xenith-acquired loan that had been charged off prior to the Company’s acquisition of Xenith and a gain on sale of investment securities of approximately $7.1 million recorded during the quarter. Fiduciary and asset management fees increased $1.7 million and mortgage banking income increased $3.4 million primarily related to the acquisition of Access. In addition, loan related interest rate swap income increased $4.9 million from the quarter ended September 30, 2018. Partially offsetting these increases was a decline of $2.8 million in net interchange income primarily due to reduced debit card interchange transaction fees as a result of the Durbin Amendment which was effective for the Company on July 1, 2019.

For the Nine Months Ended

September 30,

Change


2019

2018

$

%

(Dollars in thousands)

Noninterest income:

Service charges on deposit accounts

$
22,331

$
18,566

$
3,765

20.3
%
Other service charges and fees

4,879

4,137

742

17.9
%
Interchange fees, net

12,765

14,163

(1,398)

(9.9)
%
Fiduciary and asset management fees

16,834

11,507

5,327

46.3
%
Mortgage banking income, net

7,614

—

7,614

NM

Gains (losses) on securities transactions, net

7,306

222

7,084

3,191.0
%
Bank owned life insurance income

6,191

5,126

1,065

20.8
%
Loan-related interest rate swap fees, net

10,656

2,178

8,478

389.3
%
Gain on Shore Premier sale

—

19,966

(19,966)

(100.0)
%
Other operating income

15,045

4,887

10,158

207.9
%
Total noninterest income

$
103,621

$
80,752

$
22,869

28.3
%
~~NM - Not meaningful~~

~~-65-~~

~~Table of Contents~~

~~Noninterest income increased $22.9 million, or 28.3%, to $103.6 million for the nine months ended September 30, 2019 from $80.7 million for the nine months ended September 30, 2018,~~ primarily driven by approximately $9.3 million in life insurance proceeds received during the third quarter of 2019 related to a Xenith-acquired loan that had been charged off prior to the Company’s acquisition of ~~Xenith~~Xenith. In addition, there was a decline of $7.1 million in gains on securities transactions, a decline of $2.3 million in loan-related interest rate swap income due to lower transaction volumes, and a ~~gain~~decline in service charges on ~~sale~~deposit accounts of ~~investment securities~~$1.6 million primarily due to lower NSF and overdraft fees. Partially offsetting these decreases was an increase in mortgage banking income of ~~approximately $7.1~~$5.5 million ~~recorded~~primarily due to increased mortgage loan origination volumes due to the current low interest rate environment, and an increase in bank owned life insurance income of $1.4 million primarily related to death benefit proceeds received during the third quarter of 2020.

For the Nine Months Ended

September 30,

Change


2020

2019⁽¹⁾

$

%

(Dollars in thousands)

Noninterest income:

Service charges on deposit accounts

$
18,549

$
22,331

$
(3,782)

(16.9)
%
Other service charges, commissions, and fees

4,600

4,879

(279)

(5.7)
%
Interchange fees

5,300

12,765

(7,465)

(58.5)
%
Fiduciary and asset management fees

17,543

16,834

709

4.2
%
Mortgage banking income

16,744

7,614

9,130

119.9
%
Gains on securities transactions

12,293

7,306

4,987

68.3
%
Bank owned life insurance income

7,498

6,191

1,307

21.1
%
Loan-related interest rate swap fees

12,602

10,656

1,946

18.3
%
Other operating income

4,116

15,045

(10,929)

(72.6)
%
Total noninterest income

$
99,245

$
103,621

$
(4,376)

(4.2)
%
(1) Amounts exclude discontinued operations. Refer to Note 14 "Segment Reporting & Discontinued Operations" in Item 1 "Financial Statements", of this Quarterly Report for further discussion regarding discontinued operations.

Noninterest income decreased $4.4 million, or 4.2%, to $99.2 million for the nine months ended September 30, 2020 compared to $103.6 million for the nine months ended September 30, 2019. ~~Fiduciary and asset management fees increased $5.3~~The decrease was primarily driven by approximately $9.3 million ~~and mortgage banking income increased $7.6~~in life insurance proceeds received during the third quarter of 2019 related to a Xenith-acquired loan that had been charged off prior to the Company’s acquisition of Xenith. In addition, there was a decline in service charges on deposit accounts of $3.8 million primarily ~~related~~due to the acquisition of Access. In addition, loan related interest rate swap income increased $8.5 million. These increases were partially offset by the net gain on the Shore Premier sale of $20.0 million recognized during the first nine months of 2018lower NSF and overdraft fees, and a decline of ~~$1.4~~$7.5 million in ~~net~~ interchange ~~income~~ fees

-71-

Table of Contents

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

~~The following table excludes~~Noninterest Expense

For the Three Months Ended

September 30,

Change


2020

2019⁽¹⁾

$

%

(Dollars in thousands)

Noninterest expense:

Salaries and benefits

$
49,000

$
49,718

$
(718)

(1.4)
%
Occupancy expenses

7,441

7,493

(52)

(0.7)
%
Furniture and equipment expenses

3,895

3,719

176

4.7
%
Printing, postage, and supplies

904

1,268

(364)

(28.7)
%
Technology and data processing

6,564

5,787

777

13.4
%
Professional services

2,914

2,681

233

8.7
%
Marketing and advertising expense

2,631

2,600

31

1.2
%
FDIC assessment premiums and other insurance

1,811

381

1,430

375.3
%
Other taxes

4,124

3,971

153

3.9
%
Loan-related expenses

2,314

2,566

(252)

(9.8)
%
OREO and credit-related expenses

413

1,005

(592)

(58.9)
%
Amortization of intangible assets

4,053

4,764

(711)

(14.9)
%
Training and other personnel costs

746

1,618

(872)

(53.9)
%
Merger-related costs

—

2,435

(2,435)

(100.0)
%
Rebranding expense

—

1,133

(1,133)

(100.0)
%
Loss on debt extinguishment

—

16,397

(16,397)

(100.0)
%
Other expenses

6,412

4,151

2,261

54.5
%
Total noninterest expense

$
93,222

$
111,687

$
(18,465)

(16.5)
%
(1) Amounts exclude discontinued operations. Refer to Note 14 "Segment Reporting & Discontinued Operations" in Item 1 "Financial Statements", of this ~~Form 10-Q~~Quarterly Report for further discussion regarding discontinued operations.
~~Noninterest Expense~~

For the Three Months Ended

September 30,

Change


2019

2018

$

%

(Dollars in thousands)

Noninterest expense:

Salaries and benefits

$
49,718

$
39,279

$
10,439

26.6
%
Occupancy expenses

7,493

6,551

942

14.4
%
Furniture and equipment expenses

3,719

2,983

736

24.7
%
Printing, postage, and supplies

1,268

1,183

85

7.2
%
Communications expense

1,037

872

165

18.9
%
Technology and data processing

5,787

4,841

946

19.5
%
Professional services

2,681

2,875

(194)

(6.7)
%
Marketing and advertising expense

2,600

3,109

(509)

(16.4)
%
FDIC assessment premiums and other insurance

381

1,363

(982)

(72.0)
%
Other taxes

3,971

2,878

1,093

38.0
%
Loan-related expenses

2,566

1,939

627

32.3
%
OREO and credit-related expenses

1,005

452

553

122.3
%
Amortization of intangible assets

4,764

3,490

1,274

36.5
%
Training and other personnel costs

1,618

1,024

594

58.0
%
Merger-related costs

2,435

1,429

1,006

70.4
%
Rebranding expense

1,133

—

1,133

NM

Loss on debt extinguishment

16,397

—

16,397

NM

Other expenses

3,114

2,081

1,033

49.6
%
Total noninterest expense

$
111,687

$
76,349

$
35,338

46.3
%
~~NM - Not meaningful~~

Noninterest expense ~~increased $35.3~~decreased $18.5 million, or ~~46.3%~~16.5%, to $93.2 million for the quarter ended September 30, 2020 compared to $111.7 million for the quarter ended September 30, ~~2019 compared to $76.3 million for the quarter ended September 30, 2018.~~2019. Excluding merger-related costs, amortization of intangible assets, and rebranding-related costs, operating noninterest expense^(1) (2)for the quarter ended September 30, ~~2019 increased $31.9~~2020 decreased $14.2 million, or ~~44.7%~~13.7%, compared to the third quarter of ~~2018.~~2019. The ~~increase~~decrease in ~~operating noninterest expense~~the third quarter of 2020 was primarily ~~related to the acquisition of Access,~~driven by the recognition of an approximately $16.4 million loss on debt extinguishment resulting from the repayment of approximately $140.0 million in FHLB advances and the termination of the related cash flow ~~hedges. In addition, operating noninterest expense included approximately $309,000~~hedges in ~~OREO valuation adjustments driven by updated appraisals received during~~ the third quarter of ~~2019, $275,000~~2019. This decrease was partially offset by an increase in ~~recruiting~~FDIC assessment premiums of $1.4 million. Noninterest expense also included approximately $2.6 million in costs related to the ~~new equipment finance division, $1.0 million~~Company’s expense reduction plans, including the closure of 14 branches in September 2020, approximately $639,000 in costs related to the Company’s response to COVID-19, and marketing expenses related to donations made by the Company to support organizations that fight the injustices of ~~a community development initiative as well as an FDIC small bank assessment expense credit of approximately $2.4 million as the deposit insurance fund reserve ratio exceeded 1.38%~~inequality and contribute to change in ~~the second quarter of 2019.~~our communities.

~~-66-~~

~~Table of Contents~~(2)

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

For the Nine Months Ended

September 30,

Change


2019

2018

$

%

(Dollars in thousands)

Noninterest expense:

Salaries and benefits

$
148,116

$
120,797

$
27,319

22.6
%
Occupancy expenses

22,427

18,778

3,649

19.4
%
Furniture and equipment expenses

10,656

9,024

1,632

18.1
%
Printing, postage, and supplies

3,763

3,525

238

6.8
%
Communications expense

3,199

2,976

223

7.5
%
Technology and data processing

17,203

13,722

3,481

25.4
%
Professional services

8,269

8,101

168

2.1
%
Marketing and advertising expense

7,891

7,834

57

0.7
%
FDIC assessment premiums and other insurance

5,620

5,430

190

3.5
%
Other taxes

11,779

8,660

3,119

36.0
%
Loan-related expenses

7,250

5,097

2,153

42.2
%
OREO and credit-related expenses

3,162

3,106

56

1.8
%
Amortization of intangible assets

13,919

9,885

4,034

40.8
%
Training and other personnel costs

4,240

3,155

1,085

34.4
%
Merger-related costs

26,928

37,414

(10,486)

(28.0)
%
Rebranding expense

5,553

—

5,553

NM

Loss on debt extinguishment

16,397

—

16,397

NM

Other expenses

7,650

5,730

1,920

33.5
%
Total noninterest expense

$
324,022

$
263,234

$
60,788

23.1
%
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For the Nine Months Ended

September 30,

Change


2020

2019⁽¹⁾

$

%

(Dollars in thousands)

Noninterest expense:

Salaries and benefits

$
149,013

$
148,116

$
897

0.6
%
Occupancy expenses

21,798

22,427

(629)

(2.8)
%
Furniture and equipment expenses

11,042

10,656

386

3.6
%
Printing, postage, and supplies

3,194

3,763

(569)

(15.1)
%
Technology and data processing

19,187

17,203

1,984

11.5
%
Professional services

9,211

8,269

942

11.4
%
Marketing and advertising expense

7,413

7,891

(478)

(6.1)
%
FDIC assessment premiums and other insurance

7,578

5,620

1,958

34.8
%
Other taxes

12,364

11,779

585

5.0
%
Loan-related expenses

7,512

7,250

262

3.6
%
OREO and credit-related expenses

1,512

3,162

(1,650)

(52.2)
%
Amortization of intangible assets

12,676

13,919

(1,243)

(8.9)
%
Training and other personnel costs

3,192

4,240

(1,048)

(24.7)
%
Merger-related costs

—

26,928

(26,928)

(100.0)
%
Rebranding expense

—

5,553

(5,553)

(100.0)
%
Loss on debt extinguishment

10,306

16,397

(6,091)

(37.1)
%
Other expenses

15,683

10,849

4,834

44.6
%
Total noninterest expense

$
291,681

$
324,022

$
(32,341)

(10.0)
%
(1) ~~NM - Not meaningful~~Amounts exclude discontinued operations. Refer to Note 14 "Segment Reporting & Discontinued Operations" in Item 1 "Financial Statements", of this Quarterly Report for further discussion regarding discontinued operations.

Noninterest expense ~~increased $60.8~~decreased $32.3 million, or ~~23.1%~~10.0%, to $291.7 million for the nine months ended September 30, 2020 compared to $324.0 million for the nine months ended September 30, ~~2019 compared to $263.2 million for the nine months ended September 30, 2018.~~2019. Excluding merger-related costs, amortization of intangible assets, and rebranding-related costs, operating noninterest expense^(1) (2)for the nine months ended September 30, ~~2019~~2020 increased ~~$61.7~~$1.4 million, or ~~28.6%~~0.5%, compared to the same period in ~~2018.~~2019. The increase ~~in operating noninterest expense~~ was primarily driven by $6.0 million in costs related to the ~~acquisition~~Company’s expense reduction plans, including the closure of ~~Access,~~14 branches in September 2020, and approximately $1.6 million in costs related to the Company’s response to COVID-19 incurred during the nine months ended September 30, 2020. In addition, both technology and data processing costs and FDIC assessment premiums increased by $2.0 million. Noninterest expense also included the recognition of an approximately ~~$16.4~~$10.3 million loss on debt extinguishment during the nine months ended September 30, 2020, resulting from the ~~repayment~~prepayment of approximately ~~$140.0~~$200.0 million in long-term FHLB ~~advances,~~advances.The increases were partially offset by a decline in OREO and the termination of the related cash flow hedges. In addition, operating noninterest expense included $275,000 in recruiting costs related to the new equipment finance division, $1.0 million in support of a community development initiative as well as an FDIC small bank assessment expense creditcredit-related expenses of approximately ~~$2.4~~$1.7 million ~~as the deposit insurance fund reserve ratio exceeded 1.38%~~due to lower OREO valuation adjustments, and a decline in ~~the second quarter~~training and personnel costs of ~~2019.~~$1.0 million.
~~(1)~~(2) Refer to the “Non-GAAP Financial Measures” section within this Item 2 for more information about this non-GAAP
financial measure, including a reconciliation of these measures to the most directly comparable financial measures
calculated in accordance with ~~GAAP.~~GAAP.

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Income Taxes

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

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

The effective tax rate for the three months ended September 30, 2020 and 2019 was 15.3% and ~~2018 was~~ 16.8% ~~and 15.9%~~, ~~respectively; the~~respectively. The effective tax rate for the nine months ended September 30, 2020 and 2019 was 15.1% and ~~2018 was~~ 16.0% ~~and 16.6%~~, respectively. The ~~change~~decrease in the effective tax rates is primarily due to the proportion of tax-exempt income to pre-tax income.

~~BALANCE SHEET~~DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
~~Assets~~Overview
Assets
At September 30, ~~2019,~~2020, total assets were ~~$17.4~~$19.9 billion, an increase of ~~$3.6~~$2.4 billion, or approximately 18.0% (annualized), from ~~$13.8~~$17.5 billion at December 31, ~~2018, reflecting the impact~~2019. The increase in assets was primarily a result of ~~the Access acquisition.~~both organic and PPP loan growth.
~~On February 1, 2019, the Company completed its acquisition of Access. Below is a summary of the transaction and related impact on the Company’s balance sheet.~~
● ~~The fair value of assets acquired equaled $2.856 billion, and the fair value of the liabilities assumed equaled $2.559 billion~~
● ~~Total loans acquired totaled $2.217 billion with a fair value of $2.173 billion~~
● ~~Total deposits assumed totaled $2.228 billion with a fair value of $2.227 billion~~
● ~~Total goodwill arising from the transaction equaled $202.6 million~~
● ~~Core deposit intangibles acquired totaled $40.9 million~~
~~Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition, in accordance with ASC 805,~~ ~~Business Combinations~~.
Loans held for investment ~~net~~(net of deferred fees and ~~costs,~~costs) were ~~$12.3~~$14.4 billion at September 30, ~~2019,~~2020, an increase of ~~$2.6~~$1.8 billion, or ~~26.7%~~18.8% (annualized), from December 31, ~~2018.~~ 2019. Excluding the effects of the PPP, loans held for investment (net of deferred fees and costs) increased $171.7 million, or 1.8% (annualized) during this period. Quarterly average loans increased ~~$2.9~~$2.1 billion, or ~~31.7%~~17.3%, for the quarter ended September 30, ~~2019~~2020 compared to the quarter ended September 30, ~~2018 primarily due to~~2019. Excluding the ~~Access acquisition.~~ effects of the PPP, quarterly average loans increased $480.2 million, or 3.9% from the prior year. Refer to "Loan Portfolio" within Item 2 and Note 4 "Loans and Allowance for Loan and Lease Losses" in Part I of Item I for additional information on the Company’s loan activity. Refer to "Non-GAAP Financial Measures" within Item 2 for additional information on PPP adjusted impacts, including a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated in accordance with GAAP.
Liabilities and Stockholders’ Equity
At September 30, ~~2019,~~2020, total liabilities were ~~$14.9~~$17.3 billion, an increase of ~~$3.1~~$2.2 billion from $15.1 billion at December 31, ~~2018.~~2019.
Total deposits were ~~$13.0~~$15.6 billion at September 30, ~~2019,~~2020, an increase of ~~$3.1~~$2.3 billion, or ~~30.8%~~approximately 22.8% (annualized), from December 31, ~~2018.~~2019. Quarterly average deposits increased ~~$3.0~~$2.8 billion, or ~~30.7%~~21.6%, for the quarter ended September 30, ~~2019~~2020 compared to the quarter ended September 30, ~~2018~~2019 primarily due to the ~~Access acquisition.~~impact of PPP loan related deposits and government stimulus. Refer to “Deposits” within this Item 2 for further discussion on this topic.

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~~Table of Contents~~

At September 30, ~~2019,~~2020, stockholders’ equity was ~~$2.5~~$2.7 billion, an increase of ~~$600.5~~$147.8 million from December 31, ~~2018.~~2019. The ~~Company’s capital ratios continue~~increase in stockholders’ equity is primarily related to ~~exceed~~ the ~~minimum capital requirements for regulatory purposes.~~issuance and sale of Series A preferred stock that took place on June 9, 2020. Refer to “Capital Resources” within this Item 2 and Note 10 "Stockholders’ Equity" in Part I of Item I for additional information on the Company’s capital ratios.

The Company declared and paid a cash dividend of $0.25 per share during both the third quarter of ~~2019, an increase of $0.02 per share, or 8.7%, compared to the dividend paid during~~2020 and the third quarter of ~~2018.~~2019. Dividends for the nine months ended September 30, ~~2019~~2020 were ~~$0.71,~~$0.75, an increase of ~~$0.06~~$0.04 per share, or ~~9.2%~~5.6% compared to the nine months ended September 30, ~~2018.~~2019. During the third quarter of 2020, the Board also declared and paid a quarterly dividend on the outstanding shares of Series A Preferred Stock of $156.60 per share (equivalent to $0.39 per outstanding depositary share).

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Securities

At September 30, ~~2019,~~2020, the Company had total investments in the amount of $3.1 billion, or 15.6% of total assets, as compared to $2.6 billion, or 15.0% of total assets, ~~as compared to $2.4 billion, or 17.4% of total assets,~~ at December 31, ~~2018.~~2019. The Company seeks to diversify its portfolio to minimize risk. It focuses on purchasing mortgage-backed securities for cash flow and reinvestment opportunities and securities issued by states and political subdivisions due to the tax benefits and the higher yield offered from these securities. The majority of the Company’s mortgage-backed securities are agency-backed securities, which have a government guarantee. The investment portfolio has a high percentage of ~~municipals and mortgage-backed~~municipal securities; therefore, the Company earns a higher taxable equivalent yield on its portfolio as compared to many of its peers. ~~During the fourth quarter of 2018, the Company entered into a swap agreement to hedge the interest rate on a portion of its fixed rate available for sale securities.~~ For information regarding the hedge transaction related to available for sale securities, see Note 9 "Derivatives" in Part I of Item I of this ~~Form 10-Q.~~Quarterly Report.
The table below sets forth a summary of the AFS securities, HTM securities, and restricted stock as of the dates indicated (dollars in thousands):


September 30,

December 31,

2019

2018
Available for Sale:




U.S. government and agency securities

$
4,490

$
—
Obligations of states and political subdivisions

438,613

468,491
Corporate and other bonds

229,524

167,696
Mortgage-backed securities

1,243,165

1,129,865
Other securities

3,067

8,769
Total AFS securities, at fair value

1,918,859

1,774,821
Held to Maturity:




Obligations of states and political subdivisions, at carrying value

546,515

492,272
Mortgage-backed securities

10,064

—
Total held to maturity securities

556,579

492,272
Restricted Stock:




Federal Reserve Bank stock

66,964

52,576
FHLB stock

65,346

72,026
Total restricted stock, at cost

132,310

124,602
Total investments

$
2,607,748

$
2,391,695


September 30,

December 31,

2020

2019
Available for Sale:




U.S. government and agency securities

$
13,878

$
21,320
Obligations of states and political subdivisions

796,856

447,091
Corporate and other bonds

148,918

135,959
Mortgage-backed securities

Commercial

388,965

425,047
Residential

1,093,102

912,949
Total mortgage-back securities

1,482,067

1,337,996
Other securities

1,621

3,079
Total AFS securities, at fair value

2,443,340

1,945,445
Held to Maturity:




U.S. government and agency securities

2,767

2,813
Obligations of states and political subdivisions, at carrying value

538,352

545,148
Mortgage-backed securities

Commercial

5,542

7,183
Residential

—

—
Total mortgage-back securities

5,542

7,183
Total held to maturity securities

546,661

555,144
Restricted Stock:




Federal Reserve Bank stock

67,032

66,964
FHLB stock

45,184

63,884
Total restricted stock, at cost

112,216

130,848
Total investments

$
3,102,217

$
2,631,437

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During each quarter and at year end, the Company conducts an assessment of the securities portfolio for OTTI consideration. No OTTI was recognized during the three months ended September 30, 2019. The Company monitors the portfolio, which is subject to liquidity needs, market rate changes, and credit risk changes, to determine whether adjustments are needed. 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.
The following table summarizes the contractual maturity of AFS securities at fair value and their weighted average yields as of September 30, ~~2019~~2020 (dollars in thousands):


1 Year or



5 – 10

Over 10


Less

1 - 5 Years

Years

Years

Total

U.S. government and agency securities











Amortized cost

$
4,475

$
—

$
—

$
—

$
4,475

Fair value

4,490

—

—

—

4,490

Weighted average yield ⁽¹⁾

2.53
%

—
%

—
%

—
%

2.53
%
Mortgage backed securities:











Amortized cost

$
9,053

$
141,213

$
134,856

$
930,141

$
1,215,263

Fair value

9,092

143,356

138,276

952,441

1,243,165

Weighted average yield ⁽¹⁾

3.19
%

2.53
%

2.67
%

3.04
%

2.94
%

Obligations of states and political subdivisions:











Amortized cost

$
6,087

$
10,154

$
34,277

$
361,172

$
411,690

Fair value

6,156

10,362

35,421

386,674

438,613

Weighted average yield ⁽¹⁾

5.35
%

4.47
%

3.90
%

3.68
%

3.74
%

Corporate bonds and other securities:











Amortized cost

$
3,067

$
9,922

$
94,355

$
120,577

$
227,921

Fair value

3,067

10,190

96,060

123,274

232,591

Weighted average yield ⁽¹⁾

2.23
%

4.56
%

4.48
%

3.33
%

3.85
%

Total AFS securities:











Amortized cost

$
22,682

$
161,289

$
263,488

$
1,411,890

$
1,859,349

Fair value

22,805

163,908

269,757

1,462,389

1,918,859

Weighted average yield ⁽¹⁾

3.51
%

2.78
%

3.48
%

3.23
%

3.23
%


1 Year or



5 – 10

Over 10


Less

1 - 5 Years

Years

Years

Total

U.S. government and agency securities











Amortized cost

$
—

$
—

$
13,463

$
—

$
13,463

Fair value

—

—

13,878

—

13,878

Weighted average yield ⁽¹⁾

—
%

—
%

2.29
%

—
%

2.29
%

Obligations of states and political subdivisions:

Amortized cost

$
2,484

$
9,030

$
47,380

$
701,042

$
759,936

Fair value

2,505

9,401

49,785

735,165

796,856

Weighted average yield ⁽¹⁾

5.27
%

4.02
%

2.66
%

3.00
%

2.99
%

Corporate bonds and other securities:

Amortized cost

$
1,621

$
5,208

$
103,292

$
38,938

$
149,059

Fair value

1,621

5,155

105,178

38,585

150,539

Weighted average yield ⁽¹⁾

1.48
%

2.28
%

4.50
%

1.80
%

3.68
%

Mortgage backed securities:

Commercial

Amortized cost

$
24,445

$
113,359

$
26,713

$
206,548

$
371,065

Fair value

24,676

120,246

27,757

216,286

388,965

Weighted average yield ⁽¹⁾

2.66
%

2.68
%

2.72
%

2.86
%

2.78
%
Residential

Amortized cost

$
31

$
13,247

$
60,653

$
985,462

$
1,059,393

Fair value

32

13,312

62,208

1,017,550

1,093,102

Weighted average yield ⁽¹⁾

2.90
%

2.74
%

2.54
%

2.21
%

2.23
%
Total mortgage-backed securities

Amortized cost

$
24,476

$
126,606

$
87,366

$
1,192,010

$
1,430,458

Fair value

24,708

133,558

89,965

1,233,836

1,482,067

Weighted average yield ⁽¹⁾

2.66
%

2.69
%

2.60
%

2.32
%

2.38
%

Total AFS securities:

Amortized cost

$
28,581

$
140,844

$
251,501

$
1,931,990

$
2,352,916

Fair value

28,834

148,114

258,806

2,007,586

2,443,340

Weighted average yield ⁽¹⁾

2.82
%

2.76
%

3.37
%

2.55
%

2.66
%
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis.

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The following table summarizes the contractual maturity of HTM securities at carrying value and their weighted average yields as of September 30, ~~2019~~2020 (dollars in thousands):


1 Year or



5 – 10

Over 10


Less

1 - 5 Years

Years

Years

Total

Obligations of states and political subdivisions:

Carrying value

$
504

$
7,309

$
1,954

$
536,748

$
546,515

Fair value

507

7,515

2,026

587,469

597,517

Weighted average yield ⁽¹⁾

3.27
%

2.45
%

3.24
%

4.09
%

4.07
%
Mortgage backed securities:











Carrying value

$
—

$
1,625

$
1,206

$
7,233

$
10,064

Fair value

—

1,650

1,221

7,328

10,199

Weighted average yield⁽¹⁾

—

4.97
%

4.12
%

5.76
%

5.43
%
Total HTM securities:











Carrying value

$
504

$
8,934

$
3,160

543,981

556,579

Fair value

507

9,165

3,247

594,797

607,716

Weighted average yield ⁽¹⁾

3.27
%

2.91
%

3.58
%

4.12
%

4.09
%


1 Year or



5 – 10

Over 10


Less

1 - 5 Years

Years

Years

Total

U.S. government and agency securities

Carrying value

$
—

$
1,580

$
1,187

$
—

$
2,767

Fair value

—

1,571

1,182

—

2,753

Weighted average yield ⁽¹⁾

—
%

4.60
%

4.17
%

—
%

4.41
%

Obligations of states and political subdivisions:

Carrying value

$
1,005

$
7,496

$
562

$
529,289

$
538,352

Fair value

1,024

7,865

614

596,410

605,913

Weighted average yield ⁽¹⁾

3.35
%

2.49
%

3.16
%

4.10
%

4.07
%

Mortgage backed securities:

Commercial

Amortized cost

$
—

$
—

$
—

$
5,542

$
5,542

Fair value

—

—

—

5,507

5,507

Weighted average yield ⁽¹⁾

—
%

—
%

—
%

4.98
%

4.98
%
Residential

Amortized cost

$
—

$
—

$
—

$
—

$
—

Fair value

—

—

—

—

—

Weighted average yield ⁽¹⁾

—
%

—
%

—
%

—
%

—
%
Total mortgage-backed securities

Amortized cost

$
—

$
—

$
—

$
5,542

$
5,542

Fair value

—

—

—

5,507

5,507

Weighted average yield ⁽¹⁾

—
%

—
%

—
%

4.98
%

4.98
%

Total HTM securities:

Carrying value

$
1,005

$
9,076

$
1,749

$
534,831

$
546,661

Fair value

1,024

9,436

1,796

601,917

614,173

Weighted average yield ⁽¹⁾

3.35
%

2.86
%

3.84
%

4.11
%

4.09
%
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis.
As of September 30, ~~2019,~~2020, the Company maintained a diversified municipal bond portfolio with approximately ~~63%~~74% of its holdings in general obligation issues and the majority of the remainder backed by revenue bonds. Issuances within the ~~State~~states of Texas and Virginia represented ~~19%~~25% and 22% of the municipal ~~portfolio;~~portfolio, respectively; no other state had a concentration above 10%. Substantially all municipal holdings are considered investment grade. When purchasing municipal securities, the Company focuses on strong underlying ratings for general obligation issuers or bonds backed by essential service revenues.
~~Liquidity~~

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Liquidity

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

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

During the second quarter of 2020, in connection with the loans originated as part of the PPP, the Company borrowed under the Federal Reserve’s PPPLF. Under the terms of the PPPLF, the Company can borrow funds which are secured by the Company’s PPP loans. As of September 30, ~~2019,~~2020 the Company’s outstanding advances under the PPPLF, were $189.9 million. The interest rate on the advances is fixed at a rate of 0.35% through the advance maturities in April 2022. The Company’s available borrowing capacity under the PPPLF as of September 30, 2020 was $1.4 billion.

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

As of September 30, 2020, liquid assets totaled ~~$5.5~~$6.2 billion, or ~~31.7%~~31.3%, of total assets, and liquid earning assets totaled ~~$5.3~~$6.1 billion, or ~~34.6%~~34.0% of total earning assets. Asset liquidity is also provided by managing loan and securities maturities and cash flows. As of September 30, ~~2019,~~2020, approximately ~~$4.5~~$5.2 billion, or ~~36.7%~~36.4% of total loans, are scheduled to mature within one year based on contractual maturity, adjusted for expected prepayments, and approximately ~~$342.3~~$441.7 million, or ~~13.1%~~14.2% of total securities, are scheduled to mature within one year.

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

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Table of Contents

Loan Portfolio

Loans held for investment, net of deferred fees and costs, were $14.4 billion at September 30, 2020, $12.6 billion at December 31, 2019, and $12.3 billion at September 30, ~~2019, $9.7 billion at December 31, 2018,~~2019. Commercial & industrial loans and ~~$9.4 billion~~commercial real estate loans represented the Company’s largest categories at September 30, ~~2018.~~2020. Commercial and industrial loans included approximately $1.6 billion in loans from the PPP loan program. When adjusting for the impact of PPP loans, commercial real estate -– non-owner occupied loans ~~continue to represent~~remained the ~~Company’s~~ largest ~~category, comprising 26.0% of the total loan portfolio at September 30, 2019.~~category.

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


	September 30, 2019				June 30, 2019				March 31, 2019				December 31, 2018				September 30, 2018				September 30, 2020				June 30, 2020				March 31, 2020				December 31, 2019				September 30, 2019
Construction and Land Development	$	1,201,149	9.8	%	$	1,267,712	10.4	%	$	1,326,679	11.1	%	$	1,194,821	12.3	%	$	1,178,054	12.5	%	$	1,207,190	8.4	%	$	1,247,939	8.7	%	$	1,318,252	10.3	%	$	1,250,924	9.9	%	$	1,201,149	9.8	%
Commercial Real Estate - Owner Occupied		1,979,052	16.1	%		1,966,776	16.1	%		1,921,464	16.1	%		1,337,345	13.8	%		1,283,125	13.6	%		2,107,333	14.7	%		2,067,087	14.4	%		2,051,904	16.1	%		2,041,243	16.2	%		1,979,052	16.1	%
Commercial Real Estate - Non-Owner Occupied		3,198,580	26.0	%		3,104,823	25.4	%		2,970,453	24.9	%		2,467,410	25.4	%		2,427,251	25.8	%		3,497,929	24.3	%		3,455,125	24.1	%		3,328,012	26.1	%		3,286,098	26.1	%		3,198,580	26.0	%
Multifamily Real Estate		659,946	5.4	%		602,115	4.9	%		591,431	5.0	%		548,231	5.6	%		542,662	5.8	%		731,582	5.1	%		717,719	5.0	%		679,390	5.3	%		633,743	5.0	%		659,946	5.4	%
Commercial & Industrial		2,058,133	16.7	%		2,032,799	16.6	%		1,866,625	15.6	%		1,317,135	13.6	%		1,154,583	12.3	%		3,536,249	24.6	%		3,555,971	24.9	%		2,177,932	17.1	%		2,114,033	16.8	%		2,058,133	16.7	%
Residential 1-4 Family - Commercial		721,185	5.9	%		723,636	6.0	%		743,101	6.2	%		640,419	6.6	%		646,581	6.9	%		696,944	4.8	%		715,384	5.0	%		721,800	5.7	%		724,337	5.7	%		721,185	5.9	%
Residential 1-4 Family - Consumer		913,245	7.4	%		928,130	7.6	%		937,710	7.8	%		673,909	6.9	%		684,945	7.2	%		830,144	5.8	%		841,051	5.9	%		854,550	6.7	%		890,503	7.1	%		913,245	7.4	%
Residential 1-4 Family - Revolving																						618,320	4.3	%		627,765	4.4	%		652,135	5.1	%		659,504	5.2	%		660,963	5.4	%
Auto		328,456	2.7	%		311,858	2.6	%		300,631	2.5	%		301,943	3.1	%		306,196	3.3	%		387,417	2.7	%		380,053	2.7	%		358,039	2.8	%		350,419	2.8	%		328,456	2.7	%
HELOC		660,963	5.4	%		660,621	5.4	%		672,087	5.6	%		613,383	6.3	%		612,116	6.5	%
Consumer		386,848	3.1	%		383,653	3.1	%		397,491	3.3	%		379,694	3.9	%		345,320	3.7	%		276,023	1.9	%		311,362	2.2	%		352,572	2.8	%		372,853	3.0	%		386,848	3.1	%
Other Commercial		199,440	1.5	%		238,391	1.9	%		224,638	1.9	%		241,917	2.5	%		230,765	2.4	%		494,084	3.4	%		389,190	2.7	%		274,255	2.0	%		287,279	2.2	%		199,440	1.5	%
Total loans held for investment	$	12,306,997	100.0	%	$	12,220,514	100.0	%	$	11,952,310	100.0	%	$	9,716,207	100.0	%	$	9,411,598	100.0	%	$	14,383,215	100.0	%	$	14,308,646	100.0	%	$	12,768,841	100.0	%	$	12,610,936	100.0	%	$	12,306,997	100.0	%

The following table presents the remaining maturities, based on contractual maturity, by loan type and by rate type (variable or fixed), as of September 30, ~~2019~~2020 (dollars in thousands):

��





Variable Rate

Fixed Rate


Total

Less than 1





More than 5





More than 5

Maturities

year

Total

1-5 years

years

Total

1-5 years

years
Construction and Land Development

$
1,201,149

$
549,680

$
375,467

$
279,204

$
96,263

$
276,002

$
217,705

$
58,297
Commercial Real Estate - Owner Occupied

1,979,052

196,254

480,038

102,389

377,649

1,302,760

705,158

597,602
Commercial Real Estate - Non-Owner Occupied

3,198,580

373,332

1,225,208

370,102

855,106

1,600,040

1,165,446

434,594
Multifamily Real Estate

659,946

103,292

290,449

80,082

210,367

266,205

216,181

50,024
Commercial & Industrial

2,058,133

613,940

874,111

695,546

178,565

570,082

358,597

211,485
Residential 1-4 Family - Commercial

721,185

141,766

125,502

14,712

110,790

453,917

395,703

58,214
Residential 1-4 Family - Consumer

913,245

22,319

407,008

6,210

400,798

483,918

23,052

460,866
Auto

328,456

2,401

2

2

—

326,053

160,241

165,812
HELOC

660,963

63,675

588,946

83,545

505,401

8,342

778

7,564
Consumer

386,848

12,097

17,612

15,655

1,957

357,139

213,975

143,164
Other Commercial

199,440

33,803

38,251

5,866

32,385

127,386

62,504

64,882
Total loans held for investment

$
12,306,997

$
2,112,559

$
4,422,594

$
1,653,313

$
2,769,281

$
5,771,844

$
3,519,340

$
2,252,504

Variable Rate

Fixed Rate


Total

Less than 1





More than 5





More than 5

Maturities

year

Total

1-5 years

years

Total

1-5 years

years
Construction and Land Development

$
1,207,190

$
536,238

$
417,054

$
288,204

$
128,850

$
253,898

$
163,324

$
90,574
Commercial Real Estate - Owner Occupied

2,107,333

172,574

620,319

120,517

499,802

1,314,440

633,692

680,748
Commercial Real Estate - Non-Owner Occupied

3,497,929

414,575

1,590,183

603,718

986,465

1,493,171

1,095,756

397,415
Multifamily Real Estate

731,582

74,989

397,660

78,449

319,211

258,933

196,620

62,313
Commercial & Industrial

3,536,249

431,867

857,897

679,191

178,706

2,246,485

1,959,064

287,421
Residential 1-4 Family - Commercial

696,944

108,451

150,064

21,226

128,838

438,429

354,419

84,010
Residential 1-4 Family - Consumer

830,144

5,213

326,391

2,357

324,034

498,540

15,809

482,731
Residential 1-4 Family - Revolving

618,320

52,370

551,420

61,693

489,727

14,530

1,190

13,340
Auto

387,417

2,707

—

—

—

384,710

162,898

221,812
Consumer

276,023

23,932

19,369

16,243

3,126

232,722

107,253

125,469
Other Commercial

494,084

41,676

82,574

7,611

74,963

369,834

209,030

160,804
Total loans held for investment

$
14,383,215

$
1,864,592

$
5,012,931

$
1,879,209

$
3,133,722

$
7,505,692

$
4,899,055

$
2,606,637

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The Company remains committed to originating soundly underwritten loans to qualifying borrowers within its markets. The Company is focused on providing community-based financial services and discourages the origination of portfolio loans outside of its principal trade areas. As reflected in the loan table, at September 30, ~~2019,~~2020, the largest components of the Company’s loan portfolio consisted of commercial real estate, commercial & industrial, and construction and land development loans. The risks attributable to these concentrations are mitigated by the Company’s credit underwriting and monitoring processes, including oversight by a centralized credit administration function and credit policy and risk management committee, as well as seasoned bankers focusing their lending to borrowers with proven track records in markets with which the Company is familiar.

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

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Table of Contents

Asset Quality

~~Overview~~

Overview

At September 30, ~~2019,~~2020, the Company ~~had higher levels of~~experienced increases in NPAs compared to December 31, ~~2018,~~2019, primarily due to ~~nonaccrual additions~~the inclusion of ~~commercial real estate – owner occupied, residential 1-4 family - consumer, and construction and land development which were attributable to several smaller credit relationships. NPAs~~assets not previously reported as ~~a percentage of total outstanding loans held for investment decreased from December 31, 2018. Past~~nonperforming that are now considered such under the CECL methodology. Total past due loan levels as a percentage of total loans held for investment at September 30, ~~2019~~2020 were ~~lower than~~down from total past due loan levels at December 31, 2018. As the Company’s NPAs and past due loan levels have been at or near historic lows over the last several quarters, certain changes from quarter to quarter might stand out in comparison to one another but have an insignificant impact on the Company’s overall asset quality position.2019.

Net charge-offs ~~increased~~decreased for the nine months ended September 30, ~~2019~~2020 compared to the nine months ended September 30, ~~2018.~~2019. Total net charge-offs as a percentage of total average loans on an annualized basis also ~~increased~~decreased for the nine months ended September 30, ~~2019~~2020 compared to the nine months ended September 30, ~~2018.~~2019. The ~~increase in net charge-offs is primarily from the Company’s consumer lending portfolio and a construction and land development loan. At September 30, 2019, the~~ allowance ~~and the provision~~ for ~~loan~~credit losses ~~for the nine months ended September 30, 2019~~ increased from December 31, 2019, as a result of the ~~nine months ended September 30, 2018~~adoption of ASC 326 as well as a worsening economic forecast due to the impact of COVID-19, which also led to an increase in ~~net charge-offs~~the provision for credit losses.

As discussed under “Recent Developments” within this Item 2, the pandemic is having a wide range of economic impacts, including impacts in the Company’s area of operations and ~~loan growth during 2019.~~on the Company’s clients and borrowers. While the Company has not yet experienced deterioration in asset quality as compared to pre-pandemic performance, the Company does expect that at some point asset quality will be adversely affected to some degree due to pandemic-related bankruptcies, business closures, unemployment, and other effects. At this time, it is impossible for the Company to estimate either the timing or the magnitude of any such adverse changes in asset quality.

~~All nonaccrual and past due loan metrics discussed below exclude PCI loans totaling $89.7 million (net of fair value mark of $24.0 million) at September 30, 2019.~~

Troubled Debt Restructurings

The total recorded investment in TDRs as of September 30, ~~2019~~2020 was ~~$18.7~~$21.6 million, ~~a decrease~~an increase of ~~$7.9~~$2.1 million, or ~~29.7%~~10.6%, from ~~$26.6~~$19.5 million at December 31, ~~2018~~2019 and ~~a decrease~~an increase of ~~$9.6~~$2.8 million, or ~~33.9%~~15.1%, from ~~$28.3~~$18.7 million at September 30, ~~2018.~~2019. Of the ~~$18.7~~$21.6 million of TDRs at September 30, ~~2019, $15.1~~2020, $14.5 million, or ~~80.7%~~67.3%, were considered performing while the remaining ~~$3.6~~$7.1 million were considered nonperforming.

Loan Modifications for Borrowers Affected by COVID-19

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

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

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

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

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

Nonperforming Assets

At September 30, ~~2019,~~2020, NPAs totaled ~~$36.4~~$43.2 million, an increase of ~~$2.7~~$10.2 million ~~or 8.1%~~ from December 31, ~~2018 and an increase of $1.5 million or 4.3% from September 30, 2018.~~2019. NPAs as a percentage of total outstanding loans at September 30, ~~2019~~2020 were 0.30%, ~~a decline~~an increase of 54 basis points from ~~0.35%~~0.26% at December 31, ~~2018 and~~2019. Excluding the impact of the PPP loans⁽²⁾, NPAs as a ~~decline~~percentage of ~~7 basis points from 0.37% at September 30, 2018.~~total outstanding loans were 0.34%, an

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Table of Contents

increase of 8 basis points from December 31, 2019. The Company’s adoption of ASC 326 resulted in a change in the accounting and reporting related to PCI loans which are now defined as PCD and evaluated at the loan level instead of being evaluated in pools under PCI accounting. All prior period nonaccrual and past due loan metrics discussed herein have not been restated for CECL accounting and exclude PCI-related loan balances.

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

September 30,

June 30,

March 31,

December 31,

September 30,

2020

2020

2020

2019

2019

Nonaccrual loans⁽¹⁾

$
39,023

$
39,624

$
44,022

$
28,232

$
30,032

Foreclosed properties

4,159

4,397

4,444

4,708

6,385

Total NPAs

43,182

44,021

48,466

32,940

36,417

Loans past due 90 days and accruing interest⁽¹⁾

15,661

19,255

12,876

13,396

12,036

Total NPAs and loans past due 90 days and accruing interest

$
58,843

$
63,276

$
61,342

$
46,336

$
48,453

Performing TDRs

$
14,515

$
15,303

$
14,865

$
15,686

$
15,156

Balances











Allowance for loan and lease losses

$
174,122

$
169,977

$
141,043

$
42,294

$
43,820

Average loans, net of deferred fees and costs

14,358,666

13,957,711

12,593,923

12,327,692

12,240,254

Loans, net of deferred fees and costs

14,383,215

14,308,646

12,768,841

12,610,936

12,306,997

Ratios











NPAs to total loans

0.30
%

0.31
%

0.38
%

0.26
%

0.30
%
NPAs to total adjusted loans⁽²⁾

0.34
%

0.35
%

0.38
%

0.26
%

0.30
%
NPAs & loans 90 days past due to total loans

0.41
%

0.44
%

0.48
%

0.37
%

0.39
%
NPAs to total loans & foreclosed property

0.30
%

0.31
%

0.38
%

0.26
%

0.30
%
NPAs & loans 90 days past due to total loans & foreclosed property

0.41
%

0.44
%

0.48
%

0.37
%

0.39
%
ALL to nonaccrual loans

446.20
%

428.97
%

320.39
%

149.81
%

145.91
%
ALL to nonaccrual loans & loans 90 days past due

318.41
%

288.69
%

247.89
%

101.60
%

104.16
%


September 30,

June 30,

March 31,

December 31,

September 30,

2019

2019

2019

2018

2018

Nonaccrual loans, excluding PCI loans

$
30,032

$
27,462

$
24,841

$
26,953

$
28,110

Foreclosed properties

6,385

6,506

7,353

6,722

6,800

Total NPAs

36,417

33,968

32,194

33,675

34,910

Loans past due 90 days and accruing interest

12,036

8,828

10,953

8,856

9,532

Total NPAs and loans past due 90 days and accruing interest

$
48,453

$
42,796

$
43,147

$
42,531

$
44,442

Performing TDRs

$
15,156

$
19,144

$
20,808

$
19,201

$
19,854

PCI loans

89,735

101,301

99,932

90,221

94,746

Balances











Allowance for loan losses

$
43,820

$
42,463

$
40,827

$
41,045

$
41,294

Average loans, net of deferred fees and costs

12,240,254

12,084,961

11,127,390

9,584,785

9,297,213

Loans, net of deferred fees and costs

12,306,997

12,220,514

11,952,310

9,716,207

9,411,598

Ratios











NPAs to total loans

0.30
%

0.28
%

0.27
%

0.35
%

0.37
%
NPAs & loans 90 days past due to total loans

0.39
%

0.35
%

0.36
%

0.44
%

0.47
%
NPAs to total loans & foreclosed property

0.30
%

0.28
%

0.27
%

0.35
%

0.37
%
NPAs & loans 90 days past due to total loans & foreclosed property

0.39
%

0.35
%

0.36
%

0.44
%

0.47
%
ALL to nonaccrual loans

145.91
%

154.62
%

164.35
%

152.28
%

146.90
%
ALL to nonaccrual loans & loans 90 days past due

104.16
%

117.01
%

114.06
%

114.62
%

109.70
%
(1) Amounts are not directly comparable due to the Company’s adoption of ASC 326 on January 1, 2020. Prior to January 1, 2020, nonaccrual and past due loan information excluded PCI-related loan balances. These balances also reflect the impact of Section 4013 of the CARES Act and the March 22 Guidance.
(2) Refer to the “Non-GAAP Financial Measures” section within this Item 2 for more information about these non-GAAP financial measures, including a reconciliation of these measures to the most directly comparable financial measures in accordance with GAAP.

-82-

~~NPAs at September 30, 2019 included $30.0 million in nonaccrual loans, a net increase~~Table of ~~$3.1 million or 11.4% from December 31, 2018 and a net increase of $1.9 million or 6.8% from September 30, 2018.~~ Contents

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


	September 30,		June 30,		March 31,		December 31,		September 30,		September 30,		June 30,		March 31,		December 31,		September 30,
	2019		2019		2019		2018		2018		2020		2020		2020		2019		2019
Beginning Balance	$	27,462	$	24,841	$	26,953	$	28,110	$	25,662	$	39,624	$	44,022	$	28,232	$	30,032	$	27,462
Impact of ASC 326 adoption												—		—		14,381		—		—
Additions												2,790		3,206		6,059		5,631		8,327
Net customer payments		(3,612)		(3,108)		(2,314)		(3,077)		(2,459)		(2,803)		(6,524)		(3,451)		(5,741)		(3,612)
Additions		8,327		6,321		3,297		4,659		6,268
Charge-offs		(884)		(592)		(1,626)		(2,069)		(1,137)		(588)		(1,088)		(1,199)		(1,690)		(884)
Loans returning to accruing status		(1,103)		—		(952)		(420)		(70)		—		8		—		—		(1,103)
Transfers to foreclosed property		(158)		—		(517)		(250)		(154)		—		—		—		—		(158)
Ending Balance	$	30,032	$	27,462	$	24,841	$	26,953	$	28,110	$	39,023	$	39,624	$	44,022	$	28,232	$	30,032

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~~Table of Contents~~

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


	September 30,		June 30,		March 31,		December 31,		September 30,		September 30,		June 30,		March 31,		December 31,		September 30,
	2019		2019		2019		2018		2018		2020		2020		2020		2019		2019
Construction and Land Development	$	7,785	$	5,619	$	5,513	$	8,018	$	9,221	$	3,520	$	3,977	$	3,234	$	3,703	$	7,785
Commercial Real Estate - Owner Occupied		5,684		4,062		3,307		3,636		3,202		9,267		8,924		11,250		6,003		5,684
Commercial Real Estate - Non-owner Occupied		381		1,685		1,787		1,789		1,812		1,992		1,877		1,642		381		381
Multifamily Real Estate												33		33		53		—		—
Commercial & Industrial		1,585		1,183		721		1,524		1,404		1,592		2,708		3,431		1,735		1,585
Residential 1-4 Family - Commercial		3,879		4,135		4,244		2,481		1,956		5,743		5,784		7,040		4,301		3,879
Residential 1-4 Family - Consumer		8,292		8,677		7,119		7,276		8,535		12,620		12,029		13,088		9,292		8,292
Residential 1-4 Family - Revolving												3,664		3,626		3,547		2,080		1,641
Auto		604		449		523		576		525		517		584		550		563		604
HELOC		1,641		1,432		1,395		1,518		1,273
Consumer and all other		181		220		232		135		182
Consumer												75		81		91		77		84
Other Commercial												—		1		96		97		97
Total	$	30,032	$	27,462	$	24,841	$	26,953	$	28,110	$	39,023	$	39,624	$	44,022	$	28,232	$	30,032

NPAs at September 30, ~~2019~~2020 also included ~~$6.4~~$4.2 million in foreclosed property, a decrease of ~~$337,000~~$549,000, or ~~5.0%~~11.7%, from December 31, ~~2018 and a decrease of $415,000 or 6.1%, from September 30, 2018.~~2019. The following table shows the activity in foreclosed property for the quarters ended (dollars in thousands):


	September 30,		June 30,		March 31,		December 31,		September 30,		September 30,		June 30,		March 31,		December 31,		September 30,
	2019		2019		2019		2018		2018		2020		2020		2020		2019		2019
Beginning Balance	$	6,506	$	7,353	$	6,722	$	6,800	$	7,241	$	4,397	$	4,444	$	4,708	$	6,385	$	6,506
Additions of foreclosed property		645		271		900		432		165		—		—		615		62		645
Valuation adjustments		(62)		(433)		(51)		(140)		(42)		—		—		(44)		(375)		(62)
Proceeds from sales		(737)		(638)		(171)		(286)		(889)		(254)		(55)		(854)		(1,442)		(737)
Gains (losses) from sales		33		(47)		(47)		(84)		325		16		8		19		78		33
Ending Balance	$	6,385	$	6,506	$	7,353	$	6,722	$	6,800	$	4,159	$	4,397	$	4,444	$	4,708	$	6,385

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


	September 30,		June 30,		March 31,		December 31,		September 30,		September 30,		June 30,		March 31,		December 31,		September 30,
	2019		2019		2019		2018		2018		2020		2020		2020		2019		2019
Land	$	1,842	$	1,842	$	2,216	$	2,306	$	2,377	$	1,238	$	1,245	$	1,251	$	1,615	$	1,842
Land Development		2,788		2,809		2,809		2,809		2,904		1,965		1,965		1,965		1,978		2,788
Residential Real Estate		1,214		1,304		1,925		1,204		1,116		793		793		834		721		1,214
Commercial Real Estate		541		551		403		403		403		163		394		394		394		541
Total	$	6,385	$	6,506	$	7,353	$	6,722	$	6,800	$	4,159	$	4,397	$	4,444	$	4,708	$	6,385

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Past Due Loans

At September 30, ~~2019,~~2020, total accruing past due loans were $50.9 million, or 0.35% of total loans held for investment, compared to $76.6 million, or 0.61% of total loans held for investment, at December 31, 2019 and $55.1 million, or 0.45% of total loans held for investment, ~~compared to $61.9 million or 0.64%~~at September 30, 2019. Excluding the impact of ~~total~~the PPP loans ~~held for investment at December 31, 2018 and $46.6 million or 0.49%~~⁽¹⁾, past due loans still accruing interest were 0.40% of total loans held for investment at September 30, ~~2018.~~2020. Of the total past due loans still accruing interest at September 30, ~~2019, $12.0~~2020, $15.6 million, or ~~0.10%~~0.11% of total loans held for investment, were past due 90 days or more, compared to ~~$8.9~~$13.4 million, or ~~0.09%~~0.11% of total loans held for investment, at December 31, ~~2018~~2019 and ~~$9.5~~$12.0 million, or 0.10% of total loans held for investment, at September 30, ~~2018.~~2019.

Net Charge-offs

For the quarter ended September 30, ~~2019,~~2020, net charge-offs were ~~$7.7~~$1.4 million, or ~~0.25%~~0.04% of total average loans on an annualized basis, compared to ~~$3.2~~$7.7 million, or ~~0.13%~~0.25%, for the same quarter last year. Excluding the impact of the PPP loans⁽¹⁾, net charge-offs were 0.04% of total average loans on an annualized basis. For the nine months ended September 30, ~~2019,~~2020, net charge-offs were ~~$16.2~~ $9.7 million, or ~~0.18%~~ 0.09% of total average loans on annualized basis, compared to ~~$6.0~~$16.2 million, or

~~-75-~~

0.~~Table of Contents~~

~~0.08%~~18%, for the same period in ~~2018.~~2019. Excluding the impact of the PPP loans⁽¹⁾, net charge-offs were 0.11% of total average loans on an annualized basis. The majority of net charge-offs in ~~2019 have been~~2020 were related to the third-party consumer ~~loans and a construction and land development loan.~~loan portfolio.

Provision for ~~Loan~~Credit Losses

The provision for ~~loan~~credit losses for the quarter ended September 30, ~~2019~~2020 was ~~$9.1~~$6.6 million, ~~an increase~~a decline of ~~$6.0~~$2.5 million compared with the same quarter last year. The provision for credit losses for the third quarter of 2020 included $5.6 million in provision for loan losses and $1.0 million in provision for unfunded commitments. The provision for credit losses for the nine months ended September 30, ~~2019~~2020 was ~~$19.0~~$100.9 million compared to ~~$9.3~~$18.2 million for the nine months ended September 30, ~~2018.~~ 2019. The provision for credit losses for the nine months ended September 30, 2020 included $94.0 million in provision for loan losses and $6.9 million in provision for unfunded commitments. The increase in the provision for ~~loan~~credit losses ~~compared to the third quarter of 2018 and~~for the nine months ended September 30, ~~2018 was primarily driven by an increase in net charge-offs and loan growth.~~

~~Allowance for Loan Losses~~

~~The ALL of $43.8 million at September 30, 2019 is an increase of $2.8 million~~2020 compared to the ~~ALL at~~same period in 2019 was due to the impact of the worsening economic forecast due to the impact of COVID-19 under CECL accounting for credit losses.

Allowance for Credit Losses

At September 30, 2020, the ACL was $186.1 million and included an ALLL of $174.1 million and an RUC of $12.0 million. The ACL increased $142.9 million from December 31, ~~2018~~2019, primarily due to ~~loan growth. The current level~~the adoption of CECL (the “CECL Day 1 impact”) as well as the impact of the ~~ALL reflects specific reserves~~worsening economic forecast related to ~~nonperforming loans, current risk ratings on loans, net charge-off activity, loan growth, delinquency trends,~~COVID-19 subsequent to the adoption of CECL (the “CECL Day 2 impact”).

The ALLL increased $131.8 million from December 31, 2019, due to the CECL Day 1 impact of $47.5 million and ~~other credit risk factors that~~ the ~~Company considers important in assessing the adequacy~~CECL Day 2 impact of ~~the ALL.~~$84.3 million. The ~~ALL~~ALLL as a percentage of the total ~~loans held for investment~~loan portfolio was ~~0.36%~~1.21% at September 30, ~~2019, 0.42%~~2020 and 0.34% at December 31, ~~2018, and 0.44%~~2019. When excluding PPP loans⁽¹⁾, which are 100% guaranteed by the SBA, the ALLL as a percentage of adjusted loans increased 102 bps to 1.36% from December 31, 2019. The ratio of the ALLL to nonaccrual loans was 446.20% at September 30, ~~2018.~~ 2020 and 149.81% at December 31, 2019.

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

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

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

September 30,

June 30,

March 31,

December 31,

September 30,

2019

2019

2019

2018

2018

Balance, beginning of period

$
42,463

$
40,827

$
41,045

$
41,294

$
41,270

Loans charged-off:











Commercial

304

878

980

141

233

Real estate

3,998

765

1,093

2,806

1,435

Consumer

5,015

4,291

3,866

3,184

2,892

Total loans charged-off

9,317

5,934

5,939

6,131

4,560

Recoveries:











Commercial

255

321

360

121

153

Real estate

548

553

555

391

622

Consumer

771

796

781

574

626

Total recoveries

1,574

1,670

1,696

1,086

1,401

Net charge-offs

7,743

4,264

4,243

5,045

3,159

Provision for loan losses - continuing operations

9,100

5,900

4,025

4,800

3,100

Provision for loan losses - discontinued operations

—

—

—

(4)

83

Balance, end of period

$
43,820

$
42,463

$
40,827

$
41,045

$
41,294

ALL to loans

0.36
%

0.35
%

0.34
%

0.42
%

0.44
%
Net charge-offs to average loans

0.25
%

0.14
%

0.15
%

0.21
%

0.13
%
Provision to average loans

0.29
%

0.20
%

0.15
%

0.20
%

0.13
%

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Table of Contents

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

September 30,

June 30,

March 31,

December 31,

September 30,

2020

2020

2020

2019

2019

Balance, beginning of period

$
169,977

$
141,043

$
42,294

$
43,820

$
42,463

Day 1 impact from adoption of CECL

—

—

47,484

—

—

Loans charged-off:











Commercial

995

1,590

2,968

2,092

4,184

Consumer

1,983

3,087

4,183

4,826

5,133

Total loans charged-off

2,978

4,677

7,151

6,918

9,317

Recoveries:











Commercial

718

708

1,154

1,096

611

Consumer

848

703

1,006

1,196

963

Total recoveries

1,566

1,411

2,160

2,292

1,574

Net charge-offs

1,412

3,266

4,991

4,626

7,743

Provision for loan losses

5,557

32,200

56,256

3,100

9,100

Balance, end of period

$
174,122

$
169,977

$
141,043

$
42,294

$
43,820

Total ACL

$
186,122

$
180,977

$
150,043

$
43,194

$
44,920

ACL to loans

1.29
%

1.26
%

1.18
%

0.34
%

0.36
%
ACL to adjusted loans⁽¹⁾

1.46
%

1.42
%

1.18
%

0.34
%

0.36
%
ALLL to loans

1.21
%

1.19
%

1.10
%

0.34
%

0.36
%
ALLL to adjusted loans⁽¹⁾

1.36
%

1.34
%

1.10
%

0.34
%

0.36
%
Net charge-offs to average loans

0.04
%

0.09
%

0.16
%

0.15
%

0.25
%
Net charge-offs to adjusted average loans⁽¹⁾

0.04
%

0.10
%

0.16
%

0.15
%

0.25
%
Provision for loan losses to average loans

0.15
%

0.93
%

1.80
%

0.10
%

0.29
%
Provision for loan losses to adjusted average loans⁽¹⁾

0.17
%

1.02
%

1.80
%

0.10
%

0.29
%

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

September 30,

June 30,

March 31,

December 31,

September 30,

September 30,

June 30,

March 31,

December 31,

September 30,

2019

2019

2019

2018

2018

2020

2020

2020

2019

2019


$

% ⁽¹⁾

$

% ⁽¹⁾

$

% ⁽¹⁾

$

% ⁽¹⁾

$

% ⁽¹⁾


$

% ⁽²⁾

$

% ⁽²⁾

$

% ⁽²⁾

$

% ⁽²⁾

$

% ⁽²⁾

Commercial

$
9,149

16.7
%
$
7,696

16.6
%
$
7,411

15.6
%
$
7,636

13.6
%
$
6,702

12.3
%

$
126,655

85.3
%
$
111,954

84.8
%
$
77,843

82.6
%
$
30,941

81.9
%
$
31,936

81.4
%
Real estate

24,916

76.0
%

25,120

75.8
%

24,848

76.7
%

24,821

76.9
%

26,432

78.3
%
Consumer

9,755

7.3
%

9,647

7.6
%

8,568

7.7
%

8,588

9.5
%

8,160

9.4
%

47,467

14.7
%

58,023

15.2
%

63,200

17.4
%

11,353

18.1
%

11,884

18.6
%
Total

$
43,820

100.0
%
$
42,463

100.0
%
$
40,827

100.0
%
$
41,045

100.0
%
$
41,294

100.0
%

$
174,122

100.0
%
$
169,977

100.0
%
$
141,043

100.0
%
$
42,294

100.0
%
$
43,820

100.0
%
(1) Refer to the “Non-GAAP Financial Measures” section within this Item 2 for more information about these non-GAAP financial measures, including a reconciliation of these measures to the most directly comparable financial measures in accordance with GAAP.
(2) Represents the loan balance divided by total loans held for investment.

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Deposits

As of September 30, ~~2019,~~2020, total deposits were ~~$13.0~~$15.6 billion, an increase of ~~$3.1~~$2.3 billion, or ~~30.8%,~~22.8% annualized, from December 31, ~~2018.~~2019. Total interest-bearing deposits consist of NOW, money market, savings, and time deposit account balances. Total time deposit balances of ~~$2.9~~$2.6 billion accounted for ~~29.3%~~23.0% of total interest-bearing deposits at September 30, ~~2019.~~2020.

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


	September 30, 2019				December 31, 2018				September 30, 2020				December 31, 2019
			% of total				% of total				% of total				% of total
Deposits:	Amount		deposits		Amount		deposits		Amount		deposits		Amount		deposits
Non-interest bearing	$	3,155,174	24.2	%	$	2,094,607	21.0	%	$	4,420,665	28.4	%	$	2,970,139	22.3	%
NOW accounts		2,515,777	19.3	%		2,288,523	23.0	%		3,460,480	22.2	%		2,905,714	21.8	%
Money market accounts		3,737,426	28.6	%		2,875,301	28.8	%		4,269,696	27.4	%		3,951,856	29.7	%
Savings accounts		739,505	5.7	%		622,823	6.2	%		861,685	5.5	%		727,847	5.5	%
Time deposits of $100,000 and over⁽¹⁾		1,770,707	13.6	%		1,067,181	10.7	%		1,474,171	9.5	%		1,618,637	12.2	%
Other time deposits		1,126,123	8.6	%		1,022,525	10.3	%		1,089,401	7.0	%		1,130,788	8.5	%
Total Deposits	$	13,044,712	100.0	%	$	9,970,960	100.0	%	$	15,576,098	100.0	%	$	13,304,981	100.0	%

(1)	Includes time deposits of $250,000 and over of ~~$717,090~~$633.3 million and ~~$292,224~~$684.8 million as of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

The Company may also borrow additional funds by purchasing certificates of deposit through a nationally recognized network of financial institutions. The Company utilizes this funding source when rates are more favorable than other funding sources. As of September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, there were ~~$194.2~~$86.4 million and ~~$188.5~~$190.7 million, respectively, purchased certificates of deposit included in certificates of deposit on the Company’s Consolidated Balance Sheets.

Maturities of time deposits of $100,000 or more as of September 30, ~~2019~~2020 were as follows (dollars in thousands):


	Amount		Amount
Within 3 Months	$	527,931	$	273,681
3 - 12 Months		1,114,970
3 - 6 Months				230,818
6 - 12 Months				530,793
Over 12 Months		1,253,929		438,879
Total	$	2,896,830	$	1,474,171

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Table of Contents

Capital Resources

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

~~In July 2013,~~On June 9, 2020, the Company announced the closing of an offering of 6,900,000 depositary shares, each representing a 1/400th ownership interest in a share of its Series A preferred stock, with a liquidation preference of $10,000 per share of Series A preferred stock (equivalent to $25 per depositary share), including 900,000 depositary shares pursuant to the exercise in full by the underwriters of their option to purchase additional depositary shares. The total net proceeds to the Company were approximately $166.4 million, after deducting the underwriting discount and other offering expenses payable by the Company. The Company intends to use the net proceeds of the offering for general corporate purposes in the ordinary course of its business. General corporate purposes may include repayment of debt, loan funding, acquisitions, additions to working capital, capital expenditures and investments in the Company’s subsidiaries.

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

The Federal Reserve issued final rules to include technical changes to its market risk capital rules to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. Effective January 1, 2015, the final rules requirerequires the Company and the Bank to comply with the following minimum capital ratios: (i) a ~~new~~ common equity Tier 1 capital ratio of ~~4.5%~~7.0% of risk-weighted assets; (ii) a Tier 1 capital ratio of ~~6.0%~~8.5% of risk-weighted ~~assets (increased from the prior requirement of 4.0%);~~assets; (iii) a total capital ratio of ~~8.0%~~10.5% of risk-weighted ~~assets (unchanged from the prior requirement);~~assets; and (iv) a leverage ratio of 4.0% of total ~~assets (unchanged from~~assets. These ratios, with the ~~prior requirement). These capital requirements will be phased in over~~exception of the leverage ratio, include a four-year period. The rules were fully phased in on January 1, 2019, and now require the Company and the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer, (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

Beginning January 1, 2016, the capital conservation buffer requirement began to be phased in at 0.625% of risk-weighted assets, and increased by the same amount each year and was fully implemented at 2.5% on January 1, 2019. The capital conservation bufferwhich is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

On February 1, 2019, the Company completed its acquisition of Access. As a result, as of September 30, 2019, the Company’s assets exceeded $15.0 billion and the trust preferred capital notes qualify for Tier 2 capital for regulatory purposes.

On July 10, 2019, the Company announced that its Board of Directors has authorized a share repurchase program to purchase up to $150.0 million of the Company’s common stock through June 30, 2021 in open market transactions or privately negotiated transactions. ~~Authority remained~~On March 20, 2020, the Company suspended its share repurchase program, which had approximately $20 million remaining in authorization at the time. The Company repurchased an aggregate of approximately 3.7 million shares, at an average price of $35.48 per share, under the authorization prior to ~~repurchase approximately $92.0 million and $115 million~~suspension.

On March 27, 2020, the banking agencies issued an interim final rule that allows the Company to phase in the impact of adopting the CECL methodology up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay. The Company is allowed to include the impact of the CECL transition, which is defined as the CECL Day 1 impact to capital plus 25% of the Company’s ~~common stock as of November 1, 2019 and September 30, 2019, respectively.~~provision for credit losses during 2020, in regulatory capital through 2021. Beginning in 2022, the transition amount will begin to impact regulatory capital by phasing it in over a three-year period ending in 2024.

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Table of Contents

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


				September 30,	December 31,	September 30,
	September 30, 2019	December 31, 2018	September 30, 2018	2020	2019	2019
Common equity Tier 1 capital	$ 1,441,259	$ 1,106,871	$ 1,069,539	$ 1,470,639	$ 1,437,908	$ 1,441,259
Tier 1 capital	1,441,259	1,236,709	1,199,189	1,636,995	1,437,908	1,441,259
Tier 2 capital	337,436	199,002	199,301	401,456	335,927	337,436
Total risk-based capital	1,778,695	1,435,711	1,398,491	2,038,451	1,773,835	1,778,695
Risk-weighted assets	13,752,804	11,146,898	10,780,051	14,644,960	14,042,949	13,751,401
Capital ratios:
Common equity Tier 1 capital ratio	10.48%	9.93%	9.92%	10.04%	10.24%	10.48%
Tier 1 capital ratio	10.48%	11.09%	11.12%	11.18%	10.24%	10.48%
Total capital ratio	12.93%	12.88%	12.97%	13.92%	12.63%	12.93%
Leverage ratio (Tier 1 capital to average assets)	8.94%	9.71%	9.89%	8.82%	8.79%	8.94%
Capital conservation buffer ratio ⁽¹⁾	4.48%	4.88%	4.97%	5.18%	4.24%	4.48%
Common equity to total assets	14.48%	13.98%	14.06%	12.52%	14.31%	14.48%
Tangible common equity to tangible assets ⁽²⁾	9.23%	8.84%	8.74%	7.91%	9.08%	9.23%

(1)	Calculated by subtracting the regulatory minimum capital ratio requirements from the Company’s actual ratio results for Common equity, Tier 1, and Total risk based capital. The lowest of the three measures represents the Company’s capital conservation buffer ratio.

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

(3)	All ratios and amounts at September 30, ~~2019~~2020 are estimates and subject to change pending the Company’s filing of its FR Y9-C. All other periods are presented as filed.

SUPERVISION AND REGULATION

The following information is intended to update, and should be read in conjunction with, the information contained under the caption “Supervision and Regulation” in the Company’s 2019 Form 10-K and the supplemental disclosure related thereto contained under the same caption in the Company’s first quarter Form 10-Q filed on May 8, 2020 and the Company’s second quarter Form 10-Q filed on August 4, 2020.
The CARES Act
On March 27, 2020, the CARES Act was passed by Congress and signed into law by the President. The CARES Act provided approximately $2.2 trillion in direct economic relief in response to the public health and economic impacts of COVID-19. Many of the CARES Act’s programs are, and remain, dependent upon the direct involvement of U.S. financial institutions like the Company and the Bank. These programs have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve, and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including new bills comparable in scope to the CARES Act, prior to the end of 2020.

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

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

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

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

Federal Reserve Programs and Other Recent Initiatives

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

Supervisory Developments.

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

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

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

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

NON-GAAP FINANCIAL MEASURES
In reporting the results of the three and nine months ended September 30, 2020 and 2019, the Company has provided supplemental performance measures on a tax-equivalent, tangible, operating, adjusted and/or ~~operating~~pre-tax pre-provision basis. These non-GAAP financial measures are a supplement to GAAP ~~which is~~ used to prepare the Company’s financial statements and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company’s non-GAAP ~~financial~~ measures may not be comparable to non-GAAP ~~financial~~ measures of other companies. The Company uses the non-GAAP ~~financial~~ measures discussed herein in its analysis of the Company’s performance.
Net interest income (FTE) and total revenue (FTE), which isare used in computing net interest margin (FTE) and operating efficiency ratio (FTE), ~~provides~~respectively, provide valuable additional insight into the net interest margin and the efficiency ratio by adjusting for differences in tax treatment of interest income sources. The entire FTE adjustment is attributable to interest income on earning assets, which is used in computing yield on earning assets. Interest expense and the related cost of interest-bearing liabilities and cost of funds ratios are not affected by the FTE components.

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019


2020

2019

Interest Income (FTE)

Interest and dividend income (GAAP)

$
157,414

$
178,345

$
491,607

$
525,122

FTE adjustment

2,901

2,804

8,462

8,468

Interest and dividend income FTE (non-GAAP)

$
160,315

$
181,149

$
500,069

$
533,590

Average earning assets

$
17,748,152

$
15,191,792

$
16,809,423

$
14,700,019

Yield on interest-earning assets (GAAP)

3.53
%

4.66
%

3.91
%

4.78
%
Yield on interest-earning assets (FTE) (non-GAAP)

3.59
%

4.73
%

3.97
%

4.85
%
Net Interest Income (FTE)









Net Interest Income (GAAP)

$
137,381

$
136,601

$
409,694

$
402,743

FTE adjustment

2,901

2,804

8,462

8,468

Net Interest Income FTE (non-GAAP)

140,282

139,405

418,156

411,211

Noninterest income (GAAP)

34,407

48,106

99,245

103,621

Total Revenue (FTE) (non-GAAP)

$
174,689

$
187,511

$
517,401

$
514,832

Average earning assets

$
17,748,152

$
15,191,792

$
16,809,423

$
14,700,019

Net interest margin (GAAP)

3.08
%

3.57
%

3.26
%

3.66
%
Net interest margin (FTE) (non-GAAP)

3.14
%

3.64
%

3.32
%

3.74
%

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

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019


2020

2019

Tangible Assets









Ending Assets (GAAP)

$
19,930,650

$
17,441,035

$
19,930,650

$
17,441,035

Less: Ending goodwill

935,560

929,815

935,560

929,815

Less: Ending amortizable intangibles

61,068

78,241

61,068

78,241

Ending tangible assets (non-GAAP)

$
18,934,022

$
16,432,979

$
18,934,022

$
16,432,979

Tangible Common Equity









Ending Equity (GAAP)

$
2,660,885

$
2,525,031

$
2,660,885

$
2,525,031

Less: Ending goodwill

935,560

929,815

935,560

929,815

Less: Ending amortizable intangibles

61,068

78,241

61,068

78,241

Less: Perpetual preferred stock

166,357

—

166,357

—

Ending tangible common equity (non-GAAP)

$
1,497,900

$
1,516,975

$
1,497,900

$
1,516,975

Average equity (GAAP)

$
2,648,777

$
2,528,435

$
2,541,856

$
2,429,912

Less: Average goodwill

935,560

930,525

935,560

906,476

Less: Average amortizable intangibles

63,016

80,510

67,130

80,605

Less: Average perpetual preferred stock

166,353

—

69,248

—

Average tangible common equity (non-GAAP)

$
1,483,848

$
1,517,400

$
1,469,918

$
1,442,831

ROE (GAAP)

9.16
%

8.35
%

5.19
%

7.58
%
Common equity to assets (GAAP)

12.52
%

14.48
%

12.52
%

14.48
%
Tangible common equity to tangible assets (non-GAAP)

7.91
%

9.23
%

7.91
%

9.23
%
Book value per share (GAAP)

$
31.86

$
31.29

$
31.86

$
31.29

Tangible book value per share (non-GAAP)

$
19.13

$
18.80

$
19.13

$
18.80

Operating measures exclude ~~merger~~merger-related and rebranding-related costs unrelated to the Company’s normal operations. The Company believes these measures are useful to investors as they exclude certain costs resulting from acquisition activity and allow investors to more clearly see the combined economic results of the ~~organization’s~~organization's operations.
The following table reconciles non-GAAP financial measures from the most directly comparable GAAP financial measures for each of the periods presented (dollars in thousands, except per share amounts):

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019


2020

2019

Operating Measures

Net income (GAAP)

$
61,000

$
53,238

$
98,798

$
137,692

Merger and rebranding-related costs, net of tax

—

2,819

—

25,973

Net operating earnings (non-GAAP)

$
61,000

$
56,057

$
98,798

$
163,665

Less: Dividends on preferred stock

2,691

—

2,691

—

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

$
58,309

$
56,057

$
96,107

$
163,665

Weighted average common shares outstanding, diluted

78,725,346

81,832,868

78,921,108

80,183,113

Earnings per common share, diluted (GAAP)

$
0.74

$
0.65

$
1.22

$
1.72

Operating earnings per share, diluted (non-GAAP)

$
0.74

$
0.69

$
1.22

$
2.04

Average assets (GAAP)

$
19,785,167

$
17,203,328

$
18,837,580

$
16,639,041

ROA (GAAP)

1.23
%

1.23
%

0.70
%

1.11
%
Operating ROA (non-GAAP)

1.23
%

1.29
%

0.70
%

1.32
%

Average common equity (GAAP)

$
2,648,777

$
2,528,435

$
2,541,856

$
2,429,912

ROE (GAAP)

9.16
%

8.35
%

5.19
%

7.58
%
Operating ROE (non-GAAP)

9.16
%

8.80
%

5.19
%

9.01
%

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

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019


2020

2019

Noninterest expense (GAAP)

$
93,222

$
111,687

$
291,681

$
324,022

Less: Merger-related costs

—

2,435

—

26,928

Less: Rebranding-related costs

—

1,133

—

5,553

Less: Amortization of intangible assets

4,053

4,764

12,676

13,919

Operating noninterest expense (non-GAAP)

$
89,169

$
103,355

$
279,005

$
277,622

Net interest income (GAAP)

$
137,381

$
136,601

$
409,694

$
402,743

Net interest income (FTE) (non-GAAP)

$
140,282

$
139,405

$
418,156

$
411,211

Noninterest income (GAAP)

$
34,407

$
48,106

$
99,245

$
103,621

Efficiency ratio (GAAP)

54.27
%

60.47
%

57.31
%

63.99
%
Operating efficiency ratio (FTE) (non-GAAP)

51.04
%

55.12
%

53.92
%

53.92
%

The Company believes that operating ROTCE is a meaningful supplement to GAAP financial measures and useful to investors because it measures the performance of a business consistently across time without regard to whether components of the business were acquired or developed internally.
The following table reconciles non-GAAP financial measures from the most directly comparable GAAP financial measures for each of the periods presented (dollars in thousands):

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019


2020

2019

Operating ROTCE

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

$
58,309

$
56,057

$
96,107

$
163,665

Plus: Amortization of intangibles, tax effected

3,202

3,764

10,014

10,996

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

$
61,511

$
59,821

$
106,121

$
174,661

Average tangible common equity (non-GAAP)

$
1,483,848

$
1,517,400

$
1,469,918

$
1,442,831

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

16.49
%

15.64
%

9.64
%

16.18
%

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

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

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


2020

2019


2020

2019
Pre-tax pre-provision operating earnings

Net Income (GAAP)

$
61,000

$
53,238

$
98,798

$
137,692
Plus: Provision for credit losses

6,558

9,100

100,954

18,192
Plus: Income tax expenses

11,008

10,724

17,506

26,330
Plus: Merger and rebranding-related costs

—

3,568

—

32,481
Pre-tax pre-provision operating earnings (non-GAAP)

$
78,566

$
76,630

$
217,258

$
214,695

Three Months Ended

Nine Months Ended

September 30,

September 30,


2019

2018


2019

2018

Interest Income (FTE)

Interest and dividend income (GAAP)

$
178,345

$
131,363

$
525,122

$
388,151

FTE adjustment

2,804

2,014

8,468

5,860

Interest and dividend income FTE (non-GAAP)

$
181,149

$
133,377

$
533,590

$
394,011

Average earning assets

$
15,191,792

$
11,383,320

$
14,700,019

$
11,506,200

Yield on interest-earning assets (GAAP)

4.66
%

4.58
%

4.78
%

4.51
%
Yield on interest-earning assets (FTE) (non-GAAP)

4.73
%

4.65
%

4.85
%

4.58
%
Net Interest Income (FTE)









Net Interest Income (GAAP)

$
136,601

$
105,963

$
402,743

$
317,602

FTE adjustment

2,804

2,014

8,468

5,860

Net Interest Income FTE (non-GAAP)

139,405

107,977

411,211

323,462

Average earning assets

$
15,191,792

$
11,383,320

$
14,700,019

$
11,506,200

Net interest margin (GAAP)

3.57
%

3.69
%

3.66
%

3.69
%
Net interest margin (FTE) (non-GAAP)

3.64
%

3.76
%

3.74
%

3.76
%
Tangible Assets









Ending Assets (GAAP)

$
17,441,035

$
13,371,742

$
17,441,035

$
13,371,742

Less: Ending goodwill

929,815

727,699

929,815

727,699

Less: Ending amortizable intangibles

78,241

51,563

78,241

51,563

Ending tangible assets (non-GAAP)

$
16,432,979

$
12,592,480

$
16,432,979

$
12,592,480

Tangible Common Equity









Ending Equity (GAAP)

$
2,525,031

$
1,880,029

$
2,525,031

$
1,880,029

Less: Ending goodwill

929,815

727,699

929,815

727,699

Less: Ending amortizable intangibles

78,241

51,563

78,241

51,563

Ending tangible common equity (non-GAAP)

$
1,516,975

$
1,100,767

$
1,516,975

$
1,100,767

Average equity (GAAP)

$
2,528,435

$
1,880,582

$
2,429,912

$
1,851,072

Less: Average goodwill

930,525

723,785

906,476

724,940

Less: Average amortizable intangibles

80,510

53,267

80,605

51,829

Average tangible common equity (non-GAAP)

$
1,517,400

$
1,103,530

$
1,442,831

$
1,074,303

ROE (GAAP)

8.35
%

8.06
%

7.58
%

7.38
%
Common equity to assets (GAAP)

14.48
%

14.06
%

14.48
%

14.06
%
Tangible common equity to tangible assets (non-GAAP)

9.23
%

8.74
%

9.23
%

8.74
%
Book value per share (GAAP)

$
31.29

$
28.68

$
31.29

$
28.68

Tangible book value per share (non-GAAP)

$
18.80

$
16.79

$
18.80

$
16.79

Operating Measures

Net income (GAAP)

$
53,238

$
38,197

$
137,692

$
102,163

Merger-related costs, net of tax

2,819

1,129

25,973

29,902

Net operating earnings (non-GAAP)

$
56,057

$
39,326

$
163,665

$
132,065

Weighted average common shares outstanding, diluted

81,832,868

66,013,152

80,183,113

65,873,202

Earnings per common share, diluted (GAAP)

$
0.65

$
0.58

$
1.72

$
1.55

Operating earnings per share, diluted (non-GAAP)

$
0.69

$
0.60

$
2.04

$
2.01

Average assets (GAAP)

$
17,203,328

$
12,947,352

$
16,639,041

$
13,061,453

ROA (GAAP)

1.23
%

1.17
%

1.11
%

1.05
%
Operating ROA (non-GAAP)

1.29
%

1.21
%

1.32
%

1.35
%

Average common equity (GAAP)

$
2,528,435

$
1,880,582

$
2,429,912

$
1,851,072

ROE (GAAP)

8.35
%

8.06
%

7.58
%

7.38
%
Operating ROE (non-GAAP)

8.80
%

8.30
%

9.01
%

9.54
%

Noninterest expense (GAAP)

$
111,687

$
76,349

$
324,022

$
263,234

Less: Merger-related costs

2,435

1,429

26,928

37,414

Less: Rebranding-related costs

1,133

—

5,553

—

Less: Amortization of intangible assets

4,764

3,490

13,919

9,885

Operating noninterest expense (non-GAAP)

$
103,355

$
71,430

$
277,622

$
215,935

Net interest income (GAAP)

$
136,601

$
105,963

$
402,743

$
317,602

Net interest income (FTE) (non-GAAP)

$
139,405

$
107,977

$
411,211

$
323,462

Noninterest income (GAAP)

$
48,106

$
19,887

$
103,621

$
80,752

Efficiency ratio (GAAP)

60.47
%

60.67
%

63.99
%

66.08
%
Operating efficiency ratio (FTE) (non-GAAP)

55.12
%

58.59
%

53.92
%

55.87
%
Operating ROTCE

Operating Net Income (non-GAAP)

$
56,057

$
39,326

$
163,665

$
132,065

Plus: Amortization of intangibles, tax effected

3,764

2,757

10,996

7,809

Net Income before amortization of intangibles (non-GAAP)

$
59,821

$
42,083

$
174,661

$
139,874

Average tangible common equity (non-GAAP)

$
1,517,400

$
1,103,530

$
1,442,831

$
1,074,303

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

15.64
%

15.13
%

16.18
%

17.41
%

Three Months Ended

Nine Months Ended

September 30,

June 30,

March 31,

December 31,

September 30,

September 30,

September 30,

2020

2020

2020

2019

2019

2020

2019
PPP adjustment impact

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

$
14,383,215

$
14,308,646

$
12,768,841

$
12,610,936

$
12,306,997

$
14,383,215

$
12,306,997
Less: PPP adjustments

1,600,577

1,598,718

—

—

—

1,600,577

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

$
12,782,638

$
12,709,928

$
12,768,841

$
12,610,936

$
12,306,997

$
12,782,638

$
12,306,997

Average loans held for investment (GAAP)

$
14,358,666

$
13,957,711

$
12,593,923

$
12,327,692

$
12,240,254

$
13,639,401

$
11,821,612
Less: Average PPP adjustments

1,638,204

1,273,883

—

—

—

1,457,091

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

$
12,720,462

$
12,683,828

$
12,593,923

$
12,327,692

$
12,240,254

$
12,182,310

$
11,821,612

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. The Company’s market risk is composed primarily of interest rate risk. The ALCO of the Company is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to this risk. The Company’s Board of Directors reviews and approves the guidelines established by ALCO.
Interest rate risk is monitored through the use of three complementary modeling tools: static gap analysis, earnings simulation modeling, and economic value simulation (net present value estimation). Each of these models measures changes in a variety of interest rate scenarios. While each of the interest rate risk models has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Static gap, which measures aggregate re-pricing values, is less utilized because it does not effectively measure the options risk impact on the Company and is not addressed here. Earnings simulation and economic value models, which more effectively measure the cash flow and optionality impacts, are utilized by management on a regular basis and are explained below.
The Company determines the overall magnitude of interest sensitivity risk and then formulates policies and practices governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, the states of the national, regional and local economies, and other financial and business risk factors. The Company uses simulation modeling to measure and monitor the effect of various interest rate scenarios and business strategies on net interest income. This modeling reflects interest rate changes and the related impact on net interest income and net income over specified time horizons.
Earnings Simulation Analysis
Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analyses, such as the static gap analysis discussed above.
Assumptions used in the model are derived from historical trends and management’s outlook and include loan and deposit growth rates and projected yields and rates. These assumptions may not materialize and unanticipated events and circumstances may occur. The model also does not take into account any future actions of management to mitigate the impact of interest rate changes. Such assumptions are monitored by management and periodically adjusted as appropriate. All maturities, calls, and prepayments in the securities portfolio are assumed to be reinvested in like instruments. ~~Mortgage loans and mortgage-backed~~Mortgage-backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are reflected in the different rate scenarios.
The Company uses its simulation model to estimate earnings in rate environments where rates are instantaneously shocked up or down around a “most likely” rate scenario, based on implied forward rates and futures curves. The analysis assesses the impact on net interest income over a 12-month time horizon after an immediate increase or “shock” in rates, of 100 basis points up to 300 basis points. The model, under all scenarios, does not drop the index below zero.

~~-82-~~-95-

Table of Contents

The following table represents the interest rate sensitivity on net interest income for the Company across the rate paths modeled for balances as of September 30, ~~2019~~2020 and ~~2018~~2019 (dollars in thousands):

Change In Net Interest Income

September 30,

2019

2018

2020

2019

Change in Yield Curve:

+300 basis points

13.16

73,140

7.34

32,889

11.39

61,649

13.16

73,140

+200 basis points

8.71

48,405

5.41

24,219

8.26

44,678

8.71

48,405

+100 basis points

4.48

24,893

2.76

12,369

4.37

23,637

4.48

24,893

Most likely rate scenario

—

-100 basis points

(5.39)

(29,980)

(3.40)

(15,236)

(0.97)

(5,244)

(5.39)

(29,980)

-200 basis points

(8.71)

(48,423)

(7.52)

(33,701)

(1.19)

(6,454)

(8.71)

(48,423)

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

From a net interest income perspective, the Company was ~~more~~less asset sensitive as of September 30, ~~2019,~~2020, compared to its position as of September 30, ~~2018.~~2019. This shift is in part due to the changing market characteristics of certain loan and deposit products and in part due to various other balance sheet strategies. The Company would expect net interest income to increase with an immediate increase or shock in market rates. In the decreasing interest rate environments, the Company would expect a decline in net interest income as interest-earning assets re-price at lower rates and interest-bearing deposits remain near their floors.

Economic Value Simulation

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

The following chart reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the quarterly periods ended September 30, ~~2019~~2020 and ~~2018~~2019 (dollars in thousands):

Change In Economic Value of Equity

September 30,

2019

2018

2020

2019

Change in Yield Curve:

+300 basis points

(4.13)

(132,210)

(4.48)

(117,972)

(1.30)

(38,815)

(4.13)

(132,210)

+200 basis points

(2.44)

(78,042)

(2.64)

(69,687)

0.49

14,551

(2.44)

(78,042)

+100 basis points

(0.97)

(31,031)

(1.03)

(27,234)

1.39

41,643

(0.97)

(31,031)

Most likely rate scenario

—

-100 basis points

(3.43)

(109,752)

(0.96)

(25,237)

(5.24)

(156,742)

(3.43)

(109,752)

-200 basis points

(9.63)

(307,914)

(3.59)

(94,539)

(1.96)

(58,650)

(9.63)

(307,914)

~~-83-~~

~~Table of Contents~~

As of September 30, ~~2019,~~2020, the Company’s economic value of equity is less sensitive in a rising interest rate environment compared to September 30, ~~2018~~2019 primarily due to the composition of the Consolidated Balance Sheets and due in part to the market characteristics of certain loans and deposits.

-96-

Table of Contents

ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, ~~2019.~~2020. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act, means controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, ~~2019,~~2020, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control Over Financial Reporting
~~There was no change in~~Management has taken measures to maintain the internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) ~~that occurred~~ during the quarter ended September 30, ~~2019~~2020. There have been no changes that ~~has~~have materially affected, or isare reasonably likely to materially affect, the internal control over financial reporting.

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Table of Contents

PART II - OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business or the financial condition or results of operations of the Company.
ITEM 1A – RISK FACTORS
~~There~~During the quarter ended September 30, 2020, there have been no material changes ~~with respect to~~from the risk factors previously disclosed under Part I, Item 1A. “Risk Factors” in the Company’s ~~2018~~2019 Annual Report and Part II, Item 1A. “Risk Factors” in the Company’s second quarter Form ~~10-K.~~10-Q filed on August 4, 2020.
An investment in the Company’s securities involves risks. In addition to the other information set forth in this Quarterly Report, including the information addressed under “Forward-Looking Statements,” investors in the Company’s securities should carefully consider the factors discussed below, as well as the factors discussed in the Company’s 2019 Annual Report and second quarter Form 10-Q filed on August 4, 2020. These factors could materially and adversely affect the Company’s business, financial condition, liquidity, results of operations, and capital position and could cause the Company’s actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this report, in which case the trading price of the Company’s securities could decline.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Sales of Unregistered Securities – None
(b) Use of Proceeds – Not Applicable.
(c) Issuer Purchases of Securities
Stock Repurchase Program; Other

~~The following information describes the Company’s common stock repurchases for the three months ended September 30, 2019:~~

Period

Total number of shares purchased⁽¹⁾

Average price paid per share ($)

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

Approximate value of shares remaining that may be purchased under the plan ($)
July 1 - July 31, 2019

2,308

35.49

-

150,000,000
August 1 - August 31, 2019

556,745

35.90

556,365

130,027,000
September 1 - September 30, 2019

413,762

37.01

412,900

114,746,000
Total

972,815

36.37

969,265

~~(1)~~ ~~Effective~~On July 8, 2019, the Company’s Board of Directors authorized a share repurchase program to purchase up to ~~$150.0~~$150 million worth of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act. The repurchase program iswas authorized through June 30, ~~2021. During~~2021, but, on March 20, 2020, the Company announced the suspension of the program.

The following information describes the Company’s common stock repurchases for the three months ended September 30, ~~2019, 3,550 shares were withheld upon the vesting of restricted shares granted to employees of the Company in order to satisfy tax withholding obligations.~~2020:

Period

Total number of shares purchased⁽¹⁾

Average price paid per share ($)

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

Approximate dollar value of shares that may yet be purchased under the plans or programs ($)
July 1 - July 31, 2020

294

22.02

-

19,951,000
August 1 - August 31, 2020

450

25.04

-

19,951,000
September 1 - September 30, 2020

281

22.03

-

19,951,000
Total

1,025

23.35

-

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

~~-85-~~-98-

Table of Contents

ITEM 6 – EXHIBITS
The following exhibits are filed as part of this ~~Form 10-Q~~Quarterly Report and this list includes the Exhibit Index:

Exhibit No.
Description

~~2.01~~2.1

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

~~2.02~~2.2

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

~~3.01~~3.1

Amended and Restated Articles of Incorporation of Atlantic Union Bankshares Corporation, ~~as amended April 25, 2014~~effective May 7, 2020 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on ~~April 29, 2014)~~May 7, 2020).

~~3.02~~3.1.1

~~Amendment to~~ Articles of ~~Incorporation of Atlantic Union Bankshares Corporation,~~Amendment designating the 6.875% Perpetual Non-Cumulative Preferred Stock, Series A, effective ~~May 17, 2019~~June 9, 2020 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on ~~May 3, 2019)~~June 9, 2020).

~~3.03~~3.2

Amended and Restated Bylaws of Atlantic Union Bankshares Corporation, effective ~~May 17,~~as of December 5, 2019 (incorporated by reference to Exhibit ~~3.2~~3.3 to ~~Current~~Annual Report on Form ~~8-K~~10-K filed on ~~May 3, 2019)~~February 25, 2020).

~~15.01~~15.1

Letter regarding unaudited interim financial information.

~~31.01~~31.1

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

~~31.02~~31.2

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

~~32.01~~32.1

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

~~101.00~~101.0

Interactive data files formatted in Inline eXtensible Business Reporting Language for the quarter ended September 30, ~~2019~~2020 pursuant to Rule 405 of Regulation S-T (1): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income (unaudited), (iii) the Consolidated Statements of Comprehensive Income (unaudited), (iv) the Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (v) the Consolidated Statements of Cash Flows (unaudited) and (vi) the Notes to Consolidated Financial Statements (unaudited).

~~104.00~~104.0

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2019,~~2020, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).

~~-86-~~-99-

Table of Contents

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

Atlantic Union Bankshares Corporation

(Registrant)

Date: November ~~5, 2019~~3, 2020
By:
/s/ John C. Asbury

John C. Asbury,

President and Chief Executive Officer

(principal executive officer)

Date: November ~~5, 2019~~3, 2020
By:
/s/ Robert M. Gorman

Robert M. Gorman,

Executive Vice President and Chief Financial Officer

(principal financial and accounting officer)

~~-87-~~-100-


ITEM		PAGE

	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019 (audited)	2

	Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019	3

	Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019	4

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019	5

	Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, ~~2019~~2020 and ~~2018~~2019	7

	Notes to Consolidated Financial Statements (unaudited)	9

	Review Report of Independent Registered Public Accounting Firm	5560

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5661

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	8295

Item 4.	Controls and Procedures	8497

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	8598

Item 1A.	Risk Factors	8598

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8598

Item 6.	Exhibits	8699

	Signatures	87100


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

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

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


		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


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

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

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

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


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


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


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

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


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

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


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


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


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


	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		0		168
Multifamily Real Estate		0		33		0		359
Commercial & Industrial		3,037		1,592		0		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		0		315
Consumer		88		75		0		327
Other Commercial		98		—		0		0
Total loans held for investment	$	45,204	$	39,023	$	6,846	$	15,661


	September 30, 2020
	No. of	Recorded		Outstanding
	Loans	Investment		Commitment
Performing
Construction and Land Development	4	$	219	$	0
Commercial Real Estate - Owner Occupied	6		2,140		101
Commercial Real Estate - Non-Owner Occupied	1		1,089		0
Commercial & Industrial	5		1,117		0
Residential 1-4 Family - Commercial	3		247		0
Residential 1-4 Family - Consumer	80		9,165		0
Residential 1-4 Family - Revolving	2		55		0
Consumer	5		31		0
Other Commercial	1		452		0
Total performing	107	$	14,515	$	101
Nonperforming
Commercial Real Estate - Owner Occupied	2	$	293	$	0
Commercial Real Estate - Non-Owner Occupied	1		137		0
Commercial & Industrial	3		261		0
Residential 1-4 Family - Commercial	4		1,313		0
Residential 1-4 Family - Consumer	23		4,937		0
Residential 1-4 Family - Revolving	3		104		0
Total nonperforming	36	$	7,045	$	0
Total performing and nonperforming	143	$	21,560	$	101


	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	0	$	0	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	0	$	0	3	$	127
Residential 1-4 Family - Commercial	1		299	1		299
Residential 1-4 Family - Consumer	0		0	4		324
Consumer	0		0	1		10
Total loan term extended at a market rate	1	$	299	9	$	760

Term modification, below market rate
Construction and Land Development	0	$	0	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	0		0	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	0	$	0	0	$	0

Total	8	$	1,807	33	$	4,805





	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


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


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


		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		0		0			368		710		2,040		3,968		0		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		0		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		0		0			6,464		0		25		3,248		0		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		0		16,733
Substandard		0		0			0		0		0		391		0		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		0		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		0			621		1,312		927		8,351		0		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


	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


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

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

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

Total	18	$	9,352	40	$	13,892


	December 31, 2019
	No. of	Recorded		Outstanding
	Loans	Investment		Commitment
Performing
Construction and Land Development	4	$	1,114	$	0
Commercial Real Estate - Owner Occupied	6		2,228		26
Commercial Real Estate - Non-Owner Occupied	1		1,089		0
Commercial & Industrial	4		1,020		0
Residential 1-4 Family - Commercial	5		290		0
Residential 1-4 Family - Consumer	69		9,396		0
Residential 1-4 Family - Revolving	2		56		0
Consumer	4		29		0
Other Commercial	1		464		0
Total performing	96	$	15,686	$	26
Nonperforming
Commercial Real Estate - Owner Occupied	2	$	176	$	0
Commercial & Industrial	1		55		0
Residential 1-4 Family - Consumer	19		3,522		0
Residential 1-4 Family - Revolving	2		57		0
Total nonperforming	24	$	3,810	$	0
Total performing and nonperforming	120	$	19,496	$	26


	Nine Months Ended September 30, 2019										Nine Months Ended September 30, 2019
	Allowance for loan losses										Allowance for loan losses
	Balance,		Recoveries		Loans		Provision		Balance,		Balance,		Recoveries		Loans		Provision		Balance,
	beginning of		credited to		charged		charged to		end of		beginning of		credited to		charged		charged to		end of
	the year		allowance		off		operations		period		the year		allowance		off		operations		period
Construction and Land Development	$	6,803	$	269	$	(4,028)	$	2,863	$	5,907	$	6,803	$	269	$	(4,028)	$	2,863	$	5,907
Commercial Real Estate - Owner Occupied		4,023		118		(483)		361		4,019		4,023		118		(483)		361		4,019
Commercial Real Estate - Non-Owner Occupied		8,865		95		(270)		996		9,686		8,865		95		(270)		996		9,686
Multifamily Real Estate		649		85		—		46		780		649		85		0		46		780
Commercial & Industrial		7,636		936		(2,162)		2,739		9,149		7,636		936		(2,162)		2,739		9,149
Residential 1-4 Family - Commercial		1,692		244		(397)		50		1,589		1,692		244		(397)		50		1,589
Residential 1-4 Family - Consumer		1,492		256		(108)		158		1,798		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		1,443		452		(957)		614		1,552
HELOC		1,297		589		(570)		(179)		1,137
Consumer and all other⁽¹⁾		7,145		1,896		(12,215)		11,377		8,203		7,145		1,896		(12,215)		11,377		8,203
Total	$	41,045	$	4,940	$	(21,190)	$	19,025	$	43,820	$	41,045	$	4,940	$	(21,190)	$	19,025	$	43,820


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


	Pass		Watch & Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	1,197,066	$	37,182	$	5,732	$	0	$	1,239,980
Commercial Real Estate - Owner Occupied		1,916,492		87,004		10,309		0		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		0		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		0		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		0		655,377
Auto		345,960		2,630		1,825		0		350,415
Consumer		371,315		550		320		0		372,185
Other Commercial		284,914		1,863		158		0		286,935
Total	$	12,142,328	$	316,317	$	65,252	$	358	$	12,524,255


	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


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


	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	%


	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


	September 30, 2020
	Lessor		Lessee
		Sales-type and Direct Financing	Operating		Finance
For the remaining three months of 2020	$	7,416	$	3,193	$	0
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


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