Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-39325
ATLANTIC UNION BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
54-1598552
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
1051 East Cary Street
Suite 1200
Richmond, Virginia 23219
(Address of principal executive offices) (Zip Code)
(804) 633-5031
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.33 per share
AUB
The NASDAQ Global Select Market
Depositary Shares, Each Representing a 1/400th Interest in a Share of 6.875% Perpetual Non-Cumulative Preferred Stock, Series A
AUBAP
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of common stock outstanding as of October 28, 2021 was 75,653,113.
INDEX
ITEM
PAGE
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020 (audited)
2
Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2021 and 2020
3
Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2021 and 2020
4
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and nine months ended September 30, 2021 and 2020
5
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2021 and 2020
7
Notes to Consolidated Financial Statements (unaudited)
9
Review Report of Independent Registered Public Accounting Firm
52
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
53
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
84
Item 4.
Controls and Procedures
86
PART II - OTHER INFORMATION
Legal Proceedings
88
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
89
Signatures
90
Glossary of Acronyms and Defined Terms
2020 Form 10-K
–
Annual Report on Form 10-K for the year ended December 31, 2020
Access
Access National Corporation and its subsidiaries
ACL
Allowance for credit losses
AFS
Available for sale
ALCO
Asset Liability Committee
ALLL
Allowance for loan and lease losses, a component of ACL
AOCI
Accumulated other comprehensive income (loss)
ASC
Accounting Standards Codification
ASC 326
ASU 2016-13, Financial Instruments and Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
ASC 820
ASC 820, Fair Value Measurements and Disclosures
ASU
Accounting Standards Update
ATM
Automated teller machine
Atlantic Union Bankshares Corporation
Atlantic Union Bankshares Corporation trading symbol
the Bank
Atlantic Union Bank (formerly, Union Bank & Trust)
BOLI
Bank-owned life insurance
bps
Basis points
CAA
Consolidated Appropriations Act, 2021
CARES Act
Coronavirus Aid, Relief, and Economic Security Act
CECL
Current expected credit losses
the Company
Atlantic Union Bankshares Corporation (formerly, Union Bankshares Corporation) and its subsidiaries
COVID-19
COVID-19 global pandemic
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)
DHFB
Dixon, Hubard, Feinour & Brown, Inc.
EPS
Earnings per common 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 Bank or
FRB
Federal Reserve Bank of Richmond
FHLB
Federal Home Loan Bank of Atlanta
FHLMC
Federal Home Loan Mortgage Corporation
FNMA
Federal National Mortgage Association
FOMC
Federal Open Markets Committee
FTE
Fully taxable equivalent
GAAP or U.S. GAAP
Accounting principles generally accepted in the United States
GNMA
Government National Mortgage Association
HTM
Held to maturity
ICE Data Services
Intercontinental Exchange Data Services
the Joint Guidance
The five federal bank regulatory agencies and the Conference of State Bank Supervisors guidance issued on March 22, 2020 (subsequently revised on April 7, 2020)
LHFI
Loans held for investment
LHFS
Loans held for sale
LIBOR
London Interbank Offered Rate
NOW
Negotiable order of withdrawal
NPA
Nonperforming assets
OCI
Other comprehensive income
OREO
Other real estate owned
OTC
Over-the-counter
PCD
Purchased credit deteriorated
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, 2021
Repurchase Program
The share repurchase program, approved on May 4, 2021 by the Company’s Board of Directors, which authorizes the Company to purchase up to $125 million worth of the Company’s common stock
ROU Asset
Right of Use Asset
RUC
Reserve for unfunded commitments
RVI
Residual value insurance
SBA
Small Business Administration
SEC
Securities and Exchange Commission
Series A preferred stock
6.875% Perpetual Non-Cumulative Preferred Stock, Series A, par value $10.00 per share
SSFA
Simplified supervisory formula approach
TDR
Troubled debt restructuring
Topic 606
ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606”
Topic 740
ASU 2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes”
Topic 848
ASU 2020-04, “Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting”
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,
2021
2020
ASSETS
(unaudited)
(audited)
Cash and cash equivalents:
Cash and due from banks
$
255,648
172,307
Interest-bearing deposits in other banks
807,225
318,974
Federal funds sold
377
2,013
Total cash and cash equivalents
1,063,250
493,294
Securities available for sale, at fair value
3,195,176
2,540,419
Securities held to maturity, at carrying value
535,722
544,851
Restricted stock, at cost
76,825
94,782
Loans held for sale, at fair value
35,417
96,742
Loans held for investment, net of deferred fees and costs
13,139,586
14,021,314
Less allowance for loan and lease losses
101,798
160,540
Total loans held for investment, net
13,037,788
13,860,774
Premises and equipment, net
159,588
163,829
Goodwill
935,560
Amortizable intangibles, net
46,537
57,185
Bank owned life insurance
430,341
326,892
Other assets
419,453
514,121
Total assets
19,935,657
19,628,449
LIABILITIES
Noninterest-bearing demand deposits
5,328,838
4,368,703
Interest-bearing deposits
11,293,322
11,354,062
Total deposits
16,622,160
15,722,765
Securities sold under agreements to repurchase
95,181
100,888
Other short-term borrowings
—
250,000
Long-term borrowings
290,584
489,829
Other liabilities
233,293
356,477
Total liabilities
17,241,218
16,919,959
Commitments and contingencies (Note 7)
STOCKHOLDERS' EQUITY
Preferred stock, $10.00 par value
173
Common stock, $1.33 par value
100,062
104,169
Additional paid-in capital
1,804,617
1,917,081
Retained earnings
760,164
616,052
29,423
71,015
Total stockholders' equity
2,694,439
2,708,490
Total liabilities and stockholders' equity
Common shares outstanding
75,645,031
78,729,212
Common shares authorized
200,000,000
Preferred shares outstanding
17,250
Preferred shares authorized
500,000
See accompanying notes to consolidated financial statements.
-2-
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except share and per share data)
Three Months Ended
Nine Months Ended
Interest and dividend income:
Interest and fees on loans
124,999
138,402
383,575
432,763
Interest on deposits in other banks
291
137
454
1,154
Interest and dividends on securities:
Taxable
11,230
10,275
32,102
33,170
Nontaxable
9,859
8,600
28,773
24,520
Total interest and dividend income
146,379
157,414
444,904
491,607
Interest expense:
Interest on deposits
5,837
15,568
22,203
63,943
Interest on short-term borrowings
22
72
91
1,598
Interest on long-term borrowings
3,032
4,393
9,676
16,372
Total interest expense
8,891
20,033
31,970
81,913
Net interest income
137,488
137,381
412,934
409,694
Provision for credit losses
(18,850)
6,558
(59,888)
100,954
Net interest income after provision for credit losses
156,338
130,823
472,822
308,740
Noninterest income:
Service charges on deposit accounts
7,198
6,041
19,314
18,549
Other service charges, commissions and fees
1,534
1,621
4,970
4,600
Interchange fees
2,203
1,979
6,252
5,300
Fiduciary and asset management fees
7,029
6,045
20,323
17,543
Mortgage banking income
4,818
8,897
17,692
16,744
Gains on securities transactions
18
87
12,293
Bank owned life insurance income
2,727
3,421
8,202
7,498
Loan-related interest rate swap fees
1,102
3,170
4,176
12,602
Other operating income
3,318
3,215
8,372
4,116
Total noninterest income
29,938
34,407
89,388
99,245
Noninterest expenses:
Salaries and benefits
53,534
49,000
156,959
149,013
Occupancy expenses
7,251
7,441
21,705
21,798
Furniture and equipment expenses
4,040
3,895
11,919
11,042
Technology and data processing
7,534
6,564
21,657
19,187
Professional services
3,792
2,914
13,161
9,211
Marketing and advertising expense
2,548
2,631
7,330
7,413
FDIC assessment premiums and other insurance
2,172
1,811
6,798
7,578
Other taxes
4,432
4,124
13,303
12,364
Loan-related expenses
1,503
2,314
5,289
7,512
Amortization of intangible assets
3,381
4,053
10,679
12,676
Loss on debt extinguishment
14,695
10,306
Other expenses
5,156
8,475
15,756
23,581
Total noninterest expenses
95,343
93,222
299,251
291,681
Income from continuing operations before income taxes
90,933
72,008
262,959
116,304
Income tax expense
16,368
11,008
46,821
17,506
Net income
74,565
61,000
216,138
98,798
Dividends on preferred stock
2,967
2,691
8,901
Net income available to common shareholders
71,598
58,309
207,237
96,107
Basic earnings per common share
0.94
0.74
2.66
1.22
Diluted earnings per common share
Dividends declared per common share
0.28
0.25
0.81
0.75
Basic weighted average number of common shares outstanding
76,309,355
78,714,353
77,988,151
78,904,792
Diluted weighted average number of common shares outstanding
76,322,736
78,725,346
78,007,543
78,921,108
-3-
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)
Other comprehensive income (loss):
Cash flow hedges:
Change in fair value of cash flow hedges
(545)
634
(699)
Reclassification adjustment for losses (gains) included in net income (net of tax, $0 and $0 for the three months and $12 and $394 for the nine months ended September 30, 2021 and 2020, respectively) (1)
(47)
1,481
AFS securities:
Unrealized holding gains (losses) arising during period (net of tax, $6,178 and $332 for the three months and $11,311 and $9,824 for the nine months ended September 30, 2021 and 2020, respectively)
(23,242)
1,250
(42,549)
36,956
Reclassification adjustment for gains included in net income (net of tax, $2 and $4 for the three months and $18 and $2,582 for the nine months ended September 30, 2021 and 2020, respectively) (2)
(7)
(14)
(69)
(9,711)
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, 2021 and 2020, respectively) (3)
(5)
(15)
Bank owned life insurance:
Unrealized holding losses arising during the period
(1,289)
Reclassification adjustment for losses included in net income (4)
150
127
364
Other comprehensive income (loss)
(23,649)
1,358
(41,592)
27,087
Comprehensive income
50,916
62,358
174,546
125,885
(1) The gross amounts reclassified into earnings for the nine months ended September 30, 2020 included a $1.8 million loss related to the termination of a cash flow hedge that is reported in “Other operating income” with the corresponding income tax effect being reflected as a component of income tax expense. The remaining gross amounts are reported in the interest income and interest expense sections of the Company’s Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense.
(2) The gross amounts reclassified into earnings are reported as "Gains on securities transactions" on the Company’s Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense.
(3) The gross amounts reclassified into earnings are reported within interest income on the Company’s Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense.
(4) Reclassifications in earnings are reported in "Salaries and benefits" expense on the Company’s Consolidated Statements of Income.
-4-
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(Dollars in thousands, except share and per share amounts)
Accumulated
Additional
Other
Common
Preferred
Paid-In
Retained
Comprehensive
Stock
Capital
Earnings
Income
Total
Balance - December 31, 2020
Net Income
56,189
Other comprehensive loss (net of taxes of $8,835)
(34,514)
Dividends on common stock ($0.25 per share)
(19,700)
Dividends on preferred stock ($171.88 per share)
(2,967)
Issuance of common stock under Equity Compensation Plans, for services rendered, and vesting of restricted stock, net of shares held for taxes (243,884 shares)
324
(289)
35
Stock-based compensation expense
2,199
Balance - March 31, 2021
104,493
1,918,991
649,574
36,501
2,709,732
85,384
Other comprehensive gain (net of taxes of $3,672)
16,571
Dividends on common stock ($0.28 per share)
(22,125)
Stock purchased under stock repurchase plan (1,090,169 shares)
(1,450)
(40,913)
(42,363)
Issuance of common stock under Equity Compensation Plans, for services rendered, and vesting of restricted stock, net of shares held for taxes (35,693 shares)
48
663
711
2,654
Balance- June 30, 2021
103,091
1,881,395
709,866
53,072
2,747,597
Other comprehensive loss (net of taxes of $6,181)
(21,300)
Stock purchased under stock repurchase plan (2,288,961 shares)
(3,045)
(79,592)
(82,637)
Issuance of common stock under Equity Compensation Plans, for services rendered, and vesting of restricted stock, net of shares held for taxes (11,953 shares)
16
175
191
2,639
Balance- September 30, 2021
-5-
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020
Balance - December 31, 2019
105,827
1,790,305
581,395
35,575
2,513,102
7,089
Other comprehensive income (net of taxes of $3,890)
12,754
(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, for services rendered, and vesting of restricted stock, net of shares held for taxes (183,750 shares)
244
(1,273)
(1,029)
Impact of adoption of ASC 326
(39,053)
2,291
Balance- March 31, 2020
104,086
1,743,429
529,606
48,329
2,425,450
30,709
Other comprehensive income (net of taxes of $3,415)
12,975
Issuance of preferred stock (17,250 shares)
166,190
166,363
(19,677)
Issuance of common stock under Equity Compensation Plans, for services rendered, and vesting of restricted stock, net of shares held for taxes (30,120 shares)
40
45
2,361
Balance - June 30, 2020
104,126
1,911,985
540,638
61,304
2,618,226
Other comprehensive income (net of taxes of $327)
Net proceeds from preferred stock
(19,678)
Dividends on preferred stock ($156.60 per share)
(2,691)
Issuance of common stock under Equity Compensation Plans, for services rendered, and vesting of restricted stock, net of shares held for taxes (11,601 shares)
15
162
177
2,500
Balance - September 30, 2020
104,141
1,914,640
579,269
62,662
2,660,885
-6-
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
Operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of premises and equipment
11,992
11,311
Writedown of foreclosed properties and former bank premises
1,119
4,847
Amortization, net
24,397
20,151
Accretion related to acquisitions, net
(1,792)
(7,736)
Gains on securities transactions, net
(87)
(12,293)
BOLI income
(8,202)
(7,498)
Originations and purchases of loans held for sale
(491,895)
(514,760)
Proceeds from sales of loans held for sale
550,683
516,516
Losses on sales of foreclosed properties and former bank premises, net
638
37
Losses on debt extinguishment
Stock-based compensation expenses
7,492
7,152
Issuance of common stock for services
372
604
Net (increase) decrease in other assets
108,677
(180,343)
Net increase (decrease) in other liabilities
(134,336)
128,323
Net cash provided by operating activities
240,003
176,369
Investing activities:
Purchases of AFS securities and restricted stock
(1,142,304)
(940,745)
Proceeds from sales of AFS securities and restricted stock
45,436
232,946
Proceeds from maturities, calls and paydowns of AFS securities
392,129
271,986
Proceeds from maturities, calls and paydowns of HTM securities
6,642
5,996
Net decrease (increase) in loans held for investment
891,240
(1,760,300)
Net increase in premises and equipment
(9,221)
(18,557)
Proceeds from BOLI settlements
4,843
439
Purchases of BOLI policies
(100,000)
Proceeds from sales of foreclosed properties and former bank premises
8,632
2,706
Net cash provided by (used in) investing activities
97,397
(2,205,529)
Financing activities:
Net increase in noninterest-bearing deposits
960,135
1,450,526
Net increase in interest-bearing deposits
(60,716)
820,701
Net decrease in short-term borrowings
(255,707)
(169,967)
Proceeds from issuance of long-term debt
189,945
Repayments of long-term debt
(214,695)
(230,306)
Cash dividends paid - common stock
(63,125)
(59,180)
Cash dividends paid - preferred stock
(8,901)
Repurchase of common stock
(125,000)
Issuance of common stock
2,955
801
Issuance of preferred stock, net
166,356
Vesting of restricted stock, net of shares held for taxes
(2,390)
(2,212)
Net cash provided by financing activities
232,556
2,114,094
Increase in cash and cash equivalents
569,956
84,934
Cash, cash equivalents, and restricted cash at beginning of the period
436,032
Cash, cash equivalents, and restricted cash at end of the period
520,966
-7-
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest
30,749
82,409
Income taxes
1,260
13,649
Supplemental schedule of noncash investing and financing activities
Transfers from loans to foreclosed properties
14
615
Transfers from bank premises to OREO
1,109
7,949
Transfers from LHFS to LHFI
1,050
-8-
Notes to Consolidated Financial Statements (Unaudited)
The Company
Headquartered in Richmond, Virginia, Atlantic Union Bankshares Corporation (Nasdaq: AUB) is the holding company for Atlantic Union Bank. Atlantic Union Bank has 130 branches and approximately 150 ATMs located throughout Virginia, and in portions of Maryland and North Carolina. Certain non-bank financial services affiliates of Atlantic Union Bank include: Atlantic Union Equipment Finance, Inc., which provides equipment financing; Dixon, Hubard, Feinour & Brown, Inc., which provides investment advisory services; Atlantic Union Financial Consultants, LLC, which provides brokerage services; and Union Insurance Group, LLC, which offers various lines of insurance products.
Effective March 1, 2021, Middleburg Financial, the Bank’s wealth management division was rebranded to Atlantic Union Bank Wealth Management, and Middleburg Investment Services, LLC changed its name to Atlantic Union Financial Consultants, LLC.
Effective October 1, 2021, Old Dominion Capital Management, Inc., and its subsidiary, Outfitter Advisors, Ltd., merged with and into DHFB, as part of an internal reorganization to streamline operations. Old Dominion Capital Management operates as a division of DHFB.
The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements; however, in the opinion of management all adjustments necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year or any other period.
The 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 2020 Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation.
Adoption of New Accounting Standards
In March 2020, the FASB issued Topic 848. This guidance provides temporary, optional guidance to ease the potential burden in accounting for reference rate reform associated with the LIBOR transition. LIBOR and other interbank offered rates are widely used benchmark or reference rates that have been used in the valuation of loans, derivatives, and other financial contracts. Topic 848 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. Topic 848 is intended to help stakeholders during the global market-wide reference rate transition period. The amendments are effective as of March 12, 2020 through December 31, 2022 and can be adopted at an instrument level. As of March 31, 2021, the Company utilized the expedient to assert probability of the hedged interest, regardless of any expected modification in terms related to reference rate reform for the newly executed cash flow hedges. The Company expects to incorporate other components of Topic 848 at a later date. This amendment does not have a material impact on the consolidated financial statements.
On January 1, 2021, the Company adopted Topic 740. This guidance was issued to simplify accounting for income taxes by removing specific technical exceptions that often produce information difficult for users of financial statements to understand. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company’s adoption of Topic 740 did not have a material impact on the consolidated financial statements.
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.
-9-
Restricted cash is disclosed in Note 7 “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 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.
Accrued Interest Receivable
The Company has elected to exclude accrued interest from the amortized cost basis in its determination of the ALLL, as well as the ACL reserve for securities. Accrued interest receivable totaled $46.2 million and $56.7 million on loans held for investment, $5.1 million and $6.8 million on HTM securities, and $13.0 million and $11.9 million on AFS securities at September 30, 2021 and December 31, 2020, respectively, and is included in “Other Assets” on the Company’s Consolidated Balance Sheets. The Company’s policy is to write off accrued interest receivable through reversal of interest income when it becomes probable the Company will not be able to collect the accrued interest. For the quarters ended September 30, 2021 and September 30, 2020, accrued interest receivable write offs were not material to the Company’s consolidated financial statements.
Segment Reporting
Operating segments are components of a business about which separate financial information is available and evaluated regularly by the chief operating decision makers in deciding how to allocate resources and assessing performance. The Bank is the Company’s only reportable operating segment upon which management makes decisions regarding how to allocate resources and assess performance. While the Company’s chief operating decision makers do have some limited financial information about its various financial products and services, that information is not complete since it does not include a full allocation of revenue, costs, and capital from key corporate functions; therefore, the Company evaluates financial performance on the Company-wide basis. Management continues to evaluate these business units for separate reporting as facts and circumstances change.
-10-
2. SECURITIES
Available for Sale
The Company’s AFS investment portfolio is generally highly-rated or agency backed. All AFS securities were current with no securities past due or on non-accrual as of September 30, 2021 and December 31, 2020.
The amortized cost, gross unrealized gains and losses, and estimated fair values of AFS securities as of September 30, 2021 are summarized as follows (dollars in thousands):
Amortized
Gross Unrealized
Estimated
Cost
Gains
(Losses)
Fair Value
September 30, 2021
U.S. government and agency securities
74,214
645
(41)
74,818
Obligations of states and political subdivisions
971,987
34,885
(7,991)
998,881
Corporate and other bonds (1)
145,151
3,931
(54)
149,028
Commercial mortgage-backed securities
Agency
338,327
9,213
(2,557)
344,983
Non-agency
95,405
250
(296)
95,359
Total commercial mortgage-backed securities
433,732
9,463
(2,853)
440,342
Residential mortgage-backed securities
1,449,753
20,630
(14,030)
1,456,353
73,783
530
(195)
74,118
Total residential mortgage-backed securities
1,523,536
21,160
(14,225)
1,530,471
Other securities
1,636
Total AFS securities
3,150,256
70,084
(25,164)
(1) Other bonds include asset-backed securities
The amortized cost, gross unrealized gains and losses, and estimated fair values of AFS securities as of December 31, 2020 are summarized as follows (dollars in thousands):
December 31, 2020
13,009
437
(52)
13,394
786,466
50,878
(18)
837,326
148,747
2,430
(99)
151,078
321,015
16,277
(2)
337,290
51,244
167
(17)
51,394
372,259
16,444
(19)
388,684
1,012,237
31,816
(1,946)
1,042,107
104,904
1,507
(206)
106,205
1,117,141
33,323
(2,152)
1,148,312
1,625
2,439,247
103,512
(2,340)
-11-
The following table shows the gross unrealized losses and fair value of the Company’s AFS securities with unrealized losses for which an ACL has not been recorded at September 30, 2021 and December 31, 2020 and that are not deemed to be impaired as of those dates. These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position (dollars in thousands).
Less than 12 months
More than 12 months
Fair
Unrealized
Value
Losses
4,255
394,065
(7,885)
2,072
(106)
396,137
Corporate and other bonds(1)
11,594
(51)
1,903
(3)
13,497
136,397
(2,556)
344
(1)
136,741
21,407
(103)
11,789
(193)
33,196
157,804
(2,659)
12,133
(194)
169,937
857,253
(12,584)
76,393
(1,446)
933,646
13,182
870,435
(12,779)
946,828
1,433,898
(23,374)
96,756
(1,790)
1,530,654
5,456
5,091
17,946
10,698
28,644
5,893
376
6,269
17,654
23,547
23,923
219,388
(1,944)
1,055
220,443
36,942
256,330
(2,150)
257,385
302,914
(2,239)
17,585
(101)
320,499
(1) Other bonds includes asset-backed securities
-12-
As of September 30, 2021, there were $96.8 million, comprised of 26 individual AFS securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of approximately $1.8 million. As of December 31, 2020, there were $17.6 million, comprised of 15 individual securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of $101,000.
The Company has evaluated AFS securities in an unrealized loss position for credit related impairment at September 30, 2021 and December 31, 2020 and concluded no impairment existed based on several factors which included: (1) the majority of these securities are of high credit quality, (2) unrealized losses are primarily the result of market volatility, (3) the contractual terms of the investments do not permit the issuer(s) to settle the securities at a price less than the cost basis of each investment, (4) issuers continue to make timely principal and interest payments, and (5) the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis.
Additionally, the majority of the Company’s mortgage-backed securities are issued by FNMA, FHLMC, and GNMA and do not have credit risk given the implicit and explicit government guarantees associated with these agencies. In addition, the non-agency mortgage-backed and asset-backed securities generally received a 20% SSFA rating.
The following table presents the amortized cost and estimated fair value of AFS securities as of September 30, 2021 and December 31, 2020, by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands).
Due in one year or less
11,823
11,927
19,875
19,997
Due after one year through five years
175,393
180,836
161,448
169,103
Due after five years through ten years
316,877
325,440
235,021
242,791
Due after ten years
2,646,163
2,676,973
2,022,903
2,108,528
Refer to Note 7 "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, 2021 and December 31, 2020.
Held to Maturity
The Company’s HTM investment portfolio primarily consists of highly-rated municipal securities and the estimated credit loss inherent in the portfolio is currently immaterial. The Company’s HTM securities were all current, with no securities past due or on non-accrual at September 30, 2021 and December 31, 2020.
The Company reports HTM securities on the Company’s Consolidated Balance Sheets at carrying value. Carrying value is amortized cost, which includes any unamortized unrealized gains and losses recognized in accumulated other comprehensive income prior to reclassifying the securities from AFS securities to HTM securities. Investment securities transferred into the 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.
-13-
The carrying value, gross unrealized gains and losses, and estimated fair values of HTM securities as of September 30, 2021 are summarized as follows (dollars in thousands):
Carrying
2,637
(8)
528,157
62,763
590,920
4,928
(30)
4,901
Total held-to-maturity securities
62,768
(38)
598,452
The carrying value, gross unrealized gains and losses, and estimated fair values of HTM securities as of December 31, 2020 are summarized as follows (dollars in thousands):
2,751
2,733
536,767
74,978
611,745
5,333
(50)
5,287
74,982
(68)
619,765
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 September 30, 2021 and December 31, 2020. The primary indicators of credit quality for the Company’s HTM portfolio are security type and credit rating, which is influenced by a number of factors including obligor cash flow, geography, seniority, and others. The Company’s only HTM securities with credit risk are obligations of states and political subdivisions.
-14-
The following table presents the amortized cost of HTM securities as of September 30, 2021 and December 31, 2020 by security type and credit rating (dollars in thousands):
U.S. Government and Agency
Obligations of states and political
Mortgage-backed
Total HTM
securities
subdivisions
Credit Rating:
AAA/AA/A
Not Rated - Agency(1)
7,565
Not Rated - Non-Agency
532,157
8,084
4,610
(1) Generally considered not to have credit risk given the government guarantees associated with these agencies
The following table presents the amortized cost and estimated fair value of HTM securities as of September 30, 2021 and December 31, 2020, by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands).
3,501
3,512
1,443
1,460
5,890
6,142
8,577
8,893
14,061
16,091
1,744
1,805
512,270
572,707
533,087
607,607
Total HTM securities
Refer to Note 7 "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, 2021 and December 31, 2020.
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. The FHLB required the Bank to maintain stock in an amount equal to 3.75% and 4.25% of outstanding borrowings at September 30, 2021 and December 31, 2020, respectively, as well as 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, 2021 and December 31, 2020. Restricted equity securities consist of Federal Reserve Bank stock in the amount of $67.0 million for September 30, 2021 and December 31, 2020 and FHLB stock in the amount of $9.8 million and $27.8 million as of September 30, 2021 and December 31, 2020, respectively.
-15-
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, 2021 and 2020 (dollars in thousands):
Realized gains (losses)(1):
Gross realized gains
147
Gross realized losses
(60)
Net realized gains
Proceeds from sales of securities
September 30, 2020
12,522
(229)
4,675
(1) Includes gains (losses) on sales and calls of securities
-16-
3. LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The information included below reflects the impact of the CARES Act, as amended by the CAA, and the Joint Guidance. See Note 1 “Summary of Significant Accounting Policies” in the Company’s 2020 Form 10-K for information about COVID-19 and related legislative and regulatory developments.
The Company’s loans are stated at their face amount, net of deferred fees and costs, and consist of the following at September 30, 2021 and December 31, 2020 (dollars in thousands):
Construction and Land Development
877,351
925,798
Commercial Real Estate - Owner Occupied
2,027,299
2,128,909
Commercial Real Estate - Non-Owner Occupied
3,730,720
3,657,562
Multifamily Real Estate
776,287
814,745
Commercial & Industrial(1)
2,580,190
3,263,460
Residential 1-4 Family - Commercial
624,347
671,949
Residential 1-4 Family - Consumer
822,971
822,866
Residential 1-4 Family - Revolving
557,803
596,996
Auto
425,436
401,324
Consumer
182,039
247,730
Other Commercial(2)
535,143
489,975
Total loans held for investment, net of deferred fees and costs(3)
Allowance for loan and lease losses
(101,798)
(160,540)
(1) Commercial & industrial loans include approximately $455.8 million and $1.2 billion in loans from the PPP at September 30, 2021 and December 31, 2020, respectively.
(2) Other commercial loans include approximately $10.8 million and $11.3 million in loans from the PPP at September 30, 2021 and December 31, 2020, respectively.
(3) Total loans include unamortized premiums and discounts, and unamortized deferred fees and costs totaling $60.0 million and $69.7 million as of September 30, 2021 and December 31, 2020, respectively.
-17-
The following table shows the aging of the Company’s loan portfolio, by class, at September 30, 2021 (dollars in thousands):
Greater than
30-59 Days
60-89 Days
90 Days and
Current
Past Due
still Accruing
Nonaccrual
Total Loans
873,535
744
58
304
2,710
2,016,831
735
61
1,886
7,786
3,723,499
1,302
570
1,175
4,174
776,174
113
Commercial & Industrial
2,562,455
11,089
3,328
1,256
2,062
619,306
807
698
1,091
2,445
805,765
406
2,188
2,462
12,150
549,927
1,092
587
2,474
3,723
423,222
1,548
202
209
255
180,705
790
317
54
Other Commercial
533,912
631
600
Total loans held for investment
13,065,331
19,144
8,609
11,030
35,472
% of total loans
99.43
%
0.15
0.07
0.08
0.27
100.00
The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2020 (dollars in thousands):
920,276
547
3,072
2,114,804
1,870
1,380
3,727
7,128
3,651,232
2,144
1,721
148
2,317
814,095
617
33
3,257,201
1,848
1,190
1,114
2,107
657,351
2,227
818
1,560
9,993
792,852
10,182
1,533
5,699
12,600
587,522
2,975
1,044
826
4,629
398,206
2,076
166
500
245,551
1,166
550
394
69
489,959
13,929,049
27,024
9,159
13,634
42,448
99.34
0.19
0.10
0.30
-18-
The following table shows the Company’s amortized cost basis of loans on nonaccrual status as of January 1, 2021, as well as amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of September 30, 2021 (dollars in thousands):
January 1, 2021
Nonaccrual With No ALLL
90 Days and still Accruing
1,985
1,996
1,089
1
-
1,047
60
6,178
The following table shows the Company’s amortized cost basis of loans on nonaccrual status as of January 1, 2020, as well as amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of December 31, 2020 (dollars in thousands):
January 1, 2020
4,060
13,889
1,994
1,368
3,037
6,492
6,388
13,117
1,069
2,490
565
98
45,204
11,497
There was no interest income recognized on nonaccrual loans during the three and nine months ended September 30, 2021 and 2020. See Note 1 “Summary of Significant Accounting Policies” in the Company’s 2020 Form 10-K for additional information on the Company’s policies for nonaccrual loans.
-19-
Troubled Debt Restructurings
The CARES Act, as amended by the CAA, 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 January 1, 2022 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 also issued guidance to encourage financial institutions to make loan modifications for borrowers affected by COVID-19. As of September 30, 2021, there were immaterial loans still under their modified terms. As of December 31, 2020, the Company had approximately $146.1 million in loans still under their modified terms.
As of September 30, 2021, the Company has TDRs totaling $18.7 million with an estimated $854,000 of allowance for those loans for the current period. As of December 31, 2020, the Company had TDRs totaling $20.6 million with an estimated $1.6 million of allowance for those 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 credit losses in accordance with the Company’s ALLL methodology. For the three and nine months ended September 30, 2021 and 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, 2021 and December 31, 2020 (dollars in thousands):
No. of
Recorded
Outstanding
Loans
Investment
Commitment
Performing
205
215
1,003
6
2,033
176
413
727
245
75
9,182
77
8,943
268
277
248
410
Total performing
11,335
102
13,961
Nonperforming
831
20
1,366
134
362
237
393
1,296
24
4,312
23
4,865
101
103
Total nonperforming
39
7,365
6,655
Total performing and nonperforming
130
18,700
20,616
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, 2021 and 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.
-20-
The following table shows, by class and modification type, TDRs that occurred during the three and nine months ended September 30, 2021 (dollars in thousands):
Three Months Ended September 30, 2021
Nine Months Ended September 30, 2021
Investment at
Period End
Modified to interest only, at a market rate
Total interest only at market rate of interest
Term modification, at a market rate
157
Total loan term extended at a market rate
259
Term modification, below market rate
11
1,813
Total loan term extended at a below market rate
12
1,828
Interest rate modification, below market rate
Total interest only at below market rate of interest
2,132
-21-
The following table shows, by class and modification type, TDRs that occurred during the three and nine months ended September 30, 2020 (dollars in thousands):
Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020
272
652
924
299
10
760
34
143
358
290
423
17
2,387
856
3,121
8
1,807
4,805
-22-
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. Each loan segment is further disaggregated into classes based on similar risk characteristics. The Company has identified the following classes within each loan segment:
The following tables show the ALLL activity by loan segment for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands):
Commercial
Balance at beginning of period
89,837
28,424
118,261
117,403
43,137
Loans charged-off
(967)
(1,299)
(2,266)
(3,832)
(4,020)
(7,852)
Recoveries credited to allowance
1,281
872
2,153
3,929
2,569
6,498
Provision charged to operations
(15,173)
(1,177)
(16,350)
(42,522)
(14,866)
(57,388)
Balance at end of period
26,820
111,954
58,023
169,977
30,941
11,353
42,294
Impact of ASC 326 adoption on non-PCD loans
40,666
45,098
Impact of ASC 326 adoption on PCD loans
1,752
2,386
Impact of adopting ASC 326
6,184
41,300
47,484
(995)
(1,983)
(2,978)
(5,553)
(9,253)
(14,806)
718
848
1,566
2,580
2,557
5,137
14,978
(9,421)
5,557
92,503
1,510
94,013
126,655
47,467
174,122
-23-
Credit Quality Indicators
Credit quality indicators are utilized to help estimate the collectability of each loan class within the Commercial and Consumer loan 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:
Watch is determined by the following criteria:
Special Mention is determined by the following criteria:
Substandard is determined by the following criteria:
Doubtful is determined by the following criteria:
-24-
The table below details the amortized cost of the classes of loans within the Commercial segment by risk level and year of origination as of September 30, 2021 (dollars in thousands):
Term Loans Amortized Cost Basis by Origination Year
2019
2018
2017
Prior
Revolving Loans
Pass
305,044
265,805
107,223
46,770
17,980
50,365
23,429
816,616
Watch
545
657
24,401
538
335
6,255
32,731
Special Mention
2,742
181
303
3,227
Substandard
263
18,901
199
5,414
24,777
Total Construction and Land Development
308,331
266,463
132,068
66,209
18,514
62,337
161,174
286,458
310,041
266,173
202,234
588,315
19,484
1,833,879
187
25
11,745
16,141
17,279
48,534
903
94,814
201
945
24,706
1,486
1,112
30,264
1,001
59,715
12,155
1,696
1,953
22,378
709
38,891
Total Commercial Real Estate - Owner Occupied
161,562
287,428
358,647
285,496
222,578
689,491
22,097
360,208
439,673
531,065
370,114
391,043
1,161,218
56,566
3,309,887
14,549
8,528
29,797
53,599
11,463
76,680
194,632
10,649
29,923
31,347
14,062
30,133
116,114
41,595
21,279
12,557
34,354
302
110,087
Total Commercial Real Estate - Non-Owner Occupied
374,757
458,850
632,380
476,339
429,125
1,302,385
56,884
725,216
534,948
302,159
147,127
42,624
168,224
577,089
2,497,387
3,808
2,526
21,778
4,571
4,855
14,322
52,033
221
1,343
8,417
1,924
906
659
2,135
15,605
397
580
4,375
1,381
247
2,515
5,670
15,165
Total Commercial & Industrial
726,007
540,679
317,477
172,210
48,348
176,253
599,216
41,843
163,955
89,602
136,569
79,594
250,115
1,597
763,275
4,336
463
532
5,331
2,261
629
4,544
92
42
7,568
Total Multifamily Real Estate
166,216
94,567
141,576
250,852
1,639
85,081
96,580
68,972
50,528
61,335
215,176
917
578,589
2,047
6,727
7,494
3,708
8,772
314
29,062
160
97
455
409
4,957
6,078
95
3,467
896
1,341
4,520
10,618
Total Residential 1-4 Family - Commercial
85,336
98,724
79,166
59,373
66,793
233,425
1,530
145,656
173,414
105,143
5,995
26,284
50,631
13,425
520,548
589
1,259
4,563
6,411
203
7,730
7,936
Total Other Commercial
6,584
27,546
55,645
21,155
Total Commercial
1,824,222
1,960,833
1,514,205
1,023,276
821,094
2,484,044
692,507
10,320,181
15,454
15,065
79,532
100,602
38,615
150,191
15,555
415,014
3,324
15,296
63,856
39,756
16,492
66,611
10,908
216,243
492
61,855
44,153
16,297
69,542
6,980
199,899
1,843,492
1,991,774
1,719,448
1,207,787
892,498
2,770,388
725,950
11,151,337
-25-
The table below details the amortized cost of the classes of loans within the Commercial segment by risk level and year of origination as of December 31, 2020 (dollars in thousands):
2016
316,585
277,142
116,800
24,770
42,970
54,023
23,324
855,614
1,873
18,181
8,434
2,355
6,372
412
37,971
5,532
135
2,655
8,322
17,780
64
2,037
4,010
23,891
318,458
300,855
143,149
25,178
47,362
67,060
23,736
286,522
375,541
300,583
233,359
128,261
570,361
18,838
1,913,465
1,942
14,611
22,224
15,623
24,979
41,361
1,648
122,388
988
6,052
5,749
4,198
9,907
30,455
1,121
58,470
4,858
5,159
914
1,555
21,101
999
34,586
289,452
401,062
333,715
254,094
164,702
663,278
22,606
381,849
455,427
433,183
403,677
336,630
850,035
30,421
2,891,222
28,354
142,279
76,838
59,451
79,533
224,944
16,870
628,269
702
11,072
34,905
18,073
40,771
11,211
723
117,457
246
13,357
6,986
20,614
411,151
608,778
558,283
481,201
456,959
1,093,176
48,014
1,730,876
350,618
199,489
67,035
71,799
140,461
590,701
3,150,979
4,872
32,028
13,073
6,500
3,182
4,906
19,972
84,533
1,009
2,178
3,890
1,150
724
1,234
4,755
14,940
534
4,269
1,274
309
560
2,676
3,386
13,008
1,737,291
389,093
217,726
74,994
76,265
149,277
618,814
144,805
85,740
150,724
117,881
67,984
231,113
2,311
800,558
5,074
475
6,726
2,280
4,388
7,428
147,085
90,814
155,587
68,601
232,466
104,630
89,332
70,310
79,156
68,915
201,492
2,236
616,071
666
6,665
8,252
4,141
4,067
9,307
195
33,293
601
468
5,923
7,655
644
793
4,913
1,995
986
5,111
488
14,930
105,940
96,790
84,076
85,955
74,436
221,833
2,919
223,490
112,045
9,549
30,314
16,494
42,158
44,180
478,230
613
1,299
1,189
3,934
7,035
4,591
4,710
223,500
10,162
31,620
17,683
50,683
44,282
3,188,757
1,745,845
1,280,638
956,192
733,053
2,089,643
712,011
10,706,139
37,707
218,838
129,909
87,358
115,922
291,384
39,097
920,215
4,989
24,834
49,668
24,091
51,870
56,829
6,701
218,982
1,424
9,920
42,483
3,282
5,163
39,917
4,873
107,062
3,232,877
1,999,437
1,502,698
1,070,923
906,008
2,477,773
762,682
11,952,398
-26-
Consumer Loans
For Consumer loans, the Company evaluates credit quality based on the delinquency status of the loan. The following table details the amortized cost of the classes of loans within the Consumer segment based on their delinquency status and year of origination as of September 30, 2021 (dollars in thousands):
194,184
190,849
57,249
37,678
49,080
276,715
30-59 Days Past Due
117
159
47
83
60-89 Days Past Due
305
1,883
90+ Days Past Due
451
46
1,945
899
1,361
9,890
Total Residential 1-4 Family - Consumer
194,635
57,412
38,756
50,793
290,516
6,418
10,327
2,343
1,176
487
529,176
19
227
3,413
Total Residential 1-4 Family - Revolving
10,391
1,195
714
536,742
14,576
17,830
44,158
37,069
14,446
17,697
34,929
28
287
180
49
224
13
51
31
Total Consumer
14,586
17,896
44,529
37,503
14,512
18,003
35,010
138,193
136,530
81,956
36,844
19,660
10,039
79
477
190
152
81
29
Total Auto
138,373
137,201
82,587
37,133
19,893
10,249
353,371
355,536
185,706
112,767
83,186
304,938
564,115
1,959,619
505
827
566
286
459
1,105
3,836
116
111
211
326
1,891
3,294
552
114
1,981
2,491
5,318
929
1,390
10,213
16,182
354,012
356,337
186,871
114,587
85,198
319,482
571,762
1,988,249
The Company did not have any material revolving loans convert to term during the nine months ended September 30, 2021.
-27-
The following table details the amortized cost of the classes of loans within the Consumer segment based on their delinquency status and year of origination as of December 31, 2020 (dollars in thousands):
213,763
75,133
64,299
68,320
102,123
269,203
678
2,243
516
457
6,107
156
57
679
641
608
1,246
2,126
696
851
887
10,166
215,205
77,010
67,318
70,366
104,713
288,243
13,217
3,916
1,593
300
636
567,860
70
2,905
991
21
4,381
13,340
1,614
863
576,963
26,498
68,208
67,041
22,464
9,997
15,893
35,450
252
504
119
242
56
26,566
68,720
68,104
22,589
10,012
16,164
171,051
115,319
55,886
32,555
17,081
6,314
239
467
543
478
197
124
59
26
30
93
126
62
171,450
116,052
56,608
33,251
17,407
6,556
424,529
262,576
188,819
123,639
129,201
292,046
603,321
2,024,131
1,022
900
3,290
669
6,402
3,024
16,399
361
374
761
661
994
3,503
619
1,803
318
1,261
2,193
829
7,085
843
952
975
10,524
17,798
426,561
265,698
193,644
126,506
132,132
311,826
612,549
2,068,916
The Company did not have any material revolving loans convert to term during the year ended December 31, 2020.
-28-
4. GOODWILL AND 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.
COVID-19 has disrupted and adversely impacted the economy and created significant volatility in the financial markets. The volatility in the financial markets adversely affected the Company’s expected future cash flows, due to the lower interest rate environment and other factors. The forecasted impact from COVID-19 was included in the Company’s annual goodwill impairment test in the second quarter of 2021 and the Company determined that there was no impairment to its goodwill or intangible assets. In the normal course of business, the Company routinely monitors the impact of the changes in the financial markets and includes these assessments in the Company’s goodwill impairment process.
The Company analyzed its intangible assets at September 30, 2021 and concluded no impairment existed as of the balance sheet date. Amortization expense of intangibles for the three and nine months ended September 30, 2021 and 2020 totaled $3.4 million and $10.7 million, and $4.1 million and $12.7 million, respectively.
As of September 30, 2021, the estimated remaining amortization expense of intangibles is as follows for the years ending (dollars in thousands):
For the remaining three months of 2021
3,226
2022
11,490
2023
9,687
2024
7,818
2025
6,219
Thereafter
8,097
Total estimated amortization expense
-29-
5. 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 months 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 material sale leaseback transactions and 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, 2021 and December 31, 2020, the carrying value of residual assets covered by residual value guarantees and RVI was $20.5 million and $14.7 million, respectively.
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. 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. Lease income is recorded within Interest Income on the Company’s Consolidated Statements of Income. There were no significant changes in the balance of the Company’s unguaranteed residual assets for the periods ending September 30, 2021 and December 31, 2020.
Total net investment in sales-type and direct financing leases consists of the following (dollars in thousands):
Sales-type and direct financing leases:
Lease receivables, net of unearned income and deferred selling profit
161,703
141,180
Unguaranteed residual values, net of unearned income and deferred selling profit
6,805
4,796
Total net investment in sales-type and direct financing leases
168,508
145,976
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 24 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 12 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 12 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 and if the Company is reasonably certain to exercise those options it would be included in the measurement of the operating ROU Assets and lease liabilities.
-30-
Lease expense for operating lease payments is recognized on a straight-line basis over the lease term and recorded in Occupancy Expenses 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 Expenses within noninterest expense on the Company’s Consolidated Statements of Income and interest expense on the finance lease liability is recorded in Interest on Long-Term Borrowings within total interest expense on the Company’s Consolidated Statements of Income.
As of September 30, 2021, the Company had no sales leaseback transactions or leases that have not yet commenced that create significant rights and obligations.
The tables below provide information about the Company’s lessee lease portfolio and other supplemental lease information (dollars in thousands):
Operating
Finance
Right-of-use-assets
43,299
6,736
48,051
7,425
Lease liabilities
52,766
9,770
58,901
10,621
Lease Term and Discount Rate of Operating leases:
Weighted-average remaining lease term (years)
6.85
7.33
7.27
8.08
Weighted-average discount rate (1)
2.60
1.17
(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,
Cash paid for amounts included in measurement of lease liabilities:
Operating Cash Flows from Finance Leases
41
Operating Cash Flows from Operating Leases
8,961
10,398
Financing Cash Flows from Finance Leases
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
2,412
7,566
Finance leases
10,549
Three months ended September 30,
Net Operating Lease Cost
2,535
2,536
7,615
8,383
Finance Lease Cost:
Amortization of right-of-use assets
230
689
306
Interest on lease liabilities
Total Lease Cost
2,794
2,797
8,393
8,730
-31-
The maturities of lessor and lessee arrangements outstanding at September 30, 2021 are presented in the tables below (dollars in thousands):
Lessor
Lessee
Sales-type and Direct Financing
9,333
2,976
321
39,099
11,348
1,292
10,204
1,325
36,889
9,183
24,928
6,857
1,392
28,242
17,534
4,515
Total undiscounted cash flows
175,624
58,102
10,203
Less: Adjustments (1)
13,921
5,336
433
Total (2)
(1) Lessor – unearned income and unearned guaranteed residual value; Lessee – imputed interest.
(2) Represents lease receivables for lessor arrangements and lease liabilities for lessee arrangements.
-32-
6. 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, 2021 and December 31, 2020 (dollars in thousands):
Federal Funds Purchased
150,000
FHLB Advances
100,000
Total short-term borrowings
350,888
Average outstanding balance during the period
114,710
213,932
Average interest rate during the period
0.11
0.79
Average interest rate at end of period
0.06
0.13
The Bank maintains federal funds lines with several correspondent banks, the remaining available balance was $997.0 million and $847.0 million at September 30, 2021 and December 31, 2020, respectively. The Company maintains an alternate line of credit at a correspondent bank, which had an available balance of $25.0 million at both September 30, 2021 and December 31, 2020. The Company has certain restrictive covenants related to certain asset quality, capital, and profitability metrics associated with these lines and is in compliance with such covenants as of September 30, 2021 and December 31, 2020. Additionally, the Company had a collateral dependent line of credit with the FHLB of up to $6.0 billion at both September 30, 2021 and December 31, 2020.
Long-term Borrowings
In response to the current interest rate environment, the Company prepaid a $200.0 million long-term FHLB advance on February 26, 2021 and $550.0 million of long-term FHLB advances in 2020, which resulted in prepayment penalties of $14.7 million and $31.2 million, respectively.
-33-
Total long-term borrowings consist of the following as of September 30, 2021 (dollars in thousands):
Spread to
Principal
3-Month LIBOR
Rate (1)
Maturity
Investment (2)
Trust Preferred Capital Securities
Trust Preferred Capital Note - Statutory Trust I
22,500
2.75
2.88
6/17/2034
Trust Preferred Capital Note - Statutory Trust II
36,000
1.40
1.53
6/15/2036
VFG Limited Liability Trust I Indenture
20,000
2.73
2.86
3/18/2034
FNB Statutory Trust II Indenture
12,000
3.10
3.23
6/26/2033
Gateway Capital Statutory Trust I
8,000
9/17/2033
Gateway Capital Statutory Trust II
7,000
2.65
2.78
217
Gateway Capital Statutory Trust III
15,000
1.50
1.63
5/30/2036
464
Gateway Capital Statutory Trust IV
25,000
1.55
1.68
7/30/2037
774
MFC Capital Trust II
5,000
2.85
2.98
1/23/2034
155
Total Trust Preferred Capital Securities
150,500
4,659
Subordinated Debt(3)(4)
2026 Subordinated Debt(5)
5.00
12/15/2026
Total Subordinated Debt
Fair Value Premium (Discount)(6)
(14,575)
Investment in Trust Preferred Capital Securities
Total Long-term Borrowings
(1) Rate as of September 30, 2021.
(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) The remaining issuance discount as of September 30, 2021 is $1.0 million.
(4) Subordinated notes qualify as Tier 2 capital for the Company for regulatory purposes.
(5) Fixed-to-floating rate notes are redeemable, at the Company’s option, on any interest payment date occurring on or after December 15, 2021, at which time the interest rate will change to a floating rate of LIBOR plus 3.175% through its maturity date or earlier redemption.
(6) Includes discount on issued subordinated notes.
-34-
Total long-term borrowings consist of the following as of December 31, 2020 (dollars in thousands):
2.99
1.64
2.97
3.34
2.89
1.74
1.79
3.09
Fixed Rate Convertible
200,000
1.78
10/26/2028
Total FHLB Advances
(15,330)
(1) Rate as of December 31, 2020.
(3) The remaining issuance discount as of December 31, 2020 is $1.2 million.
As of September 30, 2021, the contractual maturities of long-term debt are as follows for the years ending (dollars in thousands):
Trust
Subordinated
Premium
Long-term
Notes
Debt
(Discount) (1)
Borrowings
(254)
(1,030)
(1,053)
(1,078)
(1,102)
155,159
(10,058)
295,101
Total long-term borrowings
(1) Includes discount on issued subordinated notes.
-35-
7. COMMITMENTS AND CONTINGENCIES
Litigation Matters
In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized on the Company’s Consolidated Balance Sheets. The contractual amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk. The Company considers credit losses related to off-balance sheet commitments by undergoing a similar process in evaluating losses for loans that are carried on the balance sheet. The Company considers historical loss and funding information, current and future economic conditions, risk ratings, and past due status among other factors in the consideration of expected credit losses in the Company’s off-balance sheet commitments to extend credit. The Company also records an indemnification reserve that includes balances relating to mortgage loans previously sold based on historical statistics and loss rates.
As of September 30, 2021 and December 31, 2020, the Company’s reserves for unfunded commitments and indemnification were $8.0 million and $10.8 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 as of the following dates (dollars in thousands):
Commitments with off-balance sheet risk:
Commitments to extend credit (1)
5,793,342
4,722,412
Letters of credit
153,350
161,827
Total commitments with off-balance sheet risk
5,946,692
4,884,239
(1) Includes unfunded overdraft protection.
As of September 30, 2021, the Company had approximately $212.8 million in deposits in other financial institutions, of which $88.4 million served as collateral for cash flow and loan swap derivatives. As of December 31, 2020, the Company had approximately $290.5 million in deposits in other financial institutions, of which $251.0 million served as collateral for cash flow and loan swap derivatives. For the OTC derivatives cleared with the central clearinghouses, the variation margin is treated as a settlement of the related derivatives fair values. The Company had approximately $121.5 million and $36.4 million in deposits in other financial institutions that were uninsured at September 30, 2021 and December 31, 2020, respectively. At least annually, the Company’s management evaluates the loss risk of its uninsured deposits in financial counterparties.
-36-
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 8 “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, 2021 and December 31, 2020 (dollars in thousands):
Pledged Assets as of September 30, 2021
Cash
Securities (1)
Loans (2)
Public deposits
662,373
424,355
1,086,728
Repurchase agreements
131,669
FHLB advances
45,976
4,282,408
4,328,384
Derivatives
88,446
65,615
154,061
Fed Funds
361,987
Other purposes
21,424
976
22,400
Total pledged assets
927,057
425,331
4,644,395
6,085,229
(1) Balance represents market value.
(2) Balance represents book value.
Pledged Assets as of December 31, 2020
469,864
436,449
906,313
116,876
52,323
4,374,383
4,426,706
251,047
785
251,832
340,847
123,388
8,634
132,022
763,236
445,083
4,715,230
6,174,596
-37-
8. 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. The Company clears certain OTC derivatives with central clearinghouses through FCMs due to applicable regulatory requirement, which reduces the Company’s counterparty risk.
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. For the OTC derivatives cleared with central clearinghouses, the variation margin is treated as settlement of the related derivatives fair values.
Cash Flow Hedges
The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate financial instruments. The Company uses interest rate swap agreements as part of its hedging strategy by exchanging a notional amount, equal to the principal amount of the borrowings or commercial loans, for fixed-rate interest based on benchmarked interest rates. The original terms and conditions of the interest rate swaps vary and range in length. Amounts receivable or payable are recognized as accrued under the terms of the agreements.
All swaps were entered into with counterparties that met the Company’s credit standards, and the agreements contain collateral provisions protecting the at-risk party. The Company concluded that the credit risk inherent in the contract is not significant.
For derivatives designated and qualifying as cash flow hedges, ineffectiveness is not measured or separately disclosed. Rather, as long as the hedging relationship continues to qualify for hedge accounting, the entire change in the fair value of the hedging instrument is recorded in OCI and recognized in earnings as the hedged transaction affects earnings. Derivative amounts affecting earnings are recognized consistent with the classification of the hedged item.
During the nine months ended September 30, 2021, the Company entered into two interest rate swaps with notional amounts totaling $200 million designated and qualifying as cash flow hedges of the Company’s forecasted variable interest receipts on variable rate loans. The Company did not have any derivatives designated as cash flow hedges at December 31, 2020. For each agreement, the Company receives interest at a fixed rate and pays at a variable rate.
Fair Value Hedge
Derivatives are designated as fair value hedges when they are used to manage exposure to changes in the fair value of certain financial assets and liabilities, referred to as the hedged items, which fluctuate in value as a result of movements in interest rates.
Loans: During the normal course of business, the Company enters into swap agreements to convert certain long-term fixed-rate loans to floating rates to hedge the Company’s exposure to interest rate risk. The Company pays a fixed interest rate to the counterparty and receives a floating rate from the same counterparty calculated on the aggregate notional amount. At September 30, 2021 and December 31, 2020, the aggregate notional amount of the related hedged items for certain long-term fixed rate loans totaled $89.8 million and $74.7 million, respectively, and the fair value of the swaps associated with the derivative related to hedged items was an unrealized loss of $1.2 million and $5.1 million, respectively.
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AFS Securities: The Company has entered into a swap agreement to hedge the interest rate risk on a portion of its fixed rate available for sale securities. At September 30, 2021 and December 31, 2020, the aggregate notional amount of the related hedged items of the AFS securities totaled $50 million and the fair value of the swaps associated with the derivative related to hedged items was an unrealized loss of $5.0 million and $7.3 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. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows on the derivative hedging instrument with the changes in fair value or cash flows on the designated hedged item or transactions for the risk being hedged. If a hedging relationship ceases to qualify for hedge accounting, the relationship is discontinued and future changes in the fair value of the derivative instrument are recognized in current period earnings. For a discontinued or terminated fair value hedging relationship, all remaining basis adjustments to the carrying amount of the hedged item are amortized to interest income or expense over the remaining life of the hedged item consistent with the amortization of other discounts or premiums. Previous balances deferred in AOCI from discontinued or terminated cash flow hedges are reclassified to interest income or expense as the hedged transactions affect earnings or over the originally specified term of the hedging relationship. The Company’s hedges continue to be highly effective and had no material impact on the Consolidated Statements of Income.
Loan Swaps
During the normal course of business, the Company offers interest rate swap loan relationships (“loan swaps”) to its borrowers to help meet their financing needs. Upon entering into the loan swaps, the Company enters into offsetting positions with a third party in order to minimize interest rate risk. These back-to-back loan swaps qualify as financial derivatives with fair values as reported in “Other Assets” and “Other Liabilities” on the Company’s Consolidated Balance Sheets.
The following table summarizes key elements of the Company’s derivative instruments as of September 30, 2021 and December 31, 2020, segregated by derivatives that are considered accounting hedges and those that are not (dollars in thousands):
Derivative (2)
Notional or
Contractual
Amount (1)
Assets
Liabilities
Derivatives designated as accounting hedges:
Interest rate contracts: (3)
Cash flow hedges
Fair value hedges
139,792
6,769
124,726
12,483
Derivatives not designated as accounting hedges:
Loan Swaps: (3)
Pay fixed - receive floating interest rate swaps
2,440,163
953
39,664
2,356,453
212
163,148
Pay floating - receive fixed interest rate swaps
89,293
12,431
(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.
(3) The Company’s cleared derivatives are classified as a single-unit of accounting, resulting in the fair value of the designated swap being reduced by the variation margin, which is treated as settlement of the related derivatives fair value for accounting purposes and is reported on a net basis at September 30, 2021. The previous periods presented do not include the offsetting impact of variation margin.
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The following table summarizes the carrying value of the Company’s hedged assets in fair value hedges and the associated cumulative basis adjustments included in those carrying values as of September 30, 2021 and December 31, 2020 (dollars in thousands):
Cumulative
Amount of Basis
Adjustments
Included in the
Carrying Amount
of Hedged
Amount of the
Assets/(Liabilities)
Hedged
Line items on the Consolidated Balance Sheets in which the hedged item is included:
Securities available-for-sale (1) (2)
122,522
4,993
166,413
7,297
89,792
1,170
74,726
5,088
(1) These amounts include the amortized cost basis of the investment securities designated in hedging relationships for which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At September 30, 2021 and December 31, 2020, the amortized cost basis of this portfolio was $123 million and $166 million, respectively, and the cumulative basis adjustment associated with this hedge was $5.0 million and $7.3 million, respectively. The amount of the designated hedged item at September 30, 2021 and December 31, 2020 totaled $50 million.
(2) Carrying value represents amortized cost.
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9. STOCKHOLDERS’ EQUITY
Series A Preferred Stock
On June 9, 2020, the Company issued and sold 6,900,000 depositary shares, each representing a 1/400th ownership interest in a share of its 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.
In 2019, the Company’s Board of Directors has authorized a share repurchase program to purchase up to $150.0 million of the Company’s common stock through June 30, 2021 in open market transactions or privately negotiated transactions. On March 20, 2020, the Company suspended its share repurchase program, which had approximately $20 million remaining in authorization at the time. The Company repurchased an aggregate of approximately 3.7 million shares, at an average price of $35.48 per share, under the authorization prior to suspension. On May 4, 2021, the Company’s Board of Directors authorized a new share repurchase program (the “Repurchase Program”) to purchase up to $125 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, that was due to expire on June 30, 2022. As part of the Repurchase Program, 1.1 million shares (or $42.3 million) were repurchased during the quarter ended June 30, 2021, and 2.3 million shares (or $82.7 million) were repurchased during the quarter ended September 30, 2021, fully utilizing the $125 million repurchase authorization under the Repurchase Program.
Accumulated Other Comprehensive Income (Loss)
The change in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2021 is summarized as follows, net of tax (dollars in thousands):
Unrealized Gains
for AFS
Gains (Losses)
Securities
Change in Fair
on AFS
Transferred to
Value of Cash
(Losses) on
Flow Hedge
Balance - June 30, 2021
54,792
1,132
(2,897)
Other comprehensive income (loss) before reclassification
(23,787)
Amounts reclassified from AOCI into earnings
138
Net current period other comprehensive income (loss)
(23,249)
Balance - September 30, 2021
31,543
(2,747)
74,161
55
(3,201)
(41,915)
323
(42,618)
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The change in accumulated other comprehensive income (loss) for the three months and nine months ended September 30, 2020 is summarized as follows, net of tax (dollars in thousands):
Unrealized Gain
on BOLI
63,886
65
(2,647)
108
1,236
65,122
(2,520)
37,877
(782)
(1,595)
34,968
(7,881)
27,245
782
(925)
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10. FAIR VALUE MEASUREMENTS
The Company follows ASC 820 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 8 “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, 2021 and December 31, 2020. 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, 2021 and December 31, 2020 did not have a material impact on the Company’s Consolidated Financial Statements.
AFS Securities
AFS securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity, then the security would fall to the lowest level of the hierarchy (Level 3).
The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third-party portfolio accounting service vendor for valuation of its securities portfolio. The vendor’s primary source for security valuation is ICE Data Services, which evaluates securities based on market data. ICE Data Services utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.
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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, 2021 and December 31, 2020.
The carrying value of restricted FRB and FHLB stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the table below.
Loans Held for Sale
Loans held for sale are carried at fair value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). Gains and losses on the sale of loans are recorded in current period earnings as a component of "Mortgage banking income" on the Company’s Consolidated Statements of Income.
The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020 (dollars in thousands):
Fair Value Measurements at September 30, 2021 using
Significant
Quoted Prices in
Active Markets for
Observable
Unobservable
Identical Assets
Inputs
Level 1
Level 2
Level 3
Balance
64,955
9,863
Mortgage-backed securities
1,970,813
Derivatives:
Interest rate swap
90,246
52,096
(1) Other bonds include asset-backed securities.
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Fair Value Measurements at December 31, 2020 using
1,536,996
163,360
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets after they are evaluated for impairment. The primary assets accounted for at fair value on a nonrecurring basis are related to foreclosed properties, former bank premises, and collateral-dependent loans that are individually assessed. When the asset is secured by real estate, the Company measures the fair value utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data. Management may discount the value from the appraisal in determining the fair value if, based on its understanding of the market conditions, the collateral had been impaired below the appraised value (Level 3). The assets for which a nonrecurring fair value measurement was recorded during the period ended September 30, 2021 and December 31, 2020 was $4.2 million and $12.7 million, respectively. The nonrecurring valuation adjustments for these assets did not have a material impact on the Company’s consolidated financial statements.
Fair Value of Financial Instruments
ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
HTM Securities
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The Company primarily uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of September 30, 2021 and December 31, 2020. 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, 2021 and December 31, 2020.
Loans and Leases
The fair value of loans and leases were estimated using an exit price, representing the amount that would be expected to be received if the Company sold the loans and leases. The fair value of performing loans and leases were estimated through use of discounted cash flows. Credit loss assumptions were based on market PD/LGD for loan and lease cohorts. The discount rate was based primarily on recent market origination rates. Fair value of loans and leases individually assessed and their respective levels within the fair value hierarchy are described in the previous section related to fair value measurements of assets that are measured on a nonrecurring basis.
Bank Owned Life Insurance
The carrying value of BOLI approximates fair value. The Company records these policies at their cash surrender value, which is estimated using information provided by insurance carriers.
Deposits
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposits were valued using a discounted cash flow calculation that includes a market rate analysis of the current rates offered by market participants for certificates of deposits that mature in the same period.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
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The carrying values and estimated fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020 are as follows (dollars in thousands):
Quoted Prices
in Active
Markets for
Total Fair
Cash and cash equivalents
AFS securities
3,130,221
HTM securities
7,532
Restricted stock
Net loans
12,791,350
Accrued interest receivable
64,610
16,643,354
385,765
375,577
Accrued interest payable
3,008
606,496
13,269
13,710,640
75,757
15,763,991
840,717
821,516
2,516
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The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. Borrowers with fixed rate obligations, however, are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
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11. REVENUE
The majority of the Company’s noninterest income comes from short term contracts associated with fees for services provided on deposit accounts, credit cards, and wealth management accounts and is being accounted for in accordance with Topic 606. Typically, the duration of a contract does not extend beyond the services performed; therefore, the Company concluded that discussion regarding contract balances is immaterial.
The Company’s performance obligations on revenue from interchange fees and deposit accounts are generally satisfied immediately, when the transaction occurs, or by month-end. Performance obligations on revenue from fiduciary and asset management fees are generally satisfied monthly or quarterly. For a majority of fee income on deposit accounts, the Company is a principal, controlling the promised good or service before transferring it to the customer. For the majority of income related to wealth management income, the Company is an agent, responsible for arranging for the provision of goods and services by another party. Mortgage banking income is earned when the originated loans are sold to an investor on the secondary market. The loans are classified as loans held for sale prior to being sold. Additionally, the changes in fair value of the loans held for sale, loan commitments, and related derivatives are included in mortgage banking income.
Noninterest income disaggregated by major source for the three and nine months ended September 30, 2021 and 2020, consisted of the following (dollars in thousands):
Deposit Service Charges (1):
Overdraft fees
4,648
4,231
11,864
13,240
Maintenance fees & other
2,550
1,810
7,450
5,309
Other service charges, commissions, and fees (1)
Interchange fees(1)
Fiduciary and asset management fees (1):
Trust asset management fees
3,233
2,729
9,127
8,026
Registered advisor management fees
2,510
2,224
7,299
Brokerage management fees
1,286
3,897
3,115
Other operating income (2)
(1) Income within scope of Topic 606.
(2) Includes a $1.8 million loss related to the termination of a cash flow hedge for the nine months ended September 30, 2020.
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12. EARNINGS PER SHARE
Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares outstanding attributable to stock awards.
The following table presents basic and diluted EPS calculations for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands except per share data):
Net Income:
Less: Preferred Stock Dividends
Weighted average shares outstanding, basic
76,309
78,714
77,989
78,905
Dilutive effect of stock awards
Weighted average shares outstanding, diluted
76,323
78,725
78,008
78,921
Earnings per common share, basic
Earnings per common share, diluted
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13. SUBSEQUENT EVENTS
On October 28, 2021, the Company’s Board of Directors declared a quarterly dividend of $0.28 per share of common stock. The common stock dividend amount is the same as the prior quarter and an increase of $0.03, or 12.0%, from the dividend paid in the fourth quarter of 2020. The common stock dividend is payable on November 26, 2021 to common shareholders of record as of November 12, 2021.
The Board also declared a quarterly dividend on the outstanding shares of its Series A preferred stock. The Series A preferred stock is represented by depositary shares, each representing a 1/400th ownership interest in a share of Series A preferred stock. The dividend of $171.88 per share (equivalent to $0.43 per outstanding depositary share) is consistent with the prior quarter. The preferred stock dividend is payable on December 1, 2021 to preferred shareholders of record as of November 16, 2021.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Atlantic Union Bankshares Corporation
Results of Review of Interim Financial Statements
We have reviewed the accompanying consolidated balance sheet of Atlantic Union Bankshares Corporation (the Company) as of September 30, 2021, the related consolidated statements of income, comprehensive income, and stockholders’ equity for the three and nine-month periods ended September 30, 2021 and 2020, the consolidated statements of changes in cash flows for the nine-month periods ended September 30, 2021 and 2020, 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, 2020, 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 26, 2021, 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, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
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 4, 2021
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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 2020 Form 10-K, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section therein. Highlighted in the discussion are material changes from prior reporting periods and identifiable trends materially affecting the Company. Results of operations for the interim periods are not necessarily indicative of results that may be expected for the full year or for any other period. Amounts are rounded for presentation purposes; however, some of the percentages presented are computed based on unrounded amounts.
In management’s discussion and analysis, the Company provides certain financial information determined by methods other than in accordance with US GAAP. The Company believes the presentation of non-GAAP financial measures provides a meaningful basis for period-to-period and company-to-company comparisons. Non-GAAP financial measures may be identified with the symbol (+) and may be labeled as adjusted. 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.
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, including without limitation, statements regarding future interest rate environments and potential impacts on the Company’s net interest margin, future economic conditions, and developments related to the COVID-19 pandemic, and may include other 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, or achievements 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 the effects of or changes in:
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Please refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the 2020 Form 10-K and related disclosures in other filings, including the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2021 and June 30, 2021, which have been filed with the SEC and are available on the SEC’s website at www.sec.gov. All of the forward-looking statements made in this report are expressly qualified by the cautionary statements contained or referred to in this Quarterly Report. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences 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.
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The critical accounting and reporting policies include the Company’s accounting for the ACL, acquired loans, business combinations and divestitures, and goodwill and intangible assets. The Company’s accounting policies are fundamental to understanding the Company’s consolidated financial position and consolidated results of operations. Accordingly, the Company’s significant accounting policies are discussed in detail in Note 1 “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” contained in Item 8 "Financial Statements and Supplementary Data" of the Company’s 2020 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 2020 Form 10-K and in Note 1 “Summary of Significant Accounting Policies” within Part I, Item 1 of this Quarterly Report.
RECENT ACCOUNTING PRONOUNCEMENTS (ISSUED BUT NOT FULLY ADOPTED)
In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance provides temporary, optional guidance to ease the potential burden in accounting for reference rate reform associated with the LIBOR transition. LIBOR and other interbank offered rates are widely used benchmark or reference rates that have been used in the valuation of loans, derivatives, and other financial contracts. Global capital markets are going to be required to move away from LIBOR and other interbank offered rates and toward rates that are more observable or transaction based and less susceptible to manipulation. Topic 848 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. Topic 848 is intended to help stakeholders during the global market-wide reference rate transition period. The amendments are effective as of March 12, 2020 through December 31, 2022 and can be adopted at an instrument level. As of March 31, 2021, the Company utilized the expedient to assert probability of hedged interested as detailed 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 2020 Form 10-K. The Company may incorporate other components of Topic 848 at a later date and is continuing to evaluate the remaining components of Topic 848 and its impact to the Company.
ABOUT ATLANTIC UNION BANKSHARES CORPORATION
Shares of the Company’s common stock are traded on the Nasdaq Global Select Market under the symbol "AUB". Additional information is available on the Company’s website at https://investors.atlanticunionbank.com. The information contained on the Company’s website is not a part of or incorporated into this Quarterly Report.
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RESULTS OF OPERATIONS
Executive Overview
The Company’s financial condition and results of operations as of and for the three and nine months ended September 30, 2021 have been impacted by COVID-19 and governmental programs and initiatives that have responded to COVID-19, including the PPP.
The Company participated in SBA PPP under the CARES Act, which was intended to provide economic relief to small businesses that had been adversely impacted by COVID-19. The PPP loan funding program expired on May 31, 2021. The Company had PPP loans with a recorded investment of $481.7 million and unamortized deferred fees of $15.1 million as of September 30, 2021. The PPP loans carry a 1% interest rate.
In addition to an insignificant amount of PPP loan pay offs, the Company has processed $1.7 billion(*) of loan forgiveness on 13,000 PPP loans(*) since the inception of the program through September 30, 2021 with $165.0 million(*) on 2,500 loans(*) occurring in the first quarter of 2021, $705.0 million(*) on 5,000 loans(*) occurring in the second quarter of 2021, and $392.0 million(*) on 3,000 loans(*) occurring in the third quarter of 2021.
During 2020, the Company launched several initiatives to reduce expenses in light of the current and expected operating environment, including the consolidation of certain branch locations. The Company completed the consolidation of 15 branches in 2020, and five additional branches were consolidated in February 2021. These actions resulted in branch closure costs of approximately $1.1 million in the first quarter of 2021 primarily related to lease termination costs, severance costs, and real estate write-downs.
On May 4, 2021, the Company’s Board of Directors authorized the Repurchase Program to purchase up to $125 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, that was due to expire on June 30, 2022. Under the Repurchase Program, 1.1 million shares were repurchased for $42.3 million during the quarter ended June 30, 2021 and 2.3 million shares were repurchased for $82.7 million during the quarter ended September 30, 2021, fully utilizing the $125 million repurchase authorization under the Repurchase Program.
Third Quarter Net Income and Performance Metrics
Nine Month Net Income and Performance Metrics
Balance Sheet
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(*) PPP forgiveness values are rounded and approximate values
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.
COVID-19 has had and may continue to have a wide range of economic impacts. Since the first quarter of 2020, COVID-19 has severely disrupted supply chains and adversely affected production, demand, sales, and employee productivity across a range of industries, and has increased unemployment in the Company’s areas of operation and nationally. During 2021, the economy has, with certain setbacks, started to reopen, as there was wider vaccine distribution, resulting in the easing of restrictions related to COVID-19, which appear to be leading to greater economic activity. However, the national economy and economies in the Company’s areas of operations continue to be impacted during 2021 and are likely to be impacted into 2022, despite the fact that many businesses have re-opened at full capacity. In addition, COVID-19 may have social and other impacts that are not yet known but may affect the Company’s customers, employees, and vendors. If a resurgence in the COVID-19 pandemic leads to signficant restrictions on economic activity or significant impacts on public health, COVID-19 may still present the possibility of an extended economic recession.
During 2020 and the first nine months of 2021, the Company has taken and is continuing to take precautions to protect the safety and well-being of the Bank’s employees and customers during COVID-19. The Bank has implemented additional safety policies and procedures and follows guidance issued by the Centers for Disease Control and Prevention, state health authorities, and state and local executive orders where our branches and corporate offices are located. The Bank remains very focused on the safety and well-being of its employees and customers during COVID-19 and is committed to safely and responsibly operating its branch network and maintaining appropriate staffing in each branch.
COVID-19 has adversely affected the Company’s business, financial condition, and results of operations since the first quarter of 2020. The duration, nature and severity of future impacts of COVID-19 on the Company’s operational and financial performance will depend on future developments with respect to COVID-19, all of which remain highly uncertain and cannot be predicted, and new information may emerge concerning the nature and severity of the COVID-19 pandemic, the emergence of new COVID-19 variants, short- and long-term health impacts, the actions to contain the pandemic or address its impacts (including the efficacy of vaccine and treatment developments and the success of vaccination programs), the pace and durability of any economic recovery, 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.
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Net Interest Income
For the Three Months Ended
Change
Average interest-earning assets
17,910,389
17,748,152
162,237
Interest and dividend income
(11,035)
Interest and dividend income (FTE) (1)
149,543
160,315
(10,772)
Yield on interest-earning assets
3.24
3.53
(29)
Yield on interest-earning assets (FTE) (1)
3.31
3.59
(28)
Average interest-bearing liabilities
11,908,809
12,444,083
(535,274)
Interest expense
(11,142)
Cost of interest-bearing liabilities
0.64
(34)
Cost of funds
0.45
(26)
107
Net interest income (FTE) (1)
140,652
140,282
370
Net interest margin
3.05
3.08
Net interest margin (FTE) (1)
3.12
3.14
(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 2021, net interest income was $137.5 million, and net interest income (FTE)(+) was $140.7 million, both of which were in line with the third quarter of 2020. In the third quarter of 2021, net interest margin decreased 3 basis points to 3.05% from 3.08% in the third quarter of 2020, and net interest margin (FTE)(+) decreased 2 basis points compared to the third quarter of 2020. The 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 cost of funds. The decline in the Company’s earning asset yields was primarily driven by the impact of excess liquidity, and declines in loan and investment securities yields, as a result of the decrease in market interest rates. The cost of funds decline was driven by lower deposit costs and wholesale borrowing costs driven by lower market interest rates and a favorable funding mix.
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For the Nine Months Ended
17,824,607
16,809,423
1,015,184
(46,703)
454,265
500,069
(45,804)
3.91
(57)
3.41
3.97
(56)
11,939,838
12,200,209
(260,371)
(49,943)
0.36
0.90
0.24
0.65
3,240
422,295
418,156
4,139
3.26
(16)
3.17
3.32
For the first nine months of 2021, net interest income was $412.9 million, an increase of $3.2 million from the same period of 2020. For the first nine months of 2021, net interest income (FTE)(+) was $422.3 million, an increase of $4.1 million from the same period of 2020. The increases in both net interest income and net interest income (FTE)(+) were primarily driven by a decline in interest expense due to decreased deposit costs and a favorable funding mix partially offset by lower interest income due to lower earning asset yields and an unfavorable earning asset mix. In the first nine months of 2021, net interest margin decreased 16 basis points to 3.10% from 3.26% in the first nine months of 2020, and net interest margin (FTE)(+) decreased 15 basis points compared to the first nine months of 2020. 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 cost of funds. The decline in the Company’s earning asset yields was primarily driven by the impact of excess liquidity and declines in loan and investment securities yields, as a result of the decrease in market interest rates. 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.
In response to COVID-19, the FOMC reduced its Federal Funds target rates to its current range of 0% to 0.25%, compared to an upper bound in the Federal Funds target rate of 1.75% during the first quarter of 2020. As a consequence of reduced short-term rates, the Company has seen compression on its net interest margin as earning asset yields have decreased by more than the decrease in the Company’s cost of funds due primarily to the impact of excess liquidity.
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The following tables show interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated:
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
For the Three Months Ended September 30,
Average
Income /
Yield /
Expense (1)
Rate (1)(2)
Assets:
Securities:
2,248,478
1.98
1,738,033
2.35
Tax-exempt
1,431,499
12,480
3.46
1,153,177
10,886
3.76
Total securities
3,679,977
23,710
2.56
2,891,210
21,161
2.91
Loans, net (3) (4)
13,451,674
125,290
3.70
14,358,666
138,635
3.84
Other earning assets
778,738
498,276
519
0.41
Total earning assets
(117,414)
(174,171)
Total non-earning assets
2,263,595
2,211,186
20,056,570
19,785,167
Liabilities and Stockholders' Equity:
Interest-bearing deposits:
Transaction and money market accounts
8,345,410
1,501
7,834,317
4,684
Regular savings
1,058,284
0.02
845,936
128
Time deposits (5)
2,109,131
4,281
2,579,991
10,756
1.66
Total interest-bearing deposits
11,512,825
0.20
11,260,244
0.55
Other borrowings (6)
395,984
3,054
3.06
1,183,839
4,465
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Demand deposits
5,205,319
4,320,225
224,410
372,082
17,338,538
17,136,390
Stockholders' equity
2,718,032
2,648,777
Interest rate spread
3.01
2.95
(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 $4.2 million and $3.8 million for the three months ended September 30, 2021 and 2020, respectively, in accretion of the fair market value adjustments related to acquisitions.
(5) Interest expense on time deposits includes amortization of $8,000 for the three months ended September 30, 2021 and accretion of $26,000 for the three months ended September 30, 2020, for the fair market value adjustments related to acquisitions.
(6) Interest expense on borrowings includes $203,000 and $167,000 for the three months ended September 30, 2021 and 2020, respectively, in amortization of the fair market value adjustments related to acquisitions.
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For the Nine Months Ended September 30,
2,062,486
2.08
1,676,528
2.64
1,375,799
36,421
3.54
1,044,633
31,038
3,438,285
68,523
2,721,161
64,208
3.15
13,827,002
384,252
3.72
13,639,401
433,286
4.24
559,320
1,490
448,861
2,575
0.77
(137,589)
(138,524)
2,203,137
2,166,681
19,890,155
18,837,580
8,189,587
5,462
0.09
7,415,491
26,508
0.48
1,005,537
169
792,994
2,288,530
16,572
0.97
2,667,267
37,026
1.85
11,483,654
0.26
10,875,752
456,184
9,767
1,324,457
17,970
1.81
4,949,816
3,756,957
271,896
338,558
17,161,550
16,295,724
2,728,605
2,541,856
3.07
(4) Interest income on loans includes $12.6 million and $19.8 million for the nine months ended September 30, 2021 and 2020, respectively, in accretion of the fair market value adjustments related to acquisitions.
(5) Interest expense on time deposits includes $24,000 and $110,000 for the nine months ended September 30, 2021 and 2020, respectively, in accretion of the fair market value adjustments related to acquisitions.
(6) Interest expense on borrowings includes $603,000 and $445,000 for the nine months ended September 30, 2021 and 2020, respectively, in amortization of the fair market value adjustments related to acquisitions.
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The table below presents changes in interest income and interest expense and distinguishes between the changes related to increases or decreases in average outstanding balances of interest-earning assets and interest-bearing liabilities (volume), and the changes related to increases or decreases in average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionally. Results, on a taxable equivalent basis, are as follows (dollars in thousands):
September 30, 2021 vs. September 30, 2020
Increase (Decrease) Due to Change in:
Volume
Rate
Earning Assets:
2,711
(1,756)
955
6,791
(7,859)
(1,068)
2,475
(881)
1,594
9,041
(3,658)
5,383
5,186
(2,637)
2,549
15,832
(11,517)
4,315
Loans, net (1)
(8,559)
(4,786)
(13,345)
5,886
(54,920)
(49,034)
231
(207)
527
(1,612)
(1,085)
(3,142)
(7,630)
22,245
(68,049)
Interest-Bearing Liabilities:
(3,470)
(3,183)
2,511
(23,557)
(21,046)
27
(100)
(73)
(329)
(240)
Time Deposits (2)
(1,699)
(4,776)
(6,475)
(4,682)
(15,772)
(20,454)
(1,385)
(8,346)
(9,731)
(2,082)
(39,658)
(41,740)
Other borrowings (3)
(4,180)
2,769
(1,411)
(15,400)
7,197
(8,203)
(5,565)
(5,577)
(17,482)
(32,461)
Change in net interest income
2,423
(2,053)
39,727
(35,588)
(1) The rate-related change in interest income on loans includes the impact of higher accretion of $362,000 for the three month change and lower accretion of $7.2 million for the nine month change of the acquisition-related fair market value adjustments.
(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 $34,000 and $86,000 for the three-and-nine-month change, respectively.
(3) The rate-related change in interest expense on other borrowings includes the impact of higher amortization of the acquisition-related fair market value adjustments of $36,000 and $158,000 for the three-and-nine-month change, respectively.
The Company’s net interest margin (FTE) includes the impact of acquisition accounting fair value adjustments. The impact of net accretion related to acquisition accounting fair value adjustments for the first, second and third quarters of 2020, and the first, second and third quarters of 2021 are reflected in the following table (dollars in thousands):
Loan
Deposit
Accretion
Accretion (Amortization)
Amortization
For the quarter ended March 31, 2020
9,528
50
(138)
9,440
For the quarter ended June 30, 2020
6,443
(140)
6,337
For the quarter ended September 30, 2020
3,814
(167)
3,673
For the quarter ended March 31, 2021
4,287
(198)
4,109
For the quarter ended June 30, 2021
4,132
(202)
3,942
For the quarter ended September 30, 2021
(203)
3,965
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Noninterest Income
1,157
19.2
Other service charges, commissions, and fees
(5.4)
11.3
984
16.3
(4,079)
(45.8)
(9)
(50.0)
(694)
(20.3)
(2,068)
(65.2)
3.2
(4,469)
(13.0)
Noninterest income decreased $4.5 million or 13.0% to $29.9 million for the quarter ended September 30, 2021, compared to $34.4 million for the quarter ended September 30, 2020. The decrease was primarily driven by a decrease in mortgage banking income of $4.1 million due to lower mortgage origination volumes and a decrease in loan-related interest swap income of $2.1 million due to lower transaction volumes. Partially offsetting these decreases was an increase of $1.2 million in service charges on deposit accounts and an increase of $1.0 million in fiduciary and asset management fees due to growth in assets under management.
765
4.1
8.0
18.0
2,780
15.8
948
5.7
(12,206)
(99.3)
704
9.4
(8,426)
(66.9)
4,256
103.4
(9,857)
(9.9)
Noninterest income decreased $9.9 million or 9.9% to $89.4 million for the nine months ended September 30, 2021, compared to $99.2 million for the nine months ended September 30, 2020. Excluding gains on securities transactions and losses related to balance sheet repositioning, adjusted operating noninterest income(+) for the nine months ended September 30, 2021 remained comparable with a slight decrease of $580,000 or 0.7% compared to the nine months ended September 30, 2020. Key changes from the first nine months of 2020 to the same period during 2021 related to fiduciary and asset management fees increasing $2.8 million due to growth in assets under management and other operating income increasing primarily due to the change in unrealized gains on equity method investments of approximately $4.3 million. Partially offsetting these increases was a decrease in loan-related interest swap income of $8.4 million due to lower transaction volumes.
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Noninterest Expense
Noninterest expense:
4,534
9.3
(190)
(2.6)
145
3.7
970
14.8
878
30.1
(83)
(3.2)
19.9
308
7.5
(811)
(35.0)
(672)
(16.6)
(3,319)
(39.2)
Total noninterest expense
2,121
2.3
Noninterest expense increased $2.1 million or 2.3% to $95.3 million for the quarter ended September 30, 2021 compared to $93.2 million for the quarter ended September 30, 2020. The increase was mainly driven by higher salaries and benefits of $4.5 million, technology and data processing of approximately $1.0 million, and professional services of approximately $878,000. Other expenses decreased $3.3 million, primarily due to a decrease in expenses associated with the Company’s 2020 expense reduction plans, which totaled $2.6 million for the quarter ended September 30, 2020, and primarily included branch closure costs that were not incurred during the third quarter of 2021.
7,946
5.3
(93)
(0.4)
877
7.9
2,470
12.9
3,950
42.9
(1.1)
(780)
(10.3)
939
7.6
(2,223)
(29.6)
(1,997)
(15.8)
4,389
42.6
(7,825)
(33.2)
7,570
2.6
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Noninterest expense increased $7.6 million or 2.6% to $299.3 million for the nine months ended September 30, 2021, compared to $291.7 million for the nine months ended September 30, 2020. Excluding amortization of intangible assets and losses on debt extinguishment, adjusted operating noninterest expense(+) for the nine months ended September 30, 2021 increased $5.2 million or 1.9% compared to the nine months ended September 30, 2020. The increase was primarily driven by an increase of $7.9 million in salaries and benefits due to higher wages, contract labor costs, and performance based variable incentive compensation, $4.0 million in professional services costs due to an increase in legal fees and costs related to strategic projects, and $2.5 million in technology and data processing expenses. These increases were partially offset by a decrease in other operating expenses driven by a decrease in loan-related expenses of $2.2 million due to lower third-party lending costs, and a decrease of $2.3 million in OREO and credit-related expenses, reflecting the impact of $1.8 million in gains on the sale of closed branches recorded as a reduction in other expenses in the current year and also reflecting the impact of the Company’s continued low levels of nonperforming assets.
Noninterest expense for the nine months ended September 30, 2021 included $1.2 million in real-estate related branch closure costs, compared to $4.9 million during the nine months ended September 30, 2020.
Noninterest expense for the nine months ended September 30, 2021 included approximately $500,000 in costs related to the Company’s response to COVID-19, compared to $1.6 million during the nine months ended September 30, 2020, and approximately $640,000 during the nine months ended September 30, 2021 in expenses associated with PPP loan forgiveness processing, specific to technology, digital and contract worker spending, which were not incurred in the prior period.
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 effective tax rate for the three months ended September 30, 2021 and 2020 was 18.0% and 15.3%, respectively. The effective tax rate for the nine months ended September 30, 2021 and 2020 was 17.8% and 15.1%, respectively. The increase in the effective tax rates is primarily due to the lower proportion of tax-exempt income to pre-tax income in the 2021 periods.
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DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Overview
At September 30, 2021, total assets were $19.9 billion, an increase of $307.2 million or approximately 2.1% (annualized) from $19.6 billion at December 31, 2020. Total assets have remained relatively consistent from December 31, 2020 to September 30, 2021, with loans declining due to PPP forgiveness and the negative impacts of increased loan paydowns, cash and cash equivalents increasing due to excess liquidity, and net growth in the investment securities portfolio.
Loans held for investment (net of deferred fees and costs) were $13.1 billion, including $466.6 million in PPP loans, at September 30, 2021, a decrease of $881.7 million or 8.4% (annualized) from December 31, 2020. Excluding the effects of the PPP(+), loans held for investment (net of deferred fees and costs) decreased $168.8 million or 1.8% (annualized) during this period. For the quarter ended September 30, 2021, quarterly average loans decreased $907.0 million compared to the quarter ended September 30, 2020. Excluding the effects of the PPP(+), quarterly average loans for the quarter ended September 30, 2021 increased $44.0 million or 0.3% from the quarter ended September 30, 2020. Refer to "Loan Portfolio" within Item 2 and Note 3 "Loans and Allowance for Loan and Lease Losses" in Part I, Item 1 for additional information on the Company’s loan activity.
Liabilities and Stockholders’ Equity
At September 30, 2021, total liabilities were $17.2 billion, an increase of $321.3 million from $16.9 billion at December 31, 2020.
Total deposits were $16.6 billion at September 30, 2021, an increase of $899.4 million or approximately 7.6% (annualized) from December 31, 2020. For the quarter ended September 30, 2021, quarterly average deposits increased $1.1 billion or 7.3% compared to the quarter ended September 30, 2020 primarily due to additional liquidity of bank customers due to higher levels of government assistance programs responding to the COVID-19 pandemic. Refer to “Deposits” within this Item 2 for further discussion on this topic.
Total short-term and long-term borrowings decreased from $840.7 million at December 31, 2020 to $385.8 million at September 30, 2021. The Company prepaid a $200.0 million long-term FHLB advance during the first quarter of 2021. At September 30, 2021, the Company no longer has any federal funds purchased or short-term advances with the FHLB as compared to $150.0 million and $100.0 million at December 31, 2020, respectively. Refer to Note 6 “Borrowings” in Part I of Item I for further discussion on this topic.
At September 30, 2021, stockholders’ equity was $2.7 billion, a decrease of $14.1 million from December 31, 2020. Refer to “Capital Resources” within this Item 2, as well as Note 9 "Stockholders’ Equity" in Part I, Item 1 for additional information on the Company’s capital ratios.
For information related to the Company’s stock repurchase activity and the Repurchase Program, please refer to Note 9 “Stockholders’ Equity” in Part I, Item 1 and Part II, Item 2 of this Quarterly Report.
The Company declared and paid a cash dividend of $0.28 per common share during the third quarter of 2021. Dividends for the nine months ended September 30, 2021 were $0.81, an increase of $0.06 per common share, or 8.0% compared to the nine months ended September 30, 2020. During the third quarter of 2021, the Board also declared and paid a quarterly dividend on the outstanding shares of Series A Preferred Stock of $171.88 per share (equivalent to $0.43 per outstanding depositary share). Dividends paid on the outstanding shares of Series A Preferred Stock for the nine months ended September 30, 2021 were $515.64 per share (equivalent to $1.29 per outstanding depositary share).
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Securities
At September 30, 2021, the Company had total investments in the amount of $3.8 billion, or 19.1% of total assets, as compared to $3.2 billion, or 16.2% of total assets, at December 31, 2020. The Company seeks to diversify its portfolio to minimize risk. It focuses on purchasing mortgage-backed securities for cash flow and reinvestment opportunities and securities issued by states and political subdivisions due to the tax benefits and the higher yield offered from these securities. The majority of the Company’s mortgage-backed securities are agency-backed securities, which have a government guarantee. The investment portfolio has a high percentage of municipal securities; therefore, the Company earns a higher taxable equivalent yield on its portfolio as compared to many of its peers. For information regarding the hedge transaction related to available for sale securities, see Note 8 "Derivatives" in Part I, Item 1 of this Quarterly Report.
The table below sets forth a summary of the AFS securities, HTM securities, and restricted stock as of the dates indicated (dollars in thousands):
Available for Sale:
Corporate and other bonds
Residential
Total mortgage-back securities
Total AFS securities, at fair value
Held to Maturity:
Total held to maturity securities, at carrying value
Restricted Stock:
Federal Reserve Bank stock
67,032
FHLB stock
9,793
27,750
Total restricted stock, at cost
Total investments
3,807,723
3,180,052
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The following table summarizes the contractual maturity of AFS securities at fair value and their weighted average yields as of September 30, 2021 (dollars in thousands):
1 Year or
5 – 10
Over 10
Less
1 - 5 Years
Years
Amortized cost
Fair value
Weighted average yield (1)
1.48
Obligations of states and political subdivisions:
2,276
16,261
44,408
909,042
2,325
16,897
46,525
933,134
4.93
2.63
2.77
Corporate bonds and other securities:
12,799
111,069
21,283
146,787
13,127
114,498
21,403
150,664
0.72
4.14
4.11
3.74
Mortgage backed securities:
7,886
134,472
23,887
267,487
7,941
138,840
24,277
269,284
2.46
2.23
11,861
63,299
1,448,351
11,972
65,322
1,453,152
2.47
2.33
1.75
Total mortgage-backed securities
7,911
146,333
87,186
1,715,838
1,957,268
7,966
150,812
89,599
1,722,436
2.36
3.16
2.37
1.83
1.95
Total AFS securities:
3.20
2.81
2.15
2.28
(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, 2021 (dollars in thousands):
Carrying value
1,526
1,111
1,518
1,113
4.27
4.05
4.18
1,975
12,950
507,342
567,806
2.32
4.35
4.10
4.08
4.92
Total HTM securities:
4.33
4.09
As of September 30, 2021, the Company maintained a diversified municipal bond portfolio with approximately 64% of its holdings in general obligation issues and the majority of the remainder backed by revenue bonds. Issuances within the state of Texas represented 20% of the municipal portfolio; no other state had a concentration above 10%. Substantially all municipal holdings are considered investment grade. When purchasing municipal securities, the Company focuses on strong underlying ratings for general obligation issuers or bonds backed by essential service revenues.
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Liquidity
Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, money market investments, federal funds sold, loans held for sale, and securities and loans maturing or re-pricing within one year. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary through federal funds lines with several correspondent banks, a line of credit with the FHLB, the Federal Reserve Discount Window, the purchase of brokered certificates of deposit, corporate line of credit with a large correspondent bank, and debt and capital issuance. Management considers the Company’s overall liquidity to be sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.
The Company has continued to see elevated customer deposit balances as a result of the impacts of COVID-19 as a result of government stimulus programs. As a result of the increases in customer deposits, the Company has reduced its wholesale borrowings during 2020 and in the first three quarters of 2021. The Company considers a portion of the increases in customer deposits to be temporary, which it expects will result in outflows in subsequent quarters.
Under the terms of the PPPLF, prior to that program’s expiration, the Company could borrow funds which are secured by the Company’s PPP loans. During 2020, the Company’s borrowings pursuant to the PPPLF fluctuated; however, at its peak, the Company borrowed $200.5 million. The PPPLF expired on July 30, 2021, following an extension by the Federal Reserve from the previously scheduled expiration date of June 30, 2021.
In response to the low market interest rate environment, in February 2021 the Company prepaid a $200.0 million long-term FHLB advance, which resulted in a pre-tax prepayment penalty of $14.7 million.
As of September 30, 2021, liquid assets totaled $6.8 billion or 34.3% of total assets, and liquid earning assets totaled $6.6 billion or 37.0% of total earning assets. Asset liquidity is also provided by managing loan and securities maturities and cash flows. As of September 30, 2021, loan payments of approximately $5.4 billion or 40.7% of total loans are expected within one year based on contractual terms, adjusted for expected prepayments, and approximately $380.3 million or 10.0% of total securities are scheduled to be paid down within one year based on contractual terms, adjusted for expected prepayments.
For additional information and the available balances on various lines of credit, please refer to Note 6 “Borrowings” in the “Notes to the Consolidated Financial Statements” contained in Part I of Item 1 of this Quarterly Report. 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. For additional information and outstanding balances on purchased certificates of deposits, please refer to “Deposits” within this Item 2.
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Loan Portfolio
Loans held for investment, net of deferred fees and costs, were $13.1 billion at September 30, 2021, $14.0 billion at December 31, 2020, and $14.4 billion at September 30, 2020. Commercial & industrial loans and commercial real estate-non-owner occupied loans represented the Company’s largest categories at September 30, 2021. Commercial and industrial loans included approximately $455.8 million in loans from the PPP loan program as of September 30, 2021.
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 and for the quarters ended (dollars in thousands):
June 30, 2021
March 31, 2021
Commercial loans:
6.7
838,722
6.1
884,303
6.2
6.6
1,207,190
8.4
15.4
2,069,658
15.1
2,083,155
14.6
15.2
2,107,333
14.7
28.4
3,712,607
27.1
3,671,471
25.7
26.1
3,497,929
24.3
5.9
860,081
6.3
842,906
5.8
731,582
5.1
19.6
2,990,622
21.8
3,599,884
25.2
23.3
3,536,249
24.6
4.8
637,485
4.7
658,051
4.6
696,944
600,276
4.4
529,748
3.5
494,084
3.4
Total Commercial Loans
84.9
11,709,451
85.5
12,269,518
85.9
85.3
12,271,311
Consumer loans:
823,355
6.0
816,916
830,144
4.2
559,014
563,786
4.0
618,320
4.3
411,073
3.0
406,349
2.9
387,417
2.7
1.4
195,036
215,711
1.5
1.8
276,023
1.9
Total Consumer Loans
1,988,478
14.5
2,002,762
14.1
2,111,904
100.0
13,697,929
14,272,280
14,383,215
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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, 2021 (dollars in thousands):
Variable Rate
Fixed Rate
Less than 1
More than 5
Maturities
year
1-5 years
years
395,868
328,559
267,643
60,916
152,924
92,457
60,467
172,203
630,565
133,535
497,030
1,224,531
539,635
684,896
466,112
1,885,139
779,672
1,105,467
1,379,469
1,018,486
360,983
71,924
469,310
131,776
337,534
235,053
168,287
66,766
402,254
1,096,894
923,938
172,956
1,081,042
784,645
296,397
100,988
133,031
27,656
105,375
390,328
296,776
93,552
1,043
224,994
2,045
222,949
596,934
13,015
583,919
37,532
501,633
40,830
460,803
18,638
1,573
17,065
3,080
422,356
176,417
245,939
8,045
32,016
28,676
3,340
141,978
52,264
89,714
33,996
82,719
9,228
73,491
418,428
176,395
242,033
1,693,045
5,384,860
2,344,999
3,039,861
6,061,681
3,319,950
2,741,731
The Company remains committed to originating soundly underwritten loans to qualifying borrowers within its markets. As reflected in the loan table, at September 30, 2021, the largest components of the Company’s loan portfolio consisted of commercial real estate and commercial & industrial 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.
Total short-term loan modifications related to COVID-19 are immaterial to the Company as a whole at September 30, 2021.
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Asset Quality
At September 30, 2021, the Company experienced decreases in NPAs compared to December 31, 2020. Accruing past due loan levels as a percentage of total loans held for investment at September 30, 2021 were down from accruing past due loan levels at December 31, 2020 and September 30, 2020.
Net charge-offs decreased for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Total net charge-offs as a percentage of total average loans on an annualized basis also decreased for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The allowance for credit losses decreased from December 31, 2020 due to lower expected losses than previously estimated as a result of benign credit quality metrics to date, improvements in credit trends particularly during the third quarter of 2021, and an improved economic outlook.
The Company believes its continued proactive efforts to effectively manage its loan portfolio, combined with the unprecedented government stimulus and programs and regulatory support, have contributed to the sustained historically low levels of NPAs. The Company’s efforts included identifying potential problem credits through early identification and diligent monitoring of specific problem credits where the uncertainty has been realized, or conversely, has been reduced or eliminated. The Company continues to refrain from originating or purchasing loans from foreign entities. The Company selectively originates loans to higher risk borrowers. The Company’s loan portfolio generally does not include exposure to option adjustable rate mortgage products, high loan-to-value ratio mortgages, interest only mortgage loans, subprime mortgage loans or mortgage loans with initial teaser rates, which are all considered higher risk instruments.
As discussed under “Executive Overview” within this Item 2, COVID-19 has had a wide range of economic impacts, including impacts in the Company’s area of operations and on the Company’s clients and borrowers, but the Company has not yet experienced material deterioration in asset quality as compared to asset quality before COVID-19. The Company’s asset quality may in the future be adversely impacted to some degree due to the effects of COVID-19 (including the emergence and impact of new COVID-19 variants), although 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. The Company continues to monitor asset quality trends and economic and market conditions for indications that COVID-19 may have more significant impacts on the Company’s asset quality than experienced to date. As of September 30, 2021, the Company’s management believes that the ultimate impact of COVID-19 on the Company’s asset quality will be less severe than initially projected at the start of the pandemic, and the Company’s management anticipates economic activity to increase over the next several quarters.
Nonperforming Assets
At September 30, 2021, NPAs totaled $37.2 million, a decrease of $8.1 million from December 31, 2020. NPAs as a percentage of total outstanding loans at September 30, 2021 were 0.28%, a decrease of 4 basis points from 0.32% at December 31, 2020.
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The following table shows a summary of asset quality balances and related ratios as of and for the quarters ended (dollars in thousands):
June 30,
March 31,
Nonaccrual loans
36,399
41,866
39,023
Foreclosed properties
2,344
2,773
4,159
Total NPAs
37,168
38,095
44,210
45,221
43,182
Loans past due 90 days and accruing interest
8,746
9,776
15,661
Total NPAs and loans past due 90 days and accruing interest
48,198
46,841
53,986
58,855
58,843
Performing TDRs
13,053
13,670
14,515
Balances
142,911
Average loans, net of deferred fees and costs
13,971,939
14,064,123
13,777,467
Loans, net of deferred fees and costs
Ratios
Nonaccrual loans to total loans
0.29
NPAs to total loans
0.31
0.32
NPAs to total adjusted loans(1)
0.35
0.34
NPAs & loans 90 days past due to total loans
0.37
0.38
0.42
NPAs to total loans & foreclosed property
NPAs & loans 90 days past due to total loans & foreclosed property
(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.
The following table shows the activity in nonaccrual loans for the quarters ended (dollars in thousands):
Beginning Balance
39,624
Additions
4,177
4,162
3,821
8,211
2,790
Net customer payments
(4,719)
(9,307)
(4,133)
(4,640)
(2,803)
Charge-offs
(385)
(183)
(270)
(146)
(588)
Loans returning to accruing status
(153)
Transfers to foreclosed property
Ending Balance
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The following table presents the composition of nonaccrual loans at the quarters ended (dollars in thousands):
2,685
3,520
6,969
7,016
9,267
Commercial Real Estate - Non-owner Occupied
3,026
1,958
1,992
1,908
2,023
1,592
4,200
9,190
5,743
13,489
14,770
12,620
3,726
3,853
3,664
179
517
104
NPAs at September 30, 2021 also includes $1.7 million in foreclosed property, a decrease of $1.1 million or 38.8% from December 31, 2020. The following table shows the activity in foreclosed property for the quarters ended (dollars in thousands):
4,397
Additions of foreclosed property
Valuation adjustments
(35)
Proceeds from sales
(572)
(419)
(1,357)
Gains (losses) from sales
(90)
(10)
The following table presents the composition of the foreclosed property portfolio at the quarter ended (dollars in thousands):
Land
728
1,227
1,238
Land Development
894
1,323
1,965
Residential Real Estate
74
Commercial Real Estate
163
Past Due Loans
At September 30, 2021, total accruing past due loans were $38.8 million or 0.30% of total loans held for investment, compared to $49.8 million or 0.36% of total loans held for investment at December 31, 2020 and $50.9 million or 0.35% of total loans held for investment at September 30, 2020. Of the total past due loans still accruing interest $11.0 million or 0.08% of total loans held for investment were past due 90 days or more at September 30, 2021, compared to $13.6 million or 0.10% of total loans held for investment at December 31, 2020 and $15.6 million or 0.11% of total loans held for investment at September 30, 2020.
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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. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, extension of terms that are considered to be below market, conversion to interest only, principal forgiveness and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.
The total recorded investment in TDRs at September 30, 2021 was $18.7 million, a decrease of $1.9 million or 9.3% from $20.6 million at December 31, 2020. Of the $18.7 million of TDRs at September 30, 2021, $11.3 million or 60.6% were considered performing, while the remaining $7.4 million were considered nonperforming. Of the $20.6 million of TDRs at December 31, 2020, $14.0 million or 68.0% were considered performing while the remaining $6.6 million were considered nonperforming. Loans are removed from TDR status in accordance with the established policy described in Note 1 “Summary of Significant Accounting Policies” in the Company’s 2020 Form 10-K.
Net Charge-offs
Including and excluding the impact of the PPP loans(+), net charge-offs were $113,000 or less than 0.01% of total average loans on an annualized basis for the quarter ended September 30, 2021, compared to $1.4 million or 0.04% for the same quarter last year. For the nine months ended September 30, 2021, net charge-offs were $1.4 million or 0.01% of total average loans on an annualized basis, compared to $9.7 million or 0.09% for the same period last year. Excluding the impact of the PPP loans(+), net charge-offs were 0.01% of total adjusted average loans on an annualized basis for the nine months ended September 30, 2021, compared to 0.11% of total adjusted average loans on an annualized basis for the nine months ended September 30, 2020.
Provision for Credit Losses
The Company recorded a negative provision for credit losses of $18.8 million for the quarter ended September 30, 2021 a decrease of $25.4 million compared to the provision for credit losses of $6.6 million recorded during the same quarter of 2020. For the nine months ended September 30, 2021, the Company recorded a negative $59.9 million provision for credit losses, a decrease of $160.8 million compared to the provision for credit losses of $100.9 million recorded during the same period last year. The provision for credit losses for the third quarter of 2021 reflected a negative provision of $16.3 million in provision for loan losses and negative $2.5 million in provision for unfunded commitments. The decrease in the provision for credit losses as compared to the same quarter in 2020 was driven by the benign credit impacts since the pandemic began, the significant recovery in the economy since last year, as well as the improvement in the economic forecast utilized in estimating the ACL as of September 30, 2021.
Allowance for Credit Losses
At September 30, 2021, the ACL was $109.3 million and included an ALLL of $101.8 million and an RUC of $7.5 million. The ACL decreased $61.2 million from December 31, 2020, including a decline in the ALLL of $58.7 million and a decline in the RUC of $2.5 million. The decline in the ACL was primarily due to negative provisions for credit losses that were driven by lower expected losses than previously estimated as a result of benign credit quality metrics to date and an improved economic outlook due to the roll-out of COVID-19 vaccines, as well as additional government stimulus inclusive of more PPP funding.
The ACL as a percentage of the total loan portfolio was 0.83% at September 30, 2021 and 1.22% at December 31, 2020. The ACL as a percentage of total adjusted loans(+) decreased 47 bps from December 31, 2020 to 0.86% at September 30, 2021.
The ALLL as a percentage of the total loan portfolio was 0.77% at September 30, 2021 and 1.14% at December 31, 2020. When excluding PPP loans(+), which are 100% guaranteed by the SBA, the ALLL as a percentage of total adjusted loans decreased 45 bps to 0.80% at September 30, 2021 from 1.25% at December 31, 2020.
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The following table summarizes activity in the ALLL during the quarters ended (dollars in thousands):
ALLL Balance, beginning of period
Less: Loans charged-off:
967
891
1,974
1,118
995
1,054
1,667
2,268
1,983
Total loans charged-off
2,266
3,641
2,978
Add: Recoveries:
1,042
1,606
937
834
680
Total recoveries
1,876
2,469
1,617
Net charge-offs
1,172
1,769
1,412
Add: Provision for loan losses
(24,581)
(16,457)
(11,813)
ALLL Balance, end of period
Total RUC
7,500
10,000
12,833
Total ACL
109,298
155,744
170,540
186,122
ALLL to loans
0.86
1.00
1.14
1.21
ALLL to adjusted loans(1)
0.80
0.92
1.12
1.25
1.36
ACL to loans
0.83
1.09
1.29
ACL to adjusted loans(1)
1.33
1.46
Net charge-offs to average loans
0.00
0.03
0.05
0.04
Net charge-offs to adjusted average loans(1)
Provision for loan losses to average loans
(0.48)
(0.71)
(0.47)
(0.33)
Provision for loan losses to adjusted average loans(1)
(0.51)
(0.77)
(0.52)
(0.37)
0.17
The following table shows the ALLL by loan segment and the percentage of the loan portfolio that the related ALLL covers as of the quarters ended (dollars in thousands):
% (1)
106,432
36,479
(1) Represents the loan balance divided by total loans held for investment.
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As of September 30, 2021, total deposits were $16.6 billion, an increase of $899.4 million or 7.6% annualized from December 31, 2020. Total interest-bearing deposits consist of NOW, money market, savings, and time deposit account balances. Total time deposit balances of $2.0 billion accounted for 18.1% of total interest-bearing deposits at September 30, 2021.
The following table presents the deposit balances by major category as of the quarters ended (dollars in thousands):
% of total
Deposits:
Amount
deposits
Non-interest bearing
32.0
27.8
NOW accounts
4,016,505
24.2
3,621,181
23.0
Money market accounts
4,152,986
25.0
4,248,335
27.0
Savings accounts
1,079,735
6.5
904,095
Time deposits of $100,000 and over(1)
1,179,417
7.1
1,532,082
9.7
Other time deposits
864,679
5.2
1,048,369
Total Deposits
(1) Includes time deposits of $250,000 and over of $546.2 million and $654.2 million as of September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, there were $0 and $145.9 million, respectively, purchased certificates of deposit included in certificates of deposit on the Company’s Consolidated Balance Sheets. The reduced usage of purchased certificates of deposit in 2021 is due to the increase in customer deposits.
Maturities of time deposits of $100,000 or more as of September 30, 2021 were as follows (dollars in thousands):
Within 3 Months
287,135
3 - 6 Months
258,953
6 - 12 Months
288,793
Over 12 Months
344,536
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Capital Resources
Capital resources represent funds, earned or obtained, over which financial institutions can exercise greater or longer control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company’s resources and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allow management to effectively leverage its capital to maximize return to shareholders.
The Federal Reserve requires the Company and the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 7.0% of risk-weighted assets; (ii) a Tier 1 capital ratio of 8.5% of risk-weighted assets; (iii) a total capital ratio of 10.5% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. These ratios, with the exception of the leverage ratio, include a 2.5% capital conservation buffer, which is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
For information about the Company’s stock repurchase activity and the Repurchase Program, please refer to Note 9 “Stockholders’ Equity” in Part I, Item 1 and Part II, Item 2 of this Quarterly Report.
On March 27, 2020, the banking agencies issued an interim final rule that allows the Company to phase in the impact of adopting the CECL methodology up to two years, with a three-year transition period to phase out the cumulative benefit to regulatory capital provided during the two-year delay. The Company is allowed to include the impact of the CECL transition, which is defined as the CECL Day 1 impact to capital plus 25% of the Company’s provision for credit losses during 2020, in regulatory capital through 2021. The Company elected to phase-in the regulatory capital impact as permitted under the aforementioned interim final rule. Beginning in 2022, the transition amount will begin to impact regulatory capital by phasing it in over a three-year period ending in 2024.
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The table summarizes the Company’s capital and related ratios for the periods presented (3) (dollars in thousands):
Common equity Tier 1 capital
$ 1,541,325
$ 1,512,507
$ 1,470,639
Tier 1 capital
1,707,681
1,678,863
1,636,995
Tier 2 capital
340,464
384,494
401,456
Total risk-based capital
2,048,146
2,063,356
2,038,451
Risk-weighted assets
14,858,407
14,739,253
14,644,960
Capital ratios:
Common equity Tier 1 capital ratio
10.37%
10.26%
10.04%
Tier 1 capital ratio
11.49%
11.39%
11.18%
Total capital ratio
13.78%
14.00%
13.92%
Leverage ratio (Tier 1 capital to average assets)
8.97%
8.95%
8.82%
Capital conservation buffer ratio (1)
5.49%
5.39%
5.18%
Common equity to total assets
12.68%
12.95%
12.52%
Tangible common equity to tangible assets (2)
8.16%
8.31%
7.91%
(1) Calculated by subtracting the regulatory minimum capital ratio requirements from the Company’s actual ratio results for Common equity, Tier 1, and Total risk based capital. The lowest of the three measures represents the Company’s capital conservation buffer ratio.
(2) Refer to “Non-GAAP Financial Measures” section within this Item 2 for more information about this non-GAAP financial measure, including a reconciliation of this measure to the most directly comparable financial measure calculated in accordance with GAAP.
(3) All ratios and amounts at September 30, 2021 are estimates and subject to change pending the Company’s filing of its FR Y9-C. All other periods are presented as filed.
NON-GAAP FINANCIAL MEASURES
In this Form 10-Q, the Company has provided supplemental performance measures on a tax-equivalent, tangible, operating, adjusted and/or pre-tax pre-provision basis. These measures are a supplement to GAAP used to prepare the Company’s financial statements and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. The Company uses the non-GAAP measures discussed herein in its analysis of the Company’s performance.
Net interest income (FTE), total revenue (FTE) and total adjusted revenue (FTE), which are used in computing net interest margin (FTE) and adjusted operating efficiency ratio (FTE), respectively, provide valuable additional insight into the net interest margin and the efficiency ratio by adjusting for differences in the tax treatment of interest income sources. The entire FTE adjustment is attributable to interest income on earning assets, which is used in computing the 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):
Interest Income (FTE)
Interest and dividend income (GAAP)
FTE adjustment
3,164
2,901
9,361
8,462
Interest and dividend income FTE (non-GAAP)
Average earning assets
Yield on interest-earning assets (GAAP)
Yield on interest-earning assets (FTE) (non-GAAP)
Net Interest Income (FTE)
Net interest income (GAAP)
Net interest income FTE (non-GAAP)
Noninterest income (GAAP)
Total revenue (FTE) (non-GAAP)
170,590
174,689
511,683
517,401
Net interest margin (GAAP)
Net interest margin (FTE) (non-GAAP)
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.
Tangible Assets
Ending Assets (GAAP)
19,930,650
Less: Ending goodwill
Less: Ending amortizable intangibles
61,068
Ending tangible assets (non-GAAP)
18,953,560
18,635,704
18,934,022
Tangible Common Equity
Ending Equity (GAAP)
Less: Perpetual preferred stock
166,357
Ending tangible common equity (non-GAAP)
1,545,985
1,549,388
1,497,900
Average equity (GAAP)
2,679,170
Less: Average goodwill
Less: Average amortizable intangibles
48,179
59,031
63,016
Less: Average perpetual preferred stock
166,353
Average tangible common equity (non-GAAP)
1,567,937
1,518,223
1,483,848
Tangible common equity to tangible assets (non-GAAP)
8.16
8.31
7.91
Adjusted operating measures exclude the gains or losses related to balance sheet repositioning, principally composed of gains and losses on debt extinguishment and gains or losses on sale of securities. The Company believes these non-GAAP adjusted measures provide investors with important information about the combined economic results of the organization’s operations.
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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, except per share amounts):
Adjusted Operating Earnings & EPS
Net income (GAAP)
Plus: Net loss related to balance sheet repositioning, net of tax
11,609
9,539
Less: Gain on sale of securities, net of tax
9,711
Adjusted operating earnings (non-GAAP)
74,558
60,986
227,678
98,626
Less: Dividends on preferred stock
Adjusted operating earnings available to common shareholders (non-GAAP)
71,591
58,295
218,777
95,935
The adjusted operating efficiency ratio (FTE) excludes the amortization of intangible assets and gains or losses related to balance sheet repositioning (principally composed of gains and losses on debt extinguishment). 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. Adjusted operating measures exclude the amortization of intangible assets and the gains or losses related to balance sheet repositioning, principally composed of gains and losses on debt extinguishment and gains or losses on sale of securities. The Company believes this adjusted measure provides investors with important information about the combined economic results of the organization’s operations. Net interest income (FTE) and total adjusted revenue (FTE), which are used in computing net interest margin (FTE) and adjusted operating efficiency ratio (FTE), respectively, provide valuable additional insight into the net interest margin and the efficiency ratio by adjusting for differences in tax treatment of interest income sources. The entire FTE adjustment is attributable to interest income on earning assets, which is used in computing yield on earning assets. Interest expense and the related cost of interest-bearing liabilities and cost of funds ratios are not affected by the FTE components.
Adjusted Operating Noninterest Expense, Noninterest Income & Efficiency Ratio
Noninterest expense (GAAP)
Less: Amortization of intangible assets
Less: Losses related to balance sheet repositioning
Adjusted operating noninterest expense (non-GAAP)
91,962
89,169
273,877
268,699
Plus: Losses related to balance sheet repositioning
(1,769)
Less: Gains on sale of securities
Adjusted operating noninterest income (non-GAAP)
29,929
34,389
89,301
88,721
Net interest income (FTE) (non-GAAP)
Total adjusted revenue (FTE)(non-GAAP)
170,581
174,671
511,596
506,877
Efficiency ratio (GAAP)
56.95
54.27
59.57
57.31
Adjusted operating efficiency ratio (FTE) (non-GAAP)
53.91
51.05
53.53
53.01
Pre-tax pre-provision adjusted operating earnings exclude the provision for credit losses, which can fluctuate significantly from period-to-period under the CECL methodology, income tax expense, gains or losses related to balance sheet repositioning (principally composed of gains and losses on debt extinguishment and gains or losses on sale of securities). The Company believes this adjusted measure provides investors with important information about the combined economic results of the organization’s operations.
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Pre-tax pre-provision adjusted operating earnings
Net Income (GAAP)
Plus: Provision for credit losses
Plus: Income tax expenses
Plus: Net loss related to balance sheet repositioning
12,075
Less: Gain on sale of securities
Pre-tax pre-provision adjusted operating earnings (non-GAAP)
72,074
78,548
217,679
217,040
PPP adjustment impact excludes the SBA guaranteed PPP loans funded during 2020 and 2021. 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), provision for credit losses as a percentage of average loans held for investment, 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 and the ACL, each as a percentage of loans held for investment (net of deferred fees and costs), and each excluding impacts from the PPP, are 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.
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Adjusted Loans
Loans held for investment (net of deferred fees and costs)(GAAP)
Less: PPP adjustments (net of deferred fees and costs)
466,609
859,386
1,512,714
1,179,522
1,600,577
Total adjusted loans (non-GAAP)
12,672,977
12,838,543
12,759,566
12,841,792
12,782,638
Average loans held for investment (net of deferred fees and costs) (GAAP)
14,188,661
Less: Average PPP adjustments (net of deferred fees and costs)
687,259
1,187,641
1,309,326
1,445,602
1,638,204
1,059,130
1,457,091
Total adjusted average loans (non-GAAP)
12,764,415
12,784,298
12,754,797
12,743,059
12,720,462
12,767,872
12,182,310
Provision for loan losses
1,354
9,669
Loans past due ≥ 90 days and still accruing
ALLL/total outstanding loans
ALLL/total adjusted loans (non-GAAP)
ACL/total outstanding loans
ACL/total adjusted loans (non-GAAP)
NPAs/total outstanding loans
NPAs/total adjusted loans (non-GAAP)
Net charge-offs/total average loans
0.01
Net charge-offs/total adjusted average loans (non-GAAP)
Provision for loan losses/total average loans
(0.55)
Provision for loan losses/total adjusted average loans (non-GAAP)
(0.60)
1.03
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
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of interest rate scenarios. While each of the interest rate risk models has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Static gap, which measures aggregate re-pricing values, is less utilized because it does not effectively measure the options risk impact on the Company and is not addressed here. Earnings simulation and economic value models, which more effectively measure the cash flow and optionality impacts, are utilized by management on a regular basis and are explained below.
The Company determines the overall magnitude of interest sensitivity risk and then formulates policies and practices governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, the states of the national, regional and local economies, and other financial and business risk factors. The Company uses simulation modeling to measure and monitor the effect of various interest rate scenarios and business strategies on net interest income. This modeling reflects interest rate changes and the related impact on net interest income and net income over specified time horizons.
Earnings Simulation Analysis
Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analyses, such as the static gap analysis discussed above.
Assumptions used in the model are derived from historical trends and management’s outlook and include loan and deposit growth rates and projected yields and rates. These assumptions may not materialize and unanticipated events and circumstances may occur. The model also does not take into account any future actions of management to mitigate the impact of interest rate changes. Such assumptions are monitored by management and periodically adjusted as appropriate. All maturities, calls, and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage-backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are reflected in the different rate scenarios.
The Company uses its simulation model to estimate earnings in rate environments where rates are instantaneously shocked up or down around a “most likely” rate scenario, based on implied forward rates and futures curves. The analysis assesses the impact on net interest income over a 12-month time horizon after an immediate increase or “shock” in rates, of 100 basis points up to 300 basis points. The model, under all scenarios, does not drop the index below zero.
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, 2021 and 2020:
Change In Net Interest Income
Change in Yield Curve:
+300 basis points
22.43
11.39
+200 basis points
14.90
8.26
+100 basis points
7.26
4.37
Most likely rate scenario
-100 basis points
(6.50)
(0.97)
-200 basis points
(7.73)
(1.19)
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.
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From a net interest income perspective, the Company was more asset sensitive as of September 30, 2021, compared to its position as of September 30, 2020. This shift is due to the increase in customer deposits, the changing characteristics of certain loan and deposit products, and 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 at or 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, 2021 and 2020:
Change In Economic Value of Equity
5.80
(1.30)
4.86
0.49
1.39
(6.13)
(5.24)
(7.92)
(1.96)
As of September 30, 2021, the Company’s economic value of equity is generally more asset sensitive in a rising interest rate environment compared to September 30, 2020 primarily due to the composition of the Consolidated Balance Sheets that has been impacted by the increase in customer deposits, the changing characteristics of certain loan and deposit products, and other balance sheet strategies.
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, 2021. 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, 2021, 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.
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Changes in Internal Control Over Financial Reporting
Management has taken measures to maintain the internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2021. There have been no changes that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.
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ITEM 1 – LEGAL PROCEEDINGS
In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business or the financial condition or results of operations of the Company.
ITEM 1A – RISK FACTORS
During the quarter ended September 30, 2021, there have been no material changes from the risk factors previously disclosed under Part I, Item 1A. “Risk Factors” in the Company’s 2020 Annual Report.
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 2020 Annual Report. These factors could materially and adversely affect the Company’s business, financial condition, liquidity, results of operations, and capital position and could cause the Company’s actual results to differ materially from its historical results or the results contemplated by the forward-looking statements contained in this report, in which case the trading price of the Company’s securities could decline.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Sales of Unregistered Securities – None
(b) Use of Proceeds – Not Applicable.
(c) Issuer Purchases of Securities
Stock Repurchase Program; Other
On July 8, 2019, the Company’s Board of Directors authorized a share repurchase program to purchase up to $150 million worth of the Company’s common stock through June 30, 2021, and subsequently suspended the program on March 20, 2020.
On May 4, 2021, the Company’s Board of Directors authorized a share repurchase program (or the “Repurchase Program”) to purchase up to $125 million worth of the Company’s common stock in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and/or Rule 10b-18 under the Exchange Act. The Repurchase Program was due to expire on June 30, 2022 and replaced the prior repurchase program that was due to expire on June 30, 2021. The $125 million repurchase authorization under the Repurchase Program was fully utilized in August 2021.
The following information describes the Company’s common stock repurchases for the three months ended September 30, 2021:
Period
Total number of shares purchased(1)
Average price paid per share(2) ($)
Total number of shares purchased as part of publicly announced plans or programs
Approximate dollar value of shares that may yet be purchased under the plans or programs(2) ($)
July 1 - July 31, 2021
1,422,682
35.72
1,422,362
31,835,717
August 1 - August 31, 2021
866,870
36.74
866,599
September 1 - September 30, 2021
1,384
36.68
2,290,936
36.10
2,288,961
(1) For the three months ended September 30, 2021, 1,975 shares were withheld upon vesting of restricted shares granted to employees of the Company in order to satisfy tax withholding obligations.
(2) These amounts include fees and commissions associated with the shares repurchased.
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ITEM 6 – EXHIBITS
The following exhibits are filed as part of this Quarterly Report and this list includes the Exhibit Index:
Exhibit No.
Description
2.1
Agreement and Plan of Reorganization, dated as of May 19, 2017, by and between Union Bankshares Corporation and Xenith Bankshares, Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed on May 23, 2017).
2.2
Agreement and Plan of Reorganization, dated as of October 4, 2018, as amended on December 7, 2018, by and between Union Bankshares Corporation and Access National Corporation (incorporated by reference to Annex A to Form S-4/A Registration Statement filed on December 10, 2018; SEC file no. 333-228455).
3.1
Amended and Restated Articles of Incorporation of Atlantic Union Bankshares Corporation, effective May 7, 2020 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on May 7, 2020).
3.1.1
Articles of Amendment designating the 6.875% Perpetual Non-Cumulative Preferred Stock, Series A, effective June 9, 2020 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 9, 2020).
Amended and Restated Bylaws of Atlantic Union Bankshares Corporation, effective as of December 5, 2019 (incorporated by reference to Exhibit 3.3 to Annual Report on Form 10-K filed on February 25, 2020).
10.24
Schedule of Atlantic Union Bankshares Corporation Non-Employee Directors’ Annual Compensation.
Letter regarding unaudited interim financial information.
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Interactive data files formatted in Inline eXtensible Business Reporting Language for the quarter ended September 30, 2021 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).
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline eXtensible Business Reporting Language (included with Exhibit 101).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: November 4, 2021
By:
/s/ John C. Asbury
John C. Asbury,
President and Chief Executive Officer
(principal executive officer)
/s/ Robert M. Gorman
Robert M. Gorman,
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
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