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 June 30, 2022
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 July 28, 2022 was 74,703,474.
INDEX
ITEM
PAGE
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021 (audited)
2
Consolidated Statements of Income (unaudited) for the three and six months ended June 30, 2022 and 2021
3
Consolidated Statements of Comprehensive (Loss) Income (unaudited) for the three and six months ended June 30, 2022 and 2021
4
Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and six months ended June 30, 2022 and 2021
5
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2022 and 2021
6
Notes to Consolidated Financial Statements (unaudited)
8
Review Report of Independent Registered Public Accounting Firm
47
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
48
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
75
Item 4.
Controls and Procedures
77
PART II - OTHER INFORMATION
Legal Proceedings
78
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
79
Signatures
80
Glossary of Acronyms and Defined Terms
2021 Form 10-K
–
Annual Report on Form 10-K for the year ended December 31, 2021
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 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
BVAL
Bloomberg Valuation Service
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
CSP
Cary Street Partners Financial LLC
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
FRB
Federal Reserve Bank of Richmond
FHLB
Federal Home Loan Bank of Atlanta
FHLMC
Federal Home Loan Mortgage Corporation
FNB
FNB Corporation
FNMA
Federal National Mortgage Association
FOMC
Federal Open Markets Committee
FR Y9-C
Consolidated financial statements for a U.S. bank holding company, a savings and loan holding company, a U.S. intermediate holding company, and a securities holding company
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
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
MBS
Mortgage-Backed Securities
MFC
Middleburg Financial Corporation
NASDAQ
National Association of Securities Dealers Automated Quotation exchange
NOW
Negotiable order of withdrawal
NPA
Nonperforming assets
OCI
Other comprehensive income
OREO
Other real estate owned
OTC
Over-the-counter
PD/LGD
Probability of default/loss given default
PPP
Paycheck Protection Program
Quarterly Report
Quarterly Report on Form 10-Q for the quarter ended June 30, 2022
Repurchase Program
The share repurchase program, approved on December 10, 2021 by the Company’s Board of Directors, which authorizes the Company to purchase up to $100.0 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
SOFR
Secured Overnight Financing Rate
SSFA
Simplified supervisory formula approach
TDR
Troubled debt restructuring
Topic 606
ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606”
Topic 848
ASU 2020-04, “Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting”
VFG
Virginia Financial Group, Inc.
2031 Notes
$250.0 million of 2.875% fixed-to-floating rate subordinate notes issued by the Company during the fourth quarter of 2021 with a maturity date of December 15, 2031
PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
ATLANTIC UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2022 AND DECEMBER 31, 2021
(Dollars in thousands, except share data)
June 30,
December 31,
2022
2021
ASSETS
(unaudited)
(audited)
Cash and cash equivalents:
Cash and due from banks
$
158,902
180,963
Interest-bearing deposits in other banks
82,086
618,714
Federal funds sold
388
2,824
Total cash and cash equivalents
241,376
802,501
Securities available for sale, at fair value
2,951,421
3,481,650
Securities held to maturity, at carrying value
780,749
628,000
Restricted stock, at cost
87,908
76,825
Loans held for sale, at fair value
15,866
20,861
Loans held for investment, net of deferred fees and costs
13,655,408
13,195,843
Less: allowance for loan and lease losses
104,184
99,787
Total loans held for investment, net
13,551,224
13,096,056
Premises and equipment, net
128,661
134,808
Goodwill
925,211
935,560
Amortizable intangibles, net
31,621
43,312
Bank owned life insurance
436,703
431,517
Other assets
511,059
413,706
Total assets
19,661,799
20,064,796
LIABILITIES
Noninterest-bearing demand deposits
5,361,538
5,207,324
Interest-bearing deposits
10,767,097
11,403,744
Total deposits
16,128,635
16,611,068
Securities sold under agreements to repurchase
118,658
117,870
Other short-term borrowings
290,000
—
Long-term borrowings
389,290
388,724
Other liabilities
343,740
237,063
Total liabilities
17,270,323
17,354,725
Commitments and contingencies (Note 7)
STOCKHOLDERS' EQUITY
Preferred stock, $10.00 par value
173
Common stock, $1.33 par value
98,822
100,101
Additional paid-in capital
1,767,063
1,807,368
Retained earnings
841,701
783,794
Accumulated other comprehensive (loss) income
(316,283)
18,635
Total stockholders' equity
2,391,476
2,710,071
Total liabilities and stockholders' equity
Common shares outstanding
74,688,314
75,663,648
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)
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Dollars in thousands, except share and per share data)
Three Months Ended
Six Months Ended
Interest and dividend income:
Interest and fees on loans
123,266
130,570
237,466
258,576
Interest on deposits in other banks
157
86
288
163
Interest and dividends on securities:
Taxable
14,695
10,519
28,361
20,872
Nontaxable
10,637
9,677
21,097
18,914
Total interest and dividend income
148,755
150,852
287,212
298,525
Interest expense:
Interest on deposits
6,097
7,238
10,580
16,366
Interest on short-term borrowings
555
21
576
69
Interest on long-term borrowings
3,336
3,045
6,358
6,644
Total interest expense
9,988
10,304
17,514
23,079
Net interest income
138,767
140,548
269,698
275,446
Provision for credit losses
3,559
(27,414)
6,359
(41,037)
Net interest income after provision for credit losses
135,208
167,962
263,339
316,483
Noninterest income:
Service charges on deposit accounts
8,040
6,607
15,637
12,116
Other service charges, commissions and fees
1,709
1,735
3,364
3,436
Interchange fees
2,268
2,203
4,078
4,050
Fiduciary and asset management fees
6,939
6,819
14,194
13,294
Mortgage banking income
2,200
4,619
5,317
12,874
Bank owned life insurance income
2,716
3,209
5,413
5,475
Loan-related interest rate swap fees
2,600
1,321
6,460
3,075
Other operating income
11,814
1,953
13,976
5,131
Total noninterest income
38,286
28,466
68,439
59,451
Noninterest expenses:
Salaries and benefits
55,305
50,766
113,603
103,426
Occupancy expenses
6,395
7,140
13,278
14,454
Furniture and equipment expenses
3,590
3,911
7,187
7,880
Technology and data processing
7,862
7,219
15,658
14,123
Professional services
4,680
4,408
8,770
9,369
Marketing and advertising expense
2,502
2,738
4,665
4,782
FDIC assessment premiums and other insurance
2,765
2,319
5,250
4,626
Franchise and other taxes
4,500
4,435
8,999
8,871
Loan-related expenses
1,867
1,909
3,643
3,786
Amortization of intangible assets
2,915
3,568
5,954
7,298
Loss on debt extinguishment
Other expenses
6,387
3,558
17,082
10,598
Total noninterest expenses
98,768
91,971
204,089
203,908
Income from continuing operations before income taxes
74,726
104,457
127,689
172,026
Income tax expense
12,500
19,073
21,773
30,453
Net income
62,226
85,384
105,916
141,573
Dividends on preferred stock
2,967
5,934
Net income available to common shareholders
59,259
82,417
99,982
135,639
Basic earnings per common share
0.79
1.05
1.33
1.72
Diluted earnings per common share
Dividends declared per common share
0.28
0.56
0.53
Basic weighted average number of common shares outstanding
74,847,899
78,819,697
75,194,347
78,841,462
Diluted weighted average number of common shares outstanding
74,849,871
78,843,724
75,201,326
78,863,859
-3-
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(Dollars in thousands)
Other comprehensive (loss) income:
Cash flow hedges:
Change in fair value of cash flow hedges (net of tax, $3,076 and $693 for the three months and $9,273 and $313 for the six months ended June 30, 2022 and 2021, respectively)
(11,572)
2,607
(34,885)
1,179
Reclassification adjustment for (gains) included in net income (net of tax, $0 and $0 for the three months and $0 and $12 for the six months ended June 30, 2022 and 2021, respectively) (1)
(47)
AFS securities:
Unrealized holding gains (losses) arising during period (net of tax, $30,137 and $3,673 for the three months and $79,837 and $5,132 for the six months ended June 30, 2022 and 2021, respectively)
(113,374)
13,818
(300,341)
(19,307)
Reclassification adjustment for (gains) losses included in net income (net of tax, $0 and $0 for the three months and $0 and $16 for the six months ended June 30, 2022 and 2021, respectively) (2)
1
(62)
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 $3 and $3 for the six months ended June 30, 2022 and 2021, respectively) (3)
(5)
(10)
Bank owned life insurance:
Reclassification adjustment for losses included in net income (4)
150
151
317
304
(124,800)
16,571
(334,918)
(17,943)
Comprehensive (loss) income
(62,574)
101,955
(229,002)
123,630
(1) The gross amounts are generally 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 "Other operating income" 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)
SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Dollars in thousands, except share and per share amounts)
Accumulated
Additional
Other
Common
Preferred
Paid-In
Retained
Comprehensive
Stock
Capital
Earnings
Income (Loss)
Total
Balance - December 31, 2021
Net Income
43,690
Other comprehensive loss (net of taxes of $49,701)
(210,118)
Dividends on common stock ($0.28 per share)
(21,163)
Dividends on preferred stock ($171.88 per share)
(2,967)
Stock purchased under stock repurchase plan (629,691 shares)
(837)
(24,181)
(25,018)
Issuance of common stock under Equity Compensation Plans, stock issuance for services rendered, and vesting of restricted stock, net of shares held for taxes (291,723 shares)
387
1,044
1,431
Stock-based compensation expense
2,409
Balance - March 31, 2022
99,651
1,786,640
803,354
(191,483)
2,498,335
Other comprehensive loss (net of taxes of $33,214)
(20,912)
Stock purchased under stock repurchase plan (649,208 shares)
(863)
(22,350)
(23,213)
Issuance of common stock under Equity Compensation Plans, stock issuance for services rendered, and vesting of restricted stock, net of shares held for taxes (25,955 shares)
34
(154)
(120)
2,927
Balance - June 30, 2022
Balance - December 31, 2020
104,169
1,917,081
616,052
71,015
2,708,490
56,189
Other comprehensive loss (net of taxes of $8,835)
(34,514)
Dividends on common stock ($0.25 per share)
(19,700)
Issuance of common stock under Equity Compensation Plans, stock issuance for services rendered, and vesting of restricted stock, net of shares held for taxes (243,884 shares)
324
(289)
35
2,199
Balance - March 31, 2021
104,493
1,918,991
649,574
36,501
2,709,732
Other comprehensive income (net of taxes of $3,672)
(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, stock issuance for services rendered, and vesting of restricted stock, net of shares held for taxes (35,693 shares)
663
711
2,654
Balance - June 30, 2021
103,091
1,881,395
709,866
53,072
2,747,597
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment
7,119
7,966
Writedown of ROU assets and equipment
4,570
1,065
Amortization, net
16,093
15,928
Amortization (accretion) related to acquisitions, net
1,014
(1,056)
Losses (gains) on securities transactions, net
(78)
Gain on sale of DHFB
(9,082)
BOLI income
(5,413)
(5,475)
Originations and purchases of loans held for sale
(191,470)
(348,138)
Proceeds from sales of loans held for sale
196,381
409,809
Gains on sales of foreclosed properties and former bank premises, net
(631)
(1,810)
Losses on debt extinguishment
Stock-based compensation expenses
5,336
4,853
Issuance of common stock for services
409
188
Net decrease in other assets
25,875
64,826
Net increase (decrease) in other liabilities
36,751
(125,899)
Net cash provided by operating activities
199,229
137,410
Investing activities:
Purchases of AFS securities, restricted stock, and other investments
(88,244)
(651,254)
Purchases of HTM securities
(158,445)
Proceeds from sales of AFS securities and restricted stock
12,469
45,436
Proceeds from maturities, calls and paydowns of AFS securities
207,279
256,903
Proceeds from maturities, calls and paydowns of HTM securities
3,400
1,730
Net (increase) decrease in loans held for investment
(452,948)
305,615
Net increase in premises and equipment
(1,931)
(6,836)
Proceeds from BOLI settlements
2,068
3,152
Purchases of BOLI policies
(100,000)
Proceeds from sales of foreclosed properties and former bank premises
3,001
8,632
Net cash used in investing activities
(473,351)
(136,622)
Financing activities:
Net increase in noninterest-bearing deposits
154,214
853,869
Net (decrease) increase in interest-bearing deposits
(636,667)
82,617
Net increase (decrease) in short-term borrowings
290,788
(261,139)
Repayments of long-term debt
(214,695)
Cash dividends paid - common stock
(42,075)
(41,825)
Cash dividends paid - preferred stock
(5,934)
Repurchase of common stock
(48,231)
Issuance of common stock
3,813
2,876
Vesting of restricted stock, net of shares held for taxes
(2,911)
(2,318)
Net cash (used in) provided by financing activities
(287,003)
371,088
(Decrease) increase in cash and cash equivalents
(561,125)
371,876
Cash, cash equivalents and restricted cash at beginning of the period
493,294
Cash, cash equivalents and restricted cash at end of the period
865,170
-6-
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest
16,511
23,859
Income taxes
935
1,221
Supplemental schedule of noncash investing and financing activities
Transfers from loans to foreclosed properties
382
14
Transfers from bank premises to OREO
1,109
-7-
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 114 branches and approximately 130 ATMs located throughout Virginia, and in portions of Maryland and North Carolina as of June 30, 2022. Certain non-bank financial services affiliates of Atlantic Union Bank include: Atlantic Union Equipment Finance, Inc., which provides equipment financing; Atlantic Union Financial Consultants, LLC, which provides brokerage services; and Union Insurance Group, LLC, which offers various lines of insurance products.
Effective June 30, 2022, the Company completed the sale of DHFB, which was formerly a subsidiary of the Bank.
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 2021 Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation.
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, short-term money market investments, other interest-bearing deposits, and federal funds sold.
Restricted cash is disclosed in Note 7 “Commitments and Contingencies” in Part I, Item I of this Quarterly Report 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 FRB 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. The reserve requirement is still at zero percent as of June 30, 2022.
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 $44.5 million and $43.3 million on LHFI, $8.2 million and $7.0 million on HTM securities, and $14.4 million and $14.5 million on AFS securities at June 30, 2022 and December 31, 2021, 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 June 30, 2022 and June 30, 2021, 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.
-8-
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 June 30, 2022 and December 31, 2021.
The amortized cost, gross unrealized gains and losses, and estimated fair values of AFS securities as of June 30, 2022 are summarized as follows (dollars in thousands):
Amortized
Gross Unrealized
Estimated
Cost
Gains
(Losses)
Fair Value
June 30, 2022
U.S. government and agency securities
71,665
(5,925)
65,740
Obligations of states and political subdivisions
964,651
578
(142,802)
822,427
Corporate and other bonds (1)
184,304
72
(6,484)
177,892
Commercial MBS
Agency
326,117
90
(27,246)
298,961
Non-agency
104,465
(3,591)
100,874
Total commercial MBS
430,582
(30,837)
399,835
Residential MBS
1,571,036
665
(161,629)
1,410,072
78,888
(5,083)
73,806
Total residential MBS
1,649,924
666
(166,712)
1,483,878
Other securities
1,649
Total AFS securities
3,302,775
1,406
(352,760)
(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, 2021 are summarized as follows (dollars in thousands):
December 31, 2021
73,830
179
(160)
73,849
971,126
39,343
(2,073)
1,008,396
150,201
3,353
(178)
153,376
361,806
6,761
(4,215)
364,352
107,087
139
(421)
106,805
468,893
6,900
(4,636)
471,157
1,691,651
15,180
(24,337)
1,682,494
91,443
243
(948)
90,738
1,783,094
15,423
(25,285)
1,773,232
1,640
3,448,784
65,198
(32,332)
-9-
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 June 30, 2022 and December 31, 2021 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
62,470
(5,882)
3,199
(42)
65,669
(5,924)
686,807
(131,328)
28,077
(11,474)
714,884
Corporate and other bonds(1)
162,871
237,590
(19,318)
48,976
(7,928)
286,566
84,220
(2,604)
16,654
(987)
321,810
(21,922)
65,630
(8,915)
387,440
1,002,897
(110,921)
346,933
(50,708)
1,349,830
61,820
(3,981)
11,868
(1,103)
73,688
(5,084)
1,064,717
(114,902)
358,801
(51,811)
1,423,518
(166,713)
2,298,675
(280,518)
455,707
(72,242)
2,754,382
64,474
(115)
3,900
(45)
68,374
249,701
(2,020)
2,123
(53)
251,824
21,134
(177)
703
(1)
21,837
175,588
(4,053)
3,172
(162)
178,760
33,759
(313)
11,029
(108)
44,788
209,347
(4,366)
14,201
(270)
223,548
1,140,701
(21,147)
106,104
(3,190)
1,246,805
48,392
(584)
12,716
(364)
61,108
1,189,093
(21,731)
118,820
(3,554)
1,307,913
1,733,749
(28,409)
139,747
(3,923)
1,873,496
As of June 30, 2022, there were $445.7 million AFS securities, comprised of 113 individual securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of approximately $72.2 million. As of December 31, 2021, there were $139.7 million AFS securities, comprised of 33 individual securities that had been in a continuous loss position for more than 12 months and had an aggregate unrealized loss of $3.9 million.
The Company has evaluated AFS securities in an unrealized loss position for credit related impairment at June 30, 2022 and December 31, 2021 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 and increases in market interest rates, (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 MBS 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.
-10-
The following table presents the amortized cost and estimated fair value of AFS securities as of June 30, 2022 and December 31, 2021, by contractual maturity (dollars in thousands). 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.
Due in one year or less
32,481
32,235
18,247
18,317
Due after one year through five years
167,808
165,280
180,080
183,981
Due after five years through ten years
346,288
329,509
324,615
331,215
Due after ten years
2,756,198
2,424,397
2,925,842
2,948,137
Refer to Note 7 "Commitments and Contingencies" in Part I, Item I of this Quarterly Report 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 June 30, 2022 and December 31, 2021.
Held to Maturity
The Company’s HTM investment portfolio primarily consists of highly-rated municipal securities. The Company’s HTM securities were all current, with no securities past due or on non-accrual at June 30, 2022 and December 31, 2021.
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 AOCI 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 gains or losses at the date of transfer are retained in AOCI and in the carrying value of the HTM securities. Such unrealized gains or losses are accreted over the remaining life of the security with no impact on future net income.
The carrying value, gross unrealized gains and losses, and estimated fair values of HTM securities as of June 30, 2022 are summarized as follows (dollars in thousands):
Carrying
2,178
(80)
2,098
693,070
3,125
(33,413)
662,782
Commercial Agency MBS
29,404
(3,193)
26,211
38,514
(3,833)
34,681
17,583
(136)
17,447
56,097
(3,969)
52,128
Total held-to-maturity securities
(40,655)
743,219
The carrying value, gross unrealized gains and losses, and estimated fair values of HTM securities as of December 31, 2021 are summarized as follows (dollars in thousands):
2,604
(29)
2,575
620,873
65,982
(121)
686,734
4,523
(58)
4,465
(208)
693,774
-11-
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 June 30, 2022 and December 31, 2021. 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. Substantially all of the Company’s HTM securities with credit risk are obligations of states and political subdivisions.
The following table presents the amortized cost of HTM securities as of June 30, 2022 and December 31, 2021 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)
67,918
70,096
Not Rated - Non-Agency
85,501
7,127
(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 June 30, 2022 and December 31, 2021, by contractual maturity (dollars in thousands). 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.
5,023
4,971
3,034
3,027
19,746
20,087
5,852
6,065
15,838
16,130
14,019
15,984
740,142
702,031
605,095
668,698
Total HTM securities
Refer to Note 7 "Commitments and Contingencies" in Part I, Item I of this Quarterly Report 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 June 30, 2022 and December 31, 2021.
Restricted Stock, at cost
Due to restrictions placed upon the Bank’s common stock investment in the FRB 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. Restricted stock consists of FRB stock in the amount of $67.0 million for June 30, 2022 and December 31, 2021 and FHLB stock in the amount of $20.9 million and $9.8 million as of June 30, 2022 and December 31, 2021, respectively.
-12-
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 six months ended June 30, 2022 and 2021 (dollars in thousands):
Realized gains (losses)(1):
Gross realized gains
Gross realized losses
(2)
Net realized gains
Proceeds from sales of securities
June 30, 2021
138
(60)
(1) Includes gains (losses) on sales and calls of securities
-13-
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 “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” in the Company’s 2021 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 June 30, 2022 and December 31, 2021 (dollars in thousands):
Construction and Land Development
988,379
862,236
Commercial Real Estate - Owner Occupied
1,965,702
1,995,409
Commercial Real Estate - Non-Owner Occupied
3,860,819
3,789,377
Multifamily Real Estate
762,502
778,626
Commercial & Industrial(1)
2,595,891
2,542,243
Residential 1-4 Family - Commercial
553,771
607,337
Residential 1-4 Family - Consumer
865,174
816,524
Residential 1-4 Family - Revolving
583,073
560,796
Auto
525,301
461,052
Consumer
180,045
176,992
Other Commercial(2)
774,751
605,251
Total LHFI, net of deferred fees and costs(3)
Allowance for loan and lease losses
(104,184)
(99,787)
Total LHFI, net
(1) Commercial & industrial loans include approximately $21.7 million and $145.3 million in loans from the PPP at June 30, 2022 and December 31, 2021, respectively.
(2) Other commercial loans include an insignificant amount of loans from the PPP at June 30, 2022 and included approximately $5.1 million in loans from the PPP at December 31, 2021.
(3) Total loans include unamortized premiums and discounts, and unamortized deferred fees and costs totaling $44.8 million and $49.3 million as of June 30, 2022 and December 31, 2021, respectively.
-14-
The following table shows the aging of the Company’s loan portfolio, by class, at June 30, 2022 (dollars in thousands):
Greater than
30-59 Days
60-89 Days
90 Days and
Current
Past Due
still Accruing
Nonaccrual
Total Loans
987,152
645
581
1,957,733
1,374
807
792
4,996
3,856,365
511
642
3,301
Commercial & Industrial
2,589,714
2,581
546
322
2,728
549,138
1,944
474
184
2,031
849,738
594
1,646
1,112
12,084
576,908
1,368
731
997
3,069
522,834
1,841
213
134
279
179,394
361
210
Other Commercial
774,411
11
329
Total LHFI
13,605,889
11,230
4,627
4,592
29,070
% of total loans
99.65
%
0.08
0.03
0.21
100.00
The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2021 (dollars in thousands):
857,883
1,357
299
2,697
1,987,133
1,230
152
1,257
5,637
3,783,211
1,965
127
433
3,641
778,429
84
113
2,536,100
1,161
1,438
1,897
1,647
601,946
1,844
272
990
2,285
795,821
3,368
2,925
3,013
11,397
554,652
1,493
363
882
3,406
458,473
1,866
249
241
223
175,943
689
186
120
54
605,214
37
13,134,805
15,094
5,712
9,132
31,100
99.54
0.11
0.04
0.07
0.24
-15-
The following table shows the Company’s amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of June 30, 2022 (dollars in thousands):
Nonaccrual With No ALLL
90 Days Past due and still Accruing
955
956
The following table shows the Company’s amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of December 31, 2021 (dollars in thousands):
1,985
970
1,089
4,045
There was no interest income recognized on nonaccrual loans during the three and six months ended June 30, 2022 and 2021. See Note 1 “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” contained in Item 8 “Financial Statements and Supplementary Data” in the Company’s 2021 Form 10-K for additional information on the Company’s policies for nonaccrual loans.
-16-
Troubled Debt Restructurings
As of June 30, 2022, the Company has TDRs totaling $18.0 million with an estimated $872,000 of allowance for those loans. As of December 31, 2021, the Company had TDRs totaling $18.0 million with an estimated $859,000 of allowance for those loans.
A TDR occurs when a lender, for economic or legal reasons, grants a concession to the borrower related to the borrower’s financial difficulties, that it would not otherwise consider. 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 six months ended June 30, 2022 and June 30, 2021, 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 June 30, 2022 and December 31, 2021 (dollars in thousands):
No. of
Recorded
Outstanding
Loans
Investment
Commitment
Performing
162
201
1,004
572
1,334
7,654
9,021
260
265
15
234
239
Total performing
10,662
88
10,313
Nonperforming
17
830
1,206
634
729
377
25
4,966
24
4,239
98
99
Total nonperforming
38
7,642
Total performing and nonperforming
128
17,960
126
17,955
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 six months ended June 30, 2022 and 2021, 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.
-17-
The following table shows, by class and modification type, TDRs that occurred during the three and six months ended June 30, 2022 and 2021 (dollars in thousands):
Three Months Ended June 30, 2022
Six Months Ended June 30, 2022
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
766
Total loan term extended at a market rate
Term modification, below market rate
259
12
1,111
Total loan term extended at a below market rate
3,211
Three Months Ended June 30, 2021
Six Months Ended June 30, 2021
104
1,382
1,824
1,839
Interest rate modification, below market rate
45
Total interest only at below market rate of interest
1,988
-18-
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 six months ended June 30, 2022 and 2021 (dollars in thousands):
Commercial
Balance at beginning of period
79,771
22,820
102,591
77,902
21,885
Loans charged-off
(1,007)
(950)
(1,957)
(1,766)
(1,700)
(3,466)
Recoveries credited to allowance
392
626
1,018
1,118
1,413
2,531
Provision charged to operations
(1,743)
4,275
2,532
159
5,173
5,332
Balance at end of period
77,413
26,771
106,432
36,479
142,911
117,403
43,137
160,540
(891)
(1,054)
(1,945)
(2,865)
(2,721)
(5,586)
1,042
834
1,876
2,648
1,697
4,345
(16,746)
(7,835)
(24,581)
(27,349)
(13,689)
(41,038)
89,837
28,424
118,261
-19-
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 ACL. 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:
-20-
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 June 30, 2022 (dollars in thousands):
Term Loans Amortized Cost Basis by Origination Year
2020
2019
2018
Prior
Revolving Loans
Pass
156,570
471,758
195,617
36,189
33,898
44,691
21,766
960,489
Watch
674
11,532
395
2,263
14,864
Special Mention
525
2,423
280
714
3,942
Substandard
1,252
2,841
41
215
1,367
9,084
Total Construction and Land Development
158,347
477,696
195,938
47,936
35,660
51,036
129,426
208,347
272,284
296,721
239,188
691,413
23,338
1,860,717
1,078
180
2,213
9,010
12,733
43,770
850
69,834
275
5,862
923
8,717
46
16,468
200
2,096
1,629
14,159
599
18,683
Total Commercial Real Estate - Owner Occupied
131,149
208,727
274,772
313,689
254,473
758,059
24,833
238,369
662,586
396,206
491,364
384,359
1,437,218
46,811
3,656,913
2,151
826
31,352
22,785
36,046
93,171
545
10,541
13,172
20,652
9,326
54,236
22,979
19,084
14,284
56,499
Total Commercial Real Estate - Non-Owner Occupied
238,914
664,737
407,573
558,867
446,880
1,496,874
46,974
326,629
600,456
341,948
202,253
98,356
156,743
767,050
2,493,435
1,279
1,101
16,474
1,679
13,438
3,222
25,714
62,907
190
1,250
6,748
802
4,216
13,598
565
217
4,210
14,958
1,827
4,174
25,951
Total Commercial & Industrial
327,908
602,312
359,889
214,890
127,144
162,594
801,154
49,869
79,460
208,827
75,029
77,680
265,181
2,297
758,343
355
450
429
1,234
2,223
613
89
Total Multifamily Real Estate
211,050
75,997
78,130
265,699
27,352
103,370
82,187
56,185
39,218
216,212
1,105
525,629
625
870
3,002
5,947
115
10,559
1,495
4,807
3,629
9,931
91
2,764
482
4,016
7,652
Total Residential 1-4 Family - Commercial
103,461
84,307
59,819
47,509
229,804
1,519
152,527
218,874
162,699
119,323
3,745
75,548
35,913
768,629
558
5,235
5,793
95
Total Other Commercial
4,303
81,017
36,008
Total Commercial
1,080,742
2,344,851
1,659,768
1,277,064
876,444
2,887,006
898,280
11,024,155
2,357
4,106
20,138
54,798
53,361
96,912
26,690
258,362
1,715
2,613
16,064
26,395
26,774
23,277
4,262
101,100
3,697
258
32,264
37,520
37,888
5,319
118,198
1,086,066
2,355,267
1,696,228
1,390,521
994,099
3,045,083
934,551
11,501,815
-21-
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, 2021 (dollars in thousands):
2017
430,764
218,672
39,937
40,128
11,299
50,908
22,996
814,704
185
12,923
129
349
4,026
18,007
735
3,541
221
19,264
198
5,565
28,790
434,700
218,858
53,081
59,521
11,846
61,234
222,079
279,165
321,503
263,422
179,994
555,540
19,705
1,841,408
18
7,959
10,875
14,648
57,466
702
91,853
932
11,826
610
1,052
19,480
507
34,407
153
7,455
2,538
1,935
14,834
27,741
222,464
280,268
348,743
277,445
197,629
647,320
21,540
642,386
421,063
520,035
377,176
374,949
1,102,193
36,568
3,474,370
2,152
841
35,721
39,356
18,242
101,797
198,123
10,609
25,691
20,119
12,741
4,775
73,935
23,376
11,369
7,952
252
42,949
644,538
432,513
604,823
448,020
405,932
1,216,717
36,834
770,662
450,478
287,926
110,710
38,395
170,857
619,583
2,448,611
1,233
9,641
2,766
31,635
1,370
4,405
17,220
68,270
206
8,477
1,023
564
561
3,249
15,015
379
575
3,636
463
1,639
1,690
10,347
772,480
461,629
302,805
145,333
40,792
177,462
641,742
63,431
187,616
108,402
114,077
66,562
228,013
1,548
769,649
359
459
522
1,340
44
2,248
624
4,517
7,524
63,475
189,864
109,385
119,053
228,739
108,259
94,184
65,682
46,267
55,995
196,052
550
566,989
2,041
4,887
7,483
2,415
7,573
311
24,710
96
436
391
4,126
5,049
93
3,494
536
1,291
4,876
10,589
108,352
96,321
74,063
54,722
60,092
212,627
1,160
226,595
167,497
98,848
5,620
25,723
44,114
30,445
598,842
1,246
4,341
6,168
6,201
26,971
48,694
2,464,176
1,818,675
1,442,333
957,400
752,917
2,347,677
731,395
10,514,573
3,965
12,726
64,615
90,518
38,270
180,130
408,471
250
14,820
46,618
26,705
14,750
29,768
3,756
136,667
4,213
38,182
35,672
3,887
35,218
2,867
120,768
2,472,604
1,846,950
1,591,748
1,110,295
809,824
2,592,793
756,265
11,180,479
-22-
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 June 30, 2022 (dollars in thousands):
124,295
246,560
165,049
39,693
24,195
249,933
13
30-59 Days Past Due
65
60-89 Days Past Due
40
225
1,381
90+ Days Past Due
1,067
270
854
10,524
Total Residential 1-4 Family - Consumer
246,996
40,113
25,426
263,282
52,236
15,442
6,011
1,762
851
480
500,126
60
16
2,993
Total Residential 1-4 Family - Revolving
6,071
867
506,215
146,027
183,137
100,055
57,027
22,705
13,883
189
631
267
339
176
55
53
27
26
10
32
92
Total Auto
146,266
183,864
100,523
57,553
22,902
14,193
31,089
19,340
13,178
30,036
22,274
23,930
39,547
107
56
52
70
31
Total Consumer
31,147
19,388
13,240
30,214
22,490
23,992
39,574
353,647
464,479
284,293
128,518
70,025
288,226
539,686
2,128,874
195
315
443
672
1,394
4,164
76
68
295
2,800
87
1,070
998
2,322
468
891
10,566
15,433
353,944
465,690
284,883
129,642
71,685
301,947
545,802
2,153,593
The Company did not have any material revolving loans convert to term during the six months ended June 30, 2022.
-23-
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, 2021 (dollars in thousands):
248,904
174,459
47,905
33,809
44,179
246,554
143
460
1,801
2,194
20
2,643
444
117
884
1,330
8,622
249,348
174,616
48,211
36,144
46,380
261,814
16,546
9,511
2,230
1,056
484
524,825
63
3,325
9,574
1,074
530,888
207,229
123,848
72,427
31,745
16,020
7,204
518
245
29
33
36
101
42
23
81
207,628
124,441
73,137
32,084
16,351
7,411
25,084
16,059
38,594
30,890
12,853
16,929
35,534
94
62
25,127
16,170
38,890
31,208
12,958
17,009
35,630
497,763
323,877
161,156
97,500
73,052
271,171
560,370
1,984,889
330
633
862
768
1,990
1,581
7,416
717
177
2,205
369
3,723
105
121
112
335
4,256
144
172
929
8,709
15,080
498,649
324,801
162,468
100,510
75,689
286,718
566,529
2,015,364
The Company did not have any material revolving loans convert to term during the year ended December 31, 2021.
-24-
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.
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 impairment process. The Company determined that there was no impairment to its goodwill or intangible assets as of the balance sheet date.
Effective June 30, 2022, the Company, the Bank, and CSP completed the sale of DHFB, which was formerly a subsidiary of the Bank, resulting in a reduction in both the Company’s goodwill of $10.3 million and intangible assets of $5.7 million.
Amortization expense of intangibles for the three and six months ended June 30, 2022 and 2021 totaled $2.9 million and $6.0 million, and $3.6 million and $7.3 million, respectively.
As of June 30, 2022, the estimated remaining amortization expense of intangibles is as follows for the years ending (dollars in thousands):
For the remaining six months of 2022
4,860
2023
8,518
2024
6,753
2025
5,154
2026
Thereafter
2,777
Total estimated amortization expense
-25-
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 14 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.
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 June 30, 2022 and December 31, 2021, the carrying value of residual assets covered by residual value guarantees and RVI was $31.8 million and $23.0 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 in “Interest and fees on loans” on the Company’s Consolidated Statements of Income.
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
244,356
199,423
Unguaranteed residual values, net of unearned income and deferred selling profit
11,414
8,911
Total net investment in sales-type and direct financing leases
255,770
208,334
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.
-26-
Lease expense for operating lease payments is recognized on a straight-line basis over the lease term and recorded in “Occupancy expenses” 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” on the Company’s Consolidated Statements of Income and interest expense on the finance lease liability is recorded in “Interest on long-term borrowings” on the Company’s Consolidated Statements of Income.
The tables below provide information about the Company’s lessee lease portfolio and other supplemental lease information (dollars in thousands):
Operating
Finance
ROU assets
32,947
6,047
40,653
6,506
Lease liabilities
45,769
8,888
50,742
9,477
Lease Term and Discount Rate of Operating leases:
Weighted-average remaining lease term (years)
6.56
6.58
6.75
7.08
Weighted-average discount rate (1)
2.60
1.17
2.57
(1)An incremental borrowing rate is used based on information available at commencement date of lease or at remeasurement date
Six months ended June 30,
Cash paid for amounts included in measurement of lease liabilities:
Operating Cash Flows from Finance Leases
Operating Cash Flows from Operating Leases
5,756
5,988
Financing Cash Flows from Finance Leases
589
566
ROU assets obtained in exchange for lease obligations:
Operating leases
424
2,164
Three months ended June 30,
Net Operating Lease Cost
4,542
5,081
Finance Lease Cost:
Amortization of right-of-use assets
230
Interest on lease liabilities
30
Total Lease Cost
2,486
2,792
5,054
5,600
The maturities of lessor and lessee arrangements outstanding at June 30, 2022 are presented in the table below (dollars in thousands):
Lessor
Lessee
Sales-type and Direct Financing
32,605
5,560
650
60,499
1,325
57,677
9,206
1,358
43,809
7,055
1,392
29,998
4,640
1,427
42,578
13,449
3,088
Total undiscounted cash flows
267,166
50,223
9,240
Less: Adjustments (1)
22,810
4,454
352
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
-27-
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 securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the date sold, advances from the FHLB, federal funds purchased (which are secured overnight borrowings from other financial institutions), and other lines of credit.
Total short-term borrowings consist of the following as of June 30, 2022 and December 31, 2021 (dollars in thousands):
FHLB Advances
Total short-term borrowings
408,658
Average outstanding balance during the period
241,289
113,030
Average interest rate during the period
0.48
0.10
Average interest rate at end of period
0.90
The Bank maintains federal funds lines with several correspondent banks, the available balance was $1.0 billion and $997.0 million at June 30, 2022 and December 31, 2021 respectively. The Company maintains an alternate line of credit at a correspondent bank; the available balance was $25.0 million at both June 30, 2022 and December 31, 2021. The Company has certain restrictive covenants related to certain asset quality, capital, and profitability metrics associated with these lines and is in compliance with these covenants as of June 30, 2022 and December 31, 2021. Additionally, the Company had a collateral dependent line of credit with the FHLB of up to $5.9 billion and $6.0 billion at June 30, 2022 and December 31, 2021 respectively.
Long-term Borrowings
During the fourth quarter of 2021, the company issued the 2031 Notes. The 2031 Notes were sold at par resulting in net proceeds, after underwriting discounts and offering expenses, of approximately $246.9 million. The Company used a portion of the net proceeds from the 2031 Notes issuance to repay its outstanding $150 million of 5.00% fixed-to-floating rate subordinated notes that were due in 2026.
In connection with several previous bank acquisitions, the Company issued $58.5 million and acquired $87.0 million of trust preferred capital notes. Most recently, in connection with the acquisition of Access on February 1, 2019, the Company acquired additional trust preferred capital notes totaling $5.0 million. The remaining fair value discount on all acquired trust preferred capital notes was $12.9 million and $13.3 million at June 30, 2022 and December 31, 2021, respectively.
-28-
Total long-term borrowings consist of the following as of June 30, 2022 (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
5.04
6/17/2034
696
Trust Preferred Capital Note - Statutory Trust II
36,000
1.40
3.69
6/15/2036
1,114
VFG Limited Liability Trust I Indenture
20,000
2.73
5.02
3/18/2034
619
FNB Statutory Trust II Indenture
12,000
3.10
5.39
6/26/2033
372
Gateway Capital Statutory Trust I
8,000
9/17/2033
248
Gateway Capital Statutory Trust II
7,000
2.65
4.94
Gateway Capital Statutory Trust III
15,000
1.50
3.79
5/30/2036
464
Gateway Capital Statutory Trust IV
25,000
1.55
3.84
7/30/2037
774
MFC Capital Trust II
5,000
2.85
5.14
1/23/2034
155
Total Trust Preferred Capital Securities
150,500
4,659
Subordinated Debt(3)(4)
2031 Subordinated Debt
250,000
-
2.875
12/15/2031
Total Subordinated Debt(5)
Fair Value Discount(6)
(15,869)
Investment in Trust Preferred Capital Securities
Total Long-term Borrowings
(1) Rate as of June 30, 2022. Calculated using non-rounded numbers.
(2) The total of the trust preferred capital securities and investments in the respective trusts represents the principal asset of the Company’s junior subordinated debt securities with like maturities and like interest rates to the capital securities. The Company’s investment in the trusts is reported in "Other assets" on the Company’s Consolidated Balance Sheets.
(3) The remaining issuance discount as of June 30, 2022 is $3.0 million.
(4) Subordinated notes qualify as Tier 2 capital for the Company for regulatory purposes.
(5) Fixed-to-floating rate notes. On December 15, 2026, the interest rate changes to a floating rate of the then current Three-Month Term SOFR plus a spread of 186 bps through its maturity date. The notes may be redeemed before maturity on or after December 15, 2026.
(6) Remaining discounts of $12.9 million and $3.0 million on Trust Preferred Capital Securities and Subordinated Debt, respectively.
-29-
Total long-term borrowings consist of the following as of December 31, 2021 (dollars in thousands):
2.96
1.61
2.94
3.31
2.86
1.71
1.76
3.06
(16,435)
(1) Rate as of December 31, 2021. Calculated using non-rounded numbers.
(3) The remaining issuance discount as of December 31, 2021 is $3.1 million.
(5) Fixed-to-floating rate notes. On December 15, 2026, the interest changes to a floating rate of the then current Three-Month Term SOFR plus a spread of 186 bps through its maturity date. The notes may be redeemed before maturity on or after December 15, 2026.
(6) Remaining discounts of $13.3 million and $3.1 million on Trust Preferred Capital Securities and Subordinated Debt, respectively.
As of June 30, 2022, the contractual maturities of long-term debt are as follows for the years ending (dollars in thousands):
Trust
Subordinated
Long-term
Notes
Debt
Discount (1)
Borrowings
(573)
(1,162)
(1,187)
(1,211)
(1,236)
155,159
(10,500)
394,659
Total long-term borrowings
(1) Includes discount on issued subordinated notes.
-30-
7. COMMITMENTS AND CONTINGENCIES
Litigation Matters
In the ordinary course of its operations, the Company and its subsidiaries are involved in various legal and regulatory proceedings. The amount, if any, of the ultimate liability with respect to such matters cannot be determined. Despite the uncertainties of such litigation and investigations, and 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, subject to the potential outcomes of disclosed matters. There have been no material changes with respect to the Company’s previously disclosed proceedings.
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. 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 based on historical statistics and loss rates related to mortgage loans previously sold. As of June 30, 2022 and December 31, 2021, the Company’s RUC and indemnification reserve was $9.4 million and $8.4 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)
5,253,798
5,825,557
Letters of credit
154,241
152,506
Total commitments with off-balance sheet risk
5,408,039
5,978,063
(1) Includes unfunded overdraft protection.
As of June 30, 2022, the Company had approximately $204.2 million in deposits in other financial institutions of which $180.8 million served as collateral for cash flow and loan swap derivatives. As of December 31, 2021, the Company had approximately $187.4 million in deposits in other financial institutions of which $82.3 million served as collateral for the Company’s derivative interest rate contracts. The Company had approximately $20.0 million and $102.0 million in deposits in other financial institutions that were uninsured at June 30, 2022 and December 31, 2021, respectively. At least annually, the Company’s management evaluates the loss risk of its uninsured deposits in financial counterparties.
For asset/liability management purposes, the Company uses interest rate contracts to hedge various exposures or to modify the interest rate characteristics of various balance sheet accounts. For the OTC derivatives cleared with the central clearinghouses,
-31-
the variation margin is treated as a settlement of the related derivatives fair values. Refer to Note 8 “Derivatives” in Part I, Item I of this Quarterly Report for additional information.
The Company pledges collateral to secure various financing and other activities that occur during the normal course of business as part of the liquidity management strategy. The following tables present the types of collateral pledged at June 30, 2022 and December 31, 2021 (dollars in thousands):
Pledged Assets as of June 30, 2022
Cash
Securities (1)
Loans (2)
Public deposits
579,459
498,568
1,078,027
Repurchase agreements
124,242
FHLB advances
38,944
2,592,215
2,631,159
Derivatives
180,786
59,353
240,139
Fed Funds
435,262
Other purposes
27,610
869
28,479
Total pledged assets
829,608
499,437
3,027,477
4,537,308
Pledged Assets as of December 31, 2021
703,489
472,243
1,175,732
130,217
43,722
4,263,259
4,306,981
82,299
65,053
147,352
392,067
22,003
985
22,988
964,484
473,228
4,655,326
6,175,337
(1) Balance represents market value.
(2) Balance represents book value.
-32-
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 that do not qualify for hedge accounting and consist of interest rate contracts, which include loan swaps and interest rate cap agreements, as well as interest rate lock commitments.
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 requirements, 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.
At June 30, 2022 and December 31, 2021, the Company had interest rate swaps designated and qualifying as cash flow hedges of the Company’s forecasted variable interest receipts on variable rate loans due to changes in the interest rate with a notional amount of $500 million. For each agreement, the Company receives interest at a fixed rate and pays at a variable rate.
Fair Value Hedges
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 June 30, 2022 and December 31, 2021, the aggregate notional amount of the related hedged items for certain long-term fixed rate loans totaled $86.2 million and $88.6 million, respectively, and the fair value of the swaps associated with the derivative related to hedged items was an unrealized gain of $7.8 million and an unrealized loss of $620,000, respectively.
-33-
AFS Securities: The Company has entered into a swap agreement to hedge the interest rate risk on a portion of its fixed rate AFS securities. At June 30, 2022 and December 31, 2021, the aggregate notional amount of the related hedged items of the AFS securities totaled $50.0 million and the fair value of the swaps associated with the derivative related to hedged items was an unrealized loss of $23,000 and $4.1 million, respectively.
The Company applies hedge accounting in accordance with ASC 815, Derivatives and Hedging, and the fair value hedge and the underlying hedged item, attributable to the risk being hedged, are recorded at fair value with unrealized gains and losses being recorded on the Company’s Consolidated Statements of Income. 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.
Interest Rate Contracts
During the normal course of business, the Company enters into interest rate contracts with borrowers to help meet their financing needs. Upon entering into interest rate contracts, the Company enters into offsetting positions with a third party in order to minimize interest rate risk. These interest rate contracts 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 June 30, 2022 and December 31, 2021, 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
136,220
1,171
138,606
5,387
Derivatives not designated as accounting hedges:
Interest rate contracts (3)
5,222,073
34,354
146,260
5,017,574
73,696
49,051
(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.
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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 June 30, 2022 and December 31, 2021 (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)
96,577
9
112,562
4,051
86,220
(7,787)
88,606
(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 June 30, 2022 and December 31, 2021, the amortized cost basis of this portfolio was $97 million and $113 million, respectively, and the cumulative basis adjustment associated with this hedge was $9,000 and $4.1 million, respectively. The amount of the designated hedged item at June 30, 2022 and December 31, 2021 totaled $50 million.
(2) Carrying value represents amortized cost.
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9. STOCKHOLDERS’ EQUITY
Repurchase Programs
On December 10, 2021, the Company’s Board of Directors authorized a new share Repurchase Program to purchase up to $100.0 million of the Company’s common stock through December 9, 2022 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. As part of the Repurchase Program, approximately 1.3 million shares (or $48.2 million) were repurchased during the six months ended June 30, 2022, and of these shares approximately 649,000 shares (or $23.2 million) were repurchased during the second quarter of 2022. Approximately $51.8 million of share repurchases remain available under the Repurchase Program at June 30, 2022.
Accumulated Other Comprehensive Income (Loss)
The change in AOCI for the three and six months ended June 30, 2022 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
(164,204)
(24,880)
(2,429)
Other comprehensive loss before reclassification
(124,946)
Amounts reclassified from AOCI into earnings
146
Net current period other comprehensive (loss) income
(113,373)
(277,577)
(36,452)
(2,279)
22,763
(1,567)
(2,596)
(335,226)
308
(300,340)
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The change in AOCI for the three and six months ended June 30, 2021 is summarized as follows, net of tax (dollars in thousands):
Unrealized Gain
on BOLI
40,974
50
(1,475)
(3,048)
Other comprehensive income before reclassification
16,425
54,792
1,132
(2,897)
74,161
(3,201)
Other comprehensive (loss) income before reclassification
(18,128)
(19,369)
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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 BVAL derivative pricing functions. No material differences were identified during the validation as of June 30, 2022 and December 31, 2021. 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 June 30, 2022 and December 31, 2021 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, which evaluates securities based on market data. ICE 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 BVAL 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 June 30, 2022 and December 31, 2021.
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
Residential loans originated for sale in the open market are carried at fair value. 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 June 30, 2022 and December 31, 2021 (dollars in thousands):
Fair Value Measurements at June 30, 2022 using
Significant
Quoted Prices in
Active Markets for
Observable
Unobservable
Identical Assets
Inputs
Level 1
Level 2
Level 3
Balance
58,817
6,923
1,883,713
Derivatives:
Interest rate contracts
(1) Other bonds include asset-backed securities.
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Fair Value Measurements at December 31, 2021 using
9,375
2,244,389
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 were $9.4 million and $11.3 million during the periods ended June 30, 2022 and December 31, 2021 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 BVAL, 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 June 30, 2022 and December 31, 2021. 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 June 30, 2022 and December 31, 2021.
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 June 30, 2022 and December 31, 2021 are as follows (dollars in thousands):
Quoted Prices
in Active
Markets for
Total Fair
Cash and cash equivalents
AFS securities
2,892,604
HTM securities
738,397
4,822
Restricted stock
Net loans
13,058,756
Accrued interest receivable
67,231
16,142,580
797,948
466,601
Accrued interest payable
1,349
3,417,176
686,733
7,041
12,861,274
65,015
16,630,087
506,594
488,796
933
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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 market interest rates 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 LHFS prior to being sold. Additionally, the changes in fair value of the LHFS, loan commitments, and related derivatives are included in mortgage banking income.
Noninterest income disaggregated by major source for the three and six months ended June 30, 2022 and 2021, consisted of the following (dollars in thousands):
Deposit Service Charges (1):
Overdraft fees
5,305
4,136
10,299
7,217
Maintenance fees & other
2,735
2,471
5,338
4,899
Other service charges, commissions, and fees (1)
Interchange fees(1)
Fiduciary and asset management fees (1):
Trust asset management fees
3,299
2,985
6,690
5,893
Registered advisor management fees
2,438
2,463
5,088
4,790
Brokerage management fees
1,202
1,371
2,416
2,611
Other operating income (2)
(1) Income within scope of Topic 606.
(2) Includes a $9.1 million gain related to the sale of DHFB, for the three and six months ended June 30, 2022.
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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 six months ended June 30, 2022 and 2021 (dollars in thousands except per share data):
Net Income:
Less: Preferred Stock Dividends
Weighted average shares outstanding, basic
74,848
78,820
75,194
78,842
Dilutive effect of stock awards
7
22
Weighted average shares outstanding, diluted
74,850
78,844
75,201
78,864
Earnings per common share, basic
Earnings per common share, diluted
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13. SUBSEQUENT EVENTS
The Company’s management has evaluated subsequent events through August 4, 2022, the date the financial statements were issued.
On July 28, 2022, the Company’s Board of Directors declared a quarterly dividend on the outstanding shares of its Series A preferred stock. The Series A preferred stock is represented by depositary shares, each representing a 1/400th ownership interest in a share of Series A preferred stock. The dividend of $171.88 per share (equivalent to $0.43 per outstanding depositary share) is payable on September 1, 2022 to preferred shareholders of record as of August 17, 2022.
The Company’s Board of Directors also declared a quarterly dividend of $0.30 per share of common stock. The common stock dividend is payable on August 26, 2022 to common shareholders of record as of August 12, 2022.
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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 June 30, 2022, the related consolidated statements of income, comprehensive income, and stockholders’ equity for the three and six-month periods ended June 30, 2022 and 2021, the consolidated statements of changes in cash flows for the six-month periods ended June 30, 2022 and 2021, 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, 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated February 25, 2022, 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, 2021, 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
August 4, 2022
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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 2021 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 U.S. GAAP. These non-GAAP financial measures are a supplement to GAAP, which is used to prepare the Company’s financial statements, and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company’s non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company uses the non-GAAP financial measures discussed herein in its analysis of the Company’s performance. The Company’s management believes that these non-GAAP financial measures provide additional understanding of ongoing operations, enhance comparability of results of operations with prior periods and show the effects of significant gains and charges in the periods presented without the impact of items or events that may obscure trends in the Company’s underlying performance. 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 GAAP 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 are statements that include, without limitation, statements regarding future interest rate environments and potential impacts on the Company’s net interest margin, future economic conditions, and loan and securities portfolios, and the impacts of the COVID-19 pandemic, and statements that include other projections, predictions, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Such forward-looking statements are based on certain 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 characterized by the use of qualified words (and their derivatives) 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 future results, performance, or achievements of, or trends affecting, the Company will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to 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 2021 Form 10-K and related disclosures in other filings, which have been filed with the SEC and are available on the SEC’s website at www.sec.gov. All risk factors and uncertainties described herein should be considered in evaluating forward-looking statements, 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, and undue reliance should not be placed on such forward-looking statements. Forward-looking statements speak only as of the date they are made, and the Company does not intend or assume any obligation to update, revise or clarify any forward-looking statements that may be made from time to time by or on behalf of the Company, whether as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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
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application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors of the Company.
The critical accounting and reporting policies include the Company’s accounting for the ALLL, acquired loans, and goodwill. 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 2021 Form 10-K.
The Company provides additional information on its critical accounting policies and estimates under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in its 2021 Form 10-K and in Note 1 “Summary of Significant Accounting Policies” in Part I, Item 1 of this Quarterly Report.
RECENT ACCOUNTING PRONOUNCEMENTS (ISSUED BUT NOT FULLY ADOPTED)
In March 2022, the FASB issued ASU No. 2022-02 “Financial Instruments- Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” This guidance eliminates the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the amendments require disclosure of current period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendments is permitted if ASU 2016-13 has been adopted, including adoption in an interim period. The Company is evaluating the impact ASU No. 2022-02 will have on its consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-01 “Derivatives and Hedging (Topic 815): Fair Value Hedging- Portfolio Layer Method” to allow nonprepayable financial assets to be included in a closed portfolio hedge using the portfolio layer method and to allow multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. The amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendments is permitted if the amendments in ASU 2017-12 have been adopted for the corresponding period. The Company is evaluating the impact ASU No. 2022-01 will have on its consolidated financial statements.
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, subject to meeting certain criteria, for applying current GAAP to contract modifications and hedging relationships, for contracts 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 interest 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 2021 Form 10-K. The Company may incorporate other components of Topic 848 at a later date as it continues to evaluate the remaining components of Topic 848 and its impact to the Company.
ABOUT ATLANTIC UNION BANKSHARES CORPORATION
Headquartered in Richmond, Virginia, Atlantic Union Bankshares Corporation (Nasdaq: AUB) is the holding company for Atlantic Union Bank. Atlantic Union Bank has 114 branches and approximately 130 ATMs located throughout Virginia, and in portions of Maryland and North Carolina. Certain non-bank financial services affiliates of Atlantic
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Union Bank include: Atlantic Union Equipment Finance, Inc., which provides equipment financing; Atlantic Union Financial Consultants, LLC, which provides brokerage services; and Union Insurance Group, LLC, which offers various lines of insurance products.
Shares of the Company’s common stock are traded on the Nasdaq Global Select Market under the symbol "AUB". Additional information is available on the Company’s website at https://investors.atlanticunionbank.com. The information contained on the Company’s website is not a part of or incorporated into this Quarterly Report.
RESULTS OF OPERATIONS
SIGNIFICANT ACTIVITIES
Share Repurchase Program
On December 10, 2021, the Company’s Board of Directors authorized a share repurchase program to purchase up to $100.0 million of the Company’s common stock through December 9, 2022 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. As part of the Repurchase Program, approximately 1.3 million shares (or $48.2 million) were repurchased during the six months ended June 30, 2022, and of these shares approximately 649,000 shares (or $23.2 million) were repurchased during the second quarter of 2022. At June 30, 2022, approximately $51.8 million of share repurchases remain available under the Repurchase Program.
Strategic Initiatives
During the fourth quarter of 2021, the Company took certain actions to reduce expenses in light of the period's prevailing and expected operating environment, including the closure of the Company’s operations center and consolidation of 16 branches, all of which were completed in March 2022. These actions resulted in restructuring expenses in the first quarter of 2022 of approximately $5.5 million, primarily related to lease and other asset write downs, as well as severance costs. There were no significant branch closing and facility consolidation costs for the quarter ended June 30, 2022.
COVID-19 UPDATE
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 have in the future, a wide range of economic impacts nationally and in the Company’s primary markets. The Company will carefully monitor any future economic impacts attributable to the COVID-19 pandemic and potential impact on the Company’s borrowers and their ability to repay loans.
Since the start of the pandemic, 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 continues to follow 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 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, many of which remain highly uncertain and cannot be predicted.
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SUMMARY OF QUARTERLY FINANCIAL RESULTS
Second Quarter Net Income and Performance Metrics
Six Month Net Income and Performance Metrics
Sale of Dixon, Hubard, Feinour & Brown, Inc.
Balance Sheet
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Net Interest Income
For the Three Months Ended
Change
Average interest-earning assets
17,646,470
17,868,938
(222,468)
Interest and dividend income
(2,097)
Interest and dividend income (FTE) (+)
152,332
153,996
(1,664)
Yield on interest-earning assets
3.38
3.39
Yield on interest-earning assets (FTE) (+)
3.46
Average interest-bearing liabilities
11,590,351
11,846,623
(256,272)
Interest expense
(316)
Cost of interest-bearing liabilities
0.35
Cost of funds
0.22
0.23
(1,781)
Net interest income (FTE) (+)
142,344
143,692
(1,348)
Net interest margin
3.15
Net interest margin (FTE) (+)
3.24
3.23
For the second quarter of 2022, net interest income was $138.8 million, a decrease of $1.8 million from the second quarter of 2021. For the second quarter of 2022, net interest income (FTE)(+) was $142.3 million, a decrease of $1.3 million from the second quarter of 2021. In the second quarter of 2022, net interest margin was consistent with the second quarter of 2021, and net interest margin (FTE)(+) increased 1 basis point to 3.24% from 3.23% compared to the second quarter of 2021. The declines in net interest income and net interest income (FTE)(+) were primarily the result of lower PPP interest income and fees, partially offset by higher interest income as a result of adjusted loan growth(+), and higher investment interest income due to growth in the average balance of the investment portfolio.
For the Six Months Ended
17,765,085
17,781,005
(15,920)
(11,313)
294,124
304,722
(10,598)
3.26
(13)
3.34
(12)
11,693,601
11,955,610
(262,009)
(5,565)
0.30
0.39
(9)
0.20
0.27
(7)
(5,748)
276,610
281,643
(5,033)
3.12
(6)
3.14
3.19
For the first six months of 2022, net interest income was $269.7 million, a decrease of $5.7 million from the same period of 2021. For the first six months of 2022, net interest income (FTE)(+) was $276.6 million, a decrease of $5.0 million from the same period of 2021. In the first six months of 2022, net interest margin decreased 6 bps to 3.06% from 3.12% in the first six months of 2021, and net interest margin (FTE)(+) decreased 5 bps to 3.14% from 3.19% in the first six months of 2021. The declines in net interest margin and net interest margin (FTE)(+) were primarily the result of lower PPP interest income and fees,
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partially offset by higher interest income as a result of adjusted loan growth(+), and higher investment interest income due to growth in the average balance of the investment portfolio, and lower cost of funds.
On March 16, 2022, the FOMC began to increase its Federal Funds target rates to a range of 0.25% to 0.50%, which was the first increase since December 2018. The FOMC further increased the target rates in May, June, and July 2022 to its current range of 2.25% to 2.5%. The FOMC also foreshadowed potential further increases to the target rates throughout the year and also confirmed the continued reduction to the Federal Reserve’s holdings of U.S. Treasury securities and agency debt and agency mortgage-backed securities. The Company anticipates that these FOMC actions will result in an expansion on its net interest margin due to the Company’s asset-sensitive position at June 30, 2022. Refer to “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 3 of this Quarterly Report for additional information about the Company’s interest rate sensitivity.
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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 June 30,
Average
Income /
Yield /
Expense (1)
Rate (1)(2)
Assets:
Securities:
2,322,024
2.54
2,028,637
2.08
Tax-exempt
1,608,888
13,465
3.36
1,391,692
12,249
3.53
Total securities
3,930,912
28,160
2.87
3,420,329
22,768
2.67
Loans, net (3)
13,525,529
123,764
3.67
13,971,939
130,840
3.76
Other earning assets
190,029
408
0.86
476,670
0.33
Total earning assets
(103,211)
(137,997)
Total non-earning assets
2,176,143
2,192,037
19,719,402
19,922,978
Liabilities and Stockholders' Equity:
Interest-bearing deposits:
Transaction and money market accounts
7,987,888
3,082
0.15
8,159,890
1,809
0.09
Regular savings
1,169,199
0.02
1,016,661
Time deposits
1,667,378
2,960
0.71
2,270,217
5,374
0.95
Total interest-bearing deposits
10,824,465
11,446,768
0.25
Other borrowings
765,886
3,891
2.04
399,855
3,066
3.08
Total interest-bearing liabilities
Noninterest-bearing liabilities:
Demand deposits
5,366,591
5,053,773
317,415
274,718
17,274,357
17,175,114
Stockholders' equity
2,445,045
2,747,864
Interest rate spread
3.11
(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.
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For the Six Months Ended June 30,
2,468,775
2.32
1,967,948
2.14
1,595,232
26,704
1,347,487
23,941
3.58
4,064,007
55,065
3,315,435
44,813
13,413,780
238,365
14,017,777
258,962
3.73
287,298
694
0.49
447,793
947
0.43
(101,784)
(147,844)
2,156,029
2,172,408
19,819,330
19,805,569
8,181,253
4,406
8,110,384
3,961
1,156,099
111
978,726
114
1,716,743
6,063
2,379,716
12,291
1.04
11,054,095
0.19
11,468,826
0.29
639,506
6,934
2.19
486,784
6,713
2.78
5,297,727
4,819,946
275,584
296,033
17,266,912
17,071,589
2,552,418
2,733,980
3.04
3.07
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The Volume Rate Analysis table below presents changes in interest income (FTE)(+) 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):
June 30, 2022 vs. June 30, 2021
Increase (Decrease) Due to Change in:
Volume
Rate
Earning Assets:
1,654
2,522
4,176
5,645
7,489
1,840
(624)
1,216
4,208
(1,445)
2,763
1,898
5,392
9,853
399
10,252
Loans, net
(4,125)
(2,951)
(7,076)
(10,933)
(9,664)
(20,597)
(337)
357
(373)
(253)
(968)
(696)
(1,453)
(9,145)
Interest-Bearing Liabilities:
(39)
1,312
1,273
410
445
(8)
19
(22)
(3)
Time Deposits
(1,243)
(1,171)
(2,414)
(2,917)
(3,311)
(6,228)
(1,274)
133
(1,141)
(2,863)
(2,923)
(5,786)
2,114
(1,289)
825
(1,618)
840
(1,156)
(1,024)
(4,541)
Change in net interest income (FTE)(+)
(1,808)
(429)
(4,604)
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 and second quarters of 2021, and the first and second quarters of 2022 are reflected in the following table (dollars in thousands):
Loan
Deposit
Accretion
Accretion (Amortization)
Amortization
For the quarter ended March 31, 2021
4,287
(198)
4,109
For the quarter ended June 30, 2021
4,132
(202)
For the quarter ended March 31, 2022
2,253
(203)
2,040
For the quarter ended June 30, 2022
2,879
(11)
(207)
2,661
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Noninterest Income
1,433
21.7
Other service charges, commissions, and fees
(26)
(1.5)
3.0
1.8
(2,419)
(52.4)
(493)
(15.4)
96.8
9,861
504.9
9,820
34.5
Noninterest income increased $9.8 million or 34.5% to $38.3 million for the quarter ended June 30, 2022, compared to $28.5 million for the quarter ended June 30, 2021, primarily driven by the pre-tax gain of $9.1 million related to the sale of DHFB. Excluding the gain on sale of DHFB and loss on securities, adjusted operating noninterest income(+) for the quarter ended June 30, 2022 increased $740,000 or 2.6% from the prior year quarter. The increase was primarily driven by a $1.4 million increase in service charges on deposit accounts and a $1.3 million increase in loan-related interest swap fee income due to higher transaction volumes and an increase in average swap fees. These noninterest income increases were partially offset by a $2.4 million decrease in mortgage banking income due to a decline in mortgage loan origination volumes resulting from the higher interest rate environment and declining gain on sale margins.
3,521
29.1
(72)
(2.1)
28
0.7
900
6.8
(7,557)
(58.7)
(1.1)
3,385
110.1
8,845
172.4
8,988
15.1
Noninterest income increased $9.0 million or 15.1% to $68.4 million for the six months ended June 30, 2022, compared to $59.5 million for the six months ended June 30, 2021, primarily driven by the pre-tax gain of $9.1 million related to the sale of DHFB in the second quarter of 2022. Excluding the losses and gains from securities and the gain resulting from the sale of DHFB, adjusted operating noninterest income(+) for the six months ended June 30, 2022 did not significantly change from the six months ended June 30, 2021. The $7.6 million decrease in mortgage banking is due to a decline in mortgage loan origination volumes resulting from the higher interest rate environment and declining gain on sale margins, and was offset by a $3.5 million increase in service charges on deposit accounts, a $3.4 million increase in loan-related interest swap fee income due to higher transaction volumes and an increase in average swap fees, and a $900,000 increase in fiduciary and asset management fees due to growth in assets under management.
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Noninterest Expense
Noninterest expense:
4,539
8.9
(745)
(10.4)
(321)
(8.2)
643
6.2
(236)
(8.6)
446
19.2
1.5
(2.2)
(653)
(18.3)
2,829
79.5
Total noninterest expense
6,797
7.4
Noninterest expense increased $6.8 million or 7.4% to $98.8 million for the quarter ended June 30, 2022, compared to $92.0 million for the quarter ended June 30, 2021. Excluding amortization of intangible assets and branch closing and facility consolidation costs, adjusted operating noninterest expense(+) for the quarter ended June 30, 2022 increased by $7.4 million or 8.4% from the prior year quarter. The increase from the prior year quarter was mainly due to an increase of $4.5 million in salaries and benefits primarily driven by an increase in salaries, wages, and variable incentive compensation, an increase of $1.2 million in non-credit related losses on customer transactions, $626,000 in OREO and credit-related expenses, $506,000 in teammate training and travel costs, $361,000 in deferred compensation expenses, $643,000 in technology and data processing expenses primarily driven by an increase in software licensing and maintenance expenses, and $446,000 in FDIC assessment premiums. These increases were partially offset by decreases of $745,000 in occupancy expenses and $321,000 in furniture and equipment expenses, partially reflecting the impact of the Company’s consolidation of 16 branches that was completed in March 2022.
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10,177
9.8
(1,176)
(8.1)
(693)
(8.8)
1,535
10.9
(599)
(6.4)
(117)
(2.4)
13.5
1.4
(143)
(3.8)
(1,344)
(18.4)
(14,695)
(100.0)
6,484
61.2
181
0.1
Noninterest expense for the six months ended June 30, 2022 did not significantly change from the six months ended June 30, 2021. Excluding amortization of intangible assets, losses related to balance sheet repositioning, and branch closing and facility consolidation costs adjusted operating noninterest expense(+) for the six months ended June 30, 2022 increased by $11.6 million or 6.4% compared to the six months ended June 30, 2021. The increase from the prior year quarter was mainly due to an increase of $10.2 million in salaries and benefits primarily driven by an increase in salaries, wages, and variable incentive compensation, an increase of $879,000 in OREO and credit-related expenses, an increase of $758,000 in teammate training and travel costs, an increase of $1.5 million in technology and data processing expense driven by an increase in software licensing and maintenance expenses, and an increase of $624,000 in FDIC assessment premiums. Partially offsetting these expense increases were declines of $1.2 million in occupancy expenses and $693,000 in furniture and equipment expenses, reflecting the impact of the Company’s consolidation of 16 branches that was completed in March 2022, and a decline of $599,000 in professional services expenses.
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 June 30, 2022 and 2021 was 16.7% and 18.3%, respectively. The effective tax rate for the six months ended June 30, 2022 and 2021 was 17.1% and 17.7%, respectively. The decrease in the effective tax rates reflects the impacts of the current quarter’s discrete items related to the sale of DHFB and a higher proportion of tax-exempt income to pre-tax income in the 2022 period.
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DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Overview
At June 30, 2022, total assets were $19.7 billion, a decrease of $403.0 million or approximately 4.1% (annualized) from $20.1 billion at December 31, 2021. The decrease in total assets was driven by the investment securities portfolio decrease of $366.4 million mainly due to the decline in the AFS portfolio’s fair value, reflecting the impact of market interest rate increases, partially offset by a decrease in cash and cash equivalents of $561.1 million, which was deployed primarily to fund loans which increased by $460.0 million from December 31, 2021, but also reflects the impact of net deposit outflows.
LHFI (net of deferred fees and costs) were $13.7 billion, including $21.7 million in PPP loans, at June 30, 2022, an increase of $460.0 million or 7.0% (annualized) from December 31, 2021. Excluding the effects of the PPP(+), LHFI (net of deferred fees and costs) at June 30, 2022 increased $588.2 million or 9.1% (annualized) from December 31, 2021. At June 30, 2022, quarterly average loans decreased $446.4 million or 3.2% from the same period in the prior year. Excluding the effects of the PPP(+), the adjusted quarterly average loan balance at June 30, 2022 increased $697.8 million or 5.5% from June 30, 2021. Refer to "Loan Portfolio" within Item 2 and Note 3 "Loans and Allowance for Loan and Lease Losses" in Part I, Item 1 of this Quarterly Report for additional information on the Company’s loan activity.
Liabilities and Stockholders’ Equity
At June 30, 2022, total liabilities were $17.3 billion, a decrease of $84.4 million from $17.4 billion at December 31, 2021.
Total deposits at June 30, 2022 were $16.1 billion, a decrease of $482.4 million or approximately 5.9% (annualized) from December 31, 2021. For the quarter ended June 30, 2022, quarterly average deposits decreased $309.5 million or 1.9% compared to the quarter ended June 30, 2021. The declines in deposits relate to declines in money market account balances and maturing time deposits, as well as a public funds client that used available deposit funds to repay higher cost, longer-term debt obligations during the second quarter. Refer to “Deposits” within this Item 2 for further discussion on this topic.
Total short-term and long-term borrowings at June 30, 2022 were $798.0 million, an increase of $291.4 million or 57.5% when compared to $506.6 million at December 31, 2021. Refer to Note 6 “Borrowings” in Part I, Item I of this Quarterly Report for further discussion on this topic.
At June 30, 2022, stockholders’ equity was $2.4 billion, a decrease of $318.6 million from December 31, 2021. Refer to “Capital Resources” within this Item 2, as well as Note 9 "Stockholders’ Equity" in Part I, Item 1 of this Quarterly Report for additional information on the Company’s capital resources.
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.
During the second quarter of 2022, the Company 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), consistent with the first quarter of 2022 and the second quarter of 2021. During the second quarter of 2022, the Company also declared and paid a cash dividend of $0.28 per common share, consistent with the first quarter of 2022 and the second quarter of 2021.
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Securities
At June 30, 2022, the Company had total investments in the amount of $3.8 billion, or 19.4% of total assets, as compared to $4.2 billion, or 20.9% of total assets, at December 31, 2021. This decline in the Company’s investment portfolio was primarily due to a decline in the market value of the AFS securities portfolio. The Company seeks to diversify its portfolio to minimize risk. It focuses on purchasing MBS 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 MBS are agency-backed securities, which have a government guarantee. For information regarding the hedge transaction related to AFS 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 MBS
Total AFS securities, at fair value
Held to Maturity:
Total held to maturity securities, at carrying value
Restricted Stock:
FRB stock
67,032
FHLB stock
20,876
9,793
Total restricted stock, at cost
Total investments
3,820,078
4,186,475
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The following table summarizes the weighted average yields(1) for AFS securities by contractual maturity date of the underlying securities as of June 30, 2022:
1 Year or
5 – 10
Over 10
Less
1 - 5 Years
Years
2.64
1.43
1.46
4.21
2.77
2.66
Corporate bonds and other securities
3.70
3.87
2.52
3.85
MBS:
3.99
2.46
2.18
2.42
2.23
2.51
2.09
2.10
3.22
2.50
2.20
3.54
2.90
2.44
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis.
The following table summarizes the weighted average yields(1) for HTM securities by contractual maturity date of the underlying securities as of June 30, 2022:
4.08
3.98
4.05
2.31
3.64
2.29
3.03
2.59
2.83
4.04
3.55
Weighted average yield is calculated as the tax-equivalent yield on a pro rata basis for each security based on its relative amortized cost.
As of June 30, 2022, the Company maintained a diversified municipal bond portfolio with approximately 65% of its holdings in general obligation issues and the majority of the remainder primarily backed by revenue bonds. Issuances within the State of Texas represented 18% of the total 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, LHFS, 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 seen increased customer deposit balances as a result of the impacts of COVID-19, including as a result of government stimulus programs. The Company considered a portion of the elevated levels in customer deposits to be temporary and is starting to see declines from prior elevated periods; however, the Company will use other means of borrowings to fund any liquidity needs based on declines in deposit balances.
As of June 30, 2022, liquid assets totaled $5.5 billion or 28.0% of total assets, and liquid earning assets totaled $5.4 billion or 30.5% of total earning assets. Asset liquidity is also provided by managing loan and securities maturities and cash flows. As of June 30, 2022, loan payments of approximately $4.9 billion or 36.1% of total loans are expected within one year based on contractual terms, adjusted for expected prepayments, and approximately $320.3 million or 8.4% 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 Part I, 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.
Cash Requirements
The Company’s cash requirements, outside of lending transactions, consist primarily of borrowings, debt and capital instruments which are used as part of the Company’s overall liquidity and capital management strategy. Cash required to repay these obligations will be sourced from future debt and capital issuances and from other general liquidity sources as described above under “Liquidity” within this Item 2.
The following table presents the Company’s contractual obligations related to its major cash requirements and the scheduled payments due at the various intervals over the next year and beyond as of June 30, 2022 (dollars in thousands):
Less than
More than
1 year
Long-term debt (1)
Trust preferred capital notes (1)
Leases (2)
234,561
Total contractual obligations
790,983
151,263
639,720
For more information pertaining to the previous table, reference Note 5 “Leases” and Note 6 “Borrowings” in Part I, Item 1 of this Quarterly Report.
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Loan Portfolio
LHFI, net of deferred fees and costs, were $13.7 billion at June 30, 2022, and $13.2 billion at December 31, 2021. Commercial & industrial loans and commercial real estate-non-owner occupied loans represented the Company’s largest categories at June 30, 2022. Commercial and industrial loans included approximately $21.7 million and $145.3 million in loans from the PPP loan program as of June 30, 2022 and December 31, 2021, respectively.
The following table presents the remaining maturities, based on contractual maturity, by loan type and by rate type (variable or fixed), as of June 30, 2022 (dollars in thousands):
Variable Rate
Fixed Rate
Less than 1
Maturities
year
1-5 years
5-15 years
15 years
318,369
523,512
468,177
54,113
1,222
146,498
73,700
33,611
39,187
166,915
617,084
122,906
478,475
15,703
1,181,703
491,045
660,363
30,295
418,158
2,055,666
919,977
1,125,137
10,552
1,386,995
985,214
345,039
56,742
78,845
449,209
86,166
363,043
234,448
172,714
61,734
437,472
1,324,374
1,141,296
176,072
7,006
834,045
512,442
313,484
8,119
73,273
112,680
30,333
74,298
8,049
367,818
267,766
88,560
11,492
5,325
164,121
1,907
27,651
134,563
695,728
7,999
73,885
613,844
28,084
481,906
31,661
135,479
314,766
73,083
3,171
23,526
46,386
3,064
522,237
200,474
321,763
14,367
26,462
23,266
2,293
903
139,216
49,203
24,344
70,411
108,948
18,164
57,867
32,917
595,392
190,889
268,600
135,903
1,614,283
5,863,962
2,843,853
2,494,428
525,681
6,177,163
2,971,083
2,239,768
966,312
The Company remains committed to originating soundly underwritten loans to qualifying borrowers within its markets. As reflected in the loan table, at June 30, 2022, 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.
The Company had no short-term loan modifications related to COVID-19 as of June 30, 2022 and had insignificant short-term loan modifications related to COVID-19 as of December 31, 2021.
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Asset Quality
At June 30, 2022, the Company experienced decreases in NPAs and decreases in accruing past due loan levels as a percentage of total LHFI compared to December 31, 2021. Net charge-offs for the six months ended June 30, 2022 decreased $306,000 compared to the six months ended June 30, 2021. The ACL at June 30, 2022 increased from December 31, 2021 primarily due to increased uncertainty in the macroeconomic outlook and the impact of loan growth in the first six months of 2022.
The Company believes its continued proactive efforts to effectively manage its loan portfolio, combined with the unprecedented government stimulus and programs and regulatory support in 2021 as a result of COVID-19, 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.
Nonperforming Assets
At June 30, 2022, NPAs totaled $31.1 million, a decrease of $1.7 million or 5.1% from December 31, 2021. NPAs as a percentage of total outstanding loans at June 30, 2022 were 0.23%, a decrease of 2 bps from December 31, 2021.
The following table shows a summary of asset quality balances and related ratios as of and for the quarters ended (dollars in thousands):
Nonaccrual loans
Foreclosed properties
2,065
1,696
Total NPAs
31,135
32,796
Loans past due 90 days and accruing interest
Total NPAs and loans past due 90 days and accruing interest
35,727
41,928
Performing TDRs
Balances
113,184
107,787
Average loans, net of deferred fees and costs
13,082,412
Loans, net of deferred fees and costs
Ratios
Nonaccrual loans to total loans
NPAs to total loans
NPAs & loans 90 days past due and accruing interest to total loans
0.26
0.32
NPAs to total loans & foreclosed property
NPAs & loans 90 days past due and accruing interest to total loans & foreclosed property
ALLL to nonaccrual loans
358.39
320.86
ALLL to nonaccrual loans & loans 90 days past due and accruing interest
309.50
248.03
ACL to nonaccrual loans
389.35
346.58
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NPAs at June 30, 2022 included $29.0 million in nonaccrual loans, a net decrease of $2.0 million or 6.5% from December 31, 2021. The following table shows the activity in nonaccrual loans for the quarters ended (dollars in thousands):
Beginning Balance
29,032
35,472
Net customer payments
(2,472)
(5,068)
Additions
3,203
1,294
Charge-offs
(311)
(598)
Transfers to foreclosed property
(382)
Ending Balance
The following table presents the composition of nonaccrual loans and the coverage ratio, which is the ALLL expressed as a percentage of nonaccrual loans, as of (dollars in thousands):
Commercial Real Estate - Non-owner Occupied
Coverage Ratio(1)
(1) Represents the ALLL divided by nonaccrual loans.
Past Due Loans
At June 30, 2022, past due loans still accruing interest totaled $20.4 million or 0.15% of total LHFI, compared to $29.9 million or 0.23% of total LHFI at December 31, 2021. Of the total past due loans still accruing interest, $4.6 million or 0.03% of total LHFI were past due 90 days or more at June 30, 2022, compared to $9.1 million or 0.07% of total LHFI at December 31, 2021.
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 both June 30, 2022 and December 31, 2021 totaled $18.0 million. Of the $18.0 million of TDRs at June 30, 2022, $10.7 million or 59.4% were considered performing, while the remaining $7.3 million were considered nonperforming. Of the $18.0 million of TDRs at December 31, 2021, $10.3 million or 57.4% were considered performing while the remaining $7.6 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 Item 8 “Financial Statements and Supplementary Data” in the Company’s 2021 Form 10-K.
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Net Charge-offs
For the quarter ended June 30, 2022, net charge-offs were $939,000 or 0.03% of total average loans on an annualized basis, compared to net charge-offs of less than 0.01% for the same quarter last year. For the six months ended June 30, 2022, net charge-offs were $935,000 or 0.01% of total average loans on an annualized basis, compared to $1.2 million or 0.02% for the same period last year. The net charge-offs of loans continue to be insignificant, driven by benign credit impacts since COVID-19 began.
Provision for Credit Losses
The Company recorded a provision for credit losses of $3.6 million for the quarter ended June 30, 2022, an increase of $31.0 million compared to the negative provision for credit losses of $27.4 million recorded during the same quarter of 2021. The provision for credit losses for the second quarter of 2022 reflected a provision of $2.6 million for loan and securities losses and a $1.0 million provision for unfunded commitments. The Company recorded a provision for credit losses of $6.4 million for the six months ended June 30, 2022, an increase of $47.4 million compared to the negative provision for credit losses of $41.0 million recorded during the same period last year. The provision for credit losses for the six months ended June 30, 2022 reflected a provision of $5.4 million for loan and securities losses and a $1.0 million provision for unfunded commitments. The Company released provisions for loan losses during the three and six month periods ended June 30, 2021 in light of improved economic and market conditions, compared to those that were incorporated into the Company’s ACL and provision for credit losses during 2020.
Allowance for Credit Losses
At June 30, 2022, the ACL was $113.2 million and included an ALLL of $104.2 million and an RUC of $9.0 million. The ACL increased $5.4 million from December 31, 2021, primarily due to increased uncertainty in the macroeconomic outlook and the impact of loan growth in the first six months of 2022.
The ACL as a percentage of the total loan portfolio increased slightly to 0.83% at June 30, 2021, compared to 0.82% at December 31, 2021.
The following table summarizes activity in the ALLL during the quarters ended (dollars in thousands):
Total ALLL
Total RUC
9,000
Total ACL
ALLL to total loans
0.76
ACL to total loans
0.83
0.82
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The following table summarizes the net-charge off activity by segment for the periods indicated (dollars in thousands):
Three months ended,
Six months ended,
Recoveries
Net charge-offs
(615)
(324)
(939)
(648)
(287)
(935)
Net charge-offs to average loans(1)
0.06
0.01
(220)
(69)
(217)
(1,241)
NM
0.00
(1) Annualized
The following table shows the ACL by loan segment and the percentage of the loan portfolio that the related ACL covers as of the quarters ended (dollars in thousands):
85,692
27,492
85,323
22,464
Loan %(1)
84.2
15.8
100.0
84.7
15.3
0.75
1.28
1.11
(1) The percentage represents the loan balance divided by total loans
The increase in the ACL for both loan segments is due to increased uncertainty in the macroeconomic outlook and the impact of loan growth in the first six months of 2022.
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As of June 30, 2022, total deposits were $16.1 billion, a decrease of $482.4 million or 5.9% annualized from December 31, 2021. Total interest-bearing deposits consist of NOW, money market, savings, and time deposit account balances. Total time deposit balances of $1.7 billion accounted for 15.8% of total interest-bearing deposits at June 30, 2022, compared to $1.9 billion and 16.3% at December 31, 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
33.3
31.3
NOW accounts
3,943,303
24.4
4,176,032
25.1
Money market accounts
3,956,050
24.6
4,249,858
25.6
Savings accounts
1,165,577
7.2
1,121,297
Time deposits of $250,000 and over
360,158
2.2
452,193
2.7
Other time deposits
1,342,009
8.3
1,404,364
8.5
Total Deposits (1)
(1) Includes uninsured deposits of $5.6 billion and $5.9 billion as of June 30, 2022 and December 31, 2021, respectively. Amounts are based on estimated amounts of uninsured deposits as of the reported period.
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; however, it had reduced the usage of purchased certificates of deposit, as compared to historical levels, due to increased customer deposit balances since the beginning of COVID-19. As of June 30, 2022, customer deposits have begun to decline, resulting in the Company purchasing $58.7 million of certificates of deposit. At December 31, 2021 the Company had no purchased certificates of deposit.
Maturities of uninsured time deposits in excess of FDIC limits as of June 30, 2022 and December 31, 2021 were as follows (dollars in thousands):
Within 3 Months
18,957
42,696
3 - 6 Months
50,701
30,313
6 - 12 Months
47,560
101,942
Over 12 Months
90,690
104,242
207,908
279,193
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Capital Resources
Capital resources represent funds, earned or obtained, over which financial institutions can exercise greater or longer control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company’s resources and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allow management to effectively leverage its capital to maximize return to shareholders.
On December 10, 2021, the Company’s Board of Directors authorized the Repurchase Program to purchase up to $100.0 million of the Company’s common stock through December 9, 2022 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. As part of the Repurchase Program, approximately 1.3 million shares (or $48.2 million) were repurchased during the six months ended June 30, 2022, and of these shares, approximately 649,000 shares (or $23.2 million) were repurchased during the second quarter of 2022. Approximately $51.8 million of share repurchases remain available under the Repurchase Program at June 30, 2022.
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.
The Federal Reserve requires the Company and the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 7.0% of risk-weighted assets; (ii) a Tier 1 capital ratio of 8.5% of risk-weighted assets; (iii) a total capital ratio of 10.5% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. These ratios, with the exception of the leverage ratio, include a 2.5% capital conservation buffer, which is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
On 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 began 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 regulatory capital and related ratios for the periods presented (2) (dollars in thousands):
Common equity Tier 1 capital
$ 1,592,401
$ 1,569,752
$ 1,574,570
Tier 1 capital
1,758,758
1,736,108
1,740,926
Tier 2 capital
456,853
437,435
354,132
Total risk-based capital
2,215,611
2,173,543
2,095,059
Risk-weighted assets
15,995,009
15,336,432
14,913,244
Capital ratios:
Common equity Tier 1 capital ratio
9.96%
10.24%
10.56%
Tier 1 capital ratio
11.00%
11.32%
11.67%
Total capital ratio
13.85%
14.17%
14.05%
Leverage ratio (Tier 1 capital to average assets)
9.26%
9.01%
9.20%
Capital conservation buffer ratio (1)
5.00%
5.32%
5.67%
Common equity to total assets
12.68%
12.91%
Tangible common equity to tangible assets (+)
6.78%
8.20%
8.40%
(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) All ratios and amounts at June 30, 2022 are estimates and subject to change pending the Company’s filing of its FR Y9-C. All other periods are presented as filed.
(+) 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.
NON-GAAP FINANCIAL MEASURES
In this Quarterly Report, the Company has provided supplemental performance measures on a tax-equivalent, tangible, operating, adjusted or pre-tax pre-provision basis. These non-GAAP financial measures are a supplement to GAAP, which is used to prepare the Company’s financial statements and should not be considered in isolation or as a substitute for comparable measures calculated in accordance with GAAP. In addition, the Company’s non-GAAP financial measures may not be comparable to non-GAAP financial measures of other companies. The Company uses the non-GAAP financial measures discussed herein in its analysis of the Company’s performance. The Company’s management believes that these non-GAAP financial measures provide additional understanding of ongoing operations, enhance comparability of results of operations with prior periods and show the effects of significant gains and charges in the periods presented without the impact of items or events that may obscure trends in the Company’s underlying performance.
Net interest income (FTE), which is used in computing net interest margin (FTE), provides valuable additional insight into the net interest margin 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
3,577
3,144
6,912
6,197
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)
180,630
172,158
345,049
341,094
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 basis 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)
19,989,356
Less: Ending goodwill
Less: Ending amortizable intangibles
49,917
Ending tangible assets (non-GAAP)
18,704,967
19,085,924
19,003,879
Tangible Common Equity
Ending Equity (GAAP)
Less: Perpetual preferred stock
166,357
Ending tangible common equity (non-GAAP)
1,268,287
1,564,842
1,595,763
Average equity (GAAP)
2,715,610
Less: Average goodwill
935,446
Less: Average amortizable intangibles
38,707
44,866
51,637
Less: Average perpetual preferred stock
166,356
Average tangible common equity (non-GAAP)
1,304,536
1,568,828
1,594,311
Common equity to total assets (GAAP)
11.32
12.68
12.91
Tangible common equity to tangible assets (non-GAAP)
6.78
8.20
8.40
Book value per share (GAAP)
29.95
33.80
33.30
Adjusted operating measures exclude the losses related to balance sheet repositioning (principally composed of losses on debt extinguishment), gains or losses on sale of securities, gain on the sale of DHFB, as well as branch closing and facility consolidation costs (principally composed of real estate, leases and other assets write downs, as well as severance associated with branch closing and corporate expense reduction initiatives). The Company believes these non-GAAP adjusted measures provide investors with important information about the continuing economic results of the organization’s operations. Prior periods in this Quarterly Report have been adjusted for previously announced branch closing and corporate expense reduction initiatives.
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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
Less: (Loss) gain on sale of securities, net of tax
Less: Gain on sale of DHFB, net of tax
7,984
Plus: Branch closing and facility consolidation costs, net of tax
(17)
4,351
713
Adjusted operating earnings (non-GAAP)
54,244
85,367
102,285
153,833
Less: Dividends on preferred stock
Adjusted operating earnings available to common shareholders (non-GAAP)
51,277
82,400
96,351
147,899
Weighted average common shares outstanding, diluted
Earnings per common share, diluted (GAAP)
Adjusted operating earnings per common share, diluted (non-GAAP)
0.69
1.88
Adjusted operating measures exclude the amortization of intangibles, losses related to balance sheet repositioning (principally composed of losses on debt extinguishment), gains or losses on sale of securities, as well as branch closing and facility consolidation costs (principally composed of real estate, leases and other assets write downs, as well as severance associated with branch closing and corporate expense reduction initiatives). The Company believes this adjusted measure provides investors with important information about the continuing economic results of the organization’s operations. Net interest income (FTE) , which is used in computing net interest margin (FTE)provides valuable additional insight into the net interest margin 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 is not affected by the FTE components.
Adjusted Operating Noninterest Expense & Noninterest Income
Noninterest expense (GAAP)
Less: Amortization of intangible assets
Less: Losses related to balance sheet repositioning
Less: Branch closing and facility consolidation costs
5,508
902
Adjusted operating noninterest expense (non-GAAP)
95,853
88,425
192,627
181,013
Less: (Loss) gain on sale of securities
Less: Gain on sale of DHFB
9,082
Adjusted operating noninterest income (non-GAAP)
29,206
59,359
59,373
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PPP adjustment impact excludes the unforgiven portion of PPP loans. The Company believes LHFI (net of deferred fees and costs), excluding PPP is useful to investors as it provides more clarity on the Company’s organic growth.
Adjusted Loans
Loans held for investment (net of deferred fees and costs)(GAAP)
13,697,929
Less: PPP adjustments (net of deferred fees and costs)
21,749
150,363
859,386
Total adjusted loans (non-GAAP)
13,633,659
13,045,480
12,838,543
Average loans held for investment (net of deferred fees and costs) (GAAP)
Less: Average PPP adjustments (net of deferred fees and costs)
43,391
288,204
1,187,641
1,248,147
Total adjusted average loans (non-GAAP)
13,482,138
12,794,208
12,784,298
13,340,728
12,769,630
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. The Company’s market risk is composed primarily of interest rate risk. The ALCO of the Company is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to this risk. The Company’s Board of Directors reviews and approves the guidelines established by ALCO.
Interest rate risk is monitored through the use of three complementary modeling tools: static gap analysis, earnings simulation modeling, and economic value simulation (net present value estimation). Each of these models measures changes in a variety of interest rate scenarios. While each of the interest rate risk models has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Static gap, which measures aggregate re-pricing values, is less utilized because it does not effectively measure the options risk impact on the Company and is not addressed here. Earnings simulation and economic value models, which more effectively measure the cash flow and optionality impacts, are utilized by management on a regular basis and are explained below.
The Company determines the overall magnitude of interest sensitivity risk and then formulates policies and practices governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, the states of the national, regional and local economies, and other financial and business risk factors. The Company uses simulation modeling to measure and monitor the effect of various interest rate scenarios and business strategies on net interest income. This modeling reflects interest rate changes and the related impact on net interest income and net income over specified time horizons.
Earnings Simulation Analysis
Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analyses, such as the static gap analysis discussed above.
Assumptions used in the model are derived from historical trends and management’s outlook and include loan and deposit growth rates and projected yields and rates. These assumptions may not materialize and unanticipated events and circumstances may occur. The model also does not take into account any future actions of management to mitigate the impact of interest rate changes. Such assumptions are monitored by management and periodically adjusted as appropriate. All maturities, calls, and prepayments in the securities portfolio are assumed to be reinvested in like instruments. MBS prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning.
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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 bps up to 300 bps. 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 June 30, 2022, December 31, 2021, and June 30, 2021:
Change In Net Interest Income
Change in Yield Curve:
+300 basis points
19.04
30.15
20.74
+200 basis points
12.81
20.39
13.82
+100 basis points
6.54
10.33
6.81
Most likely rate scenario
-100 basis points
(7.33)
(9.20)
(4.58)
-200 basis points
(16.45)
(13.62)
(5.48)
Asset sensitivity indicates that in a rising interest rate environment, the Company’s net interest income would increase and in a decreasing interest rate environment, the Company’s net interest income would decrease. Liability sensitivity indicates that in a rising interest rate environment, the Company’s net interest income would decrease and in a decreasing interest rate environment, the Company’s net interest income would increase.
From a net interest income perspective, the Company was generally less asset sensitive as of June 30, 2022, compared to its position as of June 30, 2021. This shift is in part due to the changing market characteristics of certain loan and deposit products and in part due to various other balance sheet strategies. The Company would expect net interest income to increase with an immediate increase or shock in market rates. In the decreasing interest rate environments, the Company would expect a decline in net interest income as interest-earning assets re-price at lower rates and interest-bearing deposits remain 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.
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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 June 30, 2022, December 31, 2021, and June 30, 2021:
Change In Economic Value of Equity
(8.07)
(6.85)
(5.43)
(3.55)
(2.07)
(1.22)
2.03
0.97
(4.82)
(3.84)
(2.45)
(12.89)
(4.12)
As of June 30, 2022, the Company’s economic value of equity is generally less asset sensitive in a rising interest rate environment compared to its position as of June 30, 2021 primarily due to the composition of the Consolidated Balance Sheets and due in part to the pricing characteristics and assumptions of certain deposits.
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 June 30, 2022. 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 ensure 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 June 30, 2022, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
In designing and evaluating the Company’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control Over Financial Reporting
Management has taken measures to maintain the internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2022. There have been no changes during the quarter ended June 30, 2022 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, subject to the potential outcomes of previously disclosed proceedings. There have been no material changes with respect to the Company’s previously disclosed proceedings.
ITEM 1A – RISK FACTORS
During the quarter ended June 30, 2022, there have been no material changes from the risk factors previously disclosed under Part I, Item 1A. “Risk Factors” in the Company’s 2021 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 in the Company’s 2021 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 Repurchases
On December 10, 2021, the Company’s Board of Directors authorized a new share repurchase program (the “Repurchase Program”) to purchase up to $100.0 million of the Company’s common stock through December 9, 2022 in open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and /or Rule 10b-18 under the Exchange Act. The Repurchase Program permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. The actual means and timing of any shares purchased under the Repurchase Program will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. The Repurchase Program does not obligate the Company to purchase any particular number of shares.
The following information describes the Company’s common stock repurchases for the three months ended June 30, 2022:
Period
Total number of shares purchased(1)
Average price paid per share ($)(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)
April 1 - April 30, 2022
450,774
36.26
449,275
58,689,927
May 1 - May 31, 2022
201,046
34.62
199,933
51,767,233
June 1 - June 30, 2022
6,732
33.92
658,552
35.74
649,208
_________________________________________
(1) For the three months ended June 30, 2022, 9,344 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
Agreement and Plan of Reorganization, dated as of October 4, 2018, as amended on December 7, 2018, by and between Union Bankshares Corporation and Access National Corporation (incorporated by reference to Annex A to Form S-4/A Registration Statement filed on December 10, 2018; SEC file no. 333-228455).
3.1
Amended and Restated Articles of Incorporation of Atlantic Union Bankshares Corporation, effective May 7, 2020 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on May 7, 2020).
3.1.1
Articles of Amendment designating the 6.875% Perpetual Non-Cumulative Preferred Stock, Series A, effective June 9, 2020 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on June 9, 2020).
3.2
Amended and Restated Bylaws of Atlantic Union Bankshares Corporation, effective as of December 5, 2019 (incorporated by reference to Exhibit 3.3 to Annual Report on Form 10-K filed on February 25, 2020).
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 June 30, 2022 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 June 30, 2022, 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: August 4, 2022
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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