Allowance for Loan and Lease Losses

6 Months Ended

Jun. 30, 2020

NOTE E - ALLOWANCE FOR CREDIT LOSSES (“ACL”)

As noted in Note A - Accounting Polices and Basis of Presentation, BancShares determined SBA-PPP loans have zero expected credit losses and as such these are excluded from ACL disclosures included in the following tables.

Activity in the ACL by class of loans is summarized as follows:


	Three months ended June 30, 2020
(Dollars in thousands)	Construction and land development - commercial		Owner occupied commercial mortgage		Non-owner occupied commercial mortgage		Commercial and industrial and leases		Residential mortgage		Revolving mortgage		Construction and land development - consumer		Consumer auto		Consumer other		PCD		Total
Allowance for credit losses:
Balance at April 1	$	2,290	$	22,970	$	16,531	$	30,619	$	38,366	$	24,557	$	1,140	$	5,769	$	40,101	$	26,916	$	209,259
Provision (credits)	4,705		(721)		5,542		(2,898)		4,909		2,211		486		4,042		2,034		242		20,552

Charge-offs	(138)		—		(8)		(3,869)		(460)		(495)		—		(1,255)		(4,447)		(1,392)		(12,064)
Recoveries	49		240		84		781		57		367		14		342		1,607		1,162		4,703
Balance at June 30	$	6,906	$	22,489	$	22,149	$	24,633	$	42,872	$	26,640	$	1,640	$	8,898	$	39,295	$	26,928	$	222,450

	Three months ended June 30, 2019
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial and leases		Other		Residential mortgage		Revolving mortgage		Construction and land development - consumer		Consumer		PCD		Total
Balance at April 1	$	37,476	$	45,281	$	2,399	$	57,025	$	2,167	$	16,987	$	21,495	$	2,473	$	34,492	$	8,980	$	228,775
Provision (credits)	(5,544)		3,714		(57)		2,699		(174)		371		(328)		277		4,877		(637)		5,198

Charge-offs	(28)		(89)		—		(3,422)		(31)		(478)		(493)		—		(6,061)		—		(10,602)
Recoveries	40		56		—		599		221		52		447		—		1,797		—		3,212
Balance at June 30	$	31,944	$	48,962	$	2,342	$	56,901	$	2,183	$	16,932	$	21,121	$	2,750	$	35,105	$	8,343	$	226,583

	Six months ended June 30, 2020
(Dollars in thousands)	Construction and land development - commercial		Owner occupied commercial mortgage		Non-owner occupied commercial mortgage		Commercial and industrial and leases		Residential mortgage		Revolving mortgage		Construction and land development - consumer		Consumer auto		Consumer other		PCD		Total
Balance at December 31	$	33,213	$	36,444	$	11,102	$	61,610	$	18,232	$	19,702	$	2,709	$	4,292	$	30,301	$	7,536	$	225,141
Adoption of ASC 326	(31,061)		(19,316)		460		(37,637)		17,118		3,665		(1,291)		1,100		10,037		19,001		(37,924)
Balance at January 1	2,152		17,128		11,562		23,973		35,350		23,367		1,418		5,392		40,338		26,537		187,217
Provision (credits)	4,756		5,386		10,498		7,525		8,502		3,515		263		5,000		5,808		(2,346)		48,907
Initial allowance on PCD loans	—		—		—		—		—		—		—		—		—		1,193		1,193
Charge-offs	(138)		(320)		(8)		(8,918)		(1,260)		(1,080)		(70)		(2,199)		(9,817)		(2,515)		(26,325)
Recoveries	136		295		97		2,053		280		838		29		705		2,966		4,059		11,458
Balance at June 30	$	6,906	$	22,489	$	22,149	$	24,633	$	42,872	$	26,640	$	1,640	$	8,898	$	39,295	$	26,928	$	222,450

	Six months ended June 30, 2019
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial and leases		Other		Residential mortgage		Revolving mortgage		Construction and land development - non - commercial		Consumer		PCI		Total
Balance at January 1	$	35,270	$	43,451	$	2,481	$	55,620	$	2,221	$	15,472	$	21,862	$	2,350	$	35,841	$	9,144	$	223,712
Provision (credits)	(3,425)		6,085		(140)		5,424		(672)		1,879		(119)		400		8,317		(801)		16,948

Charge-offs	(72)		(850)		—		(5,280)		(31)		(644)		(1,456)		—		(12,423)		—		(20,756)
Recoveries	171		276		1		1,137		665		225		834		—		3,370		—		6,679
Balance at June 30	$	31,944	$	48,962	$	2,342	$	56,901	$	2,183	$	16,932	$	21,121	$	2,750	$	35,105	$	8,343	$	226,583

Upon adoption of ASC 326, BancShares recorded a net decrease of $37.9 million in the ACL which included a decrease of $56.9 million in the ACL on non-PCD loans, offset by an increase of $19.0 million in the ACL on PCD loans. The largest changes as a result of adoption were decreases in the ACL on commercial loan segments as these portfolios have exhibited strong historical credit performance and have relatively short average lives. The reduction in ACL on these segments was partially offset by increases in ACL on our consumer loan segments primarily due to their longer average lives. The increase in the ACL on PCD loans was primarily the result of reallocating credit discount from loan balances into ACL.

The ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality. For the period ended June 30, 2020 the primary reason for the ACL change since the adoption of ASC 326, was a $36.1 million reserve build due to the potential economic impact of COVID-19 and its estimated impact on credit losses. Forecasted economic conditions are developed using third party macroeconomic scenarios adjusted based on management’s expectations over a forecast period of two years. Assumptions revert to long term historic averages over a one year period. Significant macroeconomic factors used in estimating the expected losses include unemployment, gross domestic product, home price index and commercial real estate index. Our model results included baseline, adverse and upside scenarios, as well as management’s expectation of borrower performance based upon COVID-19 residual risk by industry and geography. Expected loss estimates considered the potential impact of slower economic activity and elevated unemployment, as well as mitigating impacts from the government stimulus and loan modification programs. These loss estimates were also influenced by BancShares strong credit quality, historically low net charge-offs and recent credit trends, which remained stable through the quarter ended June 30, 2020.

BancShares individually reviews loans greater than $500 thousand that are determined to be collateral-dependent. These collateral-dependent loans are evaluated based on the fair value of the underlying collateral as repayment of the loan is expected to be made through the operation or sale of the collateral. Commercial and industrial loans and leases are collateralized by business assets, while the remaining loan classes are collateralized by real property.

The following table presents information on collateral-dependent loans by class and includes the amortized cost of collateral-dependent loans and leases, the net realizable value of the collateral, the extent to which collateral secures collateral-dependent loans and the associated ACL as of June 30, 2020 were as follows:


(Dollars in thousands)	Collateral-Dependant Loans		Net Realizable Value of Collateral		Collateral Coverage		Allowance for Credit Losses
Commercial loans:
Construction and land development	$	2,862	$	3,224	112.6	%	$	—
Owner occupied commercial mortgage	10,690		24,546		229.6		—
Non-owner occupied commercial mortgage	6,995		11,133		159.2		—
Commercial and industrial and leases	—		—		—		—
Total commercial loans	20,547		38,903		189.3		—
Consumer:
Residential mortgage	19,445		25,599		131.6		75
Revolving mortgage	310		310		100.0		—
Construction and land development	—		—		—		—


Total consumer loans	19,755		25,909		131.2		75
Total non-PCD loans	40,302		64,812		160.8		75
PCD	22,013		33,821		153.6		235
Total collateral-dependent loans	$	62,315	$	98,633	158.3	%	$	310

Collateral-dependent nonaccrual loans with no recorded allowance totaled $58.8 million as of June 30, 2020. All other nonaccrual loans have a recorded allowance.

The following tables present the allowance and recorded investment in loans and leases by class of loans, as well as the associated impairment method at December 31, 2019:















	December 31, 2019
(Dollars in thousands)	Construction and land development - commercial		Commercial mortgage		Other commercial real estate		Commercial and industrial and leases		Other		Residential mortgage		Revolving mortgage		Construction and land development - non- commercial		Consumer		Total
Non-PCI Loans
Allowance for loan and lease losses:
ALLL for loans and leases individually evaluated for impairment	$	463	$	3,650	$	39	$	1,379	$	103	$	3,278	$	2,722	$	174	$	1,107	$	12,915
ALLL for loans and leases collectively evaluated for impairment	32,750		41,685		2,172		57,995		2,133		14,954		16,980		2,535		33,486		204,690
Total allowance for loan and lease losses	$	33,213	$	45,335	$	2,211	$	59,374	$	2,236	$	18,232	$	19,702	$	2,709	$	34,593	$	217,605

Loans and leases:
Loans and leases individually evaluated for impairment	$	4,655	$	70,149	$	1,268	$	12,182	$	639	$	60,442	$	28,869	$	3,882	$	3,513	$	185,599
Loans and leases collectively evaluated for impairment	1,008,799		12,212,486		540,760		4,391,610		309,454		5,233,475		2,310,203		353,503		1,776,891		28,137,181
Total loan and leases	$	1,013,454	$	12,282,635	$	542,028	$	4,403,792	$	310,093	$	5,293,917	$	2,339,072	$	357,385	$	1,780,404	$	28,322,780

The following table presents the PCI allowance and recorded investment in loans at December 31, 2019:


(Dollars in thousands)	December 31, 2019
ALLL for loans acquired with deteriorated credit quality	$	7,536
Loans acquired with deteriorated credit quality	558,716

At December 31, 2019, $139.4 million of PCI loans experienced an adverse change in expected cash flows since the date of acquisition.

The following tables provide information on non-PCI impaired loans and leases, exclusive of loans and leases collectively evaluated:




















	December 31, 2019
(Dollars in thousands)	With a recorded allowance		With no recorded allowance		Total		Unpaid principal balance		Related allowance recorded
Non-PCI impaired loans and leases:
Commercial:
Construction and land development	$	1,851	$	2,804	$	4,655	$	5,109	$	463
Commercial mortgage	42,394		27,755		70,149		74,804		3,650
Other commercial real estate	318		950		1,268		1,360		39
Commercial and industrial and leases	7,547		4,635		12,182		13,993		1,379
Other	406		233		639		661		103
Total commercial loans	52,516		36,377		88,893		95,927		5,634
Noncommercial:
Residential mortgage	48,796		11,646		60,442		64,741		3,278
Revolving mortgage	26,104		2,765		28,869		31,960		2,722
Construction and land development	2,470		1,412		3,882		4,150		174
Consumer	3,472		41		3,513		3,821		1,107
Total noncommercial loans	80,842		15,864		96,706		104,672		7,281
Total non-PCI impaired loans and leases	$	133,358	$	52,241	$	185,599	$	200,599	$	12,915

Non-PCI impaired loans less than $500,000 that were collectively evaluated for impairment totaled $41.0 million at December 31, 2019.

The following tables show the average non-PCI impaired loan balance and the interest income recognized by loan class for the six months ended June 30, 2019:




















	Three months ended June 30, 2019						Six months ended June 30, 2019
(Dollars in thousands)	Average balance		Interest income recognized		Average balance		Interest income recognized
Non-PCI impaired loans and leases:
Commercial:
Construction and land development	$	2,102	$	6	$	2,125	$	34
Commercial mortgage	58,906		538		57,768		1,102
Other commercial real estate	519		6		602		14
Commercial and industrial and leases	11,348		113		10,674		213
Other	328		2		322		4
Total commercial	73,203		665		71,491		1,367
Noncommercial:
Residential mortgage	48,490		317		45,558		642
Revolving mortgage	29,623		256		29,183		503
Construction and land development	3,547		32		3,647		68
Consumer	3,014		31		3,007		60
Total noncommercial	84,674		636		81,395		1,273
Total non-PCI impaired loans and leases	$	157,877	$	1,301	$	152,886	$	2,640

Troubled Debt Restructurings

BancShares accounts for certain loan modifications or restructurings as TDRs. In general, the modification or restructuring of a loan is considered a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, a concession is granted to the borrower that creditors would not otherwise consider. Concessions may relate to the contractual interest rate, maturity date, payment structure or other actions. Within our allowance for credit loss models, TDRs are not individually evaluated unless determined to be collateral-dependent and are included in the definition of default which provides for a 100% probability of default applied within the models. As a result, subsequent changes in default status do not impact the calculation of the allowance for credit losses on TDR loans.

The Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus was published by banking regulators in April 2020 to clarify expectations around loan modifications and the determination of TDRs for borrowers experiencing COVID-19-related financial difficulty. BancShares applied this regulatory guidance during its TDR identification process for short-term loan forbearance agreements as a result of COVID-19 and in most cases is not recording these as TDRs.

The following tables provides a summary of total TDRs by accrual status:


	June 30, 2020
(Dollars in thousands)	Accruing		Nonaccruing		Total
Commercial loans:
Construction and land development	$	1,072	$	1,304	$	2,376
Owner occupied commercial mortgage	35,080		12,682		47,762
Non-owner occupied commercial mortgage	7,343		313		7,656
Commercial and industrial and leases	29,463		2,803		32,266
Total commercial loans	72,958		17,102		90,060
Consumer:
Residential mortgage	35,439		14,167		49,606
Revolving mortgage	22,342		7,012		29,354
Construction and land development	2,355		1,452		3,807
Consumer auto	1,989		796		2,785
Consumer other	1,091		139		1,230
Total consumer loans	63,216		23,566		86,782
PCD loans	18,639		6,024		24,663
Total loans	$	154,813	$	46,692	$	201,505


	December 31, 2019
(Dollars in thousands)	Accruing		Nonaccruing		Total
Commercial loans:
Construction and land development	$	487	$	2,279	$	2,766
Commercial mortgage	50,819		11,116		61,935
Other commercial real estate	571		—		571
Commercial and industrial and leases	9,430		2,409		11,839
Other	320		105		425
Total commercial loans	61,627		15,909		77,536
Noncommercial:
Residential mortgage	41,813		16,048		57,861
Revolving mortgage	21,032		7,367		28,399
Construction and land development	1,452		2,430		3,882
Consumer	2,826		688		3,514
Total noncommercial loans	67,123		26,533		93,656
Total loans	$	128,750	$	42,442	$	171,192

Total TDRs included $17.2 million of PCI TDRs at December 31, 2019.

The following table provides the types of modifications designated as TDRs during the six months ended June 30, 2020 and June 30, 2019, as well as a summary of loans modified as a TDR during the twelve month periods ended June 30, 2020 and June 30, 2019 that subsequently defaulted during the six months ended June 30, 2020 and June 30, 2019. BancShares defines payment default as movement of the TDR to nonaccrual status, which is generally 90 days past due for TDRs, foreclosure or charge-off, whichever occurs first.


	Three months ended June 30, 2020											Three months ended June 30, 2019
	All restructurings				Restructurings with payment default					All restructurings				Restructurings with payment default
(Dollars in thousands)	Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end			Number of Loans	Recorded investment at period end
Loans and leases
Interest only	7	$	15,352	3	$	3,398	4	$	4,343		—	$	—
Loan term extension	27	2,925		13	1,459		4	998			2	183
Below market interest rate	69	17,291		18	1,069		67	6,979			30	2,612
Discharged from bankruptcy	43	1,472		9	311		40	5,054			30	3,106
Total restructurings	146	$	37,040	43	$	6,237	115	$	17,374		62	$	5,901

	Six months ended June 30, 2020											Six months ended June 30, 2019
	All restructurings				Restructurings with payment default					All restructurings				Restructurings with payment default
(Dollars in thousands)	Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end		Number of Loans	Recorded investment at period end			Number of Loans	Recorded investment at period end
Loans and leases
Interest only	17	$	19,328	3	$	3,398	4	$	4,343		2	$	3,203
Loan term extension	33	3,657		16	1,667		8	1,437			4	534
Below market interest rate	157	25,389		46	2,324		125	11,063			61	4,645
Discharged from bankruptcy	110	5,640		44	1,507		102	7,679			53	3,948
Total restructurings	317	$	54,014	109	$	8,896	239	$	24,522		120	$	12,330

For the six months ended June 30, 2020 and June 30, 2019, the pre-modification and post-modification outstanding amortized cost of loans modified as TDRs were not materially different.