Allowance for Credit Losses

6 Months Ended

Jun. 30, 2021

ALLOWANCE FOR CREDIT LOSSES

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, 2021, the ACL change since December 31, 2020 was driven by improvement in macroeconomic factors, continued strong credit performance and low net charge-offs. Forecasted economic conditions are developed using third party macroeconomic scenarios adjusted based on management’s expectations over a forecast period of two years. For most pools, BancShares uses a 12-month straight-line reversion period to historical averages for model inputs; however for the consumer other, consumer card and commercial card pools, immediate reversion to historical net loss rates is utilized. Significant macroeconomic factors used in estimating the expected losses include unemployment, gross domestic product, home price index and commercial real estate index. BancShares’ ACL forecast considers a range of economic scenarios from an upside scenario to a severely adverse scenario, but the June 30, 2021 ACL forecast was calculated using the consensus baseline scenario. This scenario showed improvements in the most significant economic factors compared to what was used to generate the December 31, 2020 ACL. These loss estimates were also influenced by BancShares’ strong credit quality, low net charge-offs.

Activity in the ACL by portfolio segment is summarized as follows:


	Three months ended June 30, 2021
(Dollars in thousands)	Commercial		Consumer		PCD		Total
Allowance for credit losses:
Balance at April 1	$	74,864	$	112,852	$	22,935	$	210,651
Provision (credit)	3,279		(17,481)		(5,401)		(19,603)

Charge-offs	(3,044)		(4,028)		(456)		(7,528)
Recoveries	983		2,929		1,662		5,574
Balance at June 30	$	76,082	$	94,272	$	18,740	$	189,094

	Three months ended June 30, 2020
(Dollars in thousands)	Commercial		Consumer		PCD		Total
Balance at April 1	$	72,410	$	109,933	$	26,916	$	209,259
Provision (credit)	6,628		13,682		242		20,552

Charge-offs	(4,015)		(6,657)		(1,392)		(12,064)
Recoveries	1,154		2,387		1,162		4,703
Balance at June 30	$	76,177	$	119,345	$	26,928	$	222,450

	Six months ended June 30, 2021
(Dollars in thousands)	Commercial		Consumer		PCD		Total
Balance at January 1	$	80,842	$	119,485	$	23,987	$	224,314
Provision (credit)	(643)		(22,985)		(6,949)		(30,577)

Charge-offs	(6,375)		(8,497)		(1,219)		(16,091)
Recoveries	2,258		6,269		2,921		11,448
Balance at June 30	$	76,082	$	94,272	$	18,740	$	189,094

	Six months ended June 30, 2020
(Dollars in thousands)	Commercial		Consumer		PCD		Total
Balance at December 31	$	142,369	$	75,236	$	7,536	$	225,141
Adoption of ASC 326	(87,554)		30,629		19,001		(37,924)
Balance at January 1	54,815		105,865		26,537		187,217
Provision (credit)	28,165		23,088		(2,346)		48,907
Initial allowance on PCD loans	—		—		1,193		1,193
Charge-offs	(9,384)		(14,426)		(2,515)		(26,325)
Recoveries	2,581		4,818		4,059		11,458
Balance at June 30	$	76,177	$	119,345	$	26,928	$	222,450

BancShares records an allowance for credit losses on unfunded commitments within other liabilities. Activity in the allowance for credit losses for unfunded commitments is summarized as follows:


	Three months ended June 30				Six months ended June 30
(Dollars in thousands)	2021		2020		2021		2020
Allowance for credit losses:
Beginning balance	$	11,571	$	10,512	$	12,814	$	1,055
Adoption of ASC 326	—		—		—		8,885
Adjusted beginning balance	$	11,571	$	10,512	$	12,814	$	9,940
Provision (credit)	(468)		3,173		(1,711)		3,745
Ending balance	11,103		13,685		11,103		13,685

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, 2021 and December 31, 2020 were as follows:


	June 30, 2021
(Dollars in thousands)	Collateral-Dependant Loans		Net Realizable Value of Collateral		Collateral Coverage		Allowance for Credit Losses
Commercial loans:
Construction and land development	$	1,425	$	1,976	138.7	%	$	—
Owner occupied commercial mortgage	11,288		15,591		138.1		—
Non-owner occupied commercial mortgage	5,405		8,017		148.3		—
Commercial and industrial and leases	7,736		9,672		125.0		230
Total commercial loans	25,854		35,256		136.4		230
Consumer:
Residential mortgage	15,237		23,411		153.6		—
Revolving mortgage	1,385		1,724		124.5		—



Total consumer loans	16,622		25,135		151.2		—
PCD loans	19,894		34,495		173.4		—
Total collateral-dependent loans	$	62,370	$	94,886	152.1	%	$	230

	December 31, 2020
(Dollars in thousands)	Collateral-Dependant Loans		Net Realizable Value of Collateral		Collateral Coverage		Allowance for Credit Losses
Commercial loans:
Construction and land development	$	1,424	$	1,795	126.1	%	$	—
Owner occupied commercial mortgage	9,792		14,253		145.6		—
Non-owner occupied commercial mortgage	5,556		7,577		136.4		—

Total commercial loans	16,772		23,625		140.9		—
Consumer:
Residential mortgage	23,011		29,775		129.4		131





PCD loans	19,042		27,872		146.4		—
Total collateral-dependent loans	$	58,825	$	81,272	138.2	%	$	131

Collateral-dependent nonaccrual loans with no recorded allowance totaled $59.2 million and $57.5 million as of June 30, 2021 and December 31, 2020, respectively. All other nonaccrual loans have a recorded allowance.

Troubled Debt Restructurings

BancShares accounts for certain loan modifications or restructurings as troubled debt restructurings (“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 BancShares’ ACL loss models, TDRs are not individually evaluated unless determined to be collateral-dependent. Consumer TDRs 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 credit quality metrics do not impact the calculation of the ACL on consumer TDRs. For commercial TDRs, the TDR distinction does impact the calculation of ACL, as the standard definition of default is utilized.

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 financial difficulty due to COVID-19. 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 did not record these as TDRs.

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


	June 30, 2021						December 31, 2020
(Dollars in thousands)	Accruing		Nonaccruing		Total		Accruing		Nonaccruing		Total
Commercial loans:
Construction and land development	$	408	$	38	$	446	$	578	$	54	$	632
Owner occupied commercial mortgage	37,216		12,097		49,313		37,574		10,889		48,463
Non-owner occupied commercial mortgage	20,364		3,474		23,838		18,336		1,649		19,985
Commercial and industrial and leases	12,761		8,569		21,330		29,131		3,528		32,659
Total commercial loans	70,749		24,178		94,927		85,619		16,120		101,739
Consumer:
Residential mortgage	21,079		17,220		38,299		29,458		19,380		48,838
Revolving mortgage	18,038		7,196		25,234		20,124		7,128		27,252
Construction and land development	2,482		289		2,771		1,573		9		1,582
Consumer auto	2,134		653		2,787		2,018		696		2,714
Consumer other	841		56		897		955		137		1,092
Total consumer loans	44,574		25,414		69,988		54,128		27,350		81,478
PCD loans	23,981		9,073		33,054		17,617		7,346		24,963
Total loans	$	139,304	$	58,665	$	197,969	$	157,364	$	50,816	$	208,180

The following table provides the types of modifications designated as TDRs during the three and six months ended June 30, 2021 and 2020.


	Three months ended June 30, 2021			Three months ended June 30, 2020
	All restructurings				All restructurings
(Dollars in thousands)	Number of Loans	Recorded investment at period end				Number of Loans	Recorded investment at period end
Loans and leases
Interest only	4	$	3,353			7	$	15,352
Loan term extension	41	4,053				27	2,925
Below market interest rate	37	7,730				69	17,291
Discharged from bankruptcy	39	6,421				43	1,472
Total restructurings	121	$	21,557			146	$	37,040

	Six months ended June 30, 2021			Six months ended June 30, 2020
	All restructurings				All restructurings
(Dollars in thousands)	Number of Loans	Recorded investment at period end				Number of Loans	Recorded investment at period end
Loans and leases
Interest only	10	$	10,118			17	$	19,328
Loan term extension	66	7,700				33	3,657
Below market interest rate	90	15,643				157	25,389
Discharged from bankruptcy	84	10,191				110	5,640
Total restructurings	250	$	43,652			317	$	54,014

For the six months ended June 30, 2021 and 2020, the pre-modification and post-modification outstanding amortized cost of loans modified as TDRs were not materially different.