Allowance for Loan and Lease Losses

3 Months Ended

Mar. 31, 2020

NOTE E - ALLOWANCE FOR CREDIT LOSSES

Upon adoption of ASC 326, there were changes to certain non-PCD loan classes to better differentiate credit characteristics and align with our ACL models. Within the commercial segment, owner occupied and non-owner occupied commercial real estate were segregated into separate classes. Similarly, consumer auto was segregated into its own class within the consumer segment. Information for reporting periods beginning after January 1, 2020 are presented in accordance with ASC 326 and reflect changes to the respective classes, while prior period amounts continue to be reported in accordance with previously applicable GAAP and have not been reclassified to conform to the current financial statement presentation.

Activity in the allowance for credit losses by class of loans is summarized as follows:



	Three months ended March 31, 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)	51			6,107			4,956			10,423			3,593			1,304			(223		)	958			3,774			(2,588		)	28,355
Initial allowance on PCD loans	—			—			—			—			—			—			—			—			—			1,193			1,193
Charge-offs	—			(320		)	—			(5,049		)	(800		)	(585		)	(70		)	(944		)	(5,370		)	(1,123		)	(14,261		)
Recoveries	87			55			13			1,272			223			471			15			363			1,359			2,897			6,755
Balance at March 31	$	2,290		$	22,970		$	16,531		$	30,619		$	38,366		$	24,557		$	1,140		$	5,769		$	40,101		$	26,916		$	209,259

	Three months ended March 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			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)	2,119			2,371			(83		)	2,725			(498		)	1,508			209			123			3,440			(164		)	11,750
Charge-offs	(44		)	(761		)	—			(1,858		)	—			(166		)	(963		)	—			(6,362		)	—			(10,154		)
Recoveries	131			220			1			538			444			173			387			—			1,573			—			3,467
Balance at March 31	$	37,476		$	45,281		$	2,399		$	57,025		$	2,167		$	16,987		$	21,495		$	2,473		$	34,492		$	8,980		$	228,775

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.

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 quarter ended March 31, 2020 the primary reason for the ACL change since the adoption of ASC 326, was a $21.5 million increase due to the potential economic impact of the novel coronavirus (“COVID-19”) and its estimated impact on credit losses during the quarter. Within our forecast period of 24 months, forecasts varied widely for key macroeconomic variables (unemployment, gross domestic product, home price index, and commercial real estate index) used in the ACL models. Expected loss estimates considered the potential impact of slower economic activity with increasing unemployment, as well as potential 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 March 31, 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 March 31, 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	$	3,522	$	8,928	253.5	%	$	215
Owner occupied commercial mortgage	9,139		21,686		237.3		—
Non-owner occupied commercial mortgage	4,617		10,255		222.1		—
Commercial and industrial and leases	439		439		100.0		—
Total commercial loans	17,717		41,308		233.2		215
Consumer:
Residential mortgage	16,952		24,599		145.1		117
Revolving mortgage	428		452		105.6		—
Construction and land development	1,412		1,558		110.3		—
Total consumer loans	18,792		26,609		141.6		117
Total non-PCD loans	36,509		67,917		186.0		332
PCD	11,457		19,554		170.7		697
Total collateral-dependent loans	$	47,966	$	87,471	182.4	%	$	1,029

Collateral-dependent nonaccrual loans with no recorded allowance totaled $43.6 million as of March 31, 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 three months ended March 31, 2019:



	Three months ended March 31, 2019
(Dollars in thousands)	Average balance		Interest income recognized
Non-PCI impaired loans and leases:
Commercial:
Construction and land development	$	2,147	$	28
Commercial mortgage	56,629		564
Other commercial real estate	685		8
Commercial and industrial and leases	10,000		100
Other	315		2
Total commercial	69,776		702
Noncommercial:
Residential mortgage	42,626		325
Revolving mortgage	28,742		247
Construction and land development	3,747		36
Consumer	3,000		29
Total noncommercial	78,115		637
Total non-PCI impaired loans and leases	$	147,891	$	1,339

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.

Recent legislation and regulatory requirements have allowed for relief and provided guidance around the determination of TDRs for new loan modifications and forbearances for borrowers experiencing COVID-19-related financial difficulty. BancShares has utilized this guidance to identify new TDRs beginning in the first quarter of 2020 and did not identify new modifications as TDRs for those borrowers experiencing COVID-19-related financial difficulty.

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



	March 31, 2020
(Dollars in thousands)	Accruing		Nonaccruing		Total
Commercial loans:
Construction and land development	$	1,086	$	1,537	$	2,623
Owner occupied commercial mortgage	33,704		10,153		43,857
Non-owner occupied commercial mortgage	11,438		319		11,757
Commercial and industrial and leases	9,914		2,607		12,521
Total commercial loans	56,142		14,616		70,758
Consumer:
Residential mortgage	35,288		15,820		51,108
Revolving mortgage	22,677		7,206		29,883
Construction and land development	2,376		2,701		5,077
Consumer auto	2,018		718		2,736
Consumer other	1,061		124		1,185
Total consumer loans	63,420		26,569		89,989
PCD Loans	14,061		4,997		19,058
Total loans	$	133,623	$	46,182	$	179,805



	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 three months ended March 31, 2020 and March 31, 2019, as well as a summary of loans modified as a TDR during the twelve month periods ended March 31, 2020 and March 31, 2019 that subsequently defaulted during the three months ended March 31, 2020 and March 31, 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 March 31, 2020						Three months ended March 31, 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	10	$	3,986	—	$	—	—	$	—	—	$	—
Loan term extension	6	794		3	263		4	608		3	541
Below market interest rate	88	8,165		29	1,421		96	4,962		38	2,219
Discharged from bankruptcy	68	5,032		28	1,767		50	2,420		25	1,144
Total restructurings	172	$	17,977	60	$	3,451	150	$	7,990	66	$	3,904

For the three months ended March 31, 2020 and March 31, 2019, the pre-modification and post-modification outstanding amortized cost of loans modified as TDRs were not materially different.