Allowance for Loan and Lease Losses

9 Months Ended

Sep. 30, 2020

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.

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 September 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 consider baseline, adverse and upside scenarios. To calculate the ACL, we utilized the baseline scenario, which includes improvements to the most significant assumptions and the impact from government stimulus. This result was calibrated using management’s expectation of borrower performance based upon COVID-19 residual risk by industry and geography. These loss estimates were also influenced by BancShares strong credit quality, low net charge-offs and recent credit trends, which remained stable through the quarter ended September 30, 2020.

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


	Three months ended September 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 July 1	$	6,906	$	22,489	$	22,149	$	24,633	$	42,872	$	26,640	$	1,640	$	8,898	$	39,295	$	26,928	$	222,450
Provision (credits)	120		625		667		3,381		837		(958)		(54)		708		1,341		(2,625)		4,042

Charge-offs	—		(87)		—		(3,241)		(253)		(359)		—		(824)		(3,673)		(495)		(8,932)
Recoveries	264		65		10		1,999		275		336		23		401		1,684		1,319		6,376
Balance at September 30	$	7,290	$	23,092	$	22,826	$	26,772	$	43,731	$	25,659	$	1,609	$	9,183	$	38,647	$	25,127	$	223,936

	Three months ended September 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 July 1	$	31,944	$	48,962	$	2,342	$	56,901	$	2,183	$	16,932	$	21,121	$	2,750	$	35,105	$	8,343	$	226,583
Provision (credits)	208		(1,337)		(90)		4,714		54		1,024		(153)		148		3,674		(1,476)		6,766

Charge-offs	(116)		(1)		—		(3,047)		(42)		(313)		(534)		—		(5,594)		—		(9,647)
Recoveries	52		226		—		611		20		68		201		—		1,945		—		3,123
Balance at September 30	$	32,088	$	47,850	$	2,252	$	59,179	$	2,215	$	17,711	$	20,635	$	2,898	$	35,130	$	6,867	$	226,825


	Nine months ended September 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)	4,876		6,011		11,165		10,802		9,339		2,557		209		5,708		7,253		(4,971)		52,949
Initial allowance on PCD loans	—		—		—		—		—		—		—		—		—		1,193		1,193
Charge-offs	(138)		(407)		(8)		(12,159)		(1,513)		(1,439)		(70)		(3,023)		(13,490)		(3,010)		(35,257)
Recoveries	400		360		107		4,156		555		1,174		52		1,106		4,546		5,378		17,834
Balance at September 30	$	7,290	$	23,092	$	22,826	$	26,772	$	43,731	$	25,659	$	1,609	$	9,183	$	38,647	$	25,127	$	223,936

	Nine months ended September 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)	(3,217)		4,748		(230)		10,138		(618)		2,903		(272)		548		11,991		(2,277)		23,714

Charge-offs	(188)		(851)		—		(8,327)		(73)		(957)		(1,990)		—		(18,017)		—		(30,403)
Recoveries	223		502		1		1,748		685		293		1,035		—		5,315		—		9,802
Balance at September 30	$	32,088	$	47,850	$	2,252	$	59,179	$	2,215	$	17,711	$	20,635	$	2,898	$	35,130	$	6,867	$	226,825

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 September 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	$	1,425	$	1,952	137.0	%	$	—
Owner occupied commercial mortgage	5,411		9,428		174.2		—
Non-owner occupied commercial mortgage	7,121		10,874		152.7		—

Total commercial loans	13,957		22,254		159.4		—
Consumer:
Residential mortgage	22,804		31,779		139.4		162
Revolving mortgage	310		315		101.6		—



Total consumer loans	23,114		32,094		138.9		162
Total non-PCD loans	37,071		54,348		146.6		162
PCD	17,109		25,443		148.7		—
Total collateral-dependent loans	$	54,180	$	79,791	147.3	%	$	162

Collateral-dependent nonaccrual loans with no recorded allowance totaled $52.0 million as of September 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 three and nine months ended September 30, 2019:




















	Three months ended September 30, 2019				Nine months ended September 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	$	6,130	$	6	$	3,460	$	40
Commercial mortgage	70,351		551		61,962		1,653
Other commercial real estate	1,186		6		797		20
Commercial and industrial and leases	13,085		140		11,478		353
Other	298		2		314		6
Total commercial	91,050		705		78,011		2,072
Noncommercial:
Residential mortgage	56,029		346		49,048		988
Revolving mortgage	30,067		260		29,477		763
Construction and land development	3,124		25		3,473		93
Consumer	3,443		37		3,152		97
Total noncommercial	92,663		668		85,150		1,941
Total non-PCI impaired loans and leases	$	183,713	$	1,373	$	163,161	$	4,013

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:


	September 30, 2020
(Dollars in thousands)	Accruing		Nonaccruing		Total
Commercial loans:
Construction and land development	$	791	$	57	$	848
Owner occupied commercial mortgage	33,202		9,076		42,278
Non-owner occupied commercial mortgage	17,728		1,180		18,908
Commercial and industrial and leases	28,942		5,650		34,592
Total commercial loans	80,663		15,963		96,626
Consumer:
Residential mortgage	33,163		17,202		50,365
Revolving mortgage	22,232		7,140		29,372
Construction and land development	2,918		272		3,190
Consumer auto	1,992		841		2,833
Consumer other	1,010		159		1,169
Total consumer loans	61,315		25,614		86,929
PCD loans	16,801		6,774		23,575
Total loans	$	158,779	$	48,351	$	207,130


	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 nine months ended September 30, 2020 and September 30, 2019, as well as a summary of loans modified as a TDR during the twelve month periods ended September 30, 2020 and September 30, 2019 that subsequently defaulted during the nine months ended September 30, 2020 and September 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 September 30, 2020						Three months ended September 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	6	$	5,703	3	$	3,730	2	$	1,221	—	$	—
Loan term extension	29	2,380		18	1,755		5	2,473		—	—
Below market interest rate	55	15,341		26	3,170		80	4,460		34	2,034
Discharged from bankruptcy	55	1,654		22	755		55	6,097		25	2,002
Total restructurings	145	$	25,078	69	$	9,410	142	$	14,251	59	$	4,036

	Nine months ended September 30, 2020						Nine months ended September 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	23	$	24,847	6	$	6,967	6	$	3,209	2	$	2,064
Loan term extension	62	5,885		34	3,244		13	3,870		4	514
Below market interest rate	212	38,740		72	5,088		205	14,968		86	5,977
Discharged from bankruptcy	165	7,025		66	2,254		157	13,499		72	5,421
Total restructurings	462	$	76,497	178	$	17,553	381	$	35,546	164	$	13,976

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