Allowance for Credit Losses

9 Months Ended

Sep. 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 September 30, 2021, the ACL change since December 31, 2020 was driven by continued strong credit performance, low net charge-offs, and improvement in macroeconomic factors. 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 September 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 and low net charge-offs.

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


	Three months ended September 30, 2021
(Dollars in thousands)	Commercial		Consumer		PCD		Total
Allowance for credit losses:
Balance at July 1	$	76,082	$	94,272	$	18,740	$	189,094
Provision (credit)	975		(223)		(1,872)		(1,120)

Charge-offs	(5,967)		(4,307)		(799)		(11,073)
Recoveries	1,594		2,330		2,369		6,293
Balance at September 30	$	72,684	$	92,072	$	18,438	$	183,194

	Three months ended September 30, 2020
(Dollars in thousands)	Commercial		Consumer		PCD		Total
Balance at July 1	$	76,177	$	119,345	$	26,928	$	222,450
Provision (credit)	4,793		1,874		(2,625)		4,042

Charge-offs	(3,328)		(5,109)		(495)		(8,932)
Recoveries	2,338		2,719		1,319		6,376
Balance at September 30	$	79,980	$	118,829	$	25,127	$	223,936

	Nine months ended September 30, 2021
(Dollars in thousands)	Commercial		Consumer		PCD		Total
Balance at January 1	$	80,842	$	119,485	$	23,987	$	224,314
Provision (credit)	332		(23,208)		(8,821)		(31,697)

Charge-offs	(12,342)		(12,804)		(2,018)		(27,164)
Recoveries	3,852		8,599		5,290		17,741
Balance at September 30	$	72,684	$	92,072	$	18,438	$	183,194

	Nine months ended September 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)	32,854		25,066		(4,971)		52,949
Initial allowance on PCD loans	—		—		1,193		1,193
Charge-offs	(12,712)		(19,535)		(3,010)		(35,257)
Recoveries	5,023		7,433		5,378		17,834
Balance at September 30	$	79,980	$	118,829	$	25,127	$	223,936

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 September 30				Nine months ended September 30
(Dollars in thousands)	2021		2020		2021		2020
Allowance for credit losses:
Beginning balance	$	11,103	$	13,685	$	12,814	$	1,055
Adoption of ASC 326	—		—		—		8,885
Adjusted beginning balance	$	11,103	$	13,685	$	12,814	$	9,940
Provision (credit)	369		286		(1,342)		4,031
Ending balance	11,472		13,971		11,472		13,971

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, 2021 and December 31, 2020 were as follows:


	September 30, 2021
(Dollars in thousands)	Collateral-Dependent Loans		Net Realizable Value of Collateral		Collateral Coverage		Allowance for Credit Losses
Commercial:
Construction and land development	$	1,424	$	1,964	137.9	%	$	—
Owner occupied commercial mortgage	7,411		8,367		112.9		—
Non-owner occupied commercial mortgage	8,204		11,307		137.8		1,203
Commercial and industrial and leases	4,787		6,530		136.4		230
Total commercial loans	21,826		28,168		129.1		1,433
Consumer:
Residential mortgage	11,423		14,625		128.0		—
Revolving mortgage	—		—		—		—



Total consumer loans	11,423		14,625		128.0		—
PCD loans	18,154		32,788		180.6		—
Total collateral-dependent loans	$	51,403	$	75,581	147.0	%	$	1,433

	December 31, 2020
(Dollars in thousands)	Collateral-Dependent Loans		Net Realizable Value of Collateral		Collateral Coverage		Allowance for Credit Losses
Commercial:
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 $45.5 million and $57.5 million as of September 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:


	September 30, 2021						December 31, 2020
(Dollars in thousands)	Accruing		Nonaccruing		Total		Accruing		Nonaccruing		Total
Commercial:
Construction and land development	$	346	$	33	$	379	$	578	$	54	$	632
Owner occupied commercial mortgage	46,255		10,661		56,916		37,574		10,889		48,463
Non-owner occupied commercial mortgage	20,022		3,763		23,785		18,336		1,649		19,985
Commercial and industrial and leases	12,506		11,295		23,801		29,131		3,528		32,659
Total commercial loans	79,129		25,752		104,881		85,619		16,120		101,739
Consumer:
Residential mortgage	22,106		14,937		37,043		29,458		19,380		48,838
Revolving mortgage	16,533		6,925		23,458		20,124		7,128		27,252
Construction and land development	2,380		282		2,662		1,573		9		1,582
Consumer auto	1,888		636		2,524		2,018		696		2,714
Consumer other	774		61		835		955		137		1,092
Total consumer loans	43,681		22,841		66,522		54,128		27,350		81,478
PCD loans	29,207		12,365		41,572		17,617		7,346		24,963
Total loans	$	152,017	$	60,958	$	212,975	$	157,364	$	50,816	$	208,180

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


	Three months ended September 30, 2021			Three months ended September 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	7	$	9,639			6	$	5,703
Loan term extension	41	6,371				29	2,380
Below market interest rate	47	3,126				55	15,341
Discharged from bankruptcy	21	2,783				55	1,654
Total restructurings	116	$	21,919			145	$	25,078

	Nine months ended September 30, 2021			Nine months ended September 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	17	$	19,728			23	$	24,847
Loan term extension	112	14,500				62	5,885
Below market interest rate	148	21,004				212	38,740
Discharged from bankruptcy	110	12,478				165	7,025
Total restructurings	387	$	67,710			462	$	76,497

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