FCNCA 10-Q Quarterly Report June 30, 2020 | Alphaminr
FIRST CITIZENS BANCSHARES INC /DE/
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FCNCA 10-Q Quarter ended June 30, 2020

Balance Sheet
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Debt
FIRST CITIZENS BANCSHARES INC /DE/
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fcnca-20200630
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2020
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-16715
____________________________________________________
First Citizens BancShares, Inc.
(Exact name of Registrant as specified in its charter)
____________________________________________________
Delaware 56-1528994
(State or other jurisdiction of
incorporation or organization) 		(I.R.S. Employer
Identification Number)
4300 Six Forks Road Raleigh North Carolina 27609
(Address of principle executive offices) (Zip code)
(919) 716-7000
(Registrant’s telephone number, including area code)
____________________________________________________
Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class Trading Symbol Name of each exchange on which registered
Class A Common Stock, Par Value $1 FCNCA Nasdaq Global Select Market
Depositary Shares, Each Representing a 1/40th Interest in a Share of 5.375% Non-Cumulative Perpetual Preferred Stock, Series A FCNCP Nasdaq Global Select Market
Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934.
Class B Common Stock, Par Value $1
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files) Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “larger accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐ No ☒
Class A Common Stock— 8,811,220 shares
Class B Common Stock— 1,005,185 shares
(Number of shares outstanding, by class, as of July 31, 2020)

INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 6.
2
PART I
Item 1. Financial Statements
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, unaudited) June 30, 2020 December 31, 2019
Assets
Cash and due from banks $ 389,233 $ 376,719
Overnight investments 3,107,575 1,107,844
Investment in marketable equity securities (cost of $ 116,322 at June 30, 2020 and $ 59,262 at December 31, 2019)
114,316 82,333
Investment securities available for sale (cost of $ 8,472,398 at June 30, 2020 and $ 7,052,152 at December 31, 2019)
8,619,282 7,059,674
Investment securities held to maturity (fair value of $ 791,325 at June 30, 2020 and $ 30,996 at December 31, 2019)
774,878 30,996
Loans held for sale 107,881 67,869
Loans and leases 32,418,425 28,881,496
Allowance for credit losses ( 222,450 ) ( 225,141 )
Net loans and leases 32,195,975 28,656,355
Premises and equipment 1,255,688 1,244,396
Other real estate owned 53,850 46,591
Income earned not collected 175,496 123,154
Goodwill 350,298 349,398
Other intangible assets 58,606 68,276
Other assets 663,116 610,891
Total assets $ 47,866,194 $ 39,824,496
Liabilities
Deposits:
Noninterest-bearing $ 18,149,466 $ 12,926,796
Interest-bearing 23,329,779 21,504,440
Total deposits 41,479,245 34,431,236
Securities sold under customer repurchase agreements 740,276 442,956
Federal Home Loan Bank borrowings 657,682 572,185
Subordinated debt 504,246 163,412
Other borrowings 96,791 148,318
FDIC shared-loss payable 15,025 112,395
Other liabilities 381,485 367,810
Total liabilities 43,874,750 36,238,312
Shareholders’ equity
Common stock:
Class A - $ 1 par value ( 16,000,000 shares authorized; 8,928,920 and 9,624,310 shares issued and outstanding at June 30, 2020 and December 31, 2019 respectively)
8,929 9,624
Class B - $ 1 par value ( 2,000,000 shares authorized; 1,005,185 shares issued and outstanding at June 30, 2020 and December 31, 2019)
1,005 1,005
Preferred stock - $ 0.01 par value ( 10,000,000 shares authorized; 345,000 and no shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively)
339,937 —
Surplus — 44,081
Retained earnings 3,651,237 3,658,197
Accumulated other comprehensive loss ( 9,664 ) ( 126,723 )
Total shareholders’ equity 3,991,444 3,586,184
Total liabilities and shareholders’ equity $ 47,866,194 $ 39,824,496
See accompanying Notes to Unaudited Consolidated Financial Statements.
3
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended June 30 Six months ended June 30
(Dollars in thousands, except per share data, unaudited) 2020 2019 2020 2019
Interest income
Loans and leases $ 326,099 $ 303,233 $ 651,647 $ 594,155
Investment securities interest and dividend income 36,605 40,209 76,098 79,821
Overnight investments 553 7,279 5,071 13,669
Total interest income 363,257 350,721 732,816 687,645
Interest expense
Deposits 17,916 19,158 42,110 32,084
Securities sold under customer repurchase agreements 399 515 841 974
Federal Home Loan Bank borrowings 2,472 1,586 5,456 2,871
Subordinated debt 4,677 1,952 7,432 3,624
Other borrowings 399 162 1,183 272
Total interest expense 25,863 23,373 57,022 39,825
Net interest income 337,394 327,348 675,794 647,820
Provision for credit losses 20,552 5,198 48,907 16,948
Net interest income after provision for credit losses 316,842 322,150 626,887 630,872
Noninterest income
Service charges on deposit accounts 17,522 25,790 43,935 50,855
Wealth management services 22,371 24,573 48,783 49,574
Cardholder services, net 17,587 18,479 35,747 35,112
Other service charges and fees 7,145 8,164 14,937 15,586
Merchant services, net 5,363 6,455 11,251 12,290
Mortgage income 9,811 5,038 15,035 8,696
Insurance commissions 3,189 2,854 6,877 6,145
ATM income 1,395 1,625 2,817 3,136
Marketable equity securities gains, net 64,570 3,144 13,162 14,472
Realized gains on investment securities available for sale, net 13,752 5,719 33,547 5,719
Other 2,697 5,034 3,322 8,953
Total noninterest income 165,402 106,875 229,413 210,538
Noninterest expense
Salaries and wages 146,633 136,526 291,888 268,947
Employee benefits 30,364 30,197 68,875 62,732
Occupancy expense 29,556 26,886 57,036 54,647
Equipment expense 28,774 28,489 56,624 55,229
Processing fees paid to third parties 10,186 6,641 20,558 13,730
FDIC insurance expense 3,731 2,757 7,197 5,417
Collection and foreclosure-related expenses 3,949 3,659 8,003 6,681
Merger-related expenses 4,369 4,084 8,601 5,803
Other 34,117 34,158 72,868 67,868
Total noninterest expense 291,679 273,397 591,650 541,054
Income before income taxes 190,565 155,628 264,650 300,356
Income taxes 36,779 36,269 53,695 69,638
Net income $ 153,786 $ 119,359 $ 210,955 $ 230,718
Less: Preferred stock dividends 4,790 — 4,790 —
Net income available to common shareholders $ 148,996 $ 119,359 $ 206,165 $ 230,718
Weighted average common shares outstanding 10,105,520 11,286,520 10,289,320 11,402,112
Net income per common share $ 14.74 $ 10.56 $ 20.04 $ 20.23
See accompanying Notes to Unaudited Consolidated Financial Statements.
4
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three months ended June 30 Six months ended June 30
(Dollars in thousands, unaudited) 2020 2019 2020 2019
Net income $ 153,786 $ 119,359 $ 210,955 $ 230,718
Other comprehensive income
Unrealized gains on securities available for sale:
Unrealized gains on securities available for sale arising during the period 28,066 30,971 172,909 59,042
Tax effect ( 6,455 ) ( 7,123 ) ( 39,768 ) ( 13,579 )
Reclassification adjustment for realized gains on securities available for sale included in income before income taxes ( 13,752 ) ( 5,719 ) ( 33,547 ) ( 5,719 )
Tax effect 3,163 1,315 7,716 1,315
Unrealized gains on securities available for sale arising during the period, net of tax 11,022 19,444 107,310 41,059
Unrealized losses on securities available for sale transferred from/to held to maturity:
Reclassification adjustment for accretion of unrealized losses on securities available for sale transferred to held to maturity — 5,947 — 11,909
Tax effect — ( 1,368 ) — ( 2,739 )
Total change in unrealized losses on securities available for sale transferred to held to maturity, net of tax — 4,579 — 9,170
Change in pension obligation:
Amortization of actuarial losses and prior service cost 6,398 2,735 12,662 5,490
Tax effect ( 1,472 ) ( 629 ) ( 2,913 ) ( 1,263 )
Total change in pension obligation, net of tax 4,926 2,106 9,749 4,227
Other comprehensive income 15,948 26,129 117,059 54,456
Total comprehensive income $ 169,734 $ 145,488 $ 328,014 $ 285,174

See accompanying Notes to Unaudited Consolidated Financial Statements.

5
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
Three months ended June 30
(Dollars in thousands, unaudited) Class A
Common Stock 		Class B
Common Stock 		Preferred
Stock 		Surplus Retained
Earnings 		Accumulated
Other
Comprehensive
Loss 		Total
Shareholders’
Equity
Balance at March 31, 2019 $ 10,380 $ 1,005 $ — $ 393,449 $ 3,325,335 $ ( 206,860 ) $ 3,523,309
Net income — — — — 119,359 — 119,359
Other comprehensive income, net of tax — — — — — 26,129 26,129
Repurchase of 205,500 shares of Class A common stock
( 205 ) — — ( 89,569 ) — — ( 89,774 )
Cash dividends declared ($ 0.40 per common share)
Class A common stock — — — — ( 4,008 ) — ( 4,008 )
Class B common stock — — — — ( 402 ) — ( 402 )
Balance at June 30, 2019 $ 10,175 $ 1,005 $ — $ 303,880 $ 3,440,284 $ ( 180,731 ) $ 3,574,613
Balance at March 31, 2020 $ 9,275 $ 1,005 $ 339,958 $ — $ 3,632,894 $ ( 25,612 ) $ 3,957,520
Net income — — — — 153,786 — 153,786
Other comprehensive income, net of tax — — — — — 15,948 15,948
Issuance of preferred stock — — ( 21 ) — — — ( 21 )
Repurchase of 346,000 shares of Class A common stock
( 346 ) — — — ( 126,645 ) — ( 126,991 )
Cash dividends declared ($ 0.40 per common share)
Class A common stock — — — — ( 3,606 ) — ( 3,606 )
Class B common stock — — — — ( 402 ) — ( 402 )
Preferred stock dividends declared — — — — ( 4,790 ) — ( 4,790 )
Balance at June 30, 2020 $ 8,929 $ 1,005 $ 339,937 $ — $ 3,651,237 $ ( 9,664 ) $ 3,991,444
Six months ended June 30
(Dollars in thousands, unaudited) Class A
Common Stock 		Class B
Common Stock 		Preferred
Stock 		Surplus Retained
Earnings 		Accumulated
Other
Comprehensive
Loss 		Total
Shareholders’
Equity
Balance at December 31, 2018 $ 10,623 $ 1,005 $ — $ 493,962 $ 3,218,551 $ ( 235,187 ) $ 3,488,954
Net income — — — — 230,718 — 230,718
Other comprehensive income, net of tax — — — — — 54,456 54,456
Repurchase of 448,500 shares of Class A common stock
( 448 ) — — ( 190,082 ) — — ( 190,530 )
Cash dividends declared ($ 0.80 per common share)
Class A common stock — — — — ( 8,181 ) — ( 8,181 )
Class B common stock — — — — ( 804 ) — ( 804 )
Balance at June 30, 2019 $ 10,175 $ 1,005 $ — $ 303,880 $ 3,440,284 $ ( 180,731 ) $ 3,574,613
Balance at December 31, 2019 $ 9,624 $ 1,005 $ — $ 44,081 $ 3,658,197 $ ( 126,723 ) $ 3,586,184
Cumulative effect of adoption of ASC 326 — — — — 36,943 — 36,943
Net income — — — — 210,955 — 210,955
Other comprehensive income, net of tax — — — — — 117,059 117,059
Issuance of preferred stock — — 339,937 — — — 339,937
Repurchase of 695,390 shares of Class A common stock
( 695 ) — — ( 44,081 ) ( 241,919 ) — ( 286,695 )
Cash dividends declared ($ 0.80 per common share)
Class A common stock — — — — ( 7,345 ) — ( 7,345 )
Class B common stock — — — — ( 804 ) — ( 804 )
Preferred stock dividends declared — — — — ( 4,790 ) — ( 4,790 )
Balance at June 30, 2020 $ 8,929 $ 1,005 $ 339,937 $ — $ 3,651,237 $ ( 9,664 ) $ 3,991,444
See accompanying Notes to Unaudited Consolidated Financial Statements.
6
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended June 30
(Dollars in thousands, unaudited) 2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 210,955 $ 230,718
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses on loans and leases 48,907 16,948
Deferred tax expense 17,774 5,126
Net decrease (increase) in current tax receivable 12,122 ( 23,826 )
Depreciation and amortization 53,806 50,574
Net (decrease) increase in accrued interest payable ( 4,012 ) 10,485
Net increase in income earned not collected ( 51,784 ) ( 1,747 )
Contribution to pension plans ( 100,000 ) —
Realized gains on investment securities available for sale, net ( 33,547 ) ( 5,719 )
Marketable equity securities gains, net ( 13,162 ) ( 14,472 )
Origination of loans held for sale ( 503,190 ) ( 328,481 )
Proceeds from sale of loans held for sale 474,153 326,640
Gain on sale of loans held for sale ( 15,578 ) ( 6,395 )
Net write-downs/losses on other real estate owned 2,475 1,417
Net amortization (accretion) of premiums and discounts 20,889 ( 16,491 )
Amortization of intangible assets 12,464 12,019
Net change in mortgage servicing rights 357 ( 2,283 )
Net change in other assets ( 17,459 ) ( 12,375 )
Net change in other liabilities ( 14,380 ) ( 22,373 )
Net cash provided by operating activities 100,790 219,765
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans outstanding ( 3,488,854 ) ( 168,572 )
Purchases of investment securities available for sale ( 5,659,704 ) ( 1,553,876 )
Purchases of investment securities held to maturity ( 803,307 ) ( 183,288 )
Purchases of marketable equity securities ( 331,952 ) ( 14,108 )
Proceeds from maturities, calls, and principal repayments of investment securities held to maturity 57,057 190,644
Proceeds from maturities, calls, and principal repayments of investment securities available for sale 1,139,291 1,061,895
Proceeds from sales of investment securities available for sale 3,122,454 610,787
Proceeds from sales of marketable equity securities 313,131 10,694
Net increase in overnight investments ( 1,964,602 ) ( 840,371 )
Proceeds from sales of portfolio loans — 24,247
Cash paid to FDIC for settlement of shared-loss agreement ( 99,468 ) —
Proceeds from sales of other real estate owned 9,263 11,884
Proceeds from sales of premises and equipment 37 75
Purchases of premises and equipment ( 62,721 ) ( 54,873 )
Business acquisitions, net of cash acquired ( 59,999 ) ( 73,792 )
Net cash used in investing activities ( 7,829,374 ) ( 978,654 )
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in time deposits ( 623,833 ) 291,930
Net increase in demand and other interest-bearing deposits 7,649,120 762,021
Net increase (decrease) in short-term borrowings 2,043 ( 109,109 )
Repayment of long-term obligations ( 75,908 ) ( 33,008 )
Origination of long-term obligations 400,000 —
Net proceeds from subordinated notes issuance 345,850 —
Net proceeds from preferred stock issuance 339,937 —
Repurchase of common stock ( 282,923 ) ( 186,995 )
Cash dividends paid ( 13,188 ) ( 9,243 )
Net cash provided by financing activities 7,741,098 715,596
Change in cash and due from banks 12,514 ( 43,293 )
Cash and due from banks at beginning of period 376,719 327,440
Cash and due from banks at end of period $ 389,233 $ 284,147
Six months ended June 30
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: 2020 2019
Transfers of loans to other real estate $ 7,138 $ 5,710
Dividends declared but not paid 4,007 4,410
Unsettled maturities of investment securities — 150,122
Unsettled purchases of investment securities — 1,126
Net reclassification of portfolio loans (to) from loans held for sale ( 3,027 ) 23,343
Transfers of premises and equipment to other real estate 2,046 2,184
Unsettled common stock repurchases 3,772 3,535
See accompanying Notes to Unaudited Consolidated Financial Statements.
7
First Citizens BancShares, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
NOTE A - ACCOUNTING POLICIES AND BASIS OF PRESENTATION
First Citizens BancShares, Inc. (“BancShares”) is a financial holding company organized under the laws of Delaware and conducts operations through its banking subsidiary, First-Citizens Bank & Trust Company (“FCB”), which is headquartered in Raleigh, North Carolina.
General
These consolidated financial statements and notes thereto are presented in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial position and consolidated results of operations have been made. The unaudited interim consolidated financial statements included in this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in BancShares’ Annual Report on Form 10-K for the year ended December 31, 2019.
Reclassifications
In certain instances, amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current financial statement presentation. Such reclassifications had no effect on previously reported cash flows, shareholders’ equity or net income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions which affect the amounts reported. Actual results could differ from those estimates. The estimates BancShares considers significant are the allowance for credit losses, fair value measurements, and income taxes.
Issuance of Preferred Stock and Subordinated Debt
On March 4, 2020, BancShares completed its public offering of $ 350 million aggregate principal amount of its 3.375 % Fixed-to-Floating Rate Subordinated Notes due 2030 and redeemable at the option of BancShares starting in 2025. On March 12, 2020, BancShares issued and sold an aggregate of 13,800,000 depositary shares, each representing a 1/40th interest in a share of 5.375 % Non-Cumulative Perpetual Preferred Stock, Series A, par value $ 0.01 per share, with a liquidation preference of $ 25 per Depositary Share (equivalent to $ 1,000 per share of Series A Preferred Stock) for a total of $ 345 million. The capital raise provides liquidity for general corporate purposes, which may include, but is not limited to, providing capital to support our growth organically or through strategic acquisitions, financing investments and capital expenditures, for funding investments in First Citizens Bank as regulatory capital, and redeeming or repurchasing our common stock.
Share Repurchases
During the second quarter of 2020, BancShares repurchased 346,000 shares of Class A common stock for $ 127.0 million at an average cost per share of $ 366.98 . During the second quarter of 2019, BancShares purchased a total of 205,500 shares of Class A common stock for $ 89.8 million at an average cost per share of $ 436.81 . During the six months ended June 30, 2020 , BancShares repurchased 695,390 shares of Class A common stock for $ 286.7 million at an average cost per share of $ 412.23 . During the six months ended June 30, 2019 , BancShares repurchased a total of 448,500 shares of Class A common stock for $ 190.5 million at an average cost per share of $ 424.77 . All Class A common stock repurchases were consummated under previously approved authorizations.
The share repurchases during 2020 included 45,000 shares of Class A common stock repurchased from Ella Ann Holding, as trustee of her revocable trust. Pursuant to the existing share repurchase authorization and BancShares’ related person transaction policy, the Board of Director’s (the “Board”) independent Audit Committee reviewed and approved the repurchase of up to 250,000 shares held by Mrs. Holding on or before April 30, 2020.
Subsequent to quarter-end through July 31, 2020, BancShares repurchased an additional 117,700 shares of Class A common stock for $ 47.1 million at an average cost per share of $ 399.77 . Upon completion of the current authorization on July 31, 2020, share repurchase activity has been suspended and will be reevaluated in subsequent periods.
8
Small Business Administration Paycheck Protection Program
The Small Business Administration Paycheck Protection Program (“SBA-PPP”) is one of the centerpieces of the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”), which was passed on March 27, 2020 in response to the outbreak of coronavirus (“COVID-19”) and was supplemented with subsequent legislation. Overseen by the United States (“U.S.”) Treasury Department, the SBA-PPP offers cash-flow assistance to nonprofit and small business employers through guaranteed loans for expenses incurred between February 15, 2020, and August 8, 2020. Borrowers are eligible for forgiveness of principal and accrued interest on SBA-PPP loans to the extent that the proceeds are used to cover eligible payroll costs, interest costs, rent, and utility costs over a period between eight and 24-weeks after the loan is made as long as the borrower retains its employees and their compensation levels. The CARES Act authorized the SBA to temporarily guarantee these loans.
Due to the unique nature of these provisions, SBA-PPP loans have been disclosed as a separate loan class. Origination fees received by the SBA are capitalized into the carrying amount of the loans. The deferred fee income, net of origination costs, is recognized over the life of the loan as an adjustment to yield using the effective interest method. Loans outstanding as of June 30, 2020 totaled $ 3.08 billion and generated $ 19.0 million of interest income during the second quarter of 2020.
Recently Adopted Accounting Pronouncements
Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
This ASU modifies the disclosure requirements on fair value measurements by eliminating the requirements to disclose (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy (2) the policy for timing of transfers between levels and (3) the valuation processes for Level 3 fair value measurements. This ASU also added specific disclosure requirements for fair value measurements for public business entities including the requirement to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
BancShares adopted this ASU during the first quarter of 2020 and have made all applicable updates to the disclosure within the Notes to the Unaudited Consolidated Financial Statements.
FASB ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
This ASU eliminates Step 2 from the goodwill impairment test. Under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative test.
BancShares adopted this ASU during the first quarter 2020 with no impact to our consolidated financial position or consolidated results of operations as a result of the adoption.
FASB ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This ASU (and all subsequent ASUs on this topic) introduce the current expected credit loss (“CECL”) model, a new credit loss methodology, replacing multiple existing impairment methods in current GAAP, which generally require that a loss be incurred before it is recognized. The amendments in this ASU require loss estimates be determined over the lifetime of the asset and broaden the information that an entity must consider in developing its expected credit losses. The ASU does not specify a method for measuring expected credit losses and allows an entity to apply methods that reasonably reflect its expectations of the credit loss estimate based on the entity's size, complexity and risk profile. In addition, the disclosures of credit quality indicators in relation to the amortized cost of financing receivables, a current disclosure requirement, are further disaggregated by year of origination.
9
BancShares adopted this ASU (and all subsequent ASUs on this topic) as of January 1, 2020 using the modified retrospective approach for all loans, leases, debt securities designated as held to maturity, and unfunded loan commitments. BancShares adopted the ASU using the prospective approach for debt securities available for sale and purchased credit deteriorated (“PCD”) loans previously accounted for under Accounting Standard Codification (“ASC”) ASC 310-30. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. BancShares made changes to loan classifications and segmentation in order to align with ASC 326 requirements and facilitate CECL modeling. Using this updated segmentation, BancShares developed new loan level models to estimate the allowance for credit losses (“ACL”) and facilitate revised disclosures.
The information presented below represents changes from Note A, Accounting Policies and Basis of Presentation, included in BancShares’ Annual Report on Form 10-K for the year ended December 31, 2019, as well as information on the impact of adoption.
Accounting Policy - Debt Securities
BancShares classifies debt securities as held to maturity (“HTM”) or available for sale (“AFS”). Debt securities are classified as HTM when BancShares has the intent and ability to hold the securities to maturity and are reported at amortized cost. Other debt securities are classified as AFS and reported at estimated fair value, with unrealized gains and losses, net of income taxes, reported in Accumulated Other Comprehensive Income (“AOCI”). Amortization of premiums and accretion of discounts for debt securities are included in interest income. Realized gains and losses from the sale of debt securities are determined by specific identification on a trade date basis and are included in noninterest income.
BancShares performs pre-purchase due diligence and evaluates the credit risk of AFS and HTM securities purchased directly into our portfolio or via acquisition. If securities have evidence of more than insignificant credit deterioration since issuance, they are designated as PCD. P CD securities are recorded at fair value at the date of acquisition which includes an associated allowance that is added to the purchase price or fair value to arrive at the Day 1 amortized cost basis. The difference between the purchase price and the Day 1 amortized cost is amortized or accreted to interest income over the contractual life of the securities using the effective interest method.
For AFS securities, management performs a quarterly analysis of the investment portfolio to evaluate securities currently in an unrealized loss position for potential credit-related impairment. If BancShares intends to sell a security, or does not have the intent and ability to hold a security before recovering the amortized cost, the entirety of the unrealized loss is immediately recorded in earnings. For the remaining securities, an analysis is performed to determine if any portion of the unrealized loss recorded relates to credit impairment. If credit related impairment exists, the amount is recorded through the ACL and related provision. This review includes indicators such as changes in credit rating, delinquency, bankruptcy or other significant news event impacting the issuer.
BancShares’ portfolio of HTM debt securities is made up of mortgage-backed securities issued by government agencies and government sponsored entities. Given the historically strong credit rating of the U.S. Treasury and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, we determined zero expected credit losses on the HTM portfolio.
Accounting Policy - Loans and Leases
BancShares’ accounting methods for loans and leases depends on whether they are originated or purchased, and if purchased, whether or not the loans reflect more than insignificant credit deterioration since origination as of the date of acquisition.
Non-Purchased Credit Deteriorated (“Non-PCD”) Loans
Non-PCD loans consist of loans originated by BancShares and loans purchased from other institutions that do not reflect more than insignificant credit deterioration at acquisition.
Originated loans for which management has the intent and ability to hold for the foreseeable future are classified as held for investment and carried at the principal amount outstanding net of any unearned income, charge-offs and unamortized fees and costs. Nonrefundable fees collected and certain direct costs incurred related to loan originations are deferred and recorded as an adjustment to loans outstanding. The net amount of the nonrefundable fees and costs is amortized to interest income over the contractual lives using methods that approximate a constant yield.
Purchased loans which do not reflect more than insignificant credit deterioration at acquisition are classified as non-PCD loans. These loans are recorded at fair value at the date of acquisition and an initial allowance is recorded on these assets as provision expense at the date of acquisition. The difference between the fair value and the unpaid principal balance at the acquisition date is amortized or accreted to interest income over the contractual life of the loan using the effective interest method.
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Purchased Credit Deteriorated Loans
Purchased loans which reflect a more than insignificant credit deterioration since origination as of the date of acquisition are classified as PCD and are recorded at acquisition date amortized cost, which is the purchase price or fair value in a business combination, plus our initial estimate of expected credit losses. The difference between the unpaid principal balance and the acquisition date amortized cost is amortized or accreted to interest income over the contractual life of the loan using the effective interest method.
The performance of all loans within the BancShares portfolio is subject to a number of external risks, including but not limited to changes in the overall health of the economy, declines in real estate or other collateral values, changes in the demand for products and services and personal events, such as death, disability or change in marital status. BancShares evaluates and reports its non-PCD and PCD loan portfolios separately, and each non-PCD portfolio is further divided into commercial and consumer segments based on the type of borrower, purpose, collateral and/or our underlying credit management processes. Additionally, non-PCD commercial and consumer loans are assigned to loan classes, which further disaggregate the loan portfolio. PCD loans are reported as a single loan segment and class.
Upon adoption of ASC 326, owner occupied and non-owner occupied commercial real estate were segregated into separate classes within the commercial segment. Similarly, consumer auto was segregated into its own class within the consumer segment. These enhancements were made to capture the unique credit characteristics used in our CECL models. 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.
The following represent our classes of loans as of January 1, 2020 upon adoption of ASC 326 (with the exception of SBA-PPP, which was added during second quarter 2020):
Commercial loans and leases
Construction and land development - Construction and land development consists of loans to finance land for development of commercial or residential real property and construction of multifamily apartments or other commercial properties. These loans are highly dependent on the supply and demand for commercial real estate as well as the demand for newly constructed residential homes and lots acquired for development. Deterioration in demand could result in decreased collateral values, which could make repayments of outstanding loans difficult for customers.
Owner occupied commercial mortgage - Owner occupied commercial mortgages consists of loans to purchase or re-finance owner occupied nonresidential properties. This includes office buildings, other commercial facilities, and farmland. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.
Non-owner occupied commercial mortgage - Non-owner occupied commercial mortgage consists of loans to purchase or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as farmland and multifamily properties. The primary risk associated with income producing commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.
Commercial and industrial and leases - Commercial and industrial loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, business credit cards, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial and industrial and lease financing loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan or lease.
SBA-PPP - These loans were originated as part of the SBA-PPP to finance payroll and other costs for nonprofit and small businesses impacted by the COVID-19 pandemic. These loans are guaranteed by the SBA and borrowers have the ability to qualify for loan forgiveness through the U.S. Treasury.
Consumer loans
Residential mortgage - Residential mortgage consists of loans to purchase or refinance the borrower’s primary dwelling, second residence or vacation home and are often secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral.
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Revolving mortgage - Revolving mortgage consists of home equity lines of credit and other lines of credit secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. This risk is elevated for loans secured by junior lines as a substantial decline in value could render a the junior lien position effectively unsecured.
Construction and land development - Construction and land development consists of loans to construct a borrower’s primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date. These loans are typically secured by undeveloped or partially developed land in anticipation of completing construction of a 1-4 family residential property. There is risk these construction and development projects can experience delays and cost overruns exceeding the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral.
Consumer auto loans - Consumer auto loans consist of installment loans to finance purchases of vehicles. These loans include direct auto loans originated in bank branches, as well indirect auto loans originated through agreements with auto dealerships. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral.
Other consumer - Other consumer loans consist of loans to finance unsecured home improvements, student loans and revolving lines of credit that can be secured or unsecured, including personal credit cards. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral.
Accounting Policy - Nonperforming Assets and Troubled Debt Restructurings
Nonperforming Assets (“NPA”)
NPAs include nonaccrual loans, past due securities and foreclosed property. Foreclosed property consists of real estate and other assets acquired as a result of loan defaults and is discussed below.
All loans are classified as past due when the payment of principal and interest based upon contractual terms is greater than 30 days delinquent. Loans are generally placed on nonaccrual when principal or interest becomes 90 days past due or when it is probable the principal or interest is not fully collectible. When loans are placed on nonaccrual, all previously uncollected accrued interest is reversed from interest income and the ongoing accrual of interest is discontinued. All payments received thereafter are applied as a reduction of the remaining principal balance as long as doubt exists as to the ultimate collection of the principal. Loans and leases are generally removed from nonaccrual status when they become current for a sustained period of time and there is no longer concern as to the collectability of principal and interest.
Securities are also classified as past due when the payment of principal and interest based upon contractual terms is greater than 30 days delinquent. Missed interest payments on securities are rare. We review all securities with delinquent interest and immediately charge off any accrued interest determined to be uncollectible.
Troubled Debt Restructurings (“TDR”)
A loan is considered a TDR when both of the following occur: (1) a modification to a borrower’s debt agreement is made and (2) a concession is granted for economic or legal reasons related to a borrower’s financial difficulties that otherwise would not be granted. TDR concessions could include short-term deferrals of interest, modifications of payment terms, or (in certain limited instances) forgiveness of principal or interest. Loans restructured as a TDR are treated and reported as such for the remaining life of the loan. TDR loans can be nonaccrual or accrual, depending on the individual facts and circumstances of the borrower. In circumstances where a portion of the loan balance is charged-off, the remaining balance is typically classified as nonaccrual.
Accounting Policy - Allowance for Credit Losses (“ACL”)
Loans
Loans within the various reporting classes are segregated into pools with similar risk characteristics and models are built to estimate the ACL. These loan level ACL models estimate the probability of default and loss given default for individual loans within the risk pool based on historical loss experience, borrower characteristics, collateral type, forecasts of relevant economic conditions, expected future recoveries and other factors. Pools for estimating the ACL are aggregated into loan classes, as described above, which roll up into commercial and consumer loan segments. Non-PCD and PCD loans are modeled together within the loan level models using acquired and PCD indicator variables to provide differentiation of individual loan risk. BancShares uses a two year reasonable and supportable forecast period which incorporates economic forecasts at the time of evaluation. 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.
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The ACL for SBA-PPP loans originated during the second quarter of 2020 were separately evaluated given the explicit government guarantee. This analysis, which incorporated historical experience with similar SBA guarantees and underwriting, concluded the likelihood of loss was remote and therefore these loans were assigned a zero expected credit loss in the ACL.
The ACL represents management’s best estimate of credit losses expected over the life of the loan, adjusted for expected contractual payments and the impact of prepayment expectations. Prepayment assumptions were developed through a review of BancShares’ historical prepayment activity and began with a review of prepayment assumptions utilized in other modeling activities. Estimates for loan losses are determined by analyzing quantitative and qualitative components present as of the evaluation date. Adjustments to the ACL are recorded with a corresponding entry to provision for credit losses. Loan balances considered uncollectible are charged-off against the ACL. Recoveries of amounts previously charged-off are credited to the ACL.
A primary component of determining the ACL on loans is the actual net loss history of the various loan pools. For commercial pools, key factors utilized in the models include delinquency trends as well as macroeconomic variables such as unemployment and commercial real estate price index. For consumer pools, key factors include delinquency trends and the borrower’s original credit score, as well as other macroeconomic variables such as unemployment, gross domestic product, home price index, and commercial real estate index. As the models project losses over the life of the loans, prepayment assumptions also serve as significant inputs. Model outputs may be adjusted through a qualitative assessment to reflect economic conditions and trends not captured within the models including credit quality, concentrations, and significant policy and underwriting changes.
Within our ACL model, TDRs meet the definition of default and are given a 100% probability of default rating. TDRs are not individually evaluated unless determined to be collateral-dependent. Therefore, loss given default is calculated based on the individual risk characteristics of the loan as defined in the model.
When loans do not share risk characteristics similar to others in the pool, the ACL is evaluated on an individual basis. Given that BancShares' CECL models are loan level models, the population of loans evaluated individually is minimal and consists primarily of loans greater than $ 500 thousand and determined to be collateral-dependent. BancShares elected the practical expedient allowed under ASC 326 to assess the collectability of these loans, where repayment is expected to be provided substantially through operation or sale of collateral, based on the fair value of the underlying collateral. The fair value of the collateral is estimated using appraised and market values (appropriately adjusted for an assessment of the sales and marketing costs when applicable). A specific allowance is established, or partial charge-off is recorded, for the difference between the excess amortized cost of loan and the collateral’s estimated fair value.
Accrued Interest Receivable
BancShares has elected not to measure an ACL for accrued interest receivable and has excluded it from the amortized cost basis of loans and held to maturity debt securities as our accounting policies and credit monitoring provide that uncollectible accrued interest is reversed or written off against interest income in a timely manner.
Unfunded Commitments
A reserve for unfunded commitments is established for off-balance sheet exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well a both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot canceled at any time). These unfunded commitments are assessed to determine both the probability of funding as well the expectation of future losses. The expected funding balance is used in the probability of default and loss given default models to determine the reserve. The reserve for unfunded commitments was $ 13.7 million at June 30, 2020, and is recorded within other liabilities with changes recorded through other expense.
Adoption Impact
Upon adoption, BancShares recorded a net decrease of $ 37.9 million in the ACL which included a reduction 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 $ 56.9 million reduction in the ACL on non-PCD loans, as well as an $ 8.9 million increase in the reserve for unfunded commitments, net of deferred taxes, resulted in an increase in retained earnings of $ 36.9 million. The $ 19.0 million increase in the ACL on PCD loans was a reclassification of the PCD credit discount and resulted in a gross up of loan balances by this same amount and did not have any effect on retained earnings. Impact to total capital and capital ratios was not significant and we did not elect the capital phase-in option allowable for regulatory reporting purposes. There was no ACL recorded on debt securities held to maturity at adoption.
The largest changes in the ACL, affecting beginning retained earnings as a result of the 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 reserve for unfunded commitments was primarily due to increases in the scope of off-balance sheet exposures considered in this estimate due to the provisions in ASU 2016-13.
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BancShares adopted this ASU using the prospective transition approach for PCD loans previously accounted for under ASC 310-30. In accordance with the standard, we did not assess whether purchased credit impaired (“PCI”) loans met the criteria of PCD as of the date of adoption and all loans previously classified as PCI were updated to the PCD classification. Pools utilized for PCI accounting under ASC 310-30 were dissolved upon adoption. Loans from performing PCI pools, not previously considered nonaccrual of $47.0 million, were reclassified into nonaccrual status as a result of adoption. PCD loans were assessed using the loan level probability of default and loss given default models, as well as utilizing prior specific loan reviews to inform the initial PCD loan ACL. The ACL for PCD loans increased as a result of adoption and the amortized cost basis of these loans was adjusted to reflect the transfer of this amount from credit discount to ACL. The remaining noncredit discount will be accreted into interest income at the effective interest rate as of January 1, 2020. At the date of adoption, no securities were determined to be PCD.
BancShares also adopted this ASU under the prospective transition approach for debt securities available for sale. No previously recorded other than temporary impairment was reported on the portfolio of debt securities.
Recently Issued Accounting Pronouncements
FASB ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans
This ASU modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by eliminating the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year and adding a requirement to disclose an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.
The amendments in this ASU are effective for public entities for fiscal years ending after December 15, 2020. Early adoption is permitted for all entities. BancShares will adopt all applicable amendments and update the disclosures as appropriate during the fourth quarter of 2020.
NOTE B - BUSINESS COMBINATIONS
BancShares evaluated the financial statement significance for all business combinations completed during 2020 and concluded the completed business combinations noted below are not material to its consolidated financial statements, individually or in aggregate, and therefore, pro forma financial data is not included.
Each transaction is accounted for under the acquisition method of accounting and, accordingly, assets acquired and liabilities assumed are recorded at their estimated fair values as of the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding closing date fair value becomes available.
As part of the accounting for each acquisition, we perform an analysis of the acquired bank’s loan portfolio and based on such credit factors as past due status, nonaccrual status, life-to-date charge-offs and other quantitative and qualitative considerations segregate the acquired loans into PCD loans and non-PCD loans. PCD loans are accounted for under ASC 326-20, and non-PCD loans which do not meet this criteria are accounted for under ASC 310-20. Additionally, we perform an analysis of the acquired bank’s portfolio of debt securities to determine if any debt securities should be designated PCD.
Community Financial Holding Company, Inc.
On February 1, 2020, FCB completed the merger of Duluth, Georgia-based Community Financial Holding Company, Inc. (“Community Financial”) and its bank subsidiary, Gwinnett Community Bank. Under the terms of the agreement, total cash consideration of $ 2.3 million was paid to the shareholders of Community Financial. The merger allows FCB to expand its presence and enhance banking efforts in Georgia.
The fair value of the assets acquired was $ 221.4 million, including $ 110.6 million in non-PCD loans, $ 23.4 million in PCD loans, net of an ACL of $ 1.2 million, and $ 536 thousand in a core deposit intangible. No debt securities purchased in the transaction were designated PCD. Liabilities assumed were $ 219.8 million, of which $ 209.3 million were deposits. As a result of the transaction, FCB recorded $ 686 thousand of goodwill. The amount of goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. The premium paid reflects the increased market share and related synergies expected to result from the acquisition. None of the goodwill was deductible for income tax purposes as the merger was accounted for as a qualified stock purchase.
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The following table provides the purchase price as of the acquisition date and the identifiable assets acquired and liabilities assumed at their estimated fair values:
(Dollars in thousands) As recorded by FCB
Purchase price $ 2,320
Assets
Cash and due from banks $ 1,085
Overnight investments 35,129
Investment securities 30,146
Loans 133,989
Premises and equipment 7,624
Other real estate owned 9,813
Income earned not collected 558
Intangible assets 536
Other assets 2,520
Total assets acquired 221,400
Liabilities
Deposits 209,340
Borrowings 9,925
Other liabilities 501
Total liabilities assumed $ 219,766
Fair value of net assets acquired 1,634
Goodwill recorded for Community Financial $ 686
Merger-related expenses of $ 495 thousand and $ 1.7 million were recorded for the three and six months ended June 30, 2020, respectively. Loan-related interest income generated from Community Financial was approximately $ 2.7 million since the acquisition date. The ongoing contribution of this transaction to BancShares’ financial statements is not considered material, and therefore pro forma financial data is not included.
Entegra Financial Corp.
On December 31, 2019, FCB completed the merger of Franklin, North Carolina-based Entegra Financial Corp. (“Entegra”) and its bank subsidiary, Entegra Bank. In order to obtain regulatory approval, FCB entered into an agreement for Select Bank & Trust Company (“Select Bank”) to purchase three North Carolina branches, located in Highlands, Sylva and Franklin. On April 17, 2020, FCB completed the divestiture of the branches including loans and leases, premises and equipment and total deposits with fair values of $ 110.1 million, $ 2.1 million and $ 184.8 million, respectively. The Select Bank purchase price for the divested branches included an 8 % premium for deposits acquired that was applied against goodwill generated as part of the merger with Entegra Bank.
NOTE C - INVESTMENTS
Information for reporting periods beginning after January 1, 2020 are presented in accordance with ASC 326 and reflect changes required by the adoption of this standard which includes evaluating held to maturity and available for sale debt securities to determine the need to record a related allowance for credit losses. Prior period information continues to be reported in accordance with previously applicable GAAP. See Note A - Accounting Policies and Basis for Presentation for more detail on our policies and adoption.
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The amortized cost and fair value of investment securities at June 30, 2020 and December 31, 2019, were as follows:
June 30, 2020
(Dollars in thousands) Cost Gross
unrealized
gains 		Gross unrealized
losses 		Allowance for credit losses Fair
value
Investment securities available for sale
U.S. Treasury $ 754,350 $ 236 $ — $ — $ 754,586
Government agency 549,673 292 4,256 — 545,709
Residential mortgage-backed securities 5,671,151 119,935 694 — 5,790,392
Commercial mortgage-backed securities 1,047,601 32,221 — — 1,079,822
Corporate bonds 449,623 4,387 5,237 — 448,773
Total investment securities available for sale $ 8,472,398 $ 157,071 $ 10,187 $ — $ 8,619,282
Investment in marketable equity securities 116,322 6,297 8,303 114,316
Investment securities held to maturity
Residential mortgage-backed securities 693,143 16,196 — — 709,339
Commercial mortgage-backed securities 78,729 251 — 78,980
Other 3,006 — — — 3,006
Total investment securities held to maturity 774,878 16,447 — — 791,325
Total investment securities $ 9,363,598 $ 179,815 $ 18,490 $ — $ 9,524,923
December 31, 2019
(Dollars in thousands) Cost Gross
unrealized
gains 		Gross unrealized
losses 		Fair
value
Investment securities available for sale
U.S. Treasury $ 409,397 $ 602 $ — $ 409,999
Government agency 684,085 928 2,241 682,772
Residential mortgage-backed securities 5,269,060 13,417 15,387 5,267,090
Commercial mortgage-backed securities 373,105 6,974 59 380,020
Corporate bonds 198,278 3,420 132 201,566
State, county and municipal 118,227 — — 118,227
Total investment securities available for sale $ 7,052,152 $ 25,341 $ 17,819 $ 7,059,674
Investment in marketable equity securities 59,262 23,304 233 82,333
Investment securities held to maturity
Other 30,996 — — 30,996
Total investment securities held to maturity 30,996 — — 30,996
Total investment securities $ 7,142,410 $ 48,645 $ 18,052 $ 7,173,003
Investments in residential and commercial mortgage-backed securities represent securities issued by the Government National Mortgage Association, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. Investments in government agency securities represent securities issued by the United States Small Business Administration. Investments in corporate bonds and marketable equity securities represent positions in securities of other financial institutions. Other held to maturity investments include certificates of deposit with other financial institutions.
BancShares also holds approximately 354,000 shares of Visa Class B common stock. BancShares’ Visa Class B shares are not considered to have a readily determinable fair value and are recorded at $ 0 . BancShares held FHLB stock of $ 45.4 million and $ 43.0 million and other non-marketable equity securities of $ 13.1 million and $ 12.5 million at June 30, 2020 and December 31, 2019, respectively. These securities are recorded in other assets.
As of June 30, 2020 and January 1, 2020, no ACL was required for available for sale and held to maturity debt securities. Accrued interest receivable on debt securities at June 30, 2020 was $ 21.3 million and was excluded from the estimate of credit losses. During the three and six months ended June 30, 2020, no accrued interest was deemed uncollectible and written off against interest income.

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The following table provides the amortized cost and fair value by contractual maturity for investment securities available for sale and held to maturity. Expected maturities will differ from contractual maturities on certain securities because issuers and borrowers of underlying collateral may have the right to call or prepay obligations with or without prepayment penalties.
June 30, 2020 December 31, 2019
(Dollars in thousands) Cost Fair
value 		Cost Fair
value
Investment securities available for sale
Non-amortizing securities maturing in:
One year or less $ 754,350 $ 754,586 $ 406,325 $ 406,927
One through five years 51,589 51,887 24,496 24,971
Five through 10 years 369,075 368,281 185,209 187,868
Over 10 years 28,959 28,605 109,872 110,026
Government agency 549,673 545,709 684,085 682,772
Residential mortgage-backed securities 5,671,151 5,790,392 5,269,060 5,267,090
Commercial mortgage-backed securities 1,047,601 1,079,822 373,105 380,020
Total investment securities available for sale $ 8,472,398 $ 8,619,282 $ 7,052,152 $ 7,059,674
Investment securities held to maturity
Non-amortizing securities maturing in:
One year or less 2,257 2,257 30,746 30,746
One through five years 749 749 250 250
Residential mortgage-backed securities 693,143 709,339 — —
Commercial mortgage-backed securities 78,729 78,980 — —
Total investment securities held to maturity $ 774,878 $ 791,325 $ 30,996 $ 30,996
There were gross gains of $ 13.8 million on sales of investment securities available for sale during the three months ended June 30, 2020 and no gross losses. There were gross gains of $ 34.2 million and gross losses of $ 679 thousand on sales of investment securities available for sale during the six months ended June 30, 2020. There were $ 5.7 million gross gains on sales of investment securities available for sale for the three and six months ended June 30, 2019 and no gross losses.
The following table provides the realized and unrealized gains and losses on marketable equity securities for the six months ended June 30, 2020 and 2019:
Three months ended June 30 Six months ended June 30
(Dollars in thousands) 2020 2019 2020 2019
Marketable equity securities gains, net $ 64,570 $ 3,144 $ 13,162 $ 14,472
Less net gains recognized on marketable equity securities sold 36,993 2,271 37,316 2,315
Unrealized gains (losses) recognized on marketable equity securities held $ 27,577 $ 873 $ ( 24,154 ) $ 12,157
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The following table provides information regarding securities with unrealized losses as of June 30, 2020 and December 31, 2019:
June 30, 2020
Less than 12 months 12 months or more Total
(Dollars in thousands) Fair
value 		Unrealized
losses 		Fair
value 		Unrealized
losses 		Fair
value 		Unrealized
losses
Investment securities available for sale
Government agency $ 447,983 $ 3,709 $ 58,806 $ 547 $ 506,789 $ 4,256
Residential mortgage-backed securities 172,628 302 149,170 392 321,798 694
Corporate bonds 112,172 5,120 9,451 117 121,623 5,237
Total $ 732,783 $ 9,131 $ 217,427 $ 1,056 $ 950,210 $ 10,187
December 31, 2019
Less than 12 months 12 months or more Total
(Dollars in thousands) Fair
value 		Unrealized
losses 		Fair
value 		Unrealized
losses 		Fair
value 		Unrealized
losses
Investment securities available for sale
Government agency $ 347,081 $ 1,827 $ 63,947 $ 414 $ 411,028 $ 2,241
Residential mortgage-backed securities 2,387,293 14,016 264,257 1,371 2,651,550 15,387
Commercial mortgage-backed securities 35,926 59 — — 35,926 59
Corporate bonds 7,714 123 4,749 9 12,463 132
Total $ 2,778,014 $ 16,025 $ 332,953 $ 1,794 $ 3,110,967 $ 17,819
As of June 30, 2020, there were 47 investment securities available for sale with continuous losses for more than 12 months, of which 45 were government sponsored enterprise-issued mortgage-backed securities or government agency securities and two were corporate bonds.
None of the unrealized losses identified as of June 30, 2020, or December 31, 2019, relate to the marketability of the securities or the issuers’ ability to honor redemption obligations. Rather, the unrealized losses relate to changes in interest rates relative to when the investment securities were purchased, and do not indicate credit-related impairment. BancShares considered other factors including changes in credit ratings, delinquencies, and other macroeconomic factors in this determination. As a result, none of the securities were deemed to require an allowance for credit losses. BancShares has the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses.
Investment securities having an aggregate carrying value of $ 4.53 billion at June 30, 2020, and $ 3.93 billion at December 31, 2019, were pledged as collateral to secure public funds on deposit and certain short-term borrowings, and for other purposes as required by law.
BancShares’ portfolio of held to maturity debt securities consists of mortgage-backed securities issued by government agencies and government sponsored entities. Given the consistently strong credit rating of the U.S. Treasury and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, no further credit monitoring is performed on these portfolios. Should there be downgrades to the credit rating of the U.S. Treasury or losses reported on securities issued by government agencies and government sponsored entities, BancShares will reevaluate its determination of zero expected credit losses on held to maturity debt securities.
There were no debt securities held to maturity on nonaccrual status as of June 30, 2020.
A security is considered past due once it is 30 days contractually past due under the terms of the agreement. There were no securities past due as of June 30, 2020.
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NOTE D - LOANS AND LEASES
BancShares’ accounting methods for loans and leases depends on whether they are originated or purchased, and if purchased, whether or not the loans reflect more than insignificant credit deterioration since origination, which is determined as of the acquisition date. Non-PCD loans consist of loans originated by BancShares and loans purchased from other institutions, that do not reflect more than insignificant credit deterioration at acquisition and are reported by loan segments and classes as defined in Note A - Accounting Polices and Basis of Presentation. Purchased loans which reflect more than insignificant credit deterioration are classified as PCD and reported as a single loan segment or class. At the date of acquisition, all acquired loans are recorded at fair value.
Loans and leases outstanding included the following at June 30, 2020 and December 31, 2019:
(Dollars in thousands) June 30, 2020
Commercial:
Construction and land development $ 1,012,365
Owner occupied commercial mortgage 10,352,793
Non-owner occupied commercial mortgage 3,056,328
Commercial and industrial and leases 4,650,839
SBA-PPP 3,084,549
Total commercial loans 22,156,874
Consumer:
Residential mortgage 5,404,682
Revolving mortgage 2,233,977
Construction and land development 353,382
Consumer auto 1,195,771
Consumer other 543,088
Total consumer loans 9,730,900
Total non-PCD loans and leases 31,887,774
PCD loans 530,651
Total loans and leases $ 32,418,425
(Dollars in thousands) December 31, 2019
Commercial:
Construction and land development $ 1,013,454
Commercial mortgage 12,282,635
Other commercial real estate 542,028
Commercial and industrial and leases 4,403,792
Other 310,093
Total commercial loans 18,552,002
Noncommercial:
Residential mortgage 5,293,917
Revolving mortgage 2,339,072
Construction and land development 357,385
Consumer 1,780,404
Total noncommercial loans 9,770,778
Total non-PCI loans and leases 28,322,780
PCI loans 558,716
Total loans and leases $ 28,881,496
Accrued interest receivable on loans at June 30, 2020 was $ 139.8 million and was excluded from the estimate of credit losses. Management reviewed this policy election during the second quarter of 2020 due to the increase in accrued interest receivable and concluded the policy election remained appropriate.
At June 30, 2020, $ 11.78 billion in non-PCD loans with a lendable collateral value of $ 8.52 billion were used to secure $ 653.7 million in Federal Home Loan Bank (“FHLB”) of Atlanta advances, resulting in additional borrowing capacity of $ 7.86 billion. At December 31, 2019, $ 9.41 billion in non-PCD loans with a lendable collateral value of $ 6.57 billion were used to secure $ 563.7 million in FHLB of Atlanta advances, resulting in additional borrowing capacity of $ 6.01 billion. At June 30, 2020, $ 3.93 billion in non-PCD loans with a lendable collateral value of $ 3.14 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (“FRB”). At December 31, 2019, $ 3.68 billion in non-PCD loans with a lendable collateral value of $ 2.98 billion were used to secure additional borrowing capacity at the FRB.
19
Certain residential real estate loans are originated to be sold to investors and are recorded in loans held for sale at fair value. In addition, we may change our strategy for certain portfolio loans and decide to sell them in the secondary market. At that time, portfolio loans are transferred to loans held for sale at fair value. Loans held for sale totaled $ 107.9 million and $ 67.9 million at June 30, 2020 and December 31, 2019, respectively.
Net deferred fees on non-PCD loans and leases, including unearned and unamortized costs and fees, were $ 100.7 million and $ 927 thousand at June 30, 2020 and December 31, 2019, respectively. Of the amount outstanding as of June 30, 2020, $ 96.6 million relates to net deferred fees and costs on SBA-PPP loans. The net unamortized discount related to purchased non-PCD loans and leases was $ 25.8 million at June 30, 2020 and $ 30.9 million at December 31, 2019. The net unamortized discount related to PCD loans and leases was $ 54.7 million at June 30, 2020 and $ 88.2 million at December 31, 2019.
The aging of the outstanding loans and leases, by class, at June 30, 2020 and December 31, 2019 is provided in the tables below. Loans and leases past due 30 days or less are considered current as various grace periods allow borrowers to make payments within a stated period after the due date and still remain in compliance with the loan agreement.
June 30, 2020
(Dollars in thousands) 30-59 days
past due 		60-89 days
past due 		90 days or greater Total past
due 		Current Total loans
and leases
Commercial:
Construction and land development $ 1,618 $ 14 $ 1,721 $ 3,353 $ 1,009,012 $ 1,012,365
Owner occupied commercial mortgage 14,360 2,518 12,820 29,698 10,323,095 10,352,793
Non-owner occupied commercial mortgage 7,914 982 8,520 17,416 3,038,912 3,056,328
Commercial and industrial and leases 10,464 3,196 4,215 17,875 4,632,964 4,650,839
SBA-PPP — — — — 3,084,549 3,084,549
Total commercial loans 34,356 6,710 27,276 68,342 22,088,532 22,156,874
Consumer:
Residential mortgage 25,243 7,082 35,044 67,369 5,337,313 5,404,682
Revolving mortgage 8,874 4,615 9,006 22,495 2,211,482 2,233,977
Construction and land development 1,735 127 57 1,919 351,463 353,382
Consumer auto 3,093 1,124 976 5,193 1,190,578 1,195,771
Consumer other 2,433 1,691 1,835 5,959 537,129 543,088
Total consumer loans 41,378 14,639 46,918 102,935 9,627,965 9,730,900
PCD loans 18,850 4,694 33,483 57,027 473,624 530,651
Total loans and leases $ 94,584 $ 26,043 $ 107,677 $ 228,304 $ 32,190,121 $ 32,418,425
December 31, 2019
(Dollars in thousands) 30-59 days
past due 		60-89 days
past due 		90 days or greater Total past
due 		Current Total loans
and leases
Commercial:
Construction and land development $ 3,146 $ 195 $ 2,702 $ 6,043 $ 1,007,411 $ 1,013,454
Commercial mortgage 20,389 8,774 8,319 37,482 12,245,153 12,282,635
Other commercial real estate 861 331 698 1,890 540,138 542,028
Commercial and industrial and leases 18,269 4,842 5,032 28,143 4,375,649 4,403,792
Other 51 411 126 588 309,505 310,093
Total commercial loans 42,716 14,553 16,877 74,146 18,477,856 18,552,002
Noncommercial:
Residential mortgage 45,839 18,289 24,409 88,537 5,205,380 5,293,917
Revolving mortgage 9,729 3,468 9,865 23,062 2,316,010 2,339,072
Construction and land development 977 218 1,797 2,992 354,393 357,385
Consumer 10,481 3,746 3,571 17,798 1,762,606 1,780,404
Total noncommercial loans 67,026 25,721 39,642 132,389 9,638,389 9,770,778
PCI loans 26,478 10,784 28,973 66,235 492,481 558,716
Total loans and leases $ 136,220 $ 51,058 $ 85,492 $ 272,770 $ 28,608,726 $ 28,881,496
20
The amortized cost, by class, of loans and leases on nonaccrual status, and loans and leases greater than 90 days past due and still accruing at June 30, 2020 and December 31, 2019, were as follows:
January 1, 2020 (1)
June 30, 2020
(Dollars in thousands) Nonaccrual
loans and
leases 		Nonaccrual
loans and
leases 		Loans and
leases > 90
days and
accruing
Commercial:
Construction and land development $ 4,281 $ 2,938 $ 69
Owner occupied commercial mortgage 24,476 28,283 111
Non-owner occupied commercial mortgage 5,965 8,491 615
Commercial and industrial and leases 7,685 7,239 1,399
Total commercial loans 42,407 46,951 2,194
Consumer:
Residential mortgage 44,357 59,352 —
Revolving mortgage 22,411 23,600 —
Construction and land development 2,828 1,699 —
Consumer auto 2,145 2,677 —
Consumer other 798 1,001 1,450
Total consumer loans 72,539 88,329 1,450
PCD loans 53,771 62,511 152
Total loans and leases $ 168,717 $ 197,791 $ 3,796
(1) Upon the adoption of ASC 326, BancShares eliminated the pooling of PCI loans and as a result $ 47.0 million in additional PCD loans were recognized as nonaccrual loans at January 1, 2020. As of June 30, 2020, $ 35.9 million of these loans remained outstanding.
December 31, 2019
(Dollars in thousands) Nonaccrual
loans and
leases 		Loans and
leases > 90
days and
accruing
Commercial:
Construction and land development $ 4,281 $ —
Commercial mortgage 29,733 —
Commercial and industrial and leases 7,365 1,094
Other commercial real estate 708 —
Other 320 —
Total commercial loans 42,407 1,094
Noncommercial:
Construction and land development 2,828 —
Residential mortgage 44,357 45
Revolving mortgage 22,411 —
Consumer 2,943 2,152
Total noncommercial loans 72,539 2,197
PCI loans 6,743 24,257
Total loans and leases $ 121,689 $ 27,548
Credit Quality
Loans and leases are monitored for credit quality on a recurring basis. Commercial and consumer loans and leases have different credit quality indicators as a result of the unique characteristics of the loan segments being evaluated. The credit quality indicators for commercial loans and leases are borrower risk classifications developed through a review of individual borrowers on an ongoing basis. Commercial loans are evaluated at least annually, with more frequent evaluations done on criticized loans. Commercial loans are also updated if there is evidence of potential credit deterioration, such as delinquency. Commercial credit cards are included in the Commercial and industrial and leases segment, but are evaluated based primarily upon delinquency status. The risk classifications as of the date presented are based on the most recent assessment performed and are defined below:
Pass – A pass rated asset is not adversely classified because it does not display any of the characteristics for adverse classification.
Special mention – A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, such potential weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.
21
Substandard – A substandard asset is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Assets classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These assets are characterized by the distinct possibility of loss if the deficiencies are not corrected.
Doubtful – An asset classified as doubtful has all the weaknesses inherent in an asset classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values.
Loss – Assets classified as loss are considered uncollectible and of such little value that it is inappropriate to be carried as an asset. This classification is not necessarily equivalent to any potential for recovery or salvage value, but rather that it is not appropriate to defer a full charge-off even though partial recovery may be affected in the future.
Ungraded – Ungraded loans represent loans that are not included in the individual credit grading process due to their relatively small balances or borrower type. The majority of ungraded loans at June 30, 2020 relate to business credit cards. Business credit card loans are subject to automatic charge-off when they become 120 days past due in the same manner as unsecured consumer lines of credit. The remaining balance is comprised of a small amount of commercial mortgage, lease financing and other commercial real estate loans.
The credit quality indicators for consumer and PCD loans are based on delinquency status of the borrower as of the date presented. As the borrower becomes more delinquent, the likelihood of loss increases.
The following tables represent current credit quality indicators by origination year as of June 30, 2020.
Commercial Loans Amortized Cost Basis by Origination Year
Classification: 2020 2019 2018 2017 2016 Prior Revolving Revolving converted to term loans Total
(Dollars in thousands)
Construction and land development
Pass $ 175,302 $ 404,898 $ 217,555 $ 132,753 $ 31,599 $ 14,453 $ 25,141 $ — $ 1,001,701
Special Mention 88 — 334 5,507 — 93 — — 6,022
Substandard 1,405 1,221 1,813 29 8 166 — — 4,642
Total 176,795 406,119 219,702 138,289 31,607 14,712 25,141 — 1,012,365
Owner occupied commercial mortgage
Pass 1,345,296 2,218,595 1,850,128 1,452,273 1,203,335 1,943,057 106,274 137 10,119,095
Special Mention 2,296 11,164 29,941 13,089 17,795 30,315 2,742 — 107,342
Substandard 9,186 12,309 16,886 24,063 14,255 40,331 9,254 72 126,356
Total 1,356,778 2,242,068 1,896,955 1,489,425 1,235,385 2,013,703 118,270 209 10,352,793
Non-owner occupied commercial mortgage
Pass 380,269 685,067 490,693 452,152 360,096 595,139 36,723 — 3,000,139
Special Mention — 2,048 20,236 872 5,885 7,658 787 — 37,486
Substandard 1,237 1,094 3,653 1,642 6,513 3,085 1,479 — 18,703
Total 381,506 688,209 514,582 454,666 372,494 605,882 38,989 — 3,056,328
Commercial and industrial and leases
Pass 750,806 1,207,639 630,297 401,635 301,561 401,284 805,691 5,565 4,504,478
Special Mention 1,431 3,426 6,387 5,534 3,159 2,518 13,928 243 36,626
Substandard 11,847 3,794 4,323 5,608 2,790 4,941 22,084 696 56,083
Doubtful — — 39 — — — 2 — 41
Ungraded — — — — — — 53,611 — 53,611
Total 764,084 1,214,859 641,046 412,777 307,510 408,743 895,316 6,504 4,650,839
SBA-PPP
Pass 3,084,549 — — — — — — — 3,084,549
Total 3,084,549 — — — — — — — 3,084,549
Total commercial $ 5,763,712 $ 4,551,255 $ 3,272,285 $ 2,495,157 $ 1,946,996 $ 3,043,040 $ 1,077,716 $ 6,713 $ 22,156,874
22
Consumer and PCD Loans Amortized Cost Basis by Origination Year
Days Past Due: 2020 2019 2018 2017 2016 Prior Revolving Revolving converted to term loans Total
(Dollars in thousands)
Residential mortgage
Current $ 891,796 $ 1,105,486 $ 837,530 $ 755,457 $ 591,255 $ 1,132,116 $ 23,673 $ — $ 5,337,313
30-59 days 488 2,760 2,985 4,612 2,594 11,685 119 — 25,243
60-89 days 26 158 326 265 1,851 4,456 — — 7,082
90 days or greater 23 738 5,815 6,054 6,203 13,239 2,972 — 35,044
Total 892,333 1,109,142 846,656 766,388 601,903 1,161,496 26,764 — 5,404,682
Revolving mortgage
Current — — — — — — 2,054,864 156,618 2,211,482
30-59 days — — — — — — 4,622 4,252 8,874
60-89 days — — — — — — 452 4,163 4,615
90 days or greater — — — — — — 3,150 5,856 9,006
Total — — — — — — 2,063,088 170,889 2,233,977
Construction and land development
Current 88,063 174,326 52,270 16,909 8,123 7,881 3,891 — 351,463
30-59 days 245 1,312 91 — — 87 — — 1,735
60-89 days — — — 11 — 116 — — 127
90 days or greater — — — — — 57 — — 57
Total 88,308 175,638 52,361 16,920 8,123 8,141 3,891 — 353,382
Consumer auto
Current 245,264 421,363 284,557 142,512 74,782 22,100 — — 1,190,578
30-59 days 172 1,070 654 710 319 168 — — 3,093
60-89 days 75 432 239 215 132 31 — — 1,124
90 days or greater 22 312 306 206 76 54 — — 976
Total 245,533 423,177 285,756 143,643 75,309 22,353 — — 1,195,771
Consumer other
Current 27,655 40,769 17,093 9,585 10,595 31,275 400,157 — 537,129
30-59 days 78 33 79 31 13 22 2,177 — 2,433
60-89 days 31 67 70 — 5 — 1,518 — 1,691
90 days or greater 1 97 5 — 74 — 1,658 — 1,835
Total 27,765 40,966 17,247 9,616 10,687 31,297 405,510 — 543,088
Total consumer $ 1,253,939 $ 1,748,923 $ 1,202,020 $ 936,567 $ 696,022 $ 1,223,287 $ 2,499,253 $ 170,889 $ 9,730,900
PCD loans
Current $ 21,462 $ 28,900 $ 32,863 $ 39,973 $ 33,294 $ 278,266 $ 14,999 $ 23,867 $ 473,624
30-59 days 1,005 546 199 132 808 15,591 182 387 18,850
60-89 days 117 141 37 34 — 3,669 72 624 4,694
90 days or greater 454 3,075 8,152 1,469 1,101 17,135 516 1,581 33,483
Total $ 23,038 $ 32,662 $ 41,251 $ 41,608 $ 35,203 $ 314,661 $ 15,769 $ 26,459 $ 530,651
Total loans and leases $ 7,040,689 $ 6,332,840 $ 4,515,556 $ 3,473,332 $ 2,678,221 $ 4,580,988 $ 3,592,738 $ 204,061 $ 32,418,425
23
Loans and leases outstanding at December 31, 2019 by credit quality indicator are provided below:
December 31, 2019
Commercial loans and leases
(Dollars in thousands) Construction and land
development 		Commercial mortgage Other commercial real estate Commercial and industrial and leases Other PCI Total commercial loans and leases
Grade:
Pass $ 1,004,922 $ 12,050,799 $ 536,682 $ 4,256,456 $ 308,796 $ 148,412 $ 18,157,655
Special mention 2,577 115,164 3,899 44,604 622 44,290 166,866
Substandard 5,955 116,672 1,447 34,148 675 87,970 158,897
Doubtful — — — 3 — 3,657 3
Ungraded — — — 68,581 — — 68,581
Total $ 1,013,454 $ 12,282,635 $ 542,028 $ 4,403,792 $ 310,093 $ 284,329 $ 18,552,002
December 31, 2019
Noncommercial loans and leases
(Dollars in thousands) Residential mortgage Revolving mortgage Construction and land development Consumer PCI Total noncommercial loans and leases
Days past due:
Current $ 5,205,380 $ 2,316,010 $ 354,393 $ 1,762,606 $ 240,995 $ 9,638,389
30-59 days past due 45,839 9,729 977 10,481 13,764 67,026
60-89 days past due 18,289 3,468 218 3,746 5,608 25,721
90 days or greater past due 24,409 9,865 1,797 3,571 14,020 39,642
Total $ 5,293,917 $ 2,339,072 $ 357,385 $ 1,780,404 $ 274,387 $ 9,770,778
Purchased loans and leases
The following table summarizes PCD loans acquired in the Community Financial transaction and provides the contractually required payments, less the initial allowance for credit losses and discount to produce the fair value of acquired loans with evidence of more than insignificant credit quality deterioration since origination at the acquisition date:
(Dollars in thousands) Community Financial
Contractually required payments $ 25,635
Initial PCD allowance 1,193
Discount 1,055
Fair value at acquisition date $ 23,387
The recorded fair values of purchased non-PCD loans acquired in the Community Financial transaction as of the acquisition date are as follows:
(Dollars in thousands) Community Financial
Commercial:
Construction and land development $ 9,428
Owner occupied commercial mortgage 31,473
Non-owner occupied commercial mortgage 25,143
Commercial and industrial and leases 15,065
Total commercial loans 81,109
Consumer:
Residential mortgage 21,168
Revolving mortgage 2,084
Construction and land development 5,254
Consumer auto 294
Consumer other 693
Total consumer loans 29,493
Total non-PCD loans $ 110,602
24
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.
25
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
26
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.
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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.
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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.
29
NOTE F - OTHER REAL ESTATE OWNED
The following table explains changes in OREO during the six months ended June 30, 2020 and 2019:
(Dollars in thousands) OREO
Balance at December 31, 2019 $ 46,591
Additions 9,184
Acquired in business combinations 9,813
Sales ( 9,497 )
Write-downs/losses ( 2,241 )
Balance at June 30, 2020 $ 53,850
Balance at December 31, 2018 $ 48,030
Additions 7,894
Acquired in business combinations 3,613
Sales ( 11,012 )
Write-downs/losses ( 2,289 )
Balance at June 30, 2019 $ 46,236
At June 30, 2020 and December 31, 2019, BancShares had $ 11.7 million and $ 14.5 million, respectively, of foreclosed residential real estate property in OREO. The recorded investment in consumer mortgage loans collateralized by residential real estate property in the process of foreclosure was $ 25.5 million and $ 23.0 million at June 30, 2020 and December 31, 2019, respectively. Net gains and losses recorded on the sale of OREO properties were losses of $ 234 thousand and gains of $ 872 thousand for the six months ended June 30, 2020 and June 30, 2019 , respectively
NOTE G - SERVICING RIGHTS
Mortgage Servicing Rights
Our portfolio of residential mortgage loans serviced for third parties was $ 3.37 billion and $ 3.38 billion as of June 30, 2020 and December 31, 2019, respectively. These loans are originated and sold to third parties on a non-recourse basis with servicing rights retained. The retained servicing rights were recorded as a servicing asset and are reported in other intangible assets. The associated amortization expense and any valuation allowance recognized were included as a reduction of mortgage income. Mortgage servicing rights are initially recorded at fair value and then carried at the lower of amortized cost or fair value.
Contractually specified mortgage servicing fees, late fees and ancillary fees earned for the three months ended June 30, 2020 and 2019 were $ 2.1 million and $ 2.0 million, respectively, and are reported in mortgage income. For the six months ended June 30, 2020 and 2019, contractually specified mortgage servicing fees, late fees, and ancillary fees earned were $ 4.3 million and $ 3.9 million, respectively.
The following table presents changes in the servicing asset during the three and six months ended June 30, 2020 and 2019:
Three months ended June 30 Six months ended June 30
(Dollars in thousands) 2020 2019 2020 2019
Beginning balance $ 19,756 $ 20,647 $ 22,963 $ 21,396
Servicing rights originated 2,096 1,552 3,679 2,411
Amortization ( 2,119 ) ( 1,567 ) ( 3,942 ) ( 3,014 )
Valuation allowance (increase) decrease ( 1,069 ) 33 ( 4,036 ) ( 128 )
Ending balance $ 18,664 $ 20,665 $ 18,664 $ 20,665
The following table presents the activity in the servicing asset valuation allowance for the three and six months ended June 30, 2020 and 2019:
Three months ended June 30 Six months ended June 30
(Dollars in thousands) 2020 2019 2020 2019
Beginning balance $ 3,189 $ 161 $ 222 $ —
Valuation allowance increase (decrease) 1,069 ( 33 ) 4,036 128
Ending balance $ 4,258 $ 128 $ 4,258 $ 128
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Mortgage servicing rights valuations are performed using a pooling methodology where loans with similar risk characteristics are grouped together and evaluated using discounted cash flows to estimate the present value of future earnings. Key economic assumptions used to value mortgage servicing rights were as follows:
June 30, 2020 December 31, 2019
Discount rate - conventional fixed loans 7.66 % 8.92 %
Discount rate - all loans excluding conventional fixed loans 8.66 % 9.92 %
Weighted average constant prepayment rate 20.19 % 13.72 %
Weighted average cost to service a loan $ 87.30 $ 87.09
The fair value of mortgage servicing rights is sensitive to changes in assumptions and is determined by estimating the present value of the asset’s future cash flows by utilizing discount rates, prepayment rates, and other inputs. The discount rate is based on the 10-year U.S. Treasury rate plus a risk premium of 700 basis points for conventional fixed loans and 800 basis points for all other loans. The prepayment rate is derived from the Public Securities Association Standard Prepayment model. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value and may result in the recognition of a valuation allowance. The average cost to service a loan is based on the number of loans serviced and the total cost to service the loans.
NOTE H - REPURCHASE AGREEMENTS
BancShares utilizes securities sold under agreements to repurchase to facilitate the needs of customers and secure wholesale funding needs. Repurchase agreements are transactions whereby BancShares offers to sell to a counterparty an undivided interest in an eligible security at an agreed upon price, and which obligates BancShares to repurchase the security at an agreed upon date, repurchase price, and interest rate. These agreements are recorded at the amount of cash received in connection with the transaction and are reflected as securities sold under customer repurchase agreements.
BancShares monitors collateral levels on a continuous basis and maintains records of each transaction specifically describing the applicable security and the counterparty’s interest in that security, and segregates the security from general assets in accordance with regulations governing custodial holdings of securities. The primary risk with repurchase agreements is market risk associated with the investments securing the transactions, as additional collateral may be required based on fair value changes of the underlying investments. Securities pledged as collateral under repurchase agreements are maintained with safekeeping agents. The carrying value of investment securities available for sale pledged as collateral under repurchase agreements was $ 766.8 million and $ 477.6 million at June 30, 2020 and December 31, 2019, respectively.
At June 30, 2020, BancShares held $ 740.3 million of securities sold under agreements to repurchase, with overnight and continuous remaining contractual maturities, made up of $ 470.8 million collateralized by government agency securities and $ 269.5 million collateralized by commercial mortgage-backed securities. At December 31, 2019, BancShares held securities sold under agreements to repurchase of $ 443.0 million, with overnight and continuous remaining contractual maturities collateralized by government agency securities.
NOTE I - FDIC SHARED-LOSS PAYABLE
At June 30, 2020, shared-loss protection remains for single family residential loans acquired in the amount o f $ 38.0 million. The shared-loss agreement for two of the FDIC-assisted transactions include a provision related to a payment that may be owed to the FDIC at the termination of the agreement if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition (the “clawback liability”) . BancShares issued a payment to the FDIC in the first quarter of 2020 for $99.5 million related to one of the transactions. The remaining clawback liability payment date is March 2021.
The following table provides changes in the FDIC shared-loss payable since December 31, 2019:
(Dollars in thousands) Total
Balance at December 31, 2019 $ 112,395
Accretion 2,098
Payment made to the FDIC to settle shared-loss agreement ( 99,468 )
Balance at June 30, 2020 $ 15,025
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NOTE J - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) included the following as of June 30, 2020 and December 31, 2019:
June 30, 2020 December 31, 2019
(Dollars in thousands) Accumulated
other
comprehensive
income (loss) 		Deferred
tax
expense
(benefit) 		Accumulated
other
comprehensive
income (loss),
net of tax 		Accumulated
other
comprehensive
income (loss) 		Deferred
tax
expense
(benefit) 		Accumulated
other
comprehensive
income (loss),
net of tax
Unrealized gains on securities available for sale $ 146,884 $ 33,782 $ 113,102 $ 7,522 $ 1,730 $ 5,792
Defined benefit pension items ( 159,436 ) ( 36,670 ) ( 122,766 ) ( 172,098 ) ( 39,583 ) ( 132,515 )
Total $ ( 12,552 ) $ ( 2,888 ) $ ( 9,664 ) $ ( 164,576 ) $ ( 37,853 ) $ ( 126,723 )
The following table highlights changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2020 and 2019:
Three months ended June 30, 2020
(Dollars in thousands, net of tax) Unrealized gains (losses) on securities available for sale Unrealized losses on securities available for sale transferred to held to maturity Defined benefit pension items Total
Beginning balance $ 102,080 $ — $ ( 127,692 ) $ ( 25,612 )
Net unrealized gains arising during period 21,611 — — 21,611
Amounts reclassified from accumulated other comprehensive loss ( 10,589 ) — 4,926 ( 5,663 )
Net current period other comprehensive income 11,022 — 4,926 15,948
Ending balance $ 113,102 $ — $ ( 122,766 ) $ ( 9,664 )
Three months ended June 30, 2019
(Dollars in thousands, net of tax) Unrealized gains (losses) on securities available for sale Unrealized losses on securities available for sale transferred to held to maturity Defined benefit pension items Total
Beginning balance $ ( 16,890 ) $ ( 66,558 ) $ ( 123,412 ) $ ( 206,860 )
Net unrealized gains arising during period 23,848 — — 23,848
Amounts reclassified from accumulated other comprehensive loss ( 4,404 ) 4,579 2,106 2,281
Net current period other comprehensive income 19,444 4,579 2,106 26,129
Ending balance $ 2,554 $ ( 61,979 ) $ ( 121,306 ) $ ( 180,731 )
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Six months ended June 30, 2020
(Dollars in thousands, net of tax) Unrealized gains on securities available for sale Unrealized losses on securities available for sale transferred to held to maturity Defined benefit pension items Total
Beginning balance $ 5,792 $ — $ ( 132,515 ) $ ( 126,723 )
Net unrealized gains arising during period 133,141 — — 133,141
Amounts reclassified from accumulated other comprehensive loss ( 25,831 ) — 9,749 ( 16,082 )
Net current period other comprehensive income 107,310 — 9,749 117,059
Ending balance $ 113,102 $ — $ ( 122,766 ) $ ( 9,664 )
Six months ended June 30, 2019
(Dollars in thousands, net of tax) Unrealized gains on securities available for sale Unrealized losses on securities available for sale transferred to held to maturity Defined benefit pension items Total
Beginning balance $ ( 38,505 ) $ ( 71,149 ) $ ( 125,533 ) $ ( 235,187 )
Net unrealized gains arising during period 45,463 — — 45,463
Amounts reclassified from accumulated other comprehensive loss ( 4,404 ) 9,170 4,227 8,993
Net current period other comprehensive income 41,059 9,170 4,227 54,456
Ending balance $ 2,554 $ ( 61,979 ) $ ( 121,306 ) $ ( 180,731 )
The following table presents the amounts reclassified from accumulated other comprehensive income (loss) and the line item affected in the statement where net income is presented for the three and six months ended June 30, 2020 and 2019:
(Dollars in thousands) Three months ended June 30, 2020
Details about accumulated other comprehensive income (loss) Amounts reclassified from accumulated other comprehensive income (loss) Affected line item in the statement where net income is presented
Unrealized gains on securities available for sale $ 13,752 Realized gains on investment securities available for sale, net
( 3,163 ) Income taxes
$ 10,589
Amortization of defined benefit pension actuarial losses ( 6,398 ) Other
1,472 Income taxes
$ ( 4,926 )
Total reclassifications for the period $ 5,663
Three months ended June 30, 2019
Details about accumulated other comprehensive income (loss) Amounts reclassified from accumulated other comprehensive income (loss) Affected line item in the statement where net income is presented
Unrealized gains on securities available for sale $ 5,719 Realized gains on investment securities available for sale, net
( 1,315 ) Income taxes
$ 4,404
Amortization of unrealized losses on securities available for sale transferred to held to maturity $ ( 5,947 ) Net interest income
1,368 Income taxes
$ ( 4,579 )
Amortization of defined benefit pension items
Prior service costs $ ( 14 ) Salaries and wages
Actuarial losses ( 2,721 ) Other
( 2,735 ) Income before income taxes
629 Income taxes
$ ( 2,106 )
Total reclassifications for the period $ ( 2,281 )
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Six months ended June 30, 2020
Details about accumulated other comprehensive income (loss) Amounts reclassified from accumulated other comprehensive income (loss) Affected line item in the statement where net income is presented
Unrealized gains on securities available for sale $ 33,547 Realized gains on investment securities available for sale, net
( 7,716 ) Income taxes
$ 25,831
Amortization of defined benefit pension items
Actuarial losses $ ( 12,662 ) Other
2,913 Income taxes
$ ( 9,749 )
Total reclassifications for the period $ 16,082
Six months ended June 30, 2019
Details about accumulated other comprehensive income (loss) Amounts reclassified from accumulated other comprehensive income (loss) Affected line item in the statement where net income is presented
Unrealized gains on securities available for sale $ 5,719 Realized gains on investment securities available for sale, net
( 1,315 ) Income taxes
$ 4,404 Net income
Amortization of unrealized losses on securities available for sale transferred to held to maturity $ ( 11,909 ) Net interest income
2,739 Income taxes
$ ( 9,170 )
Amortization of defined benefit pension items
Prior service costs $ ( 28 ) Salaries and wages
Actuarial losses ( 5,462 ) Other
( 5,490 ) Income before income taxes
1,263 Income taxes
$ ( 4,227 )
Total reclassifications for the period $ ( 8,993 )
NOTE K - ESTIMATED FAIR VALUES
Fair value estimates are intended to represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Where there is no active market for a financial instrument, BancShares has made estimates using discounted cash flows or other valuation techniques. Inputs used in these valuation techniques are subjective in nature, involve uncertainties and require significant judgment and therefore can only be derived within a range of precision. Accordingly, the derived fair value estimates presented below are not necessarily indicative of the amounts BancShares would realize in a current market exchange.
ASC 820, Fair Value Measurements and Disclosures , indicates that assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels. The levels are based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The level within the fair value hierarchy for an asset or liability is based on the highest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows:
• Level 1 values are based on quoted prices for identical instruments in active markets.
• Level 2 values are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.
• Level 3 values are derived from valuation techniques in which one or more significant inputs or assumptions are not observable in the market. These unobservable inputs and assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models and similar techniques.
BancShares’ management reviews any changes to its valuation methodologies to ensure they are appropriate and supportable, and refines valuation methodologies as more market-based data becomes available. Accuracy of the levels of the fair value hierarchy are validated at the end of the reporting period.
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The methodologies used to estimate the fair value of financial assets and financial liabilities are discussed below:
Investment securities available for sale and held to maturity . The fair value of U.S. Treasury, government agency and mortgage-backed securities, municipal securities, as well as a portion of corporate bonds, is generally estimated using a third party pricing service. The third party provider evaluates securities based on comparable investments with trades and market data and will utilize pricing models that use a variety of inputs, such as benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers as needed. These securities are generally classified as Level 2. The remaining corporate bonds held are generally measured at fair value based on indicative bids from broker-dealers and are not directly observable. These securities are considered Level 3.
Investment in marketable equity securities. Equity securities are measured at fair value using observable closing prices and the market activity. Equity securities are classified as Level 1 if they are traded in an active market and as Level 2 if the observable closing price is from a less than active market.
Loans held for sale. Management elects the fair value option on certain residential real estate loans originated to be sold to investors. The loans are carried at fair value based on quoted market prices for similar types of loans. Accordingly, the inputs used to calculate fair value of originated residential real estate loans held for sale are classified as Level 2 inputs. Loans held for investment subsequently transferred to held for sale are carried at fair value when a firm commitment to purchase from a counterparty exists. The fair value of the transferred loans is based on the quoted prices and is considered a Level 1 input.
Net loans and leases. Fair value is estimated based on discounted future cash flows using the current interest rates at which loans with similar terms would be made to borrowers of similar credit quality. The inputs used in the fair value measurements for loans and leases are considered Level 3 inputs.
FHLB stock . The carrying amount of FHLB stock is a reasonable estimate of fair value as these securities are not readily marketable and are evaluated for impairment based on the ultimate recoverability of the par value. BancShares considers positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. BancShares believes its investment in FHLB stock is ultimately recoverable at par. The inputs used in the fair value measurement for the FHLB stock are considered Level 2 inputs.
Mortgage and other servicing rights. Mortgage and other servicing rights are carried at the lower of amortized cost or market value and are, therefore, carried at fair value only when fair value is less than the amortized cost. The fair value of mortgage and other servicing rights is performed using a pooling methodology. Similar loans are pooled together and a model that relies on discount rates, estimates of prepayment rates and the weighted average cost to service the loans is used to determine the fair value. The inputs used in the fair value measurement for mortgage and other servicing rights are considered Level 3 inputs.
Deposits. For non-time deposits, carrying value is a reasonable estimate of fair value. The fair value of time deposits is estimated by discounting future cash flows using the interest rates currently offered for deposits with similar remaining maturities. The inputs used in the fair value measurement for deposits are considered Level 2 inputs.
Borrowings. For borrowings, the fair values are determined based on recent trades or sales of the actual security if available. Otherwise, fair values are estimated by discounting future cash flows using current interest rates for similar financial instruments. The inputs used in the fair value measurement for FHLB borrowings, subordinated debentures, and other borrowings are considered Level 2 inputs.
Payable to the FDIC for shared-loss agreements. The fair value of the payable to the FDIC for shared-loss agreements is determined based on expected payments to the FDIC in accordance with the shared-loss agreements. Cash flows are discounted using current discount rates to reflect the timing of the estimated amounts due to the FDIC. The inputs used in the fair value measurement for the payable to the FDIC are considered Level 3 inputs.
Off-balance-sheet commitments and contingencies. Carrying amounts are reasonable estimates of the fair values for such financial instruments. Carrying amounts include unamortized fee income and, in some cases, reserves for any credit losses from those financial instruments. These amounts are not material to BancShares’ financial position.
For all other financial assets and liabilities, the carrying value is a reasonable estimate of the fair value as of June 30, 2020 and December 31, 2019. The carrying value and fair value for these assets and liabilities are equivalent because they are relatively short term in nature and there is no interest rate or credit risk that would cause the fair value to differ from the carrying value. Cash and due from banks is classified on the fair value hierarchy as Level 1. Overnight investments, income earned not collected, securities sold under customer repurchase agreements, and accrued interest payable are considered Level 2.
35
The table presents the carrying values and estimated fair values for financial instruments as of June 30, 2020 and December 31, 2019:
(Dollars in thousands) June 30, 2020 December 31, 2019
Carrying value Fair value Carrying value Fair value
Cash and due from banks $ 389,233 $ 389,233 $ 376,719 $ 376,719
Overnight investments 3,107,575 3,107,575 1,107,844 1,107,844
Investment in marketable equity securities 114,316 114,316 82,333 82,333
Investment securities available for sale 8,619,282 8,619,282 7,059,674 7,059,674
Investment securities held to maturity 774,878 791,325 30,996 30,996
Loans held for sale 107,881 107,881 67,869 67,869
Net loans and leases 32,195,975 32,604,388 28,656,355 28,878,550
Income earned not collected 175,496 175,496 123,154 123,154
Federal Home Loan Bank stock 45,392 45,392 43,039 43,039
Mortgage and other servicing rights 20,167 21,163 24,891 26,927
Deposits with no stated maturity 38,202,609 38,202,609 30,593,627 30,593,627
Time deposits 3,276,636 3,303,841 3,837,609 3,842,162
Securities sold under customer repurchase agreements 740,276 740,276 442,956 442,956
Federal Home Loan Bank borrowings 657,682 679,993 572,185 577,362
Subordinated debt 504,246 506,089 163,412 173,685
Other borrowings 96,791 95,861 148,318 149,232
FDIC shared-loss payable 15,025 15,730 112,395 114,252
Accrued interest payable 14,085 14,085 18,124 18,124
For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of June 30, 2020 and December 31, 2019:
June 30, 2020
Fair value measurements using:
(Dollars in thousands) Fair value Level 1 inputs Level 2 inputs Level 3 inputs
Assets measured at fair value
Investment securities available for sale
U.S. Treasury $ 754,586 $ — $ 754,586 $ —
Government agency 545,709 — 545,709 —
Residential mortgage-backed securities 5,790,392 — 5,790,392 —
Commercial mortgage-backed securities 1,079,822 — 1,079,822 —
Corporate bonds 448,773 — 278,796 169,977
Total investment securities available for sale $ 8,619,282 $ — $ 8,449,305 $ 169,977
Marketable equity securities $ 114,316 $ 50,352 $ 63,964 $ —
Loans held for sale $ 107,881 $ — $ 107,881 $ —
December 31, 2019
Fair value measurements using:
Fair value Level 1 inputs Level 2 inputs Level 3 inputs
Assets measured at fair value
Investment securities available for sale
U.S. Treasury $ 409,999 $ — $ 409,999 $ —
Government agency 682,772 — 682,772 —
Residential mortgage-backed securities 5,267,090 — 5,267,090 —
Commercial mortgage-backed securities 380,020 — 380,020 —
Corporate bonds 201,566 — 131,881 69,685
State, county and municipal 118,227 — 118,227 —
Total investment securities available for sale $ 7,059,674 $ — $ 6,989,989 $ 69,685
Marketable equity securities $ 82,333 $ 29,458 $ 52,875 $ —
Loans held for sale $ 67,869 $ — $ 67,869 $ —
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The following tables summarize activity for Level 3 assets:
Corporate bonds
Three months ended June 30 Six months ended June 30
(Dollars in thousands) 2020 2019 2020 2019
Beginning balance $ 67,016 $ 146,287 $ 69,685 $ 143,226
Purchases 100,595 991 100,595 3,991
Unrealized net gains (losses) included in other comprehensive income 2,449 1,822 ( 1,917 ) 1,838
Amounts included in net income ( 83 ) 37 ( 168 ) 82
Transfers in — — 1,782 —
Ending balance $ 169,977 $ 149,137 $ 169,977 $ 149,137
During the three months ended June 30, 2020, there were no transfers between levels. During the six months ended June 30, 2020, there were transfers from Level 2 to Level 3 of $ 1.8 million in corporate bonds available for sale. The transfers were due to a lack of observable inputs and trade activity for those securities. During the three and six months ended June 30, 2019, there were no transfers between levels.
The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis at June 30, 2020:
(Dollars in thousands) June 30, 2020
Level 3 assets Valuation technique Significant unobservable input Fair Value
Corporate bonds Indicative bid provided by broker Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the issuer $ 169,977
Fair Value Option
BancShares has elected the fair value option for residential real estate loans originated to be sold. This election reduces certain timing differences in the Consolidated Statement of Income and better aligns with the management of the portfolio from a business perspective. The changes in fair value were recorded as a component of mortgage income and included a gain of $ 2.4 million and a loss of $ 82 thousand for the three months ended June 30, 2020 and 2019, respectively. The changes in fair value included gains of $ 3.6 million and $ 167 thousand for the six months ended June 30, 2020 and 2019, respectively.
The following table summarizes the difference between the aggregate fair value and the aggregate unpaid principal balance for residential real estate originated for sale measured at fair value as of June 30, 2020 and December 31, 2019:
June 30, 2020
(Dollars in thousands) Fair value Aggregate unpaid principal balance Difference
Originated loans held for sale $ 107,881 $ 102,189 $ 5,692
December 31, 2019
Fair value Aggregate unpaid principal balance Difference
Originated loans held for sale $ 67,869 $ 65,697 $ 2,172
No originated loans held for sale were 90 or more days past due or on nonaccrual status as of June 30, 2020 or December 31, 2019.
We may be required to measure certain financial assets at fair value on a nonrecurring basis. These adjustments to fair value usually result from the application of lower of amortized cost or fair value accounting or write-downs of individual assets due to impairment.
Following the adoption of ASC 326, the population of loans measured at fair value on a non-recurring basis has greatly diminished and is limited to collateral-dependent loans evaluated individually. These collateral-dependent loans are deemed to be at fair value if there is an associated allowance for credit losses or if a charge-off has been recorded in the previous 12 months. Collateral values are determined using appraisals or other third-party value estimates of the subject property discounted based on estimated selling costs, generally between 6 % and 10 %, and immaterial adjustments for other external factors that may impact the marketability of the collateral. The weighted average discount for estimated selling costs applied was 7.81 %.
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Prior to the adoption of ASC 326, impaired loans were deemed to be at fair value if an associated allowance or current period charge-off had been recorded. The value of impaired loans was determined by either collateral valuations or discounted present value of the expected cash flow calculations. Collateral values were determined using appraisals or other third-party value estimates of the subject property with discounts, generally between 6 % and 11 %, applied for estimated selling costs and other external factors that may impact the marketability of the property. Expected cash flows were determined using expected payment information at the individual loan level, discounted using the effective interest rate. The effective interest rate for impaired loans generally ranges between 3 % and 7 %.
OREO acquired or written down within the previous 12 months is deemed to be at fair value. Asset valuations are determined by using appraisals or other third-party value estimates of the subject property with with discounts generally between 7 % and 16 % applied for estimated selling costs and other external factors that may impact the marketability of the property. At June 30, 2020, the weighted average discount applied was 8.16 %. Changes to the value of the assets between scheduled valuation dates are monitored through continued communication with brokers and monthly reviews by the asset manager assigned to each asset. If there are any significant changes in the market or the subject property, valuations are adjusted or new appraisals ordered to ensure the reported values reflect the most current information.
For financial assets and liabilities carried at fair value on a nonrecurring basis, the following table provides fair value information as of June 30, 2020 and December 31, 2019:
June 30, 2020
Fair value measurements using:
(Dollars in thousands) Fair value Level 1 inputs Level 2 inputs Level 3 inputs
Collateral-dependent loans $ 14,341 $ — $ — $ 14,341
Other real estate owned 44,465 — — 44,465
Mortgage servicing rights 17,992 — — 17,992
December 31, 2019
Fair value measurements using:
Fair value Level 1 inputs Level 2 inputs Level 3 inputs
Impaired loans $ 132,336 $ — $ — $ 132,336
Other real estate owned 38,310 — — 38,310
Mortgage servicing rights 3,757 — — 3,757
No financial liabilities were carried at fair value on a nonrecurring basis as of June 30, 2020 and December 31, 2019.
NOTE L - EMPLOYEE BENEFIT PLANS
BancShares sponsors noncontributory defined benefit pension plans for its qualifying employees. The service cost component of net periodic benefit cost is included in salaries and wages while all other non-service cost components are included in other noninterest expense.
For the three and six months ended June 30, 2020 and 2019, the components of net periodic benefit cost are as follows:
Three months ended June 30 Six months ended June 30
(Dollars in thousands) 2020 2019 2020 2019
Service cost $ 3,682 $ 3,271 $ 7,139 $ 6,384
Interest cost 8,568 9,338 17,099 18,629
Expected return on assets ( 16,435 ) ( 15,661 ) ( 32,844 ) ( 31,296 )
Amortization of prior service cost — 14 — 28
Amortization of net actuarial loss 6,398 2,721 12,662 5,462
Net periodic cost (benefit) $ 2,213 $ ( 317 ) $ 4,056 $ ( 793 )
A discretionary contribution of $ 100.0 million was made to the pension plans during the six months ended June 30, 2020. Management evaluates the need for its pension plan contributions on a periodic basis based upon numerous factors including, but not limited to, the funded status of the plans, returns on plan assets, discount rates and the current economic environment.
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NOTE M - LEASES
The following table presents lease assets and liabilities as of June 30, 2020 and December 31, 2019:
(Dollars in thousands) Classification June 30, 2020 December 31, 2019
Assets:
Operating Other assets $ 73,488 $ 77,115
Finance Premises and equipment 7,547 8,820
Total leased assets $ 81,035 $ 85,935
Liabilities:
Operating Other liabilities $ 73,481 $ 76,746
Finance Other borrowings 7,463 8,230
Total lease liabilities $ 80,944 $ 84,976
NOTE N - COMMITMENTS AND CONTINGENCIES
To meet the financing needs of its customers, BancShares and its subsidiaries have financial instruments with off-balance sheet risk. These financial instruments involve elements of credit, interest rate or liquidity risk and include commitments to extend credit and standby letters of credit.
Commitments to extend credit are legally binding agreements to lend to customers. These commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. Established credit standards control the credit risk exposure associated with these commitments. In some cases, BancShares requires collateral be pledged to secure the commitment, including cash deposits, securities and other assets.
Standby letters of credit are commitments guaranteeing performance of a customer to a third party. Those commitments are primarily issued to support public and private borrowing arrangements. To mitigate its risk, BancShares’ credit policies govern the issuance of standby letters of credit. The credit risk related to the issuance of these letters of credit is essentially the same as in extending loans to clients and, therefore, these letters of credit are collateralized when necessary.
The following table presents the commitments to extend credit and standby letters of credit as of June 30, 2020 and December 31, 2019:
(Dollars in thousands) June 30, 2020 December 31, 2019
Unused commitments to extend credit $ 11,705,547 $ 10,682,378
Standby letters of credit 104,655 99,601
BancShares has investments in qualified affordable housing projects primarily for the purposes of fulfilling Community Reinvestment Act requirements and obtaining tax credits. Affordable housing project investments were $ 169.3 million and $ 167.8 million as of June 30, 2020 and December 31, 2019, respectively, and were recorded in other assets. Unfunded commitments to fund future investments in affordable housing projects totaled $ 68.3 million and $ 70.0 million as of June 30, 2020 and December 31, 2019, respectively, and were recorded in other liabilities.
BancShares and various subsidiaries have been named as defendants in legal actions arising from their normal business activities in which damages in various amounts were claimed. BancShares has also been exposed to litigation risk relating to the prior business activities of banks from which assets were acquired and liabilities assumed in the various merger transactions. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, any such liability will not have a material effect on BancShares’ consolidated financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis (“MD&A”) of earnings and related financial data are presented to assist in understanding the financial condition and results of operations of First Citizens BancShares, Inc. and Subsidiaries (“BancShares”). This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes presented within this Quarterly Report on Form 10-Q along with our financial statements and related MD&A of financial condition and results of operations included in our 2019 Annual Report on Form 10-K. Intercompany accounts and transactions have been eliminated. Although certain amounts for prior years have been reclassified to conform to statement presentations for 2020, the reclassifications had no effect on shareholders’ equity or net income as previously reported. Unless otherwise noted, the terms “we,” “us” and “BancShares” refer to the consolidated financial position and consolidated results of operations for BancShares.
EXECUTIVE OVERVIEW
BancShares conducts its banking operations through its wholly-owned subsidiary First-Citizens Bank & Trust Company (“FCB”), a state-chartered bank organized under the laws of the state of North Carolina.
BancShares’ earnings and cash flows are primarily derived from our commercial and retail banking activities. We gather deposits from retail and commercial customers and also secure funding through various non-deposit sources. We invest the liquidity generated from these funding sources in interest-earning assets, including loans and leases, investment securities and overnight investments. We also invest in bank premises, hardware, software, furniture and equipment used to conduct our commercial and retail banking business. We provide treasury services products, cardholder and merchant services, wealth management services and various other products and services typically offered by commercial banks. The fees and service charges generated from these products and services are primary sources of noninterest income which is an essential component of our total revenue.
We are focused on expanding our position in legacy and target markets through organic growth and strategic acquisitions. We believe our franchise is positioned for continued growth as a result of our client centric banking principles, disciplined lending standards, and our people.
Refer to our 2019 Annual Report on Form 10-K for further discussion of our strategy.
RECENT ECONOMIC AND INDUSTRY DEVELOPMENTS
During the first quarter of 2020, a novel strain of coronavirus (“COVID-19”) spread throughout the world, causing significant disruptions to the domestic and global economies which continue to date. In response to the outbreak, governments have imposed restrictions resulting in business shutdowns, regional quarantines, disruptions of supply chains, changes in consumer behavior and overall economic instability. This uncertainty has led to volatility in the financial markets. This impact was coupled with spikes in unemployment as a result of business shutdowns that may continue to impact financial institutions operationally and financially. For a discussion of the risks we face with respect to the COVID-19 pandemic, the associated economic uncertainty, the steps taken to mitigate the pandemic and the resulting economic contraction, see "Item 1A — Risk Factors" in Part II of this quarterly report on Form 10-Q, which should be read in conjunction with the risk factors disclosed in our annual report on Form 10-K for the year ended December 31, 2019.
During the second quarter of 2020, the Federal Reserve’s Federal Open Market Committee (“FOMC”) maintained the federal funds rate at a target range of 0.00% to 0.25%. The FOMC cited the effects of COVID-19 on economic activity and the risks posed to the economic outlook. The FOMC expects to maintain this target range until it is confident the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.
On March 27, 2020, the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) was passed. The bill was designed to provide short-term economic relief to individuals and businesses most impacted by the fallout of the pandemic. Key provisions include: for individuals, economic impact payments and enhanced unemployment benefits; for small businesses, access to loans and support through the Small Business Administration Paycheck Protection Program (“SBA-PPP”), direct aid and loans to the medical industry and other affected sectors, and certain tax benefits that can be used in conjunction with the other aid mentioned. While direct aid to financial services entities is not a primary goal of the provisions, financial institutions will function to transmit funds from the Federal Reserve, SBA and United States (“U.S.”) Treasury to the public. This was supplemented by the Paycheck Protection Program Flexibility Act, which was signed into law on June 5, 2020 and amended provisions of the SBA-PPP including timing of the program and changes to forgiveness criteria. In addition, there were other regulatory actions taken that may impact our business including troubled debt restructuring recognition relief, changes in credit reporting on customer forbearance, federally backed mortgage forbearance, potential legal lending limit relaxation and other economic stabilization efforts. Further legislation is expected as the government continues to mitigate the economic impact on the crisis.
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BANCSHARES’ COVID-19 CONTINUED MONITORING AND RESPONSE
BancShares ended second quarter in a very strong capital and liquidity position providing stability in navigating this crisis. Our leadership team continues to ensure appropriate measures are in place to protect the welfare of our employees and soundness of the organization, while continuing to support our customers. Approximately 95% of our branches have re-opened with enhanced safety protocols and our corporate locations remain at limited occupancy due to current virus trends.
At June 30, 2020 COVID-19 related loan extensions totaled approximately $5.6 billion in outstanding loan balances, representing approximately $166 million in payment deferrals. The first wave of loans with payment deferrals have completed their extension period and the volume of extension requests declined during the second quarter. As of July 31, 2020, COVID-19 related loan extensions decreased to approximately $1.5 billion in outstanding loan balances, representing approximately $43 million in payment deferrals. Of the accounts moving to active status, 91% have made their first scheduled payment and the majority of the remaining accounts are within 15 days of their payment date. To date, we have not seen significant shifts in credit line utilization or declines in overall credit quality.
BancShares originated approximately 23,000 SBA-PPP loan requests with an outstanding balance of $3.08 billion at June 30, 2020. We have collected all $116.9 million in SBA-PPP related loan fees per the program terms. These fees and related costs are deferred and are being recognized in interest income over the life of the loans. Once the forgiveness requirements and procedures are finalized by the regulatory bodies, we anticipate accelerated recognition of the fee income as borrower requests are processed and loans are forgiven.
Table 1
SBA-PPP LOANS BY LOAN SIZE
(Dollars in thousands)
Loan Size $ of Loans % of Loans $
Less than $150,000 $ 853,103 27.7 %
$150,000 to $2,000,000 1,758,252 57.0
Greater than $2,000,000 473,194 15.3
Total $ 3,084,549 100.0 %
Strong Liquidity and Capital Position
We maintain a strong level of liquidity. As of June 30, 2020, liquid assets (available cash and unencumbered high quality liquid assets at market value) totaled approximately $8.04 billion representing 16.8% of consolidated assets as of June 30, 2020.
In addition to liquid assets, we had contingent sources of liquidity totaling approximately $11.68 billion in the form of Federal Home Loan Bank (“FHLB”) borrowing capacity, Federal Reserve Discount Window availability, federal funds lines and a committed line of credit.
At June 30, 2020, BancShares’ regulatory capital ratios were well in excess of Basel III capital requirements with a total risk-based capital ratio of 13.6%, a Tier 1 risk-based capital ratio of 11.4%, a common equity Tier 1 ratio of 10.3%, a Tier 1 leverage ratio of 8.1% and a capital conservation buffer of 5.4%, over twice the required level of 2.5%.
SIGNIFICANT EVENTS IN 2020
On January 1, 2020 BancShares adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Accounting Standards Codification (“ASC”) Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced a new credit loss methodology for the estimation of credit losses.The amendments in this ASU require loss estimates be determined over an asset’s lifetime and broaden the information that an entity must consider in developing its expected credit losses. BancShares adopted this ASU using the modified retrospective approach for all loans, leases, debt securities designated as held to maturity, and unfunded loan commitments. BancShares adopted this ASU using the prospective transition approach for PCD loans previously accounted for under ASC 310-30 and debt securities available for sale. Refer to Note A - Accounting Policies and Basis of Presentation for additional information.
Upon adoption, BancShares recorded a net decrease of $37.9 million in the Allowance for Credit Losses (“ACL”) which included a decrease of $56.9 million in the ACL on non-purchased credit deteriorated (“non-PCD”) loans, offset by an increase of $19.0 million in the ACL on purchased credit deteriorated (“PCD”) loans. The $56.9 million change in the ACL on non-PCD loans, as well as an $8.9 million increase in the reserve for unfunded commitments, net of deferred taxes, resulted in a net increase in retained earnings of $36.9 million. The $19.0 million increase in the ACL on PCD loans was a reclassification of the PCD credit discount and resulted in a gross up of loan balances by this same amount and did not have any effect on retained earnings. Impact to total capital and capital ratios was not significant and we did not elect the capital phase-in option allowable for regulatory reporting purposes.
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FINANCIAL PERFORMANCE SUMMARY
Second Quarter Highlights
• Net income for the second quarter of 2020 totaled $153.8 million, an increase of $34.4 million, or 28.8% compared to the same quarter in 2019. Net income available to common shareholders totaled $149.0 million. Net income per common share increased $4.18, or 39.6%, to $14.74 in the second quarter of 2020, from $10.56 per share during the same period in 2019. Second quarter 2020 earnings were impacted by positive changes in the fair value of the equity securities portfolio totaling $64.6 million, interest and fee income related to SBA-PPP loans of $19.0 million and realized gains on the sale of available for sale securities of $13.8 million, partially offset by an increase in provision expense of $15.4 million, primarily related to the potential impacts of COVID-19, and a decrease in net interest income, excluding the impact of SBA-PPP loans, of $9.0 million.
• Return on average assets for the second quarter of 2020 was 1.36%, up from 1.29% in the second quarter of 2019. Return on average equity for the second quarter of 2020 was 16.43%, up from 13.50% in the the second quarter of 2019.
• Net interest income totaled $337.4 million for the second quarter of 2020, an increase of $10.0 million, or 3.1% compared to the same quarter in 2019. The taxable-equivalent net interest margin (“NIM”) was 3.14% for the second quarter of 2020, down 63 basis points from 3.77% for the second quarter in 2019.
• Noninterest income for the second quarter of 2020 totaled $165.4 million, an increase of $58.5 million, or 54.8% compared to the same quarter of 2019 predominantly due to positive changes on the fair value of the equity securities portfolio.
• Noninterest expense was $291.7 million for the second quarter of 2020, compared to $273.4 million during the same quarter of 2019, an increase of $18.3 million or 6.7%.
• Total loans grew to $32.42 billion, an increase of $3.18 billion, or by 43.7% on an annualized basis, since March 31, 2020, primarily due to SBA-PPP loan originations of $3.08 billion. Excluding SBA-PPP loans and loans divested in the quarter, total loans and leases grew $203.0 million, or by 2.8% on an annualized basis. The net charge-off ratio was 0.09% for the second quarter of 2020, down from 0.11% for the same quarter in 2019.
• Total deposits grew to $41.48 billion, an increase of $6.13 billion, or by 69.8% on an annualized basis, since March 31, 2020, including $3.51 billion of estimated combined deposits related to SBA-PPP loans and consumer stimulus checks. Excluding SBA-PPP and consumer related stimulus deposits and deposits divested in the quarter, total deposits grew $2.80 billion, or by 31.9% on an annualized basis.
• BancShares repurchased 346,000 shares of its Class A common stock during the second quarter of 2020 totaling $127.0 million. At June 30, 2020, BancShares remained well capitalized with a total risk-based capital ratio of 13.6%, a Tier 1 risk-based capital of 11.4%, a common equity Tier 1 ratio of 10.3%, and a leverage ratio of 8.1%.
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Year to Date Highlights
• Net income for the six months ended June 30, 2020 totaled $211.0 million, a decrease of $19.8 million, or 8.6% compared to the same period of 2019. Net income available to common shareholders totaled $206.2 million. Earnings per share decreased $0.19, or 0.9%, to $20.04 for the six months ended June 30, 2020, from $20.23 per share during the same period in 2019.
• Return on average assets for the six months ended June 30, 2020 was 0.98%, down 30 basis points compared to the same period in 2019. Return on average equity for the six months ended June 30, 2020 was 11.40%, down 179 basis points compared to the same period in 2019.
• Net interest income for the six months ended June 30, 2020, was $675.8 million, an increase of $28.0 million, or 4.3% compared to the same period of 2019. The taxable-equivalent NIM was 3.33% for the six months ended June 30, 2020, down 48 basis points from 3.81% during the same period of 2019.
• The allowance for credit losses was $222.5 million at June 30, 2020, compared to $225.1 million at December 31, 2019. The $2.7 million change was due primarily to the $37.9 million reduction in the allowance as a result of adopting ASC 326, partially offset by a $36.1 million reserve build relating to potential COVID-19 impact.
• Total loans grew to $32.42 billion, an increase of $3.54 billion since December 31, 2019. The net growth from recent acquisitions and divestitures totaled $12.3 million and growth of $3.08 billion was related to loans originated through the SBA-PPP. Excluding acquired and SBA-PPP loans, total loans increased $440.1 million, or by 3.1% on an annualized basis. The net charge-off ratio was 0.10% for the six months ended June 30, 2020, a 1 basis point decrease compared to the same period of 2019.
• Total deposits grew to $41.48 billion, an increase of $7.05 billion since December 31, 2019. This growth includes $2.99 billion of reciprocal deposits from SBA-PPP (estimated at the time of funding) and $526.0 million from government stimulus deposits (estimated at time of issuance) as well as $43.0 million of net deposits related to acquisition and divestiture. Excluding the cumulative impact of these deposits total deposits grew $3.49 billion, or by 20.4% on an annualized basis.
• BancShares repurchased 695,390 shares of its Class A common stock during the six months ended June 30, 2020 totaling $286.7 million.
• During the first quarter of 2020, BancShares successfully completed a $695 million capital raise which consisted of $350 million of subordinated notes and $345 million of Series A preferred stock.
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Table 2
SELECTED QUARTERLY DATA
2020
2019 (1)
Six months ended June 30
Second First Fourth Third Second
(Dollars in thousands, except share data) Quarter Quarter Quarter Quarter Quarter 2020 2019
SUMMARY OF OPERATIONS
Interest income $ 363,257 $ 369,559 $ 354,048 $ 362,318 $ 350,721 $ 732,816 $ 687,645
Interest expense 25,863 31,159 26,924 25,893 23,373 57,022 39,825
Net interest income 337,394 338,400 327,124 336,425 327,348 675,794 647,820
Provision for credit losses 20,552 28,355 7,727 6,766 5,198 48,907 16,948
Net interest income after provision for credit losses 316,842 310,045 319,397 329,659 322,150 626,887 630,872
Noninterest income 165,402 64,011 104,393 100,930 106,875 229,413 210,538
Noninterest expense 291,679 299,971 292,262 270,425 273,397 591,650 541,054
Income before income taxes 190,565 74,085 131,528 160,164 155,628 264,650 300,356
Income taxes 36,779 16,916 29,654 35,385 36,269 53,695 69,638
Net income 153,786 57,169 101,874 124,779 119,359 210,955 230,718
Net income available to common shareholders $ 148,996 $ 57,169 $ 101,874 $ 124,779 $ 119,359 $ 206,165 $ 230,718
PER COMMON SHARE DATA
Net income $ 14.74 $ 5.46 $ 9.55 $ 11.27 $ 10.56 $ 20.04 $ 20.23
Cash dividends on common shares 0.40 0.40 0.40 0.40 0.40 0.80 0.80
Market price at period end (Class A) 405.02 332.87 532.21 471.55 450.27 405.02 450.27
Book value at period-end 367.57 351.90 337.38 327.86 319.74 367.57 319.74
SELECTED QUARTERLY AVERAGE BALANCES
Total assets $ 45,553,502 $ 40,648,806 $ 38,326,641 $ 37,618,836 $ 37,049,030 $ 43,101,154 $ 36,338,839
Investment securities 8,928,467 7,453,159 7,120,023 6,956,981 6,803,570 8,190,813 6,797,656
Loans and leases (2)
31,635,958 29,098,101 27,508,062 26,977,476 26,597,242 30,367,030 26,059,602
Interest-earning assets 42,795,781 38,004,341 36,032,680 35,293,979 34,674,842 40,400,061 34,056,935
Deposits 39,146,415 34,750,061 33,295,141 32,647,264 32,100,210 36,948,238 31,454,973
Interest-bearing liabilities 24,407,285 23,153,777 20,958,943 20,551,393 20,397,445 23,780,042 20,028,489
Securities sold under customer repurchase agreements 659,244 474,231 495,804 533,371 556,374 566,737 547,318
Other short-term borrowings 45,549 157,759 28,284 23,236 40,513 101,654 20,369
Long-term borrowings 1,275,928 961,132 467,223 384,047 371,843 1,118,042 358,110
Common shareholders' equity 3,648,284 3,625,975 3,570,872 3,580,235 3,546,041 3,637,129 3,528,549
Shareholders’ equity $ 3,988,225 $ 3,682,634 $ 3,570,872 $ 3,580,235 $ 3,546,041 $ 3,835,430 $ 3,528,549
Common shares outstanding 10,105,520 10,473,119 10,708,084 11,060,462 11,286,520 10,289,320 11,402,112
SELECTED QUARTER-END BALANCES
Total assets (1)
$ 47,866,194 $ 41,594,453 $ 39,824,496 $ 37,748,324 $ 37,655,094 $ 47,866,194 $ 37,655,094
Investment securities 9,508,476 8,845,197 7,173,003 7,167,680 6,695,578 9,508,476 6,695,578
Loans and leases 32,418,425 29,240,959 28,881,496 27,196,511 26,728,237 32,418,425 26,728,237
Deposits 41,479,245 35,346,711 34,431,236 32,743,277 32,719,671 41,479,245 32,719,671
Securities sold under customer repurchase agreements 740,276 540,362 442,956 522,195 544,527 740,276 544,527
Other short-term borrowings — 105,000 295,277 — — — —
Long-term borrowings 1,258,719 1,297,132 588,638 453,876 369,854 1,258,719 369,854
Shareholders’ equity $ 3,991,444 $ 3,957,520 $ 3,586,184 $ 3,568,482 $ 3,574,613 $ 3,991,444 $ 3,574,613
Common shares outstanding 9,934,105 10,280,105 10,629,495 10,884,005 11,179,905 9,934,105 11,179,905
SELECTED RATIOS AND OTHER DATA
Return on average assets (annualized) 1.36 % 0.57 % 1.05 % 1.32 % 1.29 % 0.98 % 1.28 %
Return on average common shareholders’ equity (annualized) 16.43 6.34 11.32 13.83 13.50 11.40 13.19
Net yield on interest-earning assets (taxable equivalent) 3.14 3.55 3.59 3.77 3.77 3.33 3.81
Net charge-offs (annualized) to average loans and leases 0.09 0.10 0.14 0.10 0.11 0.10 0.11
Allowance for credit losses to total loans and leases (3) :
PCD 5.07 4.80 1.35 1.34 1.51 5.07 1.51
Non-PCD 0.61 0.64 0.77 0.82 0.83 0.61 0.83
Total 0.69 0.72 0.78 0.83 0.85 0.69 0.85
Ratio of total nonperforming assets to total loans, leases and other real estate owned (4)
0.77 0.79 0.58 0.57 0.56 0.77 0.56
Tier 1 risk-based capital ratio 11.38 11.43 10.86 11.80 12.03 11.38 12.03
Common equity Tier 1 ratio 10.32 10.36 10.86 11.80 12.03 10.32 12.03
Total risk-based capital ratio 13.63 13.65 12.12 13.09 13.34 13.63 13.34
Tier 1 leverage capital ratio 8.07 8.98 8.81 9.18 9.35 8.07 9.35
Dividend payout ratio 2.71 7.33 4.19 3.55 3.79 3.99 3.95
Average loans and leases to average deposits 80.81 83.74 82.62 82.63 82.86 82.19 82.85
(1) We adopted ASC Topic 326 (CECL) utilizing the modified retrospective approach. We did not restate selected financial data for the quarters prior to 2020 presented above.
(2) Average loan and lease balances include PCD loans, non-PCD loans and leases, loans held for sale and nonaccrual loans and leases.
(3) Loans originated in relation to the SBA-PPP ($3.08 billion as of June 30, 2020) do not have a recorded ACL. As of June 30, 2020, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans is 0.68% while the ratio of ACL to total loans excluding SBA-PPP loans is 0.76%.
(4) Upon adoption of ASC 326, we dissolved pooling of PCI loans allowed under ASC 310-30. This increased the amount of nonaccrual loans as those nonaccrual loans within performing PCI pools were previously excluded from reporting. As of January 1, 2020, there were $47.0 million of nonaccrual loans released from performing PCI pools. Of these nonaccrual loans, $35.9 million were outstanding as of June 30, 2020.
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BUSINESS COMBINATIONS
Community Financial Holding Company, Inc.
On February 1, 2020, FCB completed the merger of Duluth, Georgia-based Community Financial Holding Company, Inc. (“Community Financial”) and its bank subsidiary, Gwinnett Community Bank, into FCB. Under the terms of the agreement, total cash consideration of $2.3 million was paid to the shareholders of Community Financial. The merger allows FCB to expand its presence and enhance banking efforts in Georgia. The merger contributed $222.1 million in consolidated assets, which included $686 thousand of goodwill, $134.0 million in loans, and $209.3 million in deposits.
See Note B - Business Combinations for additional disclosures.
Entegra Financial Corp.
On December 31, 2019, FCB completed the merger of Franklin, North Carolina-based Entegra Financial Corp. (“Entegra”) and its bank subsidiary, Entegra Bank. In order to obtain regulatory approval, FCB entered into an agreement for Select Bank to purchase three of our North Carolina branches, located in Highlands, Sylva and Franklin. On April 17, 2020, FCB completed the divestiture of the branches including loans and leases, premises and equipment and total deposits with a fair value of $110.1 million, $2.1 million and $184.8 million, respectively. The Select Bank purchase price for the divested branches included an 8% premium for deposits acquired that was applied against goodwill generated as part of the merger with Entegra Bank.
Federal Deposit Insurance Corporation Assisted Transactions
BancShares completed fourteen Federal Deposit Insurance Corporation (“FDIC”) assisted transactions between 2009 and 2017. Nine of the fourteen FDIC-assisted transactions included shared-loss agreements which, for their terms, protect us from a substantial portion of the credit and asset quality risk we would otherwise incur. As of June 30, 2020, shared-loss protection remains for single family residential loans acquired in the amount of $38.0 million.
The shared-loss agreement for two of the FDIC-assisted transactions included a provision related to a payment owed to the FDIC at the termination of the agreement (the “clawback liability”) . As of June 30, 2020 and December 31, 2019, the estimated clawback liability was $15.0 million and $112.4 million, respectively, as a result of a payment to the FDIC in the first quarter of 2020 for $99.5 million related to one of the transactions. The remaining clawback liability payment date is March 2021.
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Table 3
CONSOLIDATED QUARTER-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS
Three months ended June 30
2020 2019
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets
Loans and leases $ 31,635,958 $ 326,618 4.10 % $ 26,597,242 $ 303,803 4.54 %
Investment securities:
U.S. Treasury 206,575 679 1.32 1,150,001 6,770 2.36
Government agency 657,405 1,428 0.87 383,700 3,034 3.16
Mortgage-backed securities 7,555,947 28,532 1.51 4,979,160 28,130 2.26
Corporate bonds 299,250 3,782 5.06 147,669 1,931 5.23
Other investments 209,290 2,236 4.30 143,040 626 1.76
Total investment securities 8,928,467 36,657 1.64 6,803,570 40,491 2.38
Overnight investments 2,231,356 553 0.10 1,274,030 7,280 2.29
Total interest-earning assets 42,795,781 363,828 3.38 34,674,842 351,574 4.04
Cash and due from banks 404,517 295,052
Premises and equipment 1,260,566 1,214,144
Allowance for credit losses (209,973) (229,067)
Other real estate owned 55,554 4,646
Other assets 1,247,057 1,047,813
Total assets $ 45,553,502 $ 37,007,430
Liabilities
Interest-bearing deposits:
Checking with interest $ 8,562,145 $ 1,310 0.06 % $ 7,485,693 $ 1,571 0.08 %
Savings 2,846,557 312 0.04 2,658,974 527 0.08
Money market accounts 7,618,883 6,519 0.34 5,912,646 5,498 0.37
Time deposits 3,398,979 9,775 1.16 3,371,402 11,561 1.38
Total interest-bearing deposits 22,426,564 17,916 0.32 19,428,715 19,157 0.40
Securities sold under customer repurchase agreements 659,244 399 0.24 556,374 515 0.37
Other short-term borrowings 45,549 248 2.16 40,513 278 2.72
Long-term borrowings 1,275,928 7,300 2.26 371,843 3,423 3.64
Total interest-bearing liabilities 24,407,285 25,863 0.42 20,397,445 23,373 0.46
Noninterest-bearing deposits 16,719,851 12,671,495
Other liabilities 438,141 434,049
Shareholders’ equity 3,988,225 3,546,041
Total liabilities and shareholders’ equity $ 45,553,502 $ 37,049,030
Interest rate spread 2.96 % 3.58 %
Net interest income and net yield on interest-earning assets $ 337,965 3.14 % $ 328,201 3.77 %
Loans and leases include PCD loans, non-PCD loans, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rate of 21.0%, as well as state income tax rate of 3.4%, for both the three months ended June 30, 2020 and 2019. The taxable-equivalent adjustment was $571 thousand and $853 thousand for the three months ended June 30, 2020 and 2019, respectively.
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Table 4
CONSOLIDATED YEAR-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS
Six months ended June 30
2020 2019
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets
Loans and leases $ 30,367,030 $ 652,774 4.27 % $ 26,059,602 $ 595,372 4.56 %
Investment securities:
U.S. Treasury 253,176 2,356 1.87 1,178,955 13,267 2.27
Government agency 689,330 5,548 1.61 335,375 5,343 3.19
Mortgage-backed securities 6,808,190 59,239 1.74 5,015,089 56,964 2.27
Corporate bonds 252,377 6,259 4.96 146,405 3,868 5.28
Other investments 187,740 2,914 3.12 121,832 915 1.51
Total investment securities 8,190,813 76,316 1.86 6,797,656 80,357 2.37
Overnight investments 1,842,218 5,071 0.55 1,199,677 13,669 2.30
Total interest-earning assets 40,400,061 734,161 3.62 34,056,935 689,398 4.05
Cash and due from banks 352,475 288,592
Premises and equipment 1,256,268 1,210,306
Allowance for credit losses (198,621) (226,763)
Other real estate owned 54,455 46,669
Other assets 1,236,516 963,097
Total assets $ 43,101,154 $ 36,338,836
Liabilities
Interest-bearing deposits:
Checking with interest $ 8,375,564 $ 3,011 0.07 % $ 7,521,642 $ 2,948 0.08 %
Savings 2,720,213 597 0.04 2,591,633 733 0.06
Money market accounts 7,317,735 15,628 0.43 5,880,372 9,639 0.33
Time deposits 3,580,097 22,874 1.28 3,109,045 18,764 1.22
Total interest-bearing deposits 21,993,609 42,110 0.39 19,102,692 32,084 0.34
Securities sold under customer repurchase agreements 566,737 841 0.30 547,318 974 0.36
Other short-term borrowings 101,654 1,052 2.05 20,369 278 2.72
Long-term borrowings 1,118,042 13,019 2.30 358,110 6,489 3.60
Total interest-bearing liabilities 23,780,042 57,022 0.48 20,028,489 39,825 0.40
Noninterest-bearing deposits 14,954,629 12,352,281
Other liabilities 531,053 429,517
Shareholders’ equity 3,835,430 3,528,549
Total liabilities and shareholders’ equity $ 43,101,154 $ 36,338,836
Interest rate spread 3.14 % 3.65 %
Net interest income and net yield on interest-earning assets $ 677,139 3.33 % $ 649,573 3.81 %
Loans and leases include PCD loans, non-PCD loans, nonaccrual loans and loans held for sale. Yields related to loans, leases and securities exempt from both federal and state income taxes, federal income taxes only, or state income taxes only are stated on a taxable-equivalent basis assuming statutory federal income tax rate of 21.0%, as well as state income tax rate of 3.4%, for both the six months ended June 30, 2020 and June 30, 2019. The taxable-equivalent adjustment was $1.3 million and $1.8 million for the six months ended June 30, 2020 and June 30, 2019, respectively.
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Table 4
CHANGES IN CONSOLIDATED TAXABLE EQUIVALENT NET INTEREST INCOME
Three months ended June 30, 2020 Six months ended June 30, 2020
Change from prior year period due to: Change from prior year period due to:
(Dollars in thousands)
Volume (1)
Yield/Rate (1)
Total Change
Volume (1)
Yield/Rate (1)
Total Change
Assets
Loans and leases $ 60,243 $ (37,428) $ 22,815 $ 96,223 $ (38,821) $ 57,402
Investment securities:
U.S. Treasury (5,558) (533) (6,091) (10,423) (488) (10,911)
Government agency 2,164 (3,770) (1,606) 5,639 (5,434) 205
Mortgage-backed securities 15,546 (15,144) 402 21,611 (19,336) 2,275
Corporate bonds 1,981 (130) 1,851 2,799 (408) 2,391
Other investments 291 1,319 1,610 245 1,754 1,999
Total investment securities 14,424 (18,258) (3,834) 19,871 (23,912) (4,041)
Overnight investments 5,435 (12,162) (6,727) 7,352 (15,950) (8,598)
Total interest-earning assets $ 80,102 $ (67,848) $ 12,254 $ 123,446 $ (78,683) $ 44,763
Liabilities
Interest-bearing deposits:
Checking with interest $ 221 $ (482) $ (261) $ 327 $ (264) $ 63
Savings 36 (251) (215) 35 (171) (136)
Money market accounts 1,567 (546) 1,021 2,303 3,686 5,989
Time deposits 63 (1,849) (1,786) 2,777 1,333 4,110
Total interest-bearing deposits 1,887 (3,128) (1,241) 5,442 4,584 10,026
Securities sold under customer repurchase agreements 33 (149) (116) (56) (77) (133)
Other short-term borrowings 34 (64) (30) 545 229 774
Long-term borrowings 8,205 (4,328) 3,877 6,746 (216) 6,530
Total interest-bearing liabilities 10,159 (7,669) 2,490 12,677 4,520 17,197
Change in net interest income $ 69,943 $ (60,179) $ 9,764 $ 110,769 $ (83,203) $ 27,566
(1) The rate/volume variance is allocated proportionally between the changes in volume and rate.
RESULTS OF OPERATIONS
Net Interest Income and Margin (Taxable-Equivalent Basis)
Second Quarter 2020 compared to Second Quarter 2019
Net interest income for the second quarter of 2020 totaled $337.4 million, an increase of $10.0 million, or 3.1%, compared to the second quarter of 2019. The taxable-equivalent NIM was 3.14% in the second quarter of 2020, a decrease of 63 basis points from the same quarter in the prior year.
The increase in net interest income was primarily due to an increase of $22.8 million in interest earned on loans due to loan growth, partially offset by an increase in interest expense on borrowings of $3.7 million. Interest and fee income related to SBA-PPP loans totaled $19.0 million in the second quarter of 2020. The primary drivers of the margin decline were lower yields on interest-earning assets, partially offset by a decrease in the rates paid on borrowings and interest-bearing deposits, largely in time deposits and money market accounts.
Average interest-earning assets increased by $8.12 billion to $42.80 billion, compared to the second quarter of 2019. The primary drivers for this change were higher average loan balances which increased $5.04 billion, due to contributions from both recent acquisitions and loans originated under the SBA-PPP, as well as organic loan growth, higher average investment securities of $2.12 billion and higher average overnight investments of $957.3 million. The yield on interest-earning assets decreased by 66 basis points to 3.38% when compared to the second quarter of 2019. The yield on loans and leases decreased to 4.10%, or by 44 basis points, primarily due to lower yields on commercial and home equity loans mostly due to downward rate resets on variable rate loans and lower rates on originations. The yield on overnight investments and investment securities decreased by 219 basis points and 74 basis points, respectively. The yield decrease on overnight investments was primarily due to a lower federal funds rate, while lower yields on government agency and mortgage-backed securities were the primary reasons for the investment securities yield decline.
Average interest-bearing liabilities increased by $4.01 billion to $24.41 billion, compared to the second quarter of 2019. This increase was primarily due to an increase in average interest-bearing deposit balances of $3.00 billion driven by contributions from organic deposit growth and recent acquisitions, including reciprocal deposits from SBA-PPP loans, as well as an increase in average long-term borrowings of $904.1 million.
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Rates on interest-bearing liabilities decreased by 4 basis points to 0.42%, primarily due to decreased rates paid on borrowings and time deposits, checking with interest deposits, and money market accounts.
Six Months of 2020 compared to Six Months of 2019
Net interest income for the six months ended June 30, 2020, was $675.8 million, an increase of $28.0 million, or 4.3%, compared to the same period of 2019. The taxable-equivalent NIM was 3.33% for the six months ended June 30, 2020, a decrease of 48 basis points from the same period of 2019.
Average year-to-date interest-earning assets for the six months ended June 30, 2020, increased by $6.34 billion to $40.40 billion, compared to the same period in 2019. This increase was primarily due to a $4.31 billion increase in average outstanding loans due the impact of recent acquisitions and organic loan growth, including growth from loans originated under the SBA-PPP. This increase was coupled with increases in average investment securities of $1.39 billion and average overnight investments of $642.5 million. The yield on interest-earning assets decreased by 43 basis points to 3.62% for the six months ended June 30, 2020, compared to the same period in 2019. The yield on loans and leases decreased by 29 basis points primarily due to decreases in yields on commercial and residential loans. The yield on overnight investments and the investment securities portfolio decreased by 175 basis points and 51 basis points, respectively. The lower federal funds rate was the primary driver for the yield decrease on overnight investments, while the lower yields on mortgage-backed securities, government agency securities, and U.S. Treasury securities were the primary drivers of the investment securities yield decline.
Average year-to-date interest-bearing liabilities for the six months ended June 30, 2020 increased by $3.75 billion to $23.78 billion, compared to the same period in 2019. This increase was primarily due to a $2.89 billion increase in average interest-bearing deposit balances driven by recent acquisitions and organic growth, including reciprocal deposits related to SBA-PPP loans. The rate paid on interest-bearing liabilities increased by 8 basis points to 0.48% for the six months ended June 30, 2020 compared to same period in 2019. The rate paid on interest-bearing deposits increased by 5 basis points due primarily to increased rates on time deposits, checking with interest deposits and money market accounts.
Provision for Credit Losses
BancShares recorded net provision expense of $20.6 million for the three months ended June 30, 2020 compared to $5.2 million for the same period in 2019. BancShares recorded a net provision expense for credit losses of $48.9 million for the six months ended June 30, 2020, compared to $16.9 million for the six months ended June 30, 2019. The increase for both the three and six month periods was primarily COVID-19 related as loss estimates consider the impact of slower economic activity and elevated unemployment, as well as potential mitigants due to unprecedented government stimulus and loan accommodations. The quarter and year-to-date provision expense includes $14.6 million and $36.1 million, respectively, in additions to the ACL specifically related to COVID-19.
Noninterest Income
Table 6
NONINTEREST INCOME
Three months ended June 30 Six months ended June 30
(Dollars in thousands) 2020 2019 2020 2019
Service charges on deposit accounts $ 17,522 $ 25,790 $ 43,935 $ 50,855
Wealth management services 22,371 24,573 48,783 49,574
Cardholder services, net 17,587 18,479 35,747 35,112
Other service charges and fees 7,145 8,164 14,937 15,586
Merchant services, net 5,363 6,455 11,251 12,290
Mortgage income 9,811 5,038 15,035 8,696
Insurance commissions 3,189 2,854 6,877 6,145
ATM income 1,395 1,625 2,817 3,136
Marketable equity securities gains, net 64,570 3,144 13,162 14,472
Realized gains on investment securities available for sale, net 13,752 5,719 33,547 5,719
Other 2,697 5,034 3,322 8,953
Total noninterest income $ 165,402 $ 106,875 $ 229,413 $ 210,538
Noninterest income is an essential component of our total revenue and is critical to our profitability level. The primary sources of noninterest income consist of fees and service charges generated from deposit accounts, cardholder and merchant services, wealth management services, and mortgage lending and servicing.
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Noninterest income for the second quarter of 2020 was $165.4 million, compared to $106.9 million for the same period of 2019, an increase of $58.5 million, or 54.8%. The most significant components of the change were as follows:
• Marketable equity securities gains increased by $61.4 million. The gains of $64.6 million consisted of realized gains of $37.0 million and unrealized gains of $27.6 million.
• Gains on sales of investment securities increased by $8.0 million.
• Mortgage income increased by $4.8 million primarily due to increased origination volume brought about by lower mortgage rates. The production-related income was partially offset by mortgage servicing rights impairment of $1.1 million due to declining mortgage rates.
• Service charges on deposit accounts declined by $8.3 million primarily due to decreased customer activity and efforts to aid our customers during the COVID-19 pandemic.
• Wealth management services decreased by $2.2 million primarily due to decreased sales volume driven by branch closures in response to local government mandates and low interest rates.

Noninterest income was $229.4 million for the first six months of 2020, compared to $210.5 million for the same period of 2019, an increase of $18.9 million, or 9.0%. The most significant components of the change were as follows:
• Gains on sales investment securities increased by $27.8 million.
• Mortgage income increased by $6.3 million primarily due to increased origination volume brought about by lower mortgage rates. The production-related income was partially offset by mortgage servicing rights impairment of $4.0 million recorded due to declining mortgage rates.
• Service charges on deposit accounts declined by $6.9 million primarily due to decreased customer activity and efforts to aid our customers during the COVID-19 pandemic.
• Other noninterest income decreased $5.6 million primarily due to acquired recoveries on PCD loans, formerly reported in noninterest income, now being recorded as a component of the allowance for credit losses .
Noninterest Expense
Table 7
NONINTEREST EXPENSE
Three months ended June 30 Six months ended June 30
(Dollars in thousands) 2020 2019 2020 2019
Salaries and wages $ 146,633 $ 136,526 $ 291,888 $ 268,947
Employee benefits 30,364 30,197 68,875 62,732
Occupancy expense 29,556 26,886 57,036 54,647
Equipment expense 28,774 28,489 56,624 55,229
Processing fees paid to third parties 10,186 6,641 20,558 13,730
FDIC insurance expense 3,731 2,757 7,197 5,417
Collection and foreclosure-related expenses 3,949 3,659 8,003 6,681
Merger-related expenses 4,369 4,084 8,601 5,803
Telecommunications expense 2,815 2,393 5,788 4,434
Consultant expense 3,027 3,639 6,287 6,520
Advertising expense 1,980 2,942 4,649 5,494
Core deposit intangible amortization 3,672 4,233 7,531 8,480
Other 22,623 20,951 48,613 42,940
Total noninterest expense $ 291,679 $ 273,397 $ 591,650 $ 541,054
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The primary components of noninterest expense are salaries and related employee benefits, occupancy and equipment expense.
Noninterest expense was $291.7 million during the second quarter of 2020, compared to $273.4 million for the same period in 2019, an increase of $18.3 million, or 6.7%. The most significant components of the change were as follows:
• Personnel expense increased $10.3 million primarily due to an increase in salaries and wages as a result of merit increases and net staff additions, including personnel from acquisitions.
• Processing fees paid to third parties increased $3.5 million primarily due to the expansion of digital banking offerings as well as processing fees related to recent acquisitions.
• Occupancy expense increased $2.7 million primarily due to cleaning and sanitizing efforts in branches and corporate buildings to combat the spread of COVID-19 as well as increased building repairs.
• Other noninterest expense increased by $1.7 million primarily due to higher provision related to unfunded loan commitments as a result of potential economic impacts of COVID-19 and increased pension costs due to a lower discount rate.
Noninterest expense was $591.7 million for the first six months of 2020, compared to $541.1 million for the same period in 2019, an increase of $50.6 million, or 9.4%. The most significant components of the change were as follows:
• Personnel expense increased by $29.1 million primarily due to an increase in salaries and wages as a result of merit increases and increased headcount from recent acquisitions.
• Processing fees paid to third parties increased $6.8 million primarily due to the expansion of digital banking offerings as well as processing fees related to recent acquisitions.
• Other noninterest expense increased $5.7 million primarily due to higher provision related to unfunded loan commitments as a result of potential economic impacts of COVID-19 and increased pension costs due to a lower discount rate.
• Merger-related expenses increased $2.8 million primarily due to costs related to Entegra.
• Occupancy expense increased $2.4 million primarily due to cleaning and sanitizing efforts in branches and corporate buildings to combat the spread of COVID-19.
Income Taxes
Income tax expense was $36.8 million and $36.3 million for the second quarter of 2020 and 2019, respectively, representing effective tax rates of 19.3% and 23.3% during the periods. Income tax expense was $53.7 million and $69.6 million for the six months ended June 30, 2020 and 2019, respectively, representing effective tax rates of 20.3% and 23.2% during the periods.
The effective tax rate for the second quarter 2020 was favorably impacted by $6.9 million due to BancShares’ decision to utilize an allowable alternative for computing its 2020 federal income tax liability. Without this alternative, the effective tax rate would have been approximately 23%. The allowable alternative provides BancShares the ability to use the federal income tax rate for certain current year deductible amounts related to prior year FDIC-assisted acquisitions that was applicable when these amounts were originally subjected to tax. As a result of this favorable federal tax rate benefit, the effective tax rate for the remainder of 2020 is estimated to be approximately 21%. The actual 2020 effective tax rate will depend upon the nature and amount of future income and expenses as well as transactions with discrete tax effects.
We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. On a periodic basis, we evaluate our income tax positions based on current tax law, positions taken by various tax auditors within the jurisdictions where BancShares is required to file income tax returns, as well as potential or pending audits or assessments by tax auditors.
INTEREST-EARNING ASSETS
Interest-earning assets include investment securities, loans and leases, and overnight investments, all of which reflect varying interest rates based on the risk level and repricing characteristics of the underlying asset. Riskier investments typically carry a higher interest rate but expose us to higher levels of market risk. We strive to maintain a high level of interest-earning assets relative to total assets, while keeping non-earning assets at a minimum.
Interest-earning assets totaled $45.14 billion and $37.23 billion at June 30, 2020 and December 31, 2019, respectively. The $7.91 billion increase was primarily composed of a $3.54 billion increase in loans and leases, a $2.34 billion increase in investment securities and a $2.00 billion increase in overnight investments.
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Investment Securities
The primary objective of the investment portfolio is to generate incremental income by deploying excess funds into securities with minimal liquidity and credit risk, and low to moderate interest rate risk. Other objectives include acting as a stable source of liquidity, serving as a tool for asset and liability management and maintaining an interest rate risk profile compatible with BancShares’ objectives. Additionally, purchases of equities and corporate bonds in other financial institutions have been made largely under a long-term earnings optimization strategy. Changes in the total balance of our investment portfolio result from trends in balance sheet funding and market performance. Generally, when inflows arising from deposit and treasury services products exceed loan and lease demand, we invest excess funds into the securities portfolio and into overnight investments. Conversely, when loan demand exceeds growth in deposits and short-term borrowings, we allow overnight investments to decline and use proceeds from maturing securities and prepayments to fund loan demand. See Note C - Investments for additional disclosures.
The carrying value of investment securities totaled $9.51 billion at June 30, 2020, an increase of $2.34 billion compared to December 31, 2019. The increase in the portfolio was primarily attributable to investment securities purchases of $6.79 billion, partially offset by sales of $3.44 billion and maturities and paydowns of $1.20 billion.
As of June 30, 2020, investment securities available for sale had a net pre-tax unrealized gain of $146.9 million, compared to a net pre-tax unrealized gain of $7.5 million as of December 31, 2019. After evaluating the available for sale securities with unrealized losses, management concluded that the unrealized losses relate to changes in interest rates relative to when the securities were purchased, and therefore, no allowance for credit losses was needed at June 30, 2020. Available for sale securities are reported at fair value and unrealized gains and losses are included as a component of accumulated other comprehensive income (“AOCI”), net of deferred taxes.
As part of the adoption of ASC 326, BancShares evaluated its portfolios of held to maturity and available for sale debt securities to determine the need to record a related allowance for credit losses. See Note A - Accounting Policies and Basis for Presentation for more detail on our policies and adoption. As of January 1, 2020, no allowance for credit losses was required for available for sale and held to maturity debt securities
Table 8
INVESTMENT SECURITIES
June 30, 2020 December 31, 2019
(Dollars in thousands)
Composition (1)
Cost Fair
value
Composition (1)
Cost Fair
value
Investment securities available for sale
U.S. Treasury 7.9 % $ 754,350 $ 754,586 5.7 % $ 409,397 $ 409,999
Government agency 5.7 549,673 545,709 9.5 684,085 682,772
Residential mortgage-backed securities 60.8 5,671,151 5,790,392 73.4 5,269,060 5,267,090
Commercial mortgage-backed securities 11.4 1,047,601 1,079,822 5.3 373,105 380,020
Corporate bonds 4.7 449,623 448,773 2.8 198,278 201,566
State, county and municipal — — — 1.7 118,227 118,227
Total investment securities available for sale 90.5 8,472,398 8,619,282 98.4 7,052,152 7,059,674
Investment in marketable equity securities 1.2 116,322 114,316 1.2 59,262 82,333
Investment securities held to maturity
Residential mortgage-backed securities 7.5 693,143 709,339 — — —
Commercial mortgage-backed securities 0.8 78,729 78,980 — — —
Other — 3,006 3,006 0.4 30,996 30,996
Total investment securities held to maturity 8.3 774,878 791,325 0.4 30,996 30,996
Total investment securities 100.0 % $ 9,363,598 $ 9,524,923 100.0 % $ 7,142,410 $ 7,173,003
(1) Calculated as a percent of the total fair value of investment securities.
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Loans and Leases
Loans for held for sale were $107.9 million at June 30, 2020, a net increase of $40.0 million since December 31, 2019. The increase is primarily due to originations of $503.2 million driven by low interest rates, partially offset by sales of $474.2 million.
Loans and leases held for investment were $32.42 billion at June 30, 2020, a net increase of $3.54 billion, representing annualized growth of 24.6% since December 31, 2019. This increase was driven by a $3.56 billion net increase in the non-PCD portfolio offset by a $28.1 million net decrease in the PCD loan portfolio. The net increase in the non-PCD portfolio was due to $3.08 billion related to SBA-PPP originations as well as organic growth primarily in our commercial segments. The net decrease in PCD loans was primarily due to a $69.2 million decline in loans from prior acquisitions, partially offset by $22.1 million in acquired PCD loans during 2020 along with a 19.0 million increase from the adoption of ASC 326. Excluding 2020 loans related to acquisitions and divestitures and SBA-PPP loans, total loans grew by 3.1% on an annualized basis.
BancShares reports non-PCD and PCD loan portfolios separately, and the non-PCD portfolio is further divided into commercial and consumer segments. Non-PCD loans and leases at June 30, 2020 were $31.89 billion compared to non-PCI loans of $28.32 billion at December 31, 2019, representing 98.4% and 98.1% of total loans, respectively. PCD loans at June 30, 2020 were $530.7 million, compared to $558.7 million of PCI loans at December 31, 2019, representing 1.6% and 1.9% of loans, respectively.
The discount related to acquired non-PCD loans and leases at June 30, 2020 and non-PCI loans and leases at December 31, 2019 was $25.8 million and $30.9 million, respectively. The discount related to PCD loans at June 30, 2020 and PCI loans at December 31, 2019 was $54.7 million and $88.2 million, respectively. The primary driver of the decrease in PCD discount is the adoption of ASC 326, which resulted in a reclassification of the credit portion of the loan discount to the ACL of $19.0 million.
During the three months ended June 30, 2020 and 2019, accretion income on purchased non-PCD loans and leases was $2.5 million and $3.4 million, respectively. During the three months ended June 30, 2020 and 2019, interest and accretion income on purchased PCD loans and leases was $14.4 million and $11.9 million, respectively.
During the six months ended June 30, 2020 and 2019, accretion income on purchased non-PCD loans and leases was $5.0 million and $6.7 million, respectively. During the six months ended June 30, 2020 and 2019, interest and accretion income on purchased PCD loans and leases was $33.0 million and $29.9 million, respectively.
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Table 9
LOANS AND LEASES
(Dollars in thousands) June 30, 2020
Commercial:
Construction and land development $ 1,012,365
Owner occupied commercial mortgage 10,352,793
Non-owner occupied commercial mortgage 3,056,328
Commercial and industrial and leases 4,650,839
SBA-PPP 3,084,549
Total commercial loans 22,156,874
Consumer:
Residential mortgage 5,404,682
Revolving mortgage 2,233,977
Construction and land development 353,382
Consumer auto 1,195,771
Consumer other 543,088
Total consumer loans 9,730,900
Total non-PCD loans and leases 31,887,774
PCD loans 530,651
Total loans and leases 32,418,425
Less allowance for credit losses (222,450)
Net loans and leases $ 32,195,975
(Dollars in thousands) December 31, 2019
Commercial:
Construction and land development $ 1,013,454
Commercial mortgage 12,282,635
Other commercial real estate 542,028
Commercial and industrial and leases 4,403,792
Other 310,093
Total commercial loans 18,552,002
Noncommercial:
Residential mortgage 5,293,917
Revolving mortgage 2,339,072
Construction and land development 357,385
Consumer 1,780,404
Total noncommercial loans 9,770,778
Total non-PCI loans and leases 28,322,780
PCI loans 558,716
Total loans and leases 28,881,496
Less allowance for loan and lease losses (225,141)
Net loans and leases $ 28,656,355
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ALLOWANCE FOR CREDIT LOSSES
The ACL was $222.5 million at June 30, 2020, representing a decrease of $2.7 million since December 31, 2019. The ACL as a percentage of total loans and leases was 0.69% at June 30, 2020, compared to 0.78% December 31, 2019. The ACL as a percentage of loans and leases excluding SBA-PPP loans, which have no recorded ACL, was 0.76% at June 30, 2020.
Upon adoption of ASC 326 on January 1, 2020, 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, partially offset by an increase of $19.0 million in the ACL on PCD loans. The decrease in the ACL on non-PCD loans was primarily in the commercial segments as these portfolios have exhibited strong historical credit performance and have relatively short average lives. This decrease was partially offset by an increase in the consumer segments 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.
At June 30, 2020, the ACL allocated to non-PCD loans and leases was $195.5 million, or 0.61% of non-PCD loans and leases, compared to $217.6 million, or 0.77%, at December 31, 2019. The ACL as a percentage of non-PCD loans and leases excluding SBA-PPP loans was 0.68% at June 30, 2020. The decrease of 16 basis points since December 31, 2019 was primarily due to the adoption of ASC 326, partially offset by the forecasted potential economic impacts of the COVID-19 pandemic on expected credit losses. The adoption of ASC 326 resulted in a decrease of 18 basis points, while the COVID-19 impacts resulted in an increase of 11 basis points.
At June 30, 2020, the ACL for PCD loans totaled $26.9 million compared to $7.5 million at December 31, 2019. The increase was primarily due the adoption of ASC 326.
Net charge-offs for loans and leases were $7.4 million during the second quarter of 2020, compared to $7.4 million during the second quarter of 2019. On an annualized basis, total net charge-offs as a percentage of total average loans and leases was 0.09% and 0.11% for the second quarter of 2020 and 2019, respectively. The net charge-off ratio was 0.10% and 0.11% for the six months ended June 30, 2020 and 2019, respectively. The ACL as of June 30, 2020, excluding SBA-PPP loans, covered approximately 7.5 times annualized year to date net charge-offs compared to 6.5 times at January 1, 2020 CECL adoption.
As part of ASC 326 adoption, BancShares made a policy not to measure an ACL for accrued interest receivable as our accounting policies and credit monitoring provide that uncollectible accrued interest is reversed or written off against interest income in a timely manner. Management reviewed this policy election during the second quarter of 2020 in light of the increase in accrued interest receivable and concluded the policy election remained appropriate due to trends in payments and extension activity.
Accrued interest receivable at June 30, 2020 was $175.5 million compared to $123.2 million at December 31, 2019 of which $139.8 million and $88.0 million related to outstanding accrued interest on the loan portfolio at June 30, 2020 and December 31, 2019, respectively. The $51.8 million increase in accrued receivable on loans was due in part to the increases in loan balances, as well the volume of loans in deferred payment status. At June 30, 2020 there were approximately $5.6 billion in active COVID-19 related loan extensions with an accrued interest receivable balance of approximately $63 million. The first wave of loans with payment deferrals have completed their extension period and the volume of extension requests declined during the second quarter. As of July 31, 2020, COVID-19 related loan extensions decreased to approximately $1.5 billion in outstanding loan balances with an accrued interest receivable balance of approximately $15 million as a significant portion of the original payment extensions moved to active status.
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Table 10
ALLOWANCE FOR CREDIT LOSSES
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
The reserve for unfunded loan commitments was $13.7 million and $1.1 million at June 30, 2020 and December 31, 2019, respectively. The increase was primarily due to increases in the scope of off-balance sheet exposures considered due to the provisions of ASC 326.
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Table 11
ALLOWANCE FOR CREDIT LOSSES RATIOS
Three months ended June 30 Six months ended June 30
(Dollars in thousands) 2020 2019 2020 2019
Average loans and leases:
PCD $ 546,998 $ 544,250 $ 538,543 $ 561,574
Non-PCD 30,992,001 25,995,212 29,747,116 25,448,455
Loans and leases at period-end:
PCD 530,651 551,447 530,651 551,447
Non-PCD 31,887,774 26,176,790 31,887,774 26,176,790
Allowance for credit losses allocated to:
PCD 26,928 8,343 26,928 8,343
Non-PCD 195,522 218,240 195,522 218,240
Total $ 222,450 $ 226,583 $ 222,450 $ 226,583
Net charge-offs (recoveries) to average loans and leases:
PCD 0.17 % — % (0.58) % — %
Non-PCD 0.09 0.11 0.11 0.11
Total 0.09 0.11 0.10 0.11
Allowance for credit losses to total loans and leases (1) :
PCD 5.07 1.51 5.07 1.51
Non-PCD 0.61 0.83 0.61 0.83
Total 0.69 0.85 0.69 0.85
(1) Loans originated in relation to the SBA-PPP ($3,08 billion as of June 30, 2020) do not have a recorded ACL. As of June 30, 2020, the ratio of ACL to total Non-PCD loans excluding SBA-PPP loans is 0.68% while the ratio of ACL to total loans excluding SBA-PPP loans is 0.76%.

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NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans and leases and other real estate owned (“OREO”). At June 30, 2020, BancShares’ nonperforming assets totaled $251.6 million, an increase of $83.4 million since December 31, 2019.
Nonaccrual loans and leases at June 30, 2020 were $197.8 million, reflecting an increase of $76.1 million since December 31, 2019. Nonaccrual loans and leases as a percentage of total loans and leases was 0.61% and 0.42% at June 30, 2020 and December 31, 2019, respectively. The increase was primarily due to the dissolution of PCI loan pools under the adoption of ASC 326 as those nonaccrual loans within performing PCI pools were previously excluded from reporting. As of June 30, 2020, there were $35.9 million of nonaccrual loans that had been released from performing PCI pools. The remaining increase in nonaccrual loans was primarily due to increases within our acquired loan portfolios. The credit quality of the portfolio remains in line with our risk tolerances and management is actively monitoring any potential increases in portfolio risk due to COVID-19. At June 30, 2020, OREO totaled $53.9 million, representing an increase of $7.3 million since December 31, 2019 primarily due to additions from Community Financial of $9.8 million. Nonperforming assets as a percentage of total loans was 0.77% as of June 30, 2020 compared to 0.58% as of December 31, 2019. The additional PCI nonaccrual loans and acquired OREO resulted in an increase of 14 basis points to the nonperforming assets ratio at June 30, 2020.
Table 12
NONPERFORMING ASSETS
2020 2019
Second First Fourth Third Second
(Dollars in thousands) Quarter Quarter Quarter Quarter Quarter
Nonaccrual loans and leases:
Non-PCD $ 135,280 $ 121,337 $ 114,946 $ 108,816 $ 100,701
PCD 62,511 53,234 6,743 829 4,274
Other real estate owned 53,850 55,707 46,591 46,253 46,236
Total nonperforming assets $ 251,641 $ 230,278 $ 168,280 $ 155,898 $ 151,211
Accruing loans and leases 90 days or more past due
Non-PCD $ 3,644 $ 2,933 $ 3,291 $ 4,247 $ 3,468
PCD 152 37 24,257 23,287 29,319
Ratio of total nonperforming assets to total loans, leases and other real estate owned 0.77 % 0.79 % 0.58 % 0.57 % 0.56 %
TROUBLED DEBT RESTRUCTURINGS
We selectively agree to modify existing loan terms to provide relief to customers who are experiencing financial difficulties or other circumstances that could affect their ability to meet debt obligations. Typical modifications include short-term deferral of interest or modification of payment terms. Troubled debt restructurings (“TDRs”) not accruing interest at the time of restructure are included as nonperforming loans. TDRs accruing at the time of restructure and continuing to perform based on the restructured terms are considered performing 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.
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Table 13
TROUBLED DEBT RESTRUCTURINGS
(Dollars in thousands) June 30, 2020 December 31, 2019
Accruing TDRs:
Non-PCD $ 136,174 $ 111,676
PCD 18,639 17,074
Total accruing TDRs 154,813 128,750
Nonaccruing TDRs:
Non-PCD 40,668 42,331
PCD 6,024 111
Total nonaccruing TDRs 46,692 42,442
All TDRs:
Non-PCD 176,842 154,007
PCD 24,663 17,185
Total TDRs $ 201,505 $ 171,192
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include interest-bearing deposits, securities sold under customer repurchase agreements, FHLB borrowings, subordinated debt, and other borrowings. Interest-bearing liabilities totaled $25.33 billion at June 30, 2020, compared to $22.83 billion at December 31, 2019. The $2.50 billion increase was due to an increase in interest-bearing deposits of $1.83 billion and an increase in total borrowings of $672.1 million.
Deposits
Due to our focus on maintaining a strong liquidity position, core deposit retention remains a key business objective. We believe traditional bank deposit products remain an attractive option for many customers but, as economic conditions improve, we recognize that our liquidity position could be adversely affected as bank deposits are withdrawn and invested elsewhere. Our ability to fund future loan growth is significantly dependent on our success at retaining existing deposits and generating new deposits at a reasonable cost.
At June 30, 2020, total deposits were $41.48 billion, an increase of $7.05 billion, representing annualized growth of 41.2% since December 31, 2019. Excluding SBA-PPP reciprocal deposits of $2.99 billion, consumer stimulus deposits of $526.0 million and acquired deposits totaling $43.0 million, deposits increased $3.49 billion, or by 20.4% annualized, over the same time period. This organic growth was primarily the result of increases in demand and money market accounts partially offset by a decline in time deposits.
Table 14
DEPOSITS
(Dollars in thousands) June 30, 2020 December 31, 2019
Demand $ 18,149,466 $ 12,926,796
Checking with interest 9,056,063 8,284,302
Money market 8,013,942 6,817,752
Savings 2,983,138 2,564,777
Time 3,276,636 3,837,609
Total deposits $ 41,479,245 $ 34,431,236
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Borrowings
At June 30, 2020, total borrowings were $2.00 billion compared to $1.33 billion at December 31, 2019. The $672.1 million increase was primarily due to an increase in subordinated debt of $340.8 million due to new debt issuance in 2020, an increase in securities sold under customer repurchase agreements of $297.3 million as a result of increased customer deposit balances, and an increase in FHLB borrowings of $85.5 million, partially offset by a decrease in other borrowings of $51.5 million.
Table 15
BORROWINGS
(Dollars in thousands) June 30, 2020 December 31, 2019
Securities sold under customer repurchase agreements $ 740,276 $ 442,956
Federal Home Loan Bank borrowings 657,682 572,185
Subordinated debt
SCB Capital Trust I 9,759 9,739
FCB/SC Capital Trust II 17,597 17,532
FCB/NC Capital Trust III 88,145 88,145
Capital Trust debentures assumed in acquisitions 14,433 14,433
Other subordinated debt 374,312 33,563
Total subordinated debt 504,246 163,412
Other borrowings 96,791 148,318
Total borrowings $ 1,998,995 $ 1,326,871
BancShares owns five special purpose entities – SCB Capital Trust I, FCB/SC Capital Trust II, FCB/NC Capital Trust III, CCBI Capital Trust I, and Macon Capital Trust I (the “Trusts”), which mature in 2036, 2034, 2034, 2036, and 2034, respectively. Subordinated debt included junior subordinated debentures representing obligations to the Trusts, which may be redeemed at par in whole or in part at any time. BancShares has guaranteed all obligations of the Trusts.
SHAREHOLDERS’ EQUITY AND CAPITAL ADEQUACY
On March 4, 2020, BancShares completed its public offering of $350 million aggregate principal amount of its 3.375% Fixed-to-Floating Rate Subordinated Notes due 2030. On March 12, 2020, BancShares issued and sold an aggregate of 13,800,000 depositary shares, each representing a 1/40th interest in a share of 5.375% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share, with a liquidation preference of $25 per Depositary Share (equivalent to $1,000 per share of Series A Preferred Stock) for a total of $345 million.
The capital raise provides liquidity for general corporate purposes, which may include, but is not limited to, providing capital to support our growth organically or through strategic acquisitions, financing investments and capital expenditures, for funding investments in FCB as regulatory capital, and redeeming or repurchasing our common stock.
The table below shows Class A common stock repurchase activity for the three and six months ended June 30, 2020 and 2019. All Class A common stock repurchases completed in 2020 and 2019 were consummated under previously approved authorizations.
Table 16
CLASS A COMMON STOCK REPURCHASE ACTIVITY
Three months ended June 30 Six months ended June 30
($ in thousands, expect per share data) June 30 June 30 June 30 June 30
Number of shares repurchased 346,000 205,500 695,390 448,500
Total cost $ 126,974 $ 89,765 $ 286,664 $ 190,508
Average price per share $ 366.98 $ 436.81 $ 412.23 $ 424.77
Subsequent to quarter-end through July 31, 2020, BancShares repurchased an additional 117,700 shares of Class A common stock for $47.1 million at an average cost per share of $399.77. Upon completion of the current authorization on July 31, 2020, share repurchase activity has been suspended and will be reevaluated in subsequent periods.
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The table below shows activities that caused the change in outstanding Class A common stock over the past five quarters.
Table 16
CHANGES IN SHARES OF CLASS A COMMON STOCK OUTSTANDING
2020 2019
Second First Fourth Third Second
(in thousands) Quarter Quarter Quarter Quarter Quarter
Class A shares outstanding at beginning of period 9,275 9,624 9,879 10,175 10,380
Share repurchases (346) (349) (255) (296) (205)
Class A shares outstanding at end of period 8,929 9,275 9,624 9,879 10,175
We are committed to effectively managing our capital to protect our depositors, creditors and shareholders. We continually monitor the capital levels and ratios for BancShares and FCB to ensure they exceed the minimum requirements imposed by regulatory authorities and to ensure they are appropriate given growth projections, risk profile and potential changes in the regulatory or external environment. Failure to meet certain capital requirements may result in actions by regulatory agencies that could have a material impact on our consolidated financial statements.
In accordance with accounting principles generally accepted in the United States of America (“GAAP”), the unrealized gains and losses on certain assets and liabilities, net of deferred taxes, are included in accumulated other comprehensive loss within shareholders’ equity. These amounts are excluded from shareholders’ equity in the calculation of our capital ratios under current regulatory guidelines.
Table 18
ANALYSIS OF CAPITAL ADEQUACY
Requirements to be well-capitalized June 30, 2020 December 31, 2019
(Dollars in thousands) Amount Ratio Amount Ratio
BancShares
Risk-based capital ratios
Tier 1 risk-based capital 8.00 % $ 3,634,050 11.38 % $ 3,344,305 10.86 %
Common equity Tier 1 6.50 3,294,113 10.32 3,344,305 10.86
Total risk-based capital 10.00 4,351,169 13.63 3,731,501 12.12
Tier 1 leverage ratio (1)
5.00 3,634,050 8.07 3,344,305 8.81
FCB
Risk-based capital ratios
Tier 1 risk-based capital 8.00 % $ 4,015,721 12.58 % $ 3,554,974 11.54 %
Common equity Tier 1 6.50 4,015,721 12.58 3,554,974 11.54
Total risk-based capital 10.00 4,278,340 13.40 3,837,670 12.46
Tier 1 leverage ratio (2)
5.00 4,015,721 8.93 3,554,974 9.38
(1) The SBA PPP program, with $3.1 billion in outstanding balances, has decreased BancShares’ Tier 1 leverage ratio by 48 bps; BancShares’ Tier 1 leverage ratio would be estimated at 8.55% at June 30, 2020 without the impact the SBA PPP program.
(2) The SBA PPP program, with $3.1 billion in outstanding balances, has decreased FCB’s Tier 1 leverage ratio by 53 bps; FCB’s Tier 1 leverage ratio would be estimated at 9.46% at June 30, 2020 without the impact the SBA PPP program.
As of June 30, 2020, BancShares and FCB continued to exceed minimum capital standards and remained well-capitalized under Basel III guidelines. Trust preferred capital securities continue to be a component of total risk-based capital.
BancShares and FCB had capital conservation buffers of 5.38% and 5.40%, respectively, at June 30, 2020, which exceeded the 2.50% requirement and, therefore, result in no limit on distributions.
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RISK MANAGEMENT
Risk is inherent in any business. BancShares has defined a moderate risk appetite, a conservative approach to risk taking, with a philosophy that does not preclude higher risk business activities balanced with acceptable returns while meeting regulatory objectives. Through the comprehensive Enterprise Risk Management Framework and Risk Appetite Framework, senior management has primary responsibility for day-to-day management of the risks we face with accountability of and support from all associates. Senior management applies various strategies to reduce the risks to which BancShares activities may be exposed, with effective challenge and oversight by management committees. In addition, the Board of Directors strives to ensure that the business culture is integrated with the enterprise risk management program and that policies, procedures and metrics for identifying, assessing, measuring, monitoring and managing risk are part of the decision-making process. The Board of Directors’ role in risk oversight is an integral part of our overall Enterprise Risk Management Framework and Risk Appetite Framework. The Board of Directors administers its risk oversight function primarily through the Board Risk Committee.
The Board Risk Committee structure is designed to allow for information flow, effective challenge and timely escalation of risk-related issues. The Board Risk Committee is directed to monitor and advise the Board of Directors regarding risk exposures, including credit, market, capital, liquidity, operational, compliance, strategic and reputational risks; review, approve, and monitor adherence to the risk appetite and supporting risk tolerance levels via a series of established metrics; and evaluate, monitor and oversee the adequacy and effectiveness of the Risk Management Framework and Risk Appetite Framework. The Board Risk Committee also reviews: reports of examination by and communications from regulatory agencies; the results of internal and third party testing and qualitative and quantitative assessments related to risk management; and any other matters within the scope of the Committee’s oversight responsibilities. The Board Risk Committee monitors management’s response to certain risk-related regulatory and audit issues. In addition, the Board Risk Committee may coordinate with the Audit Committee and the Compensation, Nominations and Governance Committee for the review of financial statements and related risks, information security and other areas of joint responsibility.
In combination with other risk management and monitoring practices, enterprise-wide stress testing activities are part of the Risk Management Framework and conducted within a defined framework. Stress tests are performed for various risks to ensure the financial institution can support continued operations during stressed periods.
In response to COVID-19, BancShares assembled a cross-functional leadership team to identify and manage newly identified risks and provide effective risk oversight through this pandemic. New or elevated risks have been identified in multiple areas, including but not limited to, operational risk, credit risk, market risk, liquidity risk, capital adequacy risk, compliance risk, and financial reporting risk. As such, we have incorporated changes to Item 1A. Risk Factors within this Quarterly Report on Form 10-Q to capture these changes. These new or increased areas of risk are being actively managed by senior leadership, and have been incorporated into reporting for key management committees and regular updates are being provided to the Board of Directors.
Credit risk management
Credit risk is the risk of not collecting payments pursuant to the contractual terms of loans, leases and certain investment securities. Loans and leases we originate are underwritten in accordance with our credit policies and procedures and are subject to periodic ongoing reviews. Acquired loans, regardless of whether PCD or non-PCD, are recorded at fair value as of the acquisition date and are subject to periodic reviews to identify any further credit deterioration. Our independent credit review function conducts risk reviews and analyses of both originated and acquired loans to ensure compliance with credit policies and to monitor asset quality trends and borrower financial strength. These reviews include portfolio analysis by geographic location, industry, collateral type and product. We strive to identify potential problem loans as early as possible, to record charge-offs or write-downs as appropriate and to maintain an adequate ACL that accounts for losses inherent in the loan and lease portfolio.
We are actively monitoring our loan portfolio for areas of increased risk as a result of COVID-19. As of July 31, 2020, COVID-19 related loan extensions decreased to approximately $1.5 billion in outstanding loan balances, representing approximately $43 million in payment deferrals. The first wave of loans with payment deferrals have completed their extension period and the volume of extension requests declined during the second quarter. A significant portion of the original payment extensions, approximately $5.5 billion, have moved to active status as of July 31, 2020. To date, we have not seen significant shifts in credit line utilization or declines in overall credit quality.
Additionally, we are participating in the SBA-PPP program, which provided much needed funds to our existing small business customers, and we continue to assess both the credit and operational risks this program presents. BancShares originated approximately 23,000 SBA-PPP loan requests with an outstanding balance of $3.08 billion at June 30, 2020.
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Our ACL estimate for the quarter ended June 30, 2020 included extensive reviews of the changes in credit risk associated with the loan portfolio and uncertainties around economic forecasts and the overall economic impact of COVID-19. Expected loss estimates within each portfolio 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 additionally considered BancShares industry and geography risk, historically strong credit quality and actual net losses incurred during prior periods of economic stress, as well as recent credit trends, which have not seen deterioration from COVID-19 as of June 30, 2020.
Interest rate risk management
Interest rate risk (“IRR”) results principally from: assets and liabilities maturing or repricing at different points in time, assets and liabilities repricing at the same point in time but in different amounts, and short-term and long-term interest rates changing in different magnitudes.
We assess our short-term IRR by forecasting net interest income over 24 months under various interest rate scenarios and comparing those results to forecasted net interest income, assuming stable rates. IRR scenarios modeled include, but are not limited to, immediate, parallel rate shocks, interest rate ramps, changes in the shape of the yield curve and changes in the relationships of our rates to market rates. Market interest rates declined significantly from year-end driven by economic uncertainty brought on by COVID-19. Net interest income deterioration in down rate shocks will remain muted due to the low absolute value of market interest rates. Assumptions that incorporate customer migration from low rate deposit instruments to intermediate term fixed rate instruments as rates rise have been adjusted based on actual deposit behavior over the last 3 years during a rising rate cycle.
Table 19 provides the impact on net interest income over 24 months resulting from various instantaneous interest rate shock scenarios as of June 30, 2020 and December 31, 2019.
Table 19
NET INTEREST INCOME SENSITIVITY ANALYSIS
Estimated percentage increase (decrease) in net interest income
Change in interest rate (basis points) June 30, 2020 December 31, 2019
-100 (3.12) % (8.00) %
+100 4.91 1.30
+200 6.68 0.01
The increased asset sensitivity in net interest income sensitivity metrics as of June 30, 2020 compared to December 31, 2019 were primarily affected by a significant influx of non-maturity deposits during the second quarter of 2020 related to participation in the SBA-PPP as well as consumer stimulus payments generating large overnight cash balances.
Long-term interest rate risk exposure is measured using the economic value of equity (“EVE”) sensitivity analysis to study the impact of long-term cash flows on earnings and capital. EVE represents the difference between the sum of the present value of all asset cash flows and the sum of the present value of the liability cash flows. EVE sensitivity analysis involves discounting cash flows of balance sheet items under different interest rate scenarios. Cash flows will vary by interest rate scenario, resulting in variations in EVE. The base-case measurement and its sensitivity to shifts in the yield curve allow management to measure longer-term repricing and option risk in the balance sheet.
Table 20 table presents the EVE profile as of June 30, 2020 and December 31, 2019.
Table 20
ECONOMIC VALUE OF EQUITY MODELING ANALYSIS
Estimated percentage increase (decrease) in EVE
Change in interest rate (basis points) June 30, 2020 December 31, 2019
-100 (22.56) % (8.25) %
+100 8.10 (0.03)
+200 9.21 (4.80)
The economic value of equity metrics at June 30, 2020 compared to December 31, 2019 were primarily affected by substantial growth in demand deposits of nearly $6.5 billion during the second quarter of 2020. We do not typically utilize interest rate swaps, floors, collars or other derivative financial instruments to hedge our overall balance sheet interest rate sensitivity and risk.
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Liquidity risk management
Liquidity risk is the risk that an institution will be unable to generate or obtain sufficient cash or its equivalents on a cost-effective basis to meet commitments as they fall due. The most common sources of liquidity risk arise from mismatches in the timing and value of on-balance sheet and off-balance sheet cash inflows and outflows. In general, on-balance sheet mismatches generate liquidity risk when the effective maturity of assets exceeds the effective maturity of liabilities. A commonly cited example of a balance sheet liquidity mismatch is when long-term loans (assets) are funded with short-term borrowings (liabilities). Other forms of liquidity risk include market constraints on the ability to convert assets into cash at expected levels, an inability to access funding sources at sufficient levels at a reasonable cost, and changes in economic conditions or exposure to credit, market, operational, legal and reputation risks that can affect an institution’s liquidity risk profile.
We utilize various limit-based measures to monitor, measure and control three different categories of liquidity risk:
• Tactical - Measures the risk of a negative cash flow position whereby cash outflows exceed cash inflows over a short-term horizon out to nine weeks;
• Structural - Measures the amount by which illiquid assets are supported by long-term funding; and
• Contingent - Measures the risk of having insufficient liquidity sources to support cash needs under potential future stressed market conditions or having an inability to access wholesale funding sources in a timely and cost effective manner.
We aim to maintain a diverse mix of liquidity sources to support the liquidity management function, while aiming to avoid funding concentrations by diversifying our external funding with respect to maturities, counterparties and nature. Our primary source of liquidity is our retail deposit book due to the generally stable balances and low cost it offers. Additional sources include cash in excess of our reserve requirement at the Federal Reserve Bank, and various other corresponding bank accounts and unencumbered securities, which totaled $8.04 billion at June 30, 2020 compared to $3.57 billion at December 31, 2019. Another source of available funds was advances from the FHLB of Atlanta and Chicago. Outstanding FHLB advances were $657.7 million as of June 30, 2020, and we had sufficient collateral pledged to secure $7.86 billion of additional borrowings from the FHLB of Atlanta. Also, at June 30, 2020, $3.93 billion in non-PCD loans with a lendable collateral value of $3.14 billion were used to create additional borrowing capacity at the Federal Reserve Bank. We also maintain Federal Funds lines and other credit lines, which had $623.0 million of available capacity at June 30, 2020.
CRITICAL ACCOUNTING ESTIMATES
Except as described below, there have been no significant changes in our Critical Accounting Estimates as described in our 2019 Annual Report on Form 10-K.
Allowance for credit losses - The allowance for credit losses on loans and leases replaces the allowance for loan and leases losses as a critical accounting estimate, as of January 1, 2020 with the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments .
The allowance for credit losses represents management’s best estimate of current expected credit losses over the life of the portfolio of loan and leases. Estimating credit losses requires judgment in determining loan specific attributes impacting the borrower’s ability to repay contractual obligations. Other factors such as economic forecasts used to determine a reasonable and supportable forecast, prepayment assumptions, the value of underlying collateral, and changes in size composition and risks within the portfolio are also considered.
The allowance for credit losses is assessed at each balance sheet date and adjustments are recorded in the provision for credit losses. The allowance is estimated based on loan level characteristics using historical loss rates, a reasonable and supportable economic forecast with reversion to historical assumptions. Loan losses are estimated using the fair value of collateral for collateral-dependent loans, or when the borrower is experiencing financial difficulty such that repayment of the loan is expected to be made through the operation or sale of the collateral. Loan balances considered uncollectible are charged-off against the ACL. Recoveries of amounts previously charged-off are credited to the ACL.
PCD assets represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At acquisition, the allowance for credit losses on PCD assets is booked directly the ACL. Any subsequent changes in the ACL on PCD assets is recorded through the provision for credit losses.
Management believes that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans and leases as of the balance sheet date. Actual losses incurred may differ materially from our estimates. Particularly, the impact of COVID-19 on both borrower credit and the greater macroeconomic environment is uncertain and changes in the duration, spread and severity of the virus will affect our loss experience.
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FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q and Exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include, but are not limited to, factors discussed in our Annual Report on Form 10-K and in other documents filed by us from time to time with the Securities and Exchange Commission.
Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “projects,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of BancShares’ management about future events.
Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, the impacts of COVID-19 on our business and the economy, the financial success or changing strategies of our customers, customer acceptance of our services, products and fee structure, the competitive nature of the financial services industry, our ability to compete effectively against other financial institutions in our banking markets, actions of government regulators, the level of market interest rates and our ability to manage our interest rate risk, changes in general economic conditions that affect our loan and lease portfolio, the abilities of our borrowers to repay their loans and leases, the values of real estate and other collateral, the impact of the acquisitions, the risks discussed in Part II, Item 1A. Risk Factors and other developments or changes in our business that we do not expect.
Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, BancShares undertakes no obligation to revise or update publicly any forward-looking statements for any reason.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential economic loss resulting from changes in market prices and interest rates. This risk can either result in diminished current fair values of financial instruments or reduced net interest income in future periods. As of June 30, 2020, BancShares’ market risk profile has changed since December 31, 2019 as discussed in the Form 10-K as a result of the outbreak of COVID-19 during 2020. See section Risk Management within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussion of changes. Changes in fair value that result from movement in market rates cannot be predicted with any degree of certainty. Therefore, the impact that future changes in market rates will have on the fair values of financial instruments is uncertain.
Item 4. Controls and Procedures
BancShares’ management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of BancShares’ disclosure controls and procedures as of the end of the period covered by this Quarterly Report, in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (“Exchange Act”). Based upon that evaluation, as of the end of the period covered by this report, the Chief Executive Officer and the Chief Financial Officer concluded that BancShares’ disclosure controls and procedures were effective to provide reasonable assurance that it is able to record, process, summarize and report in a timely manner the information required to be disclosed in the reports it files under the Exchange Act.
During the first quarter of 2020, BancShares adopted ASC 326 which resulted in a material change to our methodology for estimating credit losses on the loan portfolio. As a result, the Company implemented changes to policies, processes, and controls over estimating the allowance for credit losses. Many of these controls are similar to those previously used for estimating the allowance for loan and lease losses under legacy GAAP, however, there were changes implemented to account for the additional complexity of the credit loss models, review of economic forecasts and other assumptions used in the estimation process.
During the second quarter of 2020, BancShares originated over $3.2 billion of loans as part of the SBA-PPP. As a result, BancShares enhanced existing as well as implemented new controls over financial reporting related to the origination, disbursement, recording and reporting processes involving this portfolio.
Except as noted above, no changes in BancShares’ internal control over financial reporting occurred during the second quarter of 2020 that have materially affected, or are reasonably likely to materially affect, BancShares’ internal control over financial reporting.
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PART II
Item 1. Legal Proceedings
BancShares and various subsidiaries have been named as defendants in various legal actions arising from our normal business activities in which damages in various amounts were claimed. Although the amount of any ultimate liability with respect to those matters cannot be determined, in the opinion of management, no legal actions currently exist that are expected to have a material effect on BancShares’ consolidated financial statements. Additional information relating to legal proceedings is set forth in Note N - Commitments and Contingencies.
Item 1A. Risk Factors
The following paragraphs describe changes in the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2019.
An outbreak of COVID-19 has adversely affected BancShares' business, financial condition and results of operations.
A novel strain of coronavirus (“COVID-19”) has spread across most of the world, including the United States beginning in the first quarter of 2020. It has caused severe disruptions to the US economy, regional quarantines, business shutdowns, high unemployment, disruptions to supply chains, and overall economic instability that has adversely impacted the operations, activities and business of BancShares and its customers. Effects have generally been felt across all industries; however, the industries that have been the most negatively impacted to date include hospitality, travel and tourism, retail, medical and dental, and financial services.
In response to the national public health crisis, Federal, State and Local governments continue to impose an array of restrictions on the way all businesses conduct their operations and on our customers, business partners, vendors and employees. These restrictions, along with other economic factors including inflation risks, oil price volatility, and changes in interest rates have and may continue to destabilize financial markets and negatively impact our customers’ business activities and operations, making it difficult for them to satisfy existing debt obligations. They also have led to increasing unemployment and slower consumer spending which in turn will increase our collection risk as deteriorating economic conditions correlate with lower credit quality metrics and higher customer defaults on loans. Economic pressures and uncertainty has and may continue to change consumer and business behaviors, which, in the short and long term, could affect borrowers’ creditworthiness and the demand for loans and other products and services we offer. BancShares is actively monitoring the loan portfolio to identify changes in credit risk within a specific geography, loan class, or within a particular industry concentration. Therefore, provision expense could increase as we incorporate these changes into our estimate on the allowance for credit losses.
Additionally, our operations have experienced disruptions as we transitioned to a remote working environment for most corporate employees and we adjusted branch operations and corporate processes. While we have begun a phased return to work plan based on outbreak severity within impact areas, there may be increased absenteeism, and lost productivity as a result of the remote workforce. We may see an increased incidence of cybersecurity threats or fraud as cyber-criminals look to profit from the disruption and potential strain on information technology and the fear of the general public. There may be disruption in critical third party services as they adjust to the new operating environment. BancShares has a comprehensive business continuity and data security plan in place but may not be able to mitigate all of the issues identified above.
Market volatility and general uncertainty in the capital markets may also impact our business. Our access to capital and liquidity could be limited by market disruptions which could be exacerbated by delays in customer payments or significant withdrawals from customer deposit accounts. In addition, the fair value of our assets and liabilities will be impacted by the changing market environment. This could also increase liquidity and capital adequacy risks, as well as long-lived asset impairment risk.
As the government and its regulatory bodies respond to the crisis, it increases the burden on our associates to quickly respond to changing regulatory guidance. This could increase the risk of noncompliance.
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The impacts laid out above and others will be felt across all of the following categories of risk identified by BancShares in our Annual Report on Form 10-K:
• Operational Risk
• Credit Risk
• Market Risk
• Liquidity Risk
• Capital Adequacy Risk
• Compliance Risk
• Strategic Risk
• Financial Reporting Risk
The effects of the COVID-19 pandemic will heighten specific risk factors and could impact substantially all risk factors described in our Annual Report on Form 10-K under the risk categories listed above. Those effects will adversely affect our business operations and results at least until the outbreak has subsided, and the negative effects on the economy, our customers and our business and results likely will continue to be felt for some time afterwards. The full extent of the impact will depend on future developments that are highly uncertain including the duration and spread of the outbreak, its severity, governmental actions to contain the virus, and the long term economic impact, both globally, as well as in our banking markets, which includes a potential recession. As a result, we currently cannot fully assess the risk and adverse impact of the COVID-19 pandemic, but the effects may have a material impact on our business and financial results and heighten many of the individual risk factors identified in our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information concerning BancShares’ repurchases of outstanding common stock during the three month period ended June 30, 2020, is included in the following table:
Class A common stock Total Number of Class A Shares Repurchased Average Price Paid per Share Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet be Repurchased Under the Plans or Programs
Repurchases from April 1, 2020 to April 30, 2020 111,700 $ 333.71 111,700 131,500
Repurchases from May 1, 2020 to May 31, 2020 117,000 360.91 117,000 383,000
Repurchases from June 1, 2020 to June 30, 2020 117,300 404.70 117,300 265,700
Total 346,000 $ 366.98 346,000 265,700
The Board authorized the repurchase of up to 500,000 shares of Class A common stock for the period of February 1, 2020 through April 30, 2020, superseding all previous authorities. The authorization was publicly announced on February 7, 2020.
The Board authorized the repurchase of up to 500,000 shares of Class A common stock for the period May 1, 2020 through July 31, 2020. The authorization was publicly announced on April 28, 2020.
Subsequent to quarter-end and through July 31, 2020, BancShares repurchased an additional 117,700 shares of Class A common stock for $47.1 million at an average cost per share of $399.77. Upon completion of the current authorization on July 31, 2020, share repurchase activity has been suspended and will be reevaluated in subsequent periods.

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Item 6. Exhibits
31.1
31.2
32.1
32.2
101.INS Inline XBRL Instance Document (filed herewith)
101.SCH Inline XBRL Taxonomy Extension Schema (filed herewith)
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith)
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase (filed herewith)
101.LAB Inline XBRL Taxonomy Extension Label Linkbase (filed herewith)
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith)
104 Cover Page Interactive Data File (embedded within the Inline XBRL document filed as Exhibit 101)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 4, 2020 FIRST CITIZENS BANCSHARES, INC.
(Registrant)
By: /s/ CRAIG L. NIX
Craig L. Nix
Chief Financial Officer
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TABLE OF CONTENTS