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FCNCA First Citizens Bancshares, Inc

Filed: 4 Aug 20, 8:00pm
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)
____________________________________________________
Delaware56-1528994
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
4300 Six Forks RoadRaleighNorth Carolina27609
(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 classTrading SymbolName of each exchange on which registered
Class A Common Stock, Par Value $1FCNCANasdaq Global Select Market
Depositary Shares, Each Representing a 1/40th Interest in a Share of 5.375% Non-Cumulative Perpetual Preferred Stock, Series AFCNCPNasdaq 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 filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging 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
 
2

PART I 
Item 1.Financial Statements
First Citizens BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, unaudited)June 30, 2020December 31, 2019
Assets
Cash and due from banks$389,233  $376,719  
Overnight investments3,107,575  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 sale107,881  67,869  
Loans and leases32,418,425  28,881,496  
Allowance for credit losses(222,450) (225,141) 
Net loans and leases32,195,975  28,656,355  
Premises and equipment1,255,688  1,244,396  
Other real estate owned53,850  46,591  
Income earned not collected175,496  123,154  
Goodwill350,298  349,398  
Other intangible assets58,606  68,276  
Other assets663,116  610,891  
Total assets$47,866,194  $39,824,496  
Liabilities
Deposits:
Noninterest-bearing$18,149,466  $12,926,796  
Interest-bearing23,329,779  21,504,440  
Total deposits41,479,245  34,431,236  
Securities sold under customer repurchase agreements740,276  442,956  
Federal Home Loan Bank borrowings657,682  572,185  
Subordinated debt504,246  163,412  
Other borrowings96,791  148,318  
FDIC shared-loss payable15,025  112,395  
Other liabilities381,485  367,810  
Total liabilities43,874,750  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 0 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively)339,937  —  
Surplus—  44,081  
Retained earnings3,651,237  3,658,197  
Accumulated other comprehensive loss(9,664) (126,723) 
Total shareholders’ equity3,991,444  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 30Six months ended June 30
(Dollars in thousands, except per share data, unaudited)2020201920202019
Interest income
Loans and leases$326,099  $303,233  $651,647  $594,155  
Investment securities interest and dividend income36,605  40,209  76,098  79,821  
Overnight investments553  7,279  5,071  13,669  
Total interest income363,257  350,721  732,816  687,645  
Interest expense
Deposits17,916  19,158  42,110  32,084  
Securities sold under customer repurchase agreements399  515  841  974  
Federal Home Loan Bank borrowings2,472  1,586  5,456  2,871  
Subordinated debt4,677  1,952  7,432  3,624  
Other borrowings399  162  1,183  272  
Total interest expense25,863  23,373  57,022  39,825  
Net interest income337,394  327,348  675,794  647,820  
Provision for credit losses20,552  5,198  48,907  16,948  
Net interest income after provision for credit losses316,842  322,150  626,887  630,872  
Noninterest income
Service charges on deposit accounts17,522  25,790  43,935  50,855  
Wealth management services22,371  24,573  48,783  49,574  
Cardholder services, net17,587  18,479  35,747  35,112  
Other service charges and fees7,145  8,164  14,937  15,586  
Merchant services, net5,363  6,455  11,251  12,290  
Mortgage income9,811  5,038  15,035  8,696  
Insurance commissions3,189  2,854  6,877  6,145  
ATM income1,395  1,625  2,817  3,136  
Marketable equity securities gains, net64,570  3,144  13,162  14,472  
Realized gains on investment securities available for sale, net13,752  5,719  33,547  5,719  
Other2,697  5,034  3,322  8,953  
Total noninterest income165,402  106,875  229,413  210,538  
Noninterest expense
Salaries and wages146,633  136,526  291,888  268,947  
Employee benefits30,364  30,197  68,875  62,732  
Occupancy expense29,556  26,886  57,036  54,647  
Equipment expense28,774  28,489  56,624  55,229  
Processing fees paid to third parties10,186  6,641  20,558  13,730  
FDIC insurance expense3,731  2,757  7,197  5,417  
Collection and foreclosure-related expenses3,949  3,659  8,003  6,681  
Merger-related expenses4,369  4,084  8,601  5,803  
Other34,117  34,158  72,868  67,868  
Total noninterest expense291,679  273,397  591,650  541,054  
Income before income taxes190,565  155,628  264,650  300,356  
Income taxes36,779  36,269  53,695  69,638  
Net income$153,786  $119,359  $210,955  $230,718  
Less: Preferred stock dividends4,790  —  4,790  —  
Net income available to common shareholders$148,996  $119,359  $206,165  $230,718  
Weighted average common shares outstanding10,105,520  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 30Six months ended June 30
(Dollars in thousands, unaudited)2020201920202019
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 period28,066  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 effect3,163  1,315  7,716  1,315  
Unrealized gains on securities available for sale arising during the period, net of tax11,022  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 cost6,398  2,735  12,662  5,490  
Tax effect(1,472) (629) (2,913) (1,263) 
Total change in pension obligation, net of tax4,926  2,106  9,749  4,227  
Other comprehensive income15,948  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
SurplusRetained
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
SurplusRetained
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)20202019
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 leases48,907  16,948  
Deferred tax expense17,774  5,126  
Net decrease (increase) in current tax receivable12,122  (23,826) 
Depreciation and amortization53,806  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 sale474,153  326,640  
Gain on sale of loans held for sale(15,578) (6,395) 
Net write-downs/losses on other real estate owned2,475  1,417  
Net amortization (accretion) of premiums and discounts20,889  (16,491) 
Amortization of intangible assets12,464  12,019  
Net change in mortgage servicing rights357  (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 activities100,790  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 maturity57,057  190,644  
Proceeds from maturities, calls, and principal repayments of investment securities available for sale1,139,291  1,061,895  
Proceeds from sales of investment securities available for sale3,122,454  610,787  
Proceeds from sales of marketable equity securities313,131  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 owned9,263  11,884  
Proceeds from sales of premises and equipment37  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 deposits7,649,120  762,021  
Net increase (decrease) in short-term borrowings2,043  (109,109) 
Repayment of long-term obligations(75,908) (33,008) 
Origination of long-term obligations400,000  —  
Net proceeds from subordinated notes issuance345,850  —  
Net proceeds from preferred stock issuance339,937  —  
Repurchase of common stock(282,923) (186,995) 
Cash dividends paid(13,188) (9,243) 
Net cash provided by financing activities7,741,098  715,596  
Change in cash and due from banks12,514  (43,293) 
Cash and due from banks at beginning of period376,719  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:20202019
Transfers of loans to other real estate$7,138  $5,710  
Dividends declared but not paid4,007  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 estate2,046  2,184  
Unsettled common stock repurchases3,772  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.
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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. PCD 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 0 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 0 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 0 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 investments35,129  
Investment securities30,146  
Loans133,989  
Premises and equipment7,624  
Other real estate owned9,813  
Income earned not collected558  
Intangible assets536  
Other assets2,520  
Total assets acquired221,400  
Liabilities
Deposits209,340  
Borrowings9,925  
Other liabilities501  
Total liabilities assumed$219,766  
Fair value of net assets acquired1,634  
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)CostGross
unrealized
gains
Gross unrealized
losses
Allowance for credit lossesFair
value
Investment securities available for sale
U.S. Treasury$754,350  $236  $—  $—  $754,586  
Government agency549,673  292  4,256  —  545,709  
Residential mortgage-backed securities5,671,151  119,935  694  —  5,790,392  
Commercial mortgage-backed securities1,047,601  32,221  —  —  1,079,822  
Corporate bonds449,623  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 securities116,322  6,297  8,303  114,316  
Investment securities held to maturity
Residential mortgage-backed securities693,143  16,196  —  —  709,339  
Commercial mortgage-backed securities78,729  251  —  78,980  
Other3,006  —  —  —  3,006  
Total investment securities held to maturity774,878  16,447  —  —  791,325  
Total investment securities$9,363,598  $179,815  $18,490  $—  $9,524,923  
December 31, 2019
(Dollars in thousands)CostGross
unrealized
gains
Gross unrealized
losses
Fair
value
Investment securities available for sale
U.S. Treasury$409,397  $602  $—  $409,999  
Government agency684,085  928  2,241  682,772  
Residential mortgage-backed securities5,269,060  13,417  15,387  5,267,090  
Commercial mortgage-backed securities373,105  6,974  59  380,020  
Corporate bonds198,278  3,420  132  201,566  
State, county and municipal118,227  —  —  118,227  
Total investment securities available for sale$7,052,152  $25,341  $17,819  $7,059,674  
Investment in marketable equity securities59,262  23,304  233  82,333  
Investment securities held to maturity
Other30,996  —  —  30,996  
Total investment securities held to maturity30,996  —  —  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, 0 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, 2020December 31, 2019
(Dollars in thousands)CostFair
value
CostFair
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 years51,589  51,887  24,496  24,971  
Five through 10 years369,075  368,281  185,209  187,868  
Over 10 years28,959  28,605  109,872  110,026  
Government agency549,673  545,709  684,085  682,772  
Residential mortgage-backed securities5,671,151  5,790,392  5,269,060  5,267,090  
Commercial mortgage-backed securities1,047,601  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 less2,257  2,257  30,746  30,746  
One through five years749  749  250  250  
Residential mortgage-backed securities693,143  709,339  —  —  
Commercial mortgage-backed securities78,729  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 0 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 0 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 30Six months ended June 30
(Dollars in thousands)2020201920202019
Marketable equity securities gains, net$64,570  $3,144  $13,162  $14,472  
Less net gains recognized on marketable equity securities sold36,993  2,271  37,316  2,315  
Unrealized gains (losses) recognized on marketable equity securities held$27,577  $873  $(24,154) $12,157  
17

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 months12 months or moreTotal
(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 securities172,628  302  149,170  392  321,798  694  
Corporate bonds112,172  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 months12 months or moreTotal
(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 securities2,387,293  14,016  264,257  1,371  2,651,550  15,387  
Commercial mortgage-backed securities35,926  59  —  —  35,926  59  
Corporate bonds7,714  123  4,749   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 2 were corporate bonds.
NaN 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, NaN 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 0 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 0 securities past due as of June 30, 2020.
18

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 mortgage10,352,793  
Non-owner occupied commercial mortgage3,056,328  
Commercial and industrial and leases4,650,839  
SBA-PPP3,084,549  
Total commercial loans22,156,874  
Consumer:
Residential mortgage5,404,682  
Revolving mortgage2,233,977  
Construction and land development353,382  
Consumer auto1,195,771  
Consumer other543,088  
Total consumer loans9,730,900  
Total non-PCD loans and leases31,887,774  
PCD loans530,651  
Total loans and leases$32,418,425  
(Dollars in thousands)December 31, 2019
Commercial:
Construction and land development$1,013,454  
Commercial mortgage12,282,635  
Other commercial real estate542,028  
Commercial and industrial and leases4,403,792  
Other310,093  
Total commercial loans18,552,002  
Noncommercial:
Residential mortgage5,293,917  
Revolving mortgage2,339,072  
Construction and land development357,385  
Consumer1,780,404  
Total noncommercial loans9,770,778  
Total non-PCI loans and leases28,322,780  
PCI loans558,716  
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 greaterTotal past
due
CurrentTotal loans
and leases
Commercial:
Construction and land development$1,618  $14  $1,721  $3,353  $1,009,012  $1,012,365  
Owner occupied commercial mortgage14,360  2,518  12,820  29,698  10,323,095  10,352,793  
Non-owner occupied commercial mortgage7,914  982  8,520  17,416  3,038,912  3,056,328  
Commercial and industrial and leases10,464  3,196  4,215  17,875  4,632,964  4,650,839  
SBA-PPP—  —  —  —  3,084,549  3,084,549  
Total commercial loans34,356  6,710  27,276  68,342  22,088,532  22,156,874  
Consumer:
Residential mortgage25,243  7,082  35,044  67,369  5,337,313  5,404,682  
Revolving mortgage8,874  4,615  9,006  22,495  2,211,482  2,233,977  
Construction and land development1,735  127  57  1,919  351,463  353,382  
Consumer auto3,093  1,124  976  5,193  1,190,578  1,195,771  
Consumer other2,433  1,691  1,835  5,959  537,129  543,088  
Total consumer loans41,378  14,639  46,918  102,935  9,627,965  9,730,900  
PCD loans18,850  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 greaterTotal past
due
CurrentTotal loans
and leases
Commercial:
Construction and land development$3,146  $195  $2,702  $6,043  $1,007,411  $1,013,454  
Commercial mortgage20,389  8,774  8,319  37,482  12,245,153  12,282,635  
Other commercial real estate861  331  698  1,890  540,138  542,028  
Commercial and industrial and leases18,269  4,842  5,032  28,143  4,375,649  4,403,792  
Other51  411  126  588  309,505  310,093  
Total commercial loans42,716  14,553  16,877  74,146  18,477,856  18,552,002  
Noncommercial:
Residential mortgage45,839  18,289  24,409  88,537  5,205,380  5,293,917  
Revolving mortgage9,729  3,468  9,865  23,062  2,316,010  2,339,072  
Construction and land development977  218  1,797  2,992  354,393  357,385  
Consumer10,481  3,746  3,571  17,798  1,762,606  1,780,404  
Total noncommercial loans67,026  25,721  39,642  132,389  9,638,389  9,770,778  
PCI loans26,478  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 mortgage24,476  28,283  111  
Non-owner occupied commercial mortgage5,965  8,491  615  
Commercial and industrial and leases7,685  7,239  1,399  
Total commercial loans42,407  46,951  2,194  
Consumer:
Residential mortgage44,357  59,352  —  
Revolving mortgage22,411  23,600  —  
Construction and land development2,828  1,699  —  
Consumer auto2,145  2,677  —  
Consumer other798  1,001  1,450  
Total consumer loans72,539  88,329  1,450  
PCD loans53,771  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 mortgage29,733  —  
Commercial and industrial and leases7,365  1,094  
Other commercial real estate708  —  
Other320  —  
Total commercial loans42,407  1,094  
Noncommercial:
Construction and land development2,828  —  
Residential mortgage44,357  45  
Revolving mortgage22,411  —  
Consumer2,943  2,152  
Total noncommercial loans72,539  2,197  
PCI loans6,743  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:20202019201820172016PriorRevolvingRevolving converted to term loansTotal
(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 Mention88  —  334  5,507  —  93  —  —  6,022  
Substandard1,405  1,221  1,813  29   166  —  —  4,642  
Total176,795  406,119  219,702  138,289  31,607  14,712  25,141  —  1,012,365  
Owner occupied commercial mortgage
Pass1,345,296  2,218,595  1,850,128  1,452,273  1,203,335  1,943,057  106,274  137  10,119,095  
Special Mention2,296  11,164  29,941  13,089  17,795  30,315  2,742  —  107,342  
Substandard9,186  12,309  16,886  24,063  14,255  40,331  9,254  72  126,356  
Total1,356,778  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
Pass380,269  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  
Substandard1,237  1,094  3,653  1,642  6,513  3,085  1,479  —  18,703  
Total381,506  688,209  514,582  454,666  372,494  605,882  38,989  —  3,056,328  
Commercial and industrial and leases
Pass750,806  1,207,639  630,297  401,635  301,561  401,284  805,691  5,565  4,504,478  
Special Mention1,431  3,426  6,387  5,534  3,159  2,518  13,928  243  36,626  
Substandard11,847  3,794  4,323  5,608  2,790  4,941  22,084  696  56,083  
Doubtful—  —  39  —  —  —   —  41  
Ungraded—  —  —  —  —  —  53,611  —  53,611  
Total764,084  1,214,859  641,046  412,777  307,510  408,743  895,316  6,504  4,650,839  
SBA-PPP
Pass3,084,549  —  —  —  —  —  —  —  3,084,549  
Total3,084,549  —  —  —  —  —  —  —  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:20202019201820172016PriorRevolvingRevolving converted to term loansTotal
(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 days488  2,760  2,985  4,612  2,594  11,685  119  —  25,243  
60-89 days26  158  326  265  1,851  4,456  —  —  7,082  
90 days or greater23  738  5,815  6,054  6,203  13,239  2,972�� —  35,044  
Total892,333  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
Current88,063  174,326  52,270  16,909  8,123  7,881  3,891  —  351,463  
30-59 days245  1,312  91  —  —  87  —  —  1,735  
60-89 days—  —  —  11  —  116  —  —  127  
90 days or greater—  —  —  —  —  57  —  —  57  
Total88,308  175,638  52,361  16,920  8,123  8,141  3,891  —  353,382  
Consumer auto
Current245,264  421,363  284,557  142,512  74,782  22,100  —  —  1,190,578  
30-59 days172  1,070  654  710  319  168  —  —  3,093  
60-89 days75  432  239  215  132  31  —  —  1,124  
90 days or greater22  312  306  206  76  54  —  —  976  
Total245,533  423,177  285,756  143,643  75,309  22,353  —  —  1,195,771  
Consumer other
Current27,655  40,769  17,093  9,585  10,595  31,275  400,157  —  537,129  
30-59 days78  33  79  31  13  22  2,177  —  2,433  
60-89 days31  67  70  —   —  1,518  —  1,691  
90 days or greater 97   —  74  —  1,658  —  1,835  
Total27,765  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 days1,005  546  199  132  808  15,591  182  387  18,850  
60-89 days117  141  37  34  —  3,669  72  624  4,694  
90 days or greater454  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 mortgageOther commercial real estateCommercial and industrial and leasesOtherPCITotal 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 mention2,577  115,164  3,899  44,604  622  44,290  166,866  
Substandard5,955  116,672  1,447  34,148  675  87,970  158,897  
Doubtful—  —  —   —  3,657   
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 mortgageRevolving mortgageConstruction and land developmentConsumerPCITotal 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 due45,839  9,729  977  10,481  13,764  67,026  
60-89 days past due18,289  3,468  218  3,746  5,608  25,721  
90 days or greater past due24,409  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 allowance1,193  
Discount1,055  
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 mortgage31,473  
Non-owner occupied commercial mortgage25,143  
Commercial and industrial and leases15,065  
Total commercial loans81,109  
Consumer:
Residential mortgage21,168  
Revolving mortgage2,084  
Construction and land development5,254  
Consumer auto294  
Consumer other693  
Total consumer loans29,493  
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 0 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 mortgageNon-owner occupied commercial mortgageCommercial
and industrial and leases
Residential
mortgage
Revolving
mortgage
Construction and land development - consumerConsumer autoConsumer otherPCDTotal
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) 
Recoveries49  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
OtherResidential
mortgage
Revolving
mortgage
Construction and land development - consumerConsumerPCDTotal
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) 
Recoveries40  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 mortgageNon-owner occupied commercial mortgageCommercial
and industrial and leases
Residential
mortgage
Revolving
mortgage
Construction and land development - consumerConsumer autoConsumer otherPCDTotal
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 12,152  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) 
Recoveries136  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
OtherResidential
mortgage
Revolving
mortgage
Construction
and land
development
- non - commercial
ConsumerPCITotal
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) 
Recoveries171  276   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 LoansNet Realizable Value of CollateralCollateral CoverageAllowance for Credit Losses
Commercial loans:
Construction and land development$2,862  $3,224  112.6 %$—  
Owner occupied commercial mortgage10,690  24,546  229.6  —  
Non-owner occupied commercial mortgage6,995  11,133  159.2  —  
Commercial and industrial and leases—  —  —  —  
Total commercial loans20,547  38,903  189.3  —  
Consumer:
Residential mortgage19,445  25,599  131.6  75  
Revolving mortgage310  310  100.0  —  
Construction and land development—  —  —  —  
Total consumer loans19,755  25,909  131.2  75  
Total non-PCD loans40,302  64,812  160.8  75  
PCD22,013  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
OtherResidential
mortgage
Revolving
mortgage
Construction
and land
development
- non-
commercial
ConsumerTotal
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 impairment32,750  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 impairment1,008,799  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 quality558,716  
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
TotalUnpaid
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 mortgage42,394  27,755  70,149  74,804  3,650  
Other commercial real estate318  950  1,268  1,360  39  
Commercial and industrial and leases7,547  4,635  12,182  13,993  1,379  
Other406  233  639  661  103  
Total commercial loans52,516  36,377  88,893  95,927  5,634  
Noncommercial:
Residential mortgage48,796  11,646  60,442  64,741  3,278  
Revolving mortgage26,104  2,765  28,869  31,960  2,722  
Construction and land development2,470  1,412  3,882  4,150  174  
Consumer3,472  41  3,513  3,821  1,107  
Total noncommercial loans80,842  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, 2019Six months ended June 30, 2019
(Dollars in thousands)Average
balance
Interest income recognizedAverage
balance
Interest income recognized
Non-PCI impaired loans and leases:
Commercial:
Construction and land development$2,102  $ $2,125  $34  
Commercial mortgage58,906  538  57,768  1,102  
Other commercial real estate519   602  14  
Commercial and industrial and leases11,348  113  10,674  213  
Other328   322   
Total commercial73,203  665  71,491  1,367  
Noncommercial:
Residential mortgage48,490  317  45,558  642  
Revolving mortgage29,623  256  29,183  503  
Construction and land development3,547  32  3,647  68  
Consumer3,014  31  3,007  60  
Total noncommercial84,674  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.
27

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)AccruingNonaccruing Total
Commercial loans:
Construction and land development$1,072  $1,304  $2,376  
Owner occupied commercial mortgage35,080  12,682  47,762  
Non-owner occupied commercial mortgage7,343  313  7,656  
Commercial and industrial and leases29,463  2,803  32,266  
Total commercial loans72,958  17,102  90,060  
Consumer:
Residential mortgage35,439  14,167  49,606  
Revolving mortgage22,342  7,012  29,354  
Construction and land development2,355  1,452  3,807  
Consumer auto1,989  796  2,785  
Consumer other1,091  139  1,230  
Total consumer loans63,216  23,566  86,782  
PCD loans18,639  6,024  24,663  
Total loans$154,813  $46,692  $201,505  
December 31, 2019
(Dollars in thousands)AccruingNonaccruing Total
Commercial loans:
Construction and land development$487  $2,279  $2,766  
Commercial mortgage50,819  11,116  61,935  
Other commercial real estate571  —  571  
Commercial and industrial and leases9,430  2,409  11,839  
Other320  105  425  
Total commercial loans61,627  15,909  77,536  
Noncommercial:
Residential mortgage41,813  16,048  57,861  
Revolving mortgage21,032  7,367  28,399  
Construction and land development1,452  2,430  3,882  
Consumer2,826  688  3,514  
Total noncommercial loans67,123  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.
28

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, 2020Three months ended June 30, 2019
All restructuringsRestructurings with payment defaultAll restructuringsRestructurings with payment default
(Dollars in thousands)Number of LoansRecorded investment at period endNumber of LoansRecorded investment at period endNumber of LoansRecorded investment at period endNumber of LoansRecorded investment at period end
Loans and leases
Interest only $15,352   $3,398   $4,343  —  $—  
Loan term extension27  2,925  13  1,459   998   183  
Below market interest rate69  17,291  18  1,069  67  6,979  30  2,612  
Discharged from bankruptcy43  1,472   311  40  5,054  30  3,106  
Total restructurings146  $37,040  43  $6,237  115  $17,374  62  $5,901  
Six months ended June 30, 2020Six months ended June 30, 2019
All restructuringsRestructurings with payment defaultAll restructuringsRestructurings with payment default
(Dollars in thousands)Number of LoansRecorded investment at period endNumber of LoansRecorded investment at period endNumber of LoansRecorded investment at period endNumber of LoansRecorded investment at period end
Loans and leases
Interest only17  $19,328   $3,398   $4,343   $3,203  
Loan term extension33  3,657  16  1,667   1,437   534  
Below market interest rate157  25,389  46  2,324  125  11,063  61  4,645  
Discharged from bankruptcy110  5,640  44  1,507  102  7,679  53  3,948  
Total restructurings317  $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  
Additions9,184  
Acquired in business combinations9,813  
Sales(9,497) 
Write-downs/losses(2,241) 
Balance at June 30, 2020$53,850  
Balance at December 31, 2018$48,030  
Additions7,894  
Acquired in business combinations3,613  
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 30Six months ended June 30
(Dollars in thousands)2020201920202019
Beginning balance$19,756  $20,647  $22,963  $21,396  
Servicing rights originated2,096  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 30Six months ended June 30
(Dollars in thousands)2020201920202019
Beginning balance$3,189  $161  $222  $—  
Valuation allowance increase (decrease)1,069  (33) 4,036  128  
Ending balance$4,258  $128  $4,258  $128  
30

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, 2020December 31, 2019
Discount rate - conventional fixed loans7.66 %8.92 %
Discount rate - all loans excluding conventional fixed loans8.66 %9.92 %
Weighted average constant prepayment rate20.19 %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 of $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  
Accretion2,098  
Payment made to the FDIC to settle shared-loss agreement(99,468) 
Balance at June 30, 2020$15,025  
31

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, 2020December 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 saleUnrealized losses on securities available for sale transferred to held to maturityDefined benefit pension itemsTotal
Beginning balance$102,080  $—  $(127,692) $(25,612) 
Net unrealized gains arising during period21,611  —  —  21,611  
Amounts reclassified from accumulated other comprehensive loss(10,589) —  4,926  (5,663) 
Net current period other comprehensive income11,022  —  4,926  15,948  
Ending balance$113,102  $—  $(122,766) $(9,664) 
Three months ended June 30, 2019
(Dollars in thousands, net of tax)Unrealized gains (losses) on securities available for saleUnrealized losses on securities available for sale transferred to held to maturityDefined benefit pension itemsTotal
Beginning balance$(16,890) $(66,558) $(123,412) $(206,860) 
Net unrealized gains arising during period23,848  —  —  23,848  
Amounts reclassified from accumulated other comprehensive loss(4,404) 4,579  2,106  2,281  
Net current period other comprehensive income19,444  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 saleUnrealized losses on securities available for sale transferred to held to maturityDefined benefit pension itemsTotal
Beginning balance$5,792  $—  $(132,515) $(126,723) 
Net unrealized gains arising during period133,141  —  —  133,141  
Amounts reclassified from accumulated other comprehensive loss(25,831) —  9,749  (16,082) 
Net current period other comprehensive income107,310  —  9,749  117,059  
Ending balance$113,102  $—  $(122,766) $(9,664) 
Six months ended June 30, 2019
(Dollars in thousands, net of tax)Unrealized gains on securities available for saleUnrealized losses on securities available for sale transferred to held to maturityDefined benefit pension itemsTotal
Beginning balance$(38,505) $(71,149) $(125,533) $(235,187) 
Net unrealized gains arising during period45,463  —  —  45,463  
Amounts reclassified from accumulated other comprehensive loss(4,404) 9,170  4,227  8,993  
Net current period other comprehensive income41,059  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) 
33

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.
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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, 2020December 31, 2019
Carrying valueFair valueCarrying valueFair value
Cash and due from banks$389,233  $389,233  $376,719  $376,719  
Overnight investments3,107,575  3,107,575  1,107,844  1,107,844  
Investment in marketable equity securities114,316  114,316  82,333  82,333  
Investment securities available for sale8,619,282  8,619,282  7,059,674  7,059,674  
Investment securities held to maturity774,878  791,325  30,996  30,996  
Loans held for sale107,881  107,881  67,869  67,869  
Net loans and leases32,195,975  32,604,388  28,656,355  28,878,550  
Income earned not collected175,496  175,496  123,154  123,154  
Federal Home Loan Bank stock45,392  45,392  43,039  43,039  
Mortgage and other servicing rights20,167  21,163  24,891  26,927  
Deposits with no stated maturity38,202,609  38,202,609  30,593,627  30,593,627  
Time deposits3,276,636  3,303,841  3,837,609  3,842,162  
Securities sold under customer repurchase agreements740,276  740,276  442,956  442,956  
Federal Home Loan Bank borrowings657,682  679,993  572,185  577,362  
Subordinated debt504,246  506,089  163,412  173,685  
Other borrowings96,791  95,861  148,318  149,232  
FDIC shared-loss payable15,025  15,730  112,395  114,252  
Accrued interest payable14,085  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 valueLevel 1 inputsLevel 2 inputsLevel 3 inputs
Assets measured at fair value
Investment securities available for sale
U.S. Treasury$754,586  $—  $754,586  $—  
Government agency545,709  —  545,709  —  
Residential mortgage-backed securities5,790,392  —  5,790,392  —  
Commercial mortgage-backed securities1,079,822  —  1,079,822  —  
Corporate bonds448,773  —  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 valueLevel 1 inputsLevel 2 inputsLevel 3 inputs
Assets measured at fair value
Investment securities available for sale
U.S. Treasury$409,999  $—  $409,999  $—  
Government agency682,772  —  682,772  —  
Residential mortgage-backed securities5,267,090  —  5,267,090  —  
Commercial mortgage-backed securities380,020  —  380,020  —  
Corporate bonds201,566  —  131,881  69,685  
State, county and municipal118,227  —  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 30Six months ended June 30
(Dollars in thousands)2020201920202019
Beginning balance$67,016  $146,287  $69,685  $143,226  
Purchases100,595  991  100,595  3,991  
Unrealized net gains (losses) included in other comprehensive income2,449  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 0 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 0 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 assetsValuation techniqueSignificant unobservable inputFair Value
Corporate bondsIndicative bid provided by brokerMultiple 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 valueAggregate unpaid principal balanceDifference
Originated loans held for sale$107,881  $102,189  $5,692  
December 31, 2019
Fair valueAggregate unpaid principal balanceDifference
Originated loans held for sale$67,869  $65,697  $2,172  
NaN 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 valueLevel 1 inputsLevel 2 inputsLevel 3 inputs
Collateral-dependent loans$14,341  $—  $—  $14,341  
Other real estate owned44,465  —  —  44,465  
Mortgage servicing rights17,992  —  —  17,992  
December 31, 2019
 Fair value measurements using:
Fair valueLevel 1 inputsLevel 2 inputsLevel 3 inputs
Impaired loans$132,336  $—  $—  $132,336  
Other real estate owned38,310  —  —  38,310  
Mortgage servicing rights3,757  —  —  3,757  
NaN 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 30Six months ended June 30
(Dollars in thousands)2020201920202019
Service cost$3,682  $3,271  $7,139  $6,384  
Interest cost8,568  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 loss6,398  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)ClassificationJune 30, 2020December 31, 2019
Assets:
OperatingOther assets$73,488  $77,115  
FinancePremises and equipment7,547  8,820  
Total leased assets$81,035  $85,935  
Liabilities:
OperatingOther liabilities$73,481  $76,746  
FinanceOther borrowings7,463  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, 2020December 31, 2019
Unused commitments to extend credit$11,705,547  $10,682,378  
Standby letters of credit104,655  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 $2,000,0001,758,252  57.0  
Greater than $2,000,000473,194  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.
41

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%.
42

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.
43

Table 2
SELECTED QUARTERLY DATA
2020
2019 (1)
Six months ended June 30
SecondFirstFourthThirdSecond
(Dollars in thousands, except share data)QuarterQuarterQuarterQuarterQuarter20202019
SUMMARY OF OPERATIONS
Interest income$363,257  $369,559  $354,048  $362,318  $350,721  $732,816  $687,645  
Interest expense25,863  31,159  26,924  25,893  23,373  57,022  39,825  
Net interest income337,394  338,400  327,124  336,425  327,348  675,794  647,820  
Provision for credit losses20,552  28,355  7,727  6,766  5,198  48,907  16,948  
Net interest income after provision for credit losses316,842  310,045  319,397  329,659  322,150  626,887  630,872  
Noninterest income165,402  64,011  104,393  100,930  106,875  229,413  210,538  
Noninterest expense291,679  299,971  292,262  270,425  273,397  591,650  541,054  
Income before income taxes190,565  74,085  131,528  160,164  155,628  264,650  300,356  
Income taxes36,779  16,916  29,654  35,385  36,269  53,695  69,638  
Net income153,786  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 shares0.40  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-end367.57  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 securities8,928,467  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 assets42,795,781  38,004,341  36,032,680  35,293,979  34,674,842  40,400,061  34,056,935  
Deposits39,146,415  34,750,061  33,295,141  32,647,264  32,100,210  36,948,238  31,454,973  
Interest-bearing liabilities24,407,285  23,153,777  20,958,943  20,551,393  20,397,445  23,780,042  20,028,489  
Securities sold under customer repurchase agreements659,244  474,231  495,804  533,371  556,374  566,737  547,318  
Other short-term borrowings45,549  157,759  28,284  23,236  40,513  101,654  20,369  
Long-term borrowings1,275,928  961,132  467,223  384,047  371,843  1,118,042  358,110  
Common shareholders' equity3,648,284  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 outstanding10,105,520  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 securities9,508,476  8,845,197  7,173,003  7,167,680  6,695,578  9,508,476  6,695,578  
Loans and leases32,418,425  29,240,959  28,881,496  27,196,511  26,728,237  32,418,425  26,728,237  
Deposits41,479,245  35,346,711  34,431,236  32,743,277  32,719,671  41,479,245  32,719,671  
Securities sold under customer repurchase agreements740,276  540,362  442,956  522,195  544,527  740,276  544,527  
Other short-term borrowings—  105,000  295,277  —  —  —  —  
Long-term borrowings1,258,719  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 outstanding9,934,105  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 leases0.09  0.10  0.14  0.10  0.11  0.10  0.11  
Allowance for credit losses to total loans and leases(3):
PCD5.07  4.80  1.35  1.34  1.51  5.07  1.51  
Non-PCD0.61  0.64  0.77  0.82  0.83  0.61  0.83  
Total0.69  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 ratio11.38  11.43  10.86  11.80  12.03  11.38  12.03  
Common equity Tier 1 ratio10.32  10.36  10.86  11.80  12.03  10.32  12.03  
Total risk-based capital ratio13.63  13.65  12.12  13.09  13.34  13.63  13.34  
Tier 1 leverage capital ratio8.07  8.98  8.81  9.18  9.35  8.07  9.35  
Dividend payout ratio2.71  7.33  4.19  3.55  3.79  3.99  3.95  
Average loans and leases to average deposits80.81  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.
44

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.
45

Table 3
CONSOLIDATED QUARTER-TO-DATE AVERAGE TAXABLE-EQUIVALENT BALANCE SHEETS
Three months ended June 30
20202019
InterestInterest
AverageIncome/ Yield/AverageIncome/Yield/
(Dollars in thousands)BalanceExpenseRateBalanceExpenseRate
Assets
Loans and leases$31,635,958  $326,618  4.10 %$26,597,242  $303,803  4.54 %
Investment securities:
U.S. Treasury206,575  679  1.32  1,150,001  6,770  2.36  
Government agency657,405  1,428  0.87  383,700  3,034  3.16  
Mortgage-backed securities7,555,947  28,532  1.51  4,979,160  28,130  2.26  
Corporate bonds299,250  3,782  5.06  147,669  1,931  5.23  
Other investments209,290  2,236  4.30  143,040  626  1.76  
Total investment securities8,928,467  36,657  1.64  6,803,570  40,491  2.38  
Overnight investments2,231,356  553  0.10  1,274,030  7,280  2.29  
Total interest-earning assets42,795,781  363,828  3.38  34,674,842  351,574  4.04  
Cash and due from banks404,517  295,052  
Premises and equipment1,260,566  1,214,144  
Allowance for credit losses(209,973) (229,067) 
Other real estate owned55,554  4,646  
Other assets1,247,057  1,047,813