What changed in this filing

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Item 1. Financial Statements

2020-08-05 compared with 2020-05-05 · 543 added, 345 removed, 962 unchanged (48% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

(Dollars in thousands, unaudited)

March 31, 2020

December 31, 2019

(Dollars in thousands, unaudited) June 30, 2020 December 31, 2019

Cash and due from banks $ 389,233 $ 376,719

Overnight investments 3,107,575 1,107,844

Investment in marketable equity securities (cost of $344,161 at March 31, 2020 and $59,262 at December 31, 2019)

Investment securities available for sale (cost of $7,656,464 at March 31, 2020 and $7,052,152 at December 31, 2019)

Investment securities held to maturity (fair value of $753,178 at March 31, 2020 and $30,996 at December 31, 2019)

Investment in marketable equity securities (cost of $ 116,322 at June 30, 2020 and $ 59,262 at December 31, 2019)

114,316 82,333

Investment securities available for sale (cost of $ 8,472,398 at June 30, 2020 and $ 7,052,152 at December 31, 2019)

8,619,282 7,059,674

Investment securities held to maturity (fair value of $ 791,325 at June 30, 2020 and $ 30,996 at December 31, 2019)

774,878 30,996

Loans held for sale 107,881 67,869

5 unchanged sentences

Income earned not collected 175,496 123,154

Goodwill 350,298 349,398

Other intangible assets 58,606 68,276

Other assets 663,116 610,891

Total assets $ 47,866,194 $ 39,824,496

Noninterest-bearing $ 18,149,466 $ 12,926,796

11 unchanged sentences

Class A - $ 1 par value ( 16,000,000 shares authorized;

9,274,920 and 9,624,310 shares issued and outstanding at March 31, 2020 and December 31, 2019 respectively)

8,928,920 and 9,624,310 shares issued and outstanding at June 30, 2020 and December 31, 2019 respectively)

Class B - $ 1 par value ( 2,000,000 shares authorized;

1,005,185 shares issued and outstanding at March 31, 2020 and December 31, 2019)

1,005,185 shares issued and outstanding at June 30, 2020 and December 31, 2019)

Preferred stock - $ 0.01 par value ( 10,000,000 shares authorized;

345,000 and no shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively)

345,000 and no shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively)

Surplus — 44,081

Retained earnings 3,651,237 3,658,197

6 unchanged sentences

Consolidated Statements of Income

Three months ended March 31

Three months ended June 30 Six months ended June 30

(Dollars in thousands, except per share data, unaudited) 2020 2019 2020 2019

5 unchanged sentences

Interest expense

Deposits 17,916 19,158 42,110 32,084

Securities sold under customer repurchase agreements 399 515 841 974

14 unchanged sentences

Insurance commissions 3,189 2,854 6,877 6,145

Marketable equity securities (losses) gains, net

ATM income 1,395 1,625 2,817 3,136

Marketable equity securities gains, net 64,570 3,144 13,162 14,472

Realized gains on investment securities available for sale, net 13,752 5,719 33,547 5,719

Other 2,697 5,034 3,322 8,953

Total noninterest income 165,402 106,875 229,413 210,538

8 unchanged sentences

Merger-related expenses 4,369 4,084 8,601 5,803

Other 34,117 34,158 72,868 67,868

Total noninterest expense 291,679 273,397 591,650 541,054

Income before income taxes 190,565 155,628 264,650 300,356

Income taxes 36,779 36,269 53,695 69,638

Net income $ 153,786 $ 119,359 $ 210,955 $ 230,718

Preferred stock dividends 4,790 — 4,790 —

6 unchanged sentences

Consolidated Statements of Comprehensive Income

Three months ended March 31

Three months ended June 30 Six months ended June 30

(Dollars in thousands, unaudited) 2020 2019 2020 2019

Net income $ 153,786 $ 119,359 $ 210,955 $ 230,718

Other comprehensive income

1 unchanged sentence

Unrealized gains on securities available for sale arising during the period 28,066 30,971 172,909 59,042

Tax effect ( 6,455 ) ( 7,123 ) ( 39,768 ) ( 13,579 )

Reclassification adjustment for realized gains on securities available for sale included in income before income taxes ( 13,752 ) ( 5,719 ) ( 33,547 ) ( 5,719 )

Tax effect 3,163 1,315 7,716 1,315

Unrealized gains on securities available for sale arising during the period, net of tax 11,022 19,444 107,310 41,059

1 unchanged sentence

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

1 unchanged sentence

Amortization of actuarial losses and prior service cost 6,398 2,735 12,662 5,490

Tax effect ( 1,472 ) ( 629 ) ( 2,913 ) ( 1,263 )

Total change in pension obligation, net of tax 4,926 2,106 9,749 4,227

5 unchanged sentences

Consolidated Statements of Changes in Shareholders’ Equity

Three months ended March 31

(Dollars in thousands, unaudited)

Preferred Stock

Three months ended June 30

(Dollars in thousands, unaudited) Class A

Common Stock Class B

Common Stock Preferred

Stock Surplus Retained

Earnings Accumulated

Comprehensive

Shareholders’

Balance at December 31, 2018

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

Cash dividends declared ($0.40 per share)

( 205 ) — — ( 89,569 ) — — ( 89,774 )

Cash dividends declared ($ 0.40 per common share)

Class A common stock — — — — ( 4,008 ) — ( 4,008 )

Class B common stock — — — — ( 402 ) — ( 402 )

Balance at June 30, 2019 $ 10,175 $ 1,005 $ — $ 303,880 $ 3,440,284 $ ( 180,731 ) $ 3,574,613

Balance at March 31, 2020 $ 9,275 $ 1,005 $ 339,958 $ — $ 3,632,894 $ ( 25,612 ) $ 3,957,520

Net income — — — — 153,786 — 153,786

Other comprehensive income, net of tax — — — — — 15,948 15,948

Issuance of preferred stock — — ( 21 ) — — — ( 21 )

Repurchase of 346,000 shares of Class A common stock

( 346 ) — — — ( 126,645 ) — ( 126,991 )

Cash dividends declared ($ 0.40 per common share)

Class A common stock — — — — ( 3,606 ) — ( 3,606 )

Class B common stock — — — — ( 402 ) — ( 402 )

Preferred stock dividends declared — — — — ( 4,790 ) — ( 4,790 )

Balance at June 30, 2020 $ 8,929 $ 1,005 $ 339,937 $ — $ 3,651,237 $ ( 9,664 ) $ 3,991,444

Six months ended June 30

(Dollars in thousands, unaudited) Class A

Common Stock Class B

Common Stock Preferred

Stock Surplus Retained

Earnings Accumulated

Comprehensive

Shareholders’

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

1 unchanged sentence

Repurchase of 695,390 shares of Class A common stock

Cash dividends declared ($0.40 per share)

( 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 )

Balance at March 31, 2020

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.

2 unchanged sentences

Consolidated Statements of Cash Flows

Three months ended March 31

Six months ended June 30

(Dollars in thousands, unaudited) 2020 2019

CASH FLOWS FROM OPERATING ACTIVITIES

Net income $ 210,955 $ 230,718

Adjustments to reconcile net income to cash provided by operating activities:

Provision for credit losses on loans and leases 48,907 16,948

Deferred tax benefit

Net decrease in current taxes receivable

Deferred tax expense 17,774 5,126

Net decrease (increase) in current tax receivable 12,122 ( 23,826 )

Depreciation and amortization 53,806 50,574

3 unchanged sentences

Realized gains on investment securities available for sale, net ( 33,547 ) ( 5,719 )

Marketable equity securities losses (gains), net

Marketable equity securities gains, net ( 13,162 ) ( 14,472 )

Origination of loans held for sale ( 503,190 ) ( 328,481 )

9 unchanged sentences

CASH FLOWS FROM INVESTING ACTIVITIES

Net (increase) decrease in loans outstanding

Net increase in loans outstanding ( 3,488,854 ) ( 168,572 )

Purchases of investment securities available for sale ( 5,659,704 ) ( 1,553,876 )

5 unchanged sentences

Proceeds from sales of marketable equity securities 313,131 10,694

Net decrease (increase) in overnight investments

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 ) —

7 unchanged sentences

Net increase in demand and other interest-bearing deposits 7,649,120 762,021

Net decrease in short-term borrowings

Net increase (decrease) in short-term borrowings 2,043 ( 109,109 )

Repayment of long-term obligations ( 75,908 ) ( 33,008 )

8 unchanged sentences

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:

1 unchanged sentence

Dividends declared but not paid 4,007 4,410

Net reclassification of portfolio loans from loans held for sale

Unsettled maturities of investment securities — 150,122

Unsettled purchases of investment securities — 1,126

Net reclassification of portfolio loans (to) from loans held for sale ( 3,027 ) 23,343

Transfers of premises and equipment to other real estate 2,046 2,184

Premises and equipment acquired through finance leases and other financing arrangements

Unsettled common stock repurchases 3,772 3,535

10 unchanged sentences

Reclassifications

In certain instances, amounts reported in prior years’ consolidated financial statements have been reclassified to conform to the current financial statement presentation.

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.

8 unchanged sentences

Share Repurchases

During the first quarter of 2020, BancShares repurchased 349,390 shares of Class A common stock for $ 159.7 million at an average cost per share of $ 457.05 .

During the first quarter of 2019 , BancShares repurchased a total of 243,000 shares of Class A common stock for $ 100.7 million at an average cost per share of $ 414.58 .

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 in the first quarter of 2020 included 45,000 shares of Class A common stock repurchased from Ella Ann

Holding, as trustee of her revocable trust.

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 April 30, 2020 , BancShares repurchased an additional 111,700 shares of Class A common stock for $ 37.3 million at an average cost per share of $ 333.71 .

On April 28, 2020, the Board authorized share repurchases of up to 500,000 of BancShares’ Class A common stock for the period May 1, 2020 through July 31, 2020.

This authority supersedes all previously approved authorities.

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.

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

43 unchanged sentences

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 US Treasury and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, we determined zero expected credit losses on the HTM portfolio.

Given the historically strong credit rating of the U.S.

Treasury and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, we determined zero expected credit losses on the HTM portfolio.

Accounting Policy - Loans and Leases

15 unchanged sentences

PCD loans are reported as a single loan segment and class.

The following represent our classes of loans as of January 1, 2020:

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

13 unchanged sentences

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.

Consumer loans

11 unchanged sentences

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 - 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.

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.

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.

Accounting Policy - Nonperforming Assets and Troubled Debt Restructurings

25 unchanged sentences

however for the consumer other, consumer card and commercial card pools, immediate reversion to historical net loss rates is utilized.

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 pre-payment expectations.

Pre-payment assumptions were developed through a review of BancShares historical pre-payment activity and began with a review of pre-payment assumptions utilized in other modeling activities.

The ACL for SBA-PPP loans originated during the second quarter of 2020 were separately evaluated given the explicit government guarantee.

This analysis, which incorporated historical experience with similar SBA guarantees and underwriting, concluded the likelihood of loss was remote and therefore these loans were assigned a zero expected credit loss in the ACL.

The ACL represents management’s best estimate of credit losses expected over the life of the loan, adjusted for expected contractual payments and the impact of prepayment expectations.

Prepayment assumptions were developed through a review of BancShares’ historical prepayment activity and began with a review of prepayment assumptions utilized in other modeling activities.

Estimates for loan losses are determined by analyzing quantitative and qualitative components present as of the evaluation date.

22 unchanged sentences

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 $ 10.5 million at March 31, 2020 , and is recorded within other liabilities with changes recorded through other expense.

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

1 unchanged sentence

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 resulted in a gross up of loan balances by this same amount and did not have any effect on retained earnings.

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.

27 unchanged sentences

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 Co.

On February 1, 2020, FCB completed the merger of Duluth, Georgia-based Community Financial Holding Co.

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.

1 unchanged sentence

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 allowance for credit losses of $ 1.2 million and $ 536 thousand in a core deposit intangible.

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.

5 unchanged sentences

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

(Dollars in thousands) As recorded by FCB

Purchase price $ 2,320

2 unchanged sentences

Investment securities 30,146

Loans 133,989

Premises and equipment 7,624

2 unchanged sentences

Intangible assets 536

Other assets 2,520

Total assets acquired 221,400

Deposits 209,340

Borrowings 9,925

Other liabilities 501

2 unchanged sentences

Goodwill recorded for Community Financial $ 686

Merger-related expenses of $ 1.2 million were recorded for the three months ended March 31, 2020 .

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 contributions of this transaction to BancShares’ financial statements is not considered material, and therefore pro forma financial data is not included.

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.

1 unchanged sentence

(“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 of our North Carolina branches, located in Highlands, Sylva and Franklin.

The assets and liabilities of the branches to be divested are recorded on the Consolidated Balance Sheets and in the related Unaudited Notes to the Consolidated Financial Statements within loans and leases, premises and equipment and total deposits with a fair value of $ 108.8 million , $ 1.9 million and $ 185.3 million , respectively, as of March 31, 2020.

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.

FCB completed the transaction with Select Bank on April 17, 2020.

NOTE C - INVESTMENTS

2 unchanged sentences

See Note A - Accounting Policies and Basis for Presentation for more detail on our policies and adoption.

The amortized cost and fair value of investment securities at March 31, 2020 and December 31, 2019 , were as follows:

March 31, 2020

(Dollars in thousands)

Gross unrealized

Allowance for credit losses

The amortized cost and fair value of investment securities at June 30, 2020 and December 31, 2019, were as follows:

June 30, 2020

(Dollars in thousands) Cost Gross

gains Gross unrealized

losses Allowance for credit losses Fair

Investment securities available for sale

Treasury $ 754,350 $ 236 $ — $ — $ 754,586

Government agency 549,673 292 4,256 — 545,709

6 unchanged sentences

Residential mortgage-backed securities 693,143 16,196 — — 709,339

Commercial mortgage-backed securities 78,729 251 — 78,980

Other 3,006 — — — 3,006

Total investment securities held to maturity 774,878 16,447 — — 791,325

1 unchanged sentence

December 31, 2019

(Dollars in thousands)

Gross unrealized

(Dollars in thousands) Cost Gross

gains Gross unrealized

Investment securities available for sale

Treasury $ 409,397 $ 602 $ — $ 409,999

Government agency 684,085 928 2,241 682,772

6 unchanged sentences

Investment securities held to maturity

Other 30,996 — — 30,996

Total investment securities held to maturity 30,996 — — 30,996

5 unchanged sentences

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 with no fair value.

BancShares held FHLB stock of $ 51.1 million and $ 43.0 million and other non-marketable equity securities of $ 12.9 million and $ 12.5 million at March 31, 2020 and December 31, 2019 , respectively.

Both are included in other assets.

As of March 31, 2020 and January 1, 2020, no allowance for credit losses was required for available for sale and held to maturity debt securities.

Accrued interest receivable on debt securities at March 31, 2020 was $ 22.1 million and was excluded from the estimate of credit losses.

During the three months ended March 31, 2020, no accrued interest was deemed uncollectible and written off against interest income.

BancShares’ Visa Class B shares are not considered to have a readily determinable fair value and are recorded at $ 0 .

BancShares held FHLB stock of $ 45.4 million and $ 43.0 million and other non-marketable equity securities of $ 13.1 million and $ 12.5 million at June 30, 2020 and December 31, 2019, respectively.

These securities are recorded in other assets.

As of June 30, 2020 and January 1, 2020, no ACL was required for available for sale and held to maturity debt securities.

Accrued interest receivable on debt securities at June 30, 2020 was $ 21.3 million and was excluded from the estimate of credit losses.

During the three and six months ended June 30, 2020, no accrued interest was deemed uncollectible and written off against interest income.

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 borrowers and issuers may have the right to call or prepay obligations with or without prepayment penalties.

Repayments of mortgage-backed securities and government agency securities are dependent on the repayments of the underlying loan balances.

Repayments of certain corporate bonds are subject to call provisions which can be exercised by the issuer at their discretion.

March 31, 2020

December 31, 2019

(Dollars in thousands)

Expected maturities will differ from contractual maturities on certain securities because issuers and borrowers of underlying collateral may have the right to call or prepay obligations with or without prepayment penalties.

June 30, 2020 December 31, 2019

(Dollars in thousands) Cost Fair

value Cost Fair

Investment securities available for sale

13 unchanged sentences

Residential mortgage-backed securities 693,143 709,339 — —

Commercial mortgage-backed securities 78,729 78,980 — —

Total investment securities held to maturity $ 774,878 $ 791,325 $ 30,996 $ 30,996

There were gross gains of $ 20.5 million and gross losses of $ 679 thousand on sales of investment securities available for sale during the three months ended March 31, 2020 .

There were no gross gains or losses on sales of investment securities available for sale for the three months ended March 31, 2019 .

The following table provides the realized and unrealized gains and losses on marketable equity securities for the three months ended March 31, 2020 and 2019 :

Three months ended March 31

There were gross gains of $ 13.8 million on sales of investment securities available for sale during the three months ended June 30, 2020 and no gross losses.

There were gross gains of $ 34.2 million and gross losses of $ 679 thousand on sales of investment securities available for sale during the six months ended June 30, 2020.

There were $ 5.7 million gross gains on sales of investment securities available for sale for the three and six months ended June 30, 2019 and no gross losses.

The following table provides the realized and unrealized gains and losses on marketable equity securities for the six months ended June 30, 2020 and 2019:

Three months ended June 30 Six months ended June 30

(Dollars in thousands) 2020 2019 2020 2019

Marketable equity securities (losses) gains, net

Marketable equity securities gains, net $ 64,570 $ 3,144 $ 13,162 $ 14,472

Less net gains recognized on marketable equity securities sold 36,993 2,271 37,316 2,315

Unrealized (losses) gains recognized on marketable equity securities held

The following table provides information regarding securities with unrealized losses as of March 31, 2020 and December 31, 2019 :

March 31, 2020

Less than 12 months

12 months or more

(Dollars in thousands)

Unrealized gains (losses) recognized on marketable equity securities held $ 27,577 $ 873 $ ( 24,154 ) $ 12,157

The following table provides information regarding securities with unrealized losses as of June 30, 2020 and December 31, 2019:

June 30, 2020

Less than 12 months 12 months or more Total

(Dollars in thousands) Fair

value Unrealized

Investment securities available for sale

1 unchanged sentence

Residential mortgage-backed securities 172,628 302 149,170 392 321,798 694

Commercial mortgage-backed securities

Corporate bonds 112,172 5,120 9,451 117 121,623 5,237

Investment securities held to maturity

Residential mortgage-backed securities

Total $ 732,783 $ 9,131 $ 217,427 $ 1,056 $ 950,210 $ 10,187

December 31, 2019

Less than 12 months

12 months or more

(Dollars in thousands)

Less than 12 months 12 months or more Total

(Dollars in thousands) Fair

value Unrealized

Investment securities available for sale

3 unchanged sentences

Corporate bonds 7,714 123 4,749 9 12,463 132

As of March 31, 2020 , there were 53 investment securities available for sale that had continuous losses for more than 12 months of which 51 were government sponsored enterprise-issued mortgage-backed securities or government agency securities and two were corporate bonds.

None of the unrealized losses identified as of March 31, 2020 or December 31, 2019 relate to the marketability of the securities or the issuers’ ability to honor redemption obligations.

Total $ 2,778,014 $ 16,025 $ 332,953 $ 1,794 $ 3,110,967 $ 17,819

As of June 30, 2020, there were 47 investment securities available for sale with continuous losses for more than 12 months, of which 45 were government sponsored enterprise-issued mortgage-backed securities or government agency securities and two were corporate bonds.

None of the unrealized losses identified as of June 30, 2020, or December 31, 2019, relate to the marketability of the securities or the issuers’ ability to honor redemption obligations.

Rather, the unrealized losses relate to changes in interest rates relative to when the investment securities were purchased, and do not indicate credit-related impairment.

2 unchanged sentences

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 $ 4.02 billion at March 31, 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.

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 over these portfolios.

Treasury and the long history of no credit losses on debt securities issued by government agencies and government sponsored entities, no further credit monitoring is performed on these portfolios.

Should there be downgrades to the credit rating of the U.S.

Treasury or losses reported on securities issued by government agencies and government sponsored entities, BancShares will reevaluate its determination of zero expected credit losses on held to maturity debt securities.

There were no debt securities held to maturity on nonaccrual status as of March 31, 2020 .

There were no debt securities held to maturity on nonaccrual status as of June 30, 2020.

A security is considered past due once it is 30 days contractually past due under the terms of the agreement.

There were no securities past due as of March 31, 2020 .

There were no securities past due as of June 30, 2020.

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, as of the date of acquisition.

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.

1 unchanged sentence

At the date of acquisition, all acquired loans are recorded at fair value.

Upon adoption of ASC 326, there were changes to certain non-PCD loan classes to better differentiate credit characteristics and align with our ACL models.

Within the commercial segment, owner occupied and non-owner occupied commercial real estate were segregated into separate classes.

Similarly, consumer auto was segregated into its own class within the consumer segment.

Loans and leases outstanding included the following at March 31, 2020 and December 31, 2019 :

(Dollars in thousands)

March 31, 2020

Loans and leases outstanding included the following at June 30, 2020 and December 31, 2019:

(Dollars in thousands) June 30, 2020

Construction and land development $ 1,012,365

2 unchanged sentences

Commercial and industrial and leases 4,650,839

SBA-PPP 3,084,549

Total commercial loans 22,156,874

6 unchanged sentences

Total non-PCD loans and leases 31,887,774

PCD loans 530,651

Total loans and leases $ 32,418,425

(Dollars in thousands)

December 31, 2019

(Dollars in thousands) December 31, 2019

Construction and land development $ 1,013,454

2 unchanged sentences

Commercial and industrial and leases 4,403,792

Other 310,093

Total commercial loans 18,552,002

3 unchanged sentences

Construction and land development 357,385

Consumer 1,780,404

Total noncommercial loans 9,770,778

Total non-PCI loans and leases 28,322,780

PCI loans 558,716

Total loans and leases $ 28,881,496

Accrued interest receivable on loans at March 31, 2020 was $ 90.0 million and was excluded from the estimate of credit losses.

At March 31, 2020 , $ 10.31 billion in non-PCD loans with a lendable collateral value of $ 8.22 billion were used to secure $ 787.7 million in Federal Home Loan Bank (“FHLB”) of Atlanta advances, resulting in additional borrowing capacity of $ 7.43 billion .

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 March 31, 2020 , $ 3.88 billion in non-PCD loans with a lendable collateral value of $ 3.15 billion were used to secure additional borrowing capacity at the Federal Reserve Bank (“FRB”).

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.

2 unchanged sentences

At that time, portfolio loans are transferred to loans held for sale at fair value.

Loans held for sale totaled $ 76.3 million and $ 67.9 million at March 31, 2020 and December 31, 2019 , respectively.

Net deferred fees on non-PCD loans and leases, including unearned and unamortized costs and fees, were $ 1.4 million and $ 0.9 million at March 31, 2020 and December 31, 2019 , respectively.

The net unamortized discount related to purchased non-PCD loans and leases was $ 28.3 million at March 31, 2020 and $ 30.9 million at December 31, 2019 .

The net unamortized discount related to PCD loans and leases was $ 61.6 million at March 31, 2020 and $ 88.2 million at December 31, 2019 .

The aging of the outstanding loans and leases, by class, at March 31, 2020 and December 31, 2019 are provided in the tables below.

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.

March 31, 2020

(Dollars in thousands)

90 days or greater

June 30, 2020

(Dollars in thousands) 30-59 days

past due 60-89 days

past due 90 days or greater Total past

due Current Total loans

Construction and land development $ 1,618 $ 14 $ 1,721 $ 3,353 $ 1,009,012 $ 1,012,365

2 unchanged sentences

Commercial and industrial and leases 10,464 3,196 4,215 17,875 4,632,964 4,650,839

SBA-PPP — — — — 3,084,549 3,084,549

Total commercial loans 34,356 6,710 27,276 68,342 22,088,532 22,156,874

5 unchanged sentences

Total consumer loans 41,378 14,639 46,918 102,935 9,627,965 9,730,900

PCD loans 18,850 4,694 33,483 57,027 473,624 530,651

Total loans and leases $ 94,584 $ 26,043 $ 107,677 $ 228,304 $ 32,190,121 $ 32,418,425

December 31, 2019

(Dollars in thousands)

90 days or greater

(Dollars in thousands) 30-59 days

past due 60-89 days

past due 90 days or greater Total past

due Current Total loans

Construction and land development $ 3,146 $ 195 $ 2,702 $ 6,043 $ 1,007,411 $ 1,013,454

2 unchanged sentences

Commercial and industrial and leases 18,269 4,842 5,032 28,143 4,375,649 4,403,792

Other 51 411 126 588 309,505 310,093

Total commercial loans 42,716 14,553 16,877 74,146 18,477,856 18,552,002

3 unchanged sentences

Construction and land development 977 218 1,797 2,992 354,393 357,385

Consumer 10,481 3,746 3,571 17,798 1,762,606 1,780,404

Total noncommercial loans 67,026 25,721 39,642 132,389 9,638,389 9,770,778

Total non-PCI loans and leases

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 March 31, 2020 and December 31, 2019 , were as follows:

PCI loans 26,478 10,784 28,973 66,235 492,481 558,716

Total loans and leases $ 136,220 $ 51,058 $ 85,492 $ 272,770 $ 28,608,726 $ 28,881,496

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)

March 31, 2020

(Dollars in thousands)

June 30, 2020

(Dollars in thousands) Nonaccrual

leases Nonaccrual

leases Loans and

Construction and land development $ 4,281 $ 2,938 $ 69

9 unchanged sentences

Total consumer loans 72,539 88,329 1,450

PCD loans 53,771 62,511 152

Total loans and leases $ 168,717 $ 197,791 $ 3,796

(1) Upon the adoption of ASC 326, BancShares eliminated the pooling of PCI loans and as a result $ 47.0 million in additional PCD loans were recognized as nonaccrual loans at January 1, 2020.

As of June 30, 2020, $ 35.9 million of these loans remained outstanding.

December 31, 2019

(Dollars in thousands)

(Dollars in thousands) Nonaccrual

leases Loans and

Construction and land development $ 4,281 $ —

7 unchanged sentences

Revolving mortgage 22,411 —

Consumer 2,943 2,152

Total noncommercial loans 72,539 2,197

PCI loans 6,743 24,257

Total loans and leases $ 121,689 $ 27,548

18 unchanged sentences

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 March 31, 2020 relate to business credit cards.

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.

2 unchanged sentences

As the borrower becomes more delinquent, the likelihood of loss increases.

The following tables represent current credit quality indicators by origination year as of March 31, 2020.

Commercial Term Loans Amortized Cost Basis by Origination Year

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:

Revolving converted to term loans

2020 2019 2018 2017 2016 Prior Revolving Revolving converted to term loans Total

(Dollars in thousands)

Construction and land development

Pass $ 175,302 $ 404,898 $ 217,555 $ 132,753 $ 31,599 $ 14,453 $ 25,141 $ — $ 1,001,701

Special Mention 88 — 334 5,507 — 93 — — 6,022

Substandard 1,405 1,221 1,813 29 8 166 — — 4,642

Total 176,795 406,119 219,702 138,289 31,607 14,712 25,141 — 1,012,365

Owner occupied commercial mortgage

Pass 1,345,296 2,218,595 1,850,128 1,452,273 1,203,335 1,943,057 106,274 137 10,119,095

Special Mention 2,296 11,164 29,941 13,089 17,795 30,315 2,742 — 107,342

Substandard 9,186 12,309 16,886 24,063 14,255 40,331 9,254 72 126,356

Total 1,356,778 2,242,068 1,896,955 1,489,425 1,235,385 2,013,703 118,270 209 10,352,793

Non-owner occupied commercial mortgage

Pass 380,269 685,067 490,693 452,152 360,096 595,139 36,723 — 3,000,139

Special Mention — 2,048 20,236 872 5,885 7,658 787 — 37,486

Substandard 1,237 1,094 3,653 1,642 6,513 3,085 1,479 — 18,703

Total 381,506 688,209 514,582 454,666 372,494 605,882 38,989 — 3,056,328

Commercial and industrial and leases

Pass 750,806 1,207,639 630,297 401,635 301,561 401,284 805,691 5,565 4,504,478

Special Mention 1,431 3,426 6,387 5,534 3,159 2,518 13,928 243 36,626

Substandard 11,847 3,794 4,323 5,608 2,790 4,941 22,084 696 56,083

Doubtful — — 39 — — — 2 — 41

Ungraded — — — — — — 53,611 — 53,611

Total 764,084 1,214,859 641,046 412,777 307,510 408,743 895,316 6,504 4,650,839

Pass 3,084,549 — — — — — — — 3,084,549

Total 3,084,549 — — — — — — — 3,084,549

Total commercial $ 5,763,712 $ 4,551,255 $ 3,272,285 $ 2,495,157 $ 1,946,996 $ 3,043,040 $ 1,077,716 $ 6,713 $ 22,156,874

Consumer and PCD Term Loans Amortized Cost Basis by Origination Year

Consumer and PCD Loans Amortized Cost Basis by Origination Year

Days Past Due:

Revolving converted to term loans

2020 2019 2018 2017 2016 Prior Revolving Revolving converted to term loans Total

(Dollars in thousands)

Residential mortgage

Current $ 891,796 $ 1,105,486 $ 837,530 $ 755,457 $ 591,255 $ 1,132,116 $ 23,673 $ — $ 5,337,313

30-59 days 488 2,760 2,985 4,612 2,594 11,685 119 — 25,243

60-89 days 26 158 326 265 1,851 4,456 — — 7,082

90 days or greater 23 738 5,815 6,054 6,203 13,239 2,972 — 35,044

Total 892,333 1,109,142 846,656 766,388 601,903 1,161,496 26,764 — 5,404,682

Revolving mortgage

Current — — — — — — 2,054,864 156,618 2,211,482

30-59 days — — — — — — 4,622 4,252 8,874

60-89 days — — — — — — 452 4,163 4,615

90 days or greater — — — — — — 3,150 5,856 9,006

Total — — — — — — 2,063,088 170,889 2,233,977

Construction and land development

Current 88,063 174,326 52,270 16,909 8,123 7,881 3,891 — 351,463

30-59 days 245 1,312 91 — — 87 — — 1,735

60-89 days — — — 11 — 116 — — 127

90 days or greater — — — — — 57 — — 57

Total 88,308 175,638 52,361 16,920 8,123 8,141 3,891 — 353,382

Consumer auto

Current 245,264 421,363 284,557 142,512 74,782 22,100 — — 1,190,578

30-59 days 172 1,070 654 710 319 168 — — 3,093

60-89 days 75 432 239 215 132 31 — — 1,124

90 days or greater 22 312 306 206 76 54 — — 976

Total 245,533 423,177 285,756 143,643 75,309 22,353 — — 1,195,771

Consumer other

Current 27,655 40,769 17,093 9,585 10,595 31,275 400,157 — 537,129

30-59 days 78 33 79 31 13 22 2,177 — 2,433

60-89 days 31 67 70 — 5 — 1,518 — 1,691

90 days or greater 1 97 5 — 74 — 1,658 — 1,835

Total 27,765 40,966 17,247 9,616 10,687 31,297 405,510 — 543,088

Total consumer $ 1,253,939 $ 1,748,923 $ 1,202,020 $ 936,567 $ 696,022 $ 1,223,287 $ 2,499,253 $ 170,889 $ 9,730,900

Current $ 21,462 $ 28,900 $ 32,863 $ 39,973 $ 33,294 $ 278,266 $ 14,999 $ 23,867 $ 473,624

30-59 days 1,005 546 199 132 808 15,591 182 387 18,850

60-89 days 117 141 37 34 — 3,669 72 624 4,694

90 days or greater 454 3,075 8,152 1,469 1,101 17,135 516 1,581 33,483

Total $ 23,038 $ 32,662 $ 41,251 $ 41,608 $ 35,203 $ 314,661 $ 15,769 $ 26,459 $ 530,651

Total loans and leases $ 7,040,689 $ 6,332,840 $ 4,515,556 $ 3,473,332 $ 2,678,221 $ 4,580,988 $ 3,592,738 $ 204,061 $ 32,418,425

1 unchanged sentence

December 31, 2019

(Dollars in thousands)

Commercial loans and leases

Construction and land

Commercial mortgage

Other commercial real estate

Commercial and industrial and leases

Total commercial loans and leases

(Dollars in thousands) Construction and land

development Commercial mortgage Other commercial real estate Commercial and industrial and leases Other PCI Total commercial loans and leases

Pass $ 1,004,922 $ 12,050,799 $ 536,682 $ 4,256,456 $ 308,796 $ 148,412 $ 18,157,655

Special mention 2,577 115,164 3,899 44,604 622 44,290 166,866

Substandard 5,955 116,672 1,447 34,148 675 87,970 158,897

Doubtful — — — 3 — 3,657 3

Ungraded — — — 68,581 — — 68,581

Total $ 1,013,454 $ 12,282,635 $ 542,028 $ 4,403,792 $ 310,093 $ 284,329 $ 18,552,002

December 31, 2019

Noncommercial loans and leases

(Dollars in thousands)

Residential mortgage

Revolving mortgage

Construction and land development

Total noncommercial loans and leases

(Dollars in thousands) Residential mortgage Revolving mortgage Construction and land development Consumer PCI Total noncommercial loans and leases

Days past due:

Current $ 5,205,380 $ 2,316,010 $ 354,393 $ 1,762,606 $ 240,995 $ 9,638,389

30-59 days past due 45,839 9,729 977 10,481 13,764 67,026

1 unchanged sentence

90 days or greater past due 24,409 9,865 1,797 3,571 14,020 39,642

Total $ 5,293,917 $ 2,339,072 $ 357,385 $ 1,780,404 $ 274,387 $ 9,770,778

Purchased loans and leases

The following table summarizes PCD loans acquired in the Community Financial transaction and provides the contractually required payments, less the initial allowance for credit losses and discount to produce the fair value of acquired loans with evidence of more than insignificant credit quality deterioration since origination at the acquisition date:

(Dollars in thousands)

Community Financial

(Dollars in thousands) Community Financial

Contractually required payments $ 25,635

Initial PCD allowance 1,193

Discount 1,055

Fair value at acquisition date $ 23,387

The recorded fair values of purchased non-PCD loans acquired in the Community Financial transaction as of the acquisition date are as follows:

(Dollars in thousands)

Community Financial

(Dollars in thousands) Community Financial

Construction and land development $ 9,428

10 unchanged sentences

Total non-PCD loans $ 110,602

NOTE E - ALLOWANCE FOR CREDIT LOSSES

Upon adoption of ASC 326, there were changes to certain non-PCD loan classes to better differentiate credit characteristics and align with our ACL models.

Within the commercial segment, owner occupied and non-owner occupied commercial real estate were segregated into separate classes.

Similarly, consumer auto was segregated into its own class within the consumer segment.

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

Three months ended March 31, 2020

(Dollars in thousands)

Owner occupied commercial mortgage

Non-owner occupied commercial mortgage

and industrial and leases

development - consumer

Consumer auto

Consumer other

NOTE E - ALLOWANCE FOR CREDIT LOSSES (“ACL”)

As noted in Note A - Accounting Polices and Basis of Presentation, BancShares determined SBA-PPP loans have zero expected credit losses and as such these are excluded from ACL disclosures included in the following tables.

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

Three months ended June 30, 2020

(Dollars in thousands) Construction

- commercial Owner occupied commercial mortgage Non-owner occupied commercial mortgage Commercial

and industrial and leases Residential

mortgage Revolving

mortgage Construction and land development - consumer Consumer auto Consumer other PCD Total

Allowance for credit losses:

Balance at April 1 $ 2,290 $ 22,970 $ 16,531 $ 30,619 $ 38,366 $ 24,557 $ 1,140 $ 5,769 $ 40,101 $ 26,916 $ 209,259

Provision (credits) 4,705 ( 721 ) 5,542 ( 2,898 ) 4,909 2,211 486 4,042 2,034 242 20,552

Charge-offs ( 138 ) — ( 8 ) ( 3,869 ) ( 460 ) ( 495 ) — ( 1,255 ) ( 4,447 ) ( 1,392 ) ( 12,064 )

Recoveries 49 240 84 781 57 367 14 342 1,607 1,162 4,703

Balance at June 30 $ 6,906 $ 22,489 $ 22,149 $ 24,633 $ 42,872 $ 26,640 $ 1,640 $ 8,898 $ 39,295 $ 26,928 $ 222,450

Three months ended June 30, 2019

(Dollars in thousands) Construction

- commercial Commercial

mortgage Other

real estate Commercial

and industrial and leases Other Residential

mortgage Revolving

mortgage Construction and land development - consumer Consumer PCD Total

Balance at April 1 $ 37,476 $ 45,281 $ 2,399 $ 57,025 $ 2,167 $ 16,987 $ 21,495 $ 2,473 $ 34,492 $ 8,980 $ 228,775

Provision (credits) ( 5,544 ) 3,714 ( 57 ) 2,699 ( 174 ) 371 ( 328 ) 277 4,877 ( 637 ) 5,198

Charge-offs ( 28 ) ( 89 ) — ( 3,422 ) ( 31 ) ( 478 ) ( 493 ) — ( 6,061 ) — ( 10,602 )

Recoveries 40 56 — 599 221 52 447 — 1,797 — 3,212

Balance at June 30 $ 31,944 $ 48,962 $ 2,342 $ 56,901 $ 2,183 $ 16,932 $ 21,121 $ 2,750 $ 35,105 $ 8,343 $ 226,583

Six months ended June 30, 2020

(Dollars in thousands) Construction

- commercial Owner occupied commercial mortgage Non-owner occupied commercial mortgage Commercial

and industrial and leases Residential

mortgage Revolving

mortgage Construction and land development - consumer Consumer auto Consumer other PCD Total

Balance at December 31 $ 33,213 $ 36,444 $ 11,102 $ 61,610 $ 18,232 $ 19,702 $ 2,709 $ 4,292 $ 30,301 $ 7,536 $ 225,141

3 unchanged sentences

Initial allowance on PCD loans — — — — — — — — — 1,193 1,193

Balance at March 31

Three months ended March 31, 2019

(Dollars in thousands)

and industrial and leases

- non - commercial

Charge-offs ( 138 ) ( 320 ) ( 8 ) ( 8,918 ) ( 1,260 ) ( 1,080 ) ( 70 ) ( 2,199 ) ( 9,817 ) ( 2,515 ) ( 26,325 )

Recoveries 136 295 97 2,053 280 838 29 705 2,966 4,059 11,458

Balance at June 30 $ 6,906 $ 22,489 $ 22,149 $ 24,633 $ 42,872 $ 26,640 $ 1,640 $ 8,898 $ 39,295 $ 26,928 $ 222,450

Six months ended June 30, 2019

(Dollars in thousands) Construction

- commercial Commercial

mortgage Other

real estate Commercial

and industrial and leases Other Residential

mortgage Revolving

mortgage Construction

- non - commercial Consumer PCI Total

Balance at January 1 $ 35,270 $ 43,451 $ 2,481 $ 55,620 $ 2,221 $ 15,472 $ 21,862 $ 2,350 $ 35,841 $ 9,144 $ 223,712

Provision (credits) ( 3,425 ) 6,085 ( 140 ) 5,424 ( 672 ) 1,879 ( 119 ) 400 8,317 ( 801 ) 16,948

Balance at March 31

Charge-offs ( 72 ) ( 850 ) — ( 5,280 ) ( 31 ) ( 644 ) ( 1,456 ) — ( 12,423 ) — ( 20,756 )

Recoveries 171 276 1 1,137 665 225 834 — 3,370 — 6,679

Balance at June 30 $ 31,944 $ 48,962 $ 2,342 $ 56,901 $ 2,183 $ 16,932 $ 21,121 $ 2,750 $ 35,105 $ 8,343 $ 226,583

Upon adoption of ASC 326, BancShares recorded a net decrease of $ 37.9 million in the ACL which included a decrease of $ 56.9 million in the ACL on non-PCD loans, offset by an increase of $ 19.0 million in the ACL on PCD loans.

2 unchanged sentences

The increase in the ACL on PCD loans was primarily the result of reallocating credit discount from loan balances into ACL.

ACL is calculated using a variety of factors, including, but not limited to, charge-off and recovery activity, loan growth, changes in macroeconomic factors, collateral type, estimated loan life and changes in credit quality.

For the quarter ended March 31, 2020 the primary reason for the ACL change since the adoption of ASC 326, was a $ 21.5 million increase due to the potential economic impact of the novel coronavirus (“COVID-19”) and its estimated impact on credit losses during the quarter.

Within our forecast period of 24 months , forecasts varied widely for key macroeconomic variables (unemployment, gross domestic product, home price index, and commercial real estate index) used in the ACL models.

Expected loss estimates considered the potential impact of slower economic activity with increasing unemployment, as well as potential mitigating impacts from the government stimulus and loan modification programs.

These loss estimates were also influenced by BancShares strong credit quality, historically low net charge-offs and recent credit trends, which remained stable through the quarter ended March 31, 2020.

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.

BancShares individually reviews loans greater than $ 500 thousand that are determined to be collateral-dependent.

1 unchanged sentence

Commercial and industrial loans and leases are collateralized by business assets, while the remaining loan classes are collateralized by real property.

The following table presents information on collateral-dependent loans by class and includes the amortized cost of collateral-dependent loans and leases, the net realizable value of the collateral, the extent to which collateral secures collateral-dependent loans and the associated ACL as of March 31, 2020 were as follows:

(Dollars in thousands)

Collateral-Dependant Loans

Net Realizable Value of Collateral

Collateral Coverage

Allowance for Credit Losses

(Dollars in thousands) Collateral-Dependant Loans Net Realizable Value of Collateral Collateral Coverage Allowance for Credit Losses

Commercial loans:

9 unchanged sentences

Total non-PCD loans 40,302 64,812 160.8 75

PCD 22,013 33,821 153.6 235

Total collateral-dependent loans $ 62,315 $ 98,633 158.3 % $ 310

Collateral-dependent nonaccrual loans with no recorded allowance totaled $43.6 million as of March 31, 2020 .

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.

1 unchanged sentence

December 31, 2019

(Dollars in thousands)

(Dollars in thousands) Construction

- commercial Commercial

mortgage Other

real estate Commercial

and industrial

and leases Other Residential

mortgage Revolving

mortgage Construction

commercial Consumer Total

Non-PCI Loans

8 unchanged sentences

The following table presents the PCI allowance and recorded investment in loans at December 31, 2019:

(Dollars in thousands)

December 31, 2019

(Dollars in thousands) December 31, 2019

ALLL for loans acquired with deteriorated credit quality $ 7,536

3 unchanged sentences

December 31, 2019

(Dollars in thousands)

(Dollars in thousands) With a

allowance With no

allowance Total Unpaid

balance Related

Non-PCI impaired loans and leases:

3 unchanged sentences

Commercial and industrial and leases 7,547 4,635 12,182 13,993 1,379

Other 406 233 639 661 103

Total commercial loans 52,516 36,377 88,893 95,927 5,634

3 unchanged sentences

Construction and land development 2,470 1,412 3,882 4,150 174

Consumer 3,472 41 3,513 3,821 1,107

Total noncommercial loans 80,842 15,864 96,706 104,672 7,281

1 unchanged sentence

Non-PCI impaired loans less than $ 500,000 that were collectively evaluated for impairment totaled $ 41.0 million at December 31, 2019.

The following tables show the average non-PCI impaired loan balance and the interest income recognized by loan class for the three months ended March 31, 2019 :

Three months ended March 31, 2019

(Dollars in thousands)

Interest income recognized

The following tables show the average non-PCI impaired loan balance and the interest income recognized by loan class for the six months ended June 30, 2019:

Three months ended June 30, 2019 Six months ended June 30, 2019

(Dollars in thousands) Average

balance Interest income recognized Average

balance Interest income recognized

Non-PCI impaired loans and leases:

3 unchanged sentences

Commercial and industrial and leases 11,348 113 10,674 213

Other 328 2 322 4

Total commercial 73,203 665 71,491 1,367

3 unchanged sentences

Construction and land development 3,547 32 3,647 68

Consumer 3,014 31 3,007 60

Total noncommercial 84,674 636 81,395 1,273

6 unchanged sentences

As a result, subsequent changes in default status do not impact the calculation of the allowance for credit losses on TDR loans.

Recent legislation and regulatory requirements have allowed for relief and provided guidance around the determination of TDRs for new loan modifications and forbearances for borrowers experiencing COVID-19-related financial difficulty.

BancShares has utilized this guidance to identify new TDRs beginning in the first quarter of 2020 and did not identify new modifications as TDRs for those borrowers experiencing COVID-19-related financial difficulty.

The 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:

March 31, 2020

(Dollars in thousands)

June 30, 2020

(Dollars in thousands) Accruing Nonaccruing Total

Commercial loans:

10 unchanged sentences

Total consumer loans 63,216 23,566 86,782

PCD loans 18,639 6,024 24,663

Total loans $ 154,813 $ 46,692 $ 201,505

December 31, 2019

(Dollars in thousands)

(Dollars in thousands) Accruing Nonaccruing Total

Commercial loans:

3 unchanged sentences

Commercial and industrial and leases 9,430 2,409 11,839

Other 320 105 425

Total commercial loans 61,627 15,909 77,536

3 unchanged sentences

Construction and land development 1,452 2,430 3,882

Consumer 2,826 688 3,514

Total noncommercial loans 67,123 26,533 93,656

Total loans $ 128,750 $ 42,442 $ 171,192

Total TDRs included $ 17.2 million of PCI TDRs at December 31, 2019.

The following table provides the types of modifications designated as TDRs during the three months ended March 31, 2020 and March 31, 2019 , as well as a summary of loans modified as a TDR during the twelve month periods ended March 31, 2020 and March 31, 2019 that subsequently defaulted during the three months ended March 31, 2020 and March 31, 2019 .

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 March 31, 2020

Three months ended March 31, 2019

All restructurings

Restructurings with payment default

All restructurings

Restructurings with payment default

(Dollars in thousands)

Number of Loans

Recorded investment at period end

Number of Loans

Recorded investment at period end

Number of Loans

Recorded investment at period end

Number of Loans

Recorded investment at period end

Three months ended June 30, 2020 Three months ended June 30, 2019

All restructurings Restructurings with payment default All restructurings Restructurings with payment default

(Dollars in thousands) Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end Number of Loans Recorded investment at period end

Loans and leases

4 unchanged sentences

Total restructurings 146 $ 37,040 43 $ 6,237 115 $ 17,374 62 $ 5,901

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

Six months ended June 30, 2020 Six months ended June 30, 2019

All restructurings Restructurings with payment default All restructurings Restructurings with payment default

Loans and leases

Interest only 17 $ 19,328 3 $ 3,398 4 $ 4,343 2 $ 3,203

Loan term extension 33 3,657 16 1,667 8 1,437 4 534

Below market interest rate 157 25,389 46 2,324 125 11,063 61 4,645

Discharged from bankruptcy 110 5,640 44 1,507 102 7,679 53 3,948

Total restructurings 317 $ 54,014 109 $ 8,896 239 $ 24,522 120 $ 12,330

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

NOTE F - OTHER REAL ESTATE OWNED

The following table explains changes in OREO during the three months ended March 31, 2020 and 2019 :

(Dollars in thousands)

The following table explains changes in OREO during the six months ended June 30, 2020 and 2019:

(Dollars in thousands) OREO

Balance at December 31, 2019 $ 46,591

Additions 9,184

Acquired in business combinations 9,813

Sales ( 9,497 )

Write-downs/losses ( 2,241 )

Balance at March 31, 2020

Balance at June 30, 2020 $ 53,850

Balance at December 31, 2018 $ 48,030

Additions 7,894

Acquired in business combinations 3,613

Sales ( 11,012 )

Write-downs/losses ( 2,289 )

Balance at March 31, 2019

At March 31, 2020 and December 31, 2019 , BancShares had $ 13.1 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 $ 22.0 million and $ 23.0 million at March 31, 2020 and December 31, 2019 , respectively.

Net losses recorded on the sale of OREO properties were $ 56 thousand for the three months ended March 31, 2020 .

Net gains recorded on the sale of OREO were $ 496 thousand for the three months ended March 31, 2019 .

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 $ 3.41 billion and $ 3.38 billion as of March 31, 2020 and December 31, 2019 , respectively.

These loans are originated by BancShares and sold to third parties on a non-recourse basis with servicing rights retained.

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.

1 unchanged sentence

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 March 31, 2020 and 2019 were $ 2.1 million and $ 1.9 million , respectively, and are reported in mortgage income.

The following table explains changes in the servicing asset during the three months ended March 31 , 2020 and 2019 :

Three months ended March 31

Contractually specified mortgage servicing fees, late fees and ancillary fees earned for the three months ended June 30, 2020 and 2019 were $ 2.1 million and $ 2.0 million, respectively, and are reported in mortgage income.

For the six months ended June 30, 2020 and 2019, contractually specified mortgage servicing fees, late fees, and ancillary fees earned were $ 4.3 million and $ 3.9 million, respectively.

The following table presents changes in the servicing asset during the three and six months ended June 30, 2020 and 2019:

Three months ended June 30 Six months ended June 30

(Dollars in thousands) 2020 2019 2020 2019

1 unchanged sentence

Servicing rights originated 2,096 1,552 3,679 2,411

Valuation allowance increase

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 months ended March 31 , 2020 and 2019 :

Three months ended March 31

The following table presents the activity in the servicing asset valuation allowance for the three and six months ended June 30, 2020 and 2019:

Three months ended June 30 Six months ended June 30

(Dollars in thousands) 2020 2019 2020 2019

Beginning balance $ 3,189 $ 161 $ 222 $ —

Valuation allowance increase

Valuation allowance increase (decrease) 1,069 ( 33 ) 4,036 128

Ending balance $ 4,258 $ 128 $ 4,258 $ 128

1 unchanged sentence

Key economic assumptions used to value mortgage servicing rights were as follows:

March 31, 2020

December 31, 2019

June 30, 2020 December 31, 2019

Discount rate - conventional fixed loans 7.66 % 8.92 %

6 unchanged sentences

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.

This results in a decrease in fair value, which occurred during first quarter 2020, resulting in an increase in the valuation allowance of $ 3.0 million .

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.

Other Servicing Rights

Other servicing rights were acquired as part of business combinations and relate to the sale of the guaranteed portion of government guaranteed loans with servicing retained.

The amount of the other servicing rights were $ 1.7 million and $ 1.9 million at March 31, 2020 and December 31, 2019 , respectively.

The amortization related to other servicing rights is recorded in other noninterest income.

NOTE H - REPURCHASE AGREEMENTS

5 unchanged sentences

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 $ 558.5 million and $ 477.6 million at March 31, 2020 and December 31, 2019 , respectively.

BancShares held securities sold under agreements to repurchase of $ 540.4 million at March 31, 2020 , with overnight and continuous remaining contractual maturities collateralized by government agency securities and $ 443.0 million at December 31, 2019 , with overnight and continuous remaining contractual maturities collateralized by government agency securities.

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 March 31, 2020 , shared-loss protection remains for single family residential loans acquired in the amount o f $ 42.4 million .

At June 30, 2020, shared-loss protection remains for single family residential loans acquired in the amount o f $ 38.0 million.

The shared-loss agreement for two of the FDIC-assisted transactions include a provision related to a payment that may be owed to the FDIC at the termination of the agreement if actual cumulative losses on acquired covered assets are lower than the cumulative losses originally estimated by the FDIC at the time of acquisition (the “clawback liability”) .

2 unchanged sentences

The following table provides changes in the FDIC shared-loss payable since December 31, 2019:

(Dollars in thousands)

(Dollars in thousands) Total

Balance at December 31, 2019 $ 112,395

Accretion 2,098

Payment made to the FDIC to settle shared-loss agreement ( 99,468 )

Balance at March 31, 2020

Balance at June 30, 2020 $ 15,025

NOTE J - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) included the following as of March 31, 2020 and December 31, 2019 :

March 31, 2020

December 31, 2019

(Dollars in thousands)

Accumulated other comprehensive income (loss) included the following as of June 30, 2020 and December 31, 2019:

June 30, 2020 December 31, 2019

(Dollars in thousands) Accumulated

comprehensive

income (loss)

income (loss) Deferred

(benefit) Accumulated

comprehensive

income (loss),

net of tax Accumulated

comprehensive

income (loss)

income (loss) Deferred

(benefit) Accumulated

comprehensive

2 unchanged sentences

Defined benefit pension items ( 159,436 ) ( 36,670 ) ( 122,766 ) ( 172,098 ) ( 39,583 ) ( 132,515 )

The following table highlights changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2020 and 2019 :

Three months ended March 31, 2020

(Dollars in thousands, net of tax)

Unrealized gains on securities available for sale

Unrealized losses on securities available for sale transferred to held to maturity

Defined benefit pension items

Total $ ( 12,552 ) $ ( 2,888 ) $ ( 9,664 ) $ ( 164,576 ) $ ( 37,853 ) $ ( 126,723 )

The following table highlights changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2020 and 2019:

Three months ended June 30, 2020

(Dollars in thousands, net of tax) Unrealized gains (losses) on securities available for sale Unrealized losses on securities available for sale transferred to held to maturity Defined benefit pension items Total

Beginning balance $ 102,080 $ — $ ( 127,692 ) $ ( 25,612 )

3 unchanged sentences

Ending balance $ 113,102 $ — $ ( 122,766 ) $ ( 9,664 )

Three months ended March 31, 2019

(Dollars in thousands, net of tax)

Unrealized gains on securities available for sale

Unrealized losses on securities available for sale transferred to held to maturity

Defined benefit pension items

Three months ended June 30, 2019

Beginning balance $ ( 16,890 ) $ ( 66,558 ) $ ( 123,412 ) $ ( 206,860 )

3 unchanged sentences

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 months ended March 31, 2020 and 2019 :

Three months ended March 31, 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

Realized gains on investment securities available for sale, net

Six months ended June 30, 2020

(Dollars in thousands, net of tax) Unrealized gains on securities available for sale Unrealized losses on securities available for sale transferred to held to maturity Defined benefit pension items Total

Beginning balance $ 5,792 $ — $ ( 132,515 ) $ ( 126,723 )

Net unrealized gains arising during period 133,141 — — 133,141

Amounts reclassified from accumulated other comprehensive loss ( 25,831 ) — 9,749 ( 16,082 )

Net current period other comprehensive income 107,310 — 9,749 117,059

Ending balance $ 113,102 $ — $ ( 122,766 ) $ ( 9,664 )

Six months ended June 30, 2019

Beginning balance $ ( 38,505 ) $ ( 71,149 ) $ ( 125,533 ) $ ( 235,187 )

Net unrealized gains arising during period 45,463 — — 45,463

Amounts reclassified from accumulated other comprehensive loss ( 4,404 ) 9,170 4,227 8,993

Net current period other comprehensive income 41,059 9,170 4,227 54,456

Ending balance $ 2,554 $ ( 61,979 ) $ ( 121,306 ) $ ( 180,731 )

(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

Amortization of defined benefit pension actuarial losses ( 6,398 ) Other

1,472 Income taxes

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

Amortization of unrealized losses on securities available for sale transferred to held to maturity $ ( 5,947 ) Net interest income

1,368 Income taxes

Amortization of defined benefit pension items

Actuarial losses

Prior service costs $ ( 14 ) Salaries and wages

Actuarial losses ( 2,721 ) Other

( 2,735 ) Income before income taxes

629 Income taxes

Total reclassifications for the period $ ( 2,281 )

Three months ended March 31, 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

Amortization of unrealized losses on securities available for sale transferred to held to maturity

Net interest income

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

Amortization of defined benefit pension items

Prior service costs

Salaries and wages

Actuarial losses

Actuarial losses $ ( 12,662 ) Other

2,913 Income taxes

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

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

Total reclassifications for the period $ ( 8,993 )

30 unchanged sentences

Accordingly, the inputs used to calculate fair value of originated residential real estate loans held for sale are classified as Level 2 inputs.

Portfolio loans that are subsequently transferred to held for sale to be sold in the secondary market are carried at fair value when a firm commitment from a counterparty exists.

The fair value of the transferred portfolio loans is based on the quoted prices and is considered a Level 1 input.

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.

24 unchanged sentences

These amounts are not material to BancShares’ financial position.

For all other financial assets and financial liabilities, the carrying value is a reasonable estimate of the fair value as of March 31, 2020 and December 31, 2019 .

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.

1 unchanged sentence

Overnight investments, income earned not collected, securities sold under customer repurchase agreements, and accrued interest payable are considered Level 2.

The table presents the carrying values and estimated fair values for financial instruments as of March 31, 2020 and December 31, 2019 :

(Dollars in thousands)

March 31, 2020

December 31, 2019

Carrying value

The table presents the carrying values and estimated fair values for financial instruments as of June 30, 2020 and December 31, 2019:

(Dollars in thousands) June 30, 2020 December 31, 2019

Carrying value Fair value Carrying value Fair value

Cash and due from banks $ 389,233 $ 389,233 $ 376,719 $ 376,719

8 unchanged sentences

Mortgage and other servicing rights 20,167 21,163 24,891 26,927

Deposits with no stated maturity 38,202,609 38,202,609 30,593,627 30,593,627

Time deposits 3,276,636 3,303,841 3,837,609 3,842,162

Securities sold under customer repurchase agreements 740,276 740,276 442,956 442,956

4 unchanged sentences

Accrued interest payable 14,085 14,085 18,124 18,124

Among BancShares’ assets and liabilities, investment securities available for sale, marketable equity securities and loans held for sale are reported at their fair values on a recurring basis.

For assets and liabilities carried at fair value on a recurring basis, the following table provides fair value information as of March 31, 2020 and December 31, 2019 :

March 31, 2020

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)

Level 1 inputs

Level 2 inputs

Level 3 inputs

(Dollars in thousands) Fair value Level 1 inputs Level 2 inputs Level 3 inputs

Assets measured at fair value

Investment securities available for sale

Treasury $ 754,586 $ — $ 754,586 $ —

Government agency 545,709 — 545,709 —

7 unchanged sentences

Fair value measurements using:

Level 1 inputs

Level 2 inputs

Level 3 inputs

Fair value Level 1 inputs Level 2 inputs Level 3 inputs

Assets measured at fair value

Investment securities available for sale

Treasury $ 409,999 $ — $ 409,999 $ —

Government agency 682,772 — 682,772 —

6 unchanged sentences

Loans held for sale $ 67,869 $ — $ 67,869 $ —

During the three months ended March 31, 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 months ended March 31, 2019 , there were no transfers between levels.

The following tables summarize activity for Level 3 assets:

Three months ended March 31, 2020

(Dollars in thousands)

Corporate bonds

Balance at January 1, 2020

Unrealized net losses included in other comprehensive income

Amounts included in net income

Balance at March 31, 2020

The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis at March 31, 2020 :

Three months ended June 30 Six months ended June 30

(Dollars in thousands) 2020 2019 2020 2019

March 31, 2020

Level 3 assets

Valuation technique

Significant unobservable input

Corporate bonds

Indicative bid provided by broker

Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the issuer

Beginning balance $ 67,016 $ 146,287 $ 69,685 $ 143,226

Purchases 100,595 991 100,595 3,991

Unrealized net gains (losses) included in other comprehensive income 2,449 1,822 ( 1,917 ) 1,838

Amounts included in net income ( 83 ) 37 ( 168 ) 82

Transfers in — — 1,782 —

Ending balance $ 169,977 $ 149,137 $ 169,977 $ 149,137

During the three months ended June 30, 2020, there were no transfers between levels.

During the six months ended June 30, 2020, there were transfers from Level 2 to Level 3 of $ 1.8 million in corporate bonds available for sale.

The transfers were due to a lack of observable inputs and trade activity for those securities.

During the three and six months ended June 30, 2019, there were no transfers between levels.

The following table presents quantitative information about Level 3 fair value measurements for fair value on a recurring basis at June 30, 2020:

(Dollars in thousands) June 30, 2020

Level 3 assets Valuation technique Significant unobservable input Fair Value

Corporate bonds Indicative bid provided by broker Multiple factors, including but not limited to, current operations, financial condition, cash flows, and recently executed financing transactions related to the issuer $ 169,977

Fair Value Option

1 unchanged sentence

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 $ 1.2 million and a gain of $ 249 thousand for the three months ended March 31, 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 March 31, 2020 and December 31, 2019 :

March 31, 2020

(Dollars in thousands)

Aggregate unpaid principal balance

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.

June 30, 2020

(Dollars in thousands) Fair value Aggregate unpaid principal balance Difference

Originated loans held for sale $ 107,881 $ 102,189 $ 5,692

December 31, 2019

Aggregate unpaid principal balance

Fair value Aggregate unpaid principal balance Difference

Originated loans held for sale $ 67,869 $ 65,697 $ 2,172

No originated loans held for sale were 90 or more days past due or on nonaccrual status as of March 31, 2020 or December 31, 2019 .

No originated loans held for sale were 90 or more days past due or on nonaccrual status as of June 30, 2020 or December 31, 2019.

We may be required to measure certain financial assets at fair value on a nonrecurring basis.

8 unchanged sentences

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 the majority of impaired loans generally ranges between 3 % and 7 % .

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 March 31, 2020 , the weighted average discount applied was 8.37 % .

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 March 31, 2020 and December 31, 2019 :

March 31, 2020

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)

Level 1 inputs

Level 2 inputs

Level 3 inputs

(Dollars in thousands) Fair value Level 1 inputs Level 2 inputs Level 3 inputs

Collateral-dependent loans $ 14,341 $ — $ — $ 14,341

3 unchanged sentences

Fair value measurements using:

Level 1 inputs

Level 2 inputs

Level 3 inputs

Fair value Level 1 inputs Level 2 inputs Level 3 inputs

Impaired loans $ 132,336 $ — $ — $ 132,336

1 unchanged sentence

Mortgage servicing rights 3,757 — — 3,757

No financial liabilities were carried at fair value on a nonrecurring basis as of March 31, 2020 and December 31, 2019 .

No financial liabilities were carried at fair value on a nonrecurring basis as of June 30, 2020 and December 31, 2019.

NOTE L - EMPLOYEE BENEFIT PLANS

1 unchanged sentence

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 months ended March 31, 2020 and 2019 , the components of net periodic benefit cost are as follows:

Three months ended March 31

For the three and six months ended June 30, 2020 and 2019, the components of net periodic benefit cost are as follows:

Three months ended June 30 Six months ended June 30

(Dollars in thousands) 2020 2019 2020 2019

Service cost $ 3,682 $ 3,271 $ 7,139 $ 6,384

Interest cost 8,568 9,338 17,099 18,629

3 unchanged sentences

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 three months ended March 31, 2020 .

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.

NOTE M - LEASES

The following table presents lease assets and liabilities as of March 31, 2020 and December 31, 2019 :

(Dollars in thousands)

Classification

March 31, 2020

December 31, 2019

Premises and equipment

The following table presents lease assets and liabilities as of June 30, 2020 and December 31, 2019:

(Dollars in thousands) Classification June 30, 2020 December 31, 2019

Operating Other assets $ 73,488 $ 77,115

Finance Premises and equipment 7,547 8,820

Total leased assets $ 81,035 $ 85,935

Other liabilities

Other borrowings

Operating Other liabilities $ 73,481 $ 76,746

Finance Other borrowings 7,463 8,230

Total lease liabilities $ 80,944 $ 84,976

11 unchanged sentences

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 March 31, 2020 and December 31, 2019 :

(Dollars in thousands)

March 31, 2020

December 31, 2019

The following table presents the commitments to extend credit and standby letters of credit as of June 30, 2020 and December 31, 2019:

(Dollars in thousands) June 30, 2020 December 31, 2019

Unused commitments to extend credit $ 11,705,547 $ 10,682,378

1 unchanged sentence

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 $ 166.6 million and $ 167.8 million as of March 31, 2020 and December 31, 2019 , respectively, and were recorded in other assets.

Unfunded commitments to fund future investments in affordable housing projects totaled $ 68.9 million and $ 70.0 million as of March 31, 2020 and December 31, 2019 , respectively, and were recorded in other liabilities.

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.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements