Loans Held for Investment and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2020

Loans Held for Investment and Allowance for Loan Losses

Loans Held for Investment and Allowance for Credit Losses on Loans

Loans held for investment are summarized by portfolio segment as follows:



(in thousands)	March 31, 2020			December 31, 2019
Commercial	$	9,402,250		$	9,133,444
Energy	1,331,489			1,425,309
Mortgage finance(1)	7,588,803			8,169,849
Real estate	6,196,653			6,008,040
Gross loans held for investment(2)	24,519,195			24,736,642
Deferred income (net of direct origination costs)	(72,813		)	(90,380		)
Allowance for credit losses on loans	(240,958		)	(195,047		)
Total loans held for investment, net(2)	$	24,205,424		$	24,451,215


(1)	Balances at March 31, 2020 and December 31, 2019 are stated net of $895.9 million and $682.7 million of participations sold, respectively.

(2)

Excludes accrued interest receivable of $61.7 million and $63.4 million at March 31, 2020 and December 31, 2019, respectively, that is recorded in accrued interest receivable and other assets.

The following table summarizes our gross loans held for investment by year of origination and internally assigned credit grades:



(in thousands)	2020	2019	2018	2017	2016	2015 and prior	Revolving lines of credit	Revolving lines of credit converted to term loans	Total
March 31, 2020
Commercial
(1-7) Pass	164,393	3,097,118	828,225	488,711	357,598	350,754	3,768,821	37,506	9,093,126
(8) Special mention	—	12,122	21,109	1,629	13,372	13,351	57,836	3,636	123,055
(9) Substandard - accruing	688	26,003	8,057	14,473	11,860	10,602	50,790	1,643	124,116
(9+) Non-accrual	—	6,586	876	10,368	1,395	24,752	16,906	1,070	61,953
Total commercial	165,081	3,141,829	858,267	515,181	384,225	399,459	3,894,353	43,855	9,402,250
Energy
(1-7) Pass	—	20,525	15,183	25,163	—	59,578	961,833	714	1,082,996
(8) Special mention	—	—	10,000	—	—	—	50,024	—	60,024
(9) Substandard - accruing	—	2,556	—	6,105	—	14,386	13,564	—	36,611
(9+) Non-accrual	—	40,881	56,700	3,139	11,822	10,689	26,778	1,849	151,858
Total energy	—	63,962	81,883	34,407	11,822	84,653	1,052,199	2,563	1,331,489
Mortgage finance
(1-7) Pass	282,291	623,955	673,328	492,038	67,179	5,450,012	—	—	7,588,803
(8) Special mention	—	—	—	—	—	—	—	—	—
(9) Substandard - accruing	—	—	—	—	—	—	—	—	—
(9+) Non-accrual	—	—	—	—	—	—	—	—	—
Total mortgage finance	282,291	623,955	673,328	492,038	67,179	5,450,012	—	—	7,588,803
Real estate
CRE
(1-7) Pass	133,556	733,076	951,198	811,991	284,324	640,181	87,979	44,327	3,686,632
(8) Special mention	—	—	16,484	20,918	9,558	12,908	—	1,883	61,751
(9) Substandard - accruing	—	—	—	—	—	21,305	—	1,250	22,555
(9+) Non-accrual	—	—	—	—	—	244	—	—	244
RBF
(1-7) Pass	36,669	218,642	143,204	39,091	15,521	13,968	633,422	—	1,100,517
(8) Special mention	—	689	287	—	—	—	—	—	976
(9) Substandard - accruing	—	—	—	—	—	—	—	—	—
(9+) Non-accrual	—	—	—	—	—	—	—	—	—
Other
(1-7) Pass	84,156	167,071	138,751	170,548	107,942	184,010	23,390	39,043	914,911
(8) Special mention	—	—	5,969	312	2,911	8,178	—	6,323	23,693
(9) Substandard - accruing	—	—	531	701	—	2,348	—	—	3,580
(9+) Non-accrual	—	594	—	—	—	3,095	—	—	3,689
Secured by 1-4 family
(1-7) Pass	15,641	68,913	79,808	72,265	93,948	40,231	5,460	—	376,266
(8) Special mention	—	—	—	—	—	309	—	—	309
(9) Substandard - accruing	—	—	—	—	—	109	—	—	109
(9+) Non-accrual	—	—	—	—	—	1,421	—	—	1,421
Total real estate	270,022	1,188,985	1,336,232	1,115,826	514,204	928,307	750,251	92,826	6,196,653
Total loans held for investment	717,394	5,018,731	2,949,710	2,157,452	977,430	6,862,431	5,696,803	139,244	24,519,195

The following table details activity in the allowance for credit losses on loans. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.



(in thousands)	Commercial			Energy		Mortgage Finance		Real Estate			Additional Qualitative Reserve			Total
Three months ended March 31, 2020
Allowance for credit losses on loans:
Beginning balance	$	102,254		$	60,253	$	2,265	$	30,275		$	—		$	195,047
Impact of CECL adoption	(15,740		)	24,154		2,031		(1,860		)	—			8,585
Provision for credit losses on loans	24,902			66,821		35		3,271			—			95,029
Charge-offs	20,653			37,730		—		—			—			58,383
Recoveries	257			423		—		—			—			680
Net charge-offs (recoveries)	20,396			37,307		—		—			—			57,703
Ending balance	$	91,020		$	113,921	$	4,331	$	31,686		$	—		$	240,958
Three months ended March 31, 2019
Allowance for credit losses on loans:
Beginning balance	$	96,814		$	34,882	$	—	$	52,595		$	7,231		$	191,522
Provision for credit losses on loans	12,872			12,387		1,300		2,311			(7,231		)	21,639
Charge-offs	4,865			—		—		—			—			4,865
Recoveries	277			—		—		—			—			277
Net charge-offs (recoveries)	4,588			—		—		—			—			4,588
Ending balance	$	105,098		$	47,269	$	1,300	$	54,906		$	—		$	208,573

During the first quarter of 2020, we adopted ASU 2016-13, which replaces the incurred loss methodology for determining our provision for credit losses and allowance for credit losses with an expected loss methodology that is referred to as the CECL model. Upon adoption, the allowance for credit losses was increased by $9.1 million, which included a $563,000 increase to the allowance for off-balance sheet credit losses, with no impact to the consolidated statement of income. We recorded a $96.0 million provision for credit losses for the first quarter of 2020 utilizing the newly adopted CECL methodology, a significant increase from prior quarters. The increase resulted primarily from increases in criticized loans and charge-offs, as well as the impact of reserve build related to the COVID-19 pandemic. More than half of the provision recorded in the first quarter of 2020 related to two large energy loans, previously identified as problem loans, that experienced further deterioration during the first quarter of 2020 exacerbated by the sharp decline in commodity prices, and approximately $30.0 million of the provision related to COVID-19 reserve build. In total, $1.8 billion of loans in categories that we expect to be more significantly impacted by COVID-19 were proactively downgraded, primarily to lower pass-rated grades. We recorded $57.7 million in net charge-offs during the first quarter of 2020, including $37.3 million in energy charge-offs and $15.6 million in leveraged lending charge-offs, all of which were loans that have been previously identified as problem loans, compared to $12.8 million during the fourth quarter of 2019 and $4.6 million, respectively, during the first quarter of 2019. Criticized loans totaled $675.9 million at March 31, 2020, compared to $584.1 million at December 31, 2019 and $602.8 million at March 31, 2019.

A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table summarizes collateral-dependent gross loans held for investment by collateral type as follows:



	Collateral type
(in thousands)	Business assets		Real property		Energy		Total
March 31, 2020
Commercial	$	24,752	$	—	$	—	$	24,752
Energy loans	—		—		151,858		151,858
Real estate
Secured by 1-4 family	—		1,202		—		1,202
Total collateral-dependent loans held for investment	$	24,752	$	1,202	$	151,858	$	177,812

The table below provides an age analysis of our loans held for investment:



(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due(1)		Total Past Due		Non-accrual loans as of March 31, 2020(2)		Current		Total		Non-accrual With No Allowance
March 31, 2020
Commercial	$	26,013	$	9,656	$	19,373	$	55,042	$	61,953	$	9,285,255	$	9,402,250	$	16,903
Energy	—		—		—		—		151,858		1,179,631		1,331,489		40,719
Mortgage finance loans	—		—		—		—		—		7,588,803		7,588,803		—
Real estate
CRE	9,301		—		1,837		11,138		244		3,759,800		3,771,182		—
RBF	—		—		—		—		—		1,101,493		1,101,493		—
Other	16,395		—		—		16,395		3,689		925,789		945,873		3,689
Secured by 1-4 family	79		—		64		143		1,421		376,541		378,105		1,202
Total loans held for investment	$	51,788	$	9,656	$	21,274	$	82,718	$	219,165	$	24,217,312	$	24,519,195	$	62,513


(1)	Loans past due 90 days and still accruing includes premium finance loans of $8.6 million. These loans are generally secured by obligations of insurance carriers to refund premiums on canceled insurance policies. The receipt of the refund of premiums from the insurance carriers can take 180 days or longer from the cancellation date.


(2)	As of March 31, 2020 and December 31, 2019, none of our non-accrual loans were earning interest income on a cash basis. Additionally, no interest income was recognized on non-accrual loans for the three months ended March 31, 2020. Accrued interest of $393,000 was reversed during the three months ended March 31, 2020.

On January 1, 2020, the date we adopted CECL, non-accrual loans totaled $225.4 million, and included $88.6 million in commercial loans, $125.0 million in energy loans, $9.4 million in CRE loans, $881,000 in real estate-other loans and

$1.4 million in secured by 1-4 family loans.

As of March 31, 2020 and December 31, 2019, we did not have any loans considered restructured that were not on non-accrual. Of the non-accrual loans at March 31, 2020 and December 31, 2019, $22.3 million and $35.1 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates.

We did not have any loans that were restructured during the three months ended March 31, 2020. The following table details the recorded investment at March 31, 2019 of loans restructured during the three months ended March 31, 2019 by type of modification:



	Extended Maturity			Adjusted Payment Schedule			Total
(in thousands, except number of contracts)	Number of Contracts	Balance at Period End		Number of Contracts	Balance at Period End		Number of Contracts	Balance at Period End
Three months ended March 31, 2019
Energy loans	1	$	22,540	—	$	—	1	$	22,540
Total	1	$	22,540	—	$	—	1	$	22,540

Restructured loans generally include terms to temporarily place the loan on interest only, extend the payment terms or reduce the interest rate. We did not forgive any principal on the above restructured loans. At March 31, 2020, all of the above restructured loans were on non-accrual. The restructuring of the loans did not have a significant impact on our allowance for credit losses at March 31, 2020 or 2019. As of March 31, 2020 and 2019, we did not have any loans that were restructured within the last 12 months that subsequently defaulted.

In response to the COVID-19 pandemic and its economic impact to our customers, we implemented a short-term modification program that complies with the Coronavirus Aid, Relief, and Economic Security ("CARES") Act to provide temporary payment relief to those borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. This program allows for a deferral of payments for 90 days, which we may extend for an additional 90 days, for a maximum of 180 days on a cumulative and successive basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. As of March 31, 2020, we have granted temporary modifications on approximately 146 loans, resulting in the deferral of approximately $3.7 million in interest payments. Under the applicable guidance, none of these loans were considered restructured as of March 31, 2020.