Loans Held for Investment and Allowance for Loan Losses

6 Months Ended

Jun. 30, 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)	June 30, 2020			December 31, 2019
Commercial	$	9,164,661		$	9,133,444
Energy	1,146,164			1,425,309
Mortgage finance(1)	8,972,626			8,169,849
Real estate	6,326,434			6,008,040
Gross loans held for investment(2)	25,609,885			24,736,642
Deferred income (net of direct origination costs)	(85,056		)	(90,380		)
Allowance for credit losses on loans	(264,722		)	(195,047		)
Total loans held for investment, net(2)	$	25,260,107		$	24,451,215


(1)	Balances at June 30, 2020 and December 31, 2019 are stated net of $1.3 billion and $682.7 million of participations sold, respectively.

(2)

Excludes accrued interest receivable of $55.8 million and $63.4 million at June 30, 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
June 30, 2020
Commercial
(1-7) Pass	$	995,901	$	3,094,437	$	677,757	$	409,424	$	193,252	$	259,128	$	3,115,827	$	37,322	$	8,783,048
(8) Special mention	15,204		16,219		29,464		52,773		15,860		10,715		46,899		4,009		191,143
(9) Substandard - accruing	10,608		19,213		22,743		20,754		21,662		10,605		32,097		1,582		139,264
(9+) Non-accrual	—		8,615		386		11,396		2,317		22,092		6,227		173		51,206
Total commercial	$	1,021,713	$	3,138,484	$	730,350	$	494,347	$	233,091	$	302,540	$	3,201,050	$	43,086	$	9,164,661
Energy
(1-7) Pass	$	2,519	$	—	$	154	$	22,583	$	1,500	$	10,620	$	785,048	$	150	$	822,574
(8) Special mention	—		11,000		23,571		—		15,989		15,771		75,586		—		141,917
(9) Substandard - accruing	—		—		—		—		14,605		295		62,899		—		77,799
(9+) Non-accrual	—		19,264		20,570		1,562		11,822		15,488		31,660		3,508		103,874
Total energy	$	2,519	$	30,264	$	44,295	$	24,145	$	43,916	$	42,174	$	955,193	$	3,658	$	1,146,164
Mortgage finance
(1-7) Pass	$	265,020	$	1,052,947	$	905,896	$	599,686	$	163,306	$	5,985,771	$	—	$	—	$	8,972,626
(8) Special mention	—		—		—		—		—		—		—		—		—
(9) Substandard - accruing	—		—		—		—		—		—		—		—		—
(9+) Non-accrual	—		—		—		—		—		—		—		—		—
Total mortgage finance	$	265,020	$	1,052,947	$	905,896	$	599,686	$	163,306	$	5,985,771	$	—	$	—	$	8,972,626
Real estate
CRE
(1-7) Pass	$	193,894	$	852,283	$	951,771	$	805,322	$	273,234	$	567,932	$	104,888	$	36,350	$	3,785,674
(8) Special mention	—		—		59,051		37,120		20,762		49,458		—		6,510		172,901
(9) Substandard - accruing	—		—		4,036		—		—		34,024		—		1,250		39,310
(9+) Non-accrual	—		—		—		—		—		241		—		—		241
RBF
(1-7) Pass	98,571		173,525		121,844		24,115		8,893		13,211		591,953		—		1,032,112
(8) Special mention	—		862		—		—		—		—		—		—		862
(9) Substandard - accruing	—		—		—		—		—		—		—		—		—
(9+) Non-accrual	—		—		—		—		—		—		—		—		—
Other
(1-7) Pass	113,824		167,359		137,489		154,912		97,283		129,998		19,974		23,413		844,252
(8) Special mention	—		3,578		7,486		11,894		6,218		25,234		—		7,283		61,693
(9) Substandard - accruing	—		—		526		1,009		356		10,266		—		—		12,157
(9+) Non-accrual	—		574		—		—		783		3,035		—		14,100		18,492
Secured by 1-4 family
(1-7) Pass	29,793		65,149		59,560		67,208		90,671		38,410		4,825		—		355,616
(8) Special mention	—		—		179		—		—		1,792		—		—		1,971
(9) Substandard - accruing	—		—		—		826		—		109		—		—		935
(9+) Non-accrual	—		—		—		—		—		218		—		—		218
Total real estate	$	436,082	$	1,263,330	$	1,341,942	$	1,102,406	$	498,200	$	873,928	$	721,640	$	88,906	$	6,326,434
Total loans held for investment	$	1,725,334	$	5,485,025	$	3,022,483	$	2,220,584	$	938,513	$	7,204,413	$	4,877,883	$	135,650	$	25,609,885

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
Six months ended June 30, 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	28,850			117,963		299		45,823			—			192,935
Charge-offs	32,940			100,098		—		—			—			133,038
Recoveries	770			423		—		—			—			1,193
Net charge-offs (recoveries)	32,170			99,675		—		—			—			131,845
Ending balance	$	83,194		$	102,695	$	4,595	$	74,238		$	—		$	264,722
Six months ended June 30, 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	21,979			28,430		2,316		2,150			(7,231		)	47,644
Charge-offs	9,745			15,173		—		177			—			25,095
Recoveries	501			—		—		—			—			501
Net charge-offs (recoveries)	9,244			15,173		—		177			—			24,594
Ending balance	$	109,549		$	48,139	$	2,316	$	54,568		$	—		$	214,572

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 $100.0 million provision for credit losses for the second quarter of 2020, compared to $96.0 million for the first quarter of 2020 and $27.0 million for the second quarter of 2019. The increased provision for credit losses resulted primarily from an increase in charge-offs and reserve build related to higher criticized loan levels and continued economic uncertainty from the COVID-19 pandemic. We recorded $74.1 million in net charge-offs during the second quarter of 2020, including $62.4 million in energy charge-offs and $8.1 million in leveraged lending charge-offs, all of which were loans that had been previously identified as problem loans, compared to $57.7 million during the first quarter of 2020 and $20.0 million during the second quarter of 2019. Criticized loans totaled $1.0 billion at June 30, 2020, compared to $584.1 million at December 31, 2019 and $629.1 million at June 30, 2019. The increase in criticized loans was predominantly in special mention and was primarily due to the continued downgrade of loans that have been impacted by the COVID-19 pandemic or that are in categories that are expected to be more significantly impacted by COVID-19.

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		Oil/Gas Mineral Reserves		Total
June 30, 2020
Commercial	$	11,946	$	—	$	11,946
Energy	—		84,330		84,330
Total collateral-dependent loans held for investment	$	11,946	$	84,330	$	96,276

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 June 30, 2020(2)		Current		Total		Non-accrual With No Allowance
June 30, 2020
Commercial	$	19,451	$	6,383	$	18,939	$	44,773	$	51,206	$	9,068,682	$	9,164,661	$	21,146
Energy	295		—		—		295		103,874		1,041,995		1,146,164		54,986
Mortgage finance loans	—		—		—		—		—		8,972,626		8,972,626		—
Real estate
CRE	13,307		31		1,250		14,588		241		3,983,297		3,998,126		—
RBF	—		—		—		—		—		1,032,974		1,032,974		—
Other	581		6,010		—		6,591		18,492		911,511		936,594		18,492
Secured by 1-4 family	371		1,686		890		2,947		218		355,575		358,740		—
Total loans held for investment	$	34,005	$	14,110	$	21,079	$	69,194	$	174,031	$	25,366,660	$	25,609,885	$	94,624


(1)	Loans past due 90 days and still accruing includes premium finance loans of $14.8 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 June 30, 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 six months ended June 30, 2020. Accrued interest of $708,000 was reversed during the six months ended June 30, 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 June 30, 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 June 30, 2020 and December 31, 2019, $23.7 million and $35.1 million, respectively, met the criteria for restructured. These loans had no unfunded commitments at their respective balance sheet dates.

The following table details the recorded investment at June 30, 2020 and June 30, 2019 of loans restructured during the six months ended June 30, 2020 and June 30, 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
Six months ended June 30, 2020
Commercial loans	2	$	7,906	—	$	—	2		$	7,906
Energy loans	1	6,105		—	—		1		6,105
Total	3	$	14,011	—	$	—	3		$	14,011

Six months ended June 30, 2019
Commercial loans	1	$	1,896	—	$	—	$	1	$	1,896
Energy loans	1	16,541		—	—		1		16,541
Total	2	$	18,437	—	$	—	2		$	18,437

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 June 30, 2020 and 2019, 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 June 30, 2020 or 2019. As of June 30, 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, we implemented a short-term modification program in late March 2020 to provide temporary payment relief to borrowers who meet the program's qualifications. 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 basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. As of June 30, 2020, we have granted temporary modifications on 482 loans with a total outstanding balance of $1.2 billion, resulting in the deferral of $10.8 million in interest payments. Under the applicable guidance, none of these loans were considered restructured as of June 30, 2020.