Loans Held for Investment and Allowance for Loan Losses

9 Months Ended

Sep. 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)	September 30, 2020			December 31, 2019
Commercial	$	8,786,917		$	9,133,444
Energy	968,993			1,425,309
Mortgage finance(1)	9,378,104			8,169,849
Real estate	6,112,672			6,008,040
Gross loans held for investment(2)	25,246,686			24,736,642
Deferred income (net of direct origination costs)	(78,624		)	(90,380		)
Allowance for credit losses on loans	(290,165		)	(195,047		)
Total loans held for investment, net(2)	$	24,877,897		$	24,451,215


(1)	Balances at September 30, 2020 and December 31, 2019 are stated net of $1.1 billion and $682.7 million of participations sold, respectively.

(2)

Excludes accrued interest receivable of $57.2 million and $63.4 million at September 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
September 30, 2020
Commercial
(1-7) Pass	$	1,104,589	$	2,973,613	$	661,999	$	384,067	$	207,610	$	256,339	$	2,764,619	$	33,888	$	8,386,724
(8) Special mention	319		36,072		21,423		35,407		9,208		9,371		14,067		9,226		135,093
(9) Substandard - accruing	17,476		30,923		46,453		40,670		11,875		9,737		43,533		1,922		202,589
(9+) Non-accrual	9,167		10,202		386		11,030		2,144		22,191		7,260		131		62,511
Total commercial	$	1,131,551	$	3,050,810	$	730,261	$	471,174	$	230,837	$	297,638	$	2,829,479	$	45,167	$	8,786,917
Energy
(1-7) Pass	$	1,009	$	14,500	$	25,472	$	10,423	$	21,400	$	68,284	$	553,125	$	250	$	694,463
(8) Special mention	—		27,909		22,394		—		—		15,314		64,037		—		129,654
(9) Substandard - accruing	—		—		30,977		—		—		—		40,088		—		71,065
(9+) Non-accrual	—		—		—		5,968		11,822		34,336		19,873		1,812		73,811
Total energy	$	1,009	$	42,409	$	78,843	$	16,391	$	33,222	$	117,934	$	677,123	$	2,062	$	968,993
Mortgage finance
(1-7) Pass	$	628,926	$	1,111,019	$	824,564	$	531,556	$	148,745	$	6,133,294	$	—	$	—	$	9,378,104
(8) Special mention	—		—		—		—		—		—		—		—		—
(9) Substandard - accruing	—		—		—		—		—		—		—		—		—
(9+) Non-accrual	—		—		—		—		—		—		—		—		—
Total mortgage finance	$	628,926	$	1,111,019	$	824,564	$	531,556	$	148,745	$	6,133,294	$	—	$	—	$	9,378,104
Real estate
CRE
(1-7) Pass	$	257,066	$	877,307	$	949,785	$	631,875	$	229,186	$	456,647	$	100,067	$	74,789	$	3,576,722
(8) Special mention	—		333		56,081		66,742		49,755		52,454		—		6,385		231,750
(9) Substandard - accruing	—		—		12,002		—		—		34,610		—		1,250		47,862
(9+) Non-accrual	—		—		4,028		—		—		237		—		—		4,265
RBF
(1-7) Pass	158,135		134,598		117,955		21,943		7,029		25,175		506,363		—		971,198
(8) Special mention	—		577		—		—		—		—		—		—		577
(9) Substandard - accruing	—		—		—		—		—		—		—		—		—
(9+) Non-accrual	—		—		—		—		—		—		—		—		—
Other
(1-7) Pass	156,602		160,006		123,021		123,932		91,834		114,276		19,035		32,551		821,257
(8) Special mention	—		11,423		8,604		26,952		9,351		27,740		—		1,018		85,088
(9) Substandard - accruing	—		—		—		4,496		—		2,745		—		—		7,241
(9+) Non-accrual	—		—		—		—		1,107		6,133		—		13,901		21,141
Secured by 1-4 family
(1-7) Pass	46,521		63,274		48,779		61,165		85,470		32,718		4,725		—		342,652
(8) Special mention	—		—		—		—		—		1,774		—		—		1,774
(9) Substandard - accruing	—		—		—		818		—		109		—		—		927
(9+) Non-accrual	—		—		—		—		—		218		—		—		218
Total real estate	$	618,324	$	1,247,518	$	1,320,255	$	937,923	$	473,732	$	754,836	$	630,190	$	129,894	$	6,112,672
Total loans held for investment	$	2,379,810	$	5,451,756	$	2,953,923	$	1,957,044	$	886,536	$	7,303,702	$	4,136,792	$	177,123	$	25,246,686

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
Nine months ended September 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	47,263			127,470		430		44,799			—			219,962
Charge-offs	35,376			100,239		—		—			—			135,615
Recoveries	883			1,303		—		—			—			2,186
Net charge-offs (recoveries)	34,493			98,936		—		—			—			133,429
Ending balance	$	99,284		$	112,941	$	4,726	$	73,214		$	—		$	290,165
Nine months ended September 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	30,309			42,243		1,966		(7,204		)	(7,231		)	60,083
Charge-offs	30,869			31,828		—		177			—			62,874
Recoveries	1,300			107		—		—			—			1,407
Net charge-offs (recoveries)	29,569			31,721		—		177			—			61,467
Ending balance	$	97,554		$	45,404	$	1,966	$	45,214		$	—		$	190,138

During the first quarter of 2020, we adopted ASU 2016-13, which replaced 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 $30.0 million provision for credit losses for the third quarter of 2020, compared to $100.0 million for the second quarter of 2020 and $11.0 million for the third quarter of 2019. The decreased provision for credit losses in the third quarter of 2020 as compared to the second quarter of 2020 resulted primarily from a decrease in charge-offs. We recorded $1.6 million in net charge-offs during the third quarter of 2020, compared to $74.1 million during the second quarter of 2020 and $36.9 million during the third quarter of 2019. Criticized loans totaled $1.1 billion at September 30, 2020, compared to $584.1 million at December 31, 2019 and $536.3 million at September 30, 2019. Criticized loan levels have remained heightened throughout 2020 due to the downgrade of loans to borrowers 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		Real Property		Oil/Gas Mineral Reserves		Rolling Stock		U.S. Government Guaranty		Total
September 30, 2020
Commercial	$	26,243	$	—	$	—	$	774	$	544	$	27,561
Energy	—		—		41,102		—		—		41,102
Real estate
Other	—		5,650		—		—		—		5,650
Total collateral-dependent loans held for investment	$	26,243	$	5,650	$	41,102	$	774	$	544	$	74,313

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
September 30, 2020
Commercial	$	25,387	$	1,650	$	12,248	$	39,285	$	62,511	$	8,685,121	$	8,786,917	$	19,367
Energy	20,670		—		1,995		22,665		73,811		872,517		968,993		25,090
Mortgage finance loans	—		—		—		—		—		9,378,104		9,378,104		—
Real estate
CRE	24,158		9,619		1,250		35,027		4,265		3,821,307		3,860,599		4,028
RBF	—		—		—		—		—		971,775		971,775		—
Other	1,018		—		—		1,018		21,141		912,568		934,727		20,796
Secured by 1-4 family	897		497		403		1,797		218		343,556		345,571		—
Total loans held for investment	$	72,130	$	11,766	$	15,896	$	99,792	$	161,946	$	24,984,948	$	25,246,686	$	69,281


(1)	Loans past due 90 days and still accruing includes premium finance loans of $11.9 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 September 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 nine months ended September 30, 2020. Accrued interest of $1.0 million was reversed during the nine months ended September 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 September 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 September 30, 2020 and December 31, 2019, $47.7 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 September 30, 2020 and September 30, 2019 of loans restructured during the nine months ended September 30, 2020 and September 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
Nine months ended September 30, 2020
Commercial loans	2	$	7,636	2	$	14,663	4		$	22,299
Energy loans	1	5,969		3	13,469		4		19,438
Total	3	$	13,605	5	$	28,132	8		$	41,737

Nine months ended September 30, 2019
Commercial loans	1	$	1,824	—	$	—	$	1	$	1,824
Energy loans	1	3,941		—	—		1		3,941
Total	2	$	5,765	—	$	—	2		$	5,765

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 September 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 September 30, 2020 or 2019. As of September 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. Through September 30, 2020, we granted temporary modifications on 483 loans with a total outstanding balance of $1.3 billion, resulting in the deferral of $10.7 million in interest payments. As of September 30, 2020, 73 loans with a total

outstanding balance of $166.2 million remain on deferral, of which $61.2 million have been granted a second deferral. Under the applicable guidance, none of these loans were considered restructured as of September 30, 2020.