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Loans and Allowance for Credit Losses

9 Months Ended

Sep. 30, 2020

LOANS AND ALLOWANCE FOR CREDIT LOSSES

At September 30, 2020, the Company’s loan portfolio was $14.02 billion, compared to $14.43 billion at December 31, 2019. The various categories of loans are summarized as follows:


	September 30,		December 31,
(In thousands)	2020		2019
Consumer:
Credit cards	$	172,880	$	204,802
Other consumer	190,736		249,195
Total consumer	363,616		453,997
Real Estate:
Construction and development	1,853,360		2,248,673
Single family residential	1,997,070		2,414,753
Other commercial	6,132,823		6,358,514
Total real estate	9,983,253		11,021,940
Commercial:
Commercial	2,907,798		2,451,119
Agricultural	241,687		191,525
Total commercial	3,149,485		2,642,644
Other	521,088		307,123
Total loans	$	14,017,442	$	14,425,704

The above table presents total loans at amortized cost. The difference between amortized cost and unpaid principal balance is primarily premiums and discounts associated with acquisition date fair value adjustments on acquired loans as well as net deferred origination fees totaling $69.9 million and $91.6 million at September 30, 2020 and December 31, 2019, respectively.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $65.0 million and $48.9 million at September 30, 2020 and December 31, 2019, respectively, and is included in interest receivable on the consolidated balance sheets.

Loan Origination/Risk Management – The Company seeks to manage its credit risk by diversifying its loan portfolio, determining that borrowers have adequate sources of cash flow for loan repayment without liquidation of collateral; obtaining and monitoring collateral; providing an adequate allowance for credit losses by regularly reviewing loans through the internal loan review process. The loan portfolio is diversified by borrower, purpose and industry. The Company seeks to use diversification within the loan portfolio to reduce its credit risk, thereby minimizing the adverse impact on the portfolio if weaknesses develop in either the economy or a particular segment of borrowers. Collateral requirements are based on credit assessments of borrowers and may be used to recover the debt in case of default.

Consumer – The consumer loan portfolio consists of credit card loans and other consumer loans. Credit card loans are diversified by geographic region to reduce credit risk and minimize any adverse impact on the portfolio. Although they are regularly reviewed to facilitate the identification and monitoring of creditworthiness, credit card loans are unsecured loans, making them more susceptible to be impacted by economic downturns resulting in increasing unemployment. Other consumer loans include direct and indirect installment loans and overdrafts. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.

Real estate – The real estate loan portfolio consists of construction and development loans, single family residential loans and commercial loans. Construction and development loans (“C&D”) and commercial real estate loans (“CRE”) can be particularly sensitive to valuation of real estate. Commercial real estate cycles are inevitable. The long planning and production process for new properties and rapid shifts in business conditions and employment create an inherent tension between supply and demand for commercial properties. While general economic trends often move individual markets in the same direction over time, the timing and magnitude of changes are determined by other forces unique to each market. CRE cycles tend to be local in nature and longer than other credit cycles. Factors influencing the CRE market are traditionally different from those affecting residential real estate markets; thereby making predictions for one market based on the other difficult. Additionally, submarkets within commercial real estate – such as office, industrial, apartment, retail and hotel – also experience different cycles, providing an opportunity to lower the overall risk through diversification across types of CRE loans. Management realizes that local demand and supply conditions will also mean that different geographic areas will experience cycles of different amplitude and length. The Company monitors these loans closely.

Commercial – The commercial loan portfolio includes commercial and agricultural loans, representing loans to commercial customers and farmers for use in normal business or farming operations to finance working capital needs, equipment purchases or other expansion projects. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrowers, particularly cash flow from customers’ business or farming operations. The Company continues its efforts to keep loan terms short, reducing the negative impact of upward movement in interest rates. Term loans are generally set up with one or three year balloons, and the Company has instituted a pricing mechanism for commercial loans. It is standard practice to require personal guaranties on commercial loans for closely-held or limited liability entities.

Nonaccrual and Past Due Loans – Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The amortized cost basis of nonaccrual loans segregated by class of loans are as follows:


	September 30,		December 31,
(In thousands)	2020		2019
Consumer:
Credit cards	$	253	$	382
Other consumer	1,371		1,705
Total consumer	1,624		2,087
Real estate:
Construction and development	3,806		5,289
Single family residential	31,080		27,695
Other commercial	80,427		16,582
Total real estate	115,313		49,566
Commercial:
Commercial	50,239		40,924
Agricultural	537		753
Total commercial	50,776		41,677
Total	$	167,713	$	93,330

Nonaccrual loans for which there is no related allowance for credit losses as of September 30, 2020 had an amortized cost of $17.8 million. These loans are individually assessed and do not hold an allowance due to being adequately collateralized under the collateral-dependent valuation method.

An age analysis of the amortized cost basis of past due loans, including nonaccrual loans, segregated by class of loans is as follows:


(In thousands)	Gross 30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due & Accruing
September 30, 2020
Consumer:
Credit cards	$	672	$	262	$	934	$	171,946	$	172,880	$	95
Other consumer	2,302		391		2,693		188,043		190,736		6
Total consumer	2,974		653		3,627		359,989		363,616		101
Real estate:
Construction and development	1,168		2,526		3,694		1,849,666		1,853,360		—
Single family residential	12,170		14,522		26,692		1,970,378		1,997,070		64
Other commercial	5,115		11,885		17,000		6,115,823		6,132,823		2
Total real estate	18,453		28,933		47,386		9,935,867		9,983,253		66
Commercial:
Commercial	6,984		5,824		12,808		2,894,990		2,907,798		7
Agricultural	290		328		618		241,069		241,687		—
Total commercial	7,274		6,152		13,426		3,136,059		3,149,485		7
Other	—		—		—		521,088		521,088		—
Total	$	28,701	$	35,738	$	64,439	$	13,953,003	$	14,017,442	$	174


(In thousands)	Gross 30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due & Accruing
December 31, 2019
Consumer:
Credit cards	$	848	$	641	$	1,489	$	203,313	$	204,802	$	259
Other consumer	4,884		735		5,619		243,576		249,195		—
Total consumer	5,732		1,376		7,108		446,889		453,997		259
Real estate:
Construction and development	5,792		1,078		6,870		2,241,803		2,248,673		—
Single family residential	26,318		13,789		40,107		2,374,646		2,414,753		597
Other commercial	7,645		6,450		14,095		6,344,419		6,358,514		—
Total real estate	39,755		21,317		61,072		10,960,868		11,021,940		597
Commercial:
Commercial	10,579		13,551		24,130		2,426,989		2,451,119		—
Agricultural	1,223		456		1,679		189,846		191,525		—
Total commercial	11,802		14,007		25,809		2,616,835		2,642,644		—
Other	—		—		—		307,123		307,123		—
Total	$	57,289	$	36,700	$	93,989	$	14,331,715	$	14,425,704	$	856

The following table presents information pertaining to impaired loans as of December 31, 2019, in accordance with previous US GAAP prior to the adoption of ASU 2016-13.


(In thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
December 31, 2019											Three Months Ended September 30, 2019				Nine Months Ended September 30, 2019
Consumer:
Credit cards	$	382	$	382	$	—	$	382	$	—	$	423	$	40	$	370	$	110
Other consumer	1,537		1,378		—		1,378		—		1,603		9		1,730		33
Total consumer	1,919		1,760		—		1,760		—		2,026		49		2,100		143
Real estate:
Construction and development	4,648		4,466		72		4,538		4		1,972		10		1,946		38
Single family residential	19,466		15,139		2,963		18,102		42		15,920		85		14,812		287
Other commercial	10,645		4,713		3,740		8,453		694		11,739		77		10,365		201
Total real estate	34,759		24,318		6,775		31,093		740		29,631		172		27,123		526
Commercial:
Commercial	53,436		6,582		28,998		35,580		5,007		32,020		176		26,379		511
Agricultural	525		383		116		499		—		873		3		1,010		20
Total commercial	53,961		6,965		29,114		36,079		5,007		32,893		179		27,389		531
Total	$	90,639	$	33,043	$	35,889	$	68,932	$	5,747	$	64,550	$	400	$	56,612	$	1,200

When the Company restructures a loan to a borrower that is experiencing financial difficulty and grants a concession that it would not otherwise consider, a “troubled debt restructuring” (“TDR”) results and the Company classifies the loan as a TDR. The Company grants various types of concessions, primarily interest rate reduction and/or payment modifications or extensions, with an occasional forgiveness of principal.

Once an obligation has been restructured because of such credit problems, it continues to be considered a TDR until paid in full; or, if an obligation yields a market interest rate and no longer has any concession regarding payment amount or amortization, then it is not considered a TDR at the beginning of the calendar year after the year in which the improvement takes place. The Company returns TDRs to accrual status only if (1) all contractual amounts due can reasonably be expected to be repaid within a prudent period, and (2) repayment has been in accordance with the contract for a sustained period, typically at least six months.

The provisions in the CARES Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the President terminates the COVID-19 national emergency declaration. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. As of September 30, 2020, the Company has modified 3,956 loans totaling approximately $3.21 billion to loan customers affected by COVID-19. The following table summarizes these modified loans due to COVID-19 by industry.


(Dollars in thousands)	Number	Balance
Real Estate Rental and Leasing	1,162	$	1,263,884
Accommodation and Food Services	386	845,803
Health Care and Social Assistance	226	278,200
Construction	186	190,337
Retail Trade	145	130,498
Other Services (Except Public Administration)	131	58,169
Other	1,720	444,053
Total	3,956	$	3,210,944

Deferred interest on the above loans totaled $27.6 million as of September 30, 2020. The interest will be collected at the end of the note or once regular payments are resumed. As of September 30, 2020, over 2,900 loans totaling $1.9 billion that had previously been modified under the CARES Act had returned to regular payment terms in addition to those that have paid off.

TDRs are individually evaluated for expected credit losses. The Company assesses the exposure for each modification, either by the fair value of the underlying collateral or the present value of expected cash flows, and determines if a specific allowance for credit losses is needed.

The following table presents a summary of TDRs segregated by class of loans.


	Accruing TDR Loans			Nonaccrual TDR Loans			Total TDR Loans
(Dollars in thousands)	Number	Balance		Number	Balance		Number	Balance
September 30, 2020
Real estate:
Single-family residential	31	$	2,700	18	$	3,008	49	$	5,708
Other commercial	1	49		1	15		2	64
Total real estate	32	2,749		19	3,023		51	5,772
Commercial:
Commercial	3	630		3	2,154		6	2,784
Total commercial	3	630		3	2,154		6	2,784
Total	35	$	3,379	22	$	5,177	57	$	8,556


	Accruing TDR Loans			Nonaccrual TDR Loans			Total TDR Loans
(Dollars in thousands)	Number	Balance		Number	Balance		Number	Balance
December 31, 2019
Real estate:
Construction and development	—	$	—	1	$	72	1	$	72
Single-family residential	25	2,627		20	1,330		45	3,957
Other commercial	1	476		2	80		3	556
Total real estate	26	3,103		23	1,482		49	4,585
Commercial:
Commercial	4	2,784		3	79		7	2,863
Total commercial	4	2,784		3	79		7	2,863
Total	30	$	5,887	26	$	1,561	56	$	7,448

The following table presents loans that were restructured as TDRs during the nine months ended September 30, 2020 and the three and nine months ended September 30, 2019 segregated by class of loans. There were no loans restructured as TDRs during the three months ended September 30, 2020.


(Dollars in thousands)	Number of loans	Balance Prior to TDR		Balance at September 30,		Change in Maturity Date		Change in Rate		Financial Impact on Date of Restructure
Nine Months Ended September 30, 2020
Real estate:
Single-family residential	5	$	1,948	$	1,896	$	1,896	$	—	$	—
Total real estate	5	$	1,948	$	1,896	$	1,896	$	—	$	—

Three and Nine Months Ended September 30, 2019
Real estate:
Single-family residential	1	$	330	$	330	$	330	$	—	$	—
Total real estate	1	$	330	$	330	$	330	$	—	$	—

During the nine months ended September 30, 2020, the Company modified five loans with a recorded investment of $1.9 million prior to modification which was deemed troubled debt restructuring. The restructured loans were modified by deferring amortized principal payments, changing the maturity dates and requiring interest only payments for a period of up to 12 months. A specific reserve of $16,600 was determined necessary for these loans as of September 30, 2020. Additionally, there was no immediate financial impact from the restructuring of these loans, as it was not considered necessary to charge-off interest or principal on the date of restructure.

During the three and nine months ended September 30, 2019, the Company modified one loan with a recorded investment of $330,000 prior to modification which was deemed troubled debt restructuring. The restructured loan was modified by deferring amortized principal payments, changing the maturity date and requiring interest only payments for a period of up to 12 months. A specific reserve was not considered necessary for this loan and there was no immediate financial impact from the restructuring of this loan, as it was not considered necessary to charge-off interest or principal on the date of restructure.

There was one commercial loan considered a TDR for which a payment default occurred during the nine months ended September 30, 2020. There were four loans consisting of commercial and real estate construction loans, considered TDRs for which a payment default occurred during the nine months ended September 30, 2019. The Company charged-off approximately $552,000 for these loans. The Company defines a payment default as a payment received more than 90 days after its due date.

There were no TDRs with pre-modification loan balances for which OREO was received in full or partial satisfaction of the loans during the three or nine month periods ended September 30, 2020 or 2019. At September 30, 2020 and December 31, 2019, the Company had $6,876,000 and $5,789,000, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At September 30, 2020 and December 31, 2019, the Company had $3,184,000 and $4,458,000, respectively, of OREO secured by residential real estate properties.

Credit Quality Indicators – As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk rating of commercial and real estate loans, (ii) the level of classified commercial and real estate loans, (iii) net charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions of the Company’s local markets.

The Company utilizes a risk rating matrix to assign a risk rate to each of its commercial and real estate loans. Loans are rated on a scale of 1 to 8. Risk ratings are updated on an ongoing basis and are subject to change by continuous loan monitoring processes including lending management monitoring, executive management and board committee oversight, and independent credit review. A description of the general characteristics of the 8 risk ratings is as follows:

•Risk Rate 1 – Pass (Excellent) – This category includes loans which are virtually free of credit risk. Borrowers in this category represent the highest credit quality and greatest financial strength.

•Risk Rate 2 – Pass (Good) - Loans under this category possess a nominal risk of default. This category includes borrowers with strong financial strength and superior financial ratios and trends. These loans are generally fully secured by cash or equivalents (other than those rated “excellent”).

•Risk Rate 3 – Pass (Acceptable – Average) - Loans in this category are considered to possess a normal level of risk. Borrowers in this category have satisfactory financial strength and adequate cash flow coverage to service debt requirements. If secured, the perfected collateral should be of acceptable quality and within established borrowing parameters.

•Risk Rate 4 – Pass (Monitor) - Loans in the Watch (Monitor) category exhibit an overall acceptable level of risk, but that risk may be increased by certain conditions, which represent “red flags”. These “red flags” require a higher level of supervision or monitoring than the normal “Pass” rated credit. The borrower may be experiencing these conditions for the first time, or it may be recovering from weakness, which at one time justified a higher rating. These conditions may include: weaknesses in financial trends; marginal cash flow; one-time negative operating results; non-compliance with policy or borrowing agreements; poor diversity in operations; lack of adequate monitoring information or lender supervision; questionable management ability/stability.

•Risk Rate 5 – Special Mention - A loan in this category has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention loans are not adversely classified (although they are “criticized”) and do not expose an institution to sufficient risk to warrant adverse classification. Borrowers may be experiencing adverse operating trends, or an ill-proportioned balance sheet. Non-financial characteristics of a Special Mention rating may include management problems, pending litigation, a non-existent, or ineffective loan agreement or other material structural weakness, and/or other significant deviation from prudent lending practices.

•Risk Rate 6 – Substandard - A Substandard loan is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. This does not imply ultimate loss of the principal, but may involve burdensome administrative expenses and the accompanying cost to carry the loan.

•Risk Rate 7 – Doubtful - A loan classified Doubtful has all the weaknesses inherent in a substandard loan except that the weaknesses make collection or liquidation in full (on the basis of currently existing facts, conditions, and values) highly questionable and improbable. Doubtful borrowers are usually in default, lack adequate liquidity, or capital, and lack the resources necessary to remain an operating entity. The possibility of loss is extremely high, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Pending factors include: proposed merger or acquisition; liquidation procedures; capital injection; perfection of liens on additional collateral; and refinancing plans. Loans classified as Doubtful are placed on nonaccrual status.

•Risk Rate 8 – Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loans has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless loan, even though partial recovery may be affected in the future. Borrowers in the Loss category are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Loans should be classified as Loss and charged-off in the period in which they become uncollectible.

The Company monitors credit quality in the consumer portfolio by delinquency status. The delinquency status of loans is updated daily. A description of the delinquency credit quality indicators is as follows:

•Current - Loans in this category are either current in payments or are under 30 days past due. These loans are considered to have a normal level of risk.

•30-89 Days Past Due - Loans in this category are between 30 and 89 days past due and are subject to the Company’s loss mitigation process. These loans are considered to have a moderate level of risk.

•90+ Days Past Due - Loans in this category are over 90 days past due and are placed on nonaccrual status. These loans have been subject to the Company’s loss mitigation process and foreclosure and/or charge-off proceedings have commenced.

The following table presents a summary of loans by credit quality indicator, other than pass or current, as of September 30, 2020 segregated by class of loans.


	Term Loans Amortized Cost Basis by Origination Year
(In thousands)	2020 (YTD)		2019		2018		2017		2016		2015 and Prior		Lines of Credit (“LOC”) Amortized Cost Basis		LOC Converted to Term Loans Amortized Cost Basis		Total
Consumer - credit cards
Delinquency:
30-89 days past due	$	—	$	—	$	—	$	—	$	—	$	—	$	672	$	—	$	672
90+ days past due	—		—		—		—		—		—		262		—		262
Total consumer - credit cards	—		—		—		—		—		—		934		—		934
Consumer - other
Delinquency:
30-89 days past due	213		404		344		634		505		124		78		—		2,302
90+ days past due	4		55		72		94		48		8		110		—		391
Total consumer - other	217		459		416		728		553		132		188		—		2,693
Real estate - C&D
Risk rating:
5 internal grade	504		357		173		2,171		19		238		4,707		—		8,169
6 internal grade	244		2,127		447		539		366		570		579		—		4,872
7 internal grade	—		—		—		—		—		—		—		—		—
Total real estate - C&D	748		2,484		620		2,710		385		808		5,286		—		13,041
Real estate - SF residential
Delinquency:
30-89 days past due	1,080		1,417		1,602		1,686		1,395		3,365		1,625		—		12,170
90+ days past due	26		2,308		2,873		2,438		918		3,743		2,217		—		14,523
Total real estate - SF residential	1,106		3,725		4,475		4,124		2,313		7,108		3,842		—		26,693
Real estate - other commercial
Risk rating:
5 internal grade	17,230		4,973		24,463		14,997		1,744		10,844		61,045		16,005		151,301
6 internal grade	29,267		9,544		13,940		5,751		15,069		10,114		54,571		48,444		186,700
7 internal grade	—		—		—		—		—				—		—		—
Total real estate - other commercial	46,497		14,517		38,403		20,748		16,813		20,958		115,616		64,449		338,001
Commercial
Risk rating:
5 internal grade	914		1,255		1,662		896		332		14		45,106		569		50,748
6 internal grade	7,062		3,434		19,418		2,407		1,232		1,077		51,387		522		86,539
7 internal grade	—		—		—		—		—		—		—		—		—
Total commercial	7,976		4,689		21,080		3,303		1,564		1,091		96,493		1,091		137,287
Commercial - agriculture
Risk rating:
5 internal grade	35		83		14		325		—		—		34		—		491
6 internal grade	72		140		166		53		42		10		83		—		566
7 internal grade	—		—		—		—		—		—		—		—		—
Total commercial - agriculture	107		223		180		378		42		10		117		—		1,057
Total	$	56,651	$	26,097	$	65,174	$	31,991	$	21,670	$	30,107	$	222,476	$	65,540	$	519,706

The following table presents a summary of loans by credit risk rating as of December 31, 2019 segregated by class of loans.


(In thousands)	Risk Rate 1-4		Risk Rate 5		Risk Rate 6		Risk Rate 7		Risk Rate 8		Total
December 31, 2019
Consumer:
Credit cards	$	204,161	$	—	$	641	$	—	$	—	$	204,802
Other consumer	247,668		—		2,026		—		—		249,694
Total consumer	451,829		—		2,667		—		—		454,496
Real estate:
Construction and development	2,229,019		70		7,735		—		37		2,236,861
Single family residential	2,394,284		6,049		41,601		130		—		2,442,064
Other commercial	6,068,425		69,745		67,429		—		—		6,205,599
Total real estate	10,691,728		75,864		116,765		130		37		10,884,524
Commercial:
Commercial	2,384,263		26,713		84,317		43		180		2,495,516
Agricultural	309,741		41		5,672		—		—		315,454
Total commercial	2,694,004		26,754		89,989		43		180		2,810,970
Other	275,714		—		—		—		—		275,714
Total	$	14,113,275	$	102,618	$	209,421	$	173	$	217	$	14,425,704

Allowance for Credit Losses

Allowance for Credit Losses – The allowance for credit losses is a reserve established through a provision for credit losses charged to expense, which represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations. The allowance, in the judgment of management, is necessary to reserve for expected loan losses and risks inherent in the loan portfolio. The Company’s allowance for credit loss methodology includes reserve factors calculated to estimate current expected credit losses to amortized cost balances over the remaining contractual life of the portfolio, adjusted for the effective interest rate used to discount prepayments, in accordance with ASC Topic 326-20, Financial Instruments - Credit Losses. Accordingly, the methodology is based on the Company’s reasonable and supportable economic forecasts, historical loss experience, and other qualitative adjustments.

Loans with similar risk characteristics such as loan type, collateral type, and internal risk ratings are aggregated into homogeneous segments for assessment. Reserve factors are based on estimated probability of default and loss given default for each segment. The estimates are determined based on economic forecasts over the reasonable and supportable forecast period based on projected performance of economic variables that have a statistical relationship with the historical loss experience of the segments. For contractual periods that extend beyond the one-year forecast period, the estimates revert to average historical loss experiences over a one-year period on a straight-line basis.

The Company also includes qualitative adjustments to the allowance based on factors and considerations that have not otherwise been fully accounted for. Qualitative adjustments include, but are not limited to:

•Changes in asset quality - Adjustments related to trending credit quality metrics including delinquency, nonperforming loans, charge-offs, and risk ratings that may not be fully accounted for in the reserve factor.

•Changes in the nature and volume of the portfolio - Adjustments related to current changes in the loan portfolio that are not fully represented or accounted for in the reserve factors.

•Changes in lending and loan monitoring policies and procedures - Adjustments related to current changes in lending and loan monitoring procedures as well as review of specific internal policy compliance metrics.

•Changes in the experience, ability, and depth of lending management and other relevant staff - Adjustments to measure increasing or decreasing credit risk related to lending and loan monitoring management.

•Changes in the value of underlying collateral of collateralized loans - Adjustments related to improving or deterioration of the value of underlying collateral that are not fully captured in the reserve factors.

•Changes in and the existence and effect of any concentrations of credit - Adjustments related to credit risk of specific industries that are not fully captured in the reserve factors.

•Changes in regional and local economic and business conditions and developments - Adjustments related to expected and current economic conditions at a regional or local-level that are not fully captured within the Company’s reasonable and supportable forecast.

•Data imprecisions due to limited historical loss data - Adjustments related to limited historical loss data that is representative of the collective loan portfolio.

Loans that do not share similar risk characteristics are evaluated on an individual basis. These evaluations are typically performed on loans with a deteriorated internal risk rating or are classified as a troubled debt restructuring. The allowance for credit loss is determined based on several methods including estimating the fair value of the underlying collateral or the present value of expected cash flows.

For a collateral dependent loan, the Company’s evaluation process includes a valuation by appraisal or other collateral analysis adjusted for selling costs, when appropriate. This valuation is compared to the remaining outstanding principal balance of the loan. If a loss is determined to be probable, the loss is included in the allowance for credit losses as a specific allocation. If the loan is not collateral dependent, the measurement of loss is based on the difference between the expected and contractual future cash flows of the loan.

Loans for which the repayment is expected to be provided substantially through the operation or sale of collateral and where the borrower is experiencing financial difficulty had an amortized cost of $71.7 million as of September 30, 2020, as further detailed in the table below. The collateral securing these loans consist of commercial real estate properties, residential properties, other business assets, and secured energy production assets.


(In thousands)	Real Estate Collateral		Energy		Other Collateral		Total
Construction and development	$	1,538	$	—	$	—	$	1,538
Single family residential	6,722		—		—		6,722
Other commercial real estate	40,358		—		—		40,358
Commercial	—		19,100		4,009		23,109
Total	$	48,618	$	19,100	$	4,009	$	71,727

The following table details activity in the allowance for credit losses by portfolio segment for loans for the three and nine months ended September 30, 2020. 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		Real Estate		Credit Card		Other Consumer and Other		Total
Allowance for credit losses:
Three Months Ended September 30, 2020
Beginning balance, July 1, 2020	$	59,138	$	149,471	$	10,979	$	12,055	$	231,643
Provision for credit loss expense	(6,499)		33,479		(1,823)		(2,844)		22,313
Charge-offs	(4,327)		(1,153)		(832)		(1,091)		(7,403)
Recoveries	936		120		276		366		1,698
Net charge-offs	(3,391)		(1,033)		(556)		(725)		(5,705)
Ending balance, September 30, 2020	$	49,248	$	181,917	$	8,600	$	8,486	$	248,251


(In thousands)	Commercial		Real Estate		Credit Card		Other Consumer and Other		Total
Nine Months Ended September 30, 2020
Beginning balance, January 1, 2020 - prior to adoption of CECL	$	22,863	$	39,161	$	4,051	$	2,169	$	68,244
Impact of CECL adoption	22,733		114,314		2,232		12,098		151,377
Provision for credit loss expense	42,808		31,341		4,870		(3,829)		75,190
Charge-offs	(40,537)		(3,373)		(3,326)		(3,062)		(50,298)
Recoveries	1,381		474		773		1,110		3,738
Net charge-offs	(39,156)		(2,899)		(2,553)		(1,952)		(46,560)
Ending balance, September 30, 2020	$	49,248	$	181,917	$	8,600	$	8,486	$	248,251

Activity in the allowance for credit losses for the three and nine months ended September 30, 2019 was as follows:


(In thousands)	Commercial		Real Estate		Credit Card		Other Consumer and Other		Total
Allowance for credit losses:
Three Months Ended September 30, 2019
Beginning balance, July 1, 2019	$	21,354	$	36,493	$	3,951	$	2,381	$	64,179
Provision for credit losses	19,150		2,405		946		(528)		21,973
Charge-offs	(17,778)		(1,367)		(1,117)		(1,065)		(21,327)
Recoveries	65		55		223		1,422		1,765
Net (charge-offs) recoveries	(17,713)		(1,312)		(894)		357		(19,562)
Ending balance, September 30, 2019	$	22,791	$	37,586	$	4,003	$	2,210	$	66,590

Nine Months Ended September 30, 2019
Beginning balance, January 1, 2019	$	20,514	$	29,838	$	3,923	$	2,419	$	56,694
Provision for credit losses	23,980		10,393		2,644		1,320		38,337
Charge-offs	(22,893)		(3,000)		(3,298)		(3,582)		(32,773)
Recoveries	1,190		355		734		2,053		4,332
Net charge-offs	(21,703)		(2,645)		(2,564)		(1,529)		(28,441)
Ending balance, September 30, 2019	$	22,791	$	37,586	$	4,003	$	2,210	$	66,590

The primary driver for the provision for credit losses for the quarter ended September 30, 2020 was the continued uncertainty of a more prolonged recovery than initially anticipated to the economies that affect the loan portfolio as certain industries are being more adversely impacted by the COVID-19 pandemic, such as the restaurant, retail and hotel industries. The provision for credit losses was partially offset due to a reduction in loan growth. The Company updated credit loss forecasts using multiple Moody’s economic scenarios published in September 2020. The baseline economic forecast was weighted 66% by the Company, while the downside scenario of S-2 was weighted 18% and the upside scenario of S-1 was weighted 16%. The weighting of the forecasts is characterized by, among others, market rates remaining low, the substantial decline of CRE prices, and the current national unemployment rate.

The provision for credit losses for the nine months ended September 30, 2020 was primarily related to concern over the economic stresses related to COVID-19 as well as specific provisions for two energy credits that were previously identified as problem loans that were impacted by the sharp decline in commodity pricing. Four energy credits within the Commercial segment were charged off during the second quarter of 2020 for a total of $32.6 million.

Reserve for Unfunded Commitments

In addition to the allowance for credit losses, the Company has established a reserve for unfunded commitments, classified in other liabilities. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The reserve for unfunded commitments as of September 30, 2020 and December 31, 2019 was $24.4 million and $8.4 million, respectively. The increase from year end was due to the adoption of CECL. The adequacy of the reserve for unfunded commitments is determined quarterly based on methodology similar to the methodology for determining the allowance for credit losses. For the nine months ended September 30, 2020, net adjustments to the reserve for unfunded commitments resulted in a benefit of $8.0 million and was included in provision for credit losses in the statement of income.