Quarterly report pursuant to Section 13 or 15(d)

LOANS AND ALLOWANCE FOR LOAN LOSSES

v3.20.2
LOANS AND ALLOWANCE FOR LOAN LOSSES
9 Months Ended
Sep. 30, 2020
Loans and Allowance for Loan Losses [Abstract]  
LOANS AND ALLOWANCE FOR LOAN LOSSES

4. LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

On January 1, 2020, the Company adopted ASC 326. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables. For further discussion on the Company’s accounting policies and policy elections related to the accounting standard update refer to Note 1 “Accounting Policies” in this Quarterly Report. All loan information presented as of September 30, 2020 is in accordance with ASC 326. All loan information presented prior to January 1, 2020 is in accordance with previous applicable GAAP. During March 2020, in response to the economic fallout from the COVID-19 pandemic, the CARES Act was passed by Congress and signed into law by the President along with the March 22 Joint Guidance that provided enhanced guidelines and accounting for COVID-19 related modifications. For further discussion on the CARES Act and the March 22 Joint Guidance and related loan impact refer to Note 1 “Accounting Polices” in this Quarterly Report. The information included below reflects the impact of the CARES Act and the March 22 Joint Guidance.

The Company’s loans are stated at their face amount, net of deferred fees and costs, and consist of the following at September 30, 2020 and December 31, 2019 (dollars in thousands):

September 30, 2020

    

December 31, 2019

Construction and Land Development

$

1,207,190

$

1,250,924

Commercial Real Estate - Owner Occupied

 

2,107,333

 

2,041,243

Commercial Real Estate - Non-Owner Occupied

 

3,497,929

 

3,286,098

Multifamily Real Estate

 

731,582

 

633,743

Commercial & Industrial(1)

 

3,536,249

 

2,114,033

Residential 1-4 Family - Commercial

 

696,944

 

724,337

Residential 1-4 Family - Consumer

 

830,144

 

890,503

Residential 1-4 Family - Revolving

 

618,320

 

659,504

Auto

 

387,417

 

350,419

Consumer

 

276,023

 

372,853

Other Commercial(1)

 

494,084

 

287,279

Total loans held for investment, net of deferred fees and costs

14,383,215

12,610,936

Allowance for loan and lease losses

(174,122)

(42,294)

Total loans held for investment, net

$

14,209,093

$

12,568,642

(1)Commercial & industrial and other commercial loans include approximately $1.6 billion and $21.3 million, respectively, in new loans from the PPP loan program at September 30, 2020.

The following table shows the aging of the Company’s loan portfolio, by class, at September 30, 2020 (dollars in thousands):

    

    

    

    

Greater than

    

    

30-59 Days

60-89 Days

90 Days and

Current

Past Due

Past Due

still Accruing

Nonaccrual

Total Loans

Construction and Land Development

$

1,200,729

$

2,625

$

223

$

93

$

3,520

$

1,207,190

Commercial Real Estate - Owner Occupied

 

2,090,106

 

4,924

 

1,310

 

1,726

 

9,267

 

2,107,333

Commercial Real Estate - Non-Owner Occupied

 

3,493,107

 

1,291

 

1,371

 

168

 

1,992

 

3,497,929

Multifamily Real Estate

 

731,190

 

 

 

359

 

33

 

731,582

Commercial & Industrial

 

3,528,283

 

4,322

 

1,448

 

604

 

1,592

 

3,536,249

Residential 1-4 Family - Commercial

 

683,730

 

1,236

 

937

 

5,298

 

5,743

 

696,944

Residential 1-4 Family - Consumer

 

806,055

 

2,998

 

3,976

 

4,495

 

12,620

 

830,144

Residential 1-4 Family - Revolving

 

608,570

 

2,669

 

1,141

 

2,276

 

3,664

 

618,320

Auto

 

384,619

 

1,513

 

453

 

315

 

517

 

387,417

Consumer

 

273,829

 

1,020

 

772

 

327

 

75

 

276,023

Other Commercial

493,044

613

427

494,084

Total loans held for investment

$

14,293,262

$

23,211

$

12,058

$

15,661

$

39,023

$

14,383,215

These balances reflect the impact of the CARES Act and the March 22 Joint Guidance which provides relief for TDR designations and also provides guidance on past due reporting for modified loans.

The following table shows the Company’s amortized cost basis of loans on nonaccrual status as of January 1, 2020 as well as amortized cost basis of loans on nonaccrual status and loans past due 90 days and still accruing as of September 30, 2020 (dollars in thousands):

Nonaccrual

January 1, 2020

September 30, 2020

Nonaccrual With No ALLL

90 Days and still Accruing

Construction and Land Development

$

4,060

$

3,520

$

1,985

$

93

Commercial Real Estate - Owner Occupied

13,889

9,267

1,994

1,726

Commercial Real Estate - Non-Owner Occupied

1,368

1,992

168

Multifamily Real Estate

33

359

Commercial & Industrial

3,037

1,592

604

Residential 1-4 Family - Commercial

6,492

5,743

1,738

5,298

Residential 1-4 Family - Consumer

13,117

12,620

1,069

4,495

Residential 1-4 Family - Revolving

2,490

3,664

60

2,276

Auto

565

517

315

Consumer

88

75

327

Other Commercial

98

Total loans held for investment

$

45,204

$

39,023

$

6,846

$

15,661

There was no interest income recognized on nonaccrual loans during the three or nine months ended September 30, 2020. See Note 1 “Summary of Significant Accounting Policies” in the Company’s 2019 Form 10-K for additional information on the Company’s policies for nonaccrual loans.

Troubled Debt Restructurings

The CARES Act permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. In addition, federal bank regulatory authorities have issued guidance to encourage financial institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically categorize COVID-19-related loan modifications as TDRs. As of September 30, 2020, the Company had approximately $769.6 million in loans still under their modified terms. The Company’s modification program primarily included payment deferrals and interest only modifications.

In addition to the above mentioned modifications, as of September 30, 2020, the Company has TDRs totaling $21.6 million with an estimated $2.7 million of allowance for those loans for the current period.

A modification of a loan’s terms constitutes a TDR if the creditor grants a concession that it would not otherwise consider to the borrower for economic or legal reasons related to the borrower’s financial difficulties. All loans that are considered to be TDRs are evaluated for credit losses in accordance with the Company’s ALLL methodology. For the three and nine months ended September 30, 2020, the recorded investment in TDRs prior to modifications was not materially impacted by the modifications.

The following table provides a summary, by class, of TDRs that continue to accrue interest under the terms of the applicable restructuring agreement, which are considered to be performing, and TDRs that have been placed on nonaccrual status, which are considered to be nonperforming, as of September 30, 2020 (dollars in thousands):

September 30, 2020

    

No. of

    

Recorded

    

Outstanding

Loans

Investment

Commitment

Performing

 

  

 

  

 

  

Construction and Land Development

 

4

$

219

$

Commercial Real Estate - Owner Occupied

 

6

 

2,140

 

101

Commercial Real Estate - Non-Owner Occupied

 

1

 

1,089

 

Commercial & Industrial

 

5

 

1,117

 

Residential 1-4 Family - Commercial

 

3

 

247

 

Residential 1-4 Family - Consumer

 

80

 

9,165

 

Residential 1-4 Family - Revolving

 

2

 

55

 

Consumer

 

5

 

31

 

Other Commercial

1

452

Total performing

 

107

$

14,515

$

101

Nonperforming

 

  

 

  

 

  

Commercial Real Estate - Owner Occupied

 

2

$

293

$

Commercial Real Estate - Non-Owner Occupied

1

137

Commercial & Industrial

 

3

 

261

 

Residential 1-4 Family - Commercial

 

4

 

1,313

 

Residential 1-4 Family - Consumer

 

23

 

4,937

 

Residential 1-4 Family - Revolving

 

3

 

104

 

Total nonperforming

 

36

$

7,045

$

Total performing and nonperforming

 

143

$

21,560

$

101

The Company considers a default of a TDR to occur when the borrower is 90 days past due following the restructure or a foreclosure and repossession of the applicable collateral occurs. During the three and nine months ended September 30, 2020, the Company did not have any material loans that went into default that had been restructured in the twelve-month period prior to the time of default.

The following table shows, by class and modification type, TDRs that occurred during the three and nine months ended September 30, 2020 (dollars in thousands):

All Restructurings

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

    

    

Recorded

    

    

Recorded

No. of

Investment at

No. of

Investment at

Loans

Period End

Loans

Period End

Modified to interest only, at a market rate

 

  

 

  

 

  

 

  

Commercial Real Estate - Owner Occupied

$

1

$

272

Residential 1-4 Family - Commercial

1

652

1

652

Total interest only at market rate of interest

 

1

$

652

 

2

$

924

Term modification, at a market rate

 

  

 

  

 

  

 

  

Commercial & Industrial

 

$

 

3

$

127

Residential 1-4 Family - Commercial

 

1

299

 

1

299

Residential 1-4 Family - Consumer

 

 

 

4

 

324

Consumer

1

10

Total loan term extended at a market rate

 

1

$

299

 

9

$

760

Term modification, below market rate

 

  

 

  

 

  

 

  

Construction and Land Development

$

1

$

34

Commercial & Industrial

 

1

 

143

 

2

 

358

Residential 1-4 Family - Commercial

1

290

1

290

Residential 1-4 Family - Consumer

 

4

423

 

17

2,387

Residential 1-4 Family - Revolving

 

 

 

1

 

52

Total loan term extended at a below market rate

 

6

$

856

 

22

$

3,121

Interest rate modification, below market rate

 

  

 

  

 

  

 

  

Total interest only at below market rate of interest

 

$

 

$

Total

 

8

$

1,807

 

33

$

4,805

Allowance for Loan and Lease Losses

ALLL on the loan portfolio is a material estimate for the Company. The Company estimates its ALLL on its loan portfolio on a quarterly basis. The Company models the ALLL using two primary segments, Commercial and Consumer. Within each segment, loan classes are further identified based on similar risk characteristics. The Company has identified the following classes within each segment:

Commercial: Construction and Land Development, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-Owner Occupied, Multifamily Real Estate, Commercial & Industrial, Residential 1-4 Family – Commercial, and Other Commercial
Consumer: Residential 1-4 Family – Consumer, Residential 1-4 Family – Revolving, Auto, and Consumer

The following tables show the ALLL activity by segment for the three and nine months ended September 30, 2020 (dollars in thousands):

 

 

    

    

 

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

Commercial

Consumer

Total

Commercial

Consumer

Total

Balance at beginning of period

$

111,954

$

58,023

$

169,977

$

30,941

$

11,353

$

42,294

Impact of ASC 326 adoption on non-PCD loans

 

 

 

 

4,432

 

40,666

 

45,098

Impact of ASC 326 adoption on PCD loans

 

 

 

 

1,752

 

634

 

2,386

Impact of adopting ASC 326

 

 

 

 

6,184

 

41,300

 

47,484

Loans charged-off

 

(995)

 

(1,983)

 

(2,978)

 

(5,553)

 

(9,253)

 

(14,806)

Recoveries credited to allowance

 

718

 

848

 

1,566

 

2,580

 

2,557

 

5,137

Provision charged to operations

 

14,978

 

(9,421)

 

5,557

 

92,503

 

1,510

 

94,013

Balance at end of period

$

126,655

$

47,467

$

174,122

$

126,655

$

47,467

$

174,122

Credit Quality Indicators

Credit quality indicators are utilized to help estimate the collectability of each loan class within the Commercial and Consumer segments. For classes of loans within the Commercial segment, the primary credit quality indicator used for evaluating credit quality and estimating the ALLL is risk rating categories of Pass, Watch & Special Mention, Substandard, and Doubtful.  For classes of loans within the Consumer segment, the primary credit quality indicator used for evaluating credit quality and estimating the ALLL is delinquency bands of Current, 30-59, 60-89, 90+, and Nonaccrual.  While other credit quality indicators are evaluated and analyzed as part of the Company’s credit risk management activities, these indicators are primarily used in estimating the ALLL. The Company evaluates the credit risk of its loan portfolio on at least a quarterly basis.

Commercial Loans

The Company uses a risk rating system as the primary credit quality indicator for classes of loans within the Commercial segment. The risk rating system on a scale of 0 through 9 is used to determine risk level as used in the calculation of the allowance for credit loss. The risk levels, as described below, do not necessarily follow the regulatory definitions of risk levels with the same name. A general description of the characteristics of the risk levels follows:

Pass is determined by the following criteria:

Risk rated 0 loans have little or no risk and are with General Obligation Municipal Borrowers;
Risk rated 1 loans have little or no risk and are generally secured by cash or cash equivalents;
Risk rated 2 loans have minimal risk to well qualified borrowers and no significant questions as to safety;
Risk rated 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;
Risk rated 4 loans are satisfactory loans with borrowers not as strong as risk rated 3 loans and may exhibit a greater degree of financial risk based on the type of business supporting the loan.

Watch & Special Mention is determined by the following criteria:

Risk rated 5 loans are watch loans that warrant more than the normal level of supervision and have the possibility of an event occurring that may weaken the borrower’s ability to repay;
Risk rated 6 loans have increasing potential weaknesses beyond those at which the loan originally was granted and if not addressed could lead to inadequately protecting the Company’s credit position.

Substandard is determined by the following criteria:

Risk rated 7 loans are substandard loans and are inadequately protected by the current sound worth or paying capacity of the obligor or the collateral pledged; these have well defined weaknesses that jeopardize the liquidation of the debt with the distinct possibility the Company will sustain some loss if the deficiencies are not corrected.

Doubtful is determined by the following criteria:

Risk rated 8 loans are doubtful of collection and the possibility of loss is high but pending specific borrower plans for recovery, its classification as a loss is deferred until its more exact status is determined;
Risk rated 9 loans are loss loans which are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.

The table below details the amortized cost of the classes of loans within the Commercial segment by risk level and year of origination as of September 30, 2020 (dollars in thousands):

September 30, 2020

Term Loans Amortized Cost Basis by Origination Year

2020

2019

2018

2017

2016

Prior

Revolving Loans

Total

Construction and Land Development

Pass

$

236,949

$

346,840

$

304,768

$

41,015

$

42,268

$

63,632

$

29,674

$

1,065,146

Watch & Special Mention

2,268

67,572

40,714

347

5,863

16,549

1,645

134,958

Substandard

368

710

2,040

3,968

7,086

Total Construction and Land Development

$

239,217

$

414,412

$

345,850

$

42,072

$

50,171

$

84,149

$

31,319

$

1,207,190

Commercial Real Estate - Owner Occupied

Pass

$

226,090

$

369,661

$

304,296

$

243,299

$

143,786

$

616,113

$

23,577

$

1,926,822

Watch & Special Mention

2,002

17,684

23,479

17,770

31,406

64,728

2,599

159,668

Substandard

118

1,099

1,113

1,039

17,175

299

20,843

Total Commercial Real Estate - Owner Occupied

$

228,092

$

387,463

$

328,874

$

262,182

$

176,231

$

698,016

$

26,475

$

2,107,333

Commercial Real Estate - Non-Owner Occupied

Pass

$

275,008

$

439,081

$

401,551

$

442,151

$

356,256

$

862,293

$

24,467

$

2,800,807

Watch & Special Mention

27,599

104,352

97,973

71,618

107,934

259,591

18,318

687,385

Substandard

6,464

25

3,248

9,737

Total Commercial Real Estate - Non-Owner Occupied

$

302,607

$

543,433

$

505,988

$

513,769

$

464,215

$

1,125,132

$

42,785

$

3,497,929

Commercial & Industrial

Pass

$

1,979,209

$

401,385

$

221,417

$

79,734

$

76,145

$

149,692

$

524,960

$

3,432,542

Watch & Special Mention

5,081

29,405

16,889

4,163

5,170

6,443

28,156

95,307

Substandard

37

928

396

129

623

2,710

3,577

8,400

Total Commercial & Industrial

$

1,984,327

$

431,718

$

238,702

$

84,026

$

81,938

$

158,845

$

556,693

$

3,536,249

Multifamily Real Estate

Pass

$

131,434

$

80,234

$

69,881

$

120,758

$

70,127

$

239,525

$

2,499

$

714,458

Watch & Special Mention

2,283

1,018

4,894

2,490

621

5,427

16,733

Substandard

391

391

Total Multifamily Real Estate

$

133,717

$

81,252

$

74,775

$

123,248

$

70,748

$

245,343

$

2,499

$

731,582

Residential 1-4 Family - Commercial

Pass

$

78,631

$

100,919

$

76,284

$

87,277

$

76,710

$

226,118

$

1,251

$

647,190

Watch & Special Mention

592

4,625

8,739

4,420

4,186

15,798

38,360

Substandard

652

810

272

2,060

993

6,119

488

11,394

Total Residential 1-4 Family - Commercial

$

79,875

$

106,354

$

85,295

$

93,757

$

81,889

$

248,035

$

1,739

$

696,944

Other Commercial

Pass

$

221,801

$

115,346

$

9,972

$

39,542

$

16,602

$

47,858

$

31,730

$

482,851

Watch & Special Mention

22

621

1,312

927

8,351

11,233

Total Other Commercial

$

221,823

$

115,346

$

10,593

$

40,854

$

17,529

$

56,209

$

31,730

$

494,084

Total Commercial

Pass

$

3,149,122

$

1,853,466

$

1,388,169

$

1,053,776

$

781,894

$

2,205,231

$

638,158

$

11,069,816

Watch & Special Mention(1)

39,847

224,656

193,309

102,120

156,107

376,887

50,718

1,143,644

Substandard

689

1,856

8,599

4,012

4,720

33,611

4,364

57,851

Total Commercial

$

3,189,658

$

2,079,978

$

1,590,077

$

1,159,908

$

942,721

$

2,615,729

$

693,240

$

12,271,311

(1)Approximately 85.0% was comprised of Watch, which increased from December 31, 2019 due to the continued uncertainty of the COVID-19 pandemic on impacted industries.

Consumer Loans

For Consumer loans, the Company evaluates credit quality based on the delinquency status of the loan. The following table details the amortized cost of the classes of loans within the Consumer segment based on their delinquency status and year of origination as of September 30, 2020 (dollars in thousands):

September 30, 2020

Term Loans Amortized Cost Basis by Origination Year

2020

2019

2018

2017

2016

Prior

Revolving Loans

Total

Residential 1-4 Family - Consumer

Current

$

143,716

$

83,309

$

78,957

$

77,910

$

111,043

$

311,108

$

12

$

806,055

30-59 Days Past Due

156

1,648

43

263

888

2,998

60-89 Days Past Due

708

1,138

67

2,063

3,976

90+ Days Past Due

646

1,574

313

388

1,574

4,495

Nonaccrual

708

870

774

10,268

12,620

Total Residential 1-4 Family - Consumer

$

144,362

$

85,039

$

82,021

$

80,274

$

112,535

$

325,901

$

12

$

830,144

Residential 1-4 Family - Revolving

Current

$

11,456

$

4,160

$

2,019

$

$

$

644

$

590,291

$

608,570

30-59 Days Past Due

36

2,633

2,669

60-89 Days Past Due

1,141

1,141

90+ Days Past Due

2,276

2,276

Nonaccrual

314

3,350

3,664

Total Residential 1-4 Family - Revolving

$

11,456

$

4,196

$

2,019

$

$

$

958

$

599,691

$

618,320

Consumer

Current

$

26,520

$

79,119

$

79,878

$

25,836

$

11,163

$

18,017

$

33,296

$

273,829

30-59 Days Past Due

37

261

444

87

24

41

126

1,020

60-89 Days Past Due

38

126

273

20

25

186

104

772

90+ Days Past Due

19

253

32

21

2

327

Nonaccrual

1

74

75

Total Consumer

$

26,595

$

79,525

$

80,848

$

25,975

$

11,234

$

18,318

$

33,528

$

276,023

Auto

Current

$

129,176

$

126,243

$

62,569

$

37,390

$

20,505

$

8,736

$

$

384,619

30-59 Days Past Due

145

490

265

288

195

130

1,513

60-89 Days Past Due

39

132

118

116

26

22

453

90+ Days Past Due

29

99

62

45

53

27

315

Nonaccrual

33

128

61

107

111

77

517

Total Auto

$

129,422

$

127,092

$

63,075

$

37,946

$

20,890

$

8,992

$

$

387,417

Total Consumer

Current

$

310,868

$

292,831

$

223,423

$

141,136

$

142,711

$

338,505

$

623,599

$

2,073,073

30-59 Days Past Due

182

943

2,357

418

482

1,059

2,759

8,200

60-89 Days Past Due

77

258

1,099

1,274

118

2,271

1,245

6,342

90+ Days Past Due

675

1,692

315

390

462

1,601

2,278

7,413

Nonaccrual

33

128

769

977

886

10,733

3,350

16,876

Total Consumer

$

311,835

$

295,852

$

227,963

$

144,195

$

144,659

$

354,169

$

633,231

$

2,111,904

The Company did not have any material revolving loans convert to term during the three and nine months ended September 30, 2020.

Acquired Loans

The Company has purchased loans that, at the time of acquisition, exhibited more than insignificant credit deterioration since origination. The Company has elected to treat all loans that were previously identified as PCI as PCD. As of September 30, 2020, the amortized cost of the Company’s PCD loans totaled $68.8 million, which had an estimated ALLL of $4.7 million.

Prior to the adoption of ASC 326

The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2019 (dollars in thousands):

    

    

    

Greater than

    

    

    

    

30-59 Days

60-89 Days

90 Days and

Past Due

Past Due

still Accruing

PCI

Nonaccrual

Current

Total Loans

Construction and Land Development

$

4,563

$

482

$

189

$

10,944

$

3,703

$

1,231,043

$

1,250,924

Commercial Real Estate - Owner Occupied

 

3,482

 

2,184

 

1,062

 

27,438

 

6,003

 

2,001,074

 

2,041,243

Commercial Real Estate - Non-Owner Occupied

 

457

 

 

1,451

 

14,565

 

381

 

3,269,244

 

3,286,098

Multifamily Real Estate

 

223

 

 

474

 

94

 

 

632,952

 

633,743

Commercial & Industrial

 

8,698

 

1,598

 

449

 

1,579

 

1,735

 

2,099,974

 

2,114,033

Residential 1-4 Family - Commercial

 

1,479

 

2,207

 

674

 

12,205

 

4,301

 

703,471

 

724,337

Residential 1-4 Family - Consumer

 

16,244

 

3,072

 

4,515

 

14,713

 

9,292

 

842,667

 

890,503

Residential 1-4 Family - Revolving

 

10,190

 

1,784

 

3,357

 

4,127

 

2,080

 

637,966

 

659,504

Auto

 

2,525

 

236

 

272

 

4

 

563

 

346,819

 

350,419

Consumer

 

2,128

 

1,233

 

953

 

668

 

77

 

367,794

 

372,853

Other Commercial

464

344

97

286,374

287,279

Total loans held for investment

$

50,453

$

12,796

$

13,396

$

86,681

$

28,232

$

12,419,378

$

12,610,936

The following table shows the PCI loan portfolios, by class and their delinquency status, at December 31, 2019 (dollars in thousands):

    

30-89 Days