Loans held for investment summarized by portfolio segment are as follows (in thousands).

(1)

Included loans totaling $670.7 million at September 30, 2020 funded through the Paycheck Protection Program.

(2)

Primarily represents margin loans to customers and correspondents associated with broker-dealer segment operations.

The following table provides details associated with non-accrual loans, excluding those classified as held for sale (in thousands).


	Non-accrual Loans
	September 30, 2020								Interest Income Recognized (1)
	With		With No				December 31,		Three Months Ended		Nine Months Ended
	Allowance		Allowance		Total		2019		September 30, 2020		September 30, 2020
Commercial real estate:
Non-owner occupied	$	1,049	$	1,598	$	2,647	$	3,813	$	99	$	88
Owner occupied		2,155		9,277		11,432		3,495		156		241
Commercial and industrial		23,006		15,702		38,708		15,262		312		714
Construction and land development		105		423		528		1,316		36		89
1-4 family residential		6,205		14,394		20,599		7,382		134		1,299
Consumer		53		—		53		26		2		(1)
Broker-dealer		—		—		—		—		—		—
	$	32,573	$	41,394	$	73,967	$	31,294	$	739	$	2,430

(1)	Interest income recognized on non-accrual loans during the three and nine months ended September 30, 2019 was $0.3 million and $1.1 million, respectively.

At September 30, 2020 and December 31, 2019, an additional $8.1 million and $4.8 million, respectively, of real estate loans secured by residential properties and classified as held for sale were in non-accrual status.

Loans accounted for on a non-accrual basis increased from December 31, 2019 to September 30, 2020, primarily due to the addition of two commercial and industrial relationships totaling $19.3 million, commercial real estate loans totaling $12.7 million and various 1-4 family residential loans. The increase in commercial real estate loans in non-accrual status at September 30, 2020 of $6.8 million was primarily related to the addition of 24 loans totaling $12.7 million, with a reserve of $1.4 million, that were previously accruing at December 31, 2019. This increase from December 31, 2019 was partially offset by the settlement of a single loan accounted for on a non-accrual basis with a carrying amount of $2.5 million. The increase in commercial and industrial loans in non-accrual status since December 31, 2019 was primarily due to two relationships that included six loans totaling $19.3 million and had a $4.2 million reserve at September 30, 2020 and a CECL transition gross-up adjustment of $4.6 million related to a loan with an amortized cost of $6.8 million and a reserve of $5.2 million at September 30, 2020. The increase in 1-4 family residential loans in non-accrual status at September 30, 2020, compared to December 31, 2019, was primarily related to the classification of $4.0 million of loans as non-accrual, that were previously classified as accruing.

The Company considers non-accrual loans to be collateral-dependent unless there are underlying mitigating circumstances. The practical expedient to measure the allowance using the fair value of the collateral has been implemented.

The Bank classifies loan modifications as troubled debt restructurings (“TDRs”) when it concludes that it has both granted a concession to a debtor and that the debtor is experiencing financial difficulties. Loan modifications are typically structured to create affordable payments for the debtor and can be achieved in a variety of ways. The Bank modifies loans by reducing interest rates and/or lengthening loan amortization schedules. The Bank may also reconfigure a single loan into two or more loans (“A/B Note”). The typical A/B Note restructure results in a “bad” loan which is charged off and a “good” loan or loans, the terms of which comply with the Bank’s customary underwriting policies. The debt charged off on the “bad” loan is not forgiven to the debtor.

In March 2020, the CARES Act was passed, which, among other things, allows the Bank to suspend the requirements for certain loan modifications to be categorized as a TDR. The Bank’s COVID-19 payment deferral programs allow for a deferral of principal and/or interest payments with such deferred principal payments due and payable on maturity date of the existing loan. The Bank’s actions included approval of $968.1 million in COVID-19 related loan modifications as of June 30, 2020. During the third quarter of 2020, the Bank continued to support its impacted banking clients through the approval of COVID-19 related loan modifications, which resulted in an additional $57.7 million of new COVID-19 related loan modifications since June 30, 2020. The portfolio of active deferrals that have not reached the end of their deferral period was $291.4 million as of September 30, 2020, of which approximately $208 million had received an additional deferral. COVID-19 related loan modifications of approximately $662 million have returned to agreed-upon contractual terms and had made at least one required principal and/or interest payment since the end of their initial deferral period. Such loans represent elevated risk, therefore management continues to monitor these loans. The extent to which these measures will impact the Bank is uncertain, and any progression of loans, whether receiving COVID-19 payment deferrals or not, into non-accrual status during future periods is uncertain and will depend on future developments that cannot be predicted.

There were no TDRs granted during the three months ended September 30, 2020, as compared to two commercial and industrial TDRs granted during the comparable period in 2019, with a balance of $1.6 million at date of extension and at September 30, 2019. Information regarding TDRs granted during the nine months ended September 30, 2020 and 2019, is shown in the following table (dollars in thousands).


	Nine Months Ended September 30, 2020					Nine Months Ended September 30, 2019
	Number of	Balance at		Balance at		Number of	Balance at		Balance at
	Loans	Extension		End of Period		Loans	Extension		End of Period
Commercial real estate:
Non-owner occupied	—	$	—	$	—	—	$	—	$	—
Owner occupied	—		—		—	—		—		—
Commercial and industrial	2		7,839		3,166	5		9,632		9,113
Construction and land development	—		—		—	—		—		—
1-4 family residential	—		—		—	—		—		—
Consumer	—		—		—	—		—		—
Broker-dealer	—		—		—	—		—		—
	2	$	7,839	$	3,166	5	$	9,632	$	9,113

The Bank had nominal unadvanced commitments to borrowers whose loans had been restructured in TDRs at September 30, 2020 and at December 31, 2019. There were no TDRs granted during the twelve months preceding September 30, 2020 and September 30, 2019, for which a payment was at least 30 days past due.

An analysis of the aging of the Company’s loan portfolio is shown in the following tables (in thousands).


													Accruing Loans
	Loans Past Due		Loans Past Due		Loans Past Due		Total		Current		Total		Past Due
September 30, 2020	30-59 Days		60-89 Days		90 Days or More		Past Due Loans		Loans		Loans		90 Days or More
Commercial real estate:
Non-owner occupied	$	2,389	$	2,876	$	200	$	5,465	$	1,749,896	$	1,755,361	$	—
Owner occupied		3,227		2,272		6,267		11,766		1,305,911		1,317,677		—
Commercial and industrial		1,953		3,271		19,337		24,561		2,823,728		2,848,289		2
Construction and land development		2		—		—		2		841,383		841,385		—
1-4 family residential		3,600		3,404		15,150		22,154		621,679		643,833		—
Consumer		12		251		52		315		36,405		36,720		—
Broker-dealer		—		—		—		—		502,295		502,295		—
	$	11,183	$	12,074	$	41,006	$	64,263	$	7,881,297	$	7,945,560	$	2


													Accruing Loans
	Loans Past Due		Loans Past Due		Loans Past Due		Total		Current		Total		Past Due
December 31, 2019	30-59 Days		60-89 Days		90 Days or More		Past Due Loans		Loans		Loans		90 Days or More
Commercial real estate:
Non-owner occupied	$	4,062	$	—	$	2,790	$	6,852	$	1,702,500	$	1,709,352	$	—
Owner occupied		1,813		880		3,265		5,958		1,285,213		1,291,171		—
Commercial and industrial		5,967		1,735		3,395		11,097		2,014,623		2,025,720		3
Construction and land development		7,580		1,827		—		9,407		931,157		940,564		—
1-4 family residential		12,058		3,442		6,520		22,020		769,000		791,020		—
Consumer		455		34		—		489		46,557		47,046		—
Broker-dealer		—		—		—		—		576,527		576,527		—
	$	31,935	$	7,918	$	15,970	$	55,823	$	7,325,577	$	7,381,400	$	3

In addition to the loans shown in the tables above, PrimeLending had $187.1 million and $102.7 million of loans included in loans held for sale (with an aggregate unpaid principal balance of $188.5 million and $104.0 million, respectively) that were 90 days past due and accruing interest at September 30, 2020 and December 31, 2019, respectively. These loans are guaranteed by U.S. government agencies and include loans that are subject to repurchase, or have been repurchased, by PrimeLending.

Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset levels, (iii) classified loan levels and (iv) general economic conditions in state and local markets. The Company defines classified loans as loans with a risk rating of substandard, doubtful or loss.

A description of the risk rating internal grades for commercial loans is presented in the following table.


Risk Rating	Internal Grade	Risk Rating Description
Pass low risk	1 - 3	Represents loans to very high credit quality commercial borrowers of investment or near investment grade. These borrowers have significant capital strength, moderate leverage, stable earnings and growth, and readily available financing alternatives. Commercial borrowers entirely cash secured are also included in this category.
Pass normal risk	4 - 7	Represents loans to commercial borrowers of solid credit quality with moderate risk. Borrowers in these grades are differentiated from higher grades on the basis of size (capital and/or revenue), leverage, asset quality and the stability of the industry or market area.
Pass high risk	8 - 10	Represents "pass grade" loans to commercial borrowers of higher, but acceptable credit quality and risk. Such borrowers are differentiated from Pass Normal Risk in terms of size, secondary sources of repayment or they are of lesser stature in other key credit metrics.
Watch	11	Represents loans on management's "watch list" and is intended to be utilized on a temporary basis for pass grade commercial borrowers where a significant risk-modifying action is anticipated in the near term.
Special mention	12	Represents loans with potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loans and weaken the Company's credit position at some future date.
Substandard accrual	13	Represents loans for which the accrual of interest has not been stopped, but are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Substandard non-accrual	14	Represents loans for which the accrual of interest has been stopped and includes loans where interest is more than 90 days past due and not fully secured and loans where a specific valuation allowance may be necessary.
Doubtful	15	Represents loans that are placed on non-accrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty.
Loss	16	Represents loans that are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. Rating is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

The following table presents loans held for investment grouped by asset class and credit quality indicator, segregated by year of origination or renewal (in thousands).


	Amortized Cost Basis by Origination Year
												2015 and
September 30, 2020	2020		2019		2018		2017		2016			Prior	Revolving		Total
Commercial real estate: non-owner occupied
Internal Grade 1-3 (Pass low risk)	$	13,190	$	33,533	$	3,044	$	2,300	$	13,184	$	15,748	$	401	$	81,400
Internal Grade 4-7 (Pass normal risk)		211,586		138,426		118,655		102,274		124,166		91,656		32,904		819,667
Internal Grade 8-11 (Pass high risk and watch)		127,747		160,637		118,055		91,650		124,628		62,187		483		685,387
Internal Grade 12 (Special mention)		—		—		—		—		—		—		—		—
Internal Grade 13 (Substandard accrual)		30,756		16,328		27,592		29,928		30,808		30,848		—		166,260
Internal Grade 14 (Substandard non-accrual)		—		—		—		—		—		2,647		—		2,647
Commercial real estate: owner occupied
Internal Grade 1-3 (Pass low risk)	$	46,605	$	32,541	$	10,711	$	42,978	$	24,894	$	39,509	$	1	$	197,239
Internal Grade 4-7 (Pass normal risk)		136,710		161,028		148,623		64,900		54,981		94,698		30,820		691,760
Internal Grade 8-11 (Pass high risk and watch)		95,828		76,806		47,453		26,881		29,485		31,409		927		308,789
Internal Grade 12 (Special mention)		370		—		2,316		—		—		538		—		3,224
Internal Grade 13 (Substandard accrual)		7,573		3,588		69,465		7,717		6,732		10,158		—		105,233
Internal Grade 14 (Substandard non-accrual)		508		2,248		517		5,361		1,888		910		—		11,432
Commercial and industrial
Internal Grade 1-3 (Pass low risk)	$	32,808	$	16,361	$	5,850	$	12,387	$	4,315	$	87	$	16,874	$	88,682
Internal Grade 4-7 (Pass normal risk)		135,087		76,615		63,222		26,560		15,081		13,306		330,928		660,799
Internal Grade 8-11 (Pass high risk and watch)		76,601		68,298		29,181		15,989		30,392		2,548		197,296		420,305
Internal Grade 12 (Special mention)		802		16		4,126		—		267		—		2,323		7,534
Internal Grade 13 (Substandard accrual)		25,592		4,553		12,663		6,327		7,546		358		21,994		79,033
Internal Grade 14 (Substandard non-accrual)		23,736		6,906		1,850		350		920		3,538		1,408		38,708
Construction and land development
Internal Grade 1-3 (Pass low risk)	$	16,747	$	1,979	$	22,828	$	272	$	1,088	$	290	$	2,027	$	45,231
Internal Grade 4-7 (Pass normal risk)		147,952		127,287		66,772		22,092		6,100		3,918		36,221		410,342
Internal Grade 8-11 (Pass high risk and watch)		165,359		107,915		45,176		25,883		3,656		929		3,635		352,553
Internal Grade 12 (Special mention)		—		—		—		—		—		—		—		—
Internal Grade 13 (Substandard accrual)		3,088		2,396		—		5,385		—		74		—		10,943
Internal Grade 14 (Substandard non-accrual)		—		423		—		—		—		105		—		528
Construction and land development - individuals
FICO less than 620	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
FICO between 620 and 720		2,142		82		1,460		—		—		—		—		3,684
FICO greater than 720		11,426		279		5,975		—		—		—		—		17,680
Substandard non-accrual		—		—		—		—		—		—		—		—
Other (1)		424		—		—		—		—		—		—		424
1-4 family residential
FICO less than 620	$	991	$	851	$	3,679	$	57	$	931	$	34,503	$	532	$	41,544
FICO between 620 and 720		15,184		20,358		10,077		8,858		12,689		40,560		1,317		109,043
FICO greater than 720		83,373		97,176		80,949		44,821		37,037		77,530		4,810		425,696
Substandard non-accrual		—		—		—		97		723		19,779		—		20,599
Other (1)		9,080		17,001		8,491		1,924		1,103		8,879		473		46,951
Consumer
FICO less than 620	$	736	$	1,382	$	121	$	143	$	48	$	86	$	333	$	2,849
FICO between 620 and 720		3,879		3,044		663		718		141		94		2,166		10,705
FICO greater than 720		5,334		2,729		3,235		349		87		44		4,511		16,289
Substandard non-accrual		—		—		—		31		—		22		—		53
Other (1)		4,582		1,686		271		51		37		—		197		6,824

Total loans with credit quality measures	$	1,435,796	$	1,182,472	$	913,020	$	546,283	$	532,927	$	586,958	$	692,581	$	5,890,037
Commercial and industrial (mortgage warehouse lending)															$	882,503
Commercial and industrial (Paycheck Protection Program loans)															$	670,725
Broker-Dealer (margin loans and correspondent receivables)															$	502,295
Total loans held for investment															$	7,945,560

(1) Loans classified in this category were assigned a FICO score based on various factors specific to the borrower for credit modeling purposes.

Allowance for Credit Losses for Loans Held for Investment

The allowance for credit losses for loans held for investment represents management’s best estimate of all expected credit losses over the expected contractual life of our existing portfolio. Management revised its methodology for determining the allowance for credit losses upon the implementation of CECL. Management considers the level of allowance for credit losses to be a reasonable and supportable estimate of expected credit losses inherent within the loans held for investment portfolio as of September 30, 2020. While the Company believes it has an appropriate allowance for the existing loan portfolio at September 30, 2020, additional provision for losses on existing loans may be necessary in the future. Future changes in the allowance for credit losses are expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as the impact of significant drivers, including prepayment assumptions and macroeconomic conditions and forecasts. In addition to the allowance for credit losses, the Company maintains a separate allowance for credit losses related to off-balance sheet credit exposures, including unfunded loan commitments, and this amount is included in other liabilities within the consolidated balance sheets (see Note 14 to the consolidated financial statements). For further information on the policies that govern the estimation of the allowances for credit losses levels, see Note 1 to the consolidated financial statements.

One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine our best estimate of expected credit losses as of September 30, 2020, the Company utilized a single macroeconomic baseline scenario published by a third party in September 2020 that was updated to reflect the U.S. economic outlook due to COVID-19 conditions. This baseline scenario utilizes multiple economic variables in forecasting the economic outlook. Significant variables that impact the modeled losses across our loan portfolios are the U.S. Real Gross Domestic Product, or GDP, growth rates and unemployment rate assumptions. Changes in these assumptions and forecasts of economic conditions could significantly affect the estimate of expected credit losses at the balance sheet date or between reporting periods.

The COVID-19 pandemic has resulted in a weak labor market and weak overall economic conditions that will affect borrowers across our lending portfolios and significant judgment is required to estimate the severity and duration of the current economic downturn, as well as its potential impact on borrower defaults and loss severity. In particular, macroeconomic conditions and forecasts regarding the duration and severity of the economic downturn are rapidly changing and remain highly uncertain as the resurgence of COVID-19 cases evolves nationally and in key geographies. It is difficult to predict exactly how borrower behavior will be impacted by these economic conditions as the effectiveness of government stimulus, customer relief and enhanced unemployment benefits should help mitigate in the short term, but the extent and duration of government stimulus as well as performance of recently implemented payment deferral programs remains uncertain.

The increase in the allowance for credit losses for loans held for investment during the nine months ended September 30, 2020 was primarily attributable to changes within the Bank. During the first quarter of 2020, the Company adopted the new CECL standard and recorded transition adjustment entries that resulted in an allowance for credit losses of $73.7 million as of January 1, 2020, an increase of $12.6 million. This increase included an increase in credit losses of $18.9 million from the expansion of the loss horizon to life of loan, partially offset by the elimination of the non-credit component within the historical allowance related to previously categorized PCI loans of $6.3 million.

During the three months ended September 30, 2020, the allowance included a net reversal of credit losses on individually evaluated loans of $1.2 million, while the provision for credit losses on expected losses of collectively evaluated loans accounted for $0.6 million of the total provision primarily due to the identified changes in the Bank’s loan portfolio composition and credit quality being offset by improvements in macroeconomic factor assumptions and qualitative factors from the prior quarter. The change in the allowance during the three months ended September 30, 2020 was also impacted by net charge-offs of $0.6 million. During the nine months ended September 30, 2020, the significant build in the allowance included provision for credit losses on individually evaluated loans of $22.6 million, while the provision for credit losses on expected losses of collectively evaluated loans accounted for $77.2 million of the total provision primarily due to the increase in the expected lifetime credit losses under CECL attributable to the deteriorating economic outlook associated with the impact of the market disruption caused by the COVID-19 pandemic.

The changes in the allowance for credit losses during the noted periods were also attributable to other factors including, but not limited to, loan growth and loan mix. The change in the allowance during the nine months ended September 30, 2020 was also impacted by net charge-offs of $18.5 million, primarily associated with loans specifically reserved for during the first quarter of 2020.

Changes in the allowance for credit losses for loans held for investment, distributed by portfolio segment, are shown below (in thousands).


	Balance,		Transition		Provision for				Recoveries on		Balance,
	Beginning of		Adjustment		(Reversal of)		Loans		Charged Off		End of
Three Months Ended September 30, 2020	Period		CECL		Credit Losses		Charged Off		Loans		Period
Commercial real estate	$	106,551	$	—	$	(2,527)	$	(29)	$	571	$	104,566
Commercial and industrial		31,863		—		7,274		(1,341)		382		38,178
Construction and land development		8,393		—		(2,123)		—		—		6,270
1-4 family residential		7,399		—		(2,213)		(144)		10		5,052
Consumer		1,429		—		(411)		(100)		84		1,002
Broker-dealer		748		—		(602)		—		—		146
Total	$	156,383	$	—	$	(602)	$	(1,614)	$	1,047	$	155,214


	Balance,		Transition		Provision for				Recoveries on		Balance,
	Beginning of		Adjustment		(Reversal of)		Loans		Charged Off		End of
Nine Months Ended September 30, 2020	Period		CECL		Credit Losses		Charged Off		Loans		Period
Commercial real estate	$	31,595	$	8,073	$	68,823	$	(4,517)	$	592	$	104,566
Commercial and industrial		17,964		3,193		30,896		(15,325)		1,450		38,178
Construction and land development		4,878		577		815		(2)		2		6,270
1-4 family residential		6,386		(29)		(813)		(517)		25		5,052
Consumer		265		748		154		(473)		308		1,002
Broker-dealer		48		—		98		—		—		146
Total	$	61,136	$	12,562	$	99,973	$	(20,834)	$	2,377	$	155,214


	Balance,		Transition		Provision for				Recoveries on		Balance,
	Beginning of		Adjustment		(Reversal of)		Loans		Charged Off		End of
Three Months Ended September 30, 2019	Period		CECL		Credit Losses		Charged Off		Loans		Period
Commercial real estate	$	25,114	$	—	$	757	$	(9)	$	—	$	25,862
Commercial and industrial		20,414		—		(1,625)		(1,000)		1,393		19,182
Construction and land development		4,396		—		392		—		—		4,788
1-4 family residential		4,924		—		485		(12)		14		5,411
Consumer		283		—		(9)		(12)		6		268
Broker-dealer		46		—		47		—		—		93
Total	$	55,177	$	—	$	47	$	(1,033)	$	1,413	$	55,604


	Balance,		Transition		Provision for				Recoveries on		Balance,
	Beginning of		Adjustment		(Reversal of)		Loans		Charged Off		End of
Nine Months Ended September 30, 2019	Period		CECL		Credit Losses		Charged Off		Loans		Period
Commercial real estate	$	27,100	$	—	$	(1,229)	$	(9)	$	—	$	25,862
Commercial and industrial		21,980		—		87		(5,247)		2,362		19,182
Construction and land development		6,061		—		(1,273)		—		—		4,788
1-4 family residential		3,956		—		2,321		(911)		45		5,411
Consumer		267		—		449		(476)		28		268
Broker-dealer		122		—		(29)		—		—		93
Total	$	59,486	$	—	$	326	$	(6,643)	$	2,435	$	55,604