Loans Held for Investment |
6. Loans Held for Investment Loans held for investment summarized by portfolio segment are as follows (in thousands). | | | | | | | | | | September 30, | | December 31, | | | | 2020 | | 2019 | | Commercial real estate | | $ | 3,073,038 | | $ | 3,000,523 | | Commercial and industrial (1) | | | 2,848,289 | | | 2,025,720 | | Construction and land development | | | 841,385 | | | 940,564 | | 1-4 family residential | | | 643,833 | | | 791,020 | | Consumer | | | 36,720 | | | 47,046 | | Broker-dealer (2) | | | 502,295 | | | 576,527 | | | | | 7,945,560 | | | 7,381,400 | | Allowance for credit losses | | | (155,214) | | | (61,136) | | Total loans held for investment, net of allowance | | $ | 7,790,346 | | $ | 7,320,264 | |
| (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 | |
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