Loans and Allowance for Credit Losses |
Jul. 08, 2020 |
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| Loans and Leases Receivable Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans and Allowance for Credit Losses | LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans Held for Sale The following table presents loans held for sale:
Loans Held for Investment and Allowance for Credit Losses The following table presents the amortized cost and unpaid principal for loans held for investment:
The difference between the amortized cost and unpaid principal balance is primarily (1) premiums and discounts associated with acquired loans totaling $18,511,000 and $13,573,000 at December 31, 2020 and 2019, respectively, and (2) net deferred origination and factoring fees totaling $4,887,000 and $1,392,000 at December 31, 2020 and 2019, respectively. Accrued Interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $18,198,000 and $18,553,000 at December 31, 2020 and December 31, 2019, respectively, and was included in other assets in the Consolidated Balance Sheets. As of December 31, 2020, most of the Company’s non-factoring business activity is with customers located within certain states. The states of Texas (22%), Colorado (17%), Illinois (12%), and Iowa (6%), make up 57% of the Company’s gross loans, excluding factored receivables. Therefore, the Company’s exposure to credit risk is affected by changes in the economies in these states. At December 31, 2019, the states of Texas (27%), Colorado (23%), Illinois (13%), and Iowa (7%) made up 70% of the Company’s gross loans, excluding factored receivables. A majority (90%) of the Company’s factored receivables, representing approximately 20% of the total loan portfolio as of December 31, 2020, are transportation receivables. At December 31, 2019, 77% of our factored receivables, representing approximately 11% of our total loan portfolio, were transportation receivables. At December 31, 2020 and 2019, the Company had $145,892,000 and $66,754,000, respectively, of customer reserves associated with factored receivables which are held to settle any payment disputes or collection shortfalls, may be used to pay customers’ obligations to various third parties as directed by the customer and are periodically released to or withdrawn by customers. Customer reserves are reported as deposits in the consolidated balance sheets. At December 31, 2020 the balance of the Over-Formula Advance Portfolio included in factored receivables was $62,100,000. As of December 31, 2020 the Company carries a separate $19,600,000 receivable (the “Misdirected Payments”) payable by the United States Postal Service (“USPS”) arising from accounts factored to the largest Over-Formula Advance Portfolio carrier. This amount is included in factored receivables and is separate from the aforementioned Over-Formula Advance Portfolio. The amounts represented by this receivable were paid by the USPS directly to such customer in contravention of notices of assignment delivered to, and previously honored by, the USPS, which amount was then not remitted back to the Company by such customer as required. The USPS disputes their obligation to make such payment, citing purported deficiencies in the notices delivered to them. In addition to commencing litigation against such customer, the Company has also filed a declaratory judgment action in Federal District Court for the Southern District of Florida seeking a ruling that the USPS was obligated to make the payments represented by this receivable directly to the Company. Based on our legal analysis and discussions with our counsel advising us on this matter, the Company believes it is probable that it will prevail in such action and that the USPS will have the capacity to make payment on such receivable. Consequently, the Company has not reserved for such balance as of December 31, 2020. Loans with carrying amounts of $2,255,441,000 and $1,301,851,000 at December 31, 2020 and 2019, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity and, beginning in 2020, to secure Paycheck Protection Program Liquidity Facility borrowings and Federal Reserve Bank discount window borrowing capacity. During the year ended December 31, 2020, loans with carrying amounts of $185,823,000 were transferred from loans held for investment to loans held for sale at fair value concurrently with management’s change in intent and decision to sell the loans. During the year ended December 31, 2020, certain loans transferred to held for sale were sold resulting in proceeds of $165,877,000, and the Company recognized net losses on transfers and sales of loans, which were recorded as other noninterest income in the consolidated statements of income, of $770,000. During the year ended December 31, 2019, loans with carrying amounts of $46,163,000 were transferred from loans held for investment to loans held for sale at fair value concurrently with management’s change in intent and decision to sell the loans. During the year ended December 31, 2019, certain loans transferred to held for sale were sold resulting in proceeds of $47,832,000 and net gains on transfers and sales of loans, which were recorded as other noninterest income in the Consolidated Statements of Income, of $1,669,000. During the year ended December 31, 2018, a related party loan with a carrying amount of $9,781,000 was transferred to loans held for sale as the Company made the decision to sell the loan. The loan was subsequently sold at its par value for no gain or loss. See Note 18 – Related Party Transactions for further information regarding the sale of the related party loan. Allowance for Credit Losses The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring. The activity in the allowance for credit losses (“ACL”) related to loans held for investment is as follows:
The ACL as of December 31, 2020 was estimated using the current expected credit loss model. Management determined that the $62,200,000 in Over-Formula Advances and some smaller immaterial factored receivables obtained through the TFS Acquisition had experienced more than insignificant credit deterioration since origination and thus deemed those Over-Formula Advances to be purchased credit deteriorated ("PCD"). This resulted in recording a $37,415,000 ACL on the PCD assets through purchase accounting during the year ended December 31, 2020. There was no initial impact to credit loss expense resulting from the PCD determination. At December 31, 2020, the ACL on the Over-Formula Advance PCD assets increased by $11,548,000 and the total ACL on all acquired PCD assets was $48,963,000. The change in ACL on PCD assets subsequent to acquisition was charged to credit loss expense. The primary reasons for the increase in required ACL during the year ended December 31, 2020 are the $48,963,000 PCD ACL and significant projected deterioration of the loss drivers that the Company forecasts to calculate expected losses during the period. The Company uses the discounted cash flow (DCF) method to estimate ACL for the commercial real estate, construction, land development, land, 1-4 family residential, commercial (excluding liquid credit), and consumer loan pools. For all loan pools utilizing the DCF method, the Company utilizes and forecasts national unemployment as a loss driver. The Company also utilizes and forecasts either one-year percentage change in national retail sales (commercial real estate – non multifamily, commercial general, commercial agriculture, commercial asset-based lending, commercial equipment finance, consumer), one-year percentage change in the national home price index (1-4 family residential and construction, land development, land), or one-year percentage change in national gross domestic product (commercial real estate – multifamily) as a second loss driver depending on the nature of the underlying loan pool and how well that loss driver correlates to expected future losses. Consistent forecasts of the loss drivers are used across the loan segments. For all DCF models at December 31, 2020, the Company has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. The Company leverages economic projections from a reputable and independent third-party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts are also considered by the Company when developing the forecast metrics. At December 31, 2020, as compared to January 1, 2020, the Company forecasted a significantly higher national unemployment rate, a lower one-year percentage change in national retail sales, a lower one-year percentage change in the national home price index, and a somewhat higher one-year percentage change in national gross domestic product over the reasonable and supportable forecast period. Specifically regarding the forecasts used to calculate the December 31, 2020 ACL, management expects unemployment to remain persistently above pre-pandemic levels over the forecast period. Percentage change in retail sales is assumed to return to pre-pandemic levels given additional federal stimulus and the expected broad distribution of a COVID-19 vaccine. A gradual decline in the percentage change in national home price index is expected over the forecasted period as the effects of the pandemic on home prices are expected to lag behind other loss drivers. Percentage change in GDP growth is forecasted to increase over the projected period as the national economy comes back on line over the next four quarters. The Company uses a loss-rate method to estimate expected credit losses for the farmland, liquid credit, premium finance, factored receivable, and mortgage warehouse loan pools. For each of these loan segments, the Company applies an expected loss ratio based on internal and peer historical losses adjusted as appropriate for qualitative factors. Qualitative loss factors are based on the Company's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans, and reasonable and supportable forecasts of economic conditions. Loss factors used to calculate the required ACL on pools that use the loss-rate method reflect the forecasted economic conditions described above. For the year ended December 31, 2020, the Company carried a PCD ACL of $48,963,000 previously discussed. The projected economic impact of COVID-19 on the Company’s loss drivers and assumptions over the reasonable and supportable forecast period created the need for $16,700,000 of additional ACL. The increase in required ACL was also driven by net charge-offs of $4,569,000 (which carried reserves of $1,000,000 at the time of charge-off), and net new specific allowances recorded on non-PCD individual loans of $5,100,000. The increase was partially offset by changes in mix in the underlying portfolio eligible to receive an ACL. The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:
At December 31, 2020 the balance of the Over-Formula Advance Portfolio included in factored receivables was $62,100,000 and carried an ACL allocation of $48,485,000. At December 31, 2020 the balance of Misdirected Payments included in factored receivables was $19,600,000 and carried no ACL allocation. The following table presents loans individually and collectively evaluated for impairment, as well as purchased credit impaired (“PCI”) loans, and their respective allowance for credit loss allocations as of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:
The following table presents information pertaining to impaired loans as of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:
The following table presents average impaired loans, as determined in accordance with ASC 310 prior to the adoption of ASU 2016-13, and interest recognized on such loans, for the years ended December 31, 2019 and 2018:
Past Due and Nonaccrual Loans The following tables present an aging of contractually past due loans:
At December 31, 2020, total past due Over-Formula Advances recorded in factored receivables was $62,100,000. Substantially all of the Over-Formula Advance balance is considered past due 90 days or more. Aging of the Over-Formula Advances is based upon the service month on which the advances were made by TFS prior to acquisition. Additionally, the entire $19,600,000 Misdirected Payments amount recorded in factored receivables was past due at December 31, 2020. Of this amount, approximately $6,000,000 was considered past due 90 days or more. Given the nature of factored receivables, these assets are disclosed as past due 90 days or more still accruing; however, the Company is not recognizing income on the assets at December 31, 2020. Historically, any income recognized on factored receivables that are past due 90 days or more has not been material. The following table presents the amortized cost basis of loans on nonaccrual status and the amortized cost basis of loans on nonaccrual status for which there was no related allowance for credit losses:
The following table presents accrued interest on nonaccrual loans reversed through interest income:
There was no interest earned on nonaccrual loans during the years ended December 31, 2020, 2019, and 2018. The following table presents information regarding nonperforming loans:
(1) Includes troubled debt restructurings of $13,321,000 and $4,888,000 at December 31, 2020 and 2019, respectively. (2) Other nonperforming factored receivables represent the portion of the Over-Formula Advance Portfolio that is not covered by Covenant's indemnification. This amount is also considered Classified from a risk rating perspective. Credit Quality Information The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including: current collateral and financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk on a regular basis. Large groups of smaller balance homogeneous loans, such as consumer loans, are analyzed primarily based on payment status. The Company uses the following definitions for risk ratings: Pass – Pass rated loans have low to average risk and are not otherwise classified. Classified – Classified loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Certain classified loans have the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. PCI (Prior to the Adoption of ASU 2016-13) – At acquisition, PCI loans had the characteristics of classified loans and it was probable, at acquisition, that all contractually required principal and interest payments would not be collected. The Company evaluates these loans on a projected cash flow basis with this evaluation performed quarterly. Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. As of December 31, 2020 and 2019, based on the most recent analysis performed, the risk category of loans is as follows:
Troubled Debt Restructurings The Company had a recorded investment in troubled debt restructurings of $13,324,000 and $5,221,000 as of December 31, 2020 and 2019, respectively. The Company had allocated specific allowances for these loans of $2,469,000 and $718,000 at December 31, 2020 and 2019, respectively, and had not committed to lend additional amounts. The following table presents the pre- and post-modification recorded investment of loans modified as troubled debt restructurings during the years ended December 31, 2020, 2019, and 2018. The Company did not grant principal reductions on any restructured loans.
During the year ended December 31, 2020, the Company had one loan modified as a troubled debt restructuring with a recorded investment of $5,741,000 for which there was a payment default within twelve months following the modification. The payment defaults did not result in incremental allowance allocations or charge-offs. During the year ended December 31, 2019, the Company had three loans modified as troubled debt restructurings with a recorded investment of $680,000 for which there were payment defaults within twelve months following the modification. There were no loans modified as troubled debt restructurings during the year ended December 31, 2018 for which there was a payment default during the year then ended. Default is determined at 90 or more days past due, charge-off, or foreclosure. During the year ended December 31, 2020, the Company modified $628,022,000 in loans for borrowers impacted by the COVID-19 pandemic. These modifications primarily consisted of payment deferrals to assist customers. As these modifications related to the COVID-19 pandemic and qualify under the provisions of either Section 4013 of the CARES act or Interagency Guidance, they are not considered troubled debt restructurings. The following table summarized the amortized cost of loans with payments currently in deferral and the accrued interest related to the loans with payments currently in deferral at December 31, 2020:
Residential Real Estate Loans In Process of Foreclosure At December 31, 2020 and 2019, the Company had $251,000 and $87,000, respectively, in 1-4 family residential real estate loans for which formal foreclosure proceedings were in process. Purchased Credit Impaired Loans (Prior to the Adoption of ASU 2016-13) The following table summarizes information pertaining to loans that were identified as purchased credit impaired prior to the adoption of ASU 2016-13:
The changes in accretable yield in regard to loans transferred at acquisition for which it was probable that all contractually required payments would not be collected are as follows:
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