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Loans and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2021

LOANS AND ALLOWANCE FOR CREDIT LOSSES

At March 31, 2021, the Company’s loan portfolio was $12.20 billion, compared to $12.90 billion at December 31, 2020. The various categories of loans are summarized as follows:


	March 31,		December 31,
(In thousands)	2021		2020
Consumer:
Credit cards	$	175,458	$	188,845
Other consumer	172,965		202,379
Total consumer	348,423		391,224
Real Estate:
Construction and development	1,451,841		1,596,255
Single family residential	1,730,056		1,880,673
Other commercial	5,638,010		5,746,863
Total real estate	8,819,907		9,223,791
Commercial:
Commercial	2,444,700		2,574,386
Agricultural	155,921		175,905
Total commercial	2,600,621		2,750,291
Other	426,922		535,591
Total loans	$	12,195,873	$	12,900,897

The above table presents total loans at amortized cost. The difference between amortized cost and unpaid principal balance is primarily premiums and discounts associated with acquisition date fair value adjustments on acquired loans as well as net deferred origination fees totaling $51.4 million and $57.3 million at March 31, 2021 and December 31, 2020, respectively.

Accrued interest on loans, which is excluded from the amortized cost of loans held for investment, totaled $47.8 million and $54.4 million at March 31, 2021 and December 31, 2020, respectively, and is included in interest receivable on the consolidated balance sheets.

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

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

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

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

Paycheck Protection Program Loans – The Company originated loans pursuant to multiple PPP appropriations of the CARES Act which provided 100% federally guaranteed loans for small businesses to cover up to 24 weeks of payroll costs and assist with mortgage interest, rent and utilities. Notably, these small business loans may be forgiven by the SBA if borrowers maintain their payrolls and satisfy certain other conditions. PPP loans have a zero percent risk-weight for regulatory capital ratios. As of March 31, 2021 and December 31, 2020, the total outstanding balance of PPP loans was $797.6 million and $904.7 million, respectively.

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

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


	March 31,		December 31,
(In thousands)	2021		2020
Consumer:
Credit cards	$	397	$	301
Other consumer	916		1,219
Total consumer	1,313		1,520
Real estate:
Construction and development	2,296		3,625
Single family residential	24,395		28,062
Other commercial	42,211		24,155
Total real estate	68,902		55,842
Commercial:
Commercial	44,159		65,244
Agricultural	482		273
Total commercial	44,641		65,517
Total	$	114,856	$	122,879

As of March 31, 2021 and December 31, 2020, nonaccrual loans for which there was no related allowance for credit losses had an amortized cost of $18.8 million and $16.8 million, respectively. These loans are individually assessed and do not hold an allowance due to being adequately collateralized under the collateral-dependent valuation method.

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


(In thousands)	Gross 30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due & Accruing
March 31, 2021
Consumer:
Credit cards	$	786	$	453	$	1,239	$	174,219	$	175,458	$	336
Other consumer	1,221		329		1,550		171,415		172,965		85
Total consumer	2,007		782		2,789		345,634		348,423		421
Real estate:
Construction and development	3,296		1,579		4,875		1,446,966		1,451,841		3
Single family residential	17,836		10,806		28,642		1,701,414		1,730,056		21
Other commercial	20,633		8,792		29,425		5,608,585		5,638,010		14
Total real estate	41,765		21,177		62,942		8,756,965		8,819,907		38
Commercial:
Commercial	5,572		6,245		11,817		2,432,883		2,444,700		170
Agricultural	320		412		732		155,189		155,921		6
Total commercial	5,892		6,657		12,549		2,588,072		2,600,621		176
Other	23		—		23		426,899		426,922		—
Total	$	49,687	$	28,616	$	78,303	$	12,117,570	$	12,195,873	$	635

December 31, 2020
Consumer:
Credit cards	$	708	$	256	$	964	$	187,881	$	188,845	$	256
Other consumer	2,771		302		3,073		199,306		202,379		13
Total consumer	3,479		558		4,037		387,187		391,224		269
Real estate:
Construction and development	1,375		3,089		4,464		1,591,791		1,596,255		—
Single family residential	23,726		14,339		38,065		1,842,608		1,880,673		253
Other commercial	2,660		9,586		12,246		5,734,617		5,746,863		—
Total real estate	27,761		27,014		54,775		9,169,016		9,223,791		253
Commercial:
Commercial	7,514		7,429		14,943		2,559,443		2,574,386		56
Agricultural	226		187		413		175,492		175,905		—
Total commercial	7,740		7,616		15,356		2,734,935		2,750,291		56
Other	92		—		92		535,499		535,591		—
Total	$	39,072	$	35,188	$	74,260	$	12,826,637	$	12,900,897	$	578

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

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

The provisions in the CARES Act included an election to not apply the guidance on accounting for TDRs to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the President terminates the COVID-19 national emergency declaration. In March 2020, the federal financial institution regulatory agencies issued an interagency statement encouraging financial institutions to work constructively with borrowers affected by COVID-19 and provided information regarding loan modifications. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act. In response to the concerns related to the expiration of the applicable period for which the election to not apply the guidance on accounting for TDRs to loan modifications, the CARES Act was amended in late fourth quarter of 2020 to extend COVID-19 relief related to loan modifications from the earlier of (i) January 1, 2022 or (ii) 60 days after the President terminates the COVID-19 national emergency declaration. During 2020 and the first quarter of 2021, the Company processed over 3,700 COVID-19 loan modifications in excess of $3.0 billion. As of March 31, 2021, the Company had the following loan modifications due to COVID-19 outstanding categorized by industry:


(Dollars in thousands)	Number	Balance
Assisted living	1	$	17,310
Transportation	5	783
Consumer	37	3,776
Hotel	17	152,864
Food service	3	2,683
All other	16	31,029
Total	79	$	208,445

Deferred interest on the above loans totaled $5.9 million as of March 31, 2021. The interest will be collected at the end of the note or once regular payments are resumed. As of March 31, 2021, over 3,300 loans totaling approximately $2.6 billion that had previously been modified under the CARES Act had returned to regular payment terms in addition to those that have paid off.

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

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


	Accruing TDR Loans			Nonaccrual TDR Loans			Total TDR Loans
(Dollars in thousands)	Number	Balance		Number	Balance		Number	Balance
March 31, 2021
Real estate:
Single-family residential	31	$	3,133	15	$	1,991	46	$	5,124
Other commercial	1	48		1	8		2	56
Total real estate	32	3,181		16	1,999		48	5,180
Commercial:
Commercial	3	624		3	1,479		6	2,103
Total commercial	3	624		3	1,479		6	2,103
Total	35	$	3,805	19	$	3,478	54	$	7,283


	Accruing TDR Loans			Nonaccrual TDR Loans			Total TDR Loans
(Dollars in thousands)	Number	Balance		Number	Balance		Number	Balance
December 31, 2020
Real estate:
Single-family residential	28	$	2,463	18	$	2,736	46	$	5,199
Other commercial	1	49		1	12		2	61
Total real estate	29	2,512		19	2,748		48	5,260
Commercial:
Commercial	3	626		3	1,627		6	2,253
Total commercial	3	626		3	1,627		6	2,253
Total	32	$	3,138	22	$	4,375	54	$	7,513

There were no loans restructured as TDRs during the three month periods ended March 31, 2021 or 2020.

Additionally, there were no loans considered TDRs for which a payment default occurred during the three months ended March 31, 2021 or 2020. The Company defines a payment default as a payment received more than 90 days after its due date.

There were no TDRs with pre-modification loan balances for which OREO was received in full or partial satisfaction of the loans during the three month periods ended March 31, 2021 or 2020. At March 31, 2021 and December 31, 2020, the Company had $5,838,000 and $7,182,000, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process. At March 31, 2021 and December 31, 2020, the Company had $1,995,000 and $3,172,000, respectively, of OREO secured by residential real estate properties.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The following tables present a summary of loans by credit quality indicator, other than pass or current, as of March 31, 2021 and December 31, 2020 segregated by class of loans.


	Term Loans Amortized Cost Basis by Origination Year
(In thousands)	2021 (YTD)		2020		2019		2018		2017		2016 and Prior		Lines of Credit (“LOC”) Amortized Cost Basis		LOC Converted to Term Loans Amortized Cost Basis		Total
March 31, 2021
Consumer - credit cards
Delinquency:
30-89 days past due	$	—	$	—	$	—	$	—	$	—	$	—	$	786	$	—	$	786
90+ days past due	—		—		—		—		—		—		453		—		453
Total consumer - credit cards	—		—		—		—		—		—		1,239		—		1,239
Consumer - other
Delinquency:
30-89 days past due	—		258		142		78		237		421		85		—		1,221
90+ days past due	—		19		76		36		57		137		4		—		329
Total consumer - other	—		277		218		114		294		558		89		—		1,550
Real estate - C&D
Risk rating:
5 internal grade	—		2,664		1,699		—		—		16		13,042		—		17,421
6 internal grade	93		2,449		580		387		244		460		8,386		1,955		14,554
7 internal grade	—		—		—		—		—		—		—		—		—
Total real estate - C&D	93		5,113		2,279		387		244		476		21,428		1,955		31,975
Real estate - SF residential
Delinquency:
30-89 days past due	717		1,906		1,730		3,660		2,229		6,766		828		—		17,836
90+ days past due	—		1,166		628		2,069		2,006		4,311		626		—		10,806
Total real estate - SF residential	717		3,072		2,358		5,729		4,235		11,077		1,454		—		28,642
Real estate - other commercial
Risk rating:
5 internal grade	66,468		121,611		1,463		965		13,348		32,957		89,957		7,293		334,062
6 internal grade	5,944		93,796		3,256		3,686		5,059		9,707		59,872		32,859		214,179
7 internal grade	—		—		—		—		1		—		—		1		2
Total real estate - other commercial	72,412		215,407		4,719		4,651		18,408		42,664		149,829		40,153		548,243
Commercial
Risk rating:
5 internal grade	124		3,274		202		67		8		29		5,883		18,954		28,541
6 internal grade	2,027		25,259		2,763		1,430		539		535		59,475		6,924		98,952
7 internal grade	—		3		—		5		2		—		—		1		11
Total commercial	2,151		28,536		2,965		1,502		549		564		65,358		25,879		127,504
Commercial - agriculture
Risk rating:
5 internal grade	35		—		6		12		17		—		63		—		133
6 internal grade	58		57		79		279		68		17		105		73		736
7 internal grade	—		—		—		—		—		—		—		—		—
Total commercial - agriculture	93		57		85		291		85		17		168		73		869
Other
Delinquency:
30-89 days past due	—		—		—		—		—		23		—		—		23
90+ days past due	—		—		—		—		—		—		—		—		—
Total other	—		—		—		—		—		23		—		—		23
Total	$	75,466	$	252,462	$	12,624	$	12,674	$	23,815	$	55,379	$	239,565	$	68,060	$	740,045


	Term Loans Amortized Cost Basis by Origination Year
(In thousands)	2020		2019		2018		2017		2016		2015 and Prior		Lines of Credit (“LOC”) Amortized Cost Basis		LOC Converted to Term Loans Amortized Cost Basis		Total
December 31, 2020
Consumer - credit cards
Delinquency:
30-89 days past due	$	—	$	—	$	—	$	—	$	—	$	—	$	708	$	—	$	708
90+ days past due	—		—		—		—		—		—		256		—		256
Total consumer - credit cards	—		—		—		—		—		—		964		—		964
Consumer - other
Delinquency:
30-89 days past due	234		441		327		658		689		84		339		—		2,772
90+ days past due	79		58		25		80		40		12		8		—		302
Total consumer - other	313		499		352		738		729		96		347		—		3,074
Real estate - C&D
Risk rating:
5 internal grade	2,728		344		259		2,107		19		—		9,613		—		15,070
6 internal grade	294		2,069		404		449		342		320		17,914		14		21,806
7 internal grade	—		—		—		—		—		—		—		—		—
Total real estate - C&D	3,022		2,413		663		2,556		361		320		27,527		14		36,876
Real estate - SF residential
Delinquency:
30-89 days past due	6,300		2,258		2,593		2,610		2,058		6,050		1,782		76		23,727
90+ days past due	557		1,853		2,735		2,582		832		3,852		1,928		—		14,339
Total real estate - SF residential	6,857		4,111		5,328		5,192		2,890		9,902		3,710		76		38,066
Real estate - other commercial
Risk rating:
5 internal grade	100,085		4,346		10,738		19,943		26,245		10,608		63,305		23,435		258,705
6 internal grade	66,737		9,418		24,380		14,067		3,744		11,158		52,182		39,486		221,172
7 internal grade	—		—		—		—		—		—		—		—		—
Total real estate - other commercial	166,822		13,764		35,118		34,010		29,989		21,766		115,487		62,921		479,877
Commercial
Risk rating:
5 internal grade	5,707		342		465		972		54		—		12,318		22,546		42,404
6 internal grade	23,227		4,495		1,586		730		276		334		53,682		7,522		91,852
7 internal grade	—		—		—		—		—		—		—		—		—
Total commercial	28,934		4,837		2,051		1,702		330		334		66,000		30,068		134,256
Commercial - agriculture
Risk rating:
5 internal grade	—		79		13		299		—		6		34		—		431
6 internal grade	86		101		64		47		12		10		68		75		463
7 internal grade	—		—		—		—		—		—		—		—		—
Total commercial - agriculture	86		180		77		346		12		16		102		75		894
Total	$	206,034	$	25,804	$	43,589	$	44,544	$	34,311	$	32,434	$	214,137	$	93,154	$	694,007

Allowance for Credit Losses

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

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

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

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

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

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

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

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

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

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

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

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

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

Loans for which the repayment is expected to be provided substantially through the operation or sale of collateral and where the borrower is experiencing financial difficulty had an amortized cost of $68.8 million as of March 31, 2021, as further detailed in the table below. The collateral securing these loans consist of commercial real estate properties, residential properties, other business assets, and secured energy production assets.


(In thousands)	Real Estate Collateral		Energy		Other Collateral		Total
Construction and development	$	1,837	$	—	$	—	$	1,837
Single family residential	5,086		—		—		5,086
Other commercial real estate	18,414		—		—		18,414
Commercial	—		39,827		3,624		43,451
Total	$	25,337	$	39,827	$	3,624	$	68,788

The following table details activity in the allowance for credit losses by portfolio segment for the three months ended March 31, 2021. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.


(In thousands)	Commercial		Real Estate		Credit Card		Other Consumer and Other		Total
Allowance for credit losses:








Three Months Ended March 31, 2021
Beginning balance, January 1, 2021	$	42,093	$	182,868	$	7,472	$	5,617	$	238,050
Provision for credit loss expense	(6,940)		14,242		(4,587)		(2,715)		—
Charge-offs	(830)		(1,687)		(1,003)		(731)		(4,251)
Recoveries	310		403		290		314		1,317
Net charge-offs	(520)		(1,284)		(713)		(417)		(2,934)
Ending balance, March 31, 2021	$	34,633	$	195,826	$	2,172	$	2,485	$	235,116

Activity in the allowance for credit losses for the three months ended March 31, 2020 was as follows:


(In thousands)	Commercial		Real Estate		Credit Card		Other Consumer and Other		Total
Allowance for credit losses:








Three Months Ended March 31, 2020
Beginning balance, January 1, 2020 - prior to adoption of CECL	$	22,863	$	39,161	$	4,051	$	2,169	$	68,244
Impact of CECL adoption	22,733		114,314		2,232		12,098		151,377
Provision for credit loss expense	30,907		(12,158)		2,750		4,698		26,197
Charge-offs	(523)		(396)		(1,441)		(1,379)		(3,739)
Recoveries	347		101		225		443		1,116
Net charge-offs	(176)		(295)		(1,216)		(936)		(2,623)
Ending balance, March 31, 2020	$	76,327	$	141,022	$	7,817	$	18,029	$	243,195

As of March 31, 2021, the Company’s allowance for credit losses was considered sufficient based upon expected loan level cash flows that were supported by economic forecasts. As a result, additional provision expense was not recorded for the three months ended March 31, 2021, however the Company reallocated certain amounts of the allowance for credit losses among loan categories for the same period.

A change in forecast methodology, as well as the composition of the loans, resulted in a negative provision in the real estate C&D loan segment during the first quarter of 2020. Under the economic conditions during that time, the Company’s forecast of expected losses in the C&D segment no longer produced a forecast that was considered reasonable and supportable. As such, management adjusted the forecast methodology of this segment to better align with management’s expectation of loss under the modeled economic conditions. The other categories saw increases in the provision related to increased concern over the economic stresses related to COVID-19, as well as increased specific provisions of $22.0 million for two energy credits, that were previously identified as problem loans, both of which experienced further deterioration during the first quarter of 2020 and were negatively impacted by the sharp decline in commodity pricing.

Reserve for Unfunded Commitments

In addition to the allowance for credit losses, the Company has established a reserve for unfunded commitments, classified in other liabilities. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The reserve for unfunded commitments as of March 31, 2021 and December 31, 2020 was $22.4 million. The adequacy of the reserve for unfunded commitments is determined quarterly based on methodology similar to the methodology for determining the allowance for credit losses. No adjustment was made to the reserve for unfunded commitments during the first quarter of 2021 as it was considered sufficient to cover any loss expectations. For the three month period ended March 31, 2020, net adjustments to the reserve for unfunded commitments resulted in a benefit of $3.0 million and was included in the provision for credit losses in the statement of income.

Provision for Credit Losses

Provision for credit losses is determined by the Company as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, securities and off-balance-sheet credit exposure after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb expected credit losses over the lives of the respective financial instruments.

The components of the provision for credit losses for the three month periods ended March 31, 2021 and 2020 were as follows:


	Three Months Ended March 31,
(In thousands)	2021		2020
Provision for credit losses related to:
Loans	$	—	$	26,198
Unfunded commitments	—		(3,000)
Securities - HTM	(697)		40
Securities - AFS	2,142		(104)
Total	$	1,445	$	23,134