Non-Covered Loans and Allowance for Non-Covered Loan Losses | 3 Months Ended |
Mar. 31, 2014 |
Non-Covered Loans and Allowance for Non-Covered Loan Losses | ' |
Non-Covered Loans and Allowance for Non-Covered Loan Losses | ' |
5. Non-Covered Loans and Allowance for Non-Covered Loan Losses |
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Non-covered loans refer to loans not covered by the FDIC loss-share agreements. Covered loans are discussed in Note 6 to the consolidated financial statements. Non-covered loans summarized by portfolio segment are as follows (in thousands). |
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| | March 31, | | December 31, | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 1,670,087 | | $ | 1,637,266 | | | | | | | | | | | | | | | | | | | |
Real estate | | 1,535,361 | | 1,457,253 | | | | | | | | | | | | | | | | | | | |
Construction and land development | | 387,382 | | 364,551 | | | | | | | | | | | | | | | | | | | |
Consumer | | 54,116 | | 55,576 | | | | | | | | | | | | | | | | | | | |
| | 3,646,946 | | 3,514,646 | | | | | | | | | | | | | | | | | | | |
Allowance for non-covered loan losses | | (34,645 | ) | (33,241 | ) | | | | | | | | | | | | | | | | | | |
Total non-covered loans, net of allowance | | $ | 3,612,301 | | $ | 3,481,405 | | | | | | | | | | | | | | | | | | | |
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The Bank has lending policies in place with the goal of establishing an asset portfolio that will provide a return on stockholders’ equity sufficient to maintain capital to assets ratios that meet or exceed established regulations. Loans are underwritten with careful consideration of the borrower’s financial condition, the specific purpose of the loan, the primary sources of repayment and any collateral pledged to secure the loan. |
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Underwriting procedures address financial components based on the size or complexity of the credit. The financial components include, but are not limited to, current and projected cash flows, shock analysis and/or stress testing, and trends in appropriate balance sheet and statement of operations ratios. Collateral analysis includes a complete description of the collateral, as well as determining values, monitoring requirements, loan to value ratios, concentration risk, appraisal requirements and other information relevant to the collateral being pledged. Guarantor analysis includes liquidity and cash flow analysis based on the significance the guarantors are expected to serve as secondary repayment sources. The Bank’s underwriting standards are governed by adherence to its loan policy. The loan policy provides for specific guidelines by portfolio segment, including commercial and industrial, real estate, construction and land development, and consumer loans. Within each individual portfolio segment, permissible and impermissible loan types are explicitly outlined. Within the loan types, minimum requirements for the underwriting factors listed above are provided. |
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The Bank maintains a loan review department that reviews credit risk in response to both external and internal factors that potentially impact the performance of either individual loans or the overall loan portfolio. The loan review process reviews the creditworthiness of borrowers and determines compliance with the loan policy. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel. Results of these reviews are presented to management and the Bank’s board of directors. |
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In connection with the PlainsCapital Merger and the FNB Transaction, the Company acquired non-covered loans both with and without evidence of credit quality deterioration since origination. The following table presents the carrying values and the outstanding balances of the non-covered PCI loans (in thousands). |
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| | March 31, | | December 31, | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 | | | | | | | | | | | | | | | | | | | |
Carrying amount | | $ | 85,396 | | $ | 100,392 | | | | | | | | | | | | | | | | | | | |
Outstanding balance | | 122,881 | | 141,983 | | | | | | | | | | | | | | | | | | | |
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Changes in the accretable yield for the non-covered PCI loans were as follows (in thousands). |
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| | Three Months Ended March 31, | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 | | | | | | | | | | | | | | | | | | | |
Balance, beginning of period | | $ | 17,601 | | $ | 17,553 | | | | | | | | | | | | | | | | | | | |
Additions | | — | | — | | | | | | | | | | | | | | | | | | | |
Increases in expected cash flows | | 3,475 | | 11,996 | | | | | | | | | | | | | | | | | | | |
Disposals of loans | | (603 | ) | (26 | ) | | | | | | | | | | | | | | | | | | |
Accretion | | (2,760 | ) | (3,277 | ) | | | | | | | | | | | | | | | | | | |
Balance, end of period | | $ | 17,713 | | $ | 26,246 | | | | | | | | | | | | | | | | | | | |
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Impaired loans exhibit a clear indication that the borrower’s cash flow may not be sufficient to meet principal and interest payments, which is generally when a loan is 90 days past due unless the asset is both well secured and in the process of collection. Non-covered impaired loans include non-accrual loans, troubled debt restructurings (“TDRs”), PCI loans and partially charged-off loans. |
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Non-covered PCI loans are summarized by class in the following tables (in thousands). In addition to the non-covered PCI loans, there were $5.3 million and $4.1 million of additional non-covered impaired loans at March 31, 2014 and December 31, 2013, respectively. |
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| | Unpaid | | Recorded | | Recorded | | Total | | | | | | | | | | | | |
| | Contractual | | Investment with | | Investment with | | Recorded | | Related | | | | | | | | | | |
March 31, 2014 | | Principal Balance | | No Allowance | | Allowance | | Investment | | Allowance | | | | | | | | | | |
Commercial and industrial: | | | | | | | | | | | | | | | | | | | | |
Secured | | $ | 57,302 | | $ | 19,727 | | $ | 12,894 | | $ | 32,621 | | $ | 2,716 | | | | | | | | | | |
Unsecured | | 11,421 | | 1,225 | | — | | 1,225 | | — | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | |
Secured by commercial properties | | 41,051 | | 12,053 | | 17,439 | | 29,492 | | 450 | | | | | | | | | | |
Secured by residential properties | | 4,589 | | 1,353 | | 1,356 | | 2,709 | | 79 | | | | | | | | | | |
Construction and land development: | | | | | | | | | | | | | | | | | | | | |
Residential construction loans | | 33 | | — | | — | | — | | — | | | | | | | | | | |
Commercial construction loans and land development | | 25,535 | | 14,912 | | 706 | | 15,618 | | 107 | | | | | | | | | | |
Consumer | | 7,516 | | 3,731 | | — | | 3,731 | | — | | | | | | | | | | |
| | $ | 147,447 | | $ | 53,001 | | $ | 32,395 | | $ | 85,396 | | $ | 3,352 | | | | | | | | | | |
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| | Unpaid | | Recorded | | Recorded | | Total | | | | | | | | | | | | |
| | Contractual | | Investment with | | Investment with | | Recorded | | Related | | | | | | | | | | |
December 31, 2013 | | Principal Balance | | No Allowance | | Allowance | | Investment | | Allowance | | | | | | | | | | |
Commercial and industrial: | | | | | | | | | | | | | | | | | | | | |
Secured | | $ | 60,309 | | $ | 19,280 | | $ | 16,092 | | $ | 35,372 | | $ | 2,705 | | | | | | | | | | |
Unsecured | | 11,772 | | 240 | | 1,204 | | 1,444 | | 15 | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | |
Secured by commercial properties | | 49,306 | | 20,185 | | 16,070 | | 36,255 | | 339 | | | | | | | | | | |
Secured by residential properties | | 5,013 | | 1,347 | | 1,648 | | 2,995 | | 39 | | | | | | | | | | |
Construction and land development: | | | | | | | | | | | | | | | | | | | | |
Residential construction loans | | 33 | | — | | — | | — | | — | | | | | | | | | | |
Commercial construction loans and land development | | 48,515 | | 15,225 | | 4,592 | | 19,817 | | 39 | | | | | | | | | | |
Consumer | | 7,946 | | 4,509 | | — | | 4,509 | | — | | | | | | | | | | |
| | $ | 182,894 | | $ | 60,786 | | $ | 39,606 | | $ | 100,392 | | $ | 3,137 | | | | | | | | | | |
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Average investment in non-covered PCI loans is summarized by class in the following table (in thousands). |
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| | Three Months Ended March 31, | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 | | | | | | | | | | | | | | | | | | | |
Commercial and industrial: | | | | | | | | | | | | | | | | | | | | | | | |
Secured | | $ | 33,997 | | $ | 68,316 | | | | | | | | | | | | | | | | | | | |
Unsecured | | 1,335 | | 3,107 | | | | | | | | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | | |
Secured by commercial properties | | 32,874 | | 53,371 | | | | | | | | | | | | | | | | | | | |
Secured by residential properties | | 2,852 | | 7,413 | | | | | | | | | | | | | | | | | | | |
Construction and land development: | | | | | | | | | | | | | | | | | | | | | | | |
Residential construction loans | | — | | 354 | | | | | | | | | | | | | | | | | | | |
Commercial construction loans and land development | | 17,718 | | 29,266 | | | | | | | | | | | | | | | | | | | |
Consumer | | 4,120 | | 75 | | | | | | | | | | | | | | | | | | | |
| | $ | 92,896 | | $ | 161,902 | | | | | | | | | | | | | | | | | | | |
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Non-covered non-accrual loans, excluding those classified as held for sale, are summarized by class in the following table (in thousands). |
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| | March 31, | | December 31, | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 | | | | | | | | | | | | | | | | | | | |
Commercial and industrial: | | | | | | | | | | | | | | | | | | | | | | | |
Secured | | $ | 14,551 | | $ | 15,430 | | | | | | | | | | | | | | | | | | | |
Unsecured | | 1,024 | | 1,300 | | | | | | | | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | | | | |
Secured by commercial properties | | 1,094 | | 2,638 | | | | | | | | | | | | | | | | | | | |
Secured by residential properties | | 2,371 | | 398 | | | | | | | | | | | | | | | | | | | |
Construction and land development: | | | | | | | | | | | | | | | | | | | | | | | |
Residential construction loans | | — | | — | | | | | | | | | | | | | | | | | | | |
Commercial construction loans and land development | | 142 | | 112 | | | | | | | | | | | | | | | | | | | |
Consumer | | — | | — | | | | | | | | | | | | | | | | | | | |
| | $ | 19,182 | | $ | 19,878 | | | | | | | | | | | | | | | | | | | |
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At March 31, 2014 and December 31, 2013, non-covered non-accrual loans included non-covered PCI loans of $13.9 million and $15.8 million, respectively, for which discount accretion has been suspended because the extent and timing of cash flows from these non-covered PCI loans can no longer be reasonably estimated. In addition to the non-covered non-accrual loans in the table above, $3.7 million and $3.5 million of real estate loans secured by residential properties and classified as held for sale were in non-accrual status at March 31, 2014 and December 31, 2013, respectively. |
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Interest income recorded on accruing impaired loans and on non-accrual loans was $1.4 million for the three months ended March 31, 2014. Interest income recorded on accruing impaired loans and on non-accrual loans for the three months ended March 31, 2013 was nominal. |
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The Bank classifies loan modifications as 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 also reconfigures 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. |
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Information regarding TDRs granted is shown in the following tables (in thousands). At March 31, 2014, the Bank had no unadvanced commitments to borrowers whose loans have been restructured in TDRs. At December 31, 2013, the Bank had $0.5 million in such unadvanced commitments. |
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| | Recorded Investment in Loans Modified by | | | | | | | | | | | | | |
| | | | Interest Rate | | Payment Term | | Total | | | | | | | | | | | | | |
Three months ended March 31, 2014 | | A/B Note | | Adjustment | | Extension | | Modification | | | | | | | | | | | | | |
Commercial and industrial: | | | | | | | | | | | | | | | | | | | | | |
Secured | | $ | — | | $ | — | | $ | — | | $ | — | | | | | | | | | | | | | |
Unsecured | | — | | — | | — | | — | | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | | |
Secured by commercial properties | | — | | — | | 345 | | 345 | | | | | | | | | | | | | |
Secured by residential properties | | — | | — | | 258 | | 258 | | | | | | | | | | | | | |
Construction and land development: | | | | | | | | | | | | | | | | | | | | | |
Residential construction loans | | — | | — | | — | | — | | | | | | | | | | | | | |
Commercial construction loans and land development | | — | | — | | 142 | | 142 | | | | | | | | | | | | | |
Consumer | | — | | — | | — | | — | | | | | | | | | | | | | |
| | $ | — | | $ | — | | $ | 745 | | $ | 745 | | | | | | | | | | | | | |
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| | Recorded Investment in Loans Modified by | | | | | | | | | | | | | |
| | | | Interest Rate | | Payment Term | | Total | | | | | | | | | | | | | |
Three months ended March 31, 2013 | | A/B Note | | Adjustment | | Extension | | Modification | | | | | | | | | | | | | |
Commercial and industrial: | | | | | | | | | | | | | | | | | | | | | |
Secured | | $ | — | | $ | — | | $ | 28 | | $ | 28 | | | | | | | | | | | | | |
Unsecured | | — | | — | | — | | — | | | | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | | |
Secured by commercial properties | | — | | — | | 1,236 | | 1,236 | | | | | | | | | | | | | |
Secured by residential properties | | — | | — | | 262 | | 262 | | | | | | | | | | | | | |
Construction and land development: | | | | | | | | | | | | | | | | | | | | | |
Residential construction loans | | — | | — | | — | | — | | | | | | | | | | | | | |
Commercial construction loans and land development | | — | | — | | 570 | | 570 | | | | | | | | | | | | | |
Consumer | | — | | — | | — | | — | | | | | | | | | | | | | |
| | $ | — | | $ | — | | $ | 2,096 | | $ | 2,096 | | | | | | | | | | | | | |
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An analysis of the aging of the Bank’s non-covered loan portfolio is shown in the following tables (in thousands). |
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| | | | | | | | | | | | | | | | Accruing Loans | |
| | Loans Past Due | | Loans Past Due | | Loans Past Due | | Total | | Current | | PCI | | Total | | Past Due | |
March 31, 2014 | | 30-59 Days | | 60-89 Days | | 90 Days or More | | Past Due Loans | | Loans | | Loans | | Loans | | 90 Days or More | |
Commercial and industrial: | | | | | | | | | | | | | | | | | |
Secured | | $ | 4,492 | | $ | 4,914 | | $ | 379 | | $ | 9,785 | | $ | 1,528,769 | | $ | 32,621 | | $ | 1,571,175 | | $ | 1 | |
Unsecured | | 88 | | 1 | | — | | 89 | | 97,598 | | 1,225 | | 98,912 | | — | |
Real estate: | | | | | | | | | | | | | | | | | |
Secured by commercial properties | | 205 | | — | | — | | 205 | | 1,083,444 | | 29,492 | | 1,113,141 | | — | |
Secured by residential properties | | 1,976 | | 49 | | 70 | | 2,095 | | 417,416 | | 2,709 | | 422,220 | | — | |
Construction and land development: | | | | | | | | | | | | | | | | | |
Residential construction loans | | 381 | | — | | — | | 381 | | 67,540 | | — | | 67,921 | | — | |
Commercial construction loans and land development | | — | | 3,121 | | — | | 3,121 | | 300,722 | | 15,618 | | 319,461 | | — | |
Consumer | | 240 | | 10 | | 1 | | 251 | | 50,134 | | 3,731 | | 54,116 | | 1 | |
| | $ | 7,382 | | $ | 8,095 | | $ | 450 | | $ | 15,927 | | $ | 3,545,623 | | $ | 85,396 | | $ | 3,646,946 | | $ | 2 | |
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| | | | | | | | | | | | | | | | Accruing Loans | |
| | Loans Past Due | | Loans Past Due | | Loans Past Due | | Total | | Current | | PCI | | Total | | Past Due | |
December 31, 2013 | | 30-59 Days | | 60-89 Days | | 90 Days or More | | Past Due Loans | | Loans | | Loans | | Loans | | 90 Days or More | |
Commercial and industrial: | | | | | | | | | | | | | | | | | |
Secured | | $ | 2,171 | | $ | 277 | | $ | 1,354 | | $ | 3,802 | | $ | 1,492,793 | | $ | 35,372 | | $ | 1,531,967 | | $ | 272 | |
Unsecured | | 333 | | 9 | | 60 | | 402 | | 103,453 | | 1,444 | | 105,299 | | 59 | |
Real estate: | | | | | | | | | | | | | | | | | |
Secured by commercial properties | | 192 | | — | | 132 | | 324 | | 1,044,437 | | 36,255 | | 1,081,016 | | — | |
Secured by residential properties | | 1,045 | | 36 | | 203 | | 1,284 | | 371,958 | | 2,995 | | 376,237 | | 203 | |
Construction and land development: | | | | | | | | | | | | | | | | | |
Residential construction loans | | 415 | | — | | — | | 415 | | 64,664 | | — | | 65,079 | | — | |
Commercial construction loans and land development | | 41 | | 881 | | 112 | | 1,034 | | 278,621 | | 19,817 | | 299,472 | | — | |
Consumer | | 201 | | 60 | | — | | 261 | | 50,806 | | 4,509 | | 55,576 | | — | |
| | $ | 4,398 | | $ | 1,263 | | $ | 1,861 | | $ | 7,522 | | $ | 3,406,732 | | $ | 100,392 | | $ | 3,514,646 | | $ | 534 | |
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Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset levels, (iii) classified loan levels, (iv) net charge-offs, and (v) general economic conditions in the state and local markets. |
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The Bank utilizes a risk grading matrix to assign a risk grade to each of the loans in its portfolio. A risk rating is assigned based on an assessment of the borrower’s management, collateral position, financial capacity, and economic factors. The general characteristics of the various risk grades are described below. |
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Pass — “Pass” loans present a range of acceptable risks to the Bank. Loans that would be considered virtually risk-free are rated Pass — low risk. Loans that exhibit sound standards based on the grading factors above and present a reasonable risk to the Bank are rated Pass — normal risk. Loans that exhibit a minor weakness in one or more of the grading criteria but still present an acceptable risk to the Bank are rated Pass — high risk. |
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Special Mention — “Special Mention” loans have 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 Bank’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Bank to sufficient risk to require adverse classification. |
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Substandard — “Substandard” loans are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Many substandard loans are considered impaired. |
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PCI — “PCI” loans exhibited evidence of credit deterioration at acquisition that made it probable that all contractually required principal payments would not be collected. |
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The following tables present the internal risk grades of non-covered loans, as previously described, in the portfolio by class (in thousands). |
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March 31, 2014 | | Pass | | Special Mention | | Substandard | | PCI | | Total | | | | | | | | | | |
Commercial and industrial: | | | | | | | | | | | | | | | | | | | | |
Secured | | $ | 1,474,358 | | $ | 29,114 | | $ | 35,082 | | $ | 32,621 | | $ | 1,571,175 | | | | | | | | | | |
Unsecured | | 97,512 | | 8 | | 167 | | 1,225 | | 98,912 | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | |
Secured by commercial properties | | 1,076,039 | | 5,835 | | 1,775 | | 29,492 | | 1,113,141 | | | | | | | | | | |
Secured by residential properties | | 413,626 | | — | | 5,885 | | 2,709 | | 422,220 | | | | | | | | | | |
Construction and land development: | | | | | | | | | | | | | | | | | | | | |
Residential construction loans | | 67,921 | | — | | — | | — | | 67,921 | | | | | | | | | | |
Commercial construction loans and land development | | 299,760 | | 280 | | 3,803 | | 15,618 | | 319,461 | | | | | | | | | | |
Consumer | | 50,348 | | — | | 37 | | 3,731 | | 54,116 | | | | | | | | | | |
| | $ | 3,479,564 | | $ | 35,237 | | $ | 46,749 | | $ | 85,396 | | $ | 3,646,946 | | | | | | | | | | |
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December 31, 2013 | | Pass | | Special Mention | | Substandard | | PCI | | Total | | | | | | | | | | |
Commercial and industrial: | | | | | | | | | | | | | | | | | | | | |
Secured | | $ | 1,450,734 | | $ | 16,840 | | $ | 29,021 | | $ | 35,372 | | $ | 1,531,967 | | | | | | | | | | |
Unsecured | | 103,674 | | 12 | | 169 | | 1,444 | | 105,299 | | | | | | | | | | |
Real estate: | | | | | | | | | | | | | | | | | | | | |
Secured by commercial properties | | 1,038,930 | | 4,436 | | 1,395 | | 36,255 | | 1,081,016 | | | | | | | | | | |
Secured by residential properties | | 367,758 | | — | | 5,484 | | 2,995 | | 376,237 | | | | | | | | | | |
Construction and land development: | | | | | | | | | | | | | | | | | | | | |
Residential construction loans | | 65,079 | | — | | — | | — | | 65,079 | | | | | | | | | | |
Commercial construction loans and land development | | 275,808 | | 3,384 | | 463 | | 19,817 | | 299,472 | | | | | | | | | | |
Consumer | | 51,052 | | 1 | | 14 | | 4,509 | | 55,576 | | | | | | | | | | |
| | $ | 3,353,035 | | $ | 24,673 | | $ | 36,546 | | $ | 100,392 | | $ | 3,514,646 | | | | | | | | | | |
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The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses inherent in the existing portfolio of loans. Management has responsibility for determining the level of the allowance for loan losses, subject to review by the Audit Committee of the Company’s Board of Directors and the Loan Review Committee of the Bank’s board of directors. |
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It is management’s responsibility at the end of each quarter, or more frequently as deemed necessary, to analyze the level of the allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies Topics of the ASC. Estimated credit losses are the probable current amount of loans that the Company will be unable to collect given facts and circumstances as of the evaluation date. When management determines that a loan or portion thereof is uncollectible, the loan, or portion thereof, is charged off against the allowance for loan losses. Any subsequent recovery of charged-off loans is added back to the allowance for loan losses. The Bank’s loan portfolio is designated into two populations: acquired loans and originated loans. The allowance for loan losses is calculated separately for acquired and originated loans. |
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Originated Loans |
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The Company has developed a methodology that seeks to determine an allowance within the scope of the Receivables and Contingencies Topics of the ASC. Each of the loans that has been determined to be impaired is within the scope of the Receivables Topic. Impaired loans that are equal to or greater than $0.5 million are individually evaluated for impairment using one of three impairment measurement methods as of the evaluation date: (1) the present value of expected future discounted cash flows on the loan, (2) the loan’s observable market price, or (3) the fair value of the collateral if the loan is collateral dependent. Specific reserves are provided in the estimate of the allowance based on the measurement of impairment under these three methods, except for collateral dependent loans, which require the fair value method. All non-impaired loans are within the scope of the Contingencies Topic. Estimates of loss for the Contingencies Topic are calculated based on historical loss experience by loan portfolio segment adjusted for changes in trends, conditions, and other relevant factors that affect repayment of loans as of the evaluation date. While historical loss experience provides a reasonable starting point for the analysis, historical losses, or recent trends in losses, are not the sole basis upon which to determine the appropriate level for the allowance for loan losses. Management considers recent qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience, including but not limited to: changes in lending policies and procedures; changes in underwriting standards; changes in economic and business conditions and developments that affect the collectability of the portfolio; the condition of various market segments; changes in the nature and volume of the portfolio and in the terms of loans; changes in lending management and staff; changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; changes in the loan review system; changes in the value of underlying collateral for collateral-dependent loans; and any concentrations of credit and changes in the level of such concentrations. |
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The loan review program is designed to identify and monitor problem loans by maintaining a credit grading process, requiring that timely and appropriate changes be made to reviewed loans and coordinating the delivery of the information necessary to assess the appropriateness of the allowance for loan losses. Loans are evaluated for impaired status when: (i) payments on the loan are delayed, typically by 90 days or more (unless the loan is both well secured and in the process of collection), (ii) the loan becomes classified, (iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a problem. |
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Homogeneous loans, such as consumer installment loans, residential mortgage loans and home equity loans, are not individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are established for each homogeneous pool of loans based on the expected net charge-offs from current trends in delinquencies, losses or historical experience and general economic conditions. At March 31, 2014 and December 31, 2013, there were no material delinquencies in these types of loans. |
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Acquired Loans |
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Loans acquired in a business combination are recorded at their estimated fair value on their purchase date and with no carryover of the related allowance for loan losses. Loans without evidence of credit impairment at acquisition are subsequently evaluated for any required allowance at each reporting date. An allowance for loan losses is calculated using a methodology similar to that described above for originated loans. The allowance as determined for each loan collateral type is compared to the remaining fair value discount for that loan collateral type. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for the loan and once the discount is depleted, losses are applied against the allowance established for that loan. |
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PCI loans acquired in the PlainsCapital Merger are accounted for on an individual loan basis, while PCI loans acquired in the FNB Transaction are accounted for both in pools and at the individual loan level. Cash flows expected to be collected are recast quarterly for each loan or pool. These evaluations require the continued use and updating of key assumptions and estimates such as default rates, loss severity given default and prepayment speed assumptions, similar to those used for the initial fair value estimate. Management judgment must be applied in developing these assumptions. If expected cash flows for a loan or pool decreases, an increase in the allowance for loan losses is made through a charge to the provision for loan losses. If expected cash flows for a loan or pool increase, any previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield which will be taken into income over the remaining life of the loan. |
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The allowance is subject to regulatory examinations and determinations as to appropriateness, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance. |
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Changes in the allowance for non-covered loan losses, distributed by portfolio segment, are shown below (in thousands). |
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| | Commercial and | | | | Construction and | | | | | | | | | | | | | | |
Three months ended March 31, 2014 | | Industrial | | Real Estate | | Land Development | | Consumer | | Total | | | | | | | | | | |
Balance, beginning of period | | $ | 16,865 | | $ | 8,331 | | $ | 7,957 | | $ | 88 | | $ | 33,241 | | | | | | | | | | |
Provision charged to operations | | (57 | ) | 1,319 | | 17 | | 109 | | 1,388 | | | | | | | | | | |
Loans charged off | | (807 | ) | — | | — | | (74 | ) | (881 | ) | | | | | | | | | |
Recoveries on charged off loans | | 725 | | 32 | | 122 | | 18 | | 897 | | | | | | | | | | |
Balance, end of period | | $ | 16,726 | | $ | 9,682 | | $ | 8,096 | | $ | 141 | | $ | 34,645 | | | | | | | | | | |
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| | Commercial and | | | | Construction and | | | | | | | | | | | | | | |
Three months ended March 31, 2013 | | Industrial | | Real Estate | | Land Development | | Consumer | | Total | | | | | | | | | | |
Balance, beginning of period | | $ | 1,845 | | $ | 977 | | $ | 582 | | $ | 5 | | $ | 3,409 | | | | | | | | | | |
Provision charged to operations | | 6,911 | | 2,437 | | 3,597 | | 60 | | 13,005 | | | | | | | | | | |
Loans charged off | | (438 | ) | (31 | ) | — | | (56 | ) | (525 | ) | | | | | | | | | |
Recoveries on charged off loans | | 494 | | 139 | | 107 | | 8 | | 748 | | | | | | | | | | |
Balance, end of period | | $ | 8,812 | | $ | 3,522 | | $ | 4,286 | | $ | 17 | | $ | 16,637 | | | | | | | | | | |
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The non-covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands). |
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| | Commercial and | | | | Construction and | | | | | | | | | | | | | | |
March 31, 2014 | | Industrial | | Real Estate | | Land Development | | Consumer | | Total | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | 1,930 | | $ | 2,399 | | $ | 142 | | $ | — | | $ | 4,471 | | | | | | | | | | |
Loans collectively evaluated for impairment | | 1,634,311 | | 1,500,761 | | 371,622 | | 50,385 | | 3,557,079 | | | | | | | | | | |
PCI Loans | | 33,846 | | 32,201 | | 15,618 | | 3,731 | | 85,396 | | | | | | | | | | |
| | $ | 1,670,087 | | $ | 1,535,361 | | $ | 387,382 | | $ | 54,116 | | $ | 3,646,946 | | | | | | | | | | |
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| | Commercial and | | | | Construction and | | | | | | | | | | | | | | |
December 31, 2013 | | Industrial | | Real Estate | | Land Development | | Consumer | | Total | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | 2,273 | | $ | 373 | | $ | 112 | | $ | — | | $ | 2,758 | | | | | | | | | | |
Loans collectively evaluated for impairment | | 1,598,177 | | 1,417,630 | | 344,622 | | 51,067 | | 3,411,496 | | | | | | | | | | |
PCI Loans | | 36,816 | | 39,250 | | 19,817 | | 4,509 | | 100,392 | | | | | | | | | | |
| | $ | 1,637,266 | | $ | 1,457,253 | | $ | 364,551 | | $ | 55,576 | | $ | 3,514,646 | | | | | | | | | | |
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The allowance for non-covered loan losses was distributed by portfolio segment and impairment methodology as shown below (in thousands). |
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| | Commercial and | | | | Construction and | | | | | | | | | | | | | | |
March 31, 2014 | | Industrial | | Real Estate | | Land Development | | Consumer | | Total | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | 421 | | $ | — | | $ | — | | $ | — | | $ | 421 | | | | | | | | | | |
Loans collectively evaluated for impairment | | 13,589 | | 9,153 | | 7,989 | | 141 | | 30,872 | | | | | | | | | | |
PCI Loans | | 2,716 | | 529 | | 107 | | — | | 3,352 | | | | | | | | | | |
| | $ | 16,726 | | $ | 9,682 | | $ | 8,096 | | $ | 141 | | $ | 34,645 | | | | | | | | | | |
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| | Commercial and | | | | Construction and | | | | | | | | | | | | | | |
December 31, 2013 | | Industrial | | Real Estate | | Land Development | | Consumer | | Total | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | 421 | | $ | — | | $ | — | | $ | — | | $ | 421 | | | | | | | | | | |
Loans collectively evaluated for impairment | | 13,724 | | 7,953 | | 7,918 | | 88 | | 29,683 | | | | | | | | | | |
PCI Loans | | 2,720 | | 378 | | 39 | | — | | 3,137 | | | | | | | | | | |
| | $ | 16,865 | | $ | 8,331 | | $ | 7,957 | | $ | 88 | | $ | 33,241 | | | | | | | | | | |
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