Allowance for Loan and Lease Losses | NOTE 6. ALLOWANCE FOR LOAN AND LEASE LOSSES The allowance for loan and lease losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The methodology is based on historical loss experience by type of credit and internal risk grade, changes in the composition and volume of the portfolio, and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan and lease losses is designated to account for credit deterioration as it occurs. Prior to the second quarter of 2018, the Company was utilizing a peer bank allowance coverage ratio in the qualitative reserve calculation, as the Company did not have enough historical defaults to rely on its own loss factors. Beginning the second quarter of 2018, the Company had a sufficient amount of defaults over the five year lookback period to transition over to relying more on its own historical loss data versus peer data. While this did not result in a significant change to the allowance for loan and lease losses as a whole, it continues to impact the provision for certain loan categories in which the Company had experienced more historical defaults. On November 14, 2018, the Company closed its acquisition of Comanche. At the date of acquisition, Comanche had $117.2 million in loans. In accordance with ASC 805 Business Combinations, the Company utilized a third party to value the loan portfolio as of the acquisition date. Based upon the third party valuation, the fair value of the loans was approximately $116.2 million at the acquisition date. The overall discount calculated was $946 thousand and will be accreted into interest income over the life of the loans. On April 2, 2019, the Company closed its acquisition of Beeville. At the date of acquisition, Beeville had $298.9 million in loans. In accordance with ASC 805 Business Combinations, the Company utilized a third party to value the loan portfolio as of the acquisition date. Based upon the third party valuation, the fair value of the loans was approximately $296.3 million at the acquisition date. The overall discount calculated was $2.6 million and will be accreted into interest income over the life of the loans. As of June 30, 2019, all purchased loans were excluded from the allowance for loan and lease losses calculation given there was no deterioration between the acquisition date and the end of the second quarter of 2019. Purchased credit impaired loans were insignificant. Going forward, management will evaluate the remaining credit quality, credit discount and charge-offs associated with these purchased loans to determine if an additional allowance is deemed necessary. The following tables present information related to allowance for loan and lease losses for the periods presented: Allowance Rollforward Three Months Ended June 30, 2019 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Commercial and industrial loans $ 4,661 $ (643 ) $ 31 $ 168 $ 4,217 Real estate: 1-4 single family residential loans 34 — — (2 ) 32 Construction, land and development loans 749 — — 45 794 Commercial real estate loans (including multifamily) 1,057 — — 134 1,191 Consumer loans and leases 57 (16 ) 3 (9 ) 35 Municipal and other loans 11 — 1 (4 ) 8 Ending allowance balance $ 6,569 $ (659 ) $ 35 $ 332 $ 6,277 Allowance Rollforward Three Months Ended June 30, 2018 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Commercial and industrial loans $ 2,906 $ (321 ) $ 3 $ 2,298 $ 4,886 Real estate: 1-4 single family residential loans 887 (5 ) — (564 ) 318 Construction, land and development loans 540 — — (345 ) 195 Commercial real estate loans (including multifamily) 1,032 — — (799 ) 233 Consumer loans and leases 175 (24 ) — 195 346 Municipal and other loans 187 — — (150 ) 37 Ending allowance balance $ 5,727 $ (350 ) $ 3 $ 635 $ 6,015 Allowance Rollforward Six Months Ended June 30, 2019 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Commercial and industrial loans $ 4,453 $ (1,221 ) $ 59 $ 926 $ 4,217 Real estate: 1-4 single family residential loans 59 — — (27 ) 32 Construction, land and development loans 731 — — 63 794 Commercial real estate loans (including multifamily) 960 — — 231 1,191 Consumer loans and leases 80 (34 ) 5 (16 ) 35 Municipal and other loans 3 — 1 4 8 Ending allowance balance $ 6,286 $ (1,255 ) $ 65 $ 1,181 $ 6,277 Allowance Rollforward Six Months Ended June 30, 2018 Beginning Balance Charge-offs Recoveries Provision Ending Balance (Dollars in thousands) Commercial and industrial loans $ 3,046 $ (645 ) $ 69 $ 2,416 $ 4,886 Real estate: 1-4 single family residential loans 902 (5 ) — (579 ) 318 Construction, land and development loans 441 — — (246 ) 195 Commercial real estate loans (including multifamily) 898 — — (665 ) 233 Consumer loans and leases 198 (30 ) — 178 346 Municipal and other loans 167 — — (130 ) 37 Ending allowance balance $ 5,652 $ (680 ) $ 69 $ 974 $ 6,015 Credit Quality Indicators In evaluating credit risk, the Company looks at multiple factors; however, management considers delinquency status to be the most meaningful indicator of the credit quality of 1-4 single family residential, home equity loans and lines of credit and consumer loans. Delinquency statistics are updated at least monthly. Internal risk ratings are considered the most meaningful indicator of credit quality for commercial, construction, land and development and commercial real estate loans. Internal risk ratings are updated on a continuous basis. The following tables present an aging analysis of the recorded investment for delinquent loans by portfolio and segment: Accruing June 30, 2019 Current 30 to 59 Days Past Due 60 to 89 Days Past Due 90 Days or More Past Due Non- Accrual Total (Dollars in thousands) Commercial and industrial loans $ 192,098 $ 332 $ 62 $ — $ 5,282 $ 197,774 Real estate: 1-4 single family residential loans 277,004 303 45 — 208 277,560 Construction, land and development 174,373 2,194 — — — 176,567 Commercial real estate loans (including multifamily) 665,764 13 1,068 — 136 666,981 Consumer loans and leases 20,495 157 47 — 46 20,745 Municipal and other loans 69,576 — 82 — 53 69,711 Total loans $ 1,399,310 $ 2,999 $ 1,304 $ — $ 5,725 $ 1,409,338 Accruing December 31, 2018 Current 30 to 59 Days Past Due 60 to 89 Days Past Due 90 Days or More Past Due Non- Accrual Total (Dollars in thousands) Commercial and industrial loans $ 169,206 $ 605 $ 223 $ 288 $ 3,570 $ 173,892 Real estate: 1-4 single family residential loans 273,909 581 64 — 1,090 275,644 Construction, land and development 159,723 11 — — — 159,734 Commercial real estate loans (including multifamily) 396,559 451 589 — 354 397,953 Consumer loans and leases 24,109 208 44 — 17 24,378 Municipal and other loans 61,289 50 — — — 61,339 Total loans $ 1,084,795 $ 1,906 $ 920 $ 288 $ 5,031 $ 1,092,940 There were no loans 90 days or more past due and still accruing at June 30, 2019. There were four loans 90 days or more past due and still accruing at December 31, 2018 with a recorded investment of $288 thousand. At June 30, 2019, non-accrual loans that were 30 to 59 days past due were $38 thousand, non-accrual loans that were 60 to 89 days past due were $59 thousand, and non-accrual loans that were 90 days or more past due were $1.7 million. At December 31, 2018, non-accrual loans that were 30 to 59 days past due were $175 thousand, non-accrual loans that were 60 to 89 days past due were $143 thousand, and non-accrual loans that were 90 days or more past due were $2.0 million. Loans exhibiting potential credit weaknesses that deserve management’s close attention and that if left uncorrected may result in deterioration of the repayment capacity of the borrower are categorized as special mention. Loans with well-defined credit weaknesses including payment defaults, declining collateral values, frequent overdrafts, operating losses, increasing balance sheet leverage, inadequate cash flow, project cost overruns, unreasonable construction delays, past due real estate taxes or exhausted interest reserves are assigned an internal risk rating of substandard. Loans classified as substandard can be on an accrual or non-accrual basis, as determined by its unique characteristics. A loan with a weakness so severe that collection in full is highly questionable or improbable will be assigned an internal risk rating of doubtful. The following table summarizes the Company’s loans by key indicators of credit quality: June 30, 2019 Pass Special Mention Substandard Doubtful (Dollars in thousands) Commercial and industrial loans $ 191,854 $ 2,812 $ 3,108 $ — Real estate: 1-4 single family residential loans 276,076 951 533 — Construction, land and development 175,610 10 947 — Commercial real estate loans (including multifamily) 660,606 3,214 3,161 — Consumer loans and leases 20,734 — 11 — Municipal and other loans 69,711 — — — Total loans $ 1,394,591 $ 6,987 $ 7,760 $ — December 31, 2018 Pass Special Mention Substandard Doubtful (Dollars in thousands) Commercial and industrial loans $ 163,908 $ 3,170 $ 6,601 $ 213 Real estate: 1-4 single family residential loans 270,839 1,714 2,547 544 Construction, land and development 157,688 24 2,022 — Commercial real estate loans (including multifamily) 383,323 12,412 1,806 412 Consumer loans and leases 20,798 1,836 180 1,564 Municipal and other loans 60,837 484 — 18 Total loans $ 1,057,393 $ 19,640 $ 13,156 $ 2,751 Internal risk ratings and other credit metrics are key factors in identifying loans to be individually evaluated for impairment and impact management’s estimates of loss factors used in determining the amount of the allowance for loan and lease losses. The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment: Loans - Recorded Investment Allowance for Credit Loss June 30, 2019 Individually Evaluated for Impairment Collectively Evaluated for Impairment Individually Evaluated for Impairment Collectively Evaluated for Impairment (Dollars in thousands) Commercial and industrial loans $ 3,783 $ 193,991 $ 1,618 $ 2,599 Real estate: 1-4 single family residential loans 1,401 276,159 4 28 Construction, land and development 219 176,348 — 794 Commercial real estate loans (including multifamily) 241 666,740 — 1,191 Consumer loans and leases 16 20,729 4 31 Municipal and other loans — 69,711 — 8 Total loans $ 5,660 $ 1,403,678 $ 1,626 $ 4,651 Loans - Recorded Investment Allowance for Credit Loss December 31, 2018 Individually Evaluated for Impairment Collectively Evaluated for Impairment Individually Evaluated for Impairment Collectively Evaluated for Impairment (Dollars in thousands) Commercial and industrial loans $ 3,640 $ 170,252 $ 1,234 $ 3,219 Real estate: 1-4 single family residential loans 1,193 274,451 29 30 Construction, land and development — 159,734 — 731 Commercial real estate loans (including multifamily) — 397,953 — 960 Consumer loans and leases 17 24,361 4 76 Municipal and other loans — 61,339 — 3 Total loans $ 4,850 $ 1,088,090 $ 1,267 $ 5,019 The following tables set forth certain information regarding the Company’s impaired loans that were evaluated for specific reserves: Impaired Loans - With Allowance Impaired Loans - With no Allowance June 30, 2019 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance (Dollars in thousands) Commercial and industrial loans $ 3,124 $ 6,490 $ 1,618 $ 659 $ 3,170 Real estate: 1-4 single family residential loans 152 160 4 1,249 1,582 Construction, land and development — — — 219 223 Commercial real estate loans (including multifamily) — — — 241 246 Consumer loans and leases 16 16 4 — — Municipal and other loans — — — — — Total loans $ 3,292 $ 6,666 $ 1,626 $ 2,368 $ 5,221 Impaired Loans - With Allowance Impaired Loans - With no Allowance December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance (Dollars in thousands) Commercial and industrial loans $ 1,843 $ 5,392 $ 1,234 $ 1,797 $ 3,500 Real estate: 1-4 single family residential loans 116 124 29 1,077 1,086 Construction, land and development — — — — — Commercial real estate loans (including multifamily) — — — — — Consumer loans and leases 17 17 4 — — Municipal and other loans — — — — — Total loans $ 1,976 $ 5,533 $ 1,267 $ 2,874 $ 4,586 Three Months Ended June 30, 2019 2018 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (Dollars in thousands) Commercial and industrial loans $ 3,691 $ — $ 2,435 $ — Real estate: 1-4 single family residential loans 1,282 — 1,511 — Construction, land and development 220 — 24 — Commercial real estate loans (including multifamily) 243 — 149 — Consumer loans and leases 16 — 101 — Municipal and other loans — — — — Total loans $ 5,452 $ — $ 4,220 $ — Six Months Ended June 30, 2019 2018 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (Dollars in thousands) Commercial and industrial loans $ 3,797 $ — $ 2,620 $ — Real estate: 1-4 single family residential loans 1,295 — 1,518 — Construction, land and development 222 — 25 — Commercial real estate loans (including multifamily) 245 — 151 — Consumer loans and leases 17 — 103 — Municipal and other loans — — — — Total loans $ 5,576 $ — $ 4,417 $ — Troubled Debt Restructurings: The following table provides a summary of troubled debt restructurings (“TDRs”) based upon delinquency status, all of which are considered impaired: June 30, 2019 December 31, 2018 Number of contracts Recorded Investment Number of contracts Recorded Investment (Dollars in thousands) Performing TDRs: Commercial and industrial loans 3 $ 122 3 $ 69 Real estate: 1-4 single family residential loans 2 132 2 141 Construction, land and development — — — — Commercial real estate loans (including multifamily) — — — — Consumer loans and leases — — — — Municipal and other loans — — — — Total performing TDRs 5 254 5 210 Nonperforming TDRs 9 455 7 448 Total TDRs 14 $ 709 12 $ 658 Allowance attributable to TDRs $ 224 $ 149 The following table summarizes TDRs and includes newly designated TDRs as well as modifications made to existing TDRs. Modifications may include, but are not limited to, granting a material extension of time, entering into a forbearance agreement, adjusting the interest rate, accepting interest only payments for an extended period of time, a change in the amortization period or a combination of any of these. Post-modification balances represent the recorded investment at the end of Day 2 in which the modification was made: Three Months Ended June 30, 2019 2018 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance (Dollars in thousands) Commercial and industrial loans 3 $ 185 $ 185 $ 88 2 $ 73 $ 73 $ 53 Real estate: 1-4 single family residential loans — — — — 1 34 34 — Construction, land and development — — — — — — — — Commercial real estate loans (including multifamily) — — — — — — — — Consumer loans and leases — — — — — — — — Municipal and other loans — — — — — — — — Six Months Ended June 30, 2019 2018 Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance (Dollars in thousands) Commercial and industrial loans 3 $ 185 $ 185 $ 88 7 $ 442 $ 442 $ 192 Real estate: 1-4 single family residential loans — — — — 1 34 34 — Construction, land and development — — — — — — — — Commercial real estate loans (including multifamily) — — — — — — — — Consumer loans and leases — — — — — — — — Municipal and other loans — — — — — — — — There have been no defaults of troubled debt restructurings that took place within the three or six months ended June 30, 2019 and 2018. |