Loans Held for Investment and Allowance for Credit Losses | Loans Held for Investment and Allowance for Credit Losses Loans held for investment in the accompanying consolidated balance sheets are summarized as follows: December 31, 2020 2019 Loans held for investment, carried at amortized cost: Real estate: Construction and land $ 693,030 $ 629,374 Farmland 13,844 16,939 1 - 4 family residential 524,344 549,811 Multi-family residential 424,962 320,041 OOCRE 717,472 706,782 NOOCRE 1,904,132 1,784,201 Commercial 1,559,546 1,712,838 MW 577,594 183,628 Consumer 13,000 17,457 6,427,924 5,921,071 Deferred loan (fees) costs, net (2,468) 134 Allowance for credit losses (105,084) (29,834) Loans held for investment carried at amortized cost, net $ 6,320,372 $ 5,891,371 Loans held for investment, carried at fair value: PPP Loans $ 358,042 $ — Total loans held for investment, net $ 6,678,414 $ 5,891,371 Included in the net loan portfolio as of December 31, 2020 and 2019 is an accretable discount related to purchased performing and PCD loans, previously called PCI loans prior to the Company’s adoption of ASU 2016-13, acquired within a business combination in the approximate amounts of $15,526 and $57,811, respectively. The discount is being accreted into income on a level-yield basis over the life of the loans. For the years ended December 31, 2020 and 2019, the Company recognized $5,081 and $13,522, respectively, of accretion on PCD/PCI loans into interest income. In addition, included in the net loan portfolio as of December 31, 2020 and 2019 is a discount on retained loans from sale of originated SBA loans of $3,215 and $2,193, respectively. The majority of the Company's loan portfolio consists of loans to businesses and individuals in the Dallas-Fort Worth metroplex and the Houston metropolitan area. This geographic concentration subjects the loan portfolio to the general economic conditions within these areas. The risks created by this concentration have been considered by management in the determination of the adequacy of the ACL. Management believes the ACL was adequate to cover estimated losses on loans as of December 31, 2020 and 2019. PPP loans held for investment, carried at fair value Additionally, included in total loans held for investment, as of December 31, 2020, was $358,042 of PPP loans, which are carried at fair value. During the year ended December 31, 2020, the Company recognized upfront fee income of $12,811 which is included in government guaranteed loan income, net on the accompanying consolidated statements of income. During the year ended December 31, 2020, the Company recognized a valuation adjustment of $1,799 on PPP loans which is included in government guaranteed loan income, net on the accompanying consolidated statements of income and in change in fair value of government guaranteed loans using fair value option on the accompanying consolidated statements of cash flows. These PPP loans were originated through the SBA as a result of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and are considered 100% forgiven if certain criteria are met by the borrowers. As of December 31, 2020, we do not believe any of the Company’s PPP loans will not meet such criteria. 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 ACL related to loans held for investment is as follows: December 31, 2020 Construction and Land Farmland Residential Multifamily OOCRE NOOCRE Commercial Consumer Total Balance at beginning of year $ 3,821 $ 62 $ 2,143 $ 1,200 $ 1,991 $ 8,126 $ 12,369 $ 122 $ 29,834 Impact of adopting ASC 326 non-PCD loans (707) 4 3,716 628 3,406 5,138 7,025 217 19,427 Impact of adoption ASC 326 PCD loans 645 — 908 — 7,682 2,037 8,335 103 19,710 Credit loss expense non-PCD loans 4,554 (10) 1,720 4,403 4,364 15,397 24,413 (178) 54,663 Credit loss expense PCD loans (545) — (378) — (5,303) 7,404 817 (18) 1,977 Charge-offs — — (18) — (2,421) (2,865) (15,507) (162) (20,973) Recoveries — — 57 — — — 102 287 446 Ending Balance $ 7,768 $ 56 $ 8,148 $ 6,231 $ 9,719 $ 35,237 $ 37,554 $ 371 $ 105,084 December 31, 2019 Construction and Land Farmland Residential Multifamily OOCRE NOOCRE Commercial Consumer Total Balance at beginning of year $ 2,186 $ 58 $ 1,614 $ 361 $ 1,393 $ 5,070 $ 8,554 $ 19 $ 19,255 Credit Loss Expense 1,635 4 619 839 598 3,056 14,487 276 21,514 Charge-offs — — (157) — — — (10,898) (265) (11,320) Recoveries — — 67 — — — 226 92 385 Ending Balance $ 3,821 $ 62 $ 2,143 $ 1,200 $ 1,991 $ 8,126 $ 12,369 $ 122 $ 29,834 December 31, 2018 Construction and Land Farmland Residential Multifamily OOCRE NOOCRE Commercial Consumer Total Balance at beginning of year $ 1,270 $ 45 $ 1,195 $ 278 $ 1,113 $ 3,297 $ 5,588 $ 22 $ 12,808 Credit Loss Expense 916 13 419 83 280 1,773 3,100 19 6,603 Charge-offs — — — — — — (175) (22) (197) Recoveries — — — — — — 41 — 41 Ending Balance $ 2,186 $ 58 $ 1,614 $ 361 $ 1,393 $ 5,070 $ 8,554 $ 19 $ 19,255 A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. 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 as of December 31, 2020: Real Property (1) ACL Allocation Real estate: 1 - 4 family residential $ 199 $ 11 OOCRE — — NOOCRE 16,080 — Commercial 8,666 4,668 Consumer 143 50 Total $ 25,088 $ 4,729 (1) Loans reported exclude PCD loans that transitioned upon adoption of ASC 326 and accounted for on a pooled basis. Refer to Note 1 for further discussion. The following table presents loans individually and collectively evaluated for impairment, as well as 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 Company’s adoption of ASU 2016-13: December 31, 2019 Real Estate Construction, Residential Commercial Real Estate Commercial Consumer Total Loans individually evaluated for impairment $ 567 $ 156 $ 21,644 $ 5,188 $ 61 $ 27,616 Loans collectively evaluated for impairment 641,799 865,927 2,372,485 1,869,259 17,267 5,766,737 PCI loans 3,947 3,769 96,854 22,019 129 126,718 Total $ 646,313 $ 869,852 $ 2,490,983 $ 1,896,466 $ 17,457 $ 5,921,071 ACL Allocations Loans individually evaluated for impairment $ 128 $ 37 $ 395 $ 1,042 $ — $ 1,602 Loans collectively evaluated for impairment 3,755 3,306 9,702 10,754 122 27,639 PCI loans — — 20 573 — 593 Total $ 3,883 $ 3,343 $ 10,117 $ 12,369 $ 122 $ 29,834 The following table presents information on impaired loans as of December 31, 2019, as determined in accordance with ASC 310 prior to the Company’s adoption of ASU 2016-13: December 31, 2019 (1) Unpaid Recorded Recorded Total Related Average Real estate: Construction and land $ 567 $ — $ 567 $ 567 $ 128 $ 1,793 Farmland — — — — — — 1 - 4 family residential 156 — 156 156 37 158 Multi-family residential — — — — — — Commercial real estate 21,644 21,040 604 21,644 395 22,529 Commercial 5,188 2,011 3,177 5,188 1,042 8,546 Consumer 61 61 — 61 — 62 Total $ 27,616 $ 23,112 $ 4,504 $ 27,616 $ 1,602 $ 33,088 (1) Loans reported exclude PCI loans. 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. Nonaccrual loans, aggregated by class of loans, as of December 31, 2020 and 2019, were as follows: December 31, December 31, Nonaccrual Nonaccrual With No ACL Nonaccrual Nonaccrual With No ACL Real estate: Construction and land $ — $ — $ 567 $ — 1 - 4 family residential 3,308 3,199 1,581 1,581 OOCRE 6,266 5,645 3,029 2,778 NOOCRE 40,830 19,213 18,876 18,876 Commercial 29,318 1,015 5,672 2,747 Consumer 1,374 1,220 54 54 Total $ 81,096 $ 30,292 $ 29,779 $ 26,036 There were $1,508 of PCD loans that are not accounted for on a pooled basis included in nonaccrual loans at December 31, 2020. There were no PCD loans included in nonaccrual loans at December 31, 2019. During the year ended December 31, 2020 and 2019, interest income not recognized on non-accrual loans, excluding PCD/PCI loans, was $3,368 and $1,672, respectively. An age analysis of past due loans, aggregated by class of loans, as of December 31, 2020 and 2019 is as follows: December 31, 2020 30 to 59 Days 60 to 89 Days 90 Days or Greater Total Past Due Total Current PCD Total Total 90 Days Past Due and Still Accruing (1) Real estate: Construction and land $ — $ — $ — $ — $ 690,345 $ 2,685 $ 693,030 $ — Farmland — — — — 13,844 — 13,844 — 1 - 4 family residential 2,338 122 4,802 7,262 508,341 8,741 524,344 1,670 Multi-family residential — — — — 424,962 — 424,962 — OOCRE 2,278 2,143 2,814 7,235 672,246 37,991 717,472 1,280 NOOCRE 7,675 2,911 17,586 28,172 1,832,784 43,176 1,904,132 — Commercial 1,983 1,431 20,360 23,774 1,516,312 19,460 1,559,546 1,230 MW — — — — 577,594 — 577,594 — Consumer 75 77 1,338 1,490 11,308 202 13,000 24 $ 14,349 $ 6,684 $ 46,900 $ 67,933 $ 6,247,736 $ 112,255 $ 6,427,924 $ 4,204 (1) Loans 90 days past due and still accruing excludes $32,627 of pooled PCD loans as of December 31, 2020 that transitioned upon adoption of ASC 326. Refer to Note 1 for further discussion. December 31, 2019 30 to 59 Days 60 to 89 Days 90 Days or Greater Total Past Due Total Current PCI Total Total 90 Days Past Due and Still Accruing (1) Real estate: Construction and land $ — $ — $ — $ — $ 629,374 $ 3,947 $ 629,374 $ 800 Farmland — — — — 16,939 — 16,939 — 1 - 4 family residential 2,595 520 1,155 4,270 541,772 3,769 549,811 959 Multi-family residential — — — — 320,041 — 320,041 — Commercial real estate 12 3,834 868 4,714 2,389,415 96,854 2,490,983 511 Commercial 3,572 1,707 1,497 6,776 1,684,043 22,019 1,712,838 1,317 Consumer 30 2,641 140 2,811 14,646 129 17,457 73 $ 6,209 $ 8,702 $ 3,660 $ 18,571 $ 5,596,230 $ 126,718 $ 5,737,443 $ 3,660 (1) Loans 90 days past due and still accruing excludes $41,328 of PCI loans accounted for on a pooled basis as of December 31, 2019. Loans 90 days past due and still accruing interest were $4,204 and $3,660 as of December 31, 2020 and December 31, 2019, respectively. These loans are considered well-secured and in the process of collection as of the reporting date with plans in place for the borrowers to bring the loans fully current. The Company believes that it will collect all principal and interest due on each of the loans 90 days past due and still accruing. Troubled Debt Restructuring Modifications of terms for the Company’s loans and their inclusion as TDRs are based on individual facts and circumstances. Loan modifications that are included as TDRs may involve a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk, or deferral of principal payments, regardless of the period of the modification. The recorded investment in TDRs was $29,157 and $2,142 as of December 31, 2020 and 2019, respectively. The following table presents the pre- and post-modification amortized cost of loans modified as TDRs during the twelve months ended December 31, 2020. There were thirteen and two new TDRs during the years ended December 31, 2020 and 2019 . The Company did not grant principal reductions or interest rate concessions on any TDRs during the twelve months ended December 31, 2020. The terms of certain loans modified as TDRs during the year ended December 31, 2020 and December 31, 2019 are summarized in the following tables: During the year ended December 31, 2020 Adjusted Payment Structure Payment Deferrals Total Modifications Number of Loans OOCRE $ 5,326 $ — $ 5,326 5 NOOCRE — 19,454 19,454 4 Commercial 1,419 1,345 2,764 4 Total $ 6,745 $ 20,799 $ 27,544 13 During the year ended December 31, 2019 Adjusted Payment Structure Payment Deferrals Total Modifications Number of Loans Commercial $ 919 $ 115 $ 1,034 2 There were no loans modified as TDR loans within the previous 12 months and for which there was a payment default during the years ended December 31, 2020 and 2019. A default for purposes of this disclosure is a TDR loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral. Interest income recorded during the years ended December 31, 2020 on TDR loans and interest income that would have been recorded had the terms of the loans not been modified was $1,537. Interest income recorded during the year ended December 31, 2019 on TDR loans and interest income that would have been recorded had the terms of the loans not been modified was minimal. The Company has not committed to lend additional amounts to customers with outstanding loans classified as TDRs as of December 31, 2020 or December 31, 2019. For the year ended December 31, 2020, the Company had 754 modifications of loans with aggregate principal balances of $1,126,975 that qualified for temporary suspension of TDR requirements under Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act, 2021, and related interagency guidance of the federal banking agencies. As of February 18, 2021, the Company had $26,111 in loans with remaining deferments. Credit Quality Indicators From a credit risk standpoint, the Company classifies its loans in one of the following categories: (i) pass, (ii) special mention, (iii) substandard or (iv) doubtful. Loans classified as loss are charged-off. Loans not rated special mention, substandard, doubtful or loss are classified as pass loans. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on criticized credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit as of each monthly reporting period. All classified credits are evaluated for impairment. If impairment is determined to exist, a specific reserve is established. The Company’s methodology is structured so that specific reserves are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss). Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness, however, such concerns are generally not so pronounced that the Company expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating. Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed. Credits rated doubtful are those in which full collection of principal appears highly questionable, and in which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on nonaccrual. Credits classified as PCD are those that, at acquisition date, have experienced a more-than-insignificant deterioration in credit quality since origination. All loans considered to be PCI loans prior to January 1, 2020 were converted to PCD loans upon adoption of ASC 326. The Company elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. Loans are only removed from the existing pools if they are foreclosed, written off, paid off, or sold. The Company considers the guidance in ASC 310-20 when determining whether a modification, extension or renewal of a loan constitutes a current period origination. Generally, current period renewals of credit are reunderwritten at the point of renewal and considered current period originations for purposes of the table below. Based on the most recent analysis performed, the risk category of loans by class of loans based on year or origination is as follows: Term Loans Amortized Cost Basis by Origination Year 1 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total As of December 31, 2020 Construction and land: Pass $ 155,358 $ 282,497 $ 179,372 $ 11,791 $ 9,938 $ 27,147 $ 21,066 $ — $ 687,169 Special mention — — 2,666 — — — — — 2,666 Substandard — — 510 — — — — — 510 PCD — — — — — 2,685 — — 2,685 Total construction and land $ 155,358 $ 282,497 $ 182,548 $ 11,791 $ 9,938 $ 29,832 $ 21,066 $ — $ 693,030 Farmland: Pass $ 867 $ 972 $ 3,367 $ 3,688 $ — $ 3,656 $ 1,294 $ — $ 13,844 Total farmland $ 867 $ 972 $ 3,367 $ 3,688 $ — $ 3,656 $ 1,294 $ — $ 13,844 1 - 4 family residential: Pass $ 120,580 $ 79,617 $ 91,890 $ 49,338 $ 31,936 $ 115,797 $ 19,065 $ 2,968 $ 511,191 Special mention — 1,077 154 760 — 687 — — 2,678 Substandard — — 142 668 — — 924 — 1,734 PCD — — — — — 8,741 — — 8,741 Total 1 - 4 family residential $ 120,580 $ 80,694 $ 92,186 $ 50,766 $ 31,936 $ 125,225 $ 19,989 $ 2,968 $ 524,344 Multi-family residential: Pass $ 107,332 $ 106,559 $ 139,721 $ 18,722 $ 32,672 $ 7,218 $ 58 $ — $ 412,282 Special mention — — 12,680 — — — — — 12,680 Total multi-family residential $ 107,332 $ 106,559 $ 152,401 $ 18,722 $ 32,672 $ 7,218 $ 58 $ — $ 424,962 OOCRE: Pass $ 113,741 $ 65,262 $ 75,940 $ 79,253 $ 79,202 $ 176,668 $ 5,532 $ — $ 595,598 Special mention — 948 22,725 3,701 12,860 4,326 — — 44,560 Substandard 370 — 10,579 3,830 11,315 6,822 201 6,206 39,323 PCD — — — — 7,951 30,040 — — 37,991 Total OOCRE $ 114,111 $ 66,210 $ 109,244 $ 86,784 $ 111,328 $ 217,856 $ 5,733 $ 6,206 $ 717,472 NOOCRE: Pass $ 361,246 $ 255,976 $ 445,079 $ 90,738 $ 174,893 $ 309,572 $ 13,413 $ — $ 1,650,917 Special mention 101 31,714 37,572 19,262 25,997 37,951 493 — 153,090 Substandard 1,226 0 9,850 0 4,562 4,108 — 23,098 14,105 — 56,949 PCD — — 18,744 — 6,652 17,780 — — 43,176 Total NOOCRE $ 362,573 $ 297,540 $ 505,957 $ 114,108 $ 207,542 $ 388,401 $ 28,011 $ — $ 1,904,132 Commercial: Pass $ 251,004 $ 158,158 $ 112,961 $ 50,734 $ 19,821 $ 41,856 $ 758,832 $ 13,400 $ 1,406,766 Special mention 1,306 2,539 8,224 10,033 1,201 2,165 26,922 3,670 56,060 Substandard 722 4,487 23,245 3,772 7,216 2,083 30,460 5,275 77,260 PCD — — — 3,382 4,196 11,882 — — 19,460 Total commercial $ 253,032 $ 165,184 $ 144,430 $ 67,921 $ 32,434 $ 57,986 $ 816,214 $ 22,345 $ 1,559,546 MW: Pass $ — $ — $ — $ — $ — $ — $ 577,594 $ — $ 577,594 Total MW $ — $ — $ — $ — $ — $ — $ 577,594 $ — $ 577,594 Consumer: Pass $ 2,489 $ 1,216 $ 1,038 $ 3,899 $ 887 $ 353 $ 1,475 $ — $ 11,357 Special mention — — — — 25 227 — — 252 Substandard — — — 60 — 66 1,063 — 1,189 PCD — — — 36 — 166 — — 202 Total consumer $ 2,489 $ 1,216 $ 1,038 $ 3,995 $ 912 $ 812 $ 2,538 $ — $ 13,000 Total Pass $ 1,112,617 $ 950,257 $ 1,049,368 $ 308,163 $ 349,349 $ 682,267 $ 1,398,329 $ 16,368 $ 5,866,718 Total Special Mention 1,407 36,278 84,021 33,756 40,083 45,356 27,415 3,670 271,986 Total Substandard 2,318 14,337 39,038 12,438 18,531 32,069 46,753 11,481 176,965 Total PCD — — 18,744 3,418 18,799 71,294 — — 112,255 Total $ 1,116,342 $ 1,000,872 $ 1,191,171 $ 357,775 $ 426,762 $ 830,986 $ 1,472,497 $ 31,519 $ 6,427,924 . 1 Term loans amortized cost basis by origination year excludes $2,468 of deferred loan fees, net. The following table summarizes the Company’s internal ratings of its loans, including PCI loans, as of December 31, 2019: December 31, 2019 Pass Special Substandard Doubtful PCI Total Real estate: Construction and land $ 618,773 $ 3,965 $ 2,689 $ — $ 3,947 $ 629,374 Farmland 16,939 — — — — 16,939 1 - 4 family residential 541,787 795 3,460 — 3,769 549,811 Multi-family residential 320,041 — — — — 320,041 Commercial real estate 2,332,357 23,494 38,278 — 96,854 2,490,983 Commercial 1,610,150 51,999 28,670 — 22,019 1,712,838 MW 183,628 — — — — 183,628 Consumer 17,106 40 182 — 129 17,457 Total $ 5,640,781 $ 80,293 $ 73,279 $ — $ 126,718 $ 5,921,071 Purchased Credit Impaired Loans (Prior to the Adoption of ASU 2016-13) Loans acquired with evidence of credit quality deterioration at acquisition, for which it was probable that the Company would not be able to collect all contractual amounts due, were accounted for as PCI loans. The carrying amount of PCI loans included in the consolidated balance sheets and the related outstanding balances at December 31, 2019 are set forth in the table below. The outstanding balance represents the total amount owed, including accrued but unpaid interest, and any amounts previously charged off. December 31, 2019 Carrying amount $ 126,125 Outstanding balance 157,417 Changes in the accretable yield for PCI loans for the years ended December 31, 2019 and 2018 are included in table below. Year Ended December 31, 2019 Year Ended December 31, 2018 Balance at beginning of period $ 18,747 $ 2,723 Additions 19,870 1,459 Reclassifications from nonaccretable 12,719 19,162 Accretion (13,112) (4,597) Balance at year-end $ 38,224 $ 18,747 During the year ended December 31, 2019, the Company received cash collections in excess of expected cash flows on PCI loans accounted for individually and not aggregated into loan pools of $440. Servicing Assets The Company was servicing loans of approximately $264,019 and $205,210 as of December 31, 2020 and 2019, respectively. A summary of the changes in the related servicing assets are as follows: Year Ended December 31, 2020 2019 Balance at beginning of year $ 3,113 $ 1,304 Servicing assets acquired through acquisition — 2,382 Increase from loan sales 1,121 1,253 Servicing asset impairment, net of recoveries (368) (188) Amortization charged as a reduction to income (503) (1,638) Balance at year-end $ 3,363 $ 3,113 Fair value of servicing assets is estimated by discounting estimated future cash flows from the servicing assets using discount rates that approximate current market rates over the expected lives of the loans being serviced. A valuation allowance is recorded when the fair value is below the carrying amount of the asset. As of December 31, 2020 and 2019 there was a valuation allowance of $556 and $188, respectively. The Company may also receive a portion of subsequent interest collections on loans sold that exceed the contractual servicing fees. In that case, the Company records an interest-only strip based on its relative fair market value and the other components of the loans. There was no interest-only strip receivable recorded at December 31, 2020 and 2019 . |