LHI and ACL | LHI and ACL LHI in the accompanying consolidated balance sheets are summarized as follows: March 31, 2022 December 31, 2021 LHI, carried at amortized cost: Real estate: Construction and land $ 1,297,338 $ 1,062,144 Farmland 48,095 55,827 1 - 4 family residential 604,408 542,566 Multi-family residential 272,250 310,241 OOCRE 633,615 665,537 NOOCRE 2,145,826 2,120,309 Commercial 2,125,900 2,006,876 MW 542,877 565,645 Consumer 9,533 11,998 7,679,842 7,341,143 Deferred loan fees, net (11,536) (9,489) ACL (72,485) (77,754) LHI carried at amortized cost, net 7,595,821 7,253,900 LHI, carried at fair value: PPP loans 18,512 53,369 Total LHI, net $ 7,614,333 $ 7,307,269 Included in the total LHI, net, as of March 31, 2022 and December 31, 2021 was an accretable discount related to purchased performing and purchased credit deteriorated (“PCD”) loans acquired within a business combination in the approximate amounts of $7,628 and $8,657, respectively. The discount is being accreted into income on a level-yield basis over the life of the loans. In addition, included in the net loan portfolio as of March 31, 2022 and December 31, 2021 is a discount on retained loans from sale of originated U.S. Small Business Administration (“SBA”) loans of $3,429 and $3,430, respectively. LHI, PPP loans, carried at fair value Included in total LHI, net, as of March 31, 2022 and December 31, 2021 was $18,512 and $53,369, respectively, of PPP loans, which are carried at fair value. The following table summarizes the PPP fee income and net gain (loss) due to the change in the fair value of PPP loans, both of which are included in government guaranteed loan income, net, on the Company's consolidated statements of income and in change in fair value of government guaranteed loans using fair value option on the Company's consolidated statements of cash flows: March 31, 2022 March 31, 2021 PPP fee income $ — $ 6,624 Net gain (loss) due to the change in fair value 175 (287) These PPP loans were originated through an application to the SBA under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and are 100% forgivable if certain criteria are met by the borrowers. As of March 31, 2022, we believe a majority of the Company’s PPP loans will meet such criteria. ACL 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 (TDR). The activity in the ACL related to LHI is as follows: Three Months Ended March 31, 2022 Construction and Land Farmland Residential Multifamily OOCRE NOOCRE Commercial Consumer Total Balance at beginning of year $ 7,293 $ 187 $ 5,982 $ 2,664 $ 9,215 $ 30,548 $ 21,632 $ 233 $ 77,754 Credit loss (benefit) expense non-PCD loans 1,595 (29) 224 (537) 813 (4,114) 4,044 622 2,618 Credit loss (benefit) expense PCD loans (5) — (72) — (1,264) 673 (2,442) (8) (3,118) Charge-offs — — — — (1,341) (553) (3,294) (134) (5,322) Recoveries — — — — — 400 144 9 553 Ending Balance $ 8,883 $ 158 $ 6,134 $ 2,127 $ 7,423 $ 26,954 $ 20,084 $ 722 $ 72,485 Three Months Ended March 31, 2021 Construction and Land Farmland Residential Multifamily OOCRE NOOCRE Commercial Consumer Total Balance at beginning of year $ 7,768 $ 56 $ 8,148 $ 6,231 $ 9,719 $ 35,237 $ 37,554 $ 371 $ 105,084 Credit (benefit) loss expense non-PCD loans (949) (9) (1,144) (1,417) (1,615) 4,074 (1,103) (54) (2,217) Credit (benefit) loss expense PCD loans (14) — (24) — 1,018 192 1,050 (5) 2,217 Charge-offs — — (15) — — — (346) (18) (379) Recoveries — — 3 — — — 226 2 231 Ending Balance $ 6,805 $ 47 $ 6,968 $ 4,814 $ 9,122 $ 39,503 $ 37,381 $ 296 $ 104,936 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 March 31, 2022 and 2021. 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: March 31, 2022 December 31, 2021 Real Property (1) ACL Allocation Real Property (1) ACL Allocation NOOCRE $ 17,551 $ 4,572 $ 17,908 $ 7,808 Commercial 1,085 84 1,702 — Consumer 1,063 538 1,063 — Total $ 19,699 $ 5,194 $ 20,673 $ 7,808 (1) Loans reported exclude PCD loans that transitioned upon adoption of ASC 326 and accounted for on a pooled basis. 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 in accordance with the terms of the loan agreement . 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 March 31, 2022 and December 31, 2021, were as follows: March 31, 2022 December 31, 2021 Nonaccrual Nonaccrual With No ACL Nonaccrual Nonaccrual With No ACL Real estate: 1 - 4 family residential $ 1,005 $ 1,005 $ 990 $ 990 OOCRE 13,446 13,446 14,236 13,824 NOOCRE 17,739 189 17,978 191 Commercial 13,259 1,317 15,267 4,207 Consumer 1,231 168 1,216 1,216 Total $ 46,680 $ 16,125 $ 49,687 $ 20,428 There were $10,678 and $11,056 of PCD loans that are not accounted for on a pooled basis included in nonaccrual loans at March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022 and 2021, interest income not recognized on nonaccrual loans was $889 and $1,120, respectively. An age analysis of past due loans, aggregated by class of loans and including past due nonaccrual loans, as of March 31, 2022 and December 31, 2021, is as follows: March 31, 2022 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 $ 1,400 $ — $ — $ 1,400 $ 1,294,062 $ 1,876 $ 1,297,338 $ — Farmland — — — — 48,095 — 48,095 — 1 - 4 family residential 2,429 — 926 3,355 599,891 1,162 604,408 — Multi-family residential — — — — 272,250 — 272,250 — OOCRE 3,114 509 13,446 17,069 593,946 22,600 633,615 — NOOCRE — — 17,739 17,739 2,112,843 15,244 2,145,826 — Commercial 4,026 6,280 3,881 14,187 2,104,273 7,440 2,125,900 264 MW 430 — — 430 542,447 — 542,877 — Consumer 68 35 1,161 1,264 8,099 170 9,533 — Total $ 11,467 $ 6,824 $ 37,153 $ 55,444 $ 7,575,906 $ 48,492 $ 7,679,842 $ 264 (1) Loans 90 days past due and still accruing excludes $5,511 of PCD loans and $203 of PPP loans as of March 31, 2022. December 31, 2021 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 $ — $ — $ — $ — $ 1,059,796 $ 2,348 $ 1,062,144 $ — Farmland — — — — 55,827 — 55,827 — 1 - 4 family residential 2,073 — 1,008 3,081 538,307 1,178 542,566 24 Multi-family residential — — — — 310,241 — 310,241 — OOCRE 4,538 965 11,622 17,125 620,848 27,564 665,537 — NOOCRE 936 — 192 1,128 2,100,981 18,200 2,120,309 — Commercial 1,525 4,395 3,708 9,628 1,988,622 8,626 2,006,876 191 MW — — — — 565,645 — 565,645 — Consumer 135 105 1,082 1,322 10,499 177 11,998 20 Total $ 9,207 $ 5,465 $ 17,612 $ 32,284 $ 7,250,766 $ 58,093 $ 7,341,143 $ 235 (1) Loans 90 days past due and still accruing excludes $9,345 of PCD loans and $206 of PPP loans as of December 31, 2021. Loans past due 90 days and still accruing were $264 and $235 as of March 31, 2022 and December 31, 2021, respectively. These loans are also considered well-secured, and are in the process of collection with plans in place for the borrowers to bring the notes fully current or to subsequently be renewed. The Company believes that it will collect all principal and interest due on each of the loans past due 90 days 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 $23,273 and $25,518 as of March 31, 2022 and December 31, 2021, respectively. There were no new TDRs during the three months ended March 31, 2022. The following tables presents the pre- and post-modification amortized cost of loans modified as TDRs during the three months ended March 31, 2021. During the Three Months Ended March 31, 2021 Adjusted Payment Structure Payment Deferrals Total Modifications Number of Loans Commercial real estate $ 240 $ — $ 240 1 Total $ 240 $ — $ 240 1 There were no loans modified as TDR loans within the previous 12 months and for which there was a payment default during the three months ended March 31, 2022 and 2021. 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. During the three months ended March 31, 2022 and 2021 , interest income that would have been recorded on TDR loans had the terms of the loans not been modified was $92 and $122, respectively. The Company has not committed to lend additional amounts to customers with outstanding loans classified as TDRs as of March 31, 2022 or December 31, 2021. 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 non-accrual. 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 purchased-credit impaired 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 re-underwritten 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 2022 2021 2020 2019 2018 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total As of March 31, 2022 Construction and land: Pass $ 42,398 $ 530,492 $ 518,181 $ 113,127 $ 54,941 $ 27,712 $ 6,160 $ 838 $ 1,293,849 Special mention — — 1,613 — — — — — 1,613 PCD — — — — — 1,876 — — 1,876 Total construction and land $ 42,398 $ 530,492 $ 519,794 $ 113,127 $ 54,941 $ 29,588 $ 6,160 $ 838 $ 1,297,338 Farmland: Pass $ 2,278 $ 16,697 $ 18,914 $ 25 $ 3,367 $ 5,533 $ 1,281 $ — $ 48,095 Total farmland $ 2,278 $ 16,697 $ 18,914 $ 25 $ 3,367 $ 5,533 $ 1,281 $ — $ 48,095 1 - 4 family residential: Pass $ 26,827 $ 251,200 $ 102,312 $ 48,789 $ 52,176 $ 108,126 $ 11,245 $ 680 $ 601,355 Special mention — — — — — 344 — — 344 Substandard — — — — — 980 567 — 1,547 PCD — — — — — 1,162 — — 1,162 Total 1 - 4 family residential $ 26,827 $ 251,200 $ 102,312 $ 48,789 $ 52,176 $ 110,612 $ 11,812 $ 680 $ 604,408 Multi-family residential: Pass $ 28,596 $ 66,418 $ 59,149 $ 33,489 $ 51,868 $ 11,020 $ 46 $ — $ 250,586 Special mention — — — — 21,664 — — — 21,664 Total multi-family residential $ 28,596 $ 66,418 $ 59,149 $ 33,489 $ 73,532 $ 11,020 $ 46 $ — $ 272,250 OOCRE: Pass $ 12,150 $ 111,119 $ 101,059 $ 56,202 $ 60,078 $ 209,795 $ 2,566 $ 13,674 $ 566,643 Special mention — 2,397 889 1,037 — 5,713 — — 10,036 Substandard — — — — 23,628 10,708 — — 34,336 PCD — — — — — 22,600 — — 22,600 Total OOCRE $ 12,150 $ 113,516 $ 101,948 $ 57,239 $ 83,706 $ 248,816 $ 2,566 $ 13,674 $ 633,615 NOOCRE: Pass $ 150,063 $ 628,084 $ 271,385 $ 200,553 $ 285,499 $ 413,590 $ 7,237 $ 1,567 $ 1,957,978 Special mention — — 741 2,170 44,414 72,686 — — 120,011 Substandard — — — 1,770 9,889 40,934 — — 52,593 PCD — — — — 13,785 1,459 — — 15,244 Total NOOCRE $ 150,063 $ 628,084 $ 272,126 $ 204,493 $ 353,587 $ 528,669 $ 7,237 $ 1,567 $ 2,145,826 Commercial: Pass $ 92,216 $ 445,732 $ 170,620 $ 130,796 $ 58,092 $ 75,602 $ 1,048,204 $ 175 $ 2,021,437 Special mention — 17,848 2,421 131 10,101 6,394 5,737 — 42,632 Substandard — 4,744 4,918 6,137 13,579 6,463 18,550 — 54,391 PCD — — — — 309 7,131 — — 7,440 Total commercial $ 92,216 $ 468,324 $ 177,959 $ 137,064 $ 82,081 $ 95,590 $ 1,072,491 $ 175 $ 2,125,900 MW: Pass $ — $ — $ — $ — $ — $ — $ 542,447 $ — $ 542,447 Substandard — — — — — — 430 — 430 Total MW $ — $ — $ — $ — $ — $ — $ 542,877 $ — $ 542,877 Consumer: Pass $ 685 $ 899 $ 1,411 $ 437 $ 310 $ 3,341 $ 968 $ — $ 8,051 Special mention — — — — — 76 — — 76 Substandard — — — 2 — 170 1,064 — 1,236 PCD — — — — — 170 — — 170 Total consumer $ 685 $ 899 $ 1,411 $ 439 $ 310 $ 3,757 $ 2,032 $ — $ 9,533 Total Pass $ 355,213 $ 2,050,641 $ 1,243,031 $ 583,418 $ 566,331 $ 854,719 $ 1,620,154 $ 16,934 $ 7,290,441 Total Special Mention — 20,245 5,664 3,338 76,179 85,213 5,737 — 196,376 Total Substandard — 4,744 4,918 7,909 47,096 59,255 20,611 — 144,533 Total PCD — — — — 14,094 34,398 — — 48,492 Total $ 355,213 $ 2,075,630 $ 1,253,613 $ 594,665 $ 703,700 $ 1,033,585 $ 1,646,502 $ 16,934 $ 7,679,842 1 Term loans amortized cost basis by origination year excludes $11,536 of deferred loan fees, net. Term Loans Amortized Cost Basis by Origination Year 1 2021 2020 2019 2018 2017 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Total As of December 31, 2021 Construction and land: Pass $ 389,420 $ 453,262 $ 116,855 $ 57,637 $ 5,741 $ 29,182 $ 4,631 $ 1,163 $ 1,057,891 Special mention — 1,593 — 312 — — — — 1,905 PCD — — — — — 2,348 — — 2,348 Total construction and land $ 389,420 $ 454,855 $ 116,855 $ 57,949 $ 5,741 $ 31,530 $ 4,631 $ 1,163 $ 1,062,144 Farmland: Pass $ 16,849 $ 28,655 $ 27 $ 3,367 $ 2,957 $ 2,643 $ 1,329 $ — $ 55,827 Total farmland $ 16,849 $ 28,655 $ 27 $ 3,367 $ 2,957 $ 2,643 $ 1,329 $ — $ 55,827 1 - 4 family residential: Pass $ 191,333 $ 101,377 $ 54,826 $ 59,861 $ 27,743 $ 85,661 $ 12,659 $ 6,025 $ 539,485 Special mention — — — — — 352 — — 352 Substandard — — — — 81 903 567 — 1,551 PCD — — — — — 1,178 — — 1,178 Total 1 - 4 family residential $ 191,333 $ 101,377 $ 54,826 $ 59,861 $ 27,824 $ 88,094 $ 13,226 $ 6,025 $ 542,566 Multi-family residential: Pass $ 67,979 $ 59,239 $ 54,321 $ 68,531 $ 11,815 $ 27,020 $ 49 $ — $ 288,954 Special mention — — — 21,287 — — — — 21,287 Total multi-family residential $ 67,979 $ 59,239 $ 54,321 $ 89,818 $ 11,815 $ 27,020 $ 49 $ — $ 310,241 OOCRE: Pass $ 114,413 $ 111,516 $ 56,964 $ 73,112 $ 54,921 $ 174,500 $ 2,986 $ 2,965 $ 591,377 Special mention 2,420 — 1,052 — — 6,232 — — 9,704 Substandard — 412 — 25,440 781 10,259 — — 36,892 PCD — 1,377 — — 6,567 19,620 — — 27,564 Total OOCRE $ 116,833 $ 113,305 $ 58,016 $ 98,552 $ 62,269 $ 210,611 $ 2,986 $ 2,965 $ 665,537 NOOCRE: Pass $ 628,140 $ 298,091 $ 254,566 $ 319,359 $ 56,710 $ 336,713 $ 5,861 $ 23,015 $ 1,922,455 Special mention — 613 1,685 29,469 16,354 48,952 — 489 97,562 Substandard — 48 1,775 26,209 1,581 52,479 — — 82,092 PCD — — — 13,620 — 4,580 — — 18,200 Total NOOCRE $ 628,140 $ 298,752 $ 258,026 $ 388,657 $ 74,645 $ 442,724 $ 5,861 $ 23,504 $ 2,120,309 Commercial: Pass $ 430,213 $ 187,370 $ 124,798 $ 65,186 $ 40,254 $ 52,491 $ 968,229 $ 19,130 $ 1,887,671 Special mention 7,958 2,341 149 15,136 1,069 3,368 3,482 2,589 36,092 Substandard 15,662 5,843 6,286 14,908 4,167 2,779 20,500 4,342 74,487 PCD — — — 315 1,785 6,526 — — 8,626 Total commercial $ 453,833 $ 195,554 $ 131,233 $ 95,545 $ 47,275 $ 65,164 $ 992,211 $ 26,061 $ 2,006,876 MW: Pass $ — $ — $ — $ — $ — $ — $ 564,850 $ 250 $ 565,100 Substandard — — — — — — 545 — 545 Total MW $ — $ — $ — $ — $ — $ — $ 565,395 $ 250 $ 565,645 Consumer: Pass $ 3,362 $ 1,566 $ 512 $ 408 $ 2,777 $ 784 $ 1,006 $ 25 $ 10,440 Special mention — — — — 65 14 — — 79 Substandard — — 22 — 177 39 1,064 — 1,302 PCD — — — — 24 153 — — 177 Total consumer $ 3,362 $ 1,566 $ 534 $ 408 $ 3,043 $ 990 $ 2,070 $ 25 $ 11,998 Total Pass $ 1,841,709 $ 1,241,076 $ 662,869 $ 647,461 $ 202,918 $ 708,994 $ 1,561,600 $ 52,573 $ 6,919,200 Total Special Mention 10,378 4,547 2,886 66,204 17,488 58,918 3,482 3,078 166,981 Total Substandard 15,662 6,303 8,083 66,557 6,787 66,459 22,676 4,342 196,869 Total PCD — 1,377 — 13,935 8,376 34,405 — — 58,093 Total $ 1,867,749 $ 1,253,303 $ 673,838 $ 794,157 $ 235,569 $ 868,776 $ 1,587,758 $ 59,993 $ 7,341,143 1 Term loans amortized cost basis by origination year excludes $9,489 of deferred loan fees, net. Servicing Assets The Company was servicing loans of approximately $518,612 and $261,885 as of March 31, 2022 and 2021, respectively. A summary of the changes in the related servicing assets are as follows: Three Months Ended March 31, 2022 2021 Balance at beginning of period $ 17,705 $ 3,363 Increase from loan sales 1,491 — Servicing asset impairment, net of recoveries (280) 128 Amortization charged as a reduction to income (748) (89) Balance at end of period $ 18,168 $ 3,402 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 March 31, 2022 and 2021 there was a valuation allowance of $908 and $428, 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 March 31, 2022 and December 31, 2021. |