LOANS AND ALLOWANCE FOR LOAN LOSSES | 6. LOANS AND ALLOWANCE FOR LOAN LOSSES The loan portfolio balances, net of unearned income and fees, consist of various types of loans primarily all made to borrowers located within Texas and are classified by major type as follows: December 31, 2018 2017 (Dollars in thousands) Commercial and industrial $ 702,037 $ 457,129 Mortgage warehouse 48,274 69,456 Real estate: Commercial real estate (including multi- family residential) 1,650,912 1,080,247 Commercial real estate construction and land development 430,128 243,389 1-4 family residential (including home equity) 649,311 301,219 Residential construction 186,411 109,116 Consumer and other 41,233 10,320 Total loans 3,708,306 2,270,876 Allowance for loan losses (26,331 ) (23,649 ) Loans, net $ 3,681,975 $ 2,247,227 (1) Mortgage warehouse loans are to unaffiliated mortgage loan originators collateralized by mortgage promissory notes which are segregated in the Company’s mortgage warehouse portfolio. These promissory notes originated by the Company’s mortgage warehouse customers carry terms and conditions as would be expected in the competitive permanent mortgage market and serve as collateral under a traditional mortgage warehouse arrangement whereby such promissory notes are warehoused under a revolving credit facility to allow for the end investor (or purchaser) of the note to receive a complete loan package and remit funds to the bank. The maturity of each revolving line of credit facility is normally less than 24 months, while the promissory notes that are warehoused under such facilities may have a much shorter length of time outstanding. For mortgage promissory notes secured by residential property, the warehouse time is normally 10 to 20 days. For mortgage promissory notes secured by commercial property, the warehouse time is normally 40 to 50 days. The funded balance of the mortgage warehouse portfolio can have significant fluctuation based upon market demand for the product, level of home sales and refinancing activity, market interest rates and velocity of end investor processing times. Loan Origination/Risk Management The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. In addition, an independent third party loan review is performed on a semi-annual basis. (i) Commercial and Industrial Loans. (ii) Commercial Real Estate. The Company’s nonowner-occupied and multi-family commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. The Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. In addition, these loans are generally guaranteed by individual owners of the borrower and have typically lower loan to value ratios. Loans secured by owner-occupied properties generally involve less risk and represented 51.4% of the outstanding principal balance of the Company’s commercial real estate loans at December 31, 2018. The Company is dependent on the cash flows of the business occupying the property and its owners and requires these loans to be secured by property with adequate margins and to be guaranteed by the individual owners. The Company’s owner-occupied commercial real estate loans collateralized by first liens on real estate typically have fixed interest rates and amortize over a 10 to 20 year period. (iii) Construction and Land Development Loans. (iv) Residential Real Estate Loans. (v) Consumer and Other Loans. Acquired Loans PCI loans The carrying amount of PCI loans included in the consolidated balance sheet and the related outstanding balance owed at December 31, 2018 are presented in the table below (in thousands): PCI loans: Outstanding balance at December 31, 2018 $ 26,862 Less: Discount 3,599 Recorded investment at December 31, 2018 $ 23,263 Changes in the accretable yield for PCI loans for the year ended December 31, 2018 were as follows (in thousands): Balance at beginning of period $ — Additions 495 Reclassifications from nonaccretable — Accretion 59 Balance at December 31, 2018 $ 436 Non-PCI Loans. The carrying amount of Non-PCI loans included in the consolidated balance sheet and the related outstanding balance owed at December 31, 2018 are presented in the table below (in thousands). Non-PCI loans: Outstanding balance at December 31, 2018 $ 1,124,342 Less: Discount 10,650 Recorded investment at December 31, 2018 $ 1,113,692 Changes in the discount accretion for Non-PCI loans for the years ended December 31, 2018 were as follows (in thousands): Balance at beginning of period $ — Additions 13,293 Reclassifications from nonaccretable — Accretion 2,643 Balance at December 31, 2018 $ 10,650 Concentrations of Credit The vast majority of the Company’s lending activity occurs in and around the Houston, Texas area. The Company’s loans are primarily loans secured by real estate, including commercial and residential construction, owner-occupied and nonowner-occupied and multi-family commercial real estate, raw land and other real estate based loans. Related Party Loans As of December 31, 2018 and 2017, loans outstanding to directors, officers and their affiliates totaled $7.9 million and $4.4 million, respectively. An analysis of activity with respect to these related-party loans is as follows: 2018 (Dollars in thousands) Beginning balance on January 1 $ 4,368 New loans and reclassified related loans 5,003 Repayments (1,501 ) Ending balance on December 31 $ 7,870 Nonaccrual and Past Due Loans An aging analysis of the recorded investment in past due loans, segregated by class of loans, is as follows: December 31, 2018 Loans Past Due and Still Accruing 30-89 90 or More Total Past Nonaccrual Current Total Days Days Due Loans Loans Loans Loans (Dollars in thousands) Commercial and industrial $ 1,951 $ — $ 1,951 $ 10,861 $ 689,225 $ 702,037 Mortgage warehouse — — — — 48,274 48,274 Real estate: Commercial real estate (including multi-family residential) 3,502 — 3,502 17,776 1,629,634 1,650,912 Commercial real estate construction and land development 1,300 — 1,300 974 427,854 430,128 1-4 family residential (including home equity) 3,643 — 3,643 3,201 642,467 649,311 Residential construction - — - — 186,411 186,411 Consumer and other 91 — 91 141 41,001 41,233 Total loans $ 10,487 $ — $ 10,487 $ 32,953 $ 3,664,866 $ 3,708,306 December 31, 2017 Loans Past Due and Still Accruing 30-89 90 or More Total Past Nonaccrual Current Total Days Days Due Loans Loans Loans Loans (Dollars in thousands) Commercial and industrial $ 1,069 $ — $ 1,069 $ 6,437 $ 449,623 $ 457,129 Mortgage warehouse — — — — 69,456 69,456 Real estate: Commercial real estate (including multi-family residential) 4,932 — 4,932 6,110 1,069,205 1,080,247 Commercial real estate construction and land development 5,274 — 5,274 — 238,115 243,389 1-4 family residential (including home equity) 924 — 924 781 299,514 301,219 Residential construction 674 — 674 — 108,442 109,116 Consumer and other 74 — 74 — 10,246 10,320 Total loans $ 12,947 $ — $ 12,947 $ 13,328 $ 2,244,601 $ 2,270,876 If interest on nonaccrual loans had been accrued under the original loan terms, approximately $1.0 million and $733 thousand would have been recorded as income for the years ended December 31, 2018 and 2017, respectively. Impaired Loans Impaired loans by class of loans are set forth in the following tables. December 31, 2018 Unpaid Recorded Principal Related Investment Balance Allowance (Dollars in thousands) With no related allowance recorded: Commercial and industrial $ 4,354 $ 4,771 $ — Mortgage warehouse — — — Real estate: Commercial real estate (including multi-family residential) 11,322 11,322 — Commercial real estate construction and land development 1,326 1,326 — 1-4 family residential (including home equity) 2,742 2,741 — Residential construction — — — Consumer and other 3 3 — Total 19,747 20,163 — With an allowance recorded: Commercial and industrial 9,150 9,545 3,898 Mortgage warehouse — — — Real estate: Commercial real estate (including multi-family residential) 11,542 11,542 2,641 Commercial real estate construction and land development 3,114 3,114 190 1-4 family residential (including home equity) — — — Residential construction — — — Consumer and other — — — Total 23,806 24,201 6,729 Total: Commercial and industrial 13,504 14,316 3,898 Mortgage warehouse — — — Real estate: Commercial real estate (including multi-family residential) 22,864 22,864 2,641 Commercial real estate construction and land development 4,440 4,440 190 1-4 family residential (including home equity) 2,742 2,741 — Residential construction — — — Consumer and other 3 3 — $ 43,553 $ 44,364 $ 6,729 December 31, 2017 Unpaid Recorded Principal Related Investment Balance Allowance (Dollars in thousands) With no related allowance recorded: Commercial and industrial $ 5,792 $ 6,666 $ — Mortgage warehouse — — — Real estate: Commercial real estate (including multi-family residential) 12,155 12,155 — Commercial real estate construction and land development 209 209 — 1-4 family residential (including home equity) 948 948 — Residential construction — — — Consumer and other — — — Total 19,104 19,978 — With an allowance recorded: Commercial and industrial 5,600 5,652 1,640 Mortgage warehouse — — — Real estate: Commercial real estate (including multi-family residential) 8,009 8,194 716 Commercial real estate construction and land development — — — 1-4 family residential (including home equity) — — — Residential construction — — — Consumer and other — — — Total 13,609 13,846 2,356 Total: Commercial and industrial 11,392 12,318 1,640 Mortgage warehouse — — — Real estate: Commercial real estate (including multi-family residential) 20,164 20,349 716 Commercial real estate construction and land development 209 209 — 1-4 family residential (including home equity) 948 948 — Residential construction — — — Consumer and other — — — $ 32,713 $ 33,824 $ 2,356 The following table presents the average recorded investment of impaired loans and interest recognized on impaired loans. Years Ended December 31, 2018 2017 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (Dollars in thousands) Commercial and industrial $ 14,555 $ 423 $ 11,972 $ 418 Mortgage warehouse — — — — Real estate: Commercial real estate (including multi-family residential) 23,198 756 20,606 475 Commercial real estate construction and land development 4,247 98 314 10 1-4 family residential (including home equity) 2,815 — 1,167 18 Residential construction — — — — Consumer and other 3 5 - 1 Total $ 44,818 $ 1,282 $ 34,059 $ 922 The average recorded investment of impaired loans for the year ended December 31, 2016 was $22.5 million. Interest income recognized for the year ended December 31, 2016 was $862 thousand. Credit Quality Indicators The company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt including factors such as: current financial information, historical payment experience, credit documentation, public information and current economic trends. The Company analyzes loans individually by classifying the loans by credit risk. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks risk ratings to be used as credit quality indicators. The following is a general description of the risk ratings used: Watch —Loans classified as watch loans may still be of high quality, but have an element of risk added to the credit such as declining payment history, deteriorating financial position of the borrower or a decrease in collateral value. Special Mention —Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Substandard —Loans classified as substandard have well-defined weaknesses on a continuing basis and are inadequately protected by the current net worth and paying capacity of the borrower, impaired or declining collateral values, or a continuing downturn in their industry which is reducing their profits to below zero and having a significantly negative impact on their cash flow. These loans so classified are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful —Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the most recent analysis performed, the risk category of loans by class of loan at December 31, 2018 is as follows: Pass Watch Special Mention Substandard Doubtful Total (Dollars in thousands) Commercial and industrial $ 656,783 $ 9,696 $ 13,874 $ 21,684 $ — $ 702,037 Mortgage warehouse 48,274 — — — — 48,274 Real estate: Commercial real estate (including multi-family residential) 1,570,243 29,702 7,101 43,866 — 1,650,912 Commercial real estate construction and land development 424,460 729 2,149 2,790 — 430,128 1-4 family residential (including home equity) 629,657 3,797 4,216 11,641 — 649,311 Residential construction 186,411 — — — — 186,411 Consumer and other 40,673 31 301 228 — 41,233 Total loans $ 3,556,501 $ 43,955 $ 27,641 $ 80,209 $ — $ 3,708,306 The following table presents the risk category of loans by class of loan at December 31, 2017: Pass Watch Special Mention Substandard Doubtful Total (Dollars in thousands) Commercial and industrial $ 427,336 $ 10,274 $ 2,195 $ 17,324 $ — $ 457,129 Mortgage warehouse 69,456 — — — — 69,456 Real estate: Commercial real estate (including multi-family residential) 1,016,831 23,039 4,685 35,692 — 1,080,247 Commercial real estate construction and land development 231,536 4,397 — 7,456 — 243,389 1-4 family residential (including home equity) 295,744 2,696 785 1,994 — 301,219 Residential construction 103,611 5,505 — — — 109,116 Consumer and other 10,207 111 — 2 — 10,320 Total loans $ 2,154,721 $ 46,022 $ 7,665 $ 62,468 $ — $ 2,270,876 Allowance for Loan Losses At December 31, 2018, the allowance for loan losses totaled $26.3 million, or 0.71% of total loans. At December 31, 2017, the allowance totaled $23.6 million or 1.04% of total loans. Acquired loans are carried over without an allowance for loan losses as they are recorded at fair value at the acquisition date. However, the Company recorded a discount on the acquired loans which will be prospectively accreted, increasing its basis in such loans. At December 31, 2018, the balance of the acquisition accounting discount was $14.2 million. The following table presents the activity in the allowance for loan losses by portfolio type for the years ended December 31, 2018, 2017 and 2016: Commercial real Commercial real 1-4 family Commercial estate (including estate construction residential and industrial Mortgage warehouse multi-family residential) and land development (including home equity) Residential construction Consumer and other Total (Dollars in thousands) Allowance for loan losses: Balance December 31, 2017 $ 7,694 $ — $ 10,253 $ 2,525 $ 2,140 $ 942 $ 95 $ 23,649 Provision for loan losses 2,234 — 1,588 199 127 98 2 4,248 Charge-offs (2,424 ) — (42 ) — (25 ) — (24 ) (2,515 ) Recoveries 847 — 102 — — — — 949 Net charge-offs (1,577 ) — 60 — (25 ) — (24 ) (1,566 ) Balance December 31, 2018 $ 8,351 $ — $ 11,901 $ 2,724 $ 2,242 $ 1,040 $ 73 $ 26,331 Allowance for loan losses: Balance December 31, 2016 $ 5,059 $ — $ 8,950 $ 1,217 $ 1,876 $ 748 $ 61 $ 17,911 Provision for loan losses 9,792 — 1,424 1,298 254 194 226 13,188 Charge-offs (7,673 ) — (124 ) — — — (196 ) (7,993 ) Recoveries 516 — 3 10 10 — 4 543 Net charge-offs (7,157 ) — (121 ) 10 10 — (192 ) (7,450 ) Balance December 31, 2017 $ 7,694 $ — $ 10,253 $ 2,525 $ 2,140 $ 942 $ 95 $ 23,649 Allowance for loan losses: Balance December 31, 2015 $ 3,644 $ — $ 5,914 $ 1,221 $ 1,432 $ 820 $ 67 $ 13,098 Provision for loan losses 1,951 — 3,122 (4 ) 434 (72 ) 38 5,469 Charge-offs (722 ) — (129 ) — — — (49 ) (900 ) Recoveries 186 — 43 — 10 — 5 244 Net charge-offs (536 ) — (86 ) — 10 — (44 ) (656 ) Balance December 31, 2016 $ 5,059 $ — $ 8,950 $ 1,217 $ 1,876 $ 748 $ 61 $ 17,911 The following table presents the balance in the allowance for loan losses by portfolio type based on the impairment method as of December 31, 2018 and 2017: Commercial real Commercial real 1-4 family Commercial estate (including estate construction residential and industrial Mortgage warehouse multi-family residential) and land development (including home equity) Residential construction Consumer and other Total (Dollars in thousands) Allowance for loan losses related to: December 31, 2018 Individually evaluated for impairment $ 3,898 $ — $ 2,641 $ 190 $ — $ — $ — $ 6,729 Collectively evaluated for impairment 4,453 — 9,260 2,534 2,242 1,040 73 19,602 Total allowance for loan losses $ 8,351 $ — $ 11,901 $ 2,724 $ 2,242 $ 1,040 $ 73 $ 26,331 Allowance for loan losses related to: December 31, 2017 Individually evaluated for impairment $ 1,640 $ — $ 716 $ — $ — $ — $ — $ 2,356 Collectively evaluated for impairment 6,054 — 9,537 2,525 2,140 942 95 21,293 Total allowance for loan losses $ 7,694 $ — $ 10,253 $ 2,525 $ 2,140 $ 942 $ 95 $ 23,649 The following table presents the recorded investment in loans held for investment by portfolio type based on the impairment method as of December 31, 2018 and 2017: Commercial real Commercial real 1-4 family Commercial estate (including estate construction residential and industrial Mortgage warehouse multi-family residential) and land development (including home equity) Residential construction Consumer and other Total (Dollars in thousands) Recorded investment in loans: December 31, 2018 Individually evaluated for impairment $ 13,504 $ — $ 22,864 $ 4,440 $ 2,742 $ — $ 3 $ 43,553 Collectively evaluated for impairment 688,533 48,274 1,628,048 425,688 646,569 186,411 41,230 3,664,753 Total loans evaluated for impairment $ 702,037 $ 48,274 1,650,912 $ 430,128 $ 649,311 $ 186,411 $ 41,233 $ 3,708,306 Recorded investment in loans: December 31, 2017 Individually evaluated for impairment $ 11,392 $ — $ 20,164 $ 209 $ 948 $ — $ — $ 32,713 Collectively evaluated for impairment 445,737 69,456 1,060,083 243,180 300,271 109,116 10,320 2,238,163 Total loans evaluated for impairment $ 457,129 $ 69,456 $ 1,080,247 $ 243,389 $ 301,219 $ 109,116 $ 10,320 $ 2,270,876 Troubled Debt Restructurings As of December 31, 2018 and 2017, the Company had a recorded investment in troubled debt restructurings of $33.1 million and $25.6 million, respectively. The Company allocated $3.0 million and $2.2 million of specific reserves for these loans at December 31, 2018 and 2017, respectively, and did not commit to lend additional amounts on these loans. The following table presents information regarding loans modified in a troubled debt restructuring during the years ended December 31, 2018, 2017 and 2016: As of December 31, 2018 2017 2016 Pre- Post- Pre- Post- Pre- Post- Modification of Modification of Modification of Modification of Modification of Modification of Number of Outstanding Outstanding Number of Outstanding Outstanding Number of Outstanding Outstanding Contracts Recorded Investment Recorded Investment Contracts Recorded Investment Recorded Investment Contracts Recorded Investment Recorded Investment (Dollars in thousands) Troubled Debt Restructurings Commercial and industrial 11 $ 2,770 $ 2,770 9 $ 2,399 $ 2,399 21 $ 3,939 $ 3,939 Mortgage warehouse — — — — — — — — — Real estate: Commercial real estate (including multi-family residential) 3 4,288 4,288 6 11,837 11,837 8 7,144 7,144 Commercial real estate construction and land development 1 3,114 3,114 1 210 210 — — — 1-4 family residential (including home equity) — — — 1 86 86 — — — Residential construction — — — — — — — — — Consumer and other — — — — — — 1 6 6 Total 15 $ 10,172 $ 10,172 17 $ 14,532 $ 14,532 30 $ 11,089 $ 11,089 Troubled debt restructurings resulted in charge-offs of $272 thousand, $136 thousand and $211 thousand during the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, there were four defaults totaling $200 thousand on loans that were modified as troubled debt restructurings during the preceding 12 months. Default is determined at 90 or more days past due. The modifications primarily related to extending the amortization periods of the loans. The Company did not grant principal reductions on any restructured loans. There were no commitments to lend additional amounts for the years 2018 and 2017. During the year ended December 31, 2018, the Company added $10.2 million in new troubled debt restructurings, of which $9.8 million was still outstanding on December 31, 2018. |