LOANS AND ALLOWANCE FOR LOAN LOSSES | 5. LOANS AND ALLOWANCE FOR LOAN LOSSES The loan portfolio balances, net of unearned income and fees, consist of various types of loans primarily made to borrowers located within Texas and are classified by major type as follows: March 31, December 31, 2019 2018 (Dollars in thousands) Commercial and industrial $ 699,471 $ 702,037 Mortgage warehouse 36,742 48,274 Real estate: Commercial real estate (including multi-family residential) 1,771,890 1,650,912 Commercial real estate construction and land development 396,162 430,128 1-4 family residential (including home equity) 658,261 649,311 Residential construction 201,314 186,411 Consumer and other 42,321 41,233 Total loans 3,806,161 3,708,306 Allowance for loan losses (27,123 ) (26,331 ) Loans, net $ 3,779,038 $ 3,681,975 Acquired Loans PCI loans The carrying amount of PCI loans included in the consolidated balance sheet and the related outstanding balance owed at March 31, 2019 are presented in the table below (dollars in thousands): PCI loans: Outstanding balance at March 31, 2019 $ 24,337 Less: Discount (2,916 ) Recorded investment at March 31, 2019 $ 21,421 Changes in the accretable yield for PCI loans for the quarter ended March 31, 2019 were as follows (in thousands): Balance at beginning of period $ 436 Measurement period adjustment 2,674 Reclassifications from nonaccretable 234 Accretion (703 ) Balance at March 31, 2019 $ 2,641 Nonaccrual and Past Due Loans An aging analysis of the recorded investment in past due loans, segregated by class of loans, is as follows: March 31, 2019 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 $ 4,625 $ — $ 4,625 $ 11,221 $ 683,625 $ 699,471 Mortgage warehouse — — — — 36,742 36,742 Real estate: Commercial real estate (including multi-family residential) 10,818 — 10,818 17,531 1,743,541 1,771,890 Commercial real estate construction and land development 1,250 — 1,250 818 394,094 396,162 1-4 family residential (including home equity) 4,372 — 4,372 2,928 650,961 658,261 Residential construction 305 — 305 — 201,009 201,314 Consumer and other 55 — 55 172 42,094 42,321 Total loans $ 21,425 $ — $ 21,425 $ 32,670 $ 3,752,066 $ 3,806,161 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 Impaired Loans Impaired loans by class of loans are set forth in the following tables. As of March 31, 2019 Unpaid Recorded Principal Related Investment Balance Allowance (Dollars in thousands) With no related allowance recorded: Commercial and industrial $ 5,520 $ 6,131 $ — Mortgage warehouse — — — Real estate: Commercial real estate (including multi-family residential) 11,974 11,974 — Commercial real estate construction and land development 671 671 — 1-4 family residential (including home equity) 1,231 1,231 — Residential construction — — — Consumer and other 39 39 — Total 19,435 20,046 — With an allowance recorded: Commercial and industrial 8,287 8,682 3,558 Mortgage warehouse — — — Real estate: Commercial real estate (including multi-family residential) 10,338 10,338 2,390 Commercial real estate construction and land development 3,114 3,114 191 1-4 family residential (including home equity) 1,240 1,240 270 Residential construction — — — Consumer and other — — — Total 22,979 23,374 6,409 Total: Commercial and industrial 13,807 14,813 3,558 Mortgage warehouse — — — Real estate: Commercial real estate (including multi-family residential) 22,312 22,312 2,390 Commercial real estate construction and land development 3,785 3,785 191 1-4 family residential (including home equity) 2,471 2,471 270 Residential construction — — — Consumer and other 39 39 — $ 42,414 $ 43,420 $ 6,409 As of 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 The following table presents average impaired loans and interest recognized on impaired loans for the three months ended March 31, 2019 and 2018: Three Months Ended March 31, 2019 2018 Average Interest Average Interest Recorded Income Recorded Income Investment Recognized Investment Recognized (Dollars in thousands) Commercial and industrial $ 14,352 $ 92 $ 11,461 $ 94 Mortgage warehouse — — — — Real estate: Commercial real estate (including multi-family residential) 22,499 95 18,967 141 Commercial real estate construction and land development 3,786 31 209 3 1-4 family residential (including home equity) 2,495 4 927 4 Residential construction — — — — Consumer and other 40 — — — Total $ 43,172 $ 222 $ 31,564 $ 242 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: Pass —Loans classified as pass are loans with low to average risk and not otherwise classified as watch, special mention, substandard or doubtful. In addition, the guaranteed portion of SBA loans are considered pass risk rated loans. 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 classified loans 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. Based on the most recent analysis performed, the risk category of loans by class of loan at March 31, 2019 is as follows: Pass Watch Special Mention Substandard Doubtful Total (Dollars in thousands) Commercial and industrial $ 653,383 $ 8,716 $ 15,207 $ 22,165 $ — $ 699,471 Mortgage warehouse 36,742 — — — — 36,742 Real estate: Commercial real estate (including multi-family residential) 1,692,524 28,098 8,846 42,422 — 1,771,890 Commercial real estate construction and land development 390,494 895 1,760 3,013 — 396,162 1-4 family residential (including home equity) 637,410 3,832 5,481 11,538 — 658,261 Residential construction 195,013 2,662 3,639 — — 201,314 Consumer and other 41,764 29 319 209 — 42,321 Total loans $ 3,647,330 $ 44,232 $ 35,252 $ 79,347 $ — $ 3,806,161 The following table presents the risk category of loans by class of loan at December 31, 2018: 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 Allowance for Loan Losses The following table presents the activity in the allowance for loan losses by portfolio type for the three months ended March 31, 2019 and 2018: Commercial and Mortgage warehouse Commercial real estate (including multi-family residential) Commercial real estate construction and land development 1-4 family residential (including home equity) Residential construction Consumer and other Total (Dollars in thousands) Allowance for loan losses: Three Months Ended Balance December 31, 2018 $ 8,351 $ — $ 11,901 $ 2,724 $ 2,242 $ 1,040 $ 73 $ 26,331 Provision for loan losses 803 — (85 ) (435 ) 653 84 (18 ) 1,002 Charge-offs (246 ) — (80 ) — — — — (326 ) Recoveries 91 — 3 — — — 22 116 Net charge-offs (155 ) — (77 ) — — — 22 (210 ) Balance March 31, 2019 $ 8,999 $ — $ 11,739 $ 2,289 $ 2,895 $ 1,124 $ 77 $ 27,123 Allowance for loan losses: Three Months Ended Balance December 31, 2017 $ 7,694 $ — $ 10,253 $ 2,525 $ 2,140 $ 942 $ 95 $ 23,649 Provision for loan losses 1,440 — (963 ) 20 160 4 (8 ) 653 Charge-offs (367 ) — (40 ) — — — — (407 ) Recoveries 631 — 102 — — — — 733 Net recoveries 264 — 62 — — — — 326 Balance March 31, 2018 $ 9,398 $ — $ 9,352 $ 2,545 $ 2,300 $ 946 $ 87 $ 24,628 The following table presents the balance of the allowance for loan losses by portfolio type based on the impairment method as of March 31, 2019 and December 31, 2018: Commercial and Mortgage warehouse Commercial real estate (including multi-family residential) Commercial real estate construction and land development 1-4 family residential (including home equity) Residential construction Consumer and other Total (Dollars in thousands) Allowance for loan losses related to: March 31, 2019 Individually evaluated for impairment $ 3,558 $ — $ 2,390 $ 191 $ 270 $ — $ — $ 6,409 Collectively evaluated for impairment 5,441 — 9,349 2,098 2,625 1,124 77 20,714 Total allowance for loan losses $ 8,999 $ — $ 11,739 $ 2,289 $ 2,895 $ 1,124 $ 77 $ 27,123 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 The following table presents the recorded investment in loans held for investment by portfolio type based on the impairment method as of March 31, 2019 and December 31, 2018: Commercial and Mortgage warehouse Commercial real estate (including multi-family residential) Commercial real estate construction and land development 1-4 family residential (including home equity) Residential construction Consumer and other Total (Dollars in thousands) Recorded investment in loans: March 31, 2019 Individually evaluated for impairment $ 13,807 $ — $ 22,312 $ 3,785 $ 2,471 $ — $ 39 $ 42,414 Collectively evaluated for impairment 685,664 36,742 1,749,578 392,377 655,790 201,314 42,282 3,763,747 Total loans evaluated for impairment $ 699,471 $ 36,742 $ 1,771,890 $ 396,162 $ 658,261 $ 201,314 $ 42,321 $ 3,806,161 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 Troubled Debt Restructurings As of March 31, 2019 and December 31, 2018, the Company had a recorded investment in troubled debt restructurings of $33.4 million and $33.1 million, respectively. The Company allocated $5.1 million and $3.0 million of specific reserves for troubled debt restructurings at March 31, 2019 and December 31, 2018, respectively. The following tables present information regarding loans modified in a troubled debt restructuring during the three months ended March 31, 2019 and 2018: Three Months Ended March 31, 2019 2018 Pre- Post- Pre- Post- Modification of Modification of Modification of Modification of Outstanding Outstanding Outstanding Outstanding Number of Contracts Recorded Investment Recorded Investment Number of Contracts Recorded Investment Recorded Investment (Dollars in thousands) Troubled Debt Restructurings Commercial and industrial 6 $ 511 $ 511 6 $ 337 $ 337 Mortgage warehouse — — — — — — Real estate: Commercial real estate (including multi-family residential) — — — — — — Commercial real estate construction and land development — — — — — — 1-4 family residential (including home equity) 1 397 397 — — — Residential construction — — — — — — Consumer and other 1 38 38 — — — Total 8 $ 946 $ 946 6 $ 337 $ 337 There were no charge-offs on troubled debt restructurings during the three months ended March 31, 2019. Troubled debt restructurings resulted in charge-offs of $17 thousand during the three months ended March 31, 2018. As of March 31, 2019, a $3.4 million loan was modified under a troubled debt restructuring during the previous twelve month period that subsequently defaulted during the three months ended March 31, 2019. As of March 31, 2018, there were no defaults on any 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 to troubled debt restructured loans for the three months ended March 31, 2019 and 2018. During the three months ended March 31, 2019, the Company added $946 thousand in new troubled debt restructurings, of which $902 thousand were still outstanding on March 31, 2019. During the three months ended March 31, 2018, the Company added $337 thousand in new troubled debt restructurings, of which $314 thousand were still outstanding on March 31, 2018. |