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: September 30, December 31, 2019 2018 (Dollars in thousands) Commercial and industrial $ 675,055 $ 702,037 Mortgage warehouse 36,594 48,274 Real estate: Commercial real estate (including multi-family residential) 1,859,721 1,650,912 Commercial real estate construction and land development 386,723 430,128 1-4 family residential (including home equity) 695,520 649,311 Residential construction 189,608 186,411 Consumer and other 42,783 41,233 Total loans 3,886,004 3,708,306 Allowance for loan losses (29,808 ) (26,331 ) Loans, net $ 3,856,196 $ 3,681,975 Acquired Loans PCI loans The Company has loans that were acquired and for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of PCI loans included in the consolidated balance sheet and the related outstanding balance owed at September 30, 2019 are presented in the table below (dollars in thousands): As of September 30, 2019 As of December 31, 2018 Outstanding balance $ 20,206 $ 26,862 Less: Discount (2,991 ) (3,599 ) Recorded investment $ 17,215 $ 23,263 Acquired loans were recorded through acquisition accounting without an allowance. There was an allocation of $231 thousand established in the allowance for loan losses relating to PCI loans at September 30, 2019. Changes in the accretable yield for PCI loans for the three and nine months ended September 30, 2019 were as follows (dollars in thousands): Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019 Balance at beginning of period $ 2,195 $ 436 Measurement period adjustment - 2,674 Additions - - Reclassifications from nonaccretable 88 301 Accretion (379 ) (1,507 ) Balance at September 30, 2019 $ 1,904 $ 1,904 There were no PCI loans at September 30, 2018. Nonaccrual and Past Due Loans An aging analysis of the recorded investment in past due loans, segregated by class of loans, is as follows: September 30, 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 $ 4,162 $ — $ 4,162 $ 8,033 $ 662,860 $ 675,055 Mortgage warehouse — — — — 36,594 36,594 Real estate: Commercial real estate (including multi-family residential) 9,203 — 9,203 15,356 1,835,162 1,859,721 Commercial real estate construction and land development 147 — 147 9,050 377,526 386,723 1-4 family residential (including home equity) 2,585 — 2,585 1,992 690,943 695,520 Residential construction 932 — 932 — 188,676 189,608 Consumer and other 93 — 93 184 42,506 42,783 Total loans $ 17,122 $ — $ 17,122 $ 34,615 $ 3,834,267 $ 3,886,004 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 September 30, 2019 Unpaid Recorded Principal Related Investment Balance Allowance (Dollars in thousands) With no related allowance recorded: Commercial and industrial $ 3,568 $ 3,683 $ — Mortgage warehouse — — — Real estate: Commercial real estate (including multi-family residential) 6,715 6,795 — Commercial real estate construction and land development 9,050 9,050 — 1-4 family residential (including home equity) 1,598 1,598 — Residential construction — — — Consumer and other 57 57 — Total 20,988 21,183 — With an allowance recorded: Commercial and industrial 8,450 8,845 4,354 Mortgage warehouse — — — Real estate: Commercial real estate (including multi-family residential) 11,749 11,749 2,236 Commercial real estate construction and land development 3,114 3,114 191 1-4 family residential (including home equity) — — — Residential construction — — — Consumer and other 32 32 28 Total 23,345 23,740 6,809 Total: Commercial and industrial 12,018 12,528 4,354 Mortgage warehouse — — — Real estate: Commercial real estate (including multi-family residential) 18,464 18,544 2,236 Commercial real estate construction and land development 12,164 12,164 191 1-4 family residential (including home equity) 1,598 1,598 — Residential construction — — — Consumer and other 89 89 28 $ 44,333 $ 44,923 $ 6,809 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 and nine months ended September 30, 2019 and 2018: Three Months Ended September 30, 2019 2018 Average Interest Average Interest Recorded Income Recorded Income Investment Recognized Investment Recognized (Dollars in thousands) Commercial and industrial $ 12,268 $ 94 $ 12,979 $ 119 Mortgage warehouse — — — — Real estate: Commercial real estate (including multi-family residential) 18,762 86 18,242 181 Commercial real estate construction and land development 12,005 52 695 5 1-4 family residential (including home equity) 1,609 — 2,993 4 Residential construction — — — — Consumer and other 91 1 — — Total $ 44,735 $ 233 $ 34,909 $ 309 Nine Months Ended September 30, 2019 2018 Average Interest Average Interest Recorded Income Recorded Income Investment Recognized Investment Recognized (Dollars in thousands) Commercial and industrial $ 12,265 $ 261 $ 13,370 $ 316 Mortgage warehouse — — — — Real estate: Commercial real estate (including multi-family residential) 19,453 279 18,409 497 Commercial real estate construction and land development 10,263 140 600 8 1-4 family residential (including home equity) 1,641 4 3,033 9 Residential construction — — — — Consumer and other 96 — — — Total $ 43,718 $ 684 $ 35,412 $ 830 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 September 30, 2019 is as follows: Pass Watch Special Mention Substandard Doubtful Total (Dollars in thousands) Commercial and industrial $ 633,253 $ 9,167 $ 7,547 $ 25,008 $ 80 $ 675,055 Mortgage warehouse 36,594 — — — — 36,594 Real estate: Commercial real estate (including multi-family residential) 1,782,152 30,240 7,891 39,438 — 1,859,721 Commercial real estate construction and land development 372,601 1,296 1,350 11,476 — 386,723 1-4 family residential (including home equity) 663,642 15,720 7,214 8,944 — 695,520 Residential construction 184,410 2,867 2,331 — — 189,608 Consumer and other 42,203 7 335 238 — 42,783 Total loans $ 3,714,855 $ 59,297 $ 26,668 $ 85,104 $ 80 $ 3,886,004 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 and nine months ended September 30, 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 June 30, 2019 $ 8,255 $ — $ 12,940 $ 2,257 $ 3,376 $ 1,004 $ 108 $ 27,940 Provision for loan losses 1,322 — 613 (222 ) 608 247 29 2,597 Charge-offs (769 ) — — (44 ) — — — (813 ) Recoveries 84 — — — — — — 84 Net charge-offs (685 ) — — (44 ) — — — (729 ) Balance September 30, 2019 $ 8,892 $ — $ 13,553 $ 1,991 $ 3,984 $ 1,251 $ 137 $ 29,808 Nine Months Ended Balance December 31, 2018 $ 8,351 $ — $ 11,901 $ 2,724 $ 2,242 $ 1,040 $ 73 $ 26,331 Provision for loan losses 1,668 — 1,729 (689 ) 2,037 211 50 5,006 Charge-offs (1,357 ) — (80 ) (44 ) (295 ) — (8 ) (1,784 ) Recoveries 230 — 3 — — — 22 255 Net (charge-offs) recoveries (1,127 ) — (77 ) (44 ) (295 ) — 14 (1,529 ) Balance September 30, 2019 $ 8,892 $ — $ 13,553 $ 1,991 $ 3,984 $ 1,251 $ 137 $ 29,808 Allowance for loan losses: Three Months Ended Balance June 30, 2018 $ 9,154 $ — $ 9,203 $ 2,288 $ 2,189 $ 914 $ 83 $ 23,831 Provision for loan losses (621 ) — (2 ) 447 35 153 (12 ) — Charge-offs (235 ) — — — (25 ) — — (260 ) Recoveries 15 — — — — — — 15 Net charge-offs (220 ) — — — (25 ) — — (245 ) Balance September 30, 2018 $ 8,313 $ — $ 9,201 $ 2,735 $ 2,199 $ 1,067 $ 71 $ 23,586 Nine Months Ended Balance December 31, 2017 $ 7,694 $ — $ 10,253 $ 2,525 $ 2,140 $ 942 $ 95 $ 23,649 Provision for loan losses 2,002 — (1,113 ) 210 84 125 (24 ) 1,284 Charge-offs (2,123 ) — (41 ) — (25 ) — — (2,189 ) Recoveries 740 — 102 — — — — 842 Net (charge-offs) recoveries (1,383 ) — 61 — (25 ) — — (1,347 ) Balance September 30, 2018 $ 8,313 $ — $ 9,201 $ 2,735 $ 2,199 $ 1,067 $ 71 $ 23,586 The following table presents the balance of the allowance for loan losses by portfolio type based on the impairment method as of September 30, 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: September 30, 2019 Individually evaluated for impairment $ 4,354 $ — $ 2,236 $ 191 $ — $ — $ 28 $ 6,809 Collectively evaluated for impairment 4,509 - 11,198 1,792 3,909 1,251 109 22,768 PCI 29 — 119 8 75 — — 231 Total allowance for loan losses $ 8,892 $ — $ 13,553 $ 1,991 $ 3,984 $ 1,251 $ 137 $ 29,808 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 September 30, 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: September 30, 2019 Individually evaluated for impairment $ 12,018 $ — $ 18,464 $ 12,164 $ 1,598 $ — $ 89 $ 44,333 Collectively evaluated for impairment 663,037 36,594 1,841,257 374,559 693,922 189,608 42,694 3,841,671 Total loans evaluated for impairment $ 675,055 $ 36,594 $ 1,859,721 $ 386,723 $ 695,520 $ 189,608 $ 42,783 $ 3,886,004 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 September 30, 2019 and December 31, 2018, the Company had a recorded investment in troubled debt restructurings of $27.5 million and $33.1 million, respectively. The Company allocated $4.5 million and $3.0 million of specific reserves for troubled debt restructurings at September 30, 2019 and December 31, 2018, respectively. The following tables present information regarding loans modified in a troubled debt restructuring during the three and nine months ended September 30, 2019 and 2018: Three Months Ended September 30, 2019 2018 Number of Contracts Pre-Modification of Outstanding Recorded Investment Post Modification of Outstanding Recorded Investment Number of Contracts Pre-Modification of Outstanding Recorded Investment Post Modification of Outstanding Recorded Investment (Dollars in thousands) Troubled Debt Restructurings Commercial and industrial 4 $ 1,502 $ 1,502 1 $ 200 $ 200 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) — — — — — — Residential construction — — — — — — Consumer and other — — — — — — Total 4 $ 1,502 $ 1,502 1 $ 200 $ 200 Nine Months Ended September 30, 2019 2018 Number of Contracts Pre-Modification of Outstanding Recorded Investment Post Modification of Outstanding Recorded Investment Number of Contracts Pre-Modification of Outstanding Recorded Investment Post Modification of Outstanding Recorded Investment (Dollars in thousands) Troubled Debt Restructurings Commercial and industrial 11 $ 2,069 $ 2,069 9 $ 1,797 $ 1,797 Mortgage warehouse — — — — — — Real estate: Commercial real estate (including multi-family residential) 1 303 303 — — — Commercial real estate construction and land development — — — — — — 1-4 family residential (including home equity) 1 396 396 — — — Residential construction — — — — — — Consumer and other 1 38 38 — — — Total 14 $ 2,806 $ 2,806 9 $ 1,797 $ 1,797 Troubled debt restructurings resulted in a $251 thousand charge-off during the three and nine months ended September 30, 2019. Troubled debt restructurings resulted in charge-offs of $55 thousand and $72 thousand during the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, seven loans for a total of $4.7 million were modified under a troubled debt restructuring during the previous twelve-month period that subsequently defaulted during the nine months ended September 30, 2019. As of September 30, 2018, a $29 thousand loan was modified under a troubled debt restructurings during the previous twelve-month period that subsequently defaulted during the nine months ended September 30, 2018. 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 and nine months ended September 30, 2019 and 2018. During the nine months ended September 30, 2019, the Company added $2.8 million in new troubled debt restructurings, of which $2.7 million was still outstanding on September 30, 2019. During the nine months ended September 30, 2018, the Company added $1.8 million in new troubled debt restructurings, all of which were still outstanding on September 30, 2018. |