LOANS AND ALLOWANCE FOR CREDIT LOSSES | 5. LOANS AND ALLOWANCE FOR CREDIT 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, 2021 December 31, 2020 (Dollars in thousands) Commercial and industrial $ 664,792 $ 667,079 Paycheck Protection Program (PPP) 728,424 569,901 Real estate: Commercial real estate (including multi-family residential) 2,018,853 1,999,877 Commercial real estate construction and land development 386,637 367,213 1-4 family residential (including home equity) 726,228 737,605 Residential construction 119,528 127,522 Consumer and other 14,707 22,567 Total loans 4,659,169 4,491,764 Allowance for credit losses on loans (52,758 ) (53,173 ) Loans, net $ 4,606,411 $ 4,438,591 Nonaccrual and Past Due Loans An aging analysis of the recorded investment in past due loans, segregated by class of loans, is included below. For purposes of this and future disclosures recorded investment has been defined as the outstanding loan balances including net deferred loan fees, and excluding accrued interest receivable of $33.5 million and $34.5 million as of March 31, 2021 and December 31, 2020, respectively, due to immateriality. March 31, 2021 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 $ 3,941 $ — $ 3,941 $ 14,059 $ 646,792 $ 664,792 Paycheck Protection Program (PPP) — — — — 728,424 728,424 Real estate: Commercial real estate (including multi-family residential) 8,712 — 8,712 13,455 1,996,686 2,018,853 Commercial real estate construction and land development 5,691 — 5,691 1,000 379,946 386,637 1-4 family residential (including home equity) 2,488 — 2,488 5,736 718,004 726,228 Residential construction 324 — 324 — 119,204 119,528 Consumer and other 6 — 6 801 13,900 14,707 Total loans $ 21,162 $ — $ 21,162 $ 35,051 $ 4,602,956 $ 4,659,169 December 31, 2020 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 $ 2,486 $ — $ 2,486 $ 10,747 $ 653,846 $ 667,079 Paycheck Protection Program (PPP) — — — — 569,901 569,901 Real estate: Commercial real estate (including multi-family residential) 3,063 — 3,063 10,081 1,986,733 1,999,877 Commercial real estate construction and land development 2,930 — 2,930 3,011 361,272 367,213 1-4 family residential (including home equity) 3,000 — 3,000 4,525 730,080 737,605 Residential construction — — — — 127,522 127,522 Consumer and other 46 — 46 529 21,992 22,567 Total loans $ 11,525 $ — $ 11,525 $ 28,893 $ 4,451,346 $ 4,491,764 Credit Quality Indicators The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt. The Company utilizes a risk rating matrix to assign a risk rating to each of its loans. Loans are rated on a scale of 1 to 9. Risk ratings are updated on an ongoing basis and are subject to change by continuous loan monitoring processes including lending management monitoring, executive management and board committee oversight, and independent credit review. including trends related to (i) the weighted-average risk 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, 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. Loss —Loans classified as loss are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt . The following table presents risk ratings by category of loan as of March 31, 2021 and December 31, 2020: As of March 31, 2021 As of December 31, 2020 Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 Prior Revolving Loans Revolving Loans Converted to Term Loans Total Total (Dollars in thousands) Commercial and industrial Pass $ 42,316 $ 130,986 $ 74,052 $ 45,122 $ 17,573 $ 25,166 $ 235,233 $ — $ 570,448 $ 562,518 Watch 4,886 8,079 5,314 4,381 1,198 1,839 15,629 — 41,326 41,026 Special Mention 784 1,151 2,663 1,798 1,105 2,487 6,148 — 16,136 25,010 Substandard 4,629 11,859 3,007 3,157 4,829 1,245 7,932 — 36,658 38,385 Doubtful — 213 — 11 — — — — 224 140 Total commercial and industrial loans $ 52,615 $ 152,288 $ 85,036 $ 54,469 $ 24,705 $ 30,737 $ 264,942 $ — $ 664,792 $ 667,079 Paycheck Protection Program (PPP) Pass $ 331,736 $ 396,538 $ — $ — $ — $ 150 $ — $ — $ 728,424 $ 569,901 Watch — — — — — — — — — — Special Mention — — — — — — — — — — Substandard — — — — — — — — — — Doubtful — — — — — — — — — — Total PPP loans $ 331,736 $ 396,538 $ — $ — $ — $ 150 $ — $ — $ 728,424 $ 569,901 Commercial real estate (including multi-family residential) Pass $ 153,677 $ 586,634 $ 296,323 $ 200,738 $ 190,080 $ 212,707 $ 47,193 $ — $ 1,687,352 $ 1,629,023 Watch 6,612 25,111 39,322 17,722 23,039 36,873 1,956 — 150,635 177,651 Special Mention 6,115 11,053 8,007 6,003 10,328 14,462 647 — 56,615 68,276 Substandard 2,909 21,312 24,711 17,806 23,616 31,344 2,553 — 124,251 124,927 Doubtful — — — — — — — — — — Total commercial real estate (including multi-family residential) loans $ 169,313 $ 644,110 $ 368,363 $ 242,269 $ 247,063 $ 295,386 $ 52,349 $ — $ 2,018,853 $ 1,999,877 Commercial real estate construction and land development Pass $ 39,047 $ 171,318 $ 61,948 $ 29,238 $ 13,064 $ 8,001 $ 14,375 $ — $ 336,991 $ 320,133 Watch 1,214 17,351 3,466 3,253 6,332 2,606 — — 34,222 39,021 Special Mention 523 2,091 2,967 374 911 261 113 — 7,240 2,880 Substandard — 5,983 966 680 — — 555 — 8,184 5,179 Doubtful — — — — — — — — — — Total commercial real estate construction and land development $ 40,784 $ 196,743 $ 69,347 $ 33,545 $ 20,307 $ 10,868 $ 15,043 $ — $ 386,637 $ 367,213 1-4 family residential (including home equity) Pass $ 55,339 $ 199,484 $ 111,305 $ 89,416 $ 60,582 $ 61,211 $ 84,886 $ — $ 662,223 $ 670,074 Watch 3,108 11,833 3,110 4,135 5,660 4,300 4,455 — 36,601 37,667 Special Mention — 2,387 1,472 4,284 390 4,757 2,453 — 15,743 18,790 Substandard — 1,375 2,527 3,073 1,499 2,969 218 — 11,661 11,074 Doubtful — — — — — — — — — — Total 1-4 family residential (including home equity) $ 58,447 $ 215,079 $ 118,414 $ 100,908 $ 68,131 $ 73,237 $ 92,012 $ — $ 726,228 $ 737,605 As of March 31, 2021 As of December 31, 2020 Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 Prior Revolving Loans Revolving Loans Converted to Term Loans Total Total (Dollars in thousands) Residential construction Pass $ 16,204 $ 85,597 $ 6,971 $ 5,266 $ 730 $ 730 $ — $ — $ 115,498 $ 124,737 Watch 50 2,584 742 — — — — — 3,376 2,785 Special Mention — 654 — — — — — — 654 — Substandard — — — — — — — — — — Doubtful — — — — — — — — — — Total residential construction $ 16,254 $ 88,835 $ 7,713 $ 5,266 $ 730 $ 730 $ — $ — $ 119,528 $ 127,522 Consumer and other Pass (1) $ (11,511 ) $ 16,325 $ 2,469 $ 1,360 $ 485 $ 130 $ 4,027 $ — $ 13,285 $ 21,359 Watch — 53 161 3 — — 63 — 280 389 Special Mention — 224 — 33 — — 3 — 260 270 Substandard — 470 300 39 73 — — — 882 549 Doubtful — — — — — — — — — — Total consumer and other $ (11,511 ) $ 17,072 $ 2,930 $ 1,435 $ 558 $ 130 $ 4,093 $ — $ 14,707 $ 22,567 Total loans Pass $ 626,808 $ 1,586,882 $ 553,068 $ 371,140 $ 282,514 $ 308,095 $ 385,714 $ — $ 4,114,221 $ 3,897,745 Watch 15,870 65,011 52,115 29,494 36,229 45,618 22,103 — 266,440 298,539 Special Mention 7,422 17,560 15,109 12,492 12,734 21,967 9,364 — 96,648 115,226 Substandard 7,538 40,999 31,511 24,755 30,017 35,558 11,258 — 181,636 180,114 Doubtful — 213 — 11 — — — — 224 140 Total loans $ 657,638 $ 1,710,665 $ 651,803 $ 437,892 $ 361,494 $ 411,238 $ 428,439 $ — $ 4,659,169 $ 4,491,764 (1) Includes net deferred fees of $22.0 million and $13.9 million on PPP loans as of March 31, 2021 and December 31, 2020, respectively. The following table presents the activity in the allowance for credit losses on loans by portfolio type for the three months ended March 31, 2021 and 2020: Commercial and Paycheck Protection Program (PPP) 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 credit losses on loans: Three Months Ended Balance December 31, 2020 $ 17,738 $ — $ 23,934 $ 6,939 $ 3,279 $ 870 $ 413 $ 53,173 Provision for loan losses 1,304 — (155 ) 683 (1,723 ) (45 ) (134 ) (70 ) Charge-offs (404 ) — — — — — — (404 ) Recoveries 59 — — — — — — 59 Net charge-offs (345 ) — — — — — — (345 ) Balance March 31, 2021 $ 18,697 $ — $ 23,779 $ 7,622 $ 1,556 $ 825 $ 279 $ 52,758 Allowance for loan losses: Three Months Ended Balance December 31, 2019 $ 8,818 $ — $ 11,170 $ 4,421 $ 3,852 $ 1,057 $ 120 $ 29,438 Provision for loan losses 1,865 — 5,725 732 2,296 374 (2 ) 10,990 Charge-offs (734 ) — (144 ) (2,164 ) (90 ) — — (3,132 ) Recoveries 215 — — — — — — 215 Net charge-offs (519 ) — (144 ) (2,164 ) (90 ) — — (2,917 ) Balance March 31, 2020 $ 10,164 $ — $ 16,751 $ 2,989 $ 6,058 $ 1,431 $ 118 $ 37,511 Allowance for Credit Losses on Unfunded Commitments . In addition to the allowance for credit losses on loans, the Company has established an allowance for credit losses on unfunded commitments, classified in other liabilities and adjusted as a provision for credit loss expense. The allowance represents estimates of expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is informed by historical analysis looking at utilization rates. The expected credit loss rates applied to the commitments expected to fund is informed by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. The allowance for credit losses on unfunded commitments as of March 31, 2021 and December 31, 2020 was $5.4 million and $4.7 million, respectively. The establishment of an allowance as of December 31, 2020 was due to the adoption of CECL and as such was not considered at March 31, 2020. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments. The following table details activity in the allowance for credit losses on unfunded commitments as of March 31, 2021 is as follows (dollars in thousands): Balance at December 31, 2020 $ 4,697 Provision for credit losses on unfunded commitments 709 Balance at March 31, 2021 $ 5,406 Collateral dependent loans are secured by commercial real estate assets, accounts receivable, inventory and equipment. For a collateral dependent loan, the Company’s evaluation process includes a valuation by appraisal or other collateral analysis adjusted for selling costs, when appropriate. This valuation is compared to the remaining outstanding principal balance of the loan. If a loss is determined to be probable, the loss is included in the allowance for credit losses on loans as a specific allocation As of March 31, 2021 Real Estate Business Assets Other Total (Dollars in thousands) Commercial and industrial $ — $ 8,619 $ — $ 8,619 Paycheck Protection Program (PPP) — — — — Real estate: Commercial real estate (including multi-family residential) 707 — — 707 Commercial real estate construction and land development 1,000 — — 1,000 1-4 family residential (including home equity) 5,572 — — 5,572 Residential construction — — — — Consumer and other — — 280 280 Total $ 7,279 $ 8,619 $ 280 $ 16,178 As of December 31, 2020 Real Estate Business Assets Other Total (Dollars in thousands) Commercial and industrial $ — $ 5,157 $ — $ 5,157 Paycheck Protection Program (PPP) — — — — Real estate: Commercial real estate (including multi-family residential) 425 — — 425 Commercial real estate construction and land development — — — — 1-4 family residential (including home equity) 3,101 — — 3,101 Residential construction — — — — Consumer and other — — — — Total $ 3,526 $ 5,157 $ — $ 8,683 The following table presents additional information regarding nonaccrual loans. No interest income was recognized on nonaccrual loans as of March 31, 2021 and December 31, 2020. As of March 31, 2021 Nonaccrual Loans with No Related Allowance Nonaccrual Loans with Related Allowance Total Nonaccrual Loans (Dollars in thousands) Commercial and industrial $ 2,906 $ 11,153 $ 14,059 Paycheck Protection Program (PPP) — — — Real estate: Commercial real estate (including multi-family residential) 4,191 9,264 13,455 Commercial real estate construction and land development 1,000 — 1,000 1-4 family residential (including home equity) 5,160 576 5,736 Residential construction — — — Consumer and other 625 176 801 Total loans $ 13,882 $ 21,169 $ 35,051 As of December 31, 2020 Nonaccrual Loans with No Related Allowance Nonaccrual Loans with Related Allowance Total Nonaccrual Loans (Dollars in thousands) Commercial and industrial $ 2,097 $ 8,650 $ 10,747 Paycheck Protection Program (PPP) — — — Real estate: Commercial real estate (including multi-family residential) 7,487 2,594 10,081 Commercial real estate construction and land development 2,958 53 3,011 1-4 family residential (including home equity) 2,652 1,873 4,525 Residential construction — — — Consumer and other — 529 529 Total loans $ 15,194 $ 13,699 $ 28,893 Troubled Debt Restructurings As of March 31, 2021 and December 31, 2020, the Company had a recorded investment in troubled debt restructurings of $25.2 million and $25.8 million, respectively. The Company allocated $2.9 million and $3.3 million of specific reserves for troubled debt restructurings at March 31, 2021 and December 31, 2020, respectively. The following table presents information regarding loans modified in a troubled debt restructuring during the three months ended March 31, 2021 and 2020: Three Months Ended March 31, 2021 2020 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 — $ — $ — 5 $ 1,104 $ 1,104 Paycheck Protection Program (PPP) — — — — — — Real estate: Commercial real estate (including multi-family residential) 1 545 545 — — — Commercial real estate construction and land development — — — — — — 1-4 family residential (including home equity) — — — 1 118 118 Residential construction — — — — — — Consumer and other — — — 1 30 30 Total 1 $ 545 $ 545 7 $ 1,252 $ 1,252 Troubled debt restructurings resulted in no charge-offs during the three months ended March 31, 2021 and $394 thousand of charge-offs during the three months ended March 31, 2020. As of March 31, 2021, one loan for $174 thousand was modified under a troubled debt restructuring during the previous twelve-month period that subsequently defaulted during the three months ended March 31, 2021. As of March 31, 2020, four loans for a total of $441 thousand were modified under a troubled debt restructuring during the previous twelve-month period that subsequently defaulted during the three months ended March 31, 2020. 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, 2021 and 2020. During the three months ended March 31, 2021, the Company added $545 thousand in new troubled debt restructurings, of which $545 thousand was still outstanding on March 31, 2021. During the three months ended March 31, 2020, the Company added $1.3 million in new troubled debt restructurings, of which $1.2 million was still outstanding on March 31, 2020. The Company granted principal and interest deferrals on outstanding loan balances to customers affected by the COVID-19 pandemic. Additionally, upon request and after meeting certain conditions, borrowers could be granted additional payment deferrals subsequent to the first deferral. In addition to the short-term modification program implemented by the Company, Section 4013 of the CARES Act and bank regulatory interagency guidance gave entities temporary relief from the accounting and disclosure requirements for troubled debt restructurings (“TDR”) indicating that a lender could conclude that the modifications are not a TDR if the borrower was less than 30 days past due as of December 31, 2019. The following table presents information regarding principal and interest deferrals as of March 31, 2021 associated with loan modifications related to COVID-19: Initial Deferrals Additional Deferrals Remaining Deferrals Outstanding Loan Balance Deferred Loan Balance Percentage of Total Deferrals Deferred Loan Balance Percentage of Total Deferrals Deferred Loan Balance Percentage of Total Deferrals (Dollars in thousands) Commercial and industrial $ 664,792 $ 109,866 10.3 % $ 22,134 9.3 % $ 6,398 10.3 % Paycheck Protection Program (PPP) 728,424 — 0.0 % — 0.0 % — 0.0 % Real estate: Commercial real estate (including multi-family residential) 2,018,853 761,179 71.5 % 182,662 76.8 % 48,646 78.3 % Commercial real estate construction and land development 386,637 81,566 7.7 % 19,991 8.4 % 2,613 4.2 % 1-4 family residential (including home equity) 726,228 108,870 10.2 % 12,700 5.3 % 4,463 7.2 % Residential construction 119,528 1,687 0.2 % 161 0.1 % — 0.0 % Consumer and other 14,707 805 0.1 % 157 0.1 % — 0.0 % Total loans $ 4,659,169 $ 1,063,973 100.0 % $ 237,805 100.0 % $ 62,120 100.0 % |