Loans and Allowance for Loan Losses | 3. Loans and Allowance for Loan Losses Loans in the accompanying consolidated balance sheets consisted of the following: March 31, December 31, (Dollars in thousands) 2022 2021 Real estate loans: Non-farm non-residential $ 477,573 $ 383,941 Non-farm non-residential non-owner 463,618 445,308 Residential 225,649 213,264 Construction, development & other 414,653 320,335 Farmland 13,467 9,934 Commercial & industrial 756,005 611,348 Consumer 3,304 4,001 Other 93,676 80,593 2,447,945 2,068,724 Allowance for loan losses (23,312 ) (19,295 ) Loans, net $ 2,424,633 $ 2,049,429 Total loans are presented net of unaccreted discounts and deferred fees totaling $7.1 million and $6.5 million at March 31, 2022 and December 31, 2021, respectively. The Company had $26.7 million and $81.6 million in outstanding loan balances related to the guaranteed SBA Paycheck Protection Program (“PPP”) as of March 31, 2022 and December 31, 2021, respectively. These loans are included within the commercial and industrial loan balances throughout the footnotes. Non-accrual Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. As mentioned in Note 1, the accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. Non-accrual March 31, December 31, 2022 2021 (Dollars in thousands) Non-accrual Accruing loans Non-accrual Accruing loans Real estate loans: Non-farm non-residential $ 986 $ — $ 1,008 $ — Non-farm non-residential non-owner 334 — 346 — Residential 121 — 127 — Construction, development & other 238 — 244 — Farmland — — — — Commercial & industrial 8,210 40 8,297 278 Consumer — — — — Other — — — — Purchased credit impaired 7 — 8 — $ 9,896 $ 40 $ 10,030 $ 278 As of March 31, 2022 and 2021, the amount of income that would have been accrued for loans on non-accrual An age analysis of past due loans, segregated by class of loans, were as follows: March 31, 2022 (Dollars in thousands) 30-59 60-89 Over 90 Total Total Total Real estate loans: Non-farm non-residential $ 451 $ 379 $ 986 $ 1,816 $ 475,757 $ 477,573 Non-farm non-residential non-owner 1,933 150 334 2,417 460,470 462,887 Residential 1,438 — 121 1,559 224,090 225,649 Construction, development & other 401 — 238 639 409,919 410,558 Farmland — — — — 13,467 13,467 Commercial & industrial 542 496 8,250 9,288 746,655 755,943 Consumer 44 — — 44 3,260 3,304 Other 151 — — 151 93,525 93,676 Purchased credit impaired — — 7 7 4,881 4,888 $ 4,960 $ 1,025 $ 9,936 $ 15,921 $ 2,432,024 $ 2,447,945 December 31, 2021 (Dollars in thousands) 30-59 60-89 Over 90 Total Total Total Real estate loans: Non-farm non-residential $ 291 $ — $ 1,008 $ 1,299 $ 382,642 $ 383,941 Non-farm non-residential non-owner 161 — 346 507 444,079 444,586 Residential 230 — 127 357 212,822 213,179 Construction, development & other — 395 244 639 315,584 316,223 Farmland — — — — 9,934 9,934 Commercial & industrial 960 457 8,575 9,992 601,291 611,283 Consumer 9 — — 9 3,992 4,001 Other 18 1 — 19 80,574 80,593 Purchased credit impaired — — 8 8 4,976 4,984 $ 1,669 $ 853 $ 10,308 $ 12,830 $ 2,055,894 $ 2,068,724 Impaired Loans The following tables present impaired loans by class of loans: March 31, 2022 (Dollars in thousands) Unpaid Recorded Recorded Total Related Average Real estate loans: Non-farm $ 986 $ 986 $ — $ 986 $ — $ 997 Non-farm non-residential non-owner 5,603 5,595 — 5,595 — 5,613 Residential 124 121 — 121 — 124 Construction, development & other 235 238 — 238 — 241 Farmland — — — — — — Commercial & industrial 9,000 7,522 1,483 9,005 297 9,045 Consumer — — — — — — Other — — — — — — Purchased credit impaired 62 — 61 61 15 63 $ 16,010 $ 14,462 $ 1,544 $ 16,006 $ 312 $ 16,083 December 31, 2021 (Dollars in thousands) Unpaid Recorded Recorded Total Related Average Real estate loans: Non-farm non-residential $ 1,008 $ 1,008 $ — $ 1,008 $ — $ 1,051 Non-farm non-residential non-owner 5,641 5,630 — 5,630 — 5,680 Residential 130 127 — 127 — 138 Construction, development & other 241 244 — 244 — 255 Farmland — — — — — — Commercial & industrial 8,297 7,331 967 8,298 290 9,117 Consumer — — — — — — Other — — — — — — Purchased credit impaired 65 — 65 65 17 71 $ 15,382 $ 14,340 $ 1,032 $ 15,372 $ 307 $ 16,312 Interest payments received on impaired loans are recorded as interest income unless collections of the remaining recorded investment are doubtful, at which time payments received are recorded as reductions of principal. Interest income collected on impaired loans was approximately $120,000 and $39,000 for the three months ended March 31, 2022 and 2021, respectively. Troubled Debt Restructuring During the three months ended March 31, 2022, the terms of one loan were modified as a troubled debt restructuring (“TDR”). The terms of three loans were modified as TDRs prior to December 31, 2021. The following table presents modifications of loans the Company considers to be TDR loans: March 31, 2022 Loan modifications (Dollars in thousands) Number Pre- Post- Adjusted Payment Combined Real estate loans: Non-farm non-residential 3 $ 865 $ 865 $ — $ 865 $ — Non-farm non-residential non-owner — — — — — — Residential — — — — — — Construction, development & other — — — — — — Farmland — — — — — — Commercial & industrial 1 790 790 — 790 — Consumer — — — — — — Other — — — — — — 4 $ 1,655 $ 1,655 $ — $ 1,655 $ — December 31, 2021 Loan modifications (Dollars in thousands) Number Pre- Post- Adjusted Payment Combined Real estate loans: Non-farm non-residential 3 $ 927 $ 927 $ — $ 927 $ — Non-farm non-residential non-owner — — — — — — Residential — — — — — — Construction, development & other — — — — — — Farmland — — — — — — Commercial & industrial 2 758 758 — 758 — Consumer — — — — — — Other — — — — — — 5 $ 1,685 $ 1,685 $ — $ 1,685 $ — No loans modified under a TDR during the previous twelve-month period were in default. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral. At March 31, 2022 and December 31, 2021, the Company had no commitments to lend additional funds to borrowers with loans whose terms had been modified under TDRs. COVID-19 Certain borrowers were unable to meet their contractual payment obligations because of the adverse effects of COVID-19. COVID-19 COVID-19 COVID-19 non-accrual Credit Quality Indicators Credit Quality Indicators. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on 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. The Company’s methodology is structured so that specific allocations 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). (i) The Company has several pass credit grades that are assigned to loans based on varying levels of credits, ranging from credits that are secured by cash or marketable securities, to watch credits that have all the characteristics of an acceptable credit risk but warrant more than the normal level of supervision. (ii) Special mention loans are loans that still show sufficient cash flow to service their debt but show a declining financial trend with potential cash flow shortages if trends continue. This category should be treated as a temporary grade. If cash flow deteriorates further to become negative, then a substandard grade should be given. If cash flow trends begin to improve then an upgrade back to pass would be justified. Nonfinancial reasons for rating a credit special mention include management problems, pending litigation, an ineffective loan agreement or other material structure weakness. (iii) A substandard loan has material weakness in the primary repayment source such as insufficient cash flow from operations to service the debt. However, other weaknesses such as limited paying capacity of the obligor or the collateral pledged could justify a substandard grade. Substandard loans must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. (iv) Credits purchased from third parties are recorded at their estimated fair value at the acquisition date and are classified as PCI loans if the loans reflect credit deterioration since origination and it is probable at acquisition that the Company will be unable to collect all contractually required payments (see Note 1 – Nature of Operations and Summary of Significant Accounting Policies—Certain Acquired Loans). (v) A loan classified as doubtful has all the weaknesses of a substandard loan 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. A doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Because of high probability of loss, non-accrual (vi) Loans classified as loss are considered uncollectible and of such little value that their continuance as banking assets are not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. With loans classified as loss, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified as loss, there is little prospect of collecting either its principal or interest. When access to collateral, rather than the value of the collateral, is a problem, a less severe classification may be appropriate. However, the Company does not maintain an asset on the balance sheet if realizing its value would require long-term litigation or other lengthy recovery efforts. Losses are to be recorded in the period an obligation becomes uncollectible. The following tables summarize the Company’s internal ratings of its loans: March 31, 2022 (Dollars in thousands) Pass Special Substandard Purchased Doubtful Total Real estate loans: Non-farm non-residential $ 466,035 $ 4,695 $ 6,843 $ — $ — $ 477,573 Non-farm non-residential non-owner 454,476 — 8,411 731 — 463,618 Residential 224,593 — 1,056 — — 225,649 Construction, development & other 410,319 — 238 4,096 — 414,653 Farmland 13,467 — — — — 13,467 Commercial & industrial 751,356 — 4,588 61 — 756,005 Consumer 3,283 21 — — — 3,304 Other 93,676 — — — 93,676 $ 2,417,205 $ 4,716 $ 21,136 $ 4,888 $ — $ 2,447,945 December 31, 2021 (Dollars in thousands) Pass Special Substandard Purchased Doubtful Total Real estate loans: Non-farm non-residential $ 370,062 $ 6,953 $ 6,926 $ — $ — $ 383,941 Non-farm non-residential non-owner 428,972 8,338 7,276 722 — 445,308 Residential 212,109 — 1,069 86 — 213,264 Construction, development & other 315,979 — 244 4,112 — 320,335 Farmland 9,934 — — — — 9,934 Commercial & industrial 605,322 1,146 4,816 64 — 611,348 Consumer 3,979 22 — — — 4,001 Other 80,593 — — — — 80,593 $ 2,026,950 $ 16,459 $ 20,331 $ 4,984 $ — $ 2,068,724 Allowance for Loan Losses The majority of the loan portfolio is comprised of loans to businesses and individuals in the Greater Houston, Dallas-Fort Worth, and Austin-San The following tables detail the activity in the allowance for loan losses by portfolio segment: For the Three Months Ended March 31, 2022 (Dollars in thousands) Beginning Provision for Charge- Recoveries Ending Real estate loans: Non-farm non-residential $ 3,456 $ 631 $ — $ — $ 4,087 Non-farm non-residential non-owner 5,935 (322 ) — — 5,613 Residential 957 (191 ) — — 766 Construction, development & other 2,064 260 — — 2,324 Farmland 45 (1 ) — — 44 Commercial & industrial 6,500 3,669 — 4 10,173 Consumer 6 (14 ) — 13 5 Other 332 (32 ) — — 300 $ 19,295 $ 4,000 $ — $ 17 $ 23,312 For the Three Months Ended March 31, 2021 (Dollars in thousands) Beginning Provision for Charge- Recoveries Ending Real estate loans: Non-farm non-residential $ 2,608 $ 1,544 $ — $ — $ 4,152 Non-farm non-residential non-owner 3,107 1,025 — — 4,132 Residential 1,218 (280 ) — — 938 Construction, development & other 932 (230 ) — — 702 Farmland 32 — — — 32 Commercial & industrial 3,858 (538 ) — 3 3,323 Consumer 35 (23 ) — — 12 Other 189 2 (13 ) 2 180 $ 11,979 $ 1,500 $ (13 ) $ 5 $ 13,471 The following tables summarize the allocation of the allowance for loan losses, by portfolio segment, for loans evaluated for impairment individually and collectively: March 31, 2022 Period end amounts of ALLL (Dollars in thousands) Individually Collectively PCI Total Real estate loans: Non-farm non-residential $ — $ 4,087 $ — $ 4,087 Non-farm non-residential non-owner — 5,613 — 5,613 Residential — 766 — 766 Construction, development & other — 2,324 — 2,324 Farmland — 44 — 44 Commercial & industrial 297 9,861 15 10,173 Consumer — 5 — 5 Other — 300 — 300 $ 297 $ 23,000 $ 15 $ 23,312 December 31, 2021 Period end amounts of ALLL (Dollars in thousands) Individually Collectively PCI Total Real estate loans: Non-farm non-residential $ — $ 3,456 $ — $ 3,456 Non-farm non-residential non-owner — 5,935 — 5,935 Residential — 957 — 957 Construction, development & other — 2,064 — 2,064 Farmland — 45 — 45 Commercial & industrial 290 6,193 17 6,500 Consumer — 6 — 6 Other — 332 — 332 $ 290 $ 18,988 $ 17 $ 19,295 The Company’s recorded investment in loans related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology is as follows: March 31, 2022 Loans evaluated for (Dollars in thousands) Individually Collectively PCI Total Real estate loans: Non-farm non-residential $ 986 $ 476,587 $ — $ 477,573 Non-farm non-residential non-owner 5,595 458,023 — 463,618 Residential 121 225,528 — 225,649 Construction, development & other 238 414,415 — 414,653 Farmland — 13,467 — 13,467 Commercial & industrial 9,005 746,939 61 756,005 Consumer — 3,304 — 3,304 Other — 93,676 — 93,676 $ 15,945 $ 2,431,939 $ 61 $ 2,447,945 December 31, 2021 Loans evaluated for (Dollars in thousands) Individually Collectively PCI Total Real estate loans: Non-farm non-residential $ 1,008 $ 382,933 — $ 383,941 Non-farm non-residential non-owner 5,630 439,678 — 445,308 Residential 127 213,137 — 213,264 Construction, development & other 244 320,091 — 320,335 Farmland — 9,934 — 9,934 Commercial & industrial 8,298 602,985 65 611,348 Consumer — 4,001 — 4,001 Other — 80,593 — 80,593 $ 15,307 $ 2,053,352 $ 65 $ 2,068,724 Certain Acquired Loans During 2013, the Company purchased certain loans from a third party with gross contractual balances of $8.2 million for a purchase price of $6.3 million, resulting in a discount of $1.9 million. Upon acquisition, the acquired loans were initially segregated and classified in one of two categories: 1) PCI loans and 2) acquired performing loans. At acquisition date, estimated fair values of PCI loans and acquired performing loans were $3.2 million and $3.1 million, respectively. The gross contractual amounts receivable for PCI loans and acquired performing loans were $4.5 million and $3.7 million, respectively, as of the acquisition date. On January 1, 2020, the Company acquired loans with fair values of $259.6 million as part of the acquisition of Heritage Bancorp, Inc. and its subsidiary, Heritage Bank. Of the total $263.3 million of loans acquired, $250.7 million were determined to have no evidence of deteriorated credit quality and are accounted for under ASC Topics 310-10 310-20. 310-30. In connection with the acquisition of loans from Heritage Bancorp, Inc. and its subsidiary, Heritage Bank, on January 1, 2020, the PCI loan portfolio was accounted for at fair value as follows: Contractual required payments $ 26,627 Non-accretable 15,027 Cash flows expected to be collected at acquisition 11,600 Accretable yield 1,850 Basis in acquired Heritage PCI loans $ 9,750 The following table presents the gross contractual amounts receivable balances, by portfolio segment, and the carrying amount of PCI loans: (Dollars in thousands) March 31, December 31, Real estate loans: Non-farm non-residential $ — $ — Non-farm non-residential non-owner 794 820 Residential 88 181 Construction, development & other 5,141 5,169 Farmland — — Commercial & industrial 63 66 Consumer — — Other — — Total outstanding balances $ 6,086 $ 6,236 Carrying amount $ 4,888 $ 4,984 The accretable discount is accreted into income using the interest method over the life of the loans. At March 31, 2022 and December 31, 2021, unaccreted discounts on PCI loans totaled $881,000 and $926,000, respectively, and were included in net loans in the accompanying consolidated balance sheets. At March 31, 2022 and December 31, 2021, the allowance for loan losses related to the PCI loans disclosed above was $16,000 and $17,000, respectively. Determining the fair value of PCI loans at acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected to be collected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for credit losses from the acquired loans. Accretable yield, or income expected to be collected on PCI loans was as follows: (Dollars in thousands) March 31, December 31, Balance at beginning of year $ 926 $ 2,261 Accretion of income (45 ) (1,335 ) Balance at end of period $ 881 $ 926 | 3. Loans and Allowance for Loan Losses Loans in the accompanying consolidated balance sheets consisted of the following: December 31, (Dollars in thousands) 2021 2020 Real estate loans: Non-farm non-residential $ 383,941 $ 353,273 Non-farm non-residential non-owner 445,308 277,804 Residential 213,264 140,622 Construction, development & other 320,335 98,207 Farmland 9,934 4,653 Commercial & industrial 611,348 645,928 Consumer 4,001 4,157 Other 80,593 31,448 2,068,724 1,556,092 Allowance for loan losses (19,295 ) (11,979 ) Loans, net $ 2,049,429 $ 1,544,113 Total loans are presented net of unaccreted discounts and deferred fees totaling $6.5 million and $10.4 million at December 31, 2021 and 2020, respectively. The Company had $81.6 million and $390.8 million in outstanding loan balances related to the guaranteed SBA Paycheck Protection Program (“PPP”) as of December 31, 2021 and 2020, respectively. These loans are included within the commercial and industrial loan balances throughout the footnotes. Non-accrual Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. As mentioned in Note 1, the accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. Non-accrual December 31, 2021 2020 (Dollars in thousands) Non-accrual Accruing loans Non-accrual Accruing loans Real estate loans: Non-farm non-residential $ 1,008 $ — $ 1,944 $ 569 Non-farm non-residential non-owner 346 — 385 — Residential 127 — 85 183 Construction, development & other 244 — 264 — Farmland — — — — Commercial & industrial 8,297 278 4,155 — Consumer — — — — Other — — — — Purchased credit impaired 8 — 424 — $ 10,030 $ 278 $ 7,257 $ 752 As of December 31, 2021 and 2020, the amount of income that would have been accrued for loans on non-accrual An age analysis of past due loans, segregated by class of loans, were as follows: December 31, 2021 (Dollars in thousands) 30-59 60-89 Over 90 Total Total Total Real estate loans: Non-farm non-residential $ 291 $ — $ 1,008 $ 1,299 $ 382,642 $ 383,941 Non-farm non-residential non-owner 161 — 346 507 444,079 444,586 Residential 230 — 127 357 212,822 213,179 Construction, development & other — 395 244 639 315,584 316,223 Farmland — — — — 9,934 9,934 Commercial & industrial 960 457 8,575 9,992 601,291 611,283 Consumer 9 — — 9 3,992 4,001 Other 18 1 — 19 80,574 80,593 Purchased credit impaired — — 8 8 4,976 4,984 $ 1,669 $ 853 $ 10,308 $ 12,830 $ 2,055,894 $ 2,068,724 December 31, 2020 (Dollars in thousands) 30-59 60-89 Over 90 Total Total Total Real estate loans: Non-farm non-residential $ 287 $ — $ 2,512 $ 2,799 $ 350,474 $ 353,273 Non-farm non-residential non-owner 1,734 — 385 2,119 271,785 273,904 Residential 287 — 269 556 140,048 140,604 Construction, development & other — — 264 264 93,820 94,084 Farmland — — — — 4,653 4,653 Commercial & industrial 842 256 4,155 5,253 640,405 645,658 Consumer 50 — — 50 4,107 4,157 Other 21 — — 21 31,427 31,448 Purchased credit impaired — — 424 424 7,887 8,311 $ 3,221 $ 256 $ 8,009 $ 11,486 $ 1,544,606 $ 1,556,092 Impaired Loans The following tables present impaired loans by class of loans: December 31, 2021 (Dollars in thousands) Unpaid Recorded Recorded Total Related Average Real estate loans: Non-farm non-residential $ 1,008 $ 1,008 $ — $ 1,008 $ — $ 1,051 Non-farm non-residential non-owner 5,641 5,630 — 5,630 — 5,680 Residential 130 127 — 127 — 138 Construction, development & other 241 244 — 244 — 255 Farmland — — — — — — Commercial & industrial 8,297 7,331 967 8,298 290 9,117 Consumer — — — — — — Other — — — — — — Purchased credit impaired 65 — 65 65 17 71 $ 15,382 $ 14,340 $ 1,032 $ 15,372 $ 307 $ 16,312 December 31, 2020 (Dollars in thousands) Unpaid Recorded Recorded Total Related Average Real estate loans: Non-farm non-residential $ 1,944 $ 1,944 $ — $ 1,944 $ — $ 1,754 Non-farm non-residential non-owner 385 384 — 384 — 406 Residential 85 83 — 83 — 70 Construction, development & other 264 267 — 267 — 188 Farmland — — — — — — Commercial & industrial 4,737 3,706 1,031 4,737 136 4,904 Consumer — — — — — — Other — — — — — — Purchased credit impaired — — — — — — $ 7,415 $ 6,384 $ 1,031 $ 7,415 $ 136 $ 7,322 December 31, 2019 (Dollars in thousands) Unpaid Recorded Recorded Total Related Average Real estate loans: Non-farm non-residential $ 57 $ 57 $ — $ 57 $ — $ 59 Non-farm non-residential non-owner — — — — — — Residential 458 459 — 459 — 462 Construction, development & other — — — — — — Farmland — — — — — — Commercial & industrial 3,343 995 2,348 3,343 1,178 4,180 Consumer 14 14 — 14 — 17 Other 34 — 34 34 8 35 Purchased credit impaired 295 171 — 171 — 182 $ 4,201 $ 1,696 $ 2,382 $ 4,078 $ 1,186 $ 4,935 Interest payments received on impaired loans are recorded as interest income unless collections of the remaining recorded investment are doubtful, at which time payments received are recorded as reductions of principal. Interest income collected on impaired loans was approximately $248,000, $26,000 and $0 for the years ended December 31, 2021, 2020 and 2019, respectively. Troubled Debt Restructuring During the year ended December 31, 2021 and 2020, the terms of one loan were modified as a troubled debt restructuring (“TDR”). The following table presents modifications of loans the Company considers to be TDR loans: December 31, 2021 Loan modifications (Dollars in thousands) Number Pre- Post- Adjusted Payment Combined Real estate loans: Non-farm non-residential 3 $ 878 $ 878 $ — $ 878 $ — Non-farm non-residential non-owner 1 5,294 5,294 — 5,294 — Residential — — — — — — Construction, development & other — — — — — — Farmland — — — — — — Commercial & industrial — — — — — — Consumer — — — — — — Other — — — — — — 4 $ 6,172 $ 6,172 $ — $ 6,172 $ — December 31, 2020 Loan modifications (Dollars in thousands) Number Pre- Post- Adjusted Payment Combined Real estate loans: Non-farm non-residential 3 $ 927 $ 927 $ — $ 927 $ — Non-farm non-residential non-owner — — — — — — Residential — — — — — — Construction, development & other — — — — — — Farmland — — — — — — Commercial & industrial 2 758 758 — 758 — Consumer — — — — — — Other — — — — — — 5 $ 1,685 $ 1,685 $ — $ 1,685 $ — There were no loans modified as TDRs during the year ended December 31,2019. No loans modified under a troubled debt restructuring during the previous twelve-month period were in default as of December 31, 2021, 2020 and 2019. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral. At December 31, 2021, 2020 and 2019, the Company had no commitments to lend additional funds to borrowers with loans whose terms had been modified under troubled debt restructurings. COVID-19 Certain borrowers were unable to meet their contractual payment obligations because of the adverse effects of COVID-19. COVID-19 non-accrual Credit Quality Indicators Credit Quality Indicators. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on 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. The Company’s methodology is structured so that specific allocations 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). (i) The Company has several pass credit grades that are assigned to loans based on varying levels of credits, ranging from credits that are secured by cash or marketable securities, to watch credits that have all the characteristics of an acceptable credit risk but warrant more than the normal level of supervision. (ii) Special mention loans are loans that still show sufficient cash flow to service their debt but show a declining financial trend with potential cash flow shortages if trends continue. This category should be treated as a temporary grade. If cash flow deteriorates further to become negative, then a substandard grade should be given. If cash flow trends begin to improve then an upgrade back to pass would be justified. Nonfinancial reasons for rating a credit special mention include management problems, pending litigation, an ineffective loan agreement or other material structure weakness. (iii) A substandard loan has material weakness in the primary repayment source such as insufficient cash flow from operations to service the debt. However, other weaknesses such as limited paying capacity of the obligor or the collateral pledged could justify a substandard grade. Substandard loans must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. (iv) Credits purchased from third parties are recorded at their estimated fair value at the acquisition date and are classified as PCI loans if the loans reflect credit deterioration since origination and it is probable at acquisition that the Company will be unable to collect all contractually required payments (see Note 1 - Nature of Operations and Summary of Significant Accounting Policies—Certain Acquired Loans). (v) A loan classified as doubtful has all the weaknesses of a substandard loan 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. A doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Because of high probability of loss, non-accrual (vi) Loans classified as loss are considered uncollectible and of such little value that their continuance as banking assets are not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. With loans classified as loss, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified as loss, there is little prospect of collecting either its principal or interest. When access to collateral, rather than the value of the collateral, is a problem, a less severe classification may be appropriate. However, the Company does not maintain an asset on the balance sheet if realizing its value would require long-term litigation or other lengthy recovery efforts. Losses are to be recorded in the period an obligation becomes uncollectible. The following tables summarize the Company’s internal ratings of its loans: December 31, 2021 (Dollars in thousands) Pass Special Substandard Purchased Doubtful Total Real estate loans: Non-farm non-residential $ 370,062 $ 6,953 $ 6,926 $ — $ — $ 383,941 Non-farm non-residential non-owner 428,972 8,338 7,276 722 — 445,308 Residential 212,109 — 1,069 86 — 213,264 Construction, development & other 315,979 — 244 4,112 — 320,335 Farmland 9,934 — — — — 9,934 Commercial & industrial 605,322 1,146 4,816 64 — 611,348 Consumer 3,979 22 — — — 4,001 Other 80,593 — — — — 80,593 $ 2,026,950 $ 16,459 $ 20,331 $ 4,984 $ — $ 2,068,724 December 31, 2020 (Dollars in thousands) Pass Special Substandard Purchased Doubtful Total Real estate loans: Non-farm non-residential $ 335,442 $ 12,189 $ 5,642 $ — $ — $ 353,273 Non-farm non-residential non-owner 255,468 12,706 5,730 3,900 — 277,804 Residential 139,743 — 861 18 — 140,622 Construction, development & other 93,817 — 267 4,123 — 98,207 Farmland 4,653 — — — — 4,653 Commercial & industrial 629,093 6,144 9,847 270 574 645,928 Consumer 4,157 — — — — 4,157 Other 31,448 — — — — 31,448 $ 1,493,821 $ 31,039 $ 22,347 $ 8,311 $ 574 $ 1,556,092 Allowance for Loan Losses The majority of the loan portfolio is comprised of loans to businesses and individuals in the Greater Houston, Dallas-Fort Worth, and Austin-San The following tables detail the activity in the allowance for loan losses by portfolio segment: For the Year Ended December 31, 2021 (Dollars in thousands) Beginning Provision for Charge- Recoveries Ending Real estate loans: Non-farm non-residential $ 2,608 $ 848 $ — $ — $ 3,456 Non-farm non-residential non-owner 3,107 2,828 — — 5,935 Residential 1,218 (261 ) — — 957 Construction, development & other 932 1,132 — — 2,064 Farmland 32 13 — — 45 Commercial & industrial 3,858 5,233 (2,914 ) 323 6,500 Consumer 35 (30 ) — 1 6 Other 189 160 (20 ) 3 332 $ 11,979 $ 9,923 $ (2,934 ) $ 327 $ 19,295 For the Year Ended December 31, 2020 (Dollars in thousands) Beginning Provision for Charge- Recoveries Ending Real estate loans: Non-farm non-residential $ 2,158 $ 449 $ — $ — $ 2,608 Non-farm non-residential non-owner 1,627 3,816 (2,336 ) — 3,107 Residential 373 845 — — 1,218 Construction, development & other 330 602 — — 932 Farmland 29 3 — — 32 Commercial & industrial 3,504 1,710 (1,389 ) 33 3,858 Consumer 16 22 (7 ) 5 35 Other 86 103 — — 189 $ 8,123 $ 7,550 $ (3,732 ) $ 38 $ 11,979 For the Year Ended December 31, 2019 (Dollars in thousands) Beginning Provision for Charge- Recoveries Ending Real estate loans: Non-farm non-residential $ 1,559 $ 550 $ — $ 50 $ 2,158 Non-farm non-residential non-owner 1,669 (42 ) — — 1,627 Residential 219 154 — — 373 Construction, development & other 306 24 — — 330 Farmland 28 — — — 29 Commercial & industrial 3,063 918 (506 ) 29 3,504 Consumer 14 4 (2 ) — 16 Other 69 17 — — 86 $ 6,927 $ 1,625 $ (508 ) $ 79 $ 8,123 The following tables summarize the allocation of the allowance for loan losses, by portfolio segment, for loans evaluated for impairment individually and collectively: December 31, 2021 Period end amounts of ALLL (Dollars in thousands) Individually Collectively PCI Total Real estate loans: Non-farm non-residential $ — $ 3,456 $ — $ 3,456 Non-farm non-residential non-owner — 5,935 — 5,935 Residential — 957 — 957 Construction, development & other — 2,064 — 2,064 Farmland — 45 — 45 Commercial & industrial 290 6,193 17 6,500 Consumer — 6 — 6 Other — 332 — 332 $ 290 $ 18,988 $ 17 $ 19,295 December 31, 2020 Period end amounts of ALLL (Dollars in thousands) Individually Collectively PCI Total Real estate loans: Non-farm non-residential $ — $ 2,608 $ — $ 2,608 Non-farm non-residential non-owner — 3,107 — 3,107 Residential — 1,218 — 1,218 Construction, development & other — 932 — 932 Farmland — 32 — 32 Commercial & industrial 136 3,722 — 3,858 Consumer — 35 — 35 Other — 189 — 189 $ 136 $ 11,843 $ — $ 11,979 The company’s recorded investment in loans related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology is as follows: December 31, 2021 Loans evaluated for (Dollars in thousands) Individually Collectively PCI Total Real estate loans: Non-farm non-residential $ 1,008 $ 382,933 $ — $ 383,941 Non-farm non-residential non-owner 5,630 439,678 — 445,308 Residential 127 213,137 — 213,264 Construction, development & other 244 320,091 — 320,335 Farmland — 9,934 — 9,934 Commercial & industrial 8,363 602,920 65 611,348 Consumer — 4,001 — 4,001 Other — 80,593 — 80,593 $ 15,372 $ 2,053,287 $ 65 $ 2,068,724 December 31, 2020 Loans evaluated for (Dollars in thousands) Individually Collectively PCI Total Real estate loans: Non-farm non-residential $ 1,944 $ 351,329 — $ 353,273 Non-farm non-residential non-owner 384 273,519 3,901 277,804 Residential 83 140,521 18 140,622 Construction, development & other 267 93,817 4,123 98,207 Farmland — 4,653 — 4,653 Commercial & industrial 4,737 640,921 270 645,928 Consumer — 4,157 — 4,157 Other — 31,448 — 31,448 $ 7,415 $ 1,540,365 $ 8,312 $ 1,556,092 Certain Acquired Loans During 2013, the Company purchased certain loans from a third party with gross contractual balances of $8.2 million for a purchase price of $6.3 million, resulting in a discount of $1.9 million. Upon acquisition, the acquired loans were initially segregated and classified in one of two categories: 1) PCI loans and 2) acquired performing loans. At acquisition date, estimated fair values of PCI loans and acquired performing loans were $3.2 million and $3.1 million, respectively. The gross contractual amounts receivable for PCI loans and acquired performing loans were $4.5 million and $3.7 million, respectively, as of the acquisition date. As discussed in Note 19, the Company acquired loans with fair values of $259.6 million as part of the acquisition of Heritage Bancorp, Inc. and its subsidiary, Heritage Bank. Of the total $263.3 million of loans acquired, $250.7 million were determined to have no evidence of deteriorated credit quality and are accounted for under ASC Topics 310-10 310-20. 310-30. In connection with the acquisition of loans from Heritage Bancorp, Inc. and its subsidiary, Heritage Bank on January 1, 2020, the PCI loan portfolio was accounted for at fair value as follows: (Dollars in thousands) Contractual required payments $ 26,627 Non-accretable 15,027 Cash flows expected to be collected at acquisition 11,600 Accretable yield 1,850 Basis in acquired Heritage PCI loans $ 9,750 The following table presents the gross contractual amounts receivable balances, by portfolio segment, and the carrying amount of PCI loans: December 31, (Dollars in thousands) 2021 2020 Real estate loans: Non-farm non-residential $ — $ — Non-farm non-residential non-owner 820 5,426 Residential 181 200 Construction, development & other 5,169 5,105 Farmland — — Commercial & industrial 66 383 Consumer — — Other — — Total outstanding balances $ 6,236 $ 11,114 Carrying amount $ 4,984 $ 8,312 The accretable discount is accreted into income using the interest method over the life of the loans. At December 31, 2021 and 2020, unaccreted discounts on PCI loans totaled $926,000 and $2.4 million, respectively, and were included in net loans in the accompanying consolidated balance sheets. At December 31, 2021 and 2020, the allowance for loan losses related to the PCI loans disclosed above was $17,000 and $0, respectively. Determining the fair value of PCI loans at acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected to be collected over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments and the cash flows expected to be collected reflects the impact of estimated loan losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for loan losses from the acquired loans. Accretable yield, or income expected to be collected on PCI loans was as follows: December 31, (Dollars in thousands) 2021 2020 2019 Balance at beginning of year $ 2,261 $ 83 $ 83 New loans acquired from Heritage acquisition — 2,726 — Accretion of income (1,335 ) (808 ) — Reclassifications from non-accretable — 260 — Disposals — — — Balance at end of year $ 926 $ 2,261 $ 83 |