| Loans and Allowance for Loan Losses | Note 5 - Loans and Allowance for Loan Losses
Loans held for investment are stated at the amount of unpaid
principal, reduced by unearned income and an allowance for loan
losses. Interest on loans is calculated by using the simple
interest method on daily balances of the principal amounts
outstanding. The Company defers and amortizes net loan
origination fees and costs as an adjustment to yield. The allowance
for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance
for loan losses when management believes the collectability of the
principal is unlikely.
The Company has certain lending policies and procedures in place
that are designed to maximize loan income with an acceptable level
of risk. Management reviews and approves these policies and
procedures on an annual basis and makes changes as
appropriate. Management receives and reviews monthly reports
related to loan originations, quality, concentrations,
delinquencies, nonperforming and potential problem
loans. Diversification in the loan portfolio is a means of
managing risk associated with fluctuations in economic conditions,
both by type of loan and geographic location.
Commercial loans are underwritten after evaluating and
understanding the borrower’s ability to operate profitably
and effectively. Underwriting standards are designed to determine
whether the borrower possesses sound business ethics and practices
and to evaluate current and projected cash flows to determine the
ability of the borrower to repay their obligations as
agreed. Commercial loans are primarily made based on the
identified cash flows of the borrower and, secondarily, on the
underlying collateral provided by the borrower. Most
commercial loans are secured by the assets being financed or other
business assets, such as accounts receivable or inventory, and
include personal guarantees.
Agricultural loans are subject to underwriting standards and
processes similar to commercial loans. These agricultural
loans are based primarily on the identified cash flows of the
borrower and secondarily on the underlying collateral provided by
the borrower. Most agricultural loans are secured by the
agriculture related assets being financed, such as farm land,
cattle or equipment, and include personal guarantees.
Real estate loans are also subject to underwriting standards and
processes similar to commercial and agricultural loans. These loans
are underwritten primarily based on projected cash flows and,
secondarily, as loans secured by real estate. The repayment of real
estate loans is generally largely dependent on the successful
operation of the property securing the loans or the business
conducted on the property securing the loan. Real estate loans may
be more adversely affected by conditions in the real estate markets
or in the general economy. The properties securing the
Company’s real estate portfolio are generally diverse in
terms of type and geographic location within Texas. This diversity
helps reduce the exposure to adverse economic events that affect
any single market or industry. Generally, real estate loans are
owner occupied which further reduces the Company’s risk.
Consumer loan underwriting utilizes methodical credit standards and
analysis to supplement the Company’s underwriting policies
and procedures. The Company’s loan policy addresses types of
consumer loans that may be originated and the collateral, if
secured, which must be perfected. The relatively smaller individual
dollar amounts of consumer loans that are spread over numerous
individual borrowers also minimize the Company’s risk.
The allowance for loan losses is an amount which represents
management’s best estimate of probable losses that are
inherent in the Company’s loan portfolio as of the balance
sheet date. The allowance for loan losses is comprised of three
elements: (i) specific reserves determined based on probable losses
on specific classified loans; (ii) a historical valuation reserve
component that considers historical loss rates; and (iii)
qualitative reserves based upon general economic conditions and
other qualitative risk factors both internal and external to the
Company. The allowance for loan losses is increased by charges to
income and decreased by charge-offs
Although we believe we use the best information available to make
loan loss allowance determinations, future adjustments could be
necessary if circumstances or economic conditions differ
substantially from the assumptions used in making our initial
determinations. A downturn in the economy and employment could
result in increased levels of non-performing assets and
charge-offs, increased loan provisions and reductions in
income. Additionally, bank regulatory agencies periodically
review our allowance for loan losses and methodology and could
require, in accordance with generally accepted accounting
principles, additional provisions to the allowance for loan losses
based on their judgment of information available to them at the
time of their examination as well as changes to our
methodology.
Accrual of interest is discontinued on a loan and payments are
applied to principal when management believes, after considering
economic and business conditions and collection efforts, the
borrower’s financial condition is such that collection of
interest is doubtful. Except consumer loans, generally all loans
past due greater than 90 days, based on contractual terms, are
placed on non-accrual. Loans are returned to accrual status when
all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
Consumer loans are generally charged-off when a loan becomes past
due 90 days. For other loans in the portfolio, facts and
circumstances are evaluated in making charge-off decisions.
Loans are considered impaired when, based on current information
and events, management determines that it is probable we will be
unable to collect all amounts due in accordance with the loan
agreement, including scheduled principal and interest
payments. If a loan is impaired, a specific valuation
allowance is allocated, if necessary. Interest payments on impaired
loans are typically applied to principal unless collectability of
the principal amount is reasonably assured, in which case interest
is recognized on a cash basis. Impaired loans, or portions
thereof, are charged off when deemed uncollectable.
The Company’s policy requires measurement of the allowance
for an impaired, collateral dependent loan based on the fair value
of the collateral. Other loan impairments for non-collateral
dependent loans are measured based on the present value of expected
future cash flows or the loan’s observable market price. At
March 31, 2016 and 2015, and December 31, 2015, all significant
impaired loans have been determined to be collateral dependent and
the allowance for loss has been measured utilizing the estimated
fair value of the collateral.
From time to time, the Company modifies its loan agreement with a
borrower. A modified loan is considered a troubled debt
restructuring when two conditions are met: (i) the borrower is
experiencing financial difficulty and (ii) concessions are made by
the Company that would not otherwise be considered for a borrower
with similar credit risk characteristics. Modifications to loan
terms may include a lower interest rate, a reduction of principal,
or a longer term to maturity. For all impaired loans, including the
Company’s troubled debt restructurings, the Company performs
a periodic, well-documented credit evaluation of the
borrower’s financial condition and prospects for repayment to
assess the likelihood that all principal and interest payments
required under the terms of the agreement will be collected in
full. When doubt exists about the ultimate collectability of
principal and interest, the troubled debt restructuring remains on
non-accrual status and payments received are applied to reduce
principal to the extent necessary to eliminate such doubt. This
determination of accrual status is judgmental and is based on facts
and circumstances related to each troubled debt restructuring. Each
of these loans is individually evaluated for impairment and a
specific reserve is recorded based on probable losses, taking into
consideration the related collateral, modified loan terms and cash
flow. As of March 31, 2016 and 2015, and December 31, 2015,
substantially all of the Company’s troubled debt restructured
loans are included in the non-accrual totals.
The Company originates certain mortgage loans for sale in the
secondary market. Accordingly, these loans are classified as
held-for-sale and are carried at the lower of cost or fair value on
an aggregate basis. The mortgage loan sales contracts contain
indemnification clauses should the loans default, generally in the
first three to six months, or if documentation is determined not to
be in compliance with regulations. The Company’s historic
losses as a result of these indemnities have been
insignificant.
Loans acquired, including loans acquired in a business combination,
are initially recorded at fair value with no valuation
allowance. Acquired loans are segregated between those
considered to be credit impaired and those deemed
performing. To make this determination, management considers
such factors as past due status, non-accrual status and credit risk
ratings. The fair value of acquired performing loans is
determined by discounting expected cash flows, both principal and
interest, at prevailing market interest rates. The difference
between the fair value and principal balances at acquisition date,
the fair value discount, is accreted into interest income over the
estimated life of each loan.
Purchased credit impaired loans are those loans that showed
evidence of deterioration of credit quality since origination and
for which it is probable, at acquisition, that the Company will be
unable to collect all amounts contractually owed. Their acquisition
fair value, which includes a credit component at the acquisition
date, was based on the estimate of cash flows, both principal and
interest, expected to be collected or estimated collateral values
if cash flows are not estimable, discounted at prevailing market
rates of interest. The difference between the discounted cash flows
expected at acquisition and the investment in the loan is
recognized as interest income on a level-yield method over the life
of the loan, unless management was unable to reasonably forecast
cash flows in which case the loans were placed on nonaccrual.
Contractually required payments for interest and principal that
exceed the cash flows expected at acquisition are not recognized as
a yield adjustment. Increases in expected cash flows
subsequent to the initial investment are recognized prospectively
through adjustment of the yield on the loan over its remaining
life. Decreases in expected cash flows subsequent to
acquisition are recognized as impairment. Valuation allowances
on these impaired loans reflect only losses incurred after the
acquisition. The carrying amount of purchased credit impaired loans
at March 31, 2016 and 2015, and December 31, 2015, was $1,970,000,
$2,037,000 and $2,178,000, respectively, compared to a contractual
balance of $2,701,000, $2,817,000, and $2,936,000,
respectively. Other purchased credit impaired loan disclosures
were omitted due to immateriality.
Loans held-for-investment by class of financing receivables are as
follows (in thousands):
March 31, December 31,
2016 2015 2015
Commercial $ 669,525 $ 651,723 $ 696,163
Agricultural 87,490 90,610 102,351
Real estate 2,150,132 1,826,579 2,136,233
Consumer 375,052 359,564 382,303
Total loans held-for-investment $ 3,282,199 $ 2,928,476 $ 3,317,050
Loans held for sale totaled $17,008,000, $10,231,000 and
$33,543,000 at March 31, 2016 and 2015, and December 31, 2015,
respectively, which are valued using the lower of cost or market
method.
The Company’s non-accrual loans, loans still accruing and
past due 90 days or more and restructured loans are as follows (in
thousands):
March 31, December 31,
2016 2015 2015
Non-accrual loans* $ 27,175 $ 18,935 $ 28,601
Loans still accruing and past due 90 days or more 59 184 341
Troubled debt restructured loans** 973 177 199
Total $ 28,207 $ 19,296 $ 29,141
* Includes $1,970,000, $2,037,000 and
$2,178,000 of purchased credit impaired loans as of March 31, 2016
and 2015, and December 31, 2015, respectively.
** Troubled debt restructured loans of
$8,527,000, $8,431,000 and $6,113,000, whose interest collection,
after considering economic and business conditions and collection
efforts, is doubtful are included in non-accrual loans at March 31,
2016 and 2015, and December 31, 2015, respectively.
The Company’s recorded investment in impaired loans and the
related valuation allowance are as follows (in thousands):
March 31, 2016 March 31, 2015 December 31, 2015
Recorded Valuation Recorded Valuation Recorded Valuation
$ 27,175 $ 5,262 $ 18,935 $ 3,860 $ 28,601 $ 5,071
The average recorded investment in impaired loans for the three
months ended March 31, 2016 and 2015, and the year ended December
31, 2015, was approximately $26,412,000, $20,263,000 and
$21,735,000, respectively. The Company had $29,028,000, $20,377,000
and $29,768,000 in non-accrual, past due 90 days or more and still
accruing, restructured loans and foreclosed assets at March 31,
2016 and 2015, and December 31, 2015,
respectively. Non-accrual loans at March 31, 2016 and 2015,
and December 31, 2015, consisted of the following by class of
financing receivables (in thousands):
March 31, December 31,
2016 2015 2015
Commercial $ 7,392 $ 3,098 $ 8,761
Agricultural 19 197 97
Real estate 18,473 14,983 18,766
Consumer 1,291 657 977
Total $ 27,175 $ 18,935 $ 28,601
No significant additional funds are committed to be advanced in
connection with impaired loans as of March 31, 2016.
The Company’s impaired loans and related allowance as of
March 31, 2016 and 2015, and December 31, 2015, are summarized in
the following tables by class of financing receivables (in
thousands). No interest income was recognized on impaired loans
subsequent to their classification as impaired.
March 31, 2016 Unpaid Recorded Recorded Total Related Average
Commercial $ 8,309 $ 1,227 $ 6,165 $ 7,392 $ 2,165 $ 6,812
Agricultural 19
— 19 19 7 11
Real Estate 23,740 5,746 12,727 18,473 2,658 18,504
Consumer 1,478 210 1,081 1,291 432 1,085
Total $ 33,546 $ 7,183 $ 19,992 $ 27,175 $ 5,262 $ 26,412
* Includes $1,970,000 of purchased
credit impaired loans.
March 31, 2015 Unpaid Recorded Recorded Total Related Average
Commercial $ 3,696 $ 373 $ 2,725 $ 3,098 $ 1,079 $ 3,200
Agricultural 213
— 197 197 55 207
Real Estate 20,865 4,519 10,464 14,983 2,617 16,179
Consumer 870 406 251 657 109 677
Total $ 25,644 $ 5,298 $ 13,637 $ 18,935 $ 3,860 $ 20,263
* Includes $2,037,000 of purchased
credit impaired loans.
December 31, 2015 Unpaid Recorded Recorded Total Related Year
Commercial $ 10,056 $ 608 $ 8,153 $ 8,761 $ 2,030 $ 5,812
Agricultural 97
— 97 97 70 48
Real Estate 23,710 5,314 13,452 18,766 2,827 15,211
Consumer 1,167 624 353 977 144 664
Total $ 35,030 $ 6,546 $ 22,055 $ 28,601 $ 5,071 $ 21,735
* Includes $2,178,000 of purchased
credit impaired loans.
The Company recognized interest income on impaired loans prior to
being recognized as impaired of approximately $922,000 during the
year ended December 31, 2015. Such amounts for the three-month
periods ended March 31, 2016 and 2015 were not significant.
From a credit risk standpoint, the Company rates its loans in one
of four categories: (i) pass, (ii) special mention, (iii)
substandard or (iv) doubtful. Loans rated as loss are
charged-off.
The ratings of loans reflect a judgment about the risks of default
and loss associated with the loan. The Company reviews the ratings
on our credits as part of our on-going monitoring of the credit
quality of our loan portfolio. Ratings are adjusted to reflect the
degree of risk and loss that are felt to be inherent in each credit
as of each reporting period. Our 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).
Credits rated special mention show clear signs of financial
weaknesses or deterioration in credit worthiness, however, such
concerns are not so pronounced that the Company generally expects
to experience significant loss within the short-term. Such
credits typically maintain the ability to perform within standard
credit terms and credit exposure is not as prominent as credits
rated more harshly.
Credits rated substandard are those in which the normal repayment
of principal and interest may be, or has been, jeopardized by
reason of adverse trends or developments of a financial,
managerial, economic or political nature, or important weaknesses
exist in collateral. A protracted workout on these credits is a
distinct possibility. Prompt corrective action is therefore
required to strengthen the Company’s position, and/or to
reduce exposure and to assure that adequate remedial measures are
taken by the borrower. Credit exposure becomes more likely in such
credits and a serious evaluation of the secondary support to the
credit is performed.
Credits rated doubtful are those in which full collection of
principal appears highly questionable, and which some degree of
loss is anticipated, even though the ultimate amount of loss may
not yet be certain and/or other factors exist which could affect
collection of debt. Based upon available information, positive
action by the Company is required to avert or minimize
loss. Credits rated doubtful are generally also placed on
non-accrual.
The following summarizes the Company’s internal ratings of
its loans held-for-investment by class of financing receivables and
portfolio segments, which are the same, at March 31, 2016 and 2015,
and December 31, 2015 (in thousands):
March 31, 2016 Pass Special Substandard Doubtful Total
Commercial $ 611,466 $ 7,378 $ 50,681 $
— $ 669,525
Agricultural 84,555 350 2,585
— 87,490
Real Estate 2,072,210 23,359 54,563
— 2,150,132
Consumer 371,826 399 2,827
— 375,052
Total $ 3,140,057 $ 31,486 $ 110,656 $
— $ 3,282,199
March 31, 2015 Pass Special Substandard Doubtful Total
Commercial $ 631,100 $ 9,384 $ 11,239 $
— $ 651,723
Agricultural 90,030 164 416
— 90,610
Real Estate 1,771,889 20,809 33,782 99 1,826,579
Consumer 357,709 517 1,338
— 359,564
Total $ 2,850,728 $ 30,874 $ 46,775 $ 99 $ 2,928,476
December 31, 2015 Pass Special Substandard Doubtful Total
Commercial $ 633,083 $ 9,762 $ 53,318 $
— $ 696,163
Agricultural 99,862 1,398 1,091
— 102,351
Real Estate 2,054,738 29,000 52,458 37 2,136,233
Consumer 379,941 416 1,946
— 382,303
Total $ 3,167,624 $ 40,576 $ 108,813 $ 37 $ 3,317,050
At March 31, 2016 and 2015, and December 31, 2015, the
Company’s past due loans are as follows (in thousands):
March 31, 2016 15-59 60-89 Greater Total Current Total 90 Days
Commercial $ 3,338 $ 1,228 $ 1,498 $ 6,064 $ 663,461 $ 669,525 $ 42
Agricultural 320
—
— 320 87,170 87,490
—
Real Estate 10,979 1,560 3,684 16,223 2,133,909 2,150,132
—
Consumer 1,677 336 162 2,175 372,877 375,052 17
Total $ 16,314 $ 3,124 $ 5,344 $ 24,782 $ 3,257,417 $ 3,282,199 $ 59
March 31, 2015 15-59 60-89 Greater Total Current Total 90 Days
Commercial $ 4,514 $ 283 $ 208 $ 5,005 $ 646,718 $ 651,723 $
—
Agricultural 485 35
— 520 90,090 90,610
—
Real Estate 13,077 1,116 1,368 15,561 1,811,018 1,826,579 144
Consumer 1,679 390 218 2,287 357,277 359,564 40
Total $ 19,755 $ 1,824 $ 1,794 $ 23,373 $ 2,905,103 $ 2,928,476 $ 184
December 31, 2015 15-59 60-89 Greater Total Total Total Total
Commercial $ 3,099 $ 3,652 $ 1,024 $ 7,775 $ 688,388 $ 696,163 $ 54
Agricultural 348 83
— 431 101,920 102,351
—
Real Estate 12,247 2,226 2,874 17,347 2,118,886 2,136,233 217
Consumer 1,645 183 266 2,094 380,209 382,303 70
Total $ 17,339 $ 6,144 $ 4,164 $ 27,647 $ 3,289,403 $ 3,317,050 $ 341
* The Company monitors commercial,
agricultural and real estate loans after such loans are 15 days
past due. Consumer loans are monitored after such loans are 30
days past due.
The following table details the allowance for loan losses at March
31, 2016 and 2015, and December 31, 2015, by portfolio segment
(in thousands). There were no allowances for purchased credit
impaired loans at March 31, 2016 and 2015, and December 31, 2015.
Allocation of a portion of the allowance to one category of loans
does not preclude its availability to absorb losses in other
categories.
March 31, 2016 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 2,165 $ 7 $ 2,658 $ 432 $ 5,262
Loans collectively evaluated for impairment 10,740 1,248 23,441 3,381 38,810
Total $ 12,905 $ 1,255 $ 26,099 $ 3,813 $ 44,072
March 31, 2015 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 1,079 $ 55 $ 2,617 $ 109 $ 3,860
Loans collectively evaluated for impairment 9,296 418 22,622 1,632 33,968
Total $ 10,375 $ 473 $ 25,239 $ 1,741 $ 37,828
December 31, 2015 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 2,030 $ 70 $ 2,827 $ 144 $ 5,071
Loans collectively evaluated for impairment 10,614 1,121 21,548 3,523 36,806
Total $ 12,644 $ 1,191 $ 24,375 $ 3,667 $ 41,877
Changes in the allowance for loan losses for the three months ended
March 31, 2016 and 2015, are summarized as follows by portfolio
segment (in thousands):
Three months ended
March 31, 2016 Commercial Agricultural Real Estate Consumer Total
Beginning balance $ 12,644 $ 1,191 $ 24,375 $ 3,667 $ 41,877
Provision for loan losses 847 196 832 453 2,328
Recoveries 286 11 1,227 125 1,649
Charge-offs (872 ) (143 ) (335 ) (432 ) (1,782 )
Ending balance $ 12,905 $ 1,255 $ 26,099 $ 3,813 $ 44,072
Three months ended
March 31, 2015 Commercial Agricultural Real Estate Consumer Total
Beginning balance $ 7,990 $ 527 $ 26,657 $ 1,650 $ 36,824
Provision for loan losses 2,465 (32 ) (1,467 ) 324 1,290
Recoveries 80 2 71 71 224
Charge-offs (160 ) (24 ) (22 ) (304 ) (510 )
Ending balance $ 10,375 $ 473 $ 25,239 $ 1,741 $ 37,828
The Company’s recorded investment in loans as of March 31,
2016 and 2015, and December 31, 2015 related to the balance in the
allowance for loan losses on the basis of the Company’s
impairment methodology was as follows (in thousands). Purchased
credit impaired loans of $1,970,000, $2,037,000 and $2,178,000 at
March 31, 2016 and 2015, and December 31, 2015, respectively, are
included in loans individually evaluated for impairment.
March 31, 2016 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 7,392 $ 19 $ 18,473 $ 1,291 $ 27,175
Loans collectively evaluated for impairment 662,133 87,471 2,131,659 373,761 3,255,024
Total $ 669,525 $ 87,490 $ 2,150,132 $ 375,052 $ 3,282,199
March 31, 2015 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 3,098 $ 197 $ 14,983 $ 657 $ 18,935
Loans collectively evaluated for impairment 648,625 90,413 1,811,596 358,907 2,909,541
Total $ 651,723 $ 90,610 $ 1,826,579 $ 359,564 $ 2,928,476
December 31, 2015 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 8,761 $ 97 $ 18,766 $ 977 $ 28,601
Loans collectively evaluated for impairment 687,402 102,254 2,117,467 381,326 3,288,449
Total $ 696,163 $ 102,351 $ 2,136,233 $ 382,303 $ 3,317,050
The Company’s loans that were modified in the three months
ended March 31, 2016 and 2015 and considered troubled debt
restructurings are as follows (in thousands):
Three Months Ended March 31,
2016 Three Months Ended March 31,
2015
Number Pre- Post- Number Pre- Post-
Commercial 7 $ 2,640 $ 2,640 3 $ 128 $ 128
Agricultural
—
—
—
—
—
—
Real Estate 2 463 463
—
—
—
Consumer 2 20 20 1 24 24
Total 11 $ 3,123 $ 3,123 4 $ 152 $ 152
The balances below provide information as to how the loans were
modified as troubled debt restructured loans during the three
months ended March 31, 2016 and 2015 (in thousands):
Three Months Ended March 31, 2016
Three Months Ended March 31, 2015
Adjusted Extended Combined Adjusted Extended Combined
Commercial $
— $ 2,237 $ 403 $
— $ 128 $
—
Agricultural
—
—
—
—
—
—
Real Estate
— 113 350
—
—
—
Consumer
— 4 16
—
— 24
Total $
— $ 2,354 $ 769 $
— $ 128 $ 24
During the three months ended March 31, 2015, one loan was modified
as troubled debt restructured loan within the previous 12 months
and for which there was a payment default. There were no such
defaults in the three months ended March 31, 2016. A default
for purposes of this disclosure is a troubled debt restructured
loan in which the borrower is 90 days past due or more or results
in the foreclosure and repossession of the applicable
collateral. The loans with payment default are as follows
(dollars in thousands):
Three Months Ended March 31, 2015
Number Balance
Commercial 1 $ 111
Agriculture
—
—
Real Estate
—
—
Consumer
—
—
Total 1 $ 111
As of March 31, 2016, the Company has no commitments to lend
additional funds to loan customers whose terms have been modified
in troubled debt restructurings.
Our subsidiary bank has established a line of credit with the
Federal Home Loan Bank of Dallas (FHLB) to provide liquidity and
meet pledging requirements for those customers eligible to have
securities pledged to secure certain uninsured deposits. At
March 31, 2016, $2,032,327,000 in loans held by our bank
subsidiary were subject to blanket liens as security for this line
of credit. At March 31, 2016, $175,000,000 were outstanding
under this line of credit. |
