| Loans Held for Investment and Allowance for Loan Losses | Note 5 – Loans Held for Investment 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 decline in the economy and employment rates could
result in increased levels of non-performing
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. charged-off charge-off
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
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 non-accrual
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
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 June 30,
2018 and 2017, and December 31, 2017, was $2,813,000, $889,000
and $618,000, respectively, compared to a contractual balance of
$3,918,000, $1,174,290, and $755,000, respectively. Other purchased
credit impaired loan disclosures were omitted due to
immateriality.
Loans held-for-investment
June 30, December 31,
2018 2017 2017
Commercial $ 775,010 $ 668,049 $ 684,099
Agricultural 92,583 77,342 94,543
Real estate 2,567,878 2,271,100 2,302,998
Consumer 396,009 422,861 403,929
Total loans held-for-investment $ 3,831,480 $ 3,439,352 $ 3,485,569
The Company’s non-accrual
June 30, December 31,
2018 2017 2017
Non-accrual $ 26,685 $ 21,489 $ 17,670
Loans still accruing and past due 90 days or more 200 314 288
Troubled debt restructured loans** 514 672 627
Total $ 27,399 $ 22,475 $ 18,585
*
Includes $2,813,000, $889,000 and $618,000 of
purchased credit impaired loans as of June 30, 2018 and 2017,
and December 31, 2017, respectively.
**
Troubled debt restructured loans of $4,329,000,
$5,417,000 and $4,629,000, whose interest collection, after
considering economic and business conditions and collection
efforts, is doubtful are included in non-accrual
The Company’s recorded investment in impaired loans and the
related valuation allowance are as follows (in thousands):
June 30, 2018 June 30, 2017 December 31, 2017
Recorded Valuation Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance Investment Allowance
$26,685 $ 4,823 $ 21,489 $ 4,543 $ 17,670 $ 3,996
The Company had $28,104,000, $24,720,000 and $20,117,000
in non-accrual, Non-accrual
June 30, December 31,
2018 2017 2017
Commercial $ 7,580 $ 5,404 $ 3,612
Agricultural 1,259 61 134
Real estate 16,715 14,801 12,838
Consumer 1,131 1,223 1,086
Total $ 26,685 $ 21,489 $ 17,670
No significant additional funds are committed to be advanced in
connection with impaired loans as of June 30, 2018.
The Company’s impaired loans and related allowance 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.
June 30, 2018 Unpaid Recorded Recorded Total Related Year–to-Date Three-
Commercial $ 9,432 $ 3,264 $ 4,316 $ 7,580 $ 1,379 $ 8,485 $ 8,226
Agricultural 1,278 50 1,209 1,259 368 1,670 1,589
Real Estate 22,358 3,569 13,146 16,715 2,645 18,441 18,019
Consumer 1,344 169 962 1,131 431 1,240 1,192
Total $ 34,412 $ 7,052 $ 19,633 $ 26,685 $ 4,823 $ 29,836 $ 29,026
*
Includes $2,813,000 of purchased credit impaired
loans.
June 30, 2017 Unpaid Recorded Recorded Total Related Year–to-Date Three-
Commercial $ 9,362 $ 708 $ 4,696 $ 5,404 $ 1,683 $ 13,590 $ 7,985
Agricultural 66
— 61 61 17 69 66
Real Estate 19,071 3,755 11,046 14,801 2,369 17,769 15,473
Consumer 1,432 309 914 1,223 474 1,457 1,294
Total $ 29,931 $ 4,772 $ 16,717 $ 21,489 $ 4,543 $ 32,885 $ 24,818
*
Includes $889,000 of purchased credit impaired
loans.
December 31, 2017 Unpaid Recorded Recorded Total Related 12 Month
Commercial $ 5,597 $ 518 $ 3,094 $ 3,612 $ 1,194 $ 4,849
Agricultural 147
— 134 134 31 120
Real Estate 16,823 2,348 10,490 12,838 2,316 13,835
Consumer 1,284 143 943 1,086 455 1,258
Total $ 23,851 $ 3,009 $ 14,661 $ 17,670 $ 3,996 $ 20,062
*
Includes $618,000 of purchased credit impaired
loans.
The Company recognized interest income on impaired loans prior to
being recognized as impaired of approximately $624,000 during the
year ended December 31, 2017. Such amounts for the three-month
and six-month
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
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
June 30, 2018 Pass Special Substandard Doubtful Total
Commercial $ 749,387 $ 6,439 $ 19,184 $
— $ 775,010
Agricultural 87,768 1,568 3,247
— 92,583
Real Estate 2,487,399 26,182 54,297
— 2,567,878
Consumer 393,200 368 2,441
— 396,009
Total $ 3,717,754 $ 34,557 $ 79,169 $
— $ 3,831,480
June 30, 2017 Pass Special Substandard Doubtful Total
Commercial $ 627,812 $ 5,965 $ 34,272 $
— $ 668,049
Agricultural 73,727 859 2,756
— 77,342
Real Estate 2,200,067 20,978 50,055
— 2,271,100
Consumer 420,138 197 2,526
— 422,861
Total $ 3,321,744 $ 27,999 $ 89,609 $
— $ 3,439,352
December 31, 2017 Pass Special Substandard Doubtful Total
Commercial $ 649,166 $ 6,282 $ 28,651 $
— $ 684,099
Agricultural 90,457 1,527 2,559
— 94,543
Real Estate 2,227,302 29,089 46,607
— 2,302,998
Consumer 401,434 181 2,314
— 403,929
Total $ 3,368,359 $ 37,079 $ 80,131 $
— $ 3,485,569
The Company’s past due loans are as follows (in
thousands):
June 30, 2018 15-59 60-89 Greater Total Past Current Total Loans 90 Days
Commercial $ 4,950 $ 1,085 $ 3,029 $ 9,064 $ 765,946 $ 775,010 $ 74
Agricultural 626 159
— 785 91,798 92,583
—
Real Estate 13,441 474 532 14,447 2,553,431 2,567,878 70
Consumer 919 232 76 1,227 394,782 396,009 56
Total $ 19,936 $ 1,950 $ 3,637 $ 25,523 $ 3,805,957 $ 3,831,480 $ 200
June 30, 2017 15-59 60-89 Greater Total Past Current Total Loans 90 Days
Commercial $ 3,026 $ 872 $ 2,673 $ 6,571 $ 661,478 $ 668,049 $ 150
Agricultural 633
— 8 641 76,701 77,342 8
Real Estate 12,794 1,713 4,661 19,168 2,251,932 2,271,100 99
Consumer 1,134 414 99 1,647 421,214 422,861 57
Total $ 17,587 $ 2,999 $ 7,441 $ 28,027 $ 3,411,325 $ 3,439,352 $ 314
December 31, 2017 15-59 60-89 Greater Total Past Total Current Total Loans Total 90
Commercial $ 2,039 $ 1,104 $ 1,081 $ 4,224 $ 679,875 $ 684,099 $ 7
Agricultural 640
—
— 640 93,903 94,543
—
Real Estate 12,308 511 1,198 14,017 2,288,981 2,302,998 216
Consumer 1,360 361 135 1,856 402,073 403,929 65
Total $ 16,347 $ 1,976 $ 2,414 $ 20,737 $ 3,464,832 $ 3,485,569 $ 288
*
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 by
portfolio segment (in thousands). There were no allowances for
purchased credit impaired loans at June 30, 2018 and 2017, and
December 31, 2017. Allocation of a portion of the allowance to
one category of loans does not preclude its availability to absorb
losses in other categories.
June 30, 2018 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 1,379 $ 368 $ 2,645 $ 431 $ 4,823
Loans collectively evaluated for impairment 7,839 1,034 30,598 5,657 45,128
Total $ 9,218 $ 1,402 $ 33,243 $ 6,088 $ 49,951
June 30, 2017 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 1,683 $ 17 $ 2,369 $ 474 $ 4,543
Loans collectively evaluated for impairment 10,252 1,110 25,654 5,851 42,867
Total $ 11,935 $ 1,127 $ 28,023 $ 6,325 $ 47,410
December 31, 2017 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 1,194 $ 31 $ 2,316 $ 455 $ 3,996
Loans collectively evaluated for impairment 9,671 1,274 27,580 5,635 44,160
Total $ 10,865 $ 1,305 $ 29,896 $ 6,090 $ 48,156
Changes in the allowance for loan losses are summarized as follows
by portfolio segment (in thousands):
Three months ended June 30, 2018 Commercial Agricultural Real Estate Consumer Total
Beginning balance $ 9,277 $ 1,512 $ 32,539 $ 6,171 $ 49,499
Provision for loan losses 335 (115 ) 799 86 1,105
Recoveries 126 5 18 147 296
Charge-offs (520 )
— (113 ) (316 ) (949 )
Ending balance $ 9,218 $ 1,402 $ 33,243 $ 6,088 $ 49,951
Three months ended June 30, 2017 Commercial Agricultural Real Estate Consumer Total
Beginning balance $ 11,682 $ 946 $ 27,279 $ 6,285 $ 46,192
Provision for loan losses (76 ) 207 1,359 235 1,725
Recoveries 522 2 39 104 667
Charge-offs (193 ) (28 ) (654 ) (299 ) (1,174 )
Ending balance $ 11,935 $ 1,127 $ 28,023 $ 6,325 $ 47,410
Six months ended June 30, 2018 Commercial Agricultural Real Estate Consumer Total
Beginning balance $ 10,865 $ 1,305 $ 29,896 $ 6,090 $ 48,156
Provision for loan losses (1,292 ) 88 3,233 386 2,415
Recoveries 284 9 260 247 800
Charge-offs (639 )
— (146 ) (635 ) (1,420 )
Ending balance $ 9,218 $ 1,402 $ 33,243 $ 6,088 $ 49,951
Six months ended June 30, 2017 Commercial Agricultural Real Estate Consumer Total
Beginning balance $ 11,707 $ 1,101 $ 26,864 $ 6,107 $ 45,779
Provision for loan losses 927 54 2,132 562 3,675
Recoveries 749 8 91 309 1,157
Charge-offs (1,448 ) (36 ) (1,064 ) (653 ) (3,201 )
Ending balance $ 11,935 $ 1,127 $ 28,023 $ 6,325 $ 47,410
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 (in
thousands). Purchased credit impaired loans of $2,813,000, $889,000
and $618,000 at June 30, 2018 and 2017, and December 31,
2017, respectively, are included in loans individually evaluated
for impairment.
June 30, 2018 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 7,580 $ 1,259 $ 16,715 $ 1,131 $ 26,685
Loans collectively evaluated for impairment 767,430 91,324 2,551,163 394,878 3,804,795
Total $ 775,010 $ 92,583 $ 2,567,878 $ 396,009 $ 3,831,480
June 30, 2017 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 5,404 $ 61 $ 14,801 $ 1,223 $ 21,489
Loans collectively evaluated for impairment 662,645 77,281 2,256,299 421,638 3,417,863
Total $ 668,049 $ 77,342 $ 2,271,100 $ 422,861 $ 3,439,352
December 31, 2017 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 3,612 $ 134 $ 12,838 $ 1,086 $ 17,670
Loan collectively evaluated for impairment 680,487 94,409 2,290,160 402,843 3,467,899
Total $ 684,099 $ 94,543 $ 2,302,998 $ 403,929 $ 3,485,569
The Company’s loans that were modified and considered
troubled debt restructurings are as follows (in thousands):
Three Months Ended June 30,
2018 Six Months Ended June 30,
2018
Pre-Modification Post-Modification Pre-Modification Post-Modification
Recorded Recorded Recorded Recorded
Number Investment Investment Number Investment Investment
Commercial 1 $ 279 $ 279 1 $ 279 $ 279
Agricultural
—
—
— 1 4 4
Real Estate 2 162 162 4 525 525
Consumer 3 39 39 6 113 113
Total 6 $ 480 $ 480 12 $ 921 $ 921
Three Months Ended June 30,
2017 Six Months Ended June 30,
2017
Pre-Modification Post-Modification Pre-Modification Post-Modification
Recorded Recorded Recorded Recorded
Number Investment Investment Number Investment Investment
Commercial 2 $ 90 $ 90 6 $ 324 $ 324
Agricultural
—
—
—
—
—
—
Real Estate 1 161 161 2 217 217
Consumer 1 25 25 1 25 25
Total 4 $ 276 $ 276 9 $ 566 $ 566
The balances below provide information as to how the loans were
modified as troubled debt restructured loans (in thousands):
Three Months Ended June 30, 2018 Six Months Ended June 30,
2018
Adjusted Extended Combined Adjusted Extended Combined
Commercial $
— $
— $ 279
— $
— $ 279
Agricultural
—
—
—
—
— 4
Real Estate
— 162
—
— 162 363
Consumer
—
— 39
—
— 113
Total $
— $ 162 $ 318
— $ 162 $ 759
Three Months Ended June 30, 2017 Six Months Ended June 30,
2017
Adjusted Extended Combined Adjusted Extended Combined
Commercial $
— $ 90 $
—
— $ 180 $ 144
Agricultural
—
—
—
—
—
—
Real Estate
—
— 161
— 56 161
Consumer
— 25
—
— 25
—
Total $
— $ 115 $ 161
— $ 261 $ 305
During the three months ended June 30, 2018 and 2017, no loans
were modified as a troubled debt restructured loan within the
previous 12 months and for which there was a payment default.
During the six months ended June 30, 2017, two loans were
modified in the six-month
Three Months Ended June 30, 2018
Six Months Ended June 30, 2018
Number Balance Number Balance
Commercial
— $
—
— $
—
Agriculture
—
—
—
—
Real Estate
—
—
—
—
Consumer
—
—
—
—
Total
— $
—
— $
—
Three Months Ended June 30, 2017
Six Months Ended June 30, 2017
Number Balance Number Balance
Commercial
— $
— 1 $ 53
Agriculture
—
—
—
—
Real Estate
—
— 1 63
Consumer
—
—
—
—
Total
— $
— 2 $ 116
As of June 30, 2018, 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
June 30, 2018, $2,378,431,000 in loans held by our bank
subsidiary were subject to blanket liens as security for this line
of credit. At June 30, 2018, there was $60,000,000 outstanding
under this line of credit. At June 30, 2018,
$1,500,000 million in letters of credit were outstanding under
this line of credit that were pledged as collateral for public
funds held by our bank subsidiary. |
