| 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
September 30, 2018 and 2017, and December 31, 2017, was
$2,947,000, $736,000 and $618,000, respectively, compared to a
contractual balance of $3,898,000, $932,000, and $755,000,
respectively. Other purchased credit impaired loan disclosures were
omitted due to immateriality.
Loans held-for-investment
September 30,
December 31,
2018 2017 2017
Commercial $ 773,924 $ 674,947 $ 684,099
Agricultural 93,953 83,005 94,543
Real estate 2,614,929 2,297,556 2,302,998
Consumer 384,234 416,719 403,929
Total loans held-for-investment $ 3,867,040 $ 3,472,227 $ 3,485,569
The Company’s non-accrual
September 30,
December 31,
2018 2017 2017
Non-accrual $ 25,587 $ 18,750 $ 17,670
Loans still accruing and past due 90 days or more 88 257 288
Troubled debt restructured loans** 513 668 627
Total $ 26,188 $ 19,675 $ 18,585
*
Includes $2,947,000, $736,000 and $618,000 of
purchased credit impaired loans as of September 30, 2018 and
2017, and December 31, 2017, respectively.
**
Troubled debt restructured loans of $4,577,000,
$5,277,000 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):
September 30, 2018 September 30, 2017 December 31, 2017
Recorded
Investment
Valuation
Recorded
Valuation
Recorded
Valuation
$
25,587 $ 4,988 $ 18,750 $ 4,177 $ 17,670 $ 3,996
The Company had $26,859,000, $22,076,000 and $20,117,000
in non-accrual, Non-accrual
September 30,
December 31,
2018 2017 2017
Commercial $ 6,961 $ 4,133 $ 3,612
Agricultural 1,046 60 134
Real estate 16,682 13,386 12,838
Consumer 898 1,171 1,086
Total $ 25,587 $ 18,750 $ 17,670
No significant additional funds are committed to be advanced in
connection with impaired loans as of September 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.
September 30,
2018 Unpaid Recorded Recorded Total Related Year –to-Date Three-
Commercial $ 9,276 $ 3,467 $ 3,494 $ 6,961 $ 1,412 $ 8,339 $ 7,669
Agricultural 1,062
— 1,046 1,046 528 1,506 1,101
Real Estate 22,513 4,215 12,467 16,682 2,652 18,688 17,762
Consumer 1,088 50 848 898 396 1,012 942
Total $ 33,939 $ 7,732 $ 17,855 $ 25,587 $ 4,988 $ 29,545 $ 27,474
*
Includes $2,947,000 of purchased credit impaired
loans.
September 30,
2017 Unpaid Recorded Recorded Total Related Year –to- Three-
Commercial $ 10,989 $ 617 $ 3,516 $ 4,133 $ 1,671 $ 7,313 $ 5,866
Agricultural 66
— 60 60 17 66 60
Real Estate 17,306 3,742 9,644 13,386 1,984 14,279 13,829
Consumer 1,388 262 909 1,171 505 1,341 1,238
Total $ 29,749 $ 4,621 $ 14,129 $ 18,750 $ 4,177 $ 22,999 $ 20,993
*
Includes $736,000 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 nine-month periods ended September 30, 2018 and 2017 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
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
September 30, 2018 Pass Special Substandard Doubtful Total
Commercial $ 747,758 $ 8,817 $ 17,349 $
— $ 773,924
Agricultural 89,314 68 4,571
— 93,953
Real Estate 2,530,673 27,241 57,015
— 2,614,929
Consumer 381,772 324 2,138
— 384,234
Total $ 3,749,517 $ 36,450 $ 81,073 $
— $ 3,867,040
September 30, 2017 Pass Special Substandard Doubtful Total
Commercial $ 632,693 $ 7,997 $ 34,257 $
— $ 674,947
Agricultural 79,227 841 2,937
— 83,005
Real Estate 2,224,970 26,231 46,355
— 2,297,556
Consumer 414,043 168 2,508
— 416,719
Total $ 3,350,933 $ 35,237 $ 86,057 $
— $ 3,472,227
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):
September 30,
2018 15-59 60-89 Greater Total Current Total 90 Days
Commercial $ 3,850 $ 420 $ 3,331 $ 7,601 $ 766,323 $ 773,924 $
—
Agricultural 442
— 287 729 93,224 93,953
—
Real Estate 15,542 2,583 661 18,786 2,596,143 2,614,929
—
Consumer 749 173 145 1,067 383,167 384,234 88
Total $ 20,583 $ 3,176 $ 4,424 $ 28,183 $ 3,838,857 $ 3,867,040 $ 88
September 30,
2017 15-59 60-89 Greater Total Current Total 90 Days
Commercial $ 3,288 $ 585 $ 1,495 $ 5,368 $ 669,579 $ 674,947 $ 212
Agricultural 322
—
— 322 82,683 83,005
—
Real Estate 12,636 984 2,293 15,913 2,281,643 2,297,556
—
Consumer 1,211 457 176 1,844 414,875 416,719 45
Total $ 17,457 $ 2,026 $ 3,964 $ 23,447 $ 3,448,780 $ 3,472,227 $ 257
December 31,
2017 15-59 60-89 Greater Total Total Total 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 September 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.
September 30, 2018 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 1,412 $ 528 $ 2,652 $ 396 $ 4,988
Loans collectively evaluated for impairment 7,549 1,106 31,713 5,515 45,883
Total $ 8,961 $ 1,634 $ 34,365 $ 5,911 $ 50,871
September 30, 2017 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 1,671 $ 17 $ 1,984 $ 505 $ 4,177
Loans collectively evaluated for impairment 10,201 1,284 26,484 5,776 43,745
Total $ 11,872 $ 1,301 $ 28,468 $ 6,281 $ 47,922
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
September 30, 2018 Commercial Agricultural Real Estate Consumer Total
Beginning balance $ 9,218 $ 1,402 $ 33,243 $ 6,088 $ 49,951
Provision for loan losses (24 ) 229 1,091 154 1,450
Recoveries 192 3 85 135 415
Charge-offs (425 )
— (54 ) (466 ) (945 )
Ending balance $ 8,961 $ 1,634 $ 34,365 $ 5,911 $ 50,871
Three months ended
September 30, 2017 Commercial Agricultural Real Estate Consumer Total
Beginning balance $ 11,935 $ 1,127 $ 28,023 $ 6,325 $ 47,410
Provision for loan losses 557 157 424 277 1,415
Recoveries 119 17 50 91 277
Charge-offs (739 )
— (29 ) (412 ) (1,180 )
Ending balance $ 11,872 $ 1,301 $ 28,468 $ 6,281 $ 47,922
Nine months ended
September 30, 2018 Commercial Agricultural Real Estate Consumer Total
Beginning balance $ 10,865 $ 1,305 $ 29,896 $ 6,090 $ 48,156
Provision for loan losses (1,316 ) 317 4,325 539 3,865
Recoveries 476 12 345 382 1,215
Charge-offs (1,064 )
— (201 ) (1,100 ) (2,365 )
Ending balance $ 8,961 $ 1,634 $ 34,365 $ 5,911 $ 50,871
Nine months ended
September 30, 2017 Commercial Agricultural Real Estate Consumer Total
Beginning balance $ 11,707 $ 1,101 $ 26,864 $ 6,107 $ 45,779
Provision for loan losses 1,485 211 2,556 838 5,090
Recoveries 868 25 141 400 1,434
Charge-offs (2,188 ) (36 ) (1,093 ) (1,064 ) (4,381 )
Ending balance $ 11,872 $ 1,301 $ 28,468 $ 6,281 $ 47,922
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 $2,947,000, $736,000
and $618,000 at September 30, 2018 and 2017, and
December 31, 2017, respectively, are included in loans
individually evaluated for impairment.
September 30, 2018 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 6,961 $ 1,046 $ 16,682 $ 898 $ 25,587
Loans collectively evaluated for impairment 766,963 92,907 2,598,247 383,336 3,841,453
Total $ 773,924 $ 93,953 $ 2,614,929 $ 384,234 $ 3,867,040
September 30, 2017 Commercial Agricultural Real Estate Consumer Total
Loans individually evaluated for impairment $ 4,133 $ 60 $ 13,386 $ 1,171 $ 18,750
Loans collectively evaluated for impairment 670,814 82,945 2,284,170 415,548 3,453,477
Total $ 674,947 $ 83,005 $ 2,297,556 $ 416,719 $ 3,472,227
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 September 30, 2018
Nine Months Ended September 30, 2018
Pre- Modification
Post- Modification
Pre- Modification
Post- Modification
Recorded Recorded Recorded Recorded
Number Investment Investment Number Investment Investment
Commercial 2 $ 547 $ 547 3 $ 826 $ 826
Agricultural
—
—
— 1 4 4
Real Estate 1 117 117 5 642 642
Consumer
—
—
— 6 113 113
Total 3 $ 664 $ 664 15 $ 1,585 $ 1,585
Three Months Ended September 30, 2017
Nine Months Ended September 30, 2017
Pre- Modification Post-
Pre- Modification Post-
Recorded Recorded Recorded Recorded
Number Investment Investment Number Investment Investment
Commercial 3 $ 514 $ 514 9 $ 838 $ 838
Agricultural
—
—
—
—
—
—
Real Estate 1 256 256 3 473 473
Consumer
—
—
— 1 25 25
Total 4 $ 770 $ 770 13 $ 1,336 $ 1,336
The balances below provide
information as to how the loans were modified as troubled debt
restructured loans (in thousands):
Three Months Ended September 30, 2018
Nine Months Ended September 30, 2018
Adjusted Extended Combined Adjusted Extended Combined
Commercial $
— $ 491 $ 56
— $ 491 $ 335
Agricultural
—
—
—
—
— 4
Real Estate
— 117
—
— 279 363
Consumer
—
—
—
—
— 113
Total $
— $ 608 $ 56
— $ 770 $ 815
Three Months Ended September 30, 2017
Nine Months Ended September 30, 2017
Adjusted Extended Combined Adjusted Extended Combined
Commercial $
— $
— $ 514
— $ 181 $ 657
Agricultural
—
—
—
—
—
—
Real Estate
— 256
—
— 312 161
Consumer
—
—
—
— 25
—
Total $
— $ 256 $ 514
— $ 518 $ 818
During the three and nine months ended September 30, 2018, 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 three and nine months ended September 30, 2017, two
loans and four loans, respectively, were modified as a troubled
debt restructured loan within the previous 12 months and for which
there was a payment default. 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 September 30,
Nine Months Ended September 30,
Number Balance Number Balance
Commercial
— $
—
— $
—
Agriculture
—
—
—
—
Real Estate
—
—
—
—
Consumer
—
—
—
—
Total
— $
—
— $
—
Three Months Ended September 30,
Nine Months Ended September 30,
Number Balance Number Balance
Commercial 2 $ 88 3 $ 141
Agriculture
—
—
—
—
Real Estate
—
— 1 62
Consumer
—
—
—
—
Total 2 $ 88 4 $ 203
As of September 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
September 30, 2018, $2,450,523,000 in loans held by our bank
subsidiary were subject to blanket liens as security for this line
of credit. At September 30, 2018, there were no advances or
letters of credit outstanding under this line of credit. |
