| 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 estimated loss emergence periods; 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 (net of recoveries). Management’s periodic evaluation of the appropriateness of the allowance is based on general economic conditions, the financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio. For purposes of determining our historical valuation reserve, the loan portfolio, less cash secured loans, government guaranteed loans and classified loans, is multiplied by the Company’s historical loss rate adjusted for the estimated loss emergence period. Specific allocations are increased or decreased in accordance with deterioration or improvement in credit quality and a corresponding increase or decrease in risk of loss on a particular loan. In addition, we adjust our allowance for qualitative factors such as current local economic conditions and trends, including, without limitations, unemployment, oil and gas prices, drought conditions, changes in lending staff, policies and procedures, changes in credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans. This qualitative reserve serves to estimate for additional areas of losses inherent in our portfolio that are not reflected in our historic loss factors. 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 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 U.S. GAAP, 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 less cost to sell. 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, 2019 and 2018 and December 31, 2018, 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 less cost to sell. 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, 2019 and 2018 and December 31, 2018, substantially all of the Company’s troubled debt restructured loans are included in the non-accrual totals. 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 the acquired portfolio. 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. Subsequent to the acquisition date, increases in expected cash flows will generally result in a recovery of any previously recorded allowance for loan loss, to the extent applicable, and/or a reclassification from the nonaccretable difference to accretable yield, which will be recognized prospectively. 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, 2019 and 2018 and December 31, 2018 were $859,000, $3,201,000 and $827,000, respectively, compared to a contractual balance of $1,196,000, $4,129,000 and $1,157,000, 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, 2019 2018 2018 Commercial $ 826,886 $ 734,156 $ 844,953 Agricultural 91,336 95,958 96,677 Real estate 2,684,207 2,502,904 2,639,346 Consumer 386,731 397,033 372,660 Total loans held-for-investment $ 3,989,160 $ 3,730,051 $ 3,953,636 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, 2019 2018 2018 Non-accrual loans* $ 28,508 $ 22,752 $ 27,534 Loans still accruing and past due 90 days or more 97 327 1,008 Troubled debt restructured loans** 472 514 513 Total $ 29,077 $ 23,593 $ 29,055 * Includes $859,000, $3,201,000 and $827,000 of purchased credit impaired loans as of March 31, 2019 and 2018, and December 31, 2018, respectively. ** Troubled debt restructured loans of $4,566,000, $4,608,000 and $3,840,000, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in non-accrual loans at March 31, 2019 and 2018, and December 31, 2018, respectively. The Company’s recorded investment in impaired loans and the related valuation allowance are as follows (in thousands): March 31, 2019 March 31, 2018 December 31, 2018 Recorded Investment Valuation Allowance Recorded Investment Valuation Allowance Recorded Investment Valuation Allowance $ 28,508 $ 4,472 $ 22,752 $ 4,365 $ 27,534 $ 4,069 The Company had $29,724,000, $24,869,000 and $29,632,000 in non-accrual, past due 90 days or more and still accruing, restructured loans and foreclosed assets at March 31, 2019 and 2018, and December 31, 2018, respectively. Non-accrual loans at March 31, 2019 and 2018, and December 31, 2018, consisted of the following by class of financing receivables (in thousands): March 31, December 31, 2019 2018 2018 Commercial $ 8,897 $ 5,351 $ 9,334 Agricultural 831 143 759 Real estate 18,254 16,161 16,714 Consumer 526 1,097 727 Total $ 28,508 $ 22,752 $ 27,534 No significant additional funds are committed to be advanced in connection with impaired loans as of March 31, 2019. 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. March 31, 2019 Unpaid Contractual Principal Balance Recorded Investment With No Allowance* Recorded Investment With Allowance Total Recorded Investment Related Allowance Three- Month Average Recorded Investment Commercial $ 10,227 $ 6,129 $ 2,768 $ 8,897 $ 1,184 $ 9,292 Agricultural 892 179 652 831 130 859 Real Estate 26,528 6,444 11,810 18,254 2,901 19,268 Consumer 689 27 499 526 257 577 Total $ 38,336 $ 12,779 $ 15,729 $ 28,508 $ 4,472 $ 29,996 * Includes $859,000 of purchased credit impaired loans. March 31, 2018 Unpaid Contractual Principal Balance Recorded Investment With No Allowance* Recorded Investment With Allowance Total Recorded Investment Related Allowance Three- Month Average Recorded Investment Commercial $ 7,360 $ 1,754 $ 3,597 $ 5,351 $ 1,306 $ 5,725 Agricultural 159 12 131 143 30 146 Real Estate 20,168 3,799 12,362 16,161 2,580 16,751 Consumer 1,292 117 980 1,097 449 1,149 Total $ 28,979 $ 5,682 $ 17,070 $ 22,752 $ 4,365 $ 23,771 * Includes $3,201,000 of purchased credit impaired loans. December 31, 2018 Unpaid Contractual Principal Balance Recorded Investment With No Allowance* Recorded Investment With Allowance Total Recorded Investment Related Allowance 12 Month Average Recorded Investment Commercial $ 10,808 $ 6,728 $ 2,606 $ 9,334 $ 1,133 $ 7,986 Agricultural 799 213 546 759 170 842 Real Estate 24,072 6,699 10,015 16,714 2,409 16,042 Consumer 935 101 626 727 357 914 Total $ 36,614 $ 13,741 $ 13,793 $ 27,534 $ 4,069 $ 25,784 * Includes $827,000 of purchased credit impaired loans. The Company recognized interest income on impaired loans prior to being recognized as impaired of approximately $948,000 during the year ended December 31, 2018. Such amounts for the three-month period ended March 31, 2019 and 2018 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 (in thousands): March 31, 2019 Pass Special Mention Substandard Doubtful Total Commercial $ 787,651 $ 23,182 $ 16,053 $ — $ 826,886 Agricultural 87,151 20 4,165 — 91,336 Real Estate 2,611,139 21,827 51,241 — 2,684,207 Consumer 384,786 246 1,699 — 386,731 Total $ 3,870,727 $ 45,275 $ 73,158 $ — $ 3,989,160 March 31, 2018 Pass Special Mention Substandard Doubtful Total Commercial $ 705,251 $ 9,401 $ 19,504 $ — $ 734,156 Agricultural 90,975 1,755 3,228 — 95,958 Real Estate 2,415,458 28,638 58,808 — 2,502,904 Consumer 394,312 285 2,436 — 397,033 Total $ 3,605,996 $ 40,079 $ 83,976 $ — $ 3,730,051 December 31, 2018 Pass Special Mention Substandard Doubtful Total Commercial $ 804,584 $ 23,392 $ 16,977 $ — $ 844,953 Agricultural 92,864 46 3,767 — 96,677 Real Estate 2,559,379 26,626 53,341 — 2,639,346 Consumer 370,510 315 1,835 — 372,660 Total $ 3,827,337 $ 50,379 $ 75,920 $ — $ 3,953,636 The Company’s past due loans are as follows (in thousands): March 31, 2019 15-59 Days Past Due* 60-89 Days Past Due Greater Than 90 Days Total Past Due Current Total Loans 90 Days Past Due Still Accruing Commercial $ 4,123 $ 239 $ 885 $ 5,247 $ 821,639 $ 826,886 $ 63 Agricultural 323 17 — 340 90,996 91,336 — Real Estate 15,649 671 1,541 17,861 2,666,346 2,684,207 8 Consumer 1,003 96 26 1,125 385,606 386,731 26 Total $ 21,098 $ 1,023 $ 2,452 $ 24,573 $ 3,964,587 $ 3,989,160 $ 97 March 31, 2018 15-59 Days Past Due* 60-89 Days Past Due Greater Than 90 Days Total Past Due Current Total Loans 90 Days Past Due Still Accruing Commercial $ 4,639 $ 760 $ 1,066 $ 6,465 $ 727,691 $ 734,156 $ 204 Agricultural 332 — — 332 95,626 95,958 — Real Estate 16,037 544 748 17,329 2,485,575 2,502,904 76 Consumer 824 221 161 1,206 395,827 397,033 47 Total $ 21,832 $ 1,525 $ 1,975 $ 25,332 $ 3,704,719 $ 3,730,051 $ 327 December 31, 2018 15-59 Days Past Due* 60-89 Days Past Due Greater Than 90 Days Total Past Due Total Current Total Loans Total 90 Days Past Due Still Accruing Commercial $ 3,546 $ 682 $ 677 $ 4,905 $ 840,048 $ 844,953 $ — Agricultural 791 19 26 836 95,841 96,677 — Real Estate 13,185 881 2,020 16,086 2,623,260 2,639,346 960 Consumer 782 263 54 1,099 371,561 372,660 48 Total $ 18,304 $ 1,845 $ 2,777 $ 22,926 $ 3,930,710 $ 3,953,636 $ 1,008 * 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 March 31, 2019 and 2018, and December 31, 2018. 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, 2019 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 1,184 $ 130 $ 2,901 $ 257 $ 4,472 Loans collectively evaluated for impairment 11,291 1,300 28,986 5,536 47,113 Total $ 12,475 $ 1,430 $ 31,887 $ 5,793 $ 51,585 March 31, 2018 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 1,306 $ 30 $ 2,580 $ 449 $ 4,365 Loans collectively evaluated for impairment 7,971 1,482 29,959 5,722 45,134 Total $ 9,277 $ 1,512 $ 32,539 $ 6,171 $ 49,499 December 31, 2018 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 1,133 $ 170 $ 2,409 $ 357 $ 4,069 Loans collectively evaluated for impairment 10,815 1,276 29,933 5,109 47,133 Total $ 11,948 $ 1,446 $ 32,342 $ 5,466 $ 51,202 Changes in the allowance for loan losses are summarized as follows by portfolio segment (in thousands): Three months ended March 31 , 2019 Commercial Agricultural Real Estate Consumer Total Beginning balance $ 11,948 $ 1,446 $ 32,342 $ 5,466 $ 51,202 Provision for loan losses 196 (19 ) 397 391 965 Recoveries 649 3 89 141 882 Charge-offs (318 ) — (941 ) (205 ) (1,464 ) Ending balance $ 12,475 $ 1,430 $ 31,887 $ 5,793 $ 51,585 Three months ended March 31 , 2018 Commercial Agricultural Real Estate Consumer Total Beginning balance $ 10,865 $ 1,305 $ 29,896 $ 6,090 $ 48,156 Provision for loan losses (1,627 ) 203 2,434 300 1,310 Recoveries 158 4 242 100 504 Charge-offs (119 ) — (33 ) (319 ) (471 ) Ending balance $ 9,277 $ 1,512 $ 32,539 $ 6,171 $ 49,499 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 $859,000, $3,201,000 and $827,000 at March 31, 2019 and 2018, and December 31, 2018, respectively, are included in loans individually evaluated for impairment. March 31, 2019 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 8,897 $ 831 $ 18,254 $ 526 $ 28,508 Loans collectively evaluated for impairment 817,989 90,505 2,665,953 386,205 3,960,652 Total $ 826,886 $ 91,336 $ 2,684,207 $ 386,731 $ 3,989,160 March 31, 2018 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 5,351 $ 143 $ 16,161 $ 1,097 $ 22,752 Loans collectively evaluated for impairment 728,805 95,815 2,486,743 395,936 3,707,299 Total $ 734,156 $ 95,958 $ 2,502,904 $ 397,033 $ 3,730,051 December 31, 2018 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 9,334 $ 759 $ 16,714 $ 727 $ 27,534 Loan collectively evaluated for impairment 835,619 95,918 2,622,632 371,933 3,926,102 Total $ 844,953 $ 96,677 $ 2,639,346 $ 372,660 $ 3,953,636 The Company’s loans that were modified and considered troubled debt restructurings are as follows (in thousands): Three Months Ended March 31, 2019 Three Months Ended March 31, 2018 Pre- Modification Post- Modification Pre- Modification Post- Modification Recorded Recorded Recorded Recorded Number Investment Investment Number Investment Investment Commercial 1 $ 157 $ 157 — $ — $ — Agricultural 8 367 367 1 4 4 Real Estate 4 649 649 2 363 363 Consumer — — — 3 74 74 Total 13 $ 1,173 $ 1,173 6 $ 441 $ 441 The balances below provide information as to how the loans were modified as troubled debt restructured loans (in thousands): Three Months Ended March 31, 2019 Three Months Ended March 31, 2018 Adjusted Interest Rate Extended Maturity Combined Rate and Maturity Adjusted Interest Rate Extended Maturity Combined Rate and Maturity Commercial $ — $ 157 $ — $ — $ — $ — Agricultural — 102 265 — — 4 Real Estate — 201 448 — — 363 Consumer — — — — — 74 Total $ — $ 460 $ 713 $ — $ — $ 441 During the three months ended March 31, 2019 and 2018, no loans 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. As of March 31, 2019, 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, 2019, $2,519,715,000 in loans held by our bank subsidiary were subject to blanket liens as security for this line of credit. At March 31, 2019, there were no advances or letters of credit outstanding under this line of credit. |
