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 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 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 less cost to sell. 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. 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 June 30, 2019 and 2018 and December 31, 2018 were $464,000, $2,813,000 and $827,000, respectively, compared to a contractual balance of $750,000, $3,918,000 and $1,157,000, respectively. Other purchased credit impaired loan disclosures were omitted due to immateriality. Loans held-for-investment June 30, December 31, 2019 2018 2018 Commercial $ 813,887 $ 775,010 $ 844,953 Agricultural 97,535 92,583 96,677 Real estate 2,730,585 2,567,878 2,639,346 Consumer 398,945 396,009 372,660 Total loans held-for-investment $ 4,040,952 $ 3,831,480 $ 3,953,636 The Company’s non-accrual June 30, December 31, 2019 2018 2018 Non-accrual $ 26,408 $ 26,685 $ 27,534 Loans still accruing and past due 90 days or more 300 200 1,008 Troubled debt restructured loans** 471 514 513 Total $ 27,179 $ 27,399 $ 29,055 * Includes $464,000, $2,813,000 and $827,000 of purchased credit impaired loans as of June 30, 2019 and 2018, and December 31, 2018, respectively. ** Troubled debt restructured loans of $3,906,000, $4,329,000 and $3,840,000, 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, 2019 June 30, 2018 December 31, 2018 Recorded Investment Valuation Allowance Recorded Investment Valuation Allowance Recorded Investment Valuation Allowance $26,408 $ 3,866 $ 26,685 $ 4,823 $ 27,534 $ 4,069 The Company had $27,860,000, $28,104,000 and $29,632,000 in non-accrual, Non-accrual June 30, December 31, 2019 2018 2018 Commercial $ 8,189 $ 7,580 $ 9,334 Agricultural 1,047 1,259 759 Real estate 16,787 16,715 16,714 Consumer 385 1,131 727 Total $ 26,408 $ 26,685 $ 27,534 No 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, 2019 Unpaid Contractual Principal Balance Recorded Investment With No Allowance* Recorded Investment With Allowance Total Recorded Investment Related Allowance Year- to-date Average Recorded Investment Three- Month Average Recorded Investment Commercial $ 9,340 $ 6,212 $ 1,977 $ 8,189 $ 1,022 $ 8,699 $ 8,562 Agricultural 1,108 434 613 1,047 119 1,090 1,071 Real Estate 24,262 5,034 11,753 16,787 2,515 18,054 17,105 Consumer 525 27 358 385 210 465 427 Total $ 35,235 $ 11,707 $ 14,701 $ 26,408 $ 3,866 $ 28,308 $ 27,165 * Includes $464,000 of purchased credit impaired loans. June 30, 2018 Unpaid Contractual Principal Balance Recorded Investment With No Allowance* Recorded Investment With Allowance Total Recorded Investment Related Allowance Year- to-date Average Recorded Investment Three- Average Recorded Investment 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. 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 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, 2019 Pass Special Substandard Doubtful Total Commercial $ 767,275 $ 31,124 $ 15,488 $ — $ 813,887 Agricultural 94,481 58 2,996 — 97,535 Real Estate 2,656,139 20,044 54,402 — 2,730,585 Consumer 397,017 264 1,664 — 398,945 Total $ 3,914,912 $ 51,490 $ 74,550 $ — $ 4,040,952 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 December 31, 2018 Pass Special 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): June 30, 2019 15-59 Past Due* 60-89 Past Due Greater Days Total Past Due Current Total Loans 90 Days Commercial $ 2,671 $ 352 $ 610 $ 3,633 $ 810,254 $ 813,887 $ 58 Agricultural 315 163 30 508 97,027 97,535 30 Real Estate 16,130 712 865 17,707 2,712,878 2,730,585 180 Consumer 821 99 40 960 397,985 398,945 32 Total $ 19,937 $ 1,326 $ 1,545 $ 22,808 $ 4,018,144 $ 4,040,952 $ 300 June 30, 2018 15-59 Past Due* 60-89 Past Due Greater Days Total Past Due 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 December 31, 2018 15-59 Past Due* 60-89 Past Due Greater Days Total Past Due Total Current Total Loans Total 90 Past Due Still 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 June 30, 2019 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 1,022 $ 119 $ 2,515 $ 210 $ 3,866 Loans collectively evaluated for impairment 12,877 1,241 28,284 5,552 47,954 Total $ 13,899 $ 1,360 $ 30,799 $ 5,762 $ 51,820 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 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 June 30, 2019 Commercial Agricultural Real Estate Consumer Total Beginning balance $ 12,475 $ 1,430 $ 31,887 $ 5,793 $ 51,585 Provision for loan losses 1,418 61 (929 ) 50 600 Recoveries 423 5 60 209 697 Charge-offs (417 ) (136 ) (219 ) (290 ) (1,062 ) Ending balance $ 13,899 $ 1,360 $ 30,799 $ 5,762 $ 51,820 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 Six months ended June 30, 2019 Commercial Agricultural Real Estate Consumer Total Beginning balance $ 11,948 $ 1,446 $ 32,342 $ 5,466 $ 51,202 Provision for loan losses 1,612 42 (531 ) 442 1,565 Recoveries 1,073 7 149 349 1,578 Charge-offs (734 ) (135 ) (1,161 ) (495 ) (2,525 ) Ending balance $ 13,899 $ 1,360 $ 30,799 $ 5,762 $ 51,820 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 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 $464,000, $2,813,000 and $827,000 at June 30, 2019 and 2018, and December 31, 2018, respectively, are included in loans individually evaluated for impairment. June 30, 2019 Commercial Agricultural Real Estate Consumer Total Loans individually evaluated for impairment $ 8,189 $ 1,047 $ 16,787 $ 385 $ 26,408 Loans collectively evaluated for impairment 805,698 96,488 2,713,798 398,560 4,014,544 Total $ 813,887 $ 97,535 $ 2,730,585 $ 398,945 $ 4,040,952 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 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 June 30, 2019 Six Months Ended June 30, 2019 Number Pre- Post- Number Pre- Post- Commercial 2 $ 122 $ 122 3 $ 279 $ 279 Agricultural 2 253 253 10 619 619 Real Estate — — — 4 650 650 Consumer — — — — — — Total 4 $ 375 $ 375 17 $ 1,548 $ 1,548 Three Months Ended June 30, 2018 Six Months Ended June 30, 2018 Number Pre- Post- Number Pre- Post- 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 The balances below provide information as to how the loans were modified as troubled debt restructured loans (in thousands): Three Months Ended June 30, 2019 Six Months Ended June 30, 2019 Adjusted Extended Combined Maturity Adjusted Extended Combined Maturity Commercial $ — $ 122 $ — $ — $ 279 $ — Agricultural — 253 — — 354 265 Real Estate — — — — 202 448 Consumer — — — — — — Total $ — $ 375 $ — $ — $ 835 $ 713 Three Months Ended June 30, 2018 Six Months Ended June 30, 2018 Adjusted Extended Combined Maturity Adjusted Extended Combined Maturity Commercial $ — $ — $ 279 — $ — $ 279 Agricultural — — — — — 4 Real Estate — 162 — — 162 363 Consumer — — 39 — — 113 Total $ — $ 162 $ 318 — $ 162 $ 759 During the three months ended June 30, 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. During the six months ended June 30, 2019 and 2018, no loans were modified as a troubled debt restricted during 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 June 30, 2019, the Company has no 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, 2019, $2,563,225,000 in loans held by our bank subsidiary were subject to blanket liens as security for this line of credit. At June 30, 2019, there were no advances or letters of credit outstanding under this line of credit. |