Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2022

Loans in the accompanying consolidated balance sheets consisted of the following:


	June 30,			December 31,
(Dollars in thousands)	2022			2021
Real estate loans:
Non-farm non-residential owner occupied	$	508,864		$	383,941
Non-farm non-residential non-owner occupied		464,530			445,308
Residential		273,415			213,264
Construction, development & other		440,925			320,335
Farmland		23,895			9,934
Commercial & industrial		914,845			611,348
Consumer		3,706			4,001
Municipal and other		118,997			80,593
		2,749,177			2,068,724
Allowance for loan losses		(26,666	)		(19,295	)
Loans, net	$	2,722,511		$	2,049,429

Total loans are presented net of unaccreted discounts and deferred fees totaling $8.1 million and $6.5 million at June 30, 2022 and December 31, 2021, respectively.

The Company had $8.8 million and $81.6 million in outstanding loan balances related to the guaranteed SBA Paycheck Protection Program (“PPP”) as of June 30, 2022 and December 31, 2021, respectively. These loans are included within the commercial and industrial loan balances throughout the footnotes.

Non-accrual and Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. As mentioned in Note 1, the accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. Non-accrual loans and accruing loans past due more than 90 days segregated by class of loans were as follows:


	June 30,				December 31,
	2022				2021
(Dollars in thousands)	Non-accrual		Accruing loans past due more than 90 days		Non-accrual		Accruing loans past due more than 90 days
Real estate loans:
Non-farm non-residential owner occupied	$	964	$	—	$	1,008	$	-
Non-farm non-residential non-owner occupied		323		—		346		—
Residential		116		—		127		—
Construction, development & other		232		—		244		—
Farmland		—		—		—		—
Commercial & industrial		8,165		387		8,297		278
Consumer		—		—		—		—
Municipal and other		—		—		—		—
Purchased credit impaired		6		—		8		—
	$	9,806	$	387	$	10,030	$	278

As of June 30, 2022 and 2021, the amount of income that would have been accrued for loans on non-accrual was approximately $524,000 and $984,000, respectively.

An age analysis of past due loans, segregated by class of loans, were as follows:


	June 30, 2022
(Dollars in thousands)	30-59 days		60-89 days		Over 90 days		Total past due		Total current		Total loans
Real estate loans:
Non-farm non-residential owner occupied	$	269	$	—	$	964	$	1,233	$	507,631	$	508,864
Non-farm non-residential non-owner occupied		191		—		323		514		463,263		463,777
Residential		458		655		116		1,229		272,186		273,415
Construction, development & other		—		—		232		232		436,614		436,846
Farmland		—		—		—		—		23,895		23,895
Commercial & industrial		4,334		472		8,552		13,358		901,428		914,786
Consumer		2		—		—		2		3,704		3,706
Municipal and other		—		—		—		—		118,997		118,997
Purchased credit impaired		—		—		6		6		4,885		4,891
	$	5,254	$	1,127	$	10,193	$	16,574	$	2,732,603	$	2,749,177


	December 31, 2021
(Dollars in thousands)	30-59 days		60-89 days		Over 90 days		Total past due		Total current		Total loans
Real estate loans:
Non-farm non-residential owner occupied	$	291	$	—	$	1,008	$	1,299	$	382,642	$	383,941
Non-farm non-residential non-owner occupied		161		—		346		507		444,079		444,586
Residential		230		—		127		357		212,822		213,179
Construction, development & other		—		395		244		639		315,584		316,223
Farmland		—		—		—		—		9,934		9,934
Commercial & industrial		960		457		8,575		9,992		601,291		611,283
Consumer		9		—		—		9		3,992		4,001
Municipal and other		18	1			—		19		80,574		80,593
Purchased credit impaired		—		—		8		8		4,976		4,984
	$	1,669	$	853	$	10,308	$	12,830	$	2,055,894	$	2,068,724

Impaired Loans

The following tables present impaired loans by class of loans:


	June 30, 2022
(Dollars in thousands)	Unpaid contractual principal balance		Recorded investment with no allowance		Recorded investment with allowance		Total recorded investment		Related allowance		Average recorded investment during period
Real estate loans:
Non-farm non-residential owner occupied	$	964	$	964	$	—	$	964	$	—	$	986
Non-farm non-residential non-owner occupied		5,569		5,563		—		5,563		—		5,596
Residential		119		116		—		116		—		122
Construction, development & other		229		232		—		232		—		238
Farmland		—		—		—		—		—		—
Commercial & industrial		15,047		7,477		7,574		15,051		1,686		13,504
Consumer		—		—		—		—		—		—
Municipal and other		—		—		—		—		—		—
Purchased credit impaired		58		—		58		58		15		62
	$	21,986	$	14,352	$	7,632	$	21,984	$	1,701	$	20,508


	December 31, 2021
(Dollars in thousands)	Unpaid contractual principal balance		Recorded investment with no allowance		Recorded investment with allowance		Total recorded investment		Related allowance		Average recorded investment during year
Real estate loans:
Non-farm non-residential owner occupied	$	1,008	$	1,008	$	—	$	1,008	$	—	$	1,051
Non-farm non-residential non-owner occupied		5,641		5,630		—		5,630		—		5,680
Residential		130		127		—		127		—		138
Construction, development & other		241		244		—		244		—		255
Farmland		—		—		—		—		—		—
Commercial & industrial		8,297		7,331		967		8,298		290		9,117
Consumer		—		—		—		—		—		—
Other		—		—		—		—		—		—
Purchased credit impaired		65		—		65		65		17		71
	$	15,382	$	14,340	$	1,032	$	15,372	$	307	$	16,312

Interest payments received on impaired loans are recorded as interest income unless collections of the remaining recorded investment are doubtful, at which time payments received are recorded as reductions of principal. Interest income collected on impaired loans was approximately $210,000 and $99,000 for the six months ended June 30, 2022 and 2021, respectively.

Troubled Debt Restructuring

During the six months ended June 30, 2022, the terms of one loan were modified as a troubled debt restructuring (“TDR”). The terms of three loans were modified as TDRs prior to December 31, 2021. The following table presents modifications of loans the Company considers to be TDR loans:


	June 30, 2022
	Loan modifications
(Dollars in thousands)	Number of loans		Pre- restructuring recorded investment		Post- restructuring recorded investment		Adjusted interest rate		Payment deferral		Combined rate and payment deferral
Real estate loans:
Non-farm non-residential owner occupied		3	$	851	$	851	$	—	$	851	$	—
Non-farm non-residential non-owner occupied		—		—		—		—		—		—
Residential		—		—		—		—		—		—
Construction, development & other		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Commercial & industrial		1		785		785		—		785		—
Consumer		—		—		—		—		—		—
Municipal and other		—		—		—		—		—		—
		4	$	1,636	$	1,636	$	—	$	1,636	$	—

	December 31, 2021
	Loan modifications
(Dollars in thousands)	Number of loans		Pre- restructuring recorded investment		Post- restructuring recorded investment		Adjusted interest rate		Payment deferral		Combined rate and payment deferral
Real estate loans:
Non-farm non-residential owner occupied		3	$	927	$	927	$	—	$	927	$	—
Non-farm non-residential non-owner occupied		—		—		—		—		—		—
Residential		—		—		—		—		—		—
Construction, development & other		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Commercial & industrial		2		758		758		—		758		—
Consumer		—		—		—		—		—		—
Municipal and other		—		—		—		—		—		—
		5	$	1,685	$	1,685	$	—	$	1,685	$	—

No loans modified under a TDR during the previous twelve-month period were in default. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral. At June 30, 2022 and December 31, 2021, the Company had no commitments to lend additional funds to borrowers with loans whose terms had been modified under TDRs.

COVID-19 Loan Deferments

Certain borrowers were unable to meet their contractual payment obligations because of the adverse effects of COVID-19. During March of 2020 and to help mitigate these effects, the Company began offering deferral modifications of principal and/or interest payments for varying periods, but typically no more than 90 days. After 90 days, customers could apply for an additional deferral, and a small portion of our customers requested such an additional deferral. At June 30, 2022 and December 31, 2021, the Company had approximately 400 and 500 loans totaling $190.4 million and $223.6 million, respectively, in outstanding loan balances that were subject to deferral and modification agreements due to COVID-19 whereby the principal and/or interest payments were deferred to the end of each loan term. Subsequent to the approved deferral period, customers resumed their regular payments. The Coronavirus Aid, Relief, and Economic Security Act provides banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs if the borrowers were not more than 30 days past due at December 31, 2019. In the absence of other intervening factors, such short-term modifications made on a good faith basis are not categorized as TDRs, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status. At June 30, 2022 and December 31, 2021, $4.0 million and $4.4 million, respectively, in accrued interest receivables related to these loans remained outstanding and will be collected at the end of each loan term.

Credit Quality Indicators

Credit Quality Indicators. From a credit risk standpoint, the Company classifies its loans in one of six categories: (i) pass, (ii) special mention, (iii) substandard, (iv) purchased credit impaired, (v) doubtful, or (vi) loss.

The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit as of each monthly reporting period. The Company’s 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).

(i) The Company has several pass credit grades that are assigned to loans based on varying levels of credits, ranging from credits that are secured by cash or marketable securities, to watch credits that have all the characteristics of an acceptable credit risk but warrant more than the normal level of supervision.

(ii) Special mention loans are loans that still show sufficient cash flow to service their debt but show a declining financial trend with potential cash flow shortages if trends continue. This category should be treated as a temporary grade. If cash flow deteriorates further to become negative, then a substandard grade should be given. If cash flow trends begin to improve then an upgrade back to pass would be justified. Nonfinancial reasons for rating a credit special mention include management problems, pending litigation, an ineffective loan agreement or other material structure weakness.

(iii) A substandard loan has material weakness in the primary repayment source such as insufficient cash flow from operations to service the debt. However, other weaknesses such as limited paying capacity of the obligor or the collateral pledged could justify a substandard grade. Substandard loans must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt.

(iv) Credits purchased from third parties are recorded at their estimated fair value at the acquisition date and are classified as PCI loans if the loans reflect credit deterioration since origination and it is probable at acquisition that the Company will be unable to collect all contractually required payments (see Note 1 – Nature of Operations and Summary of Significant Accounting Policies - Certain Acquired Loans).

(v) A loan classified as doubtful has all the weaknesses of a substandard loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. A doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as loss is deferred. Doubtful borrowers are usually in default, lack adequate liquidity or capital, and lack the resources necessary to remain an operating entity. Because of high probability of loss, non-accrual status is required on doubtful loans.

(vi) Loans classified as loss are considered uncollectible and of such little value that their continuance as banking assets are not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. With loans classified as loss, the underlying borrowers are often in bankruptcy, have formally suspended debt repayments, or have otherwise ceased normal business operations. Once an asset is classified as loss, there is little prospect of collecting either its principal or interest. When access to collateral, rather than the value of the collateral, is a problem, a less severe classification may be appropriate. However, the Company does not maintain an asset on the balance sheet if realizing its value would require long-term litigation or other lengthy recovery efforts. Losses are to be recorded in the period an obligation becomes uncollectible.

The following tables summarize the Company’s internal ratings of its loans:


	June 30, 2022
(Dollars in thousands)	Pass		Special Mention		Substandard		Purchased Credit Impaired		Doubtful		Total
Real estate loans:
Non-farm non-residential owner occupied	$	497,740	$	4,618	$	6,506	$	—	$	—	$	508,864
Non-farm non-residential non-owner occupied		456,855		—		6,922		753		—		464,530
Residential		272,370		—		1,045		—		—		273,415
Construction, development & other		436,614		—		232		4,079		—		440,925
Farmland		23,895		—		—		—		—		23,895
Commercial & industrial		909,153		427		5,206		59		—		914,845
Consumer		3,685		21		—		—		—		3,706
Municipal and other		118,997		—		—		—		—		118,997
	$	2,719,309	$	5,066	$	19,911	$	4,891	$	—	$	2,749,177


	December 31, 2021
(Dollars in thousands)	Pass		Special Mention		Substandard		Purchased Credit Impaired		Doubtful		Total
Real estate loans:
Non-farm non-residential owner occupied	$	370,062	$	6,953	$	6,926	$	—	$	—	$	383,941
Non-farm non-residential non-owner occupied		428,972		8,338		7,276		722		—		445,308
Residential		212,109		—		1,069		86		—		213,264
Construction, development & other		315,979		—		244		4,112		—		320,335
Farmland		9,934		—		—		—		—		9,934
Commercial & industrial		605,322		1,146		4,816		64		—		611,348
Consumer		3,979		22		—		—		—		4,001
Municipal and other		80,593		—		—		—		—		80,593
	$	2,026,950	$	16,459	$	20,331	$	4,984	$	—	$	2,068,724

Allowance for Loan Losses

The majority of the loan portfolio is comprised of loans to businesses and individuals in the Greater Houston, Dallas-Fort Worth, and Austin-San Antonio markets. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. The risks created by this concentration has been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses is adequate to cover estimated losses on loans at June 30, 2022 and December 31, 2021.

The following tables detail the activity in the allowance for loan losses by portfolio segment:


	For the Six Months Ended June 30, 2022
(Dollars in thousands)	Beginning balance		Provision for loan losses			Charge-offs		Recoveries		Ending balance
Real estate loans:
Non-farm non-residential owner occupied	$	3,456	$	596		$	—	$	—	$	4,052
Non-farm non-residential non-owner occupied		5,935		(649	)		—		—		5,286
Residential		957		(130	)		—		—		827
Construction, development & other		2,064		199			—		—		2,263
Farmland		45		24			—		—		69
Commercial & industrial		6,500		7,346			—		8		13,854
Consumer		6		(15	)		—		13		4
Municipal and other		332		(21	)		—		—		311
	$	19,295	$	7,350		$	—	$	21	$	26,666


	For the Six Months Ended June 30, 2021
(Dollars in thousands)	Beginning balance		Provision for loan losses			Charge-offs			Recoveries		Ending balance
Real estate loans:
Non-farm non-residential owner occupied	$	2,608	$	1,328		$	—		$	—	$	3,936
Non-farm non-residential non-owner occupied		3,107		1,223			—			—		4,330
Residential		1,218		(168	)		—			—		1,050
Construction, development & other		932		(250	)		—			—		682
Farmland		32		2			—			—		34
Commercial & industrial		3,858		(595	)		(170	)		99		3,192
Consumer		35		(27	)		—			2		10
Municipal and other		189		(13	)		(18	)		2		160
	$	11,979	$	1,500		$	(188	)	$	103	$	13,394


	For the Three Months Ended June 30, 2022
(Dollars in thousands)	Beginning balance		Provision for loan losses			Charge-offs		Recoveries		Ending balance
Real estate loans:
Non-farm non-residential owner occupied	$	4,087	$	(35	)	$	—	$	—	$	4,052
Non-farm non-residential non-owner occupied		5,613		(327	)		—		—		5,286
Residential		766		61			—		—		827
Construction, development & other		2,324		(61	)		—		—		2,263
Farmland		44		25			—		—		69
Commercial & industrial		10,173		3,677			—		4		13,854
Consumer		5		(1	)		—		—		4
Municipal and other		300		11			—		—		311
	$	23,312	$	3,350		$	—	$	4	$	26,666


	For the Three Months Ended June 30, 2021
(Dollars in thousands)	Beginning balance		Provision for loan losses			Charge-offs			Recoveries		Ending balance
Real estate loans:
Non-farm non-residential owner occupied	$	4,152	$	(216	)	$	—		$	—	$	3,936
Non-farm non-residential non-owner occupied		4,132		198			—			—		4,330
Residential		938		112			—			—		1,050
Construction, development & other		702		(20	)		—			—		682
Farmland		32		2			—			—		34
Commercial & industrial		3,323		(57	)		(170	)		96		3,192
Consumer		12		(4	)		—			2		10
Municipal and other		180		(15	)		(5	)		—		160
	$	13,471	$	—		$	(175	)	$	98	$	13,394

The following tables summarize the allocation of the allowance for loan losses, by portfolio segment, for loans evaluated for impairment individually and collectively:


	June 30, 2022
	Period end amounts of ALLL allocated to loans evaluated for impairment:
(Dollars in thousands)	Individually		Collectively		PCI		Total
Real estate loans:
Non-farm non-residential owner occupied	$	—	$	4,052	$	—	$	4,052
Non-farm non-residential non-owner occupied		—		5,286		—		5,286
Residential		—		827		—		827
Construction, development & other		—		2,263		—		2,263
Farmland		—		69		—		69
Commercial & industrial		1,686		12,153		15		13,854
Consumer		—		4		—		4
Municipal and other		—		311		—		311
	$	1,686	$	24,965	$	15	$	26,666


	December 31, 2021
	Period end amounts of ALLL allocated to loans evaluated for impairment:
(Dollars in thousands)	Individually		Collectively		PCI		Total
Real estate loans:
Non-farm non-residential owner occupied	$	—	$	3,456	$	—	$	3,456
Non-farm non-residential non-owner occupied		—		5,935		—		5,935
Residential		—		957		—		957
Construction, development & other		—		2,064		—		2,064
Farmland		—		45		—		45
Commercial & industrial		290		6,193		17		6,500
Consumer		—		6		—		6
Municipal and other		—		332		—		332
	$	290	$	18,988	$	17	$	19,295

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:


	June 30, 2022
	Loans evaluated for impairment:
(Dollars in thousands)	Individually		Collectively		PCI		Total
Real estate loans:
Non-farm non-residential owner occupied	$	964	$	507,900	$	—	$	508,864
Non-farm non-residential non-owner occupied		5,563		458,967		—		464,530
Residential		116		273,299		—		273,415
Construction, development & other		232		440,693		—		440,925
Farmland		—		23,895		—		23,895
Commercial & industrial		15,051		899,736		58		914,845
Consumer		—		3,706		—		3,706
Municipal and other		—		118,997		—		118,997
	$	21,926	$	2,727,193	$	58	$	2,749,177


	December 31, 2021
	Loans evaluated for impairment:
(Dollars in thousands)	Individually		Collectively		PCI		Total
Real estate loans:
Non-farm non-residential owner occupied	$	1,008	$	382,933		—	$	383,941
Non-farm non-residential non-owner occupied		5,630		439,678		—		445,308
Residential		127		213,137		—		213,264
Construction, development & other		244		320,091		—		320,335
Farmland		—		9,934		—		9,934
Commercial & industrial		8,298		602,985		65		611,348
Consumer		—		4,001		—		4,001
Municipal and other		—		80,593		—		80,593
	$	15,307	$	2,053,352	$	65	$	2,068,724

Certain Acquired Loans

On January 1, 2020, the Company acquired loans with fair values of $259.6 million as part of the acquisition of Heritage Bancorp, Inc. and its subsidiary, Heritage Bank. Of the total $263.3 million of loans acquired, $250.7 million were determined to have no evidence of deteriorated credit quality and are accounted for under ASC Topics 310-10 and 310-20. The remaining $12.6 million were determined to exhibit deteriorated credit quality since origination under ASC 310-30.

Determining the fair value of PCI loans at acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected to be collected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for credit losses from the acquired loans.

The following table presents the gross contractual amounts receivable balances, by portfolio segment, and the carrying amount of PCI loans:


	June 30,		December 31,
(Dollars in thousands)	2022		2021
Real estate loans:
Non-farm non-residential owner occupied	$	—	$	—
Non-farm non-residential non-owner occupied		784		820
Residential		83		181
Construction, development & other		5,114		5,169
Farmland		—		—
Commercial & industrial		60		66
Consumer		—		—
Municipal and other		—		—
Total outstanding balances	$	6,041	$	6,236
Carrying amount	$	4,891	$	4,984

The accretable discount is accreted into income using the interest method over the life of the loans. At June 30, 2022 and December 31, 2021, unaccreted discounts on PCI loans totaled $838,000 and $926,000, respectively, and were included in net loans in the accompanying consolidated balance sheets.

At June 30, 2022 and December 31, 2021, the allowance for loan losses related to the PCI loans disclosed above was $15,000 and $17,000, respectively.

Accretable yield, or income expected to be collected on PCI loans was as follows:


	June 30,			December 31,
(Dollars in thousands)	2022			2021
Balance at beginning of year	$	926		$	2,261
Accretion of income		(88	)		(1,335	)
Balance at end of period	$	838		$	926