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Loans and Allowance for Loan Losses
 9 Months Ended
Sep. 30, 2022
Receivables [Abstract]  
Loans and Allowance for Loan Losses Loans and Allowance for Loan Losses
Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):    
September 30, 2022December 31, 2021
Real estate loans:  
Construction$554,345 $447,860 
1-4 family residential646,692 651,140 
Commercial1,901,921 1,598,172 
Commercial loans433,538 418,998 
Municipal loans449,219 443,078 
Loans to individuals77,780 85,914 
Total loans4,063,495 3,645,162 
Less: Allowance for loan losses36,506 35,273 
Net loans$4,026,989 $3,609,889 

Paycheck Protection Program Loans
In April 2020, we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amount is still fully guaranteed by the SBA. On December 27, 2020, the Economic Aid Act was signed into law. This second coronavirus relief package granted additional funds for a new round of PPP loans. Additionally, it expanded the eligibility for loans and allowed certain businesses to request a second loan. In return for processing and booking a PPP loan, the SBA paid lenders a processing fee tiered by the size of the loan. These loans are included in commercial loans with an amortized cost basis at September 30, 2022 and December 31, 2021 of $306,000 and $31.0 million, respectively.
Construction Real Estate Loans
Our construction loans are collateralized by property located primarily in or near the market areas we serve. A number of our construction loans will be owner occupied upon completion. Construction loans for non-owner occupied projects are financed, but these typically have cash flows from leases with tenants, secondary sources of repayment, and in some cases, additional collateral. Our construction loans have both adjustable and fixed interest rates during the construction period. Construction loans to individuals are typically priced and made with the intention of granting the permanent loan on the completed property. Commercial construction loans are subject to underwriting standards similar to that of the commercial portfolio.  Owner occupied 1-4 family residential construction loans are subject to the underwriting standards of the permanent loan.
1-4 Family Residential Real Estate Loans
Residential loan originations are generated by our loan officers, in-house origination staff, marketing efforts, present customers, walk-in customers and referrals from real estate agents and builders.  We focus our lending efforts primarily on the origination of loans secured by first mortgages on owner occupied 1-4 family residences.  Substantially all of our 1-4 family residential originations are secured by properties located in or near our market areas.  
Our 1-4 family residential loans generally have maturities ranging from 15 to 30 years.  These loans are typically fully amortizing with monthly payments sufficient to repay the total amount of the loan.  Our 1-4 family residential loans are made at both fixed and adjustable interest rates.
Underwriting for 1-4 family residential loans includes debt-to-income analysis, credit history analysis, appraised value and down payment considerations. Changes in the market value of real estate can affect the potential losses in the residential portfolio.
Commercial Real Estate Loans
Commercial real estate loans as of September 30, 2022 consisted of $1.57 billion of owner and non-owner occupied real estate, $307.1 million of loans secured by multi-family properties and $24.8 million of loans secured by farmland. Commercial real estate loans primarily include loans collateralized by retail, commercial office buildings, multi-family residential buildings, medical facilities and offices, senior living, assisted living and skilled nursing facilities, warehouse facilities, hotels and churches. In determining whether to originate commercial real estate loans, we generally consider such factors as the financial condition of the borrower and the debt service coverage of the property. Commercial real estate loans are made at both fixed and adjustable interest rates for terms generally up to 20 years.
Commercial Loans
Our commercial loans are diversified loan types including short-term working capital loans for inventory and accounts receivable and short- and medium-term loans for equipment or other business capital expansion.  In our commercial loan underwriting, we assess the creditworthiness, ability to repay and the value and liquidity of the collateral being offered.  Terms of commercial loans are generally commensurate with the useful life of the collateral offered.
Municipal Loans
We make loans to municipalities and school districts primarily throughout the state of Texas, with a small percentage originating outside of the state.  The majority of the loans to municipalities and school districts have tax or revenue pledges and in some cases are additionally supported by collateral.  Municipal loans made without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service. Lending money directly to these municipalities allows us to earn a higher yield than we could if we purchased municipal securities for similar durations.
Loans to Individuals
Substantially all originations of our loans to individuals are made to consumers in our market areas.  The majority of loans to individuals are collateralized by titled equipment, which are primarily automobiles. Loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower.  The underwriting standards we employ for consumer loans include an application, a determination of the applicant’s payment history on other debts, with the greatest weight being given to payment history with us and an assessment of the borrower’s ability to meet existing obligations and payments on the proposed loan.  Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount. Most of our loans to individuals are collateralized, which management believes assists in limiting our exposure.
Credit Quality Indicators
We categorize loans into risk categories on an ongoing basis based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  We use the following definitions for risk ratings:
•Pass (Rating 1 – 4) – This rating is assigned to all satisfactory loans.  This category, by definition, consists of acceptable credit.  Credit and collateral exceptions should not be present, although their presence would not necessarily prohibit a loan from being rated Pass, if deficiencies are in the process of correction.  These loans are not included in the Watch List.
•Pass Watch (Rating 5) – These loans require some degree of special treatment, but not due to credit quality.  This category does not include loans specially mentioned or adversely classified; however, particular attention is warranted to characteristics such as:
▪A lack of, or abnormally extended payment program;
▪A heavy degree of concentration of collateral without sufficient margin;
▪A vulnerability to competition through lesser or extensive financial leverage; and
▪A dependence on a single or few customers or sources of supply and materials without suitable substitutes or alternatives.
•Special Mention (Rating 6) – A Special Mention loan has potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in our credit position at some future date.  Special Mention loans are not adversely classified and do not expose us to sufficient risk to warrant adverse classification.
•Substandard (Rating 7) – Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
•Doubtful (Rating 8) – Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation, in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
The following tables set forth the amortized cost basis by class of financing receivable and credit quality indicator for the periods presented (in thousands):
September 30, 2022Term Loans Amortized Cost Basis by Origination YearRevolving Loans Amortized Cost BasisTotal
20222021202020192018Prior
Construction real estate:
Pass$127,074 $200,310 $40,301 $9,256 $1,918 $6,813 $165,829 $551,501 
Pass watch— — — — — — — — 
Special mention1,830 305 — — — — — 2,135 
Substandard— — — 389 45 229 — 663 
Doubtful— 46 — — — — — 46 
Total construction real estate$128,904 $200,661 $40,301 $9,645 $1,963 $7,042 $165,829 $554,345 
1-4 family residential real estate:
Pass$91,723 $127,248 $112,796 $68,045 $37,349 $202,116 $2,190 $641,467 
Pass watch— — — — — — — — 
Special mention— — 80 — 1,414 — — 1,494 
Substandard4 — 396 160 184 2,531 42 3,317 
Doubtful— — — — 178 236 — 414 
Total 1-4 family residential real estate$91,727 $127,248 $113,272 $68,205 $39,125 $204,883 $2,232 $646,692 
Commercial real estate:
Pass$664,538 $579,040 $170,699 $138,748 $56,168 $241,718 $11,944 $1,862,855 
Pass watch— 9,434 — — — 1,771 — 11,205 
Special mention— — 1,844 333 116 1,898 — 4,191 
Substandard596 — 285 14,699 263 7,620 — 23,463 
Doubtful— — — 78 — 129 — 207 
Total commercial real estate$665,134 $588,474 $172,828 $153,858 $56,547 $253,136 $11,944 $1,901,921 
Commercial loans:
Pass$105,247 $76,210 $20,852 $9,369 $5,792 $3,680 $164,967 $386,117 
Pass watch217 6 — 247 — — 27,452 27,922 
Special mention— 5,183 34 — 307 — 12,742 18,266 
Substandard— 16 72 122 37 9 74 330 
Doubtful68 328 17 195 240 55 — 903 
Total commercial loans$105,532 $81,743 $20,975 $9,933 $6,376 $3,744 $205,235 $433,538 
Municipal loans:
Pass$49,215 $75,567 $58,288 $56,151 $26,141 $183,857 $— $449,219 
Pass watch— — — — — — — — 
Special mention— — — — — — — — 
Substandard— — — — — — — — 
Doubtful— — — — — — — — 
Total municipal loans$49,215 $75,567 $58,288 $56,151 $26,141 $183,857 $— $449,219 
Loans to individuals:
Pass$25,795 $24,290 $15,004 $6,515 $1,994 $1,285 $2,838 $77,721 
Pass watch— — — — — — — — 
Special mention— — — — — — — — 
Substandard— 1 — 10 40 4 1 56 
Doubtful— — — — — 3 — 3 
Total loans to individuals$25,795 $24,291 $15,004 $6,525 $2,034 $1,292 $2,839 $77,780 
Total loans$1,066,307 $1,097,984 $420,668 $304,317 $132,186 $653,954 $388,079 $4,063,495 
December 31, 2021Term Loans Amortized Cost Basis by Origination YearRevolving Loans Amortized Cost BasisTotal
20212020201920182017Prior
Construction real estate:
Pass$179,521 $82,862 $38,788 $5,666 $2,126 $6,080 $132,592 $447,635 
Pass watch— — — — — — — — 
Special mention— — — — — — — — 
Substandard— — — — — 175 — 175 
Doubtful— — — 50 — — — 50 
Total construction real estate$179,521 $82,862 $38,788 $5,716 $2,126 $6,255 $132,592 $447,860 
1-4 family residential real estate:
Pass$141,058 $129,681 $81,607 $47,566 $34,236 $209,470 $2,238 $645,856 
Pass watch— — — — — 777 — 777 
Special mention— 82 — — — — — 82 
Substandard57 403 55 — 295 3,257 88 4,155 
Doubtful— — — — — 270 — 270 
Total 1-4 family residential real estate$141,115 $130,166 $81,662 $47,566 $34,531 $213,774 $2,326 $651,140 
Commercial real estate:
Pass$648,002 $207,370 $209,923 $114,788 $143,350 $209,368 $7,566 $1,540,367 
Pass watch21,669 — 2,163 3,074 374 — — 27,280 
Special mention— 2,062 2,217 119 163 1,877 — 6,438 
Substandard3,299 667 10,830 1,480 — 7,691 — 23,967 
Doubtful— — — — — 120 — 120 
Total commercial real estate$672,970 $210,099 $225,133 $119,461 $143,887 $219,056 $7,566 $1,598,172 
Commercial loans:
Pass$140,628 $51,866 $24,688 $13,204 $2,516 $4,062 $178,263 $415,227 
Pass watch— — 280 22 — — — 302 
Special mention— 57 78 363 — 157 — 655 
Substandard— 283 296 174 16 — 1,457 2,226 
Doubtful7 26 124 359 — 72 — 588 
Total commercial loans$140,635 $52,232 $25,466 $14,122 $2,532 $4,291 $179,720 $418,998 
Municipal loans:
Pass$80,167 $64,803 $61,348 $29,168 $56,274 $151,318 $— $443,078 
Pass watch— — — — — — — — 
Special mention— — — — — — — — 
Substandard— — — — — — — — 
Doubtful— — — — — — — — 
Total municipal loans$80,167 $64,803 $61,348 $29,168 $56,274 $151,318 $— $443,078 
Loans to individuals:
Pass$40,252 $24,028 $11,813 $4,121 $1,684 $849 $3,052 $85,799 
Pass watch— — — — — — — — 
Special mention— — — 36 — — — 36 
Substandard— 1 24 4 23 10 2 64 
Doubtful— — 1 7 3 4 — 15 
Total loans to individuals$40,252 $24,029 $11,838 $4,168 $1,710 $863 $3,054 $85,914 
Total loans$1,254,660 $564,191 $444,235 $220,201 $241,060 $595,557 $325,258 $3,645,162 
Watchlisted loans reported as 2022 originations as of September 30, 2022 and watchlisted loans reported as 2021 originations as of December 31, 2021 were, for the majority, first originated in various years prior to 2022 and 2021, respectively, but were renewed in the respective year.
The following tables present the aging of the amortized cost basis in past due loans by class of loans (in thousands):
 September 30, 2022
 
30-59 Days
Past Due
60-89 Days
Past Due
Greater than 90 Days Past Due
Total Past
Due
CurrentTotal
Real estate loans:     
Construction$160 $410 $46 $616 $553,729 $554,345 
1-4 family residential1,367 547 516 2,430 644,262 646,692 
Commercial243 422 — 665 1,901,256 1,901,921 
Commercial loans1,094 794 434 2,322 431,216 433,538 
Municipal loans— — — — 449,219 449,219 
Loans to individuals208 — — 208 77,572 77,780 
Total$3,072 $2,173 $996 $6,241 $4,057,254 $4,063,495 
December 31, 2021
30-59 Days Past Due60-89 Days Past DueGreater than 90 Days
Past Due
Total Past
Due
CurrentTotal
Real estate loans:
Construction$82 $58 $— $140 $447,720 $447,860 
1-4 family residential3,226 606 227 4,059 647,081 651,140 
Commercial1,191 — 99 1,290 1,596,882 1,598,172 
Commercial loans1,523 251 537 2,311 416,687 418,998 
Municipal loans170 — — 170 442,908 443,078 
Loans to individuals315 41 8 364 85,550 85,914 
Total$6,507 $956 $871 $8,334 $3,636,828 $3,645,162 
The following table sets forth the amortized cost basis of nonperforming assets for the periods presented (in thousands):
 September 30, 2022December 31, 2021
Nonaccrual loans:
Real estate loans:
Construction$77 $57 
1-4 family residential1,183 969 
Commercial696 668 
Commercial loans1,071 815 
Loans to individuals12 27 
Total nonaccrual loans (1)
3,039 2,536 
Accruing loans past due more than 90 days— — 
TDR loans8,481 9,073 
OREO162 — 
Repossessed assets35 — 
Total nonperforming assets$11,717 $11,609 

(1)    Includes $950,000 and $1.1 million of TDR loans as of September 30, 2022 and December 31, 2021, respectively.

We reversed $10,000 and $33,000 of interest income on nonaccrual loans during the three and nine months ended September 30, 2022, and $5,000 and $13,000 for the three and nine months ended September 30, 2021, respectively. We had $1.0 million and $1.2 million of loans on nonaccrual for which there was no related allowance for credit losses as of September 30, 2022 and December 31, 2021, respectively.
Collateral-dependent loans are loans that we expect the repayment to be provided substantially through the operation or sale of the collateral of the loan and we have determined that the borrower is experiencing financial difficulty. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for selling costs. As of September 30, 2022 and December 31, 2021, we had $8.7 million and $8.5 million, respectively, of collateral-dependent loans, secured mainly by real estate and equipment. There have been no significant changes to the collateral that secures the collateral-dependent assets. Foreclosed assets include OREO and repossessed assets. For 1-4 family residential real estate properties, a loan is recognized as a foreclosed property once legal title to the real estate property has been received upon completion of foreclosure or the borrower has conveyed all interest in the residential property through a deed in lieu of foreclosure. There were $171,000 and $21,000 loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process as of September 30, 2022 and December 31, 2021, respectively.
Troubled Debt Restructurings
The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.  Concessions may include interest rate reductions or below market interest rates, restructuring amortization schedules and other actions intended to minimize potential losses. We may provide a combination of concessions which may include an extension of the amortization period, interest rate reduction and/or converting the loan to interest-only for a limited period of time.
The following tables set forth the recorded balance of loans considered to be TDRs that were restructured and the type of concession by class of loans during the periods presented (dollars in thousands):
 Nine Months Ended September 30, 2022
 
Extend Amortization
 Period
Interest Rate ReductionsCombinationTotal ModificationsNumber of Loans
Real estate loans:
1-4 family residential$— $— $307 $307 4 
Commercial loans— — 5 5 1 
Loans to individuals— — 9 9 2 
Total$— $— $321 $321 7 
Three Months Ended September 30, 2021
 
Extend Amortization
 Period
Interest Rate ReductionsCombination Total ModificationsNumber of Loans
Real estate loans:  
1-4 family residential$— $— $219 $219 3 
Commercial— — 453 453 1 
Total$— $— $672 $672 4 
 Nine Months Ended September 30, 2021
 
Extend Amortization
 Period
Interest Rate ReductionsCombinationTotal ModificationsNumber of Loans
Real estate loans:  
1-4 family residential$— $— $344 $344 5 
Commercial— — 453 453 1 
Commercial loans— 16 94 110 3 
Total$— $16 $891 $907 9 

There were no TDRs restructured during the three months ended September 30, 2022.
Interest continues to be charged on principal balances outstanding during the extended term. Therefore, the financial effects of the recorded investment of loans restructured as TDRs during the nine months ended September 30, 2022 and 2021 were not significant.
On an ongoing basis, the performance of the TDRs is monitored for subsequent payment default. Payment default for TDRs is recognized when the borrower is 90 days or more past due. As of September 30, 2022 and 2021, the amount of TDRs in default was not significant. Payment defaults for TDRs did not significantly impact the determination of the allowance for loan losses in the periods presented. At September 30, 2022 and 2021, there were no commitments to lend additional funds to borrowers whose terms had been modified in TDRs.
Allowance for Loan Losses
The following tables detail activity in the allowance for loan losses by portfolio segment for the periods presented (in thousands):
 Three Months Ended September 30, 2022
 Real Estate    
 Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of period$3,399 $2,024 $27,221 $2,558 $46 $201 $35,449 
Loans charged-off— (66)— (192)— (428)(686)
Recoveries of loans charged-off— 4 — 139 — 306 449 
Net loans (charged-off) recovered— (62)— (53)— (122)(237)
Provision for (reversal of) loan losses136 44 1,273 (272)(2)115 1,294 
Balance at end of period$3,535 $2,006 $28,494 $2,233 $44 $194 $36,506 
 Nine Months Ended September 30, 2022
 Real Estate    
 Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of period$3,787 $1,866 $26,980 $2,397 $47 $196 $35,273 
Loans charged-off— (66)— (369)— (1,285)(1,720)
Recoveries of loans charged-off1 96 81 469 — 858 1,505 
Net loans (charged-off) recovered1 30 81 100 — (427)(215)
Provision for (reversal of) loan losses(253)110 1,433 (264)(3)425 1,448 
Balance at end of period$3,535 $2,006 $28,494 $2,233 $44 $194 $36,506 
 Three Months Ended September 30, 2021
 Real Estate    
 Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of period$8,018 $2,520 $28,930 $3,097 $47 $301 $42,913 
Loans charged-off— (35)— (508)— (397)(940)
Recoveries of loans charged-off1 4 12 74 — 346 437 
Net loans (charged-off) recovered1 (31)12 (434)— (51)(503)
Provision for (reversal of) loan losses (3,036)(543)(684)(103)(1)(21)(4,388)
Balance at end of period$4,983 $1,946 $28,258 $2,560 $46 $229 $38,022 
Nine Months Ended September 30, 2021
Real Estate
Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of period$6,490 $2,270 $35,709 $4,107 $46 $384 $49,006 
Loans charged-off— (136)— (943)— (1,183)(2,262)
Recoveries of loans charged-off2 71 13 535 — 904 1,525 
Net loans (charged-off) recovered2 (65)13 (408)— (279)(737)
Provision for (reversal of) loan losses(1,509)(259)(7,464)(1,139)— 124 (10,247)
Balance at end of period$4,983 $1,946 $28,258 $2,560 $46 $229 $38,022 

The accrued interest receivable on our loan receivables is excluded from the allowance for credit loss estimate and is included in interest receivable on our consolidated balance sheets. As of September 30, 2022 and December 31, 2021, the accrued interest on our loan portfolio was $14.8 million and $13.3 million, respectively.