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Loans and Allowance for Loan Losses
 6 Months Ended
Jun. 30, 2023
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):    
June 30, 2023December 31, 2022
Real estate loans:  
Construction$657,354 $559,681 
1-4 family residential684,878 663,519 
Commercial2,100,338 1,987,707 
Commercial loans383,724 412,064 
Municipal loans435,211 450,067 
Loans to individuals67,538 74,653 
Total loans4,329,043 4,147,691 
Less: Allowance for loan losses36,303 36,515 
Net loans$4,292,740 $4,111,176 

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 June 30, 2023 consisted of $1.73 billion of owner and non-owner occupied real estate, $338.1 million of loans secured by multi-family properties and $27.8 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):
June 30, 2023Term Loans Amortized Cost Basis by Origination YearRevolving Loans Amortized Cost BasisTotal
20232022202120202019Prior
Construction real estate:
Pass$67,993 $190,372 $177,651 $31,227 $4,291 $6,267 $159,462 $637,263 
Pass watch— 2,444 1,557 — — — 14,785 18,786 
Special mention161 395 — — 9 — — 565 
Substandard— — 136 — — 225 — 361 
Doubtful— — 42 — 337 — — 379 
Total construction real estate$68,154 $193,211 $179,386 $31,227 $4,637 $6,492 $174,247 $657,354 
Current period gross charge-offs$— $63 $— $— $— $— $— $63 
1-4 family residential real estate:
Pass$25,409 $105,843 $144,970 $122,025 $66,539 $212,648 $2,205 $679,639 
Pass watch— — — 1,099 — 1,364 — 2,463 
Special mention— — 63 206 123 2,150 — 2,542 
Substandard— — — — — 234 — 234 
Doubtful— — — — — — — — 
Total 1-4 family residential real estate$25,409 $105,843 $145,033 $123,330 $66,662 $216,396 $2,205 $684,878 
Current period gross charge-offs$— $— $— $— $— $71 $— $71 
Commercial real estate:
Pass$268,423 $756,424 $524,837 $152,119 $98,968 $224,529 $15,889 $2,041,189 
Pass watch15,690 — 265 — 7,964 11,563 — 35,482 
Special mention2,019 — — — 223 188 — 2,430 
Substandard— — 100 274 14,304 6,386 — 21,064 
Doubtful— — — — 72 101 — 173 
Total commercial real estate$286,132 $756,424 $525,202 $152,393 $121,531 $242,767 $15,889 $2,100,338 
Current period gross charge-offs$— $— $— $— $— $— $— $— 
Commercial loans:
Pass$36,239 $88,384 $57,919 $14,309 $5,897 $5,441 $161,472 $369,661 
Pass watch26 193 134 — — — 200 553 
Special mention— 180 4,890 23 — 249 6,709 12,051 
Substandard168 395 87 — 61 8 20 739 
Doubtful— 328 164 — 75 153 — 720 
Total commercial loans$36,433 $89,480 $63,194 $14,332 $6,033 $5,851 $168,401 $383,724 
Current period gross charge-offs$— $290 $29 $22 $23 $5 $— $369 
Municipal loans:
Pass$11,835 $62,834 $72,572 $52,677 $44,579 $190,714 $— $435,211 
Pass watch— — — — — — — — 
Special mention— — — — — — — — 
Substandard— — — — — — — — 
Doubtful— — — — — — — — 
Total municipal loans$11,835 $62,834 $72,572 $52,677 $44,579 $190,714 $— $435,211 
Current period gross charge-offs$— $— $— $— $— $— $— $— 
Loans to individuals:
Pass$14,071 $21,029 $15,872 $9,246 $3,284 $1,410 $2,582 $67,494 
Pass watch— — — — — 1 — 1 
Special mention— — — — — — — — 
Substandard— — 17 — 20 — — 37 
Doubtful— — 6 — — — — 6 
Total loans to individuals$14,071 $21,029 $15,895 $9,246 $3,304 $1,411 $2,582 $67,538 
Current period gross charge-offs (1)
$729 $31 $22 $6 $2 $77 $— $867 
Total loans$442,034 $1,228,821 $1,001,282 $383,205 $246,746 $663,631 $363,324 $4,329,043 
Total current period gross charge-offs (1)
$729 $384 $51 $28 $25 $153 $— $1,370 
(1) Includes $729,000 in charged off demand deposit overdrafts reported as 2023 originations.
December 31, 2022Term Loans Amortized Cost Basis by Origination YearRevolving Loans Amortized Cost BasisTotal
20222021202020192018Prior
Construction real estate:
Pass$169,652 $184,501 $34,537 $7,091 $1,844 $6,434 $152,530 $556,589 
Pass watch299 — — — — — — 299 
Special mention1,858 290 — — — — — 2,148 
Substandard— — — 10 42 194 — 246 
Doubtful— 44 — 355 — — — 399 
Total construction real estate$171,809 $184,835 $34,537 $7,456 $1,886 $6,628 $152,530 $559,681 
1-4 family residential real estate:
Pass$82,847 $144,424 $128,666 $70,142 $36,710 $194,490 $2,160 $659,439 
Pass watch— — — — — — — — 
Special mention— — 79 — 1,397 — — 1,476 
Substandard3 — 217 54 32 1,942 43 2,291 
Doubtful— — — — 173 140 — 313 
Total 1-4 family residential real estate$82,850 $144,424 $128,962 $70,196 $38,312 $196,572 $2,203 $663,519 
Commercial real estate:
Pass$798,653 $546,938 $168,607 $136,440 $55,480 $233,509 $12,315 $1,951,942 
Pass watch— 9,219 — — — — — 9,219 
Special mention— — 1,832 330 115 1,849 — 4,126 
Substandard— — 281 14,603 260 6,992 — 22,136 
Doubtful— — — 76 — 208 — 284 
Total commercial real estate$798,653 $556,157 $170,720 $151,449 $55,855 $242,558 $12,315 $1,987,707 
Commercial loans:
Pass$113,678 $68,509 $17,852 $8,249 $4,820 $3,313 $178,951 $395,372 
Pass watch208 13 56 — — — — 277 
Special mention— 5,109 31 — 288 — 9,986 15,414 
Substandard220 116 70 110 12 9 — 537 
Doubtful68 100 — 86 210 — — 464 
Total commercial loans$114,174 $73,847 $18,009 $8,445 $5,330 $3,322 $188,937 $412,064 
Municipal loans:
Pass$65,258 $74,617 $57,147 $47,636 $24,576 $173,919 $— $443,153 
Pass watch— — — 508 403 6,003 — 6,914 
Special mention— — — — — — — — 
Substandard— — — — — — — — 
Doubtful— — — — — — — — 
Total municipal loans$65,258 $74,617 $57,147 $48,144 $24,979 $179,922 $— $450,067 
Loans to individuals:
Pass$29,579 $21,480 $12,651 $5,261 $1,665 $1,005 $2,935 $74,576 
Pass watch— — — — — — — — 
Special mention— — — — — — — — 
Substandard— 1 — 6 — 2 — 9 
Doubtful7 — — 18 40 3 — 68 
Total loans to individuals$29,586 $21,481 $12,651 $5,285 $1,705 $1,010 $2,935 $74,653 
Total loans$1,262,330 $1,055,361 $422,026 $290,975 $128,067 $630,012 $358,920 $4,147,691 
Watchlisted loans reported as 2023 originations as of June 30, 2023 and watchlisted loans reported as 2022 originations as of December 31, 2022 were, for the majority, first originated in various years prior to 2023 and 2022, 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):
 June 30, 2023
 
30-59 Days
Past Due
60-89 Days
Past Due
Greater than 90 Days Past Due
Total Past
Due
CurrentTotal
Real estate loans:     
Construction$122 $6 $136 $264 $657,090 $657,354 
1-4 family residential1,406 1,371 585 3,362 681,516 684,878 
Commercial708 143 38 889 2,099,449 2,100,338 
Commercial loans593 416 103 1,112 382,612 383,724 
Municipal loans— — — — 435,211 435,211 
Loans to individuals387 19 — 406 67,132 67,538 
Total$3,216 $1,955 $862 $6,033 $4,323,010 $4,329,043 
December 31, 2022
30-59 Days Past Due60-89 Days Past DueGreater than 90 Days
Past Due
Total Past
Due
CurrentTotal
Real estate loans:
Construction$43 $21 $— $64 $559,617 $559,681 
1-4 family residential3,529 368 214 4,111 659,408 663,519 
Commercial105 153 415 673 1,987,034 1,987,707 
Commercial loans515 277 247 1,039 411,025 412,064 
Municipal loans— — — — 450,067 450,067 
Loans to individuals203 3 40 246 74,407 74,653 
Total$4,395 $822 $916 $6,133 $4,141,558 $4,147,691 
The following table sets forth the amortized cost basis of nonperforming assets for the periods presented (in thousands):
 June 30, 2023December 31, 2022
Nonaccrual loans:
Real estate loans:
Construction$521 $405 
1-4 family residential1,005 848 
Commercial554 762 
Commercial loans930 757 
Loans to individuals7 74 
Total nonaccrual loans (1)
3,017 2,846 
Accruing loans past due more than 90 days— — 
Restructured loans (2)
— 7,849 
OREO— 93 
Repossessed assets42 74 
Total nonperforming assets$3,059 $10,862 

(1)    Includes $314,000 and $897,000 of restructured loans as of June 30, 2023 and December 31, 2022, respectively.
(2) Pursuant to our adoption of ASU 2022-02, effective January 1, 2023, we prospectively discontinued the recognition and measurement guidance previously required on troubled debt restructures. As a result, “restructured” loans as of March 31, 2023 exclude any loan modifications that are performing but would have previously required disclosure as troubled debt restructures.

We reversed $11,000 and $30,000 of interest income on nonaccrual loans during the three and six months ended June 30, 2023, and $24,000 and $35,000 for the three and six months ended June 30, 2022. We had $1.2 million and $1.6 million of loans on nonaccrual for which there was no related allowance for credit losses as of June 30, 2023 and December 31, 2022, 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 June 30, 2023 and December 31, 2022, we had $7.9 million and $8.1 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 $54,000 loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process as of June 30, 2023. There were no loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process as of December 31, 2022.

Restructured Loans
Pursuant to our adoption of ASU 2022-02 effective January 1, 2023, we prospectively discontinued the recognition and measurement of TDRs. This guidance eliminated TDR accounting for loans in which the borrower was experiencing financial difficulty and the creditor granted a concession. See “Note 1 - Summary of Significant Accounting and Reporting Policies” to our consolidated financial statements included in this report.
A loan is now considered restructured if the borrower is experiencing financial difficulties and the loan has been modified. Modifications 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 modifications 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. In most instances, interest will continue to be charged on principal balances outstanding during the extended term. Therefore, the financial effects of the recorded investment of loans restructured during the six months ended June 30, 2023 were not significant.
There were two commercial loans totaling $314,000 that were restructured with an extension of amortization period as of June 30, 2023 and are included in our nonaccrual loans in nonperforming assets.
On an ongoing basis, the performance of the restructured loans is monitored for subsequent payment default. Payment default is recognized when the borrower is 90 days or more past due. As of June 30, 2023, there were no restructured loans in default. Payment defaults for restructured loans did not significantly impact the determination of the allowance for loan losses in the periods presented. At June 30, 2023, there were no commitments to lend additional funds to borrowers whose loans had been restructured.

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 June 30, 2023
 Real Estate    
 Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of period$3,152 $2,314 $28,721 $1,901 $44 $200 $36,332 
Loans charged-off(63)(22)— (260)— (392)(737)
Recoveries of loans charged-off— 41 1 143 — 245 430 
Net loans (charged-off) recovered(63)19 1 (117)— (147)(307)
Provision for (reversal of) loan losses306 327 (710)233 (7)129 278 
Balance at end of period$3,395 $2,660 $28,012 $2,017 $37 $182 $36,303 
 Six Months Ended June 30, 2023
 Real Estate    
 Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of period$3,164 $2,173 $28,701 $2,235 $45 $197 $36,515 
Loans charged-off(63)(71)— (369)— (867)(1,370)
Recoveries of loans charged-off1 46 1 203 — 541 792 
Net loans (charged-off) recovered(62)(25)1 (166)— (326)(578)
Provision for (reversal of) loan losses293 512 (690)(52)(8)311 366 
Balance at end of period$3,395 $2,660 $28,012 $2,017 $37 $182 $36,303 
 Three Months Ended June 30, 2022
 Real Estate    
 Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of period$3,604 $1,982 $27,225 $2,454 $48 $211 $35,524 
Loans charged-off— — — (46)— (433)(479)
Recoveries of loans charged-off1 53 34 114 — 314 516 
Net loans (charged-off) recovered1 53 34 68 — (119)37 
Provision for (reversal of) loan losses (206)(11)(38)36 (2)109 (112)
Balance at end of period$3,399 $2,024 $27,221 $2,558 $46 $201 $35,449 
Six Months Ended June 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— — — (177)— (857)(1,034)
Recoveries of loans charged-off1 92 81 330 — 552 1,056 
Net loans (charged-off) recovered1 92 81 153 — (305)22 
Provision for (reversal of) loan losses(389)66 160 8 (1)310 154 
Balance at end of period$3,399 $2,024 $27,221 $2,558 $46 $201 $35,449 

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 June 30, 2023 and December 31, 2022, the accrued interest on our loan portfolio was $18.5 million and $18.8 million, respectively.