LOANS AND ALLOWANCE FOR CREDIT LOSSES |
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Loans And Allowance For Credit Losses [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
LOANS AND ALLOWANCE FOR CREDIT LOSSES |
6. LOANS AND ALLOWANCE FOR CREDIT LOSSES The loan portfolio balances, net of unearned income and fees, consist of various types of loans primarily all made to borrowers located within Texas and are classified by major type as follows:
Loan Origination/Risk Management The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis. In addition, an independent third party loan review is performed on a semi-annual basis. In connection with the reviews of the loan portfolio, the Company considers risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements include: (i) Commercial and Industrial Loans. The Company makes commercial and industrial loans in its market area that are underwritten on the basis of the borrower’s ability to service the debt from income. The portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. The Company generally takes as collateral a lien on any available real estate, equipment or other assets owned by the borrower and typically obtains a personal guaranty of the borrower or principal. (ii) Commercial Real Estate. The Company makes loans collateralized by owner-occupied, nonowner-occupied and multi-family real estate to finance the purchase or ownership of real estate. The Company’s nonowner-occupied and multi-family commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on sufficient income from the properties securing the loans to cover operating expenses and debt service. The Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. In addition, these loans are generally guaranteed by individual owners of the borrower and have typically lower loan to value ratios. Loans secured by owner-occupied properties represented 54.6% of the outstanding principal balance of the Company’s commercial real estate loans at December 31, 2020. The Company is dependent on the cash flows of the business occupying the property and its owners and requires these loans generally to be secured by property with adequate margins and guaranteed by the individual owners. The Company’s owner-occupied commercial real estate loans collateralized by first liens on real estate typically have fixed interest rates and amortize over a 10 to 20 year period. Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s region. (iii) Construction and Land Development Loans. The Company makes loans to finance the construction of residential and to a lesser extent nonresidential properties. Construction loans generally are collateralized by first liens on real estate and generally have floating interest rates. Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. The Company generally conducts periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Underwriting guidelines similar to those described above are also used in the Company’s construction lending activities. The Company may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s region. (iv) Residential Real Estate Loans. The Company’s lending activities also include the origination of 1-4 family residential mortgage loans (including home equity loans) collateralized by owner-occupied residential properties located in the Company’s market areas. The Company offers a variety of mortgage loan portfolio products which have a term of 5 to 7 years and generally amortize over 10 to 30 years. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts of no more than 90% of appraised value. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Company’s region that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a larger number of borrowers. (v) Consumer and Other Loans. The Company makes a variety of loans to individuals for personal and household purposes including secured and unsecured installment and term loans. Consumer loans are underwritten based on the individual borrower’s income, current debt level, past credit history and the value of any available collateral. Repayment for these loans will come from a borrower’s income source that are typically independent of the loan purpose. The terms of these loans typically range from 12 to 60 months and vary based upon the nature of collateral and size of loan. Credit risk is driven by consumer economic factors, such as, unemployment and general economic conditions in the Company region and the creditworthiness of a borrower. In addition, for each category, the Company considers secondary sources of income and the financial strength and credit history of the borrower and any guarantors. Acquired Loans
The carrying amount of PCI loans included in the consolidated balance sheet and the related outstanding balance owed at December 31, 2019 are presented in the table below (dollars in thousands):
Changes in the accretable yield for PCI loans for the year ended December 31, 2019 were deemed immaterial.
Non-PCI Loans
The recorded investment of Non-PCI loans included in the consolidated balance sheet and the related outstanding balance owed are presented in the table below (dollars in thousands).
Changes in the discount accretion for Non-PCI loans were as follows (dollars in thousands):
Concentrations of Credit The vast majority of the Company’s lending activity occurs in and around the Houston, Texas area. The Company’s loans are primarily loans secured by real estate, including commercial and residential construction, owner-occupied and nonowner-occupied and multi-family commercial real estate, raw land and other real estate based loans. Related Party Loans As of December 31, 2020 and 2019, loans outstanding to directors, officers and their affiliates totaled $1.2 million and $6.8 million, respectively. An analysis of activity with respect to these related-party loans is as follows:
Nonaccrual and Past Due Loans An aging analysis of the recorded investment in past due loans, segregated by class of loans, is included below. For purposes of this and future disclosures recorded investment has been defined as the outstanding loan balances including net deferred loan fees, and excluding accrued interest receivable of $34.5 million and $15.5 million as of December 31, 2020 and 2019, respectively, due to immateriality.
If interest on nonaccrual loans had been accrued under the original loan terms, approximately $902.5 thousand and $1.2 million would have been recorded as income for the years ended December 31, 2020 and 2019, respectively. Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt. The Company utilizes a risk rating matrix to assign a risk rating to each of its loans. Loans are rated on a scale of 1 to 9. Risk ratings are updated on an ongoing basis and are subject to change by continuous loan monitoring processes including lending management monitoring, executive management and board committee oversight, and independent credit review. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks certain risk ratings to be used as credit quality indicators including trends related to (i) the weighted-average risk grade of loans, (ii) the level of classified loans, (iii) the delinquency status of loans (iv) nonperforming loans and (vi) the general economic conditions in the Houston region. Individual bankers, under the oversight of credit administration, review updated financial information for all pass grade commercial loans to reassess the risk grade on at least an annual basis. When a loan has a risk grade of Pass/Watch (4), it is still considered a pass grade loan; however, it is considered to be on management’s “watch list,” where a significant risk-modifying action is anticipated in the near term. When a loan reaches a set of internally designated criteria, including Substandard-nonperforming (7) or higher, a special assets officer will be involved in the monitoring of the loan on an on-going basis. The following is a general description of the risk ratings used: Watch—Loans classified as watch loans may still be of high quality, but have an element of risk added to the credit such as declining payment history, deteriorating financial position of the borrower or a decrease in collateral value. Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Substandard—Loans classified as substandard have well-defined weaknesses on a continuing basis and are inadequately protected by the current net worth and paying capacity of the borrower, declining collateral values, or a continuing downturn in their industry which is reducing their profits to below zero and having a significantly negative impact on their cash flow. These loans so classified are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard 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. Loss—Loans classified as loss are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt. The following table presents risk ratings by category of loan as of December 31, 2020 and 2019:
The following table presents risk ratings by category of loan as of December 31, 2020 and 2019:
The following table presents the activity in the allowance for credit losses on loans by portfolio type for the years ended December 31, 2020, 2019 and 2018:
Allowance for Credit Losses on Unfunded Commitments. In addition to the allowance for credit losses on loans, the Company has established an allowance for credit losses on unfunded commitments, classified in other liabilities and adjusted as a provision for credit loss expense. The allowance represents estimates of expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is informed by historical analysis looking at utilization rates. The expected credit loss rates applied to the commitments expected to fund is informed by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. The allowance for credit losses on unfunded commitments as of December 31, 2020 was $4.7 million. There was no allowance recorded on unfunded commitments at December 31, 2019. The establishment of an allowance in 2020 was due to the adoption of CECL. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments.
The following table details activity in the allowance for credit losses on unfunded commitments:
Collateral dependent loans were secured by commercial real estate assets, accounts receivable, inventory and equipment. For a collateral dependent loan, the Company’s evaluation process includes a valuation by appraisal or other collateral analysis adjusted for selling costs, when appropriate. This valuation is compared to the remaining outstanding principal balance of the loan. If a loss is determined to be probable, the loss is included in the allowance for credit losses on loans as a specific allocation. At December 31, 2020, collateral dependent loans consisted primarily of commercial loans. The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses:
The following table presents additional information regarding nonaccrual loans. No interest income was recognized on nonaccrual loans for the years ended December 31, 2020 and 2019, respectively.
Impaired Loans. Prior to the adoption of ASC Topic 326 on January 1, 2020, loans were reported as impaired when, based on then current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan was impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the fair value of collateral if repayment was expected solely from the collateral. The following table presents impaired loans at December 31, 2019 as determined under ASC 310 prior to the adoption of ASC Topic 326 by class of loans.
The following table presents average impaired loans and interest recognized on impaired loans for the year ended December 31, 2019:
Troubled Debt Restructurings As of December 31, 2020 and 2019, the Company had a recorded investment in troubled debt restructurings of $25.8 million and $28.9 million, respectively. The Company allocated $3.3 million and $3.2 million of specific reserves for these loans at December 31, 2020 and 2019, respectively, and did not commit to lend additional amounts on these loans. The following table presents information regarding loans modified in a troubled debt restructuring during the years ended December 31, 2020, 2019 and 2018:
Troubled debt restructurings resulted in charge-offs of $3.2 million, $251 thousand and $272 thousand during the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, there were four loans for a total of $2.6 million were modified under a troubled debt restructuring during the previous twelve-month period that subsequently defaulted during the year 2020. As of December 31, 2019, there were five loans for a total of $472 thousand were modified under a troubled debt restructuring during the previous twelve-month period that subsequently defaulted during the year 2019. Default is determined at 90 or more days past due. The modifications primarily related to extending the amortization periods of the loans. The Company did not grant principal reductions on any restructured loans. There were no commitments to lend additional amounts for the years 2020 and 2019. During the year ended December 31, 2020, the Company added $11.8 million in new troubled debt restructurings, of which $8.1 million was still outstanding on December 31, 2020. During the year ended December 31, 2019, the Company added $5.1 million in new troubled debt restructurings, of which $4.6 million was still outstanding on December 31, 2019.
During the year ended December 31, 2020, the Company granted principal and interest deferrals on outstanding loan balances to customers affected by the COVID-19 pandemic. Additionally, upon request and after meeting certain conditions, borrowers could be granted additional payment deferrals subsequent to the first deferral. In addition to the short-term modification program implemented by the Company, Section 4013 of the CARES Act and bank regulatory interagency guidance gave entities temporary relief from the accounting and disclosure requirements for TDRs indicating that a lender could conclude that the modifications are not a TDR if the borrower was less than 30 days past due as of December 31, 2019. As of December 31, 2020, 164 loans with outstanding loan balances of $161.3 million remained on deferral. If the impact of COVID-19 persists, borrower operations do not improve or if other negative events occur, such modified loans could transition to potential problem loans or into problem loans. The following table presents information regarding principal and interest deferrals as of December 31, 2020 associated with loan modifications related to COVID-19:
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