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LOANS AND ALLOWANCE FOR LOAN LOSSES
12 Months Ended
Dec. 31, 2020
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):
December 31, 2020December 31, 2019
Real estate loans:
Construction$581,941 $644,948 
1-4 family residential719,952 787,562 
Commercial 1,295,746 1,250,208 
Commercial loans557,122 401,521 
Municipal loans409,028 383,960 
Loans to individuals93,990 100,005 
Total loans3,657,779 3,568,204 
Less: Allowance for loan losses49,006 24,797 
Net loans$3,608,773 $3,543,407 

Loans to Affiliated Parties
In the normal course of business, we make loans to certain of our executive officers and directors and their related interests.  As of December 31, 2020 and 2019, these loans totaled $32.2 million and $33.8 million, respectively.  These loans represented 3.7% and 4.2% of shareholders’ equity as of December 31, 2020 and 2019, respectively. 
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 amounts is still fully guaranteed by the SBA. Terms of the PPP loans include the following (i) maximum amount limited to the lesser of $10.0 million or an amount calculated using a payroll-based formula, (ii) maximum loan term of five years, (iii) interest rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no payments are required until the date on which the forgiveness amount relating to the loan is remitted to the lender and (vi) loan forgiveness up to the full principal amount of the loan and any accrued interest, subject to certain requirements including that no more than 40% of the loan forgiveness amount may be attributable to non-payroll costs. 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 December 31, 2020 of $214.8 million.
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. Speculative and 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 five 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 portfolio.
Commercial Real Estate Loans
Commercial real estate loans as of December 31, 2020 consisted of $1.18 billion of owner and non-owner occupied real estate, $97.9 million of loans secured by multi-family properties and $15.0 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 table sets forth the amortized cost basis by class of financing receivable and credit quality indicator for the periods presented (in thousands):
Term Loans Amortized Cost Basis by Origination YearRevolving Loans Amortized Cost BasisTotal
20202019201820172016Prior
Construction real estate:
Pass$155,693 $180,536 $76,090 $55,636 $3,191 $8,297 $101,793 $581,236 
Pass watch— — — — 23 — — 23 
Special mention— — — — — — — — 
Substandard— 382 62 — — 58 — 502 
Doubtful— — — — — 180 — 180 
Total construction real estate$155,693 $180,918 $76,152 $55,636 $3,214 $8,535 $101,793 $581,941 
1-4 family residential real estate:
Pass$154,003 $114,063 $70,621 $55,557 $57,680 $255,003 $2,833 $709,760 
Pass watch— — — — 267 564 — 831 
Special mention— — — — — 10 — 10 
Substandard1,473 — 135 427 1,588 5,134 96 8,853 
Doubtful— — — 36 103 359 — 498 
Total 1-4 family residential real estate$155,476 $114,063 $70,756 $56,020 $59,638 $261,070 $2,929 $719,952 
Commercial real estate:
Pass$270,087 $307,161 $143,177 $162,180 $98,828 $179,919 $6,957 $1,168,309 
Pass watch— — 3,153 40,125 1,696 2,582 — 47,556 
Special mention4,555 33,020 7,041 140 4,531 7,850 — 57,137 
Substandard7,542 — 2,097 65 704 12,282 — 22,690 
Doubtful— — — — — 54 — 54 
Total commercial real estate$282,184 $340,181 $155,468 $202,510 $105,759 $202,687 $6,957 $1,295,746 
Commercial loans:
Pass$313,688 $47,446 $20,386 $7,505 $3,392 $6,142 $140,018 $538,577 
Pass watch2,599 1,318 2,410 1,981 — — 370 8,678 
Special mention304 809 433 39 286 265 455 2,591 
Substandard405 1,081 473 — — 4,417 6,383 
Doubtful310 53 475 54 — — 893 
Total commercial loans$317,306 $50,707 $24,177 $9,586 $3,679 $6,407 $145,260 $557,122 
Municipal loans:
Pass$72,542 $68,132 $33,735 $61,170 $25,387 $148,062 $— $409,028 
Pass watch— — — — — — — — 
Special mention— — — — — — — — 
Substandard— — — — — — — — 
Doubtful— — — — — — — — 
Total municipal loans$72,542 $68,132 $33,735 $61,170 $25,387 $148,062 $— $409,028 
Loans to individuals:
Pass$46,722 $25,302 $10,132 $4,716 $1,867 $917 $3,900 $93,556 
Pass watch— — — — — — — — 
Special mention— — 51 — — — 55 
Substandard35 28 30 11 120 
Doubtful73 20 55 81 24 — 259 
Total loans to individuals$46,801 $25,357 $10,217 $4,801 $1,957 $952 $3,905 $93,990 
Total loans$1,030,002 $779,358 $370,505 $389,723 $199,634 $627,713 $260,844 $3,657,779 
The following tables present the aging of the amortized cost basis in past due loans by class of loans (in thousands):
 December 31, 2020
 30-59 Days
Past Due
60-89 Days
 Past Due
Greater than
90 Days
Past Due
Total Past
Due
CurrentTotal
Real estate loans:      
Construction$95 $14 $444 $553 $581,388 $581,941 
1-4 family residential7,872 2,469 2,830 13,171 706,781 719,952 
Commercial467 315 86 868 1,294,878 1,295,746 
Commercial loans1,423 4,516 323 6,262 550,860 557,122 
Municipal loans64 — — 64 408,964 409,028 
Loans to individuals519 123 27 669 93,321 93,990 
Total$10,440 $7,437 $3,710 $21,587 $3,636,192 $3,657,779 
 December 31, 2019
 30-59 Days
Past Due
60-89 Days
 Past Due
Greater than
 90 Days
Past Due
Total Past
 Due
Current (1)
Total
Real estate loans:      
Construction$1,236 $229 $337 $1,802 $643,146 $644,948 
1-4 family residential8,788 1,077 1,607 11,472 776,090 787,562 
Commercial795 259 536 1,590 1,248,618 1,250,208 
Commercial loans1,917 722 651 3,290 398,231 401,521 
Municipal loans— — — — 383,960 383,960 
Loans to individuals660 261 128 1,049 98,956 100,005 
Total$13,396 $2,548 $3,259 $19,203 $3,549,001 $3,568,204 
(1)    Prior to the adoption of CECL, PCI loans were measured at fair value at acquisition if the timing and amount of cash flows expected to be collected from those sales could be reasonably estimated.
The following table sets forth the amortized cost basis of nonperforming assets for the periods presented (in thousands):
 December 31, 2020December 31, 2019
Nonaccrual loans:
Real estate loans:
Construction$640 $405 
1-4 family residential3,922 2,611 
Commercial1,269 704 
Commercial loans1,592 944 
Loans to individuals291 299 
Total nonaccrual loans (1)
7,714 4,963 
Accruing loans past due more than 90 days— — 
TDR loans(2)
9,646 12,014 
OREO106 472 
Repossessed assets14 — 
Total nonperforming assets$17,480 $17,449 
(1)    Prior to the adoption of CECL, excluded PCI loans measured at fair value at acquisition if the timing and amount of cash flows expected to be collected from those sales could be reasonably estimated. Includes $976,000 and $469,000 of restructured loans as of December 31, 2020 and December 31, 2019, respectively.
(2)    As of December 31, 2019, prior to the adoption of CECL, included $755,000 in PCI loans restructured.
We reversed $193,000 of interest income on nonaccrual loans during the year ended December 31, 2020. We had $2.2 million of loans on nonaccrual for which there was no related allowance for credit losses as of December 31, 2020.
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 December 31, 2020, we had $11.5 million 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 $1.2 million and $992,000 in loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process as of December 31, 2020 and December 31, 2019, 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.
In response to the COVID-19 pandemic, the CARES Act was signed into law. Under the CARES Act, banks may elect to deem that loan modifications do not result in TDRs if they are (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the national emergency declaration or (B) December 31, 2020. Additionally, in accordance with the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised), other short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Loans modified under this guidance are not considered TDRs and as such are not identified in the table below. At December 31, 2020, we had outstanding loans with payment deferrals, generally for up to three months, totaling $47.2 million.
The following tables set forth the recorded balance of loans considered to be TDRs that were restructured and the type of concession by class of loans during the periods presented (dollars in thousands):
December 31, 2020
Extend Amortization
Period
Interest Rate ReductionsCombinationTotal ModificationsNumber of Loans
Real estate loans:    
Commercial$— $— $58 $58 1
Commercial loans51 — 390 441 6
Loans to individuals— — 22 22 1
Total$51 $— $470 $521 8
December 31, 2019
Extend Amortization
Period
Interest Rate ReductionsCombinationTotal ModificationsNumber of Loans
Real estate loans:    
1-4 family residential$— $— $121 $121 2
Commercial7,518 — 93 7,611 2
Commercial loans52 — 1,143 1,195 9
Loans to individuals— 24 28 5
Total$7,574 $— $1,381 $8,955 18
December 31, 2018
Extend Amortization
Period
Interest Rate ReductionsCombinationTotal ModificationsNumber of Loans
Real estate loans:    
1-4 family residential$— $79 $— $79 
Commercial10,398 — 274 10,672 
Commercial loans211 — 215 426 13
Loans to individuals33 51 92 
Total$10,617 $112 $540 $11,269 22

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 years ended December 31, 2020 and 2019 were not significant. Generally, the loans identified as TDRs were previously reported as impaired loans prior to restructuring, and therefore, the modification did not impact our determination of the allowance for loans losses.
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. For the year ended December 31, 2020, and 2019 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 December 31, 2020, 2019 and 2018, 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):
 Year Ended December 31, 2020
 Real Estate    
 Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of period$3,539 $3,833 $9,572 $6,351 $570 $932 $24,797 
Impact of CECL adoption - cumulative effect adjustment2,968 (1,447)7,730 (3,532)(522)(125)5,072 
Impact of CECL adoption - purchased loans with credit deterioration(15)(6)333 (22)— (59)231 
Loans charged-off(40)(152)(33)(823)— (1,806)(2,854)
Recoveries of loans charged-off28 32 102 310 — 1,178 1,650 
Net loans (charged-off) recovered(12)(120)69 (513)— (628)(1,204)
Provision for (reversal of) loan losses(1)
10 10 18,005 1,823 (2)264 20,110 
Balance at end of period$6,490 $2,270 $35,709 $4,107 $46 $384 $49,006 
Year Ended December 31, 2019
Real Estate
Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of period$3,597 $3,844 $13,968 $3,974 $525 $1,111 $27,019 
Loans charged-off— (126)(5,247)(1,162)— (2,398)(8,933)
Recoveries of loans charged-off12 68 113 250 — 1,167 1,610 
Net loans (charged-off) recovered12 (58)(5,134)(912)— (1,231)(7,323)
Provision for (reversal of) loan losses(70)47 738 3,289 45 1,052 5,101 
Balance at end of period$3,539 $3,833 $9,572 $6,351 $570 $932 $24,797 
Year Ended December 31, 2018
Real Estate
Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of period$3,676 $2,445 $10,821 $2,094 $860 $885 $20,781 
Loans charged-off(14)(91)(783)(756)— (2,602)(4,246)
Recoveries of loans charged-off356 36 244 — 1,404 2,047 
Net loans (charged-off) recovered(7)265 (747)(512)— (1,198)(2,199)
Provision for (reversal of) loan losses(72)1,134 3,894 2,392 (335)1,424 8,437 
Balance at end of period$3,597 $3,844 $13,968 $3,974 $525 $1,111 $27,019 
(1)    The increase in the provision for credit losses during 2020 was primarily due to the economic impact of COVID-19 on macroeconomic factors used in the CECL methodology.
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 December 31, 2020 and December 31, 2019, the accrued interest on our loan portfolio was $16.4 million and $14.2 million, respectively.