Loans and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2024

5. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The loan portfolio consists of various types of loans and is categorized by major type as follows:


	March 31, 2024		December 31, 2023
	(Dollars in thousands)
Residential mortgage loans held for sale	$	6,380	$	5,734

Commercial and industrial		2,470,848		2,305,040
Real estate:
Construction, land development and other land loans		2,876,588		3,076,591
1-4 family residential (includes home equity)		8,275,040		8,162,344
Commercial real estate (includes multi-family residential)		5,631,460		5,662,948
Farmland		590,896		598,898
Agriculture		222,196		217,145
Consumer and other		326,915		329,593
Total loans held for investment, excluding Warehouse Purchase Program		20,393,943		20,352,559
Warehouse Purchase Program		864,924		822,245
Total loans, including Warehouse Purchase Program	$	21,265,247	$	21,180,538

Concentrations of Credit. Most of the Company’s lending activity occurs within the states of Texas and Oklahoma. Commercial real estate loans, 1-4 family residential loans and construction, land development and other land loans made up 82.3% and 83.0% of the Company’s total loan portfolio, excluding Warehouse Purchase Program loans, at March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024 and December 31, 2023, excluding Warehouse Purchase Program loans, there were no concentrations of loans related to any single industry in excess of 10% of total loans.

Related Party Loans. As of March 31, 2024 and December 31, 2023, loans outstanding to directors, officers and their affiliates totaled $290 thousand and $292 thousand, respectively. All transactions between the Company and such related parties are conducted in the ordinary course of business and made on the same terms and conditions as similar transactions with unaffiliated persons.

An analysis of activity with respect to these related party loans is as follows:


	As of and for the three months ended March 31, 2024			As of and for the year ended December 31, 2023
	(Dollars in thousands)
Beginning balance on January 1	$	292		$	547
New loans		1			64
Repayments		(3	)		(319	)
Ending balance	$	290		$	292

Nonperforming Assets and Nonaccrual and Past Due Loans. The Company has several procedures in place to assist it in maintaining the overall quality of its loan portfolio. The Company has established underwriting guidelines to be followed by its officers, including requiring appraisals on loans collateralized by real estate. The Company also monitors its delinquency levels for any negative or adverse trends. Nevertheless, the Company’s loan portfolio could become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

The Company generally places a loan on nonaccrual status and ceases accruing interest when the payment of principal or interest is delinquent for 90 days, or earlier in some cases; unless the loan is in the process of collection and the underlying collateral fully supports the carrying value of the loan. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

With respect to potential problem loans, an evaluation of the borrower’s overall financial condition is made, together with an appraisal for loans collateralized by real estate, to determine the need, if any, for possible write-downs or appropriate additions to the allowance for credit losses.

An aging analysis of past due loans, segregated by category of loan, is presented below:


	March 31, 2024
	Loans Past Due and Still Accruing
	30-89 Days		90 or More Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans
	(Dollars in thousands)
Construction, land development and other land loans	$	17,078	$	—	$	17,078	$	14,749	$	2,844,761	$	2,876,588
Warehouse Purchase Program loans		—		—		—		—		864,924		864,924
Agriculture and agriculture real estate (includes farmland)		3,672		428		4,100		3,286		805,706		813,092
1-4 family (includes home equity) (1)		37,462		—		37,462		29,464		8,214,494		8,281,420
Commercial real estate (includes multi-family residential)		13,036		2,417		15,453		21,303		5,594,704		5,631,460
Commercial and industrial		20,715		190		20,905		9,542		2,440,401		2,470,848
Consumer and other		432		—		432		131		326,352		326,915
Total	$	92,395	$	3,035	$	95,430	$	78,475	$	21,091,342	$	21,265,247


	December 31, 2023
	Loans Past Due and Still Accruing
	30-89 Days		90 or More Days		Total Past Due Loans		Nonaccrual Loans		Current Loans		Total Loans
	(Dollars in thousands)
Construction, land development and other land loans	$	21,627	$	1,635	$	23,262	$	14,770	$	3,038,559	$	3,076,591
Warehouse Purchase Program loans		—		—		—		—		822,245		822,245
Agriculture and agriculture real estate (includes farmland)		8,572		—		8,572		1,460		806,011		816,043
1-4 family (includes home equity) (1)		38,350		130		38,480		25,694		8,103,904		8,168,078
Commercial real estate (includes multi-family residential)		23,511		—		23,511		18,662		5,620,775		5,662,948
Commercial and industrial		14,782		430		15,212		8,066		2,281,762		2,305,040
Consumer and other		503		—		503		36		329,054		329,593
Total	$	107,345	$	2,195	$	109,540	$	68,688	$	21,002,310	$	21,180,538

(1)

Includes $6.4 million and $5.7 million of residential mortgage loans held for sale at March 31, 2024 and December 31, 2023, respectively.

The following table presents information regarding nonperforming assets as of the dates indicated:


	March 31, 2024			December 31, 2023
	(Dollars in thousands)
Nonaccrual loans (1) (2)	$	78,475		$	68,688
Accruing loans 90 or more days past due		3,035			2,195
Total nonperforming loans		81,510			70,883
Repossessed assets		97			76
Other real estate		2,204			1,708
Total nonperforming assets	$	83,811		$	72,667

Nonperforming assets to total loans and other real estate		0.39	%		0.34	%
Nonperforming assets to total loans, excluding Warehouse Purchase Program loans, and other real estate		0.41	%		0.36	%
Nonaccrual loans to total loans		0.37	%		0.32	%
Nonaccrual loans to total loans, excluding Warehouse Purchase Program loans		0.38	%		0.34	%

(1)

ASU 2022-02 became effective for the Company on January 1, 2023.

(2)

There were no nonperforming Warehouse Purchase Program loans or Warehouse Purchase Program lines of credit for the periods presented.

The Company had $83.8 million in nonperforming assets at March 31, 2024 compared with $72.7 million at December 31, 2023. Nonperforming assets were 0.39% of total loans and other real estate at March 31, 2024 and 0.34% of total loans and other real estate at December 31, 2023. The Company had $78.5 million in nonaccrual loans at March 31, 2024 compared with $68.7 million at December 31, 2023.

Acquired Loans. Acquired loans were preliminarily recorded at fair value based on a discounted cash flow valuation methodology that considers, among other things, interest rates, projected default rates, loss given default, and recovery rates. Projected default rates, loss given default, and recovery rates for purchased credit deteriorated (“PCD”) loans primarily impact the related allowance, as opposed to the fair value mark. During the valuation process, the Company identified PCD and Non-PCD loans in the acquired loan portfolios. Loans acquired with evidence of credit quality deterioration since origination as of the acquisition date were accounted for as PCD. PCD loan identification considers the following factors: payment history and past due status, debt service coverage, loan grading, collateral values and other factors that may indicate deterioration of credit quality as of the acquisition date when compared to the origination date. Non-PCD loan identification considers the following factors: account types, remaining terms, annual interest rates or coupons, current market rates, interest types, past delinquencies, timing of principal and interest payments,

loan to value ratios, loss exposures and remaining balances. Accretion of purchased discounts on PCD and Non-PCD loans will be recognized based on payment structure and the contractual maturity of individual loans.

PCD Loans. The recorded investment in PCD loans included in the consolidated balance sheet and the related outstanding balance as of the dates indicated are presented in the table below. The outstanding balance represents the total amount owed as of March 31, 2024 and December 31, 2023.


	March 31, 2024			December 31, 2023
	(Dollars in thousands)
PCD loans:
Outstanding balance	$	495,074		$	533,653
Discount		(7,361	)		(7,914	)
Recorded investment	$	487,713		$	525,739

Changes in the accretable yield for acquired PCD loans for the three months ended March 31, 2024 and 2023 were as follows:


	Three Months Ended March 31,
	2024			2023
	(Dollars in thousands)
Balance at beginning of period	$	7,914		$	3,361
Accretion charge-offs		(5	)		—
Accretion		(548	)		(339	)
Balance at March 31,	$	7,361		$	3,022

Income recognition on PCD loans is subject to the timing and amount of future cash flows. PCD loans for which the Company is accruing interest income are not considered nonperforming or impaired. The PCD discount reflected above as of March 31, 2024, represents the amount of discount available to be recognized as income.

Non-PCD Loans. The recorded investment in Non-PCD loans included in the consolidated balance sheet and the related outstanding balance as of the dates indicated are presented in the table below. The outstanding balance represents the total amount owed as of March 31, 2024 and December 31, 2023.


	March 31, 2024			December 31, 2023
	(Dollars in thousands)
Non-PCD loans:
Outstanding balance	$	1,676,563		$	1,823,809
Discount		(18,681	)		(19,992	)
Recorded investment	$	1,657,882		$	1,803,817

Changes in the discount accretion for Non-PCD loans for the three months ended March 31, 2024 and 2023 were as follows:


	Three Months Ended March 31,
	2024			2023
	(Dollars in thousands)
Balance at beginning of period	$	19,992		$	2,233
Accretion recoveries		1			—
Accretion		(1,312	)		(532	)
Balance at March 31,	$	18,681		$	1,701

Credit Quality Indicators. 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 loan grades to be used as credit quality indicators. The following is a general description of the loan grades used:

Grade 1—Credits in this category have risk potential that is virtually nonexistent. These loans may be secured by insured certificates of deposit, insured savings accounts, U.S. Government securities and highly rated municipal bonds.

Grade 2—Credits in this category are of the highest quality. These borrowers represent top rated companies and individuals with unquestionable financial standing with excellent global cash flow coverage, net worth, liquidity and collateral coverage.

Grade 3—Credits in this category are not immune from risk but are well protected by the collateral and paying capacity of the borrower. These loans may exhibit a minor unfavorable credit factor, but the overall credit is sufficiently strong to minimize the possibility of loss.

Grade 4—Credits in this category are considered to be of acceptable credit quality with moderately greater risk than Grade 3 and receiving closer monitoring. Loans in this category have sources of repayment that remain sufficient to preclude a larger than normal probability of default and secondary sources are likewise currently of sufficient quantity, quality, and liquidity to protect the Company against loss of principal and interest. These borrowers have specific risk factors, but the overall strength of the credit is acceptable based on other mitigating credit and/or collateral factors and can repay the debt in the normal course of business.

Grade 5—Credits in this category constitute an undue and unwarranted credit risk; however, the factors do not rise to a level of substandard. These credits have potential weaknesses and/or declining trends that, if not corrected, could expose the Company to risk at a future date. These loans are monitored on the Company’s internally-generated watch list and evaluated on a quarterly basis.

Grade 6—Credits in this category are considered “substandard” but “non-impaired” loans in accordance with regulatory guidelines. Loans in this category have well-defined weakness that, if not corrected, could make default of principal and interest possible. Loans in this category are still accruing interest and may be dependent upon secondary sources of repayment and/or collateral liquidation.

Grade 7—Credits in this category are deemed “substandard” and “impaired” pursuant to regulatory guidelines. As such, the Company has determined that it is probable that less than 100% of the contractual principal and interest will be collected. These loans are individually evaluated for a specific reserve and will typically have the accrual of interest stopped.

Grade 8—Credits in this category include “doubtful” loans in accordance with regulatory guidance. Such loans are no longer accruing interest and factors indicate a loss is imminent. These loans are also deemed “impaired.” While a specific reserve may be in place while the loan and collateral are being evaluated, these loans are typically charged down to an amount the Company estimates is collectible.

Grade 9—Credits in this category are deemed a “loss” in accordance with regulatory guidelines and have been charged off or charged down. The Company may continue collection efforts and may have partial recovery in the future.

The following tables present loans by risk grade, by category of loan and year of origination/renewal at March 31, 2024.


	Term Loans
	Amortized Cost Basis by Origination Year
	2024		2023		2022		2021		2020		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total
	(Dollars in thousands)

Construction, Land Development and Other Land Loans
Grade 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Grade 2		—		1,106		166		—		—		14		—		—		1,286
Grade 3		103,359		745,828		696,969		364,477		215,354		57,308		119,072		—		2,302,367
Grade 4		3,478		83,562		146,216		42,544		5,572		26,944		30,782		—		339,098
Grade 5		—		—		1,357		—		23,373		15,796		769		—		41,295
Grade 6		—		570		—		7,698		184		561		—		—		9,013
Grade 7		—		183		2,647		343		—		242		248		—		3,663
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		1,218		29,616		98,450		15,171		7,649		7,371		20,391		—		179,866
Total	$	108,055	$	860,865	$	945,805	$	430,233	$	252,132	$	108,236	$	171,262	$	—	$	2,876,588

Current-period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Agriculture and Agriculture Real Estate (includes Farmland)
Grade 1	$	720	$	1,179	$	1,231	$	172	$	252	$	369	$	8,590	$	—	$	12,513
Grade 2		—		13		60		101		—		722		46		—		942
Grade 3		20,051		126,212		168,180		76,630		47,924		118,858		102,641		94		660,590
Grade 4		3,436		21,435		19,644		25,993		4,122		9,589		21,807		—		106,026
Grade 5		725		57		799		885		—		1,143		—		—		3,609
Grade 6		—		—		—		78		—		1,195		—		—		1,273
Grade 7		—		—		1,469		558		339		29		—		—		2,395
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		—		1,986		2,532		1,345		14,558		2,630		2,693		—		25,744
Total	$	24,932	$	150,882	$	193,915	$	105,762	$	67,195	$	134,535	$	135,777	$	94	$	813,092

Current-period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	121	$	—	$	—	$	121

1-4 Family (includes Home Equity) (1)
Grade 1	$	—	$	74	$	153	$	—	$	109	$	—	$	—	$	—	$	336
Grade 2		—		526		1,243		153		236		2,602		—		—		4,760
Grade 3		109,256		1,172,870		2,253,123		2,140,728		1,021,887		1,310,779		91,597		2,757		8,102,997
Grade 4		1,178		15,265		15,813		25,722		5,681		64,138		2,871		204		130,872
Grade 5		—		—		1,206		—		119		2,517		—		—		3,842
Grade 6		—		—		357		41		19		1,840		—		—		2,257
Grade 7		—		1,744		7,554		5,304		4,433		9,293		95		—		28,423
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		—		625		4,243		475		469		2,121		—		—		7,933
Total	$	110,434	$	1,191,104	$	2,283,692	$	2,172,423	$	1,032,953	$	1,393,290	$	94,563	$	2,961	$	8,281,420

Current-period gross write-offs	$	—	$	—	$	389	$	—	$	33	$	39	$	—	$	—	$	461


	Term Loans
	Amortized Cost Basis by Origination Year
	2024		2023		2022		2021		2020		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total
	(Dollars in thousands)

Commercial Real Estate (includes Multi-Family Residential)
Grade 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Grade 2		—		—		1,128		—		459		2,232		—		—		3,819
Grade 3		50,492		403,245		908,841		680,193		405,589		1,246,771		77,627		4,591		3,777,349
Grade 4		2,667		43,104		262,140		172,287		217,796		716,336		15,857		—		1,430,187
Grade 5		—		192		2,538		4,771		—		89,422		2,355		—		99,278
Grade 6		—		—		—		356		11,451		76,088		—		—		87,895
Grade 7		—		1,693		827		2,464		—		806		—		—		5,790
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		540		13,613		53,166		49,281		38,547		71,666		329		—		227,142
Total	$	53,699	$	461,847	$	1,228,640	$	909,352	$	673,842	$	2,203,321	$	96,168	$	4,591	$	5,631,460

Current-period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial and Industrial
Grade 1	$	6,392	$	15,267	$	9,372	$	6,418	$	2,811	$	6,188	$	41,360	$	176	$	87,984
Grade 2		—		695		7,799		219		195		3,651		2,295		—		14,854
Grade 3		211,874		206,299		222,945		147,665		49,661		187,230		910,134		30,276		1,966,084
Grade 4		20,633		44,614		30,936		14,641		11,286		110,319		65,063		2,222		299,714
Grade 5		—		17		21,827		6,057		1,666		788		8,200		100		38,655
Grade 6		413		311		3,898		615		354		962		2,390		—		8,943
Grade 7		—		3,900		420		195		1,268		1,416		457		—		7,656
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		—		3,689		14,070		3,637		661		2,439		22,462		—		46,958
Total	$	239,312	$	274,792	$	311,267	$	179,447	$	67,902	$	312,993	$	1,052,361	$	32,774	$	2,470,848

Current-period gross write-offs	$	—	$	53	$	349	$	39	$	—	$	24	$	895	$	—	$	1,360

Consumer and Other
Grade 1	$	4,614	$	12,520	$	5,465	$	2,813	$	1,681	$	5,914	$	2,588	$	—	$	35,595
Grade 2		6,132		12,406		14,181		—		—		1,839		1,507		—		36,065
Grade 3		24,054		40,317		38,129		24,769		11,901		17,352		75,004		11		231,537
Grade 4		—		1,748		257		1,105		15,259		2,255		2,865		—		23,489
Grade 5		—		—		—		—		—		—		—		—		—
Grade 6		—		—		31		5		—		—		—		—		36
Grade 7		—		—		—		—		122		1		—		—		123
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		—		—		—		34		7		15		14		—		70
Total	$	34,800	$	66,991	$	58,063	$	28,726	$	28,970	$	27,376	$	81,978	$	11	$	326,915

Current-period gross write-offs	$	1,470	$	20	$	17	$	24	$	—	$	70	$	58	$	—	$	1,659


	Term Loans
	Amortized Cost Basis by Origination Year
	2024		2023		2022		2021		2020		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total
	(Dollars in thousands)

Warehouse Purchase Program
Grade 1	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Grade 2		—		—		—		—		—		—		—		—		—
Grade 3		864,924		—		—		—		—		—		—		—		864,924
Grade 4		—		—		—		—		—		—		—		—		—
Grade 5		—		—		—		—		—		—		—		—		—
Grade 6		—		—		—		—		—		—		—		—		—
Grade 7		—		—		—		—		—		—		—		—		—
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		—		—		—		—		—		—		—		—		—
Total	$	864,924	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	864,924

Current-period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Total
Grade 1	$	11,726	$	29,040	$	16,221	$	9,403	$	4,853	$	12,471	$	52,538	$	176	$	136,428
Grade 2		6,132		14,746		24,577		473		890		11,060		3,848		—		61,726
Grade 3		1,384,010		2,694,771		4,288,187		3,434,462		1,752,316		2,938,298		1,376,075		37,729		17,905,848
Grade 4		31,392		209,728		475,006		282,292		259,716		929,581		139,245		2,426		2,329,386
Grade 5		725		266		27,727		11,713		25,158		109,666		11,324		100		186,679
Grade 6		413		881		4,286		8,793		12,008		80,646		2,390		—		109,417
Grade 7		—		7,520		12,917		8,864		6,162		11,787		800		—		48,050
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		1,758		49,529		172,461		69,943		61,891		86,242		45,889		—		487,713
Total	$	1,436,156	$	3,006,481	$	5,021,382	$	3,825,943	$	2,122,994	$	4,179,751	$	1,632,109	$	40,431	$	21,265,247

Current-period gross write-offs	$	1,470	$	73	$	755	$	63	$	33	$	254	$	953	$	—	$	3,601

(1)

Includes $6.4 million of residential mortgage loans held for sale at March 31, 2024.

Allowance for Credit Losses on Loans. The allowance for credit losses is adjusted through charges to earnings in the form of a provision for credit losses. Management has established an allowance for credit losses which it believes is adequate as of March 31, 2024 for estimated losses in the Company’s loan portfolio. The amount of the allowance for credit losses on loans is affected by the following: (1) charge-offs of loans that occur when loans are deemed uncollectible and decrease the allowance, (2) recoveries on loans previously charged off that increase the allowance, (3) provisions for credit losses charged to earnings that increase the allowance, and (4) provision releases returned to earnings that decrease the allowance. Based on an evaluation of the loan portfolio and consideration of the factors listed below, management presents a quarterly review of the allowance for credit losses to the Bank’s Board of Directors, indicating any change in the allowance since the last review and any recommendations as to adjustments in the allowance. Although management believes it uses the best information available to make determinations with respect to the allowance for credit losses, future adjustments may be necessary if economic conditions or borrower performance differ from the assumptions used in making the initial determinations.

The Company’s allowance for credit losses on loans consists of two components: (1) a specific valuation allowance based on expected losses on specifically identified loans and (2) a general valuation allowance based on historical lifetime loan loss experience, current economic conditions, reasonable and supportable forecasted economic conditions and other qualitative risk factors both internal and external to the Company.

In setting the specific valuation allowance, the Company follows a loan review program to evaluate the credit risk in the total loan portfolio and assigns risk grades to each loan. Through this loan review process, the Company maintains an internal list of impaired loans, which along with the delinquency list of loans, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for credit losses. All loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific reserve is required. For certain impaired loans, the Company allocates a specific loan loss reserve primarily based on the value of the collateral securing the impaired loan in accordance with ASC Topic 326-20, “Financial Instruments – Credit Losses.” The specific reserves are determined on an individual loan basis. Loans for which specific reserves are provided are excluded from the general valuation allowance described below.

In connection with this review 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:

•

for 1-4 family residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan to value ratio, and the age, condition and marketability of collateral;

•

for commercial real estate loans and multifamily residential loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner-occupied properties, the loan to value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type;

•

for construction, land development and other land loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan to value ratio;

•

for commercial and industrial loans, the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral;

•

for the Warehouse Purchase Program, the capitalization and liquidity of the mortgage banking client, the operating experience, the client’s satisfactory underwriting of purchased loans and the consistent timeliness by the client of loan resale to investors;

•

for agriculture real estate loans, the experience and financial capability of the borrower, projected debt service coverage of the operations of the borrower and loan to value ratio; and

•

for non-real estate agriculture loans, the operating results, experience and financial capability of the borrower, historical and expected market conditions and the value, nature and marketability of collateral.

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.

In determining the amount of the general valuation allowance, management considers factors such as historical lifetime loan loss experience, concentration risk of specific loan types, the volume, growth and composition of the Company’s loan portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect borrower ability to pay and the value of collateral, the evaluation of the Company’s loan portfolio through its internal loan review process, other qualitative risk factors both internal and external to the Company and other relevant factors in accordance with ASC Topic 326, “Financial Instruments – Credit Losses.” Historical lifetime loan loss experience is determined by utilizing an open-pool (“cumulative loss rate”) methodology. Adjustments to the historical lifetime loan loss experience are made for differences in current loan pool risk characteristics such as portfolio concentrations, delinquency, non-accrual, and watch list levels, as well as changes in current and forecasted economic conditions such as unemployment rates, property and collateral values, and other indices relating to economic activity. The utilization of reasonable and supportable forecasts includes an immediate reversion to lifetime historical loss rates. Based on a review of these factors for each loan type, the Company applies an estimated percentage to the outstanding balance of each loan type, excluding any loan that has a specific reserve. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

The following table details activity in the allowance for credit losses on loans by category of loan for the three months ended March 31, 2024 and 2023.


	Construction, Land Development and Other Land Loans			Agriculture and Agriculture Real Estate (includes Farmland)			1-4 Family (includes Home Equity)			Commercial Real Estate (includes Multi-Family Residential)			Commercial and Industrial			Consumer and Other			Total
	(Dollars in thousands)
Allowance for credit losses on loans:
Three Months Ended
Balance December 31, 2023	$	87,775		$	11,380		$	77,652		$	88,664		$	59,832		$	7,059		$	332,362
Provision for credit losses on loans		(5,619	)		1,270			2,469			(1,468	)		2,067			1,281			—
Charge-offs		—			(121	)		(461	)		—			(1,360	)		(1,659	)		(3,601	)
Recoveries		2			98			4			17			1,077			260			1,458
Net (charge-offs) recoveries		2			(23	)		(457	)		17			(283	)		(1,399	)		(2,143	)
Balance March 31, 2024	$	82,158		$	12,627		$	79,664		$	87,213		$	61,616		$	6,941		$	330,219

Allowance for credit losses on loans:
Three Months Ended
Balance December 31, 2022	$	78,853		$	7,699		$	60,795		$	66,272		$	62,319		$	5,638		$	281,576
Provision for credit losses		1,695			356			1,603			1,699			(6,495	)		1,142			—
Charge-offs		—			—			(65	)		—			(901	)		(1,225	)		(2,191	)
Recoveries		13			6			205			1			2,373			208			2,806
Net (charge-offs) recoveries		13			6			140			1			1,472			(1,017	)		615
Balance March 31, 2023	$	80,561		$	8,061		$	62,538		$	67,972		$	57,296		$	5,763		$	282,191

The allowance for credit losses on loans as of March 31, 2024 totaled $330.2 million or 1.55% of total loans, including acquired loans with discounts, a decrease of $2.1 million or 0.6% compared to the allowance for credit losses on loans totaling $332.4 million or 1.57% of total loans, including acquired loans with discounts, as of December 31, 2023. There was no provision for credit losses for the three months ended March 31, 2024 and 2023.

Net charge-offs were $2.1 million for the three months ended March 31, 2024 compared to net recoveries of $615 thousand for the three months ended March 31, 2023. Net charge-offs for the three months ended March 31, 2024 included $991 thousand related to resolved PCD loans, which had specific reserves that were allocated to the charge-offs. Further, an additional $4.1 million of specific reserves on resolved PCD loans without any related charge-offs was released to the general reserve.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures. The allowance for credit losses on off-balance sheet credit exposures estimates expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, except when an obligation is unconditionally cancellable by the Company. The allowance is adjusted by provisions for credit losses charged to earnings that increase the allowance, or by provision releases returned to earnings that decrease the allowance. 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 affected by historical analysis of utilization rates. The expected credit loss rates applied to the commitments expected to fund are affected by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. As of March 31, 2024 and December 31, 2023, the Company had $36.5 million in allowance for credit losses on off-balance sheet credit exposures. The allowance for credit losses on off-balance sheet credit exposures is a separate line item on the Company’s consolidated balance sheet. As of March 31, 2024, the Company had $2.26 billion in commitments expected to fund.

Loan Modifications Made to Borrowers Experiencing Financial Difficulty. The Company evaluates all restructurings, including restructurings for borrowers experiencing financial difficulty, to determine whether they result in a new loan or a continuation of an existing loan. In accordance with ASC Topic 326, “Financial Instruments—Credit Losses”, the Company only establishes a specific reserve for modifications to borrowers experiencing financial difficulty when the loan is identified as impaired. The effect of most modifications of loans made to borrowers who are experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance. The Company adjusts the terms of loans for certain borrowers when it believes such changes will help its customers manage their loan obligations and increase the collectability of the loans.

Modifications to borrowers experiencing financial difficulty may include but are not limited to changes in committed loan amount, interest rate, amortization, note maturity, borrower, guarantor, collateral, forbearance, forgiveness of principal or interest, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. The approval of modifications of loans for borrowers experiencing financial difficulty are handled on a case-by-case basis.

The following table displays the amortized cost of loans that were both experiencing financial difficulty and modified during the three months ended March 31, 2024 and 2023, presented by category of loan and type of modification.


	Term Extension		Percentage of Total Loans Held for Investment
	(Dollars in thousands)
Three Months Ended March 31, 2024
Commercial and industrial	$	413		—
Agriculture		11,000		0.05	%
Total	$	11,413		0.05	%

Three Months Ended March 31, 2023
Construction, land development and other land loans	$	4,233		0.02	%
Total	$	4,233		0.02	%

The following table describes the modifications made to the loans presented above to borrowers experiencing financial difficulty for the three months ended March 31, 2024 and 2023.


Term Extension
Loan Type		Three Months Ended March 31, 2024
Commercial and industrial		Modified to a 7 year term
Agriculture		Modified to a 2 year term

Loan Type		Three Months Ended March 31, 2023
Construction, land development and other land loans		Less than 12-month extension

The Company did not have any modified loans that defaulted during the three months ended March 31, 2024 that were modified during the prior trailing twelve months. Payment default is defined as movement to nonperforming status, foreclosure or charge-off, whichever occurs first.