Loans and Allowance for Credit Losses

6 Months Ended

Jun. 30, 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:


	June 30, 2024		December 31, 2023
	(Dollars in thousands)
Residential mortgage loans held for sale	$	9,951	$	5,734

Commercial and industrial		2,644,271		2,305,040
Real estate:
Construction, land development and other land loans		2,828,372		3,076,591
1-4 family residential (includes home equity)		8,416,962		8,162,344
Commercial real estate (includes multi-family residential)		5,961,884		5,662,948
Farmland		694,103		598,898
Agriculture		343,258		217,145
Consumer and other		340,611		329,593
Total loans held for investment, excluding Warehouse Purchase Program		21,229,461		20,352,559
Warehouse Purchase Program		1,081,403		822,245
Total loans, including Warehouse Purchase Program	$	22,320,815	$	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 81.0% and 83.0% of the Company’s total loan portfolio, excluding Warehouse Purchase Program loans, at June 30, 2024 and December 31, 2023, respectively. As of June 30, 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 June 30, 2024 and December 31, 2023, loans outstanding to directors, officers and their affiliates totaled $282 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 six months ended June 30, 2024			As of and for the year ended December 31, 2023
	(Dollars in thousands)
Beginning balance on January 1	$	292		$	547
New loans		2			64
Repayments		(12	)		(319	)
Ending balance	$	282		$	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:


	June 30, 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	$	16,728	$	55	$	16,783	$	2,504	$	2,809,085	$	2,828,372
Warehouse Purchase Program loans		—		—		—		—		1,081,403		1,081,403
Agriculture and agriculture real estate (includes farmland)		5,473		—		5,473		2,550		1,029,338		1,037,361
1-4 family (includes home equity) (1)		40,339		—		40,339		32,408		8,354,166		8,426,913
Commercial real estate (includes multi-family residential)		8,583		—		8,583		31,064		5,922,237		5,961,884
Commercial and industrial		14,459		100		14,559		15,575		2,614,137		2,644,271
Consumer and other		1,082		167		1,249		74		339,288		340,611
Total	$	86,664	$	322	$	86,986	$	84,175	$	22,149,654	$	22,320,815


	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 $10.0 million and $5.7 million of residential mortgage loans held for sale at June 30, 2024 and December 31, 2023, respectively.

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


	June 30, 2024			December 31, 2023
	(Dollars in thousands)
Nonaccrual loans (1) (2)	$	84,175		$	68,688
Accruing loans 90 or more days past due		322			2,195
Total nonperforming loans		84,497			70,883
Repossessed assets		113			76
Other real estate		4,960			1,708
Total nonperforming assets	$	89,570		$	72,667

Nonperforming assets to total loans and other real estate		0.40	%		0.34	%
Nonperforming assets to total loans, excluding Warehouse Purchase Program loans, and other real estate		0.42	%		0.36	%
Nonaccrual loans to total loans		0.38	%		0.32	%
Nonaccrual loans to total loans, excluding Warehouse Purchase Program loans		0.40	%		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 $89.6 million in nonperforming assets at June 30, 2024 compared with $72.7 million at December 31, 2023. Nonperforming assets were 0.40% of total loans and other real estate at June 30, 2024 and 0.34% of total loans and other real estate at December 31, 2023. The Company had $84.2 million in nonaccrual loans at June 30, 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 June 30, 2024 and December 31, 2023.


	June 30, 2024			December 31, 2023
	(Dollars in thousands)
PCD loans:
Outstanding balance	$	512,235		$	533,653
Discount		(9,507	)		(7,914	)
Recorded investment	$	502,728		$	525,739

Changes in the accretable yield for acquired PCD loans for the three and six months ended June 30, 2024 and 2023 were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
	(Dollars in thousands)
Balance at beginning of period	$	7,361		$	3,022		$	7,914		$	3,361
Additions		4,558			8,336			4,558			8,336
Adjustments		(18	)		(70	)		(23	)		(70	)
Accretion		(2,394	)		(1,178	)		(2,942	)		(1,517	)
Balance at June 30,	$	9,507		$	10,110		$	9,507		$	10,110

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 June 30, 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 June 30, 2024 and December 31, 2023.


	June 30, 2024			December 31, 2023
	(Dollars in thousands)
Non-PCD loans:
Outstanding balance	$	2,447,866		$	1,823,809
Discount		(34,250	)		(19,992	)
Recorded investment	$	2,413,616		$	1,803,817

Changes in the discount accretion for Non-PCD loans for the three and six months ended June 30, 2024 and 2023 were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
	(Dollars in thousands)
Balance at beginning of period	$	18,681		$	1,701		$	19,992		$	2,233
Additions		20,378			22,593			20,378			22,593
Adjustments		(12	)		—			(11	)		—
Accretion		(4,797	)		(1,242	)		(6,109	)		(1,774	)
Balance at June 30,	$	34,250		$	23,052		$	34,250		$	23,052

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 June 30, 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		—		1,096		163		—		—		14		—		—		1,273
Grade 3		266,862		699,907		597,832		295,308		125,102		47,761		99,061		10,049		2,141,882
Grade 4		13,666		100,506		169,491		80,180		64,039		27,682		29,883		5,931		491,378
Grade 5		—		277		1,371		—		23,351		15,687		729		—		41,415
Grade 6		—		—		—		7,319		182		534		—		—		8,035
Grade 7		—		—		—		122		—		290		236		—		648
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		2,736		25,624		74,957		7,805		4,725		7,456		20,438		—		143,741
Total	$	283,264	$	827,410	$	843,814	$	390,734	$	217,399	$	99,424	$	150,347	$	15,980	$	2,828,372

Current-period gross write-offs	$	—	$	—	$	109	$	—	$	—	$	—	$	—	$	—	$	109

Agriculture and Agriculture Real Estate (includes Farmland)
Grade 1	$	1,424	$	668	$	1,020	$	149	$	189	$	285	$	9,334	$	—	$	13,069
Grade 2		—		248		60		99		—		703		—		—		1,110
Grade 3		111,732		136,370		195,650		91,013		53,071		114,853		135,023		107		837,819
Grade 4		9,426		28,468		15,968		26,932		4,403		7,956		22,138		403		115,694
Grade 5		1,513		57		263		273		—		1,693		—		—		3,799
Grade 6		—		—		2,879		76		—		1,180		—		—		4,135
Grade 7		—		—		1,643		—		—		27		—		—		1,670
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		17,467		2,064		3,464		2,052		15,330		2,457		17,231		—		60,065
Total	$	141,562	$	167,875	$	220,947	$	120,594	$	72,993	$	129,154	$	183,726	$	510	$	1,037,361

Current-period gross write-offs	$	—	$	—	$	—	$	62	$	339	$	121	$	—	$	—	$	522

1-4 Family (includes Home Equity) (1)
Grade 1	$	—	$	74	$	150	$	—	$	108	$	—	$	—	$	—	$	332
Grade 2		—		520		1,220		150		229		2,468		—		—		4,587
Grade 3		232,171		1,214,696		2,337,634		2,125,250		996,797		1,245,564		90,447		1,880		8,244,439
Grade 4		5,391		15,839		15,636		23,121		6,049		63,434		3,354		—		132,824
Grade 5		—		—		1,195		—		119		2,488		—		—		3,802
Grade 6		—		20		508		214		19		1,087		—		—		1,848
Grade 7		—		1,598		8,550		5,698		4,715		10,735		127		—		31,423
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		358		1,780		2,476		652		520		1,872		—		—		7,658
Total	$	237,920	$	1,234,527	$	2,367,369	$	2,155,085	$	1,008,556	$	1,327,648	$	93,928	$	1,880	$	8,426,913

Current-period gross write-offs	$	—	$	44	$	719	$	28	$	33	$	70	$	—	$	—	$	894


	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	$	750	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	750
Grade 2		—		—		1,099		—		447		2,126		—		—		3,672
Grade 3		138,227		432,631		949,365		744,603		431,915		1,163,658		52,323		2,786		3,915,508
Grade 4		6,410		93,937		281,422		230,332		242,150		699,644		15,056		—		1,568,951
Grade 5		—		190		7,142		5,472		18,209		87,917		855		—		119,785
Grade 6		—		597		2,039		1,487		15,845		81,440		—		—		101,408
Grade 7		—		2,451		511		574		1,644		2,445		50		—		7,675
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		2,183		45,824		68,714		41,362		17,130		68,593		329		—		244,135
Total	$	147,570	$	575,630	$	1,310,292	$	1,023,830	$	727,340	$	2,105,823	$	68,613	$	2,786	$	5,961,884

Current-period gross write-offs	$	—	$	—	$	135	$	216	$	—	$	160	$	—	$	—	$	511

Commercial and Industrial
Grade 1	$	32,263	$	13,062	$	8,512	$	4,247	$	2,440	$	4,755	$	40,230	$	162	$	105,671
Grade 2		1,795		3,490		7,740		330		118		3,381		6,405		—		23,259
Grade 3		238,629		210,865		227,348		143,904		58,515		180,042		1,073,239		2,412		2,134,954
Grade 4		29,512		40,041		31,376		14,748		8,787		79,560		74,197		1,124		279,345
Grade 5		100		54		21,336		185		1,445		384		7,562		—		31,066
Grade 6		402		293		3,755		568		279		26		3,945		—		9,268
Grade 7		69		3,869		884		5,281		1,245		1,291		715		289		13,643
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		1,145		2,755		13,944		2,444		205		2,285		22,550		1,737		47,065
Total	$	303,915	$	274,429	$	314,895	$	171,707	$	73,034	$	271,724	$	1,228,843	$	5,724	$	2,644,271

Current-period gross write-offs	$	—	$	70	$	728	$	1,054	$	929	$	126	$	1,629	$	—	$	4,536

Consumer and Other
Grade 1	$	9,742	$	10,637	$	4,730	$	2,726	$	1,759	$	4,860	$	2,588	$	—	$	37,042
Grade 2		6,505		12,721		14,216		41		—		1,819		7		—		35,309
Grade 3		38,092		38,425		36,725		24,044		10,670		16,081		80,826		174		245,037
Grade 4		—		1,658		252		1,062		15,118		2,179		2,823		—		23,092
Grade 5		—		—		—		—		—		—		—		—		—
Grade 6		—		—		—		—		—		—		—		—		—
Grade 7		—		8		—		—		—		14		45		—		67
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		—		—		—		31		5		12		16		—		64
Total	$	54,339	$	63,449	$	55,923	$	27,904	$	27,552	$	24,965	$	86,305	$	174	$	340,611

Current-period gross write-offs	$	2,649	$	25	$	54	$	24	$	53	$	279	$	62	$	—	$	3,146


	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		1,081,403		—		—		—		—		—		—		—		1,081,403
Grade 4		—		—		—		—		—		—		—		—		—
Grade 5		—		—		—		—		—		—		—		—		—
Grade 6		—		—		—		—		—		—		—		—		—
Grade 7		—		—		—		—		—		—		—		—		—
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		—		—		—		—		—		—		—		—		—
Total	$	1,081,403	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	1,081,403

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

Total
Grade 1	$	44,179	$	24,441	$	14,412	$	7,122	$	4,496	$	9,900	$	52,152	$	162	$	156,864
Grade 2		8,300		18,075		24,498		620		794		10,511		6,412		—		69,210
Grade 3		2,107,116		2,732,894		4,344,554		3,424,122		1,676,070		2,767,959		1,530,919		17,408		18,601,042
Grade 4		64,405		280,449		514,145		376,375		340,546		880,455		147,451		7,458		2,611,284
Grade 5		1,613		578		31,307		5,930		43,124		108,169		9,146		—		199,867
Grade 6		402		910		9,181		9,664		16,325		84,267		3,945		—		124,694
Grade 7		69		7,926		11,588		11,675		7,604		14,802		1,173		289		55,126
Grade 8		—		—		—		—		—		—		—		—		—
Grade 9		—		—		—		—		—		—		—		—		—
PCD Loans		23,889		78,047		163,555		54,346		37,915		82,675		60,564		1,737		502,728
Total	$	2,249,973	$	3,143,320	$	5,113,240	$	3,889,854	$	2,126,874	$	3,958,738	$	1,811,762	$	27,054	$	22,320,815

Current-period gross write-offs	$	2,649	$	139	$	1,745	$	1,384	$	1,354	$	756	$	1,691	$	—	$	9,718

(1)

Includes $10.0 million of residential mortgage loans held for sale at June 30, 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 June 30, 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 and six months ended June 30, 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 March 31, 2024	$	82,158		$	12,627		$	79,664		$	87,213		$	61,616		$	6,941		$	330,219
Initial allowance on loans purchased with credit deterioration		942			14,309			344			4,306			6,176			1			26,078
Provision for credit losses on loans		(6,215	)		2,757			1,106			3,828			5,097			1,350			7,923
Charge-offs		(109	)		(400	)		(433	)		(511	)		(3,176	)		(1,488	)		(6,117	)
Recoveries		—			186			8			892			399			264			1,749
Net (charge-offs) recoveries		(109	)		(214	)		(425	)		381			(2,777	)		(1,224	)		(4,368	)
Balance June 30, 2024	$	76,776		$	29,479		$	80,689		$	95,728		$	70,112		$	7,068		$	359,852

Six Months Ended
Balance December 31, 2023	$	87,775		$	11,380		$	77,652		$	88,664		$	59,832		$	7,059		$	332,362
Initial allowance on loans purchased with credit deterioration		942			14,309			344			4,306			6,176			1			26,078
Provision for credit losses		(11,834	)		4,027			3,575			2,360			7,164			2,631			7,923
Charge-offs		(109	)		(522	)		(894	)		(511	)		(4,536	)		(3,146	)		(9,718	)
Recoveries		2			285			12			909			1,476			523			3,207
Net (charge-offs) recoveries		(107	)		(237	)		(882	)		398			(3,060	)		(2,623	)		(6,511	)
Balance June 30, 2024	$	76,776		$	29,479		$	80,689		$	95,728		$	70,112		$	7,068		$	359,852

Allowance for credit losses on loans:
Three Months Ended
Balance March 31, 2023	$	80,561		$	8,061		$	62,538		$	67,972		$	57,296		$	5,763		$	282,191
Initial allowance on loans purchased with credit deterioration		15,237			2,914			1,590			21,002			26,332			24			67,099
Provision for credit losses on loans		(3,890	)		201			3,524			12,748			(1,498	)		899			11,984
Charge-offs		(77	)		(113	)		(36	)		(14,975	)		(341	)		(1,291	)		(16,833	)
Recoveries		27			191			106			18			181			245			768
Net (charge-offs) recoveries		(50	)		78			70			(14,957	)		(160	)		(1,046	)		(16,065	)
Balance June 30, 2023	$	91,858		$	11,254		$	67,722		$	86,765		$	81,970		$	5,640		$	345,209

Six Months Ended
Balance December 31, 2022	$	78,853		$	7,699		$	60,795		$	66,272		$	62,319		$	5,638		$	281,576
Initial allowance on loans purchased with credit deterioration		15,237			2,914			1,590			21,002			26,332			24			67,099
Provision for credit losses		(2,195	)		557			5,127			14,447			(7,993	)		2,041			11,984
Charge-offs		(77	)		(113	)		(101	)		(14,975	)		(1,242	)		(2,516	)		(19,024	)
Recoveries		40			197			311			19			2,554			453			3,574
Net charge-offs		(37	)		84			210			(14,956	)		1,312			(2,063	)		(15,450	)
Balance June 30, 2023	$	91,858		$	11,254		$	67,722		$	86,765		$	81,970		$	5,640		$	345,209

The allowance for credit losses on loans as of June 30, 2024 totaled $359.9 million or 1.61% of total loans, including acquired loans with discounts, an increase of $27.5 million or 8.3% 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. This increase was primarily due to the merger of Lone Star State Bancshares, Inc. (“Lone Star”) into Bancshares and the subsequent merger of its wholly owned subsidiary Lone Star State Bank of West Texas (“Lone Star Bank”) into the Bank (collectively, the “LSSB Merger”) on April 1, 2024.

The provision for credit losses was $9.1 million for the three and six months ended June 30, 2024 compared to the $18.5 million provision for credit losses for the three and six months ended June 30, 2023. As a result of the loans acquired in the LSSB Merger, the second quarter of 2024 included a $7.9 million provision for credit losses on loans and a $1.2 million provision for credit losses on off-balance sheet credit exposures.

Net charge-offs were $4.4 million for the three months ended June 30, 2024 compared to net charge-offs of $16.1 million for the three months ended June 30, 2023. Net charge-offs for the three months ended June 30, 2024 included $878 thousand related to resolved PCD loans, which had specific reserves that were allocated to the charge-offs. Additionally, reserves on PCD loans increased by $26.1 million due to Day One accounting for PCD loans at the time of the LSSB Merger. Further, $4.8 million of reserves on resolved PCD loans without any related charge-offs was released to the general reserve.

Net charge-offs were $6.5 million for the six months ended June 30, 2024 compared with $15.5 million for the six months ended June 30, 2023. Net charge-offs for the six months ended June 30, 2024 included $1.9 million related to resolved PCD loans, which had specific reserves that were allocated to the charge-offs. Additionally, reserves on PCD loans increased by $26.1 million due to Day One accounting for PCD loans at the time of the LSSB Merger. Further, $8.9 million of reserves on resolved PCD loans 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 June 30, 2024 and December 31, 2023, the Company had $37.6 million and $36.5 million in allowance for credit losses on off-balance sheet credit exposures, respectively, with the increase due to the LSSB Merger. 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 June 30, 2024, the Company had $2.07 billion in commitments expected to fund.

The following table represents a rollforward of the allowance for credit losses on off-balance sheet credit exposures for the three and six months ended June 30, 2024 and 2023.


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
	(Dollars in thousands)
Balance at beginning of period	$	36,503	$	29,947	$	36,503	$	29,947
Provision for credit losses on off-balance sheet credit exposures		1,143		6,556		1,143		6,556
Balance at end of period	$	37,646	$	36,503	$	37,646	$	36,503

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 and six months ended June 30, 2024 and 2023, presented by category of loan and type of modification.


	Payment Delay		Term Extension		Interest Rate Reduction		Total		Percentage of Total Loans Held for Investment
	(Dollars in thousands)
Three Months Ended June 30, 2024
Commercial and industrial	$	—	$	2,489	$	—	$	2,489		0.01	%
Agriculture		—		650		—		650		0.00	%
Total	$	—	$	3,139	$	—	$	3,139		0.01	%

Six Months Ended June 30, 2024
Commercial and industrial	$	—	$	2,902	$	—	$	2,902		0.02	%
Agriculture		—		11,650		—		11,650		0.05	%
Total	$	—	$	14,552	$	—	$	14,552		0.07	%


	Payment Delay		Term Extension		Interest Rate Reduction		Total		Percentage of Total Loans Held for Investment
	(Dollars in thousands)
Three Months Ended June 30, 2023
Commercial and industrial	$	—			$	304	$	304		0.00	%
Construction, land development and other land loans		—		1,175		—		1,175		0.01	%
Commercial real estate (includes multi-family residential)		1,294						1,294		0.01	%
Total	$	1,294	$	1,175	$	304	$	2,773		0.02	%

Six Months Ended June 30, 2023
Commercial and industrial	$	—	$	—	$	304	$	304		0.00	%
Construction, land development and other land loans		—		5,408		—		5,408		0.03	%
Commercial real estate (includes multi-family residential)		1,294		—		—		1,294		0.01	%
Total	$	1,294	$	5,408	$	304	$	7,006		0.04	%

The following table describes the modifications made to the loans presented above to borrowers experiencing financial difficulty for the three and six months ended June 30, 2024 and 2023.


Term Extension
Loan Type	Three Months Ended June 30, 2024	Six Months Ended June 30, 2024
Commercial and industrial	Short-term extensions	Short-term extensions; modification to a 7 year term
Agriculture	Modified to a 2 year term	Modified to a 2 year term


Payment Delay
Loan Type	Three Months Ended June 30, 2023	Six Months Ended June 30, 2023
Commercial real estate (includes multi-family residential)	Short-term principal deferral	Short-term principal deferral

Term Extension
Loan Type	Three Months Ended June 30, 2023	Six Months Ended June 30, 2023
Construction, land development and other land loans	Short-term extension	Short-term extension

Interest Rate Reduction
Loan Type	Three Months Ended June 30, 2023	Six Months Ended June 30, 2023
Commercial and industrial	Reduced contractual interest rate	Reduced contractual interest rate

The Company did not have any modified loans that defaulted during the three and six months ended June 30, 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.