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Loans and Allowance for Loan Losses
 3 Months Ended
Mar. 31, 2023
Receivables [Abstract]  
Loans and Allowance for Loan Losses Loans and Allowance for Loan Losses
Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):    
March 31, 2023December 31, 2022
Real estate loans:  
Construction$591,894 $559,681 
1-4 family residential672,595 663,519 
Commercial1,990,861 1,987,707 
Commercial loans388,182 412,064 
Municipal loans438,566 450,067 
Loans to individuals70,546 74,653 
Total loans4,152,644 4,147,691 
Less: Allowance for loan losses36,332 36,515 
Net loans$4,116,312 $4,111,176 

Construction Real Estate Loans
Our construction loans are collateralized by property located primarily in or near the market areas we serve. A number of our construction loans will be owner occupied upon completion. Construction loans for non-owner occupied projects are financed, but these typically have cash flows from leases with tenants, secondary sources of repayment, and in some cases, additional collateral. Our construction loans have both adjustable and fixed interest rates during the construction period. Construction loans to individuals are typically priced and made with the intention of granting the permanent loan on the completed property. Commercial construction loans are subject to underwriting standards similar to that of the commercial portfolio.  Owner occupied 1-4 family residential construction loans are subject to the underwriting standards of the permanent loan.
1-4 Family Residential Real Estate Loans
Residential loan originations are generated by our loan officers, in-house origination staff, marketing efforts, present customers, walk-in customers and referrals from real estate agents and builders.  We focus our lending efforts primarily on the origination of loans secured by first mortgages on owner occupied 1-4 family residences.  Substantially all of our 1-4 family residential originations are secured by properties located in or near our market areas.  
Our 1-4 family residential loans generally have maturities ranging from 15 to 30 years.  These loans are typically fully amortizing with monthly payments sufficient to repay the total amount of the loan.  Our 1-4 family residential loans are made at both fixed and adjustable interest rates.
Underwriting for 1-4 family residential loans includes debt-to-income analysis, credit history analysis, appraised value and down payment considerations. Changes in the market value of real estate can affect the potential losses in the residential portfolio.
Commercial Real Estate Loans
Commercial real estate loans as of March 31, 2023 consisted of $1.65 billion of owner and non-owner occupied real estate, $313.4 million of loans secured by multi-family properties and $25.9 million of loans secured by farmland. Commercial real estate loans primarily include loans collateralized by retail, commercial office buildings, multi-family residential buildings, medical facilities and offices, senior living, assisted living and skilled nursing facilities, warehouse facilities, hotels and churches. In determining whether to originate commercial real estate loans, we generally consider such factors as the financial condition of the borrower and the debt service coverage of the property. Commercial real estate loans are made at both fixed and adjustable interest rates for terms generally up to 20 years.
Commercial Loans
Our commercial loans are diversified loan types including short-term working capital loans for inventory and accounts receivable and short- and medium-term loans for equipment or other business capital expansion.  In our commercial loan underwriting, we assess the creditworthiness, ability to repay and the value and liquidity of the collateral being offered.  Terms of commercial loans are generally commensurate with the useful life of the collateral offered.
Municipal Loans
We make loans to municipalities and school districts primarily throughout the state of Texas, with a small percentage originating outside of the state.  The majority of the loans to municipalities and school districts have tax or revenue pledges and
in some cases are additionally supported by collateral.  Municipal loans made without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service. Lending money directly to these municipalities allows us to earn a higher yield than we could if we purchased municipal securities for similar durations.
Loans to Individuals
Substantially all originations of our loans to individuals are made to consumers in our market areas.  The majority of loans to individuals are collateralized by titled equipment, which are primarily automobiles. Loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower.  The underwriting standards we employ for consumer loans include an application, a determination of the applicant’s payment history on other debts, with the greatest weight being given to payment history with us and an assessment of the borrower’s ability to meet existing obligations and payments on the proposed loan.  Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount. Most of our loans to individuals are collateralized, which management believes assists in limiting our exposure.
Credit Quality Indicators
We categorize loans into risk categories on an ongoing basis based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  We use the following definitions for risk ratings:
•Pass (Rating 1 – 4) – This rating is assigned to all satisfactory loans.  This category, by definition, consists of acceptable credit.  Credit and collateral exceptions should not be present, although their presence would not necessarily prohibit a loan from being rated Pass, if deficiencies are in the process of correction.  These loans are not included in the Watch List.
•Pass Watch (Rating 5) – These loans require some degree of special treatment, but not due to credit quality.  This category does not include loans specially mentioned or adversely classified; however, particular attention is warranted to characteristics such as:
▪A lack of, or abnormally extended payment program;
▪A heavy degree of concentration of collateral without sufficient margin;
▪A vulnerability to competition through lesser or extensive financial leverage; and
▪A dependence on a single or few customers or sources of supply and materials without suitable substitutes or alternatives.
•Special Mention (Rating 6) – A Special Mention loan has potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in our credit position at some future date.  Special Mention loans are not adversely classified and do not expose us to sufficient risk to warrant adverse classification.
•Substandard (Rating 7) – Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
•Doubtful (Rating 8) – Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation, in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.
The following tables set forth the amortized cost basis by class of financing receivable and credit quality indicator for the periods presented (in thousands):
March 31, 2023Term Loans Amortized Cost Basis by Origination YearRevolving Loans Amortized Cost BasisTotal
20232022202120202019Prior
Construction real estate:
Pass$22,665 $179,803 $176,130 $37,195 $6,980 $7,789 $141,330 $571,892 
Pass watch— 2,434 — — — — 14,808 17,242 
Special mention— 822 1,010 — 9 — — 1,841 
Substandard— — — — — 229 — 229 
Doubtful— 299 43 — 348 — — 690 
Total construction real estate$22,665 $183,358 $177,183 $37,195 $7,337 $8,018 $156,138 $591,894 
Current period gross charge-offs$— $— $— $— $— $— $— $— 
1-4 family residential real estate:
Pass$13,984 $92,684 $144,451 $126,154 $68,073 $220,774 $2,123 $668,243 
Pass watch— — — — — — — — 
Special mention— — — 78 — 1,381 — 1,459 
Substandard— 2 64 210 124 2,146 42 2,588 
Doubtful— — — — — 305 — 305 
Total 1-4 family residential real estate$13,984 $92,686 $144,515 $126,442 $68,197 $224,606 $2,165 $672,595 
Current period gross charge-offs$— $— $— $— $— $49 $— $49 
Commercial real estate:
Pass$137,028 $754,591 $523,896 $156,316 $111,505 $263,451 $10,180 $1,956,967 
Pass watch— — 9,001 — 349 — — 9,350 
Special mention— — — 1,820 437 945 — 3,202 
Substandard— — — 278 14,395 6,484 — 21,157 
Doubtful— — — — 73 112 — 185 
Total commercial real estate$137,028 $754,591 $532,897 $158,414 $126,759 $270,992 $10,180 $1,990,861 
Current period gross charge-offs$— $— $— $— $— $— $— $— 
Commercial loans:
Pass$17,642 $101,347 $61,883 $16,062 $7,209 $6,968 $161,646 $372,757 
Pass watch— 73 149 — — — 199 421 
Special mention— 183 4,996 27 — 269 8,318 13,793 
Substandard— 418 190 — 86 25 — 719 
Doubtful— 67 73 50 109 193 — 492 
Total commercial loans$17,642 $102,088 $67,291 $16,139 $7,404 $7,455 $170,163 $388,182 
Current period gross charge-offs$— $84 $11 $14 $— $— $— $109 
Municipal loans:
Pass$5,679 $63,464 $73,606 $55,338 $45,918 $187,652 $— $431,657 
Pass watch— — — — 507 6,402 — 6,909 
Special mention— — — — — — — — 
Substandard— — — — — — — — 
Doubtful— — — — — — — — 
Total municipal loans$5,679 $63,464 $73,606 $55,338 $46,425 $194,054 $— $438,566 
Current period gross charge-offs$— $— $— $— $— $— $— $— 
Loans to individuals:
Pass$7,504 $24,621 $18,476 $10,868 $4,219 $2,092 $2,704 $70,484 
Pass watch— — — — — — 10 10 
Special mention— — — — — — — — 
Substandard— — — — 5 4 — 9 
Doubtful— — 6 — 17 20 — 43 
Total loans to individuals$7,504 $24,621 $18,482 $10,868 $4,241 $2,116 $2,714 $70,546 
Current period gross charge-offs (1)
$391 $24 $6 $2 $— $52 $— $475 
Total loans$204,502 $1,220,808 $1,013,974 $404,396 $260,363 $707,241 $341,360 $4,152,644 
Total current period gross charge-offs (1)
$391 $108 $17 $16 $— $101 $— $633 
(1) Includes $391,000 in charged off demand deposit overdrafts reported as 2023 originations.
December 31, 2022Term Loans Amortized Cost Basis by Origination YearRevolving Loans Amortized Cost BasisTotal
20222021202020192018Prior
Construction real estate:
Pass$169,652 $184,501 $34,537 $7,091 $1,844 $6,434 $152,530 $556,589 
Pass watch299 — — — — — — 299 
Special mention1,858 290 — — — — — 2,148 
Substandard— — — 10 42 194 — 246 
Doubtful— 44 — 355 — — — 399 
Total construction real estate$171,809 $184,835 $34,537 $7,456 $1,886 $6,628 $152,530 $559,681 
1-4 family residential real estate:
Pass$82,847 $144,424 $128,666 $70,142 $36,710 $194,490 $2,160 $659,439 
Pass watch— — — — — — — — 
Special mention— — 79 — 1,397 — — 1,476 
Substandard3 — 217 54 32 1,942 43 2,291 
Doubtful— — — — 173 140 — 313 
Total 1-4 family residential real estate$82,850 $144,424 $128,962 $70,196 $38,312 $196,572 $2,203 $663,519 
Commercial real estate:
Pass$798,653 $546,938 $168,607 $136,440 $55,480 $233,509 $12,315 $1,951,942 
Pass watch— 9,219 — — — — — 9,219 
Special mention— — 1,832 330 115 1,849 — 4,126 
Substandard— — 281 14,603 260 6,992 — 22,136 
Doubtful— — — 76 — 208 — 284 
Total commercial real estate$798,653 $556,157 $170,720 $151,449 $55,855 $242,558 $12,315 $1,987,707 
Commercial loans:
Pass$113,678 $68,509 $17,852 $8,249 $4,820 $3,313 $178,951 $395,372 
Pass watch208 13 56 — — — — 277 
Special mention— 5,109 31 — 288 — 9,986 15,414 
Substandard220 116 70 110 12 9 — 537 
Doubtful68 100 — 86 210 — — 464 
Total commercial loans$114,174 $73,847 $18,009 $8,445 $5,330 $3,322 $188,937 $412,064 
Municipal loans:
Pass$65,258 $74,617 $57,147 $47,636 $24,576 $173,919 $— $443,153 
Pass watch— — — 508 403 6,003 — 6,914 
Special mention— — — — — — — — 
Substandard— — — — — — — — 
Doubtful— — — — — — — — 
Total municipal loans$65,258 $74,617 $57,147 $48,144 $24,979 $179,922 $— $450,067 
Loans to individuals:
Pass$29,579 $21,480 $12,651 $5,261 $1,665 $1,005 $2,935 $74,576 
Pass watch— — — — — — — — 
Special mention— — — — — — — — 
Substandard— 1 — 6 — 2 — 9 
Doubtful7 — — 18 40 3 — 68 
Total loans to individuals$29,586 $21,481 $12,651 $5,285 $1,705 $1,010 $2,935 $74,653 
Total loans$1,262,330 $1,055,361 $422,026 $290,975 $128,067 $630,012 $358,920 $4,147,691 
Watchlisted loans reported as 2023 originations as of March 31, 2023 and watchlisted loans reported as 2022 originations as of December 31, 2022 were, for the majority, first originated in various years prior to 2023 and 2022, respectively, but were renewed in the respective year.
The following tables present the aging of the amortized cost basis in past due loans by class of loans (in thousands):
 March 31, 2023
 
30-59 Days
Past Due
60-89 Days
Past Due
Greater than 90 Days Past Due
Total Past
Due
CurrentTotal
Real estate loans:     
Construction$455 $299 $— $754 $591,140 $591,894 
1-4 family residential2,562 48 359 2,969 669,626 672,595 
Commercial763 — 39 802 1,990,059 1,990,861 
Commercial loans1,929 315 94 2,338 385,844 388,182 
Municipal loans— — — — 438,566 438,566 
Loans to individuals221 — 19 240 70,306 70,546 
Total$5,930 $662 $511 $7,103 $4,145,541 $4,152,644 
December 31, 2022
30-59 Days Past Due60-89 Days Past DueGreater than 90 Days
Past Due
Total Past
Due
CurrentTotal
Real estate loans:
Construction$43 $21 $— $64 $559,617 $559,681 
1-4 family residential3,529 368 214 4,111 659,408 663,519 
Commercial105 153 415 673 1,987,034 1,987,707 
Commercial loans515 277 247 1,039 411,025 412,064 
Municipal loans— — — — 450,067 450,067 
Loans to individuals203 3 40 246 74,407 74,653 
Total$4,395 $822 $916 $6,133 $4,141,558 $4,147,691 
The following table sets forth the amortized cost basis of nonperforming assets for the periods presented (in thousands):
 March 31, 2023December 31, 2022
Nonaccrual loans:
Real estate loans:
Construction$695 $405 
1-4 family residential933 848 
Commercial582 762 
Commercial loans911 757 
Loans to individuals48 74 
Total nonaccrual loans (1)
3,169 2,846 
Accruing loans past due more than 90 days— — 
Restructured loans (2)
— 7,849 
OREO— 93 
Repossessed assets11 74 
Total nonperforming assets$3,180 $10,862 

(1)    Includes $179,000 and $897,000 of restructured loans as of March 31, 2023 and December 31, 2022, respectively.
(2) Pursuant to our adoption of ASU 2022-02, effective January 1, 2023, we prospectively discontinued the recognition and measurement guidance previously required on troubled debt restructures. As a result, “restructured” loans as of March 31, 2023 exclude any loan modifications that are performing but would have previously required disclosure as troubled debt restructures.

We reversed $26,000 of interest income on nonaccrual loans during the three months ended March 31, 2023, and $12,000 for the three months ended March 31, 2022. We had $1.3 million and $1.6 million of loans on nonaccrual for which there was no related allowance for credit losses as of March 31, 2023 and December 31, 2022, respectively.
Collateral-dependent loans are loans that we expect the repayment to be provided substantially through the operation or sale of the collateral of the loan and we have determined that the borrower is experiencing financial difficulty. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for selling costs. As of March 31, 2023 and December 31, 2022, we had $8.3 million and $8.1 million, respectively, of collateral-dependent loans, secured mainly by real estate and equipment. There have been no significant changes to the collateral that secures the collateral-dependent assets. Foreclosed assets include OREO and repossessed assets. For 1-4 family residential real estate properties, a loan is recognized as a foreclosed property once legal title to the real estate property has been received upon completion of foreclosure or the borrower has conveyed all interest in the residential property through a deed in lieu of foreclosure. There were no loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process as of March 31, 2023 and December 31, 2022, respectively.

Restructured Loans
Pursuant to our adoption of ASU 2022-02 effective January 1, 2023, we prospectively discontinued the recognition and measurement of TDRs. This guidance eliminated TDR accounting for loans in which the borrower was experiencing financial difficulty and the creditor granted a concession. See “Note 1 - Summary of Significant Accounting and Reporting Policies” to our consolidated financial statements included in this report.
A loan is now considered restructured if the borrower is experiencing financial difficulties and the loan has been modified. Modifications may include interest rate reductions or below market interest rates, restructuring amortization schedules and other actions intended to minimize potential losses. We may provide a combination of modifications which may include an extension of the amortization period, interest rate reduction and/or converting the loan to interest-only for a limited period of time. In most instances, interest will continue to be charged on principal balances outstanding during the extended term. Therefore, the financial effects of the recorded investment of loans restructured during the three months ended March 31, 2023 were not significant.
There was one commercial loan for $179,000 that was restructured with an extension of amortization period as of March 31, 2023 and is included in our nonaccrual loans in nonperforming assets.
On an ongoing basis, the performance of the restructured loans is monitored for subsequent payment default. Payment default is recognized when the borrower is 90 days or more past due. As of March 31, 2023, there were no restructured loans in default. Payment defaults for restructured loans did not significantly impact the determination of the allowance for loan losses in the periods presented. At March 31, 2023, there were no commitments to lend additional funds to borrowers whose loans had been restructured.

Allowance for Loan Losses
The following tables detail activity in the allowance for loan losses by portfolio segment for the periods presented (in thousands):
 Three Months Ended March 31, 2023
 Real Estate    
 Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of period$3,164 $2,173 $28,701 $2,235 $45 $197 $36,515 
Loans charged-off— (49)— (109)— (475)(633)
Recoveries of loans charged-off1 5 — 60 — 296 362 
Net loans (charged-off) recovered1 (44)— (49)— (179)(271)
Provision for (reversal of) loan losses(13)185 20 (285)(1)182 88 
Balance at end of period$3,152 $2,314 $28,721 $1,901 $44 $200 $36,332 
 Three Months Ended March 31, 2022
 Real Estate    
 Construction
1-4 Family
Residential
Commercial
Commercial
Loans
Municipal
Loans
Loans to
Individuals
Total
Balance at beginning of period$3,787 $1,866 $26,980 $2,397 $47 $196 $35,273 
Loans charged-off— — — (131)— (424)(555)
Recoveries of loans charged-off— 39 47 216 — 238 540 
Net loans (charged-off) recovered— 39 47 85 — (186)(15)
Provision for (reversal of) loan losses (183)77 198 (28)1 201 266 
Balance at end of period$3,604 $1,982 $27,225 $2,454 $48 $211 $35,524 

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 March 31, 2023 and December 31, 2022, the accrued interest on our loan portfolio was $16.7 million and $18.8 million, respectively.