Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2024

Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):


	June 30, 2024		December 31, 2023
Real estate loans:
Construction	$	546,040	$	789,744
1-4 family residential	738,037		696,738
Commercial	2,472,771		2,168,451
Commercial loans	359,807		366,893
Municipal loans	416,986		441,168
Loans to individuals	55,724		61,516
Total loans	4,589,365		4,524,510
Less: Allowance for loan losses	42,407		42,674
Net loans	$	4,546,958	$	4,481,836

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 real estate loan 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 mortgage 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 June 30, 2024 consisted of $1.87 billion of owner and non-owner occupied real estate, $579.7 million of loans secured by multi-family properties and $27.4 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 have made 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. These loans allow 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.

Watch List loans reported as 2024 originations as of June 30, 2024 and Watch List loans reported as 2023 originations as of December 31, 2023 were, for the majority, first originated in various years prior to 2024 and 2023, respectively, but were renewed in the respective year.

The following tables set forth the amortized cost basis by class of financing receivable and credit quality indicator for the periods presented (in thousands):


June 30, 2024	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
	2024		2023		2022		2021		2020		Prior
Construction real estate:
Pass	$	32,183	$	120,119	$	127,584	$	23,167	$	4,131	$	7,976	$	149,696	$	464,856
Pass watch	226		—		57,246		—		386		—		2,621		60,479
Special mention	—		—		—		616		—		6		—		622
Substandard	—		163		19,845		63		—		—		—		20,071
Doubtful	—		—		—		—		—		12		—		12
Total construction real estate	$	32,409	$	120,282	$	204,675	$	23,846	$	4,517	$	7,994	$	152,317	$	546,040
Current period gross charge-offs	$	—	$	24	$	—	$	—	$	—	$	—	$	—	$	24

1-4 family residential real estate:
Pass	$	22,414	$	53,754	$	154,734	$	148,586	$	111,255	$	241,168	$	1,708	$	733,619
Pass watch	—		—		—		—		—		—		—		—
Special mention	—		—		—		510		—		—		—		510
Substandard	51		—		—		69		1,096		2,362		—		3,578
Doubtful	—		—		—		—		—		330		—		330
Total 1-4 family residential real estate	$	22,465	$	53,754	$	154,734	$	149,165	$	112,351	$	243,860	$	1,708	$	738,037
Current period gross charge-offs	$	—	$	31	$	—	$	—	$	10	$	87	$	—	$	128

Commercial real estate:
Pass	$	112,416	$	496,041	$	704,544	$	624,161	$	172,212	$	279,464	$	1,900	$	2,390,738
Pass watch	—		—		52,440		—		1,002		735		—		54,177
Special mention	2,039		1,982		1,463		—		—		13,550		—		19,034
Substandard	—		—		844		90		256		5,973		—		7,163
Doubtful	—		—		—		—		—		1,659		—		1,659
Total commercial real estate	$	114,455	$	498,023	$	759,291	$	624,251	$	173,470	$	301,381	$	1,900	$	2,472,771
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial loans:
Pass	$	63,215	$	72,925	$	65,758	$	19,123	$	8,086	$	4,258	$	116,349	$	349,714
Pass watch	—		34		251		90		8		649		175		1,207
Special mention	39		2,517		—		73		3		132		2,289		5,053
Substandard	81		291		2,025		74		—		27		988		3,486
Doubtful	—		35		148		107		—		52		5		347
Total commercial loans	$	63,335	$	75,802	$	68,182	$	19,467	$	8,097	$	5,118	$	119,806	$	359,807
Current period gross charge-offs	$	—	$	275	$	49	$	37	$	—	$	6	$	—	$	367

Municipal loans:
Pass	$	1,595	$	37,835	$	59,206	$	66,385	$	45,765	$	206,200	$	—	$	416,986
Pass watch	—		—		—		—		—		—		—		—
Special mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total municipal loans	$	1,595	$	37,835	$	59,206	$	66,385	$	45,765	$	206,200	$	—	$	416,986
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Loans to individuals:
Pass	$	11,967	$	15,465	$	11,130	$	8,322	$	4,304	$	1,697	$	2,754	$	55,639
Pass watch	—		—		—		—		—		—		—		—
Special mention	—		—		—		—		—		—		—		—
Substandard	—		—		23		—		—		13		—		36
Doubtful	4		13		17		—		—		15		—		49
Total loans to individuals	$	11,971	$	15,478	$	11,170	$	8,322	$	4,304	$	1,725	$	2,754	$	55,724
Current period gross charge-offs (1)	$	750	$	20	$	20	$	2	$	33	$	11	$	—	$	836

Total loans	$	246,230	$	801,174	$	1,257,258	$	891,436	$	348,504	$	766,278	$	278,485	$	4,589,365
Total current period gross charge-offs (1)	$	750	$	350	$	69	$	39	$	43	$	104	$	—	$	1,355

(1) Includes $554,000 in charged off demand deposit overdrafts reported as 2024 originations.


December 31, 2023	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
	2023		2022		2021		2020		2019		Prior
Construction real estate:
Pass	$	132,838	$	236,573	$	196,311	$	37,997	$	3,938	$	6,457	$	144,358	$	758,472
Pass watch	—		7,798		—		—		—		—		—		7,798
Special mention	13,166		9,456		698		—		7		—		—		23,327
Substandard	36		—		68		—		—		43		—		147
Doubtful	—		—		—		—		—		—		—		—
Total construction real estate	$	146,040	$	253,827	$	197,077	$	37,997	$	3,945	$	6,500	$	144,358	$	789,744
Current period gross charge-offs	$	—	$	92	$	—	$	—	$	—	$	—	$	—	$	92

1-4 family residential real estate:
Pass	$	41,520	$	126,981	$	145,671	$	114,631	$	63,710	$	196,651	$	1,803	$	690,967
Pass watch	—		—		—		32		—		—		—		32
Special mention	—		—		—		75		—		—		—		75
Substandard	325		—		73		1,379		—		3,259		74		5,110
Doubtful	—		—		—		163		—		391		—		554
Total 1-4 family residential real estate	$	41,845	$	126,981	$	145,744	$	116,280	$	63,710	$	200,301	$	1,877	$	696,738
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	1	$	118	$	—	$	119

Commercial real estate:
Pass	$	469,844	$	641,577	$	495,363	$	143,150	$	91,085	$	189,021	$	16,493	$	2,046,533
Pass watch	24,300		34,424		255		1,037		333		146		—		60,495
Special mention	17,403		—		—		—		9,746		25,072		—		52,221
Substandard	—		862		95		269		1,565		6,346		—		9,137
Doubtful	—		—		—		—		65		—		—		65
Total commercial real estate	$	511,547	$	676,863	$	495,713	$	144,456	$	102,794	$	220,585	$	16,493	$	2,168,451
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	788	$	—	$	—	$	788

Commercial loans:
Pass	$	78,090	$	62,192	$	42,114	$	10,708	$	4,356	$	3,310	$	161,153	$	361,923
Pass watch	—		128		117		—		—		18		—		263
Special mention	191		174		—		16		—		162		—		543
Substandard	14		2,357		73		—		65		12		821		3,342
Doubtful	238		267		133		—		64		120		—		822
Total commercial loans	$	78,533	$	65,118	$	42,437	$	10,724	$	4,485	$	3,622	$	161,974	$	366,893
Current period gross charge-offs	$	745	$	440	$	44	$	26	$	23	$	5	$	—	$	1,283

Municipal loans:
Pass	$	39,028	$	61,429	$	68,979	$	49,746	$	39,949	$	182,037	$	—	$	441,168
Pass watch	—		—		—		—		—		—		—		—
Special mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total municipal loans	$	39,028	$	61,429	$	68,979	$	49,746	$	39,949	$	182,037	$	—	$	441,168
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Loans to individuals:
Pass	$	22,788	$	15,503	$	11,588	$	6,256	$	2,180	$	941	$	2,216	$	61,472
Pass watch	—		—		—		—		—		—		—		—
Special mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		13		—		—		13
Doubtful	4		17		—		10		—		—		—		31
Total loans to individuals	$	22,792	$	15,520	$	11,588	$	6,266	$	2,193	$	941	$	2,216	$	61,516
Current period gross charge-offs	$	1,682	$	54	$	61	$	20	$	6	$	99	$	—	$	1,922

Total loans	$	839,785	$	1,199,738	$	961,538	$	365,469	$	217,076	$	613,986	$	326,918	$	4,524,510
Total current period gross charge-offs (1)	$	2,427	$	586	$	105	$	46	$	818	$	222	$	—	$	4,204

(1) Includes $1.7 million in charged off demand deposit overdrafts reported as 2023 originations.

The following tables present the aging of the amortized cost basis in past due loans by class of loans (in thousands):


	June 30, 2024
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total
Real estate loans:
Construction	$	278	$	—	$	—	$	278	$	545,762	$	546,040
1-4 family residential	553		563		75		1,191		736,846		738,037
Commercial	273		244		1,881		2,398		2,470,373		2,472,771
Commercial loans	624		439		107		1,170		358,637		359,807
Municipal loans	—		—		—		—		416,986		416,986
Loans to individuals	148		30		4		182		55,542		55,724
Total	$	1,876	$	1,276	$	2,067	$	5,219	$	4,584,146	$	4,589,365


	December 31, 2023
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total
Real estate loans:
Construction	$	474	$	—	$	29	$	503	$	789,241	$	789,744
1-4 family residential	4,638		774		1,700		7,112		689,626		696,738
Commercial	621		34		40		695		2,167,756		2,168,451
Commercial loans	1,693		347		127		2,167		364,726		366,893
Municipal loans	27		—		—		27		441,141		441,168
Loans to individuals	107		1		10		118		61,398		61,516
Total	$	7,560	$	1,156	$	1,906	$	10,622	$	4,513,888	$	4,524,510

The following table sets forth the amortized cost basis of nonperforming assets for the periods presented (in thousands):


	June 30, 2024		December 31, 2023
Nonaccrual loans:
Real estate loans:
Construction	$	38	$	29
1-4 family residential	1,432		2,093
Commercial	2,065		528
Commercial loans	2,526		1,208

Loans to individuals	49		31
Total nonaccrual loans (1)	6,110		3,889

Accruing loans past due more than 90 days	—		—
Restructured loans	145		13
OREO	648		99
Repossessed assets	15		—
Total nonperforming assets	$	6,918	$	4,001

(1) Includes $368,000 and $506,000 of restructured loans as of June 30, 2024 and December 31, 2023, respectively.

We reversed $14,000 and $59,000 of interest income on nonaccrual loans during the three and six months ended June 30, 2024, respectively, and $11,000 and $30,000 for the three and six months ended June 30, 2023, respectively. We had $963,000 and $1.0 million of loans on nonaccrual for which there was no related allowance for credit losses as of June 30, 2024 and December 31, 2023, 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 June 30, 2024 and December 31, 2023, we had $10.3 million and $7.5 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 June 30, 2024. There were $1.0 million loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process as of December 31, 2023.

Restructured Loans

A loan is 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 six months ended June 30, 2024 were not significant.

There was one restructured loan totaling $26,000 restructured with an extension of the amortization period during the three and six months ended June 30, 2024. There were three restructured loans totaling $368,000 included in nonperforming assets as of June 30, 2024. There were two commercial loans totaling $314,000 that were restructured with an extension of the amortization period as of June 30, 2023 and are included in our nonaccrual loans in nonperforming assets.

On an ongoing basis, performance of restructured loans are monitored for subsequent payment default. Payment default is recognized when the borrower is 90 days or more past due. For the three and six months ended June 30, 2024 and 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 June 30, 2024, 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 June 30, 2024
	Real Estate
	Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Balance at beginning of period	$	4,920	$	2,768	$	32,893	$	2,774	$	19	$	183	$	43,557
Loans charged-off	(24)		(106)		—		(216)		—		(375)		(721)
Recoveries of loans charged-off	—		33		—		191		—		220		444
Net loans (charged-off) recovered	(24)		(73)		—		(25)		—		(155)		(277)
Provision for (reversal of) loan losses	(162)		9		(1,052)		193		(1)		140		(873)
Balance at end of period	$	4,734	$	2,704	$	31,841	$	2,942	$	18	$	168	$	42,407



	Six Months Ended June 30, 2024
	Real Estate
	Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Balance at beginning of period	$	5,287	$	2,840	$	32,266	$	2,086	$	19	$	176	$	42,674
Loans charged-off (1)	(24)		(128)		—		(367)		—		(836)		(1,355)
Recoveries of loans charged-off	—		44		3		247		—		497		791
Net loans (charged-off) recovered	(24)		(84)		3		(120)		—		(339)		(564)
Provision for (reversal of) loan losses	(529)		(52)		(428)		976		(1)		331		297
Balance at end of period	$	4,734	$	2,704	$	31,841	$	2,942	$	18	$	168	$	42,407



	Three Months Ended June 30, 2023
	Real Estate
	Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Balance at beginning of period	$	3,152	$	2,314	$	28,721	$	1,901	$	44	$	200	$	36,332


Loans charged-off	(63)		(22)		—		(260)		—		(392)		(737)
Recoveries of loans charged-off	—		41		1		143		—		245		430
Net loans (charged-off) recovered	(63)		19		1		(117)		—		(147)		(307)
Provision for (reversal of) loan losses	306		327		(710)		233		(7)		129		278
Balance at end of period	$	3,395	$	2,660	$	28,012	$	2,017	$	37	$	182	$	36,303


	Six Months Ended June 30, 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	(63)		(71)		—		(369)		—		(867)		(1,370)
Recoveries of loans charged-off	1		46		1		203		—		541		792
Net loans (charged-off) recovered	(62)		(25)		1		(166)		—		(326)		(578)
Provision for (reversal of) loan losses	293		512		(690)		(52)		(8)		311		366
Balance at end of period	$	3,395	$	2,660	$	28,012	$	2,017	$	37	$	182	$	36,303

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 June 30, 2024 and December 31, 2023, the accrued interest on our loan portfolio was $22.4 million and $21.3 million, respectively.