UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-37585
Allegiance Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Texas
(State or other jurisdiction
of incorporation or organization)
26-3564100
(I.R.S. Employer
Identification No.)
8847 West Sam Houston Parkway, N., Suite 200
Houston, Texas 77040
(Address of principal executive offices, including zip code)
(281) 894-3200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $1.00 per share
(Title of each class)
NASDAQ Global Market
(Name of each exchange on which is registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.:
☐
Large Accelerated Filer
Non-accelerated Filer
☐
Emerging growth company
Accelerated Filer
Smaller Reporting Company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the shares of common stock held by non-affiliates based on the closing price per share of the registrant’s common
stock as reported on the NASDAQ Global Market on June 30, 2018 was approximately $505.8 million.
As of March 7, 2019, there were 21,671,955 shares of the registrant's common stock, $1.00 par value, outstanding.
Portions of the Proxy Statement relating to the 2019 Annual Meeting of Shareholders of Allegiance Bancshares, Inc., which will be filed within
120 days after December 31, 2018, are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.
Documents Incorporated by Reference:
ALLEGIANCE BANCSHARES, INC.
2018 ANNUAL REPORT ON FORM 10-K
PART I
PART II
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
1
14
30
30
31
31
32
35
37
66
66
66
66
66
67
67
67
67
67
68
69
70
PART I
Except where the context otherwise requires or where otherwise indicated, in this Annual Report on Form 10-K the term
“Allegiance” refers to Allegiance Bancshares, Inc., the terms “we,” “us,” “our,” “Company” and “our business” refer to Allegiance
Bancshares, Inc. and our wholly-owned banking subsidiary, Allegiance Bank, a Texas banking association, and the terms “Allegiance
Bank” or the “Bank” refer to Allegiance Bank. In this Annual Report on Form 10-K, we refer to the Houston-The Woodlands-Sugar
Land metropolitan statistical area, or MSA, and the Beaumont-Port Arthur MSA as the “Houston region.”
ITEM 1. BUSINESS
The disclosures set forth in this item are qualified by Item 1A. “Risk Factors,” and the section captioned “Cautionary Notice
Regarding Forward-Looking Statements” in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of this report and other cautionary statements set forth elsewhere in this Annual Report on Form 10-K.
General
Allegiance Bancshares, Inc. is a Texas corporation and registered bank holding company headquartered in Houston, Texas.
Through our wholly-owned subsidiary, Allegiance Bank, we provide a diversified range of commercial banking services primarily to
small to medium-sized businesses within the Houston region, professionals and individual customers. We believe the size, growth and
increasing economic diversity of the Houston region, when combined with our super-community banking strategy, provides us with
excellent opportunities for long-term, sustainable growth. Our super-community banking strategy, which is described in more detail
below, is designed to foster strong customer relationships while benefitting from a platform and scale that is competitive with larger
regional and national banks. We believe this strategy presents a significant market advantage when serving small to medium-sized
business customers and further enables us to attract talented bankers.
As of December 31, 2018, we operated 28 full-service banking locations, with 27 bank offices and one loan production office in
the Houston metropolitan area and one bank office location in Beaumont, just outside of the Houston metropolitan area. We have
experienced significant growth since we began banking operations in 2007, resulting from both organic growth, including de novo
branching, and three whole-bank acquisitions, most recently Post Oak Bancshares, Inc. As of December 31, 2018, we had total assets
of $4.66 billion, total gross loans of $3.71 billion, total deposits of $3.66 billion and total shareholders’ equity of $703.0 million.
Initial Public Offering
Allegiance consummated the underwritten initial public offering of its common stock in October 2015. Allegiance's common
stock is traded on the NASDAQ Global Market under the ticker symbol "ABTX."
Business Strategy
The Company’s objective is to grow and strengthen its community banking franchise by deploying its super-community banking
strategy and by pursuing select strategic acquisitions in the Houston region. We have made the strategic decision to focus on the
Houston region because of our deep roots and experience operating through a variety of economic cycles in this large and vibrant
market. We are positioned to be a leading provider of personalized commercial banking services by emphasizing the strength and
capabilities of local bank office management and by providing superior customer service.
Super-community banking strategy. Our super-community banking strategy emphasizes local delivery of the excellent
customer service associated with community banking combined with the products, efficiencies and scale associated with larger banks.
By empowering our personnel to make certain business decisions at a local level in order to respond quickly to customers’ needs, we
are able to establish and foster strong relationships with customers through superior service. We operate full-service bank offices and
employ bankers with strong underwriting credentials who are authorized to make loan and underwriting decisions up to prescribed
limits at the bank office level. We support bank office operations with a centralized credit approval process for larger credit
relationships, loan operations, information technology, core data processing, accounting, finance, treasury and treasury management
support, deposit operations and executive and board oversight. We emphasize lending to and banking with small to medium-sized
businesses, with which we believe we can establish stronger relationships through excellent service and provide lending that can be
priced on terms that are more attractive to the Company than would be achieved by lending to larger businesses. We believe this
approach produces a clear competitive advantage by delivering an extraordinary customer experience and fostering a culture dedicated
to achieving both superior external and internal service levels.
1
We plan to continue to emphasize our super-community banking strategy to organically grow our presence in the Houston
region through:
increasing the productivity of existing bankers, as measured by loans, deposits and fee income per banker, while
enhancing profitability by leveraging our existing operating platform;
focusing on local and individualized decision-making, allowing us to provide customers with rapid decisions on loan
requests, which we believe allows us to effectively compete with larger financial institutions;
identifying and hiring additional seasoned bankers in the Houston region who will thrive within our super-community
banking model, and opening additional branches where we are able to attract seasoned bankers; and
developing new products designed to serve the increasingly diversified Houston economy, while preserving our strong
culture of risk management.
Select strategic acquisitions. We intend to continue to expand our market position in the Houston region through organic
growth, the development of de novo branch locations and a disciplined acquisition strategy. We focus on like-minded community
banks with similar lending strategies to our own when evaluating acquisition opportunities. We believe that our management’s
experience in assessing, executing and integrating target institutions will allow us to capitalize on acquisition opportunities. The
following table summarizes, with preacquisition historical balances, our three acquisitions to date, all of which were of Houston-based
banks:
Institution acquired
Independence Bank, N.A.
F&M Bancshares, Inc.
Post Oak Bancshares, Inc.
Date
Completed
Acquired
Assets
Acquired
Loans
(Dollars in millions)
Acquired
Deposits
Number of
Branches
November 16, 2013 $
$
January 1, 2015
$
October 1, 2018
222.1 $
569.7 $
1,490.4 $
132.4 $
410.2 $
1,180.0 $
199.4
488.9
1,289.6
3
9*
13
*
On January 31, 2016, the Company completed the sale of two of the acquired branches of Farmers & Merchants, Inc. ("F&M
Bancshares") located in Central Texas and their related assets.
The most recent and significant acquisition to date was the Post Oak acquisition completed in 2018. For additional information
pertaining to the Post Oak acquisition, see Note 2 to the audited consolidated financial statements included elsewhere in this Annual
Report on Form 10-K.
Competitive Strengths
We believe that we are well positioned to execute our super-community banking strategy as a result of the following competitive
strengths:
Experienced, growth-focused senior management team. Our senior management team has a demonstrated track record
of managing profitable organic growth, improving operating efficiencies, maintaining a strong risk management culture,
implementing a community and service-focused approach to banking and successfully executing and integrating
acquisitions. The Company’s Board of Directors has many years of combined experience in serving as directors and/or
officers of financial institutions. The directors have a wide array of business experience and, since many are residents of
our primary market area, participate in and support local community activities, which is a significant asset to our business
development efforts and enables us to be responsive to the needs of our customers.
Scalable banking and operational platform designed to foster and accommodate significant growth. We have built a
capable and knowledgeable staff by utilizing the significant prior experience of our management team and employees. We
have made extensive investments in the technology and systems necessary to build a scalable corporate infrastructure with
the capacity to support continued growth. We believe that our strong capital and asset quality position will allow us to
grow and that our scalable operating platform will effectively support expected growth, resulting in greater efficiency and
enhanced profitability.
Community-focused, full service customer relationships. We believe that our super-community banking strategy
facilitates strong relationships with our customers. We are focused on delivering a wide variety of high-quality,
relationship-driven commercial and community-oriented banking products and services tailored to meet the needs of small
to medium-sized businesses, professionals and individuals in the Houston region. We actively solicit the deposit business
of our consumer and commercial loan customers and seek to further leverage these relationships by broadening customer
relationships with additional products and services.
2
Local decision making authority and Houston region focus. Recent acquisitions of local financial institutions in the
Houston region by larger, more regionally focused competitors have led to a reduced number of locally-based competitors,
and we believe this has created an underserved base of small to medium-sized businesses, professionals and individuals
that are interested in banking with a company headquartered in, and with decision-making authority based in, the Houston
region. We seek to develop comprehensive, long-term banking relationships with customers and offer an array of products
and services to support our loan and deposit activities while delivering high quality customer service. Our products and
services are tailored to address the needs of our targeted customers. We are exclusively focused on serving the greater
Houston region, which we believe positions us well to compete effectively and build strong customer relationships.
Focus on seasoned bankers. We believe our management team’s long-standing presence and experience in the Houston
region gives us valuable insight into the local market and the ability to successfully develop and recruit talented bankers.
Our team of seasoned bankers has been the driver of our organic growth. Our officer compensation structure, which
includes equity grants, profit sharing and various incentive programs, attracts talented bankers and motivates them to
increase the size of their loan and deposit portfolios and generate fee income while maintaining strong credit quality.
Disciplined underwriting and credit administration. Our management, bankers and credit administration team
emphasize a strong culture of risk management that is supported by comprehensive policies and procedures for credit
underwriting, funding and administration that enable us to maintain sound asset quality. The Company’s underwriting
methodology emphasizes analysis of global cash flow coverage, loan to collateral value and obtaining personal guaranties
in all but a few well-secured cases. Our tiered underwriting structure includes progressive levels of individual loan
authority, concurrence authority and senior loan committee approval. We intend to continue to emphasize and adhere to
these procedures and controls, which we believe have helped to minimize our level of loan charge-offs.
Diversified loan portfolio. The Company’s focus on loans to small to medium-sized businesses results in a more diffused
and diversified portfolio of relatively smaller loan relationships, thus reducing the risks that result from a dependence on
fewer but larger lending relationships. As of December 31, 2018, our average funded core loan size was approximately
$332 thousand. Although we operate in the Houston region, we do not lend directly to oil and gas exploration and
production companies. As of December 31, 2018, 3.8% of our total loan portfolio was to customers in the oilfield services
or oil-related industries. We define these customers as those on whom the prices of oil and gas have a significant
operational or financial impact. These loans carry an overall allowance of 1.9% at December 31, 2018, have various types
of collateral and are usually personally guaranteed by the owners of the borrower.
Allegiance Community Banking Services
Lending Activities
We offer a wide range of commercial and retail lending services, including commercial loans, loans to small businesses
guaranteed by the Small Business Administration, mortgage loans, home equity loans, personal loans and automobile loans, among
others, specifically designed for small to medium-sized businesses and companies, professionals and individuals generally located
within Texas and primarily in the Houston region. See Item 7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Financial Condition—Loan Portfolio” for a more detailed discussion of the Company’s lending activities.
Deposit Products
Deposits are our principal source of funds for use in lending and other general banking purposes. We offer a variety of deposit
products and services with the goal of attracting a wide variety of customers, with an emphasis on small to medium-sized businesses.
The types of deposit accounts that the Company offers are typical of most commercial banks and consist of checking accounts,
commercial accounts, savings accounts and other time deposits of various types, ranging from daily money market accounts to longer-
term certificates of deposit. We actively pursue business checking accounts by offering our business customers competitive rates and
convenient services such as telephone, mobile and online banking. Our deposits are insured by the Federal Deposit Insurance
Corporation (the “FDIC”) to the fullest extent permitted by law. See Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Financial Condition—Deposits” for a more detailed discussion of the Company’s deposit
products.
3
Other Banking Services
We offer basic banking products and services, which we believe are attractively priced, easily understood, convenient and
readily accessible to our customers. In addition to banking during normal business hours, we offer extended drive-through hours,
ATMs, mobile banking and banking by telephone, mail and Internet. Customers can conveniently access their accounts by phone,
through a mobile application for smartphones and tablets, as well as through Internet banking that allows customers to obtain account
balances, make deposits, transfer funds, pay bills online and receive electronic delivery of statements. We also provide safe deposit
boxes, debit cards, cash management and wire transfer services, night depository, direct deposits, cashier’s checks, and letters of
credit. We have established relationships with correspondent banks and other independent financial institutions to provide other
services requested by customers, including loan participations sold where the requested loan amount exceeds the lending limits in our
lending policies.
Competition
We compete in the highly competitive commercial banking industry through the Bank and firmly believe that the Bank’s
presence in the community and philosophy of personalized service enhances our ability to attract and retain customers. The Bank faces
strong direct competition for deposit funds, lending opportunities, talented bankers, acquisition candidates and other financial-related
services. We compete with other commercial banks, thrifts and credit unions and other financial institutions.
We compete for loans primarily with other commercial banks, savings banks, savings and loan associations, credit unions,
finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based nonbank lenders and
certain other nonfinancial entities, including retail stores that may maintain their own credit programs and certain governmental
organizations, all of which are actively engaged in providing various types of loans and other financial services that may offer more
favorable financing than we are able to offer. Although some of our competitors are situated locally, others have statewide or
nationwide presence. We believe that we are able to compete with other financial institutions because of our experienced banking
professionals, the range and quality of products that we offer, our responsive decision-making with respect to loans and our emphasis
on customer service, thereby establishing strong customer relationships and building customer loyalty that distinguishes us from our
competitors.
We rely heavily on the continued business our Bank's bankers generate and the efforts of our officers and directors to solicit and
refer potential customers, and we expect this reliance to continue for the foreseeable future. We believe that our recent market share
gains in our geographic areas of operation are a reflection of our ability to compete with the larger banking franchises in our market.
Employees
As of December 31, 2018, we employed approximately 569 full-time equivalent employees. None of our employees were
represented by a collective bargaining unit or are party to a collective bargaining agreement. We believe that we have a good
relationship with our employees.
Available Information
The Company's website address is www.allegiancebank.com. We make available free of charge on or through our website our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as
reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission (the
“SEC”). Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K and is not part
of this or any other report that we file with or furnish to the SEC.
Regulation and Supervision
The U.S. banking industry is highly regulated under federal and state law. These laws and regulations affect the operations and
performance of the Company and its subsidiaries.
Statutes, regulations and policies limit the activities in which we may engage and how we conduct certain permitted activities.
Further, the bank regulatory system imposes reporting and information collection obligations. We incur significant costs related to
compliance with these laws and regulations. Banking statutes, regulations and policies are continually under review by federal and
state legislatures and regulatory agencies, and a change in them, including changes in how they are interpreted or implemented, could
have a material adverse effect on our business.
The material statutory and regulatory requirements that are applicable to us and our subsidiaries are summarized below. The
description below is not intended to summarize all laws and regulations applicable to us and our subsidiaries, and is based upon the
4
statutes, regulations, policies, interpretive letters and other written guidance that are in effect as of the date of this Annual Report on
Form 10-K.
Bank and Bank Holding Company Regulation
The Bank is a Texas-chartered banking association, the deposits of which are insured by the FDIC’s Deposit Insurance Fund
("DIF") up to applicable legal limits. The Bank is not a member of the Federal Reserve System; therefore, the Bank is subject to
ongoing and comprehensive supervision, regulation, examination and enforcement by the Texas Department of Banking (the “TDB”)
and the FDIC.
Any entity that directly or indirectly controls a bank must be approved to become a bank holding company by the Federal
Reserve under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). Bank holding companies are subject to
regulation, examination, supervision and enforcement by the Federal Reserve under the BHC Act. The Federal Reserve’s jurisdiction
also extends to any company that is directly or indirectly controlled by a bank holding company.
As a bank holding company, we are subject to ongoing and comprehensive supervision, regulation, examination and
enforcement by the Federal Reserve. As a bank holding company of a Texas state chartered bank, the Company is also subject to
supervision, regulation, examination and enforcement by the TDB.
Broad Supervision, Examination and Enforcement Powers
A principal objective of the U.S. bank regulatory system is to protect depositors by ensuring the financial safety and soundness
of banking organizations. To that end, the banking regulators have broad regulatory, examination and enforcement authority and
regularly examine the operations of banking organizations.
The regulators have various remedies available if they determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity or other aspects of a banking organization’s operations are unsatisfactory. The regulators
may also take action if they determine that the banking organization or its management is violating or has violated any law or
regulation. The regulators have the power to, among other things:
require affirmative actions to correct any violation or practice;
issue administrative orders that can be judicially enforced;
direct increases in capital;
direct the sale of subsidiaries or other assets;
limit dividends and distributions;
restrict growth;
assess civil monetary penalties;
remove officers and directors; and
terminate deposit insurance.
Engaging in unsafe or unsound practices or failing to comply with applicable laws, regulations and supervisory agreements
could subject us and our subsidiaries or their officers, directors and institution-affiliated parties to the remedies described above and
other sanctions.
The Dodd-Frank Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into
law. The Dodd-Frank Act has had a broad impact on the financial services industry, and imposes significant regulatory and compliance
requirements, including the designation of certain financial companies as systemically important financial companies; enhanced
oversight of credit rating agencies; the imposition of increased capital, leverage, and liquidity requirements; and numerous other
provisions designed to improve supervision and oversight of, and strengthen safety and soundness within, the financial services sector.
Additionally, the Dodd-Frank Act established a new framework of authority to conduct systemic risk oversight within the
financial system to be distributed among federal regulatory agencies, including the Financial Stability Oversight Council, the Federal
Reserve and the FDIC.
5
The following items provide a brief description of certain provisions of the Dodd-Frank Act that are most relevant to the
Company and the Bank.
Source of strength. Under Federal Reserve policy, bank holding companies have historically been required to act as a source
of financial and managerial strength to each of their banking subsidiaries, and the Dodd-Frank Act codified this policy as a statutory
requirement. As a result of this requirement, in the future Allegiance could be required to provide financial assistance to the Bank
should it experience financial distress.
Mortgage loan origination. The Dodd-Frank Act authorized the Consumer Financial Protection Bureau (the “CFPB”) to
establish certain minimum standards for the origination of residential mortgages, including a determination of the borrower’s ability to
repay a residential mortgage loan. Under the Dodd-Frank Act, financial institutions may not make a residential mortgage loan unless
they make a “reasonable and good faith determination” that the consumer has a “reasonable ability” to repay the loan. The Dodd-
Frank Act allows borrowers to raise certain defenses to foreclosure, but provides a full or partial safe harbor from such defenses for
loans that are “qualified mortgages.” The CFPB has promulgated rules to, among other things, specify the types of income and assets
that may be considered in the ability to repay determination, the permissible sources for verification and the required methods of
calculating the loan’s monthly payments. The rules extend the requirement that creditors verify and document a borrower’s income
and assets to include all information that creditors rely on in determining repayment ability. The rules also provide further examples of
third party documents that may be relied on for such verification, such as government records and check cashing or funds transfer
service receipts. The rules also define “qualified mortgages,” imposing both underwriting standards—for example, a borrower’s debt
to income ratio may not exceed 43%—and limits on the terms of their loans. Points and fees are subject to a relatively stringent cap,
and the terms include a wide array of payments that may be made in the course of closing a loan. Certain loans, including interest only
loans and negative amortization loans, cannot be qualified mortgages.
Risk retention. On October 22, 2014, the federal regulators including the Federal Reserve, the FDIC and the SEC issued a
final rule in connection with the risk retention requirement mandated by Section 941 of the Dodd-Frank Act. The risk retention
requirement generally requires a securitizer to retain no less than 5% of the credit risk in assets it sells into a securitization and
prohibits a securitizer from directly or indirectly hedging or otherwise transferring the credit risk that the securitizer is required to
retain, subject to limited exemptions. One significant exemption is for securities entirely collateralized by “qualified residential
mortgages” (“QRMs”), which are loans deemed to have a lower risk of default. The rule defines QRMs to have the same meaning as
the term “qualified mortgage,” as defined by the CFPB. In addition, the rule provides for reduced risk retention requirements for
qualifying commercial loan, commercial real estate loan and auto loan securitizations.
Consumer Financial Protection Bureau. The Dodd-Frank Act created the CFPB, which is tasked with establishing and
implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain
consumer financial products and services. The CFPB has rulemaking authority over many of the statutes governing products and
services offered to bank and thrift consumers. For banking organizations with assets of $10 billion or more, the CFPB has exclusive
rule-making, examination, and primary enforcement authority under federal consumer financial laws. In addition, the Dodd-Frank Act
permits states to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB.
Deposit insurance. The Dodd-Frank Act made permanent the general $250 thousand deposit insurance limit for insured
deposits. Amendments to the Federal Deposit Insurance Act (the “FDIA”) also revised the assessment base against which an insured
depository institution’s deposit insurance premiums paid to the FDIC’s DIF will be calculated. Under the amendments, the assessment
base is no longer the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity.
Additionally, the Dodd-Frank Act made changes to the minimum designated reserve ratio of the DIF, increasing the minimum from
1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to
depository institutions when the reserve ratio exceeds certain thresholds. The FDIC’s restoration plan was designed to ensure that the
fund reserve ratio reached 1.35% by September 30, 2020, as required by the Dodd-Frank Act. In November 2018, the FDIC
announced that the DIF reserve ratio reached 1.36%. Since the DIF reserve ratio exceeded 1.35% required by the Dodd-Frank Act, the
FDIC formally exited the DIF restoration plan.
Transactions with affiliates and insiders. The Dodd-Frank Act generally enhanced the restrictions on transactions with
affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions”
and clarification regarding the amount of time for which collateral requirements regarding covered credit transactions must be
satisfied. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of
the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase
agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider
to an institution, including requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s
board of directors.
6
Corporate governance. The Dodd-Frank Act addresses many investor protections, corporate governance and executive
compensation matters that will affect most U.S. publicly traded companies, including Allegiance. The Dodd-Frank Act (1) grants
shareholders of U.S. publicly traded companies an advisory vote on executive compensation, (2) enhances independence requirements
for compensation committee members, (3) requires companies listed on national securities exchanges to adopt incentive-based
compensation clawback policies for executive officers and (4) provides the SEC with authority to adopt proxy access rules that would
allow shareholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in
a company’s proxy materials. For so long as we are an emerging growth company, we may take advantage of the provisions of the
Jumpstart Our Business Startups Act (the “JOBS Act”) allowing us to not to seek a non-binding advisory vote on executive
compensation.
The requirements of the Dodd-Frank Act still are in the process of being implemented and many of the requirements remain
subject to regulations implemented over the course of several years. The manner in which the provisions of the Dodd-Frank Act will
be implemented by the various regulatory agencies and through regulations as well as the full extent of the impact such requirements
will have on our operations, is unclear.
The Volcker Rule
The Volcker Rule under the Dodd-Frank Act prohibits banks and their affiliates from engaging in proprietary trading and
investing in and sponsoring certain hedge funds and private equity funds. Since neither Allegiance nor the Bank engages in the types
of trading or investing covered by the Volcker Rule, the Volcker Rule does not currently have any effect on our operations.
Notice and Approval Requirements Related to Control
Federal and state banking laws impose notice, application, approval or non-objection and ongoing regulatory requirements on
any shareholder or other person that controls or seeks to acquire direct or indirect “control” of an FDIC-insured depository institution.
These laws include the BHC Act, the Change in Bank Control Act and the Texas Banking Act. Among other things, these laws require
regulatory filings by a shareholder or other person that seeks to acquire direct or indirect “control” of an FDIC-insured depository
institution. The determination whether a person “controls” a depository institution or its holding company is based on all of the facts
and circumstances surrounding the investment. As a general matter, a person is deemed to control a depository institution or other
company if the person owns or controls 25% or more of any class of voting stock. Subject to rebuttal, a person may be presumed to
control a depository institution or other company if the person owns or controls 10% or more of any class of voting stock and other
regulatory criteria are met. Ownership by affiliated persons, or persons acting in concert, is typically aggregated for these purposes.
In addition, except under limited circumstances, bank holding companies are prohibited from acquiring, without prior approval
control of any other bank or bank holding company or all or substantially all the assets thereof; or more than 5% of the voting shares
of a bank or bank holding company that is not already a subsidiary.
Permissible Activities and Investments
Banking laws generally restrict our ability to engage in, or acquire more than 5% of the voting shares of a company engaged in,
activities other than those determined by the Federal Reserve to be so closely related to banking as to be a proper incident thereto. The
Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “GLB Act”) expanded the scope of permissible activities for a bank
holding company that qualifies as a financial holding company. Under the regulations implementing the GLB Act, a financial holding
company may engage in additional activities that are financial in nature or incidental or complementary to a financial activity. Those
activities include, among other activities, certain insurance and securities activities. Qualifications for becoming a financial holding
company include, among other things, meeting certain specified capital standards and achieving certain management ratings in
examinations. Under the Dodd-Frank Act, bank holding companies and their subsidiaries must be well-capitalized and well-managed
in order for the bank holding company and its nonbank affiliates to engage in the expanded financial activities permissible only for a
financial holding company.
In addition, as a general matter, we must receive prior regulatory approval before establishing or acquiring a depository
institution or, in certain cases, a non-bank entity.
The Texas Constitution, as amended in 1986, provides that a Texas-chartered bank has the same rights and privileges that are or
may be granted to national banks domiciled in Texas. To the extent that the Texas laws and regulations may have allowed state-
chartered banks to engage in a broader range of activities than national banks, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (the “FDICIA”), has operated to limit this authority. The FDICIA provides that no state bank or subsidiary
thereof may engage as a principal in any activity not permitted for national banks, unless the institution complies with applicable
capital requirements and the FDIC determines that the activity poses no significant risk to the DIF of the FDIC. In general, statutory
restrictions on the activities of banks are aimed at protecting the safety and soundness of depository institutions.
7
Branching
Texas law provides that a Texas-chartered bank can establish a branch anywhere in Texas provided that the branch is approved
in advance by the TDB. The branch must also be approved by the FDIC. The regulators consider a number of factors, including
financial history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with
corporate powers. The Dodd-Frank Act permits insured state banks to engage in de novo interstate branching if the laws of the state
where the new branch is to be established would permit the establishment of the branch if it were chartered by such state.
Regulatory Capital Requirements and Capital Adequacy
The bank regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter,
FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and
types of assets they hold. The final supervisory determination on an institution’s capital adequacy is based on the regulator’s
assessment of numerous factors. As a bank holding company and a state-chartered non-member bank, the Company and the Bank are
subject to both risk-based and leverage regulatory capital requirements.
In 1988, the International Basel Committee on Banking Supervision, a committee of central banks and bank supervisors,
(“Basel Committee”), adopted a capital accord, known as Basel I, which established the framework for risk-based capital guidelines
implemented by the U.S. federal bank regulators. Basel II was issued by the Basel Committee in November 2005, and in 2010, the
Basel Committee implemented the revised framework for strengthening international capital and liquidity, referred to as Basel III.
In July 2013, the federal banking agencies published final capital rules (“Basel III Capital Rules”) effective January 1, 2015 that
revised the risk-based and leverage capital requirements and the method for calculating risk-weighted assets to implement, in part,
Basel III agreements reached by the Basel Committee and certain provisions of the Dodd-Frank Act. While some provisions are
tailored to larger institutions, the Basel III Capital Rules generally apply to all banking organizations, including the Company and the
Bank. In broad terms, the Basel III Capital Rules increased the required quality and quantity of the capital base, reduced the range of
instruments that count as capital and increased the risk-weighted asset assessment for certain types of activities.
Among other things, the Basel III Capital Rules impact regulatory capital ratios of banking organizations in the following
manner, which were fully phased in on January 1, 2019: create a new requirement to maintain a ratio of “common equity Tier 1
capital” to total risk-weighted assets of not less than 4.5%; increase the minimum leverage capital ratio to 4.0% for all banking
organizations; increase the minimum tier 1 risk-based capital ratio from 4.0% to 6.0%; and maintain the minimum total risk-based
capital ratio at 8.0%.
In addition, the Basel III Capital Rules subject a banking organization to certain limitations on capital distributions, equity
repurchases and discretionary bonus payments to executive officers if the organization does not maintain a “capital conservation
buffer” of common equity Tier 1 capital. The implementation of the capital conservation buffer began on January 1, 2016 at the
0.625% level and was phased in over a three-year period (increasing by 0.625% on each subsequent January 1, until it reached 2.5%
on January 1, 2019). As fully phased-in, the effect of the capital conservation buffer increases the minimum common equity Tier 1
capital ratio to 7.0%, the minimum tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5%.
The Basel III Capital Rules also changed the capital categories for insured depository institutions for purposes of prompt
corrective action. Under the Basel III Capital Rules, to be well capitalized, an insured depository institution is required to maintain a
minimum common equity Tier 1 capital ratio of at least 6.5%, a tier 1 risk-based capital ratio of at least 8.0%, a total risk-based capital
ratio of at least 10.0%, and a leverage capital ratio of at least 5.0%. In addition, the Basel III Capital Rules established more
conservative standards for including an instrument in regulatory capital and impose certain deductions from and adjustments to the
measure of common equity Tier 1 capital.
Under the Basel III Capital Rules, banking organizations were provided a one-time option in their initial regulatory financial
report filed after January 1, 2015, to remove certain components of accumulated other comprehensive income from the computation of
common equity regulatory capital. For banking organizations with less than $15 billion in total assets, existing trust preferred
securities and cumulative perpetual preferred stock continue to be included in regulatory capital while other instruments are
disallowed. The Basel III Capital Rules also provide additional constraints on the inclusion of minority interests, mortgage servicing
assets, deferred tax assets and certain investments in the capital of unconsolidated financial institutions in Tier 1 capital, as well as
providing stricter risk weighting rules to these assets.
The Basel III Capital Rules also provide stricter rules related to the risk weighting of past due and certain commercial real
estate loans, as well as on some equity investment exposures, and replace the existing credit rating approach for determining the risk
weighting of securitization exposures with an alternative approach.
8
The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking
organizations that meet certain specified criteria. The federal bank regulatory agencies may set capital requirements for a particular
banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve guidelines also provide
that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant reliance on intangible assets.
In October 2017, the federal bank regulatory agencies issued a notice of proposed rulemaking on simplifications to the final
rules (the "simplifications NPR"), a majority of which would apply solely to banking organizations that are not subject to the advanced
approaches capital rule. Under the proposed rulemaking, non-advanced approaches banking organizations, such as Allegiance and the
Bank, would apply a simpler regulatory capital treatment for mortgage servicing assets, certain deferred tax assets arising from
temporary differences, investments in the capital of unconsolidated financial institutions and capital issued by a consolidated
subsidiary of a banking organization and held by third parties. In anticipation of issuing the simplifications NPR that would include
changes to the regulatory capital treatment discussed above, in August 2017, the federal bank regulatory agencies issued a notice of
proposed rulemaking that would extend the current transition provisions for these items for non-advanced approach banking
organizations (the “transitions NPR”). The transitions NPR was intended solely to stay the phase-in of certain elements of the capital
rules in light of goals stated in the Economic Growth and Regulatory Paperwork Reduction Act report to Congress in March 2017 and
in contemplation of the simplifications NPR. In November 2017, the agencies published the final rule adopting the proposals set forth
in the transitions NPR thereby extending the regulatory capital treatment that was applicable during 2017 for these items for non-
advanced approach banking organizations into 2018 while the simplifications NPR is pending.
In December 2017, the Basel Committee published the last version of the Basel III accord, generally referred to as "Basel IV."
The Basel Committee stated that a key objective of the revisions incorporated into the framework is to reduce excessive variability of
risk-weighted assets, which will be accomplished by enhancing the robustness and risk sensitivity of the standardized approaches for
credit risk and operational risk, which will facilitate the comparability of banks’ capital ratios, constraining the use of internally
modeled approaches and complementing the risk-weighted capital ratio with a finalized leverage ratio and a revised and robust capital
floor. Leadership of the federal bank regulatory agencies who are tasked with implementing Basel IV supported the revisions.
Although it is uncertain at this time, we anticipate some, if not all, of the Basel IV accord may be incorporated into the capital
requirements framework applicable to the Company.
On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”) amended
provisions in the Dodd-Frank Act as well as certain other statutes administered by the federal bank agencies. Section 201 of the
EGRRCPA, directs the agencies to develop a community bank leverage ratio of not less than 8% and not more than 10% for qualifying
community banks (qualifying community banking organizations). On November 21, 2018, the federal banking agencies released a
proposal to simplify the regulatory capital requirements for qualifying community banking organizations. Under the proposal, banks
and bank holding companies that have less than $10 billion in total consolidated assets, that meet risk-based qualifying criteria, and
that have a community bank leverage ratio (as defined in the proposal) of greater than 9% would be eligible to opt into a community
bank leverage ratio framework. Such banking organizations that elect to use the community bank leverage ratio and that maintain a
community bank leverage ratio of greater than 9% would not be subject to other risk-based and leverage capital requirements and
would be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the FDIA and regulations
implementing that section, as applicable, and the generally applicable capital requirements under the banking agencies’ capital rule.
Prompt Corrective Action
Under the FDIA, the federal bank regulatory agencies must take prompt corrective action against undercapitalized U.S.
depository institutions. U.S. depository institutions are assigned one of five capital categories: “well capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” and are subjected to different
regulation corresponding to the capital category within which the institution falls. A depository institution is deemed to be “well
capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a common equity Tier 1 capital ratio of 6.5% or greater, a Tier
1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive to meet and maintain a specific level for any capital measure. A
depository institution is deemed to be “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a common
equity Tier 1 capital ratio of 4.5% or greater; a Tier 1 risk-based capital ratio of 6.0% or greater; a leverage ratio of 4.0% or greater;
and does not meet the criteria for a “well capitalized” bank. A depository institution is “under-capitalized” if it has a total risk-based
capital ratio of less than 8.0%, a common equity Tier 1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6.0%
or a leverage ratio of less than 4.0%. Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized
institution may be treated as if the institution were in the next lower capital category. A banking institution that is undercapitalized is
required to submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company
having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a
certain specified amount.
9
Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory
agencies, including: termination of deposit insurance upon notice and hearing, restrictions on certain business activities and
appointment of the FDIC as conservator or receiver. As of December 31, 2018, the Bank met the requirements to be “well capitalized”
under the prompt corrective action regulations.
Regulatory Limits on Dividends and Distributions
As a bank holding company, we are subject to certain restrictions on paying dividends under applicable federal and Texas laws
and regulations. The Federal Reserve has issued a policy statement that provides that a bank holding company should not pay
dividends unless (i) its net income over the last four quarters (net of dividends paid) has been sufficient to fully fund the dividends, (ii)
the prospective rate of earnings retention appears to be consistent with the capital needs, asset quality and overall financial condition
of the bank holding company and its subsidiaries and (iii) the bank holding company will continue to meet minimum required capital
adequacy ratios. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or that can only be
funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The Dodd-Frank Act and Basel III
capital requirements impose additional restrictions on the ability of banking institutions to pay dividends.
Substantially all of our income, and a principal source of our liquidity, are dividends from the Bank. The ability of the Bank to
pay dividends to us is restricted by federal and state laws, regulations and policies.
Capital adequacy requirements serve to limit the amount of dividends that may be paid by the Bank. Under the FDIA, an
insured depository institution such as the Bank is prohibited from making capital distributions, including the payment of dividends, if,
after making such distribution, the institution would become “undercapitalized.” The FDIC may further restrict the payment of
dividends by requiring the Bank to maintain a higher level of capital than would otherwise be required in order to be adequately
capitalized for regulatory purposes. Payment of dividends by the Bank also may be restricted at any time at the discretion of the
appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice. As noted above, the capital
conservation buffer created under the Basel III capital rules, when fully implemented, may also have the effect of limiting the payment
of capital distributions from the Bank.
Reserve Requirements
Pursuant to regulations of the Federal Reserve, all banking organizations are required to maintain average daily reserves at
mandated ratios against their transaction accounts. In addition, reserves must be maintained on certain non-personal time deposits.
These reserves must be maintained in the form of vault cash or in an account at a Federal Reserve Bank.
Limits on Transactions with Affiliates and Insiders
Insured depository institutions are subject to restrictions on their ability to conduct transactions with affiliates and other related
parties. Section 23A of the Federal Reserve Act imposes quantitative limits, qualitative requirements, and collateral requirements on
certain transactions by an insured depository institution with, or for the benefit of, its affiliates. Transactions covered by Section 23A
include loans, extensions of credit, investment in securities issued by an affiliate and acquisitions of assets from an affiliate. Section
23B of the Federal Reserve Act requires that most types of transactions by an insured depository institution with, or for the benefit of,
an affiliate be on terms, substantially the same or at least as favorable to the insured depository institution as if the transaction were
conducted with an unaffiliated third party.
As noted above, the Dodd-Frank Act generally enhances the restrictions on transactions with affiliates under Section 23A and
23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and a clarification regarding the
amount of time for which collateral requirements regarding covered credit transactions must be satisfied. The ability of the Federal
Reserve to grant exemptions from these restrictions is also narrowed by the Dodd-Frank Act, including by requiring coordination with
other bank regulators.
The Federal Reserve’s Regulation O imposes restrictions and procedural requirements in connection with the extension of
credit by an insured depository institution to directors, executive officers, principal shareholders and their related interests.
Brokered Deposits
The FDIA restricts the use of brokered deposits by certain depository institutions. Under the applicable regulations, a “well
capitalized insured depository institution” may solicit and accept, renew or roll over any brokered deposit without restriction. An
“adequately capitalized insured depository institution” may not accept, renew or roll over any brokered deposit unless it has applied
for and been granted a waiver of this prohibition by the FDIC. An “undercapitalized insured depository institution” may not accept,
10
renew or roll over any brokered deposit. The FDIC may, on a case-by-case basis and upon application by an adequately capitalized
insured depository institution, waive the restriction on brokered deposits upon a finding that the acceptance of brokered deposits does
not constitute an unsafe or unsound practice with respect to such institution.
In addition, the FDIA prohibits an insured depository institution from offering interest rates on any deposits significantly higher
than the prevailing rate in the bank’s normal market area or nationally (depending upon where the deposits are solicited), unless it is
well capitalized or is adequately capitalized and receives a waiver from the FDIC. A depository institution that is adequately
capitalized and accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposit in excess of 75
basis points over certain prevailing market rates.
Concentrated Commercial Real Estate Lending Guidance
The federal banking agencies, including the FDIC, have promulgated guidance governing financial institutions with
concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate
lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total
reported loans secured by multifamily and non-farm residential properties and loans for construction, land development, and other
land represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during
the prior 36 months. Owner-occupied commercial real estate loans are excluded from this second category. If a concentration is
present, management must employ heightened risk management practices that address the following key elements: board and
management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and
monitoring through market analysis and stress testing and maintenance of increased capital levels as needed to support the level of
commercial real estate lending.
Examination and Examination Fees
The FDIC periodically examines and evaluates state non-member banks. Based on such an evaluation, the Bank, among other
things, may be required to revalue its assets and establish specific reserves to compensate for the difference between the Bank’s
assessment and that of the FDIC. The TDB also conducts examinations of state banks but may accept the results of a federal
examination in lieu of conducting an independent examination. In addition, the FDIC and TDB may elect to conduct a joint
examination. The TDB charges fees to recover the costs of examining Texas chartered banks, as well as filing fees for certain
applications and other filings. The Dodd-Frank Act provides various agencies with the authority to assess additional supervision fees.
Deposit Insurance and Deposit Insurance Assessments
The FDIC is an independent federal agency that insures the deposits of federally insured depository institutions up to applicable
limits. The FDIC also has certain regulatory, examination and enforcement powers with respect to FDIC-insured institutions. The
deposits of the Bank are insured by the FDIC up to applicable limits. As a general matter, the maximum deposit insurance amount is
$250 thousand per depositor. FDIC-insured depository institutions are required to pay deposit insurance assessments to the FDIC. The
amount of a particular institution’s deposit insurance assessment for institutions with less than $10 billion in assets is based on that
institution’s risk classification under an FDIC risk based assessment system. An institution’s risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to the regulators. Institutions assigned to higher risk categories
(that is, institutions that pose a higher risk of loss to the Deposit Insurance Fund) pay assessments at higher rates than institutions that
pose a lower risk. As noted above, the Dodd-Frank Act changed the way an insured depository institution’s deposit insurance
premiums are calculated.
Depositor Preference
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of
depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative
expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If the Company
invests in or acquires an insured depository institution that fails, insured and uninsured depositors, along with the FDIC, will have
priority in payment ahead of unsecured, non-deposit creditors, including the Company, with respect to any extensions of credit they
have made to such insured depository institution.
Anti-Money Laundering and OFAC
Under federal law, financial institutions must maintain anti-money laundering programs that include established internal
policies, procedures and controls, a designated compliance officer, an ongoing employee training program and testing of the program
by an independent audit function. Financial institutions are also prohibited from entering into specified financial transactions and
11
account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with non-U.S.
financial institutions and non-U.S. customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of
account relationships to guard against money laundering and to report any suspicious transactions, and law enforcement authorities
have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely examine
institutions for compliance with these obligations and they must consider an institution’s compliance with such obligations in
connection with the regulatory review of applications, including applications for mergers and acquisitions. The regulatory authorities
have imposed cease and desist orders and civil money penalty sanctions against institutions found to be violating these obligations.
The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) is responsible for helping to ensure that
U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of
Congress. OFAC publishes lists of persons, organizations and countries suspected of aiding, harboring or engaging in terrorist acts,
known as Specially Designated Nationals and Blocked Persons. If the Company or the Bank finds a name on any transaction, account
or wire transfer that is on an OFAC list, the Company or the Bank must freeze or block such account or transaction, file a suspicious
activity report and notify the appropriate authorities.
Consumer Laws and Regulations
Banking organizations are subject to numerous laws and regulations intended to protect consumers. These laws include, among others:
• Truth in Lending Act;
• Truth in Savings Act;
• Electronic Funds Transfer Act;
• Expedited Funds Availability Act;
• Equal Credit Opportunity Act;
• Fair and Accurate Credit Transactions Act;
• Fair Housing Act;
• Fair Credit Reporting Act;
• Fair Debt Collection Act;
• Gramm-Leach-Bliley Act;
• Home Mortgage Disclosure Act;
• Right to Financial Privacy Act;
• Real Estate Settlement Procedures Act;
• laws regarding unfair and deceptive acts and practices; and
• usury laws.
Many states and local jurisdictions have consumer protection laws analogous to, and in addition to, those listed above. These
federal, state and local laws regulate the manner in which financial institutions deal with customers when taking deposits, making
loans or conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory
sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability. The creation of the
CFPB by the Dodd-Frank Act has led to enhanced enforcement of consumer financial protection laws.
The Community Reinvestment Act
The Community Reinvestment Act (the “CRA”) and related regulations are intended to encourage banks to help meet the credit
needs of their service areas, including low and moderate-income neighborhoods, consistent with safe and sound operations. The bank
12
regulators examine and assign each bank a public CRA rating. The CRA requires bank regulators to take into account the bank’s
record in meeting the needs of its service area when considering an application by a bank to establish or relocate a branch or to
conduct certain mergers or acquisitions. The Federal Reserve is required to consider the CRA records of a bank holding company’s
controlled banks when considering an application by the bank holding company to acquire a banking organization or to merge with
another bank holding company. When we or the Bank applies for regulatory approval to engage in certain transactions, the regulators
will consider the CRA record of target institutions and our depository institution subsidiaries. An unsatisfactory CRA record could
substantially delay approval or result in denial of an application. The regulatory agency’s assessment of the institution’s record is made
available to the public. The Bank received an overall CRA rating of “satisfactory” on its most recent CRA examination. In April 2018,
the U.S. Department of Treasury issued a memorandum to the federal banking regulators with recommended changes to the CRA’s
implementing regulations to reduce their complexity and associated burden on banks.
Incentive Compensation Guidance
In July 2010, the federal banking agencies issued guidance on incentive compensation policies that applies to all banking
organizations supervised by the agencies, including Allegiance and the Bank. Pursuant to the guidance, to be consistent with safety
and soundness principles, a banking organization’s incentive compensation arrangements should: (1) provide employees with
incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be
supported by strong corporate governance including active and effective oversight by the banking organization’s board of directors.
Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the
organization and its use of incentive compensation.
Section 956 of the Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or
guidelines prohibiting incentive-based payment arrangements at specified regulated entities that encourage inappropriate risk-taking
by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees or benefits or that
could lead to material financial loss to the entity. The federal bank regulatory agencies issued such proposed rules in April 2011 and
issued a revised proposed rule in June 2016 implementing the requirements and prohibitions set forth in Section 956. The revised
proposed rule would apply to all banks, among other institutions, with at least $1 billion in average total consolidated assets, for which
it would go beyond the existing guidance to (i) prohibit certain types and features of incentive-based compensation arrangements for
senior executive officers, (ii) require incentive-based compensation arrangements to adhere to certain basic principles to avoid a
presumption of encouraging inappropriate risk, (iii) require appropriate board or committee oversight, (iv) establish minimum
recordkeeping and (v) mandate disclosures to the appropriate federal banking agency.
Cybersecurity
Federal bank regulatory agencies have adopted guidelines for establishing information security standards and cybersecurity
programs for implementing safeguards. These guidelines, along with related regulatory materials, increasingly focus on risk
management and processes related to information technology and the use of third parties in the provision of financial services. State
regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Many states have
recently implemented or modified their data breach notification and data privacy requirements, which could apply to us depending on
the location of our customers.
Changes in Laws, Regulations or Policies
Federal, state and local legislators and regulators regularly introduce measures or take actions that would modify the regulatory
requirements applicable to banks, their holding companies and other financial institutions. Changes in laws, regulations or regulatory
policies could adversely affect the operating environment for us in substantial and unpredictable ways, increase or decrease our cost of
doing business, impose new restrictions on the way in which the Company conducts its operations or modify significant operational
constraints that might impact the Company’s profitability. Whether new legislation will be enacted and, if enacted, the effect that it, or
any implementing regulations, would have on the Company and its subsidiaries’ business, financial condition or results of operations
cannot be predicted. A change in laws, regulations or regulatory policies may have a material adverse effect on the Company’s
business and results of operations.
13
Effect on Economic Environment
The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the
operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve to affect the
money supply are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings,
and changes in reserve requirements with respect to deposits. These means are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for
deposits. Federal Reserve monetary policies have materially affected the operating results of commercial banks in the past and are
expected to continue to do so in the future. The Company cannot predict the nature of future monetary policies and the effect of such
policies on its business and earnings.
ITEM 1A. RISK FACTORS
An investment in our common stock involves risks. The following is a description of the material risks and uncertainties that we
believe affect our business and an investment in our common stock. Additional risks and uncertainties that we are unaware of, or that
we currently deem immaterial, also may become important factors that affect the Company and our business. If any of the risks
described in this Annual Report on Form 10-K were to occur, our financial condition, results of operations and cash flows could be
materially and adversely affected. In such an event, the value of our common stock could decline and you could lose all or part of your
investment.
Risks Related to our Business
Our business concentration in Texas, specifically in the Houston region, imposes risks and may magnify the consequences
of any regional or local economic downturn affecting Houston, including any downturn in the energy or real estate sectors.
We conduct our operations almost exclusively in the Houston region. As of December 31, 2018, the substantial majority of the
loans in our loan portfolio were made to borrowers who live and/or conduct business in Texas, and specifically, in the Houston region,
and the substantial majority of our secured loans were secured by collateral located in the Houston region. Accordingly, we are
significantly exposed to risks associated with a lack of geographic diversification. The economic conditions in the Houston region are
dependent on the energy sector generally and the price of oil and gas specifically. Any downturn or adverse development in the energy
sector or continued low oil or gas prices could have a material adverse impact on our business, financial condition, results of
operations and future prospects. Adverse economic developments, among other things, could negatively affect the volume of loan
originations, increase the level of nonperforming assets and charge-offs, increase the rate of foreclosure losses on loans and reduce the
value of our loans and loan servicing portfolio. Any regional or local economic downturn that affects the Houston region or Texas
more generally, or our existing borrowers, prospective borrowers or property values in the Company’s market area may affect our
profitability more significantly and more adversely than those of our competitors with operations that are less geographically
concentrated in the same area.
We may not be able to implement aspects of our growth strategy, which may affect our ability to maintain our historical
earnings trends.
The Company’s growth strategy focuses on organic growth, supplemented by strategic acquisitions. The Company may not be
able to execute on aspects of its growth strategy to sustain its historical rate of growth or may not be able to grow at all. More
specifically, the Company may not be able to generate sufficient new loans and deposits within acceptable risk and expense tolerances,
obtain the personnel or funding necessary for additional growth or find suitable acquisition candidates. Various factors, such as
economic conditions, in particular, the volatility of oil and gas prices and competition, may impede or prohibit the growth of the
Company’s operations, the opening of new branches and the consummation of additional acquisitions. Further, the Company may be
unable to attract and retain experienced bankers, which could adversely affect its growth. The success of the Company’s growth
strategy also depends on its ability to effectively manage growth, which is dependent upon a number of factors, including the
Company’s ability to adapt its existing credit, operational, technology and governance infrastructure to accommodate expanded
operations. If the Company fails to implement one or more aspects of its growth strategy, the Company may be unable to maintain its
historical earnings trends, which could adversely affect its business, financial condition and results of operations.
14
We are dependent on our executive officers and other key individuals to continue the implementation of our long-term
business strategy and the loss of one or more of these key individuals could curtail our growth and adversely affect our business,
financial condition, results of operations and prospects.
Our continued success depends in large part upon the skills, experience and continued service of our executive management
team and Board of Directors. Our goals, strategies and continued growth are closely tied to the strengths and banking philosophy of
our executive management team, including our Chairman and Chief Executive Officer, George Martinez, and our President, Steven F.
Retzloff. Successful implementation of our business strategy is also dependent in part on the continued service of our bank office
presidents. The community involvement and diverse and extensive local business relationships and experience in the Houston market
of our officers in the Houston region are important to our success. The loss of services of any of these key personnel in the future
could have a negative impact on our business because of their skills, years of industry experience and the difficulty of promptly
finding qualified replacement personnel who are experienced in the specialized aspects of our business or who have ties to the
communities within our market area. Currently, it is generally our policy not to have employment agreements with our officers. While
the Company does not anticipate any changes in our executive management team, the unexpected loss of any of these members of
management could have a material adverse effect on the Company and our ability to implement our business strategy.
Our ability to retain bankers and recruit additional successful bankers is critical to the success of our business strategy and
any failure to do so could impair our customer relationships and adversely affect our business and results of operations.
Our ability to retain and grow our loans, deposits and fee income depends upon the business generation capabilities, reputation
and the relationship management skills of our bankers. If we were to lose the services of any of our bankers, including successful
bankers employed by an acquired bank, to a competitor or otherwise, the Company may not be able to retain valuable relationships
and some of our customers could choose to use the services of a competitor instead of our services.
Our success and growth strategy also depends on our continued ability to attract and retain experienced loan officers and
support staff, as well as other management personnel. The Company may face difficulties in recruiting and retaining bankers and other
personnel of our desired caliber, including as a result of competition from other financial institutions. Competition for loan officers
and other personnel is strong and the Company may not be successful in attracting or retaining the personnel it requires. In particular,
many of our competitors are significantly larger with greater financial resources, and may be able to offer more attractive
compensation packages and broader career opportunities. Additionally, the Company may incur significant expenses and expend
significant time and resources on training, integration and business development before it is able to determine whether a new loan
officer will be profitable or effective. If we are unable to attract and retain successful loan officers and other personnel, or if our loan
officers and other personnel fail to meet our expectations in terms of customer relationships and profitability, we may be unable to
execute our business strategy and our business, financial condition, results of operations and growth prospects may be negatively
affected.
A key piece of our strategic growth plan involves decision-making authority at the bank office level, and our business,
financial condition, results of operations and prospects could be negatively affected if our local teams do not follow our internal
policies or are negligent in their decision-making.
We attract and retain our management talent by empowering them to make certain business decisions on a local level. Lending
authorities are assigned to bank office presidents and their banking teams based on their level of experience. Additionally, all loan
relationships in excess of internal specified maximums are reviewed by the Bank’s Senior Loan Committee, comprised of senior
management of the Bank. Our local bankers may not follow our internal procedures or otherwise act in our best interests with respect
to our decision-making. A failure of our employees to follow our internal policies, or actions taken by our employees that are
negligent, could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our strategic growth plan, which includes pursuing acquisitions, could expose the Company to financial, execution and
operational risks that could have a material adverse effect on our business, financial condition, results of operations and growth
prospects.
The Company has acquired three financial institutions and one branch and intends to continue to pursue a strategy that includes
future acquisitions. An acquisition strategy involves significant risks, including the following:
• discovering proper candidates for acquisition;
• incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential
transactions, resulting in management’s attention being diverted from the operation of our existing business;
• using inaccurate estimates and judgments to evaluate credit, operations, management, compliance and market risks with
respect to the target institution or assets;
15
• conducting adequate due diligence and managing known and unknown risks and uncertainties;
• obtaining necessary regulatory approvals;
• integrating the operations and personnel of the combined businesses, thereby creating an adverse short-term effect on results
of operations;
• attracting and retaining qualified management and key personnel, including bankers;
• maintaining asset quality;
• attracting and retaining customers;
• attracting funding to support additional growth within acceptable risk tolerances; and
• maintaining adequate regulatory capital.
The market for acquisition targets is highly competitive, which may adversely affect our ability to find acquisition candidates
that fit our strategy and standards. To the extent that we are unable to find suitable acquisition targets, an important component of our
growth strategy may not be realized. Acquisitions of financial institutions involve operational risks and uncertainties, such as unknown
or contingent liabilities with no available manner of recourse, exposure to unexpected problems such as asset quality, the retention of
key employees and customers and other issues that could negatively affect our business. Acquisitions of financial institutions are also
subject to regulatory approvals that can result in delays, which in some cases could be for a lengthy period of time or may not be
received. The Company may not be able to complete future acquisitions or, if completed, the Company may not be able to successfully
integrate the operations, technology platforms, management, products and services of the entities that it acquires or effectively
eliminate redundancies. The integration process may also require significant time and attention from our management that would
otherwise be directed toward servicing existing business and developing new business. Further, acquisitions typically involve the
payment of a premium over book and market values and, therefore, some dilution of our tangible book value and net income per
common share may occur in connection with any future acquisition, and the goodwill that the Company currently maintains or may
recognize in connection with future transactions may be subject to impairment in future periods.
Challenging market conditions and economic trends have adversely affected the banking industry and could adversely affect
our business, financial condition and results of operations.
We are a business operating in the challenging and uncertain financial services environment. The success of our business and
operations is sensitive to general business and economic conditions in the U.S. and locally in our industry and market. If the U.S.
economy weakens and a lack of growth in population, income levels, deposits and business investment in our local market occurs, our
growth and profitability from our lending, deposit and asset management services could be constrained. Although economic conditions
have improved in recent years, financial institutions continue to be affected by volatility in the real estate market in some parts of the
country and uncertain regulatory and interest rate conditions. The Company has direct exposure to the residential and commercial real
estate market in Texas, particularly in the Houston region, and could be affected by these events.
Uncertain market and economic conditions can make our ability to assess the creditworthiness of customers and estimate the
losses in our loan portfolio more complex. Another national economic recession or continued deterioration of conditions in our market
could drive losses beyond that which is provided for in our allowance for loan losses and result in the following consequences, any of
which could have a material adverse effect on our business:
• loan delinquencies may rise:
• nonperforming assets and foreclosures may increase;
• demand for our products and services may decline; and
• collateral securing our loans, especially real estate, may decline in value, which could reduce customers’ borrowing power
and repayment ability.
Low or volatile oil and gas prices could have an adverse impact on economic conditions in the U.S. generally and in the
Houston region specifically. Declines in real estate values, declines in the volume of home sales and financial stress on borrowers as a
result of low oil and gas prices, including job losses, could have an adverse effect on our borrowers or their customers, which could
adversely affect our business, financial condition and results of operations.
16
The small to medium-sized businesses that the Company lends to may have fewer resources to weather adverse business
developments, which may impair a borrower’s ability to repay a loan, and such impairment could adversely affect our results of
operations and financial condition.
We focus our business development and marketing strategy primarily on small to medium-sized businesses, which we
categorize as commercial borrowing relationships of less than $5 million of exposure. Small to medium-sized businesses frequently
have a smaller market share than their competition, may be more vulnerable to economic downturns, often need substantial additional
capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s
ability to repay a loan. In addition, the success of a small or medium-sized business often depends on the management skills, talents
and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of these people
could have a material adverse impact on the business and its ability to repay our loan. If general economic conditions negatively
impact the Houston region or Texas and small to medium-sized businesses are adversely affected, or our borrowers are otherwise
affected by adverse business developments, our business, financial condition and results of operations may be negatively affected.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings may be affected.
The allowance for loan losses is a valuation allowance for probable incurred loan losses. We establish our allowance for loan
losses and maintain it at a level management considers adequate to absorb probable incurred loan losses in our loan portfolio. The
allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon
relevant information available to us, such as past loan loss experience, the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic conditions and other factors. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are
credited back to the allowance. Our allowance for loan losses consists of a general component based upon probable incurred but
unidentified losses in the portfolio and a specific component based on individual loans that are considered impaired. In determining
the collectability of certain loans, management also considers the fair value of any underlying collateral. The amount ultimately
realized may differ from the carrying value of these assets because of economic, operating or other conditions beyond our control, and
any such differences may be material.
As of December 31, 2018, our allowance for loan losses was $26.3 million, which represents 0.71% of our total loans and
79.90% of our total nonperforming loans. As of December 31, 2017, our allowance for loan losses was $23.6 million, which
represented 1.04% of our total loans and 177.44% of our total nonperforming loans as of the same date. Additional loan losses will
likely occur in the future and may occur at a rate greater than the Company has previously experienced. We may be required to take
additional provisions for loan losses in the future to further supplement the allowance for loan losses, either due to management’s
decision to do so or as required by our banking regulators. In addition, federal and state bank regulatory agencies periodically review
our allowance for loan losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure. Such
regulatory agencies may require the Company to recognize future charge-offs. Their conclusions about the quality of a particular
borrower or our entire loan portfolio may be different than ours. Any increase in our allowance for loan losses or loan charge offs as
required by these regulatory agencies could have a negative effect on our results of operations and financial condition. Moreover,
additions to the allowance may be necessary based on changes in economic and real estate market conditions, new information
regarding existing loans, identification of additional problem loans, accounting rule changes (like those related to the Financial
Accounting Standards Board’s rules regarding accounting for current expected credit losses that are not yet effective) and other
factors, both within and outside of our management’s control. These additions may require increased provision expense which would
negatively impact our results of operations and financial condition.
The acquisition method of accounting requires that acquired loans are initially recorded at fair value at the time of acquisition,
which includes an estimate of loan losses expected to be realized over the remaining lives of the loans, and therefore no corresponding
allowance for loan losses is recorded for these loans at acquisition because credit quality, among other elements, was considered in the
determination of fair value. To the extent that our estimates of fair value are too high, it will incur losses associated with the acquired
loans.
17
As a significant percentage of our loan portfolio is comprised of real estate loans, an adverse change in the economic
conditions of the real estate market where we operate could affect real estate values and may result in losses to our business.
As of December 31, 2018, $2.92 billion, or 78.7%, of our total loans was comprised of loans with real estate as a primary or
secondary component of collateral. The real estate collateral provides an alternate source of repayment in the event of default by the
borrower and may deteriorate in value over the term of the loan, limiting our ability to realize the full value of the collateral
anticipated at the time of the originating loan. A weakening of the real estate market in our primary market area could have an adverse
effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral
securing the loans and the value of our business. In addition, the volatility of the real estate market may result in a lower valuation at
the time collateral is put on the market for sale. Collateral may have to be sold for less than the outstanding balance of the loan, which
could result in losses on such loans. Such declines and losses in real estate values may cause the Company to experience increases in
provisions for loan losses and charge-offs, which could adversely affect our profitability.
Our commercial real estate and construction, land development and other land loan portfolios expose us to credit risks that
may be greater than the risks related to other types of loans.
As of December 31, 2018, $1.65 billion, or 44.5%, of our total loans were comprised of commercial real estate loans (including
owner-occupied commercial real estate loans) and $430.1 million, or 11.6%, of our total loans were comprised of construction, land
development and other land loans. Commercial real estate loans generally involve relatively large balances to single borrowers or
related groups of borrowers. Repayment of these loans is typically dependent upon income generated, or expected to be generated, by
the property securing the loan in amounts sufficient to cover operating expenses and debt service. The availability of such income for
repayment may be adversely affected by changes in the economy or local market conditions. These loans expose a lender to greater
credit risk than loans secured by other types of collateral because the collateral securing these loans is typically more difficult to
liquidate due to the fluctuation of real estate values. Unexpected deterioration in the credit quality of our commercial real estate loan
portfolio could require us to increase our allowance for loan losses, which would reduce our profitability and may have a material
adverse effect on our business, financial condition and results of operations.
Real estate construction, land development and other similar land loans involve risks attributable to the fact that loan funds are
secured by a project under construction, and the project is of uncertain value prior to our completion. These risks include:
• the viability of the contractor:
• the value of the project being subject to successful completion;
• the contractor’s ability to complete the project, to meet deadlines and time schedules and to stay within our estimates; and
• concentration of such loans with a single contractor and our affiliates.
Real estate construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan and also presents risks of default in
the event of declines in property values or volatility in the real estate market during the construction phase. If we are forced to
foreclose on a project prior to completion, we may be unable to recover the entire unpaid portion of the loan. In addition, we may be
required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time, any
of which could adversely affect our business, financial condition and results of operations.
A large portion of our loan portfolio is comprised of commercial and industrial loans secured by receivables, inventory,
equipment or other commercial collateral, the deterioration in value of which could increase the potential for future losses.
As of December 31, 2018, $702.0 million, or 18.9%, of our total loans were comprised of commercial and industrial loans that
are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses. These loans may involve greater
risk because the availability of funds to repay each loan depends substantially on the success of the borrower’s business itself and
these loans are typically larger in amount, which creates the potential for larger losses on a single loan basis. Commercial and
industrial loans are collateralized by general business assets including, among other things, accounts receivable, inventory and
equipment and are generally backed by a personal guaranty of the borrower or principal. This collateral may decline in value more
rapidly than the Company anticipates, exposing it to increased credit risk. In addition, a portion of our customer base, including
customers in the energy and real estate business, may be in industries which are particularly sensitive to commodity prices or market
fluctuations, such as energy and real estate prices. Accordingly, negative changes in commodity prices and real estate values and
liquidity could impair the value of the collateral securing these loans. Significant adverse changes in the economy or local market
conditions in which our commercial lending customers operate could cause rapid declines in loan collectability and the values
associated with general business assets resulting in inadequate collateral coverage that may expose the Company to credit losses and
could adversely affect our business, financial condition and results of operations.
18
Our SBA lending program is dependent upon the federal government and our status as a participant in the SBA’s Preferred
Lenders Program, and a failure to originate SBA loans in compliance with SBA guidelines could result in losses on the guaranteed
portion of our SBA loans.
We have been approved by the Small Business Administration, or SBA, to participate in the SBA’s Preferred Lenders Program.
As an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval
process necessary for lenders who are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of
participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are
identified, the SBA may request corrective actions or impose enforcement actions, including revocation of the lender’s Preferred
Lender status. If we lose our status as an SBA Preferred Lender, we may lose some or all of our customers to lenders who are SBA
Preferred Lenders, which could adversely affect our business, financial condition and results of operations.
As of December 31, 2018, SBA 7(a) and 504 program loans of $162.4 million comprised 4.4% of our loan portfolio, and we
intend to grow this segment of our portfolio in the future. SBA lending programs typically guarantee 75.0% of the principal on an
underlying loan. If the SBA establishes that a loss on an SBA-guaranteed loan is attributable to significant technical deficiencies in the
manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the
deficiency from us notwithstanding that a portion of the loan was guaranteed by the SBA, which could adversely affect our business,
financial condition and results of operations. While we follow the SBA’s underwriting guidelines, our ability to do so depends on the
knowledge and diligence of our employees and the effectiveness of controls we have established. If our employees do not follow the
SBA guidelines in originating loans and if our loan review and audit programs fail to identify and rectify such failures, the SBA may
reduce or, in some cases, refuse to honor its guarantee obligations and we may incur losses as a result.
The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future. We
cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the
business and financial results of all commercial banks and bank holding companies, including our organization, changes in the laws,
regulations and procedures applicable to SBA loans could adversely affect our ability to operate profitably. In addition, the aggregate
amount of all SBA 7(a) and 504 loan guarantees by the SBA must be approved each fiscal year by the federal government. We cannot
predict the amount of SBA 7(a) loan guarantees in any given fiscal year. If the federal government were to reduce the amount of SBA
loan guarantees, such reduction could adversely impact our SBA lending program.
A lack of liquidity could adversely affect our operations and jeopardize our business, financial condition and results of
operations.
Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and
maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our
operations. An inability to raise funds through deposits, borrowings, the sale of our investment securities, the sale of loans and other
sources could have a substantial negative effect on our liquidity. Our most important source of funds is deposits. Deposit balances can
decrease when customers perceive alternative investments as providing a better risk/return tradeoff. If customers move money out of
bank deposits and into other investments such as money market funds, we would lose a relatively low-cost source of funds, increasing
our funding costs and reducing our net interest income and net income.
Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities and
proceeds from the issuance and sale of our equity and debt securities to investors. Additional liquidity is provided by our ability to
borrow from the Federal Reserve Bank of Dallas and the Federal Home Loan Bank (the “FHLB”) and our ability to raise brokered
deposits. The Company also may borrow funds from third-party lenders, such as other financial institutions. Our access to funding
sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors
that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative
views and expectations about the prospects for the financial services industry. Our access to funding sources could also be affected by
a decrease in the level of our business activity as a result of a downturn in the economy of the Houston region or by one or more
adverse regulatory actions against us.
Based on our experience, we believe that our deposit accounts are relatively stable sources of funds. If we increase interest rates
paid to retain deposits, our earnings may be adversely affected, which could have an adverse effect on our business, financial
condition and results of operations.
Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses or
fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material
adverse impact on our liquidity, business, financial condition and results of operations.
19
We may need to raise additional capital in the future, and such capital may not be available when needed or at all.
We may need to raise additional capital, in the form of additional debt or equity, in the future to have sufficient capital resources
and liquidity to meet our commitments and fund our business needs and future growth, particularly if the quality of our assets or
earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other things,
conditions in the capital markets at that time, which are outside of our control, and our financial condition. Economic conditions and a
loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital or
make such capital only available on unfavorable terms, including interbank borrowings, repurchase agreements and borrowings from
the discount window of the Federal Reserve. We may not be able to obtain capital on acceptable terms or at all. Any occurrence that
may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of our bank or
counterparties participating in the capital markets or other disruption in capital markets, may adversely affect our capital costs and our
ability to raise capital and, in turn, our liquidity. Further, if we need to raise capital in the future, we may have to do so when many
other financial institutions are also seeking to raise capital and would then have to compete with those institutions for investors. An
inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, financial
condition and results of operations.
Fluctuations in interest rates may adversely impact our earnings and capital levels and overall results of operations.
Like most financial institutions, our earnings and cash flows depend to a great extent upon the level of our net interest income,
or the difference between the interest income we earn on loans, investments and other interest-earning assets, and the interest expense
we pay on deposits, borrowings and other interest-bearing liabilities. Therefore, any change in general market interest rates, such as a
change in the monetary policy of the Federal Reserve or otherwise, can have a significant effect on our net interest income. The
majority of our banking assets are monetary in nature and subject to risk from changes in interest rates. Changes in interest rates can
increase or decrease our net interest income, because different types of assets and liabilities may react differently, and at different
times, to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than
interest-earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning assets
mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could reduce net interest
income.
Additionally, an increase in interest rates may, among other things, adversely affect the demand for loans and our ability to
originate loans and decrease loan repayment rates. Conversely, a decrease in the general level of interest rates may affect the Company
through, among other things, increased prepayments on loan and mortgage-backed securities portfolio and increased competition for
deposits. Accordingly, changes in the general level of market interest rates may adversely affect our net yield on interest-earning
assets, loan origination volume, loan portfolio and our overall results.
Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to changes in
market interest rates, those rates are affected by many factors outside of our control, including various governmental and regulatory
monetary policies, inflation, recession, changes in unemployment, the money supply, international disorder and instability in domestic
and foreign financial markets. Adverse changes in the Federal Reserve interest rate policies or other changes in monetary policies and
economic conditions could materially and adversely affect the Company. We may not be able to accurately predict the likelihood,
nature and magnitude of those changes or how and to what extent they may affect our business. The Company also may not be able to
adequately prepare for or compensate for the consequences of such changes. Any failure to predict and prepare for changes in interest
rates or adjust for the consequences of these changes may adversely affect our earnings, capital levels and overall results.
We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic
and market conditions deteriorate.
The Company invests in available for sale securities with the primary objectives of providing a source of liquidity, providing an
appropriate return on funds invested, managing interest rate risk, meeting pledging requirements and meeting regulatory capital
requirements. As of December 31, 2018, the amortized cost of our securities portfolio was $340.9 million, which represented 7.3% of
total assets. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential
adverse changes to the fair value of these securities. For example, fixed-rate securities are generally subject to decreases in market
value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by
the issuer or individual borrowers with respect to the underlying securities and continued instability in the credit markets. Any of the
foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses. The process for
determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial
performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual
principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, the
financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or
unrealized losses in future periods, which could have an adverse effect on our business, financial condition and results of operations.
20
If the goodwill that we have recorded in connection with a business acquisition becomes impaired, it could require charges
to earnings, which would have a negative impact on our financial condition and results of operations.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in
connection with the purchase of another financial institution. The Company reviews goodwill for impairment at least annually, or
more frequently if a triggering event occurs which indicates that the carrying value of the asset might be impaired.
The Company determines impairment by comparing the implied fair value of the reporting unit goodwill with the carrying
amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the
periods in which they become known. As of December 31, 2018, our goodwill totaled $223.1 million. While we have not recorded any
impairment charges since we initially recorded the goodwill, our future evaluations of goodwill may result in findings of impairment
and related write-downs, which may have a material adverse effect on our financial condition and results of operations.
We face strong competition to attract and retain customers from other companies that offer banking services, which could
impact our business by preventing us from obtaining customers and adversely affecting our future growth and profitability.
We conduct our operations almost exclusively in the Houston region. Many of our competitors offer the same, or a wider
variety of, banking services within this market area. These competitors include banks with nationwide operations, regional banks and
other community banks. The Company also faces competition from many other types of financial institutions, including savings
banks, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based
non-bank lenders and certain other non-financial entities, such as retail stores that may maintain their own credit programs and certain
governmental organizations that may offer more favorable financing or deposit terms than the Company can. In addition, a number of
out-of-state financial intermediaries have opened production offices, or otherwise solicit deposits, in our market area. The financial
services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued
consolidation. In addition, as customer preferences and expectations continue to evolve, technology has lowered barriers to entry and
made it possible for banks to expand their geographic reach by providing services over the internet and for nonbanks to offer products
and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Increased competition in our
market may result in reduced loans and deposits, as well as reduced net interest margin, fee income and profitability. Ultimately, the
Company may not be able to compete successfully against current and future competitors. If we are unable to attract and retain
banking customers, we may be unable to continue to grow our loan and deposit portfolios, and our business, financial condition and
results of operations could be adversely affected.
Our ability to compete successfully depends on a number of factors, including, among other things:
• the ability to develop, maintain and build long-term customer relationships based on top quality service, high ethical
standards and safe, sound assets;
• the scope, relevance and pricing of products and services offered to meet customer needs and demands;
• the rate at which we introduce new products and services relative to our competitors;
• customer satisfaction with our level of service;
• the ability to expand our market position; and
• industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our
growth and profitability, which, in turn, could adversely affect our business, financial condition and results of operations.
21
Our market is susceptible to weather events and other catastrophes that could have an adverse impact on our market's
economy, our operations or our customers, any of which could have a negative effect on us.
Our business is generated primarily from the Houston region, which is susceptible to damage by hurricanes, tornadoes, floods,
droughts and other natural disasters and adverse weather. These catastrophic events can disrupt our operations, cause widespread
property damage, and severely depress the local economy in which we operate. In August 2017, our market area experienced
catastrophic flooding and unprecedented storm damage due to Hurricane Harvey. The effect of catastrophic weather events similar to
Hurricane Harvey, if they were to occur, could have a materially adverse impact on our financial condition, results of operations and
business, as well as potentially increase our exposure to credit losses and liquidity risks. If our market experiences an overall decline
as a result of a catastrophic event, demand for loans and our other products and services could be reduced. In addition, the rates of
delinquencies, foreclosures, bankruptcies and losses within our loan portfolio may increase substantially, as uninsured property losses
or sustained job interruption or loss may materially impair the ability of borrowers to repay their loans. Moreover, the value of real
estate or other collateral that secures the loans could be materially and adversely affected by a catastrophic event. A natural disaster or
other catastrophic event could, therefore, result in decreased revenue and increased loan losses that could have an adverse effect on
our business, financial condition and results of operations.
Negative public opinion regarding the Company or failure to maintain our reputation in the community that we serve could
adversely affect our business and prevent us from growing our business.
As a community bank, our reputation within the community we serve is critical to our success. We have a business strategy to
set ourselves apart from our competitors by building strong personal and professional relationships with our customers and by our
management and employees being active members of the communities we serve. As such, we strive to enhance our reputation by
recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve and
delivering superior service to our customers. If our reputation is negatively affected by the actions of our employees or otherwise, we
may be less successful in attracting new customers, and our business, financial condition, results of operations and prospects could be
materially and adversely affected. Further, negative public opinion can expose the Company to litigation and regulatory action as the
Company seeks to implement its growth strategy. While we actively work to minimize reputation risk in dealing with our customers,
this risk will always be present given the nature of our business.
If the Company fails to maintain an effective system of disclosure controls and procedures and internal controls over
financial reporting, the Company may not be able to accurately report its financial results or prevent fraud.
Ensuring that the Company has adequate disclosure controls and procedures, including internal controls over financial
reporting, in place so that the Company can produce accurate financial statements on a timely basis is costly and time-consuming and
needs to be re-evaluated frequently. Our management is responsible for establishing and maintaining adequate internal control over
financial reporting and for evaluating and reporting on our system of internal control. Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”). As a public company,
we are required to comply with the Sarbanes-Oxley Act and other rules that govern public companies. In particular, we are required to
certify our compliance with Section 404 of the Sarbanes-Oxley Act, which requires us to furnish annually a report by management on
the effectiveness of our internal control over financial reporting. In addition, unless we remain an emerging growth company and elect
additional transitional relief available to emerging growth companies, our independent registered public accounting firm will be
required to report on the effectiveness of our internal control over financial reporting.
If we identify material weaknesses in our internal control over financial reporting in the future, if we cannot comply with the
requirements of the Sarbanes-Oxley Act in a timely manner or attest that our internal control over financial reporting is effective, or if
our independent registered public accounting firm cannot express an opinion as to the effectiveness of our internal control over
financial reporting when required, we may not be able to report our financial results accurately and timely. As a result, investors,
counterparties and customers may lose confidence in the accuracy and completeness of our financial reports; our liquidity, access to
capital markets and perceptions of our creditworthiness could be adversely affected; and the market price of our common stock could
decline. In addition, we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, the
Federal Reserve, the FDIC, or other regulatory authorities, which could require additional financial and management resources. These
events could have an adverse effect on our business, financial condition and results of operations.
22
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing
system failures and errors.
We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders, clerical
recordkeeping errors and transactional errors. Our business is dependent on our employees as well as third-party service providers to
process a large number of increasingly complex transactions. We could be materially adversely affected if one of our employees or one
of our third-party service providers causes a significant operational breakdown or failure, either as a result of human error or where an
individual purposefully sabotages or fraudulently manipulates our operations or systems. Employee or third-party service provider
errors and employee or customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our
reputation. Misconduct by an employee or third-party service provider could include hiding unauthorized activities from the Company,
improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to
prevent employee or third-party service provider errors and misconduct, and the precautions the Company takes to prevent and detect
this activity may not be effective in all cases. Employee or third-party service provider errors could also subject the Company to
financial claims for negligence.
The Company maintains a system of internal controls to mitigate against operational risks, including data processing system
failures and errors and customer or employee fraud, as well as insurance coverage designed to protect the Company from material
losses associated with these risks including losses resulting from any associated business interruption. However, if our internal
controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could
have a material adverse effect on our business, financial condition and results of operations.
In addition, when we originate loans, we rely upon information supplied by loan applicants and third parties, including the
information contained in the loan application, property appraisal and title information, if applicable, and employment and income
documentation provided by third parties. If any of this information is misrepresented and such misrepresentation is not detected prior
to loan funding, the Company generally bears the risk of loss associated with the misrepresentation. Any of these occurrences could
result in a diminished ability to operate our business, potential liability to customers, reputational damage and regulatory intervention,
which could negatively impact our business, financial condition and results of operations.
We have a continuing need for technological change, and we may not have the resources to effectively implement new
technology, or we may experience operational challenges when implementing new technology.
The financial services industry is changing rapidly, and to remain competitive, we must continue to enhance and improve the
functionality and features of our products, services and technologies. In addition to better serving our customers, the effective use of
technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, at least in part, upon
our ability to respond to future technological changes and the ability to address the needs of our customers. We address the needs of
our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to
create additional efficiencies in our operations as we continue to grow and expand our products and service offerings. We may
experience operational challenges as we implement these new technology enhancements or products, which could result in our not
fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges
in a timely manner. In addition, complications during a conversion of our core technology platform or implementation or upgrade of
any software could negatively impact the experiences or satisfaction of our customers, which could cause those customers to terminate
their relationship with us or reduce the amount of business that they do with us, either of which could adversely affect our business,
financial condition or results of operations.
Many of our larger competitors have substantially greater resources to invest in technological improvements. Third parties upon
which we rely for our technology needs may not be able to develop on a cost-effective basis systems that will enable us to keep pace
with such developments. As a result, our competitors may be able to offer additional or superior products compared to those that we
will be able to provide, which would put us at a competitive disadvantage. We may lose customers seeking new technology-driven
products and services to the extent we are unable to provide such products and services. The ability to keep pace with technological
change is important, and the failure to do so could adversely affect our business, financial condition and results of operations.
Our operations could be interrupted if our third-party service providers experience difficulty or terminate their services.
Our operations depend on a number of relationships with third-party service providers who provide services related to, among
other things, core systems processing, essential web hosting and other Internet systems, our online banking services, deposit
processing and other processing services. While we have selected these third-party vendors carefully, we do not control their actions.
Any complications caused by these third parties, including those resulting from disruptions in communication services provided by a
vendor, failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to
provide services for any reason or poor performance of services, could adversely affect our ability to deliver products and services to
our customers and otherwise conduct our business. If these third-party service providers experience difficulties, or terminate their
services, and we are unable to replace them with other service providers, particularly on a timely basis, our operations could be
23
interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of
operations could be adversely affected, perhaps materially. Even if we were able to replace third-party service providers, it may be at a
higher cost, which could adversely affect our business, financial condition and results of operations.
System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as
litigation and other potential losses.
Our computer systems and network infrastructure could be vulnerable to hardware and cybersecurity issues. Our operations are
dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a
similar catastrophic event. We could also experience a breach by intentional or negligent conduct on the part of employees or other
internal sources. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial
condition and results of operations. In addition, our operations are dependent upon our ability to protect our computer systems and
network infrastructure, including our digital, mobile and internet banking activities, against damage from physical break-ins,
cybersecurity breaches and other disruptive problems caused by the internet or other users. Such computer break-ins and other
disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network
infrastructure, which may result in significant liability, damage our reputation and inhibit the use of our internet banking services by
current and potential customers. We regularly add additional security measures to our computer systems and network infrastructure to
mitigate the possibility of cybersecurity breaches, including firewalls and penetration testing. However, it is difficult or impossible to
defend against every risk being posed by changing technologies as well as acts of cyber-crime. Increasing sophistication of cyber
criminals and terrorists make keeping up with new threats difficult and could result in a system breach. Controls employed by our
information technology department and cloud vendors could prove inadequate. A breach of our security that results in unauthorized
access to our data could expose us to a disruption or challenges relating to our daily operations, as well as to data loss, litigation,
damages, fines and penalties, significant increases in compliance costs and reputational damage, any of which could have an adverse
effect on our business, financial condition and results of operations.
We are subject to laws regarding the privacy, information security and protection of personal information and any violation
of these laws or another incident involving personal, confidential or proprietary information of individuals could damage our
reputation and otherwise adversely affect our operations and financial condition.
Our business requires the collection and retention of large volumes of customer data, including personally identifiable
information in various information systems that we maintain and in those maintained by third parties with whom we contract to
provide data services. We also maintain important internal company data such as personally identifiable information about our
employees and information relating to our operations. We are subject to complex and evolving laws and regulations governing the
privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties).
Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying
levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach.
Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can
increase our costs.
Furthermore, we may not be able to ensure that all of our clients, suppliers, counterparties and other third parties have
appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such
information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be
mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted
to have the information, or where such information was intercepted or otherwise compromised by third parties), we could be exposed
to litigation or regulatory sanctions under personal information laws and regulations. Concerns regarding the effectiveness of our
measures to safeguard personal information, or even the perception that such measures are inadequate, could cause us to lose
customers or potential customers for our products and services and thereby reduce our revenues. Accordingly, any failure or perceived
failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and
investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or
penalties, and could damage our reputation and otherwise adversely affect our operations and financial condition.
Security breaches at third parties may adversely affect our business.
Our customers interact with their own and other third-party systems, which pose operational risks to us. We may be adversely
affected by data breaches at retailers and other third parties who maintain data relating to our customers that involve the theft of
customer data, including the theft of customers’ debit card, wire transfer and other identifying and/or access information used to make
purchases or payments at such retailers and to other third parties. Despite third-party security risks that are beyond our control, we
provide certain protections against fraud and attendant losses for unauthorized use of debit cards in order to stay competitive in the
marketplace. Offering such protection to customers exposes us to significant expenses and potential losses related to reimbursing our
customers for fraud losses, reissuing the compromised cards and increased monitoring for suspicious activity. In the event of a data
24
breach at one or more retailers of considerable magnitude, our business, financial condition and results of operations may be adversely
affected.
We may be subject to environmental liabilities in connection with the real properties we own and the foreclosure on real
estate assets securing our loan portfolio.
In the course of our business, we may acquire real estate in connection with our growth efforts, or we may foreclose on and
take title to real estate or otherwise be deemed to be in control of property that serves as collateral on loans we make. As a result, we
could be subject to environmental liabilities with respect to those properties. We may be held liable to a governmental entity or to third
parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with
environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a
property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or
former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting
from environmental contamination emanating from the property.
The cost of removal or abatement may substantially exceed the value of the affected properties or the loans secured by those
properties; we may not have adequate remedies against the prior owners or other responsible parties; and we may not be able to resell
the affected properties either before or after completion of any such removal or abatement procedures. Furthermore, the value of the
property as collateral will generally be substantially reduced, or we may elect not to foreclose on the property and, as a result, we may
suffer a loss upon collection of the loan. Any significant environmental liabilities could have a material adverse effect on our business,
financial condition and results of operations.
Risks Related to our Industry and Regulation
Our business, financial condition, results of operations and future prospects could be adversely affected by the highly
regulated environment for bank holding companies and the laws and regulations that govern our operations, corporate
governance, executive compensation and accounting principles or changes in any of them.
As a bank holding company, we are subject to extensive examination, supervision and comprehensive regulation by various
federal and state agencies that govern almost all aspects of our operations. These laws and regulations are not intended to protect our
shareholders. Rather, these laws and regulations are intended to protect customers, depositors, the FDIC's DIF and the overall financial
stability of the U.S. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on
the business activities in which the Company can engage, limit the dividend or distributions that the Bank can pay to the Company,
restrict the ability of institutions to guarantee our debt and impose certain specific accounting requirements on the Company that may
be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than GAAP would require.
Compliance with these laws and regulations is difficult and costly, and changes to these laws and regulations often impose additional
compliance costs. Our failure to comply with these laws and regulations, even if the failure follows good faith efforts to comply or
reflects a difference in interpretation, could subject the Company to restrictions on our business activities, fines and other penalties,
any of which could adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules
or regulations could make compliance more difficult or expensive.
State and federal banking agencies periodically conduct examinations of our business, including compliance with laws
and regulations, and our failure to comply with any supervisory actions to which it is or becomes subject as a result of such
examinations may adversely affect the Company.
Texas and federal banking agencies, including the TDB and the Federal Reserve, periodically conduct examinations of our
business, including compliance with laws and regulations. If, as a result of an examination, a Texas or federal banking agency were to
determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of
any of our operations had become unsatisfactory, or that the Company, the Bank or their respective management were in violation of
any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to
enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice,
to issue an administrative order that can be judicially enforced, to direct an increase in our and/or the Bank’s capital, to restrict our
growth, to assess civil monetary penalties against the Company, the Bank or their respective officers or directors, to remove officers
and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to
terminate the Bank’s deposit insurance. If we become subject to such regulatory actions, our business, financial condition, results of
operations, cash flows and reputation may be negatively impacted.
25
We may be unable to identify and consummate our new activities and expansion plans and successfully implement our
growth strategy, which will require regulatory approvals, and failure to obtain them may restrict our growth.
We intend to continue to grow our business through strategic acquisitions of financial institutions coupled with organic growth.
Generally, we must receive state and federal regulatory approval before we can acquire an FDIC-insured depository institution or
related business. In determining whether to approve a proposed acquisition, federal banking regulators will consider, among other
factors, the effect of the acquisition on competition, our financial condition, liquidity, our future prospects and the impact of the
proposal on U.S. financial stability. The regulators also review current and projected capital ratios and levels, the competence,
experience and integrity of management and our record of compliance with laws and regulations, the convenience and needs of the
communities to be served (including the acquiring institution’s record of compliance under the CRA) and the effectiveness of the
acquiring institution in combating money laundering activities. Such regulatory approvals may not be granted on terms that are
acceptable to the Company, or at all, or may be granted only after lengthy delay. We may also be required to sell branches as a
condition to receiving regulatory approval, which may not be acceptable to us or, if acceptable to us, may reduce the benefit of any
acquisition.
In addition to the acquisition of existing financial institutions, as opportunities arise, we plan to continue de novo branching as
a part of our organic growth strategy. De novo branching and any acquisitions carry with them numerous risks, including the inability
to obtain all required regulatory approvals. The failure to obtain these regulatory approvals for potential future strategic acquisitions
and de novo branches may impact our business plans and restrict our growth.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering
statutes and regulations.
The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001 and other laws and regulations require financial institutions, among other duties, to institute and
maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The
federal Financial Crimes Enforcement Network, established by the U.S. Department of the Treasury (“U.S. Treasury”) to administer
the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements, and has recently
engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice
(the “Department of Justice”), Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of
compliance with the sanctions programs and rules administered and enforced by OFAC.
We provide banking services to customers located outside the United States, primarily in Guatemala. These banking services
are primarily deposit accounts, including checking, money market and short term certificates of deposit. As of December 31, 2018, our
deposits from foreign nationals, primarily residents of Guatemala, accounted for less than 5% of our total deposits.
In order to comply with regulations, guidelines and examination procedures in this area, we have dedicated significant
resources to our anti-money laundering program. If our policies, procedures and systems are deemed deficient, we could be subject to
liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain
regulatory approvals to proceed with certain aspects of our business plans, including acquisitions and de novo branching. Failure to
maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational
consequences for us.
We are subject to numerous federal and state lending laws designed to protect consumers, including the Community
Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material sanctions and penalties.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose
nondiscriminatory lending requirements on financial institutions. The Consumer Financial Protection Bureau, the Department of
Justice and other federal and state agencies are responsible for enforcing these laws and regulations. A successful challenge to an
institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the
required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions
activity and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under
fair lending laws in private class action litigation.
We may be required to pay significantly higher FDIC deposit insurance assessments in the future, which could adversely
affect our earnings.
As a result of historical economic conditions and the enactment of the Dodd-Frank Act, the FDIC’s current DIF restoration plan
is designed to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020. At least semi-annually, the FDIC updates its
loss and income projections for the fund and, if needed, increases or decreases assessment rates. If any required increase is insufficient
for the DIF to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required.
26
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional
financial institution failures that affect the DIF, we may be required to pay FDIC premiums higher than current levels. Our regulatory
assessments and FDIC insurance costs were $2.3 million for both of the years ended December 31, 2018 and 2017, respectively. Any
future additional assessments, increases or required prepayments in FDIC insurance premiums may materially adversely affect our
business, financial condition and results of operations.
The Federal Reserve may require Allegiance to commit capital resources to support the Bank.
A bank holding company is required to act as a source of financial and managerial strength to its subsidiary banks and to
commit resources to support its subsidiary banks. The Federal Reserve may require a bank holding company to make capital injections
into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure
to commit resources to such a subsidiary bank. Under these requirements, in the future, Allegiance could be required to provide
financial assistance to the Bank if it experiences financial distress.
A capital injection may be required at times when our resources are limited and we may be required to borrow the funds to
make the required capital injection. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any
commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover,
bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the
holding company’s general unsecured creditors, including the holders of any note obligations. Thus, any borrowing that must be done
by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely
impact the holding company’s business, financial condition and results of operations.
We may be materially and adversely affected by the soundness, creditworthiness and liquidity of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have
exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial
services industry, including commercial banks, brokers and dealers, investment banks and other institutional customers. Many of these
transactions expose us to credit risk in the event of a default by a counterparty or customer. In addition, our credit risk may be
exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of
the credit or derivative exposure due to us. Any such losses could have a material adverse effect on our business, financial condition
and results of operations.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and
results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the
Federal Reserve. An important function of the Federal Reserve is to regulate the U.S. money supply and credit conditions. Among the
instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities,
adjustments of both the discount rate and the federal funds rate and changes in reserve requirements against bank deposits. These
instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans,
investments and deposits. Their use also affects interest rates charged on loans or paid on deposits. The monetary policies and
regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are
expected to continue to do so in the future. Although we cannot determine the effects of such policies on us at this time, such policies
could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Allegiance's Common Stock
The market price of Allegiance's common stock could be volatile and may fluctuate significantly, which could cause the
value of an investment in Allegiance's common stock to decline.
The market price of Allegiance's common stock could fluctuate substantially due to a variety of factors, many of which are
beyond our control, including, but not limited to:
• general economic conditions and overall market fluctuations;
• actual or anticipated fluctuations in our quarterly or annual financial results;
• operating and stock price performance of other companies that investors deem comparable to ours;
• the perception that investment in Texas is unattractive or less attractive during periods of low oil prices;
27
• announcements by the Company or our competitors of significant acquisitions, dispositions, innovations or new programs
and services;
• the public reaction to our press releases, other public announcements and filings with the SEC;
• changes in financial estimates and recommendations by securities analysts following Allegiance's stock, or the failure of
securities analysts to cover Allegiance's common stock;
• changes in earnings estimates by securities analysts or our ability to meet those estimates;
• the trading volume of Allegiance's common stock;
• changes in governmental monetary policies, including the policies of the Federal Reserve;
• changes in business, legal or regulatory conditions, or other developments affecting participants in our industry, and publicity
regarding our business or any of our significant customers or competitors;
• changes in accounting standards, policies, guidance, interpretations or principles; and
• future sales of Allegiance's common stock by the Company, directors, executives and significant shareholders.
The realization of any of the risks described in this “Risk Factors” section could have a material adverse effect on the market
price of Allegiance's common stock and cause the value of an investment in Allegiance's common stock to decline. In addition, the
stock market has experienced extreme volatility that has often been unrelated to the operating performance of particular companies.
These types of broad market fluctuations may adversely affect investor confidence and could affect the trading price of Allegiance's
common stock over the short, medium or long term, regardless of our actual performance. In the past, following periods of volatility in
the market price of a company’s securities, shareholders have often instituted securities class action litigation. If we were to be
involved in a class action lawsuit, we could incur substantial costs and it could divert the attention of senior management and have a
material adverse effect on our business, financial condition and results of operations.
The obligations associated with being a public company require significant resources and management attention.
As a public company, Allegiance faces increased legal, accounting, administrative and other costs and expenses that we did not
incur as a private company, particularly after we are no longer an emerging growth company. As a public company, Allegiance is
required to:
• prepare and distribute periodic reports, proxy statements and other shareholder communications in compliance with the
federal securities laws and rules;
• expand the roles and duties of Allegiance's Board of Directors and committees thereof;
• maintain an internal audit function;
• institute more comprehensive financial reporting and disclosure compliance procedures;
• involve and retain to a greater degree outside counsel and accountants in the activities listed above;
• enhance Allegiance's investor relations function;
• establish new internal policies, including those relating to trading in our securities and disclosure controls and procedures;
• retain additional personnel;
• comply with the NASDAQ Stock Market listing standards; and
• comply with the Sarbanes-Oxley Act.
Allegiance expects these rules and regulations and changes in laws, regulations and standards relating to corporate governance
and public disclosure, which have created uncertainty for public companies, to increase legal and financial compliance costs and make
some activities more time consuming and costly relative to when Allegiance was not a public company. These laws, regulations and
28
standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in
practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing
uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
Our investment in compliance with existing and evolving regulatory requirements will result in increased administrative expenses and
a diversion of management’s time and attention from revenue-generating activities to compliance activities, which could have a
material adverse effect on our business, financial condition and results of operations. These increased costs may require that we divert
a significant amount of money that we could otherwise use to expand our business and achieve our strategic objectives.
Allegiance may issue shares of preferred stock in the future, which could make it difficult for another company to acquire it
or could otherwise adversely affect the rights of the holders of Allegiance's common stock, which could depress the price of our
common stock.
Allegiance's amended and restated certificate of formation authorizes it to issue up to 1,000,000 shares of one or more series of
preferred stock. Allegiance's Board of Directors, in its sole discretion, has the authority to determine the preferences, limitations and
relative rights of shares of preferred stock and to fix the number of shares constituting any series, the designation of such series, and
the dividend rate for each series, without any further vote or action by Allegiance's shareholders. Allegiance's preferred stock may be
issued with voting, liquidation, dividend and other rights superior to the rights of Allegiance's common stock. The potential issuance
of preferred stock may delay or prevent a change in control of the Company, discouraging bids for Allegiance's common stock at a
premium over the market price, and materially adversely affect the market price and the voting and other rights of the holders of
Allegiance's common stock.
Allegiance currently has no plans to pay dividends on its common stock, so holders of Allegiance's common stock may not
receive funds without selling their common stock.
We have not paid dividends on our common stock in the past, and do not anticipate paying dividends on our common stock in
the foreseeable future. Our ability to pay dividends on our common stock is dependent on the Bank’s ability to pay dividends to it,
which is limited by applicable laws and banking regulations. Payments of future dividends, if any, will be at the discretion of
Allegiance's Board of Directors after taking into account various factors, including our business, operating results and financial
condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay
dividends. In addition, Allegiance's existing credit agreement restricts our ability to pay dividends.
Allegiance is dependent upon the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted, which
could impact Allegiance's ability to satisfy its obligations.
Allegiance's primary tangible asset is the Bank. As such, Allegiance depends upon the Bank for cash distributions (through
dividends on the Bank’s stock) that Allegiance uses to pay its operating expenses and satisfy its obligations, including debt
obligations. There are numerous laws and banking regulations that limit the Bank’s ability to pay dividends to Allegiance. If the Bank
is unable to pay dividends to Allegiance, it will not be able to satisfy its obligations. These statutes and regulations require, among
other things, that the Bank maintain certain levels of capital in order to pay a dividend. Further, federal and state banking authorities
have the ability to restrict the Bank’s payment of dividends through supervisory action.
Allegiance's corporate governance documents and certain corporate and banking provisions of Texas law applicable to it
could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition and other actions.
Allegiance's amended and restated certificate of formation and bylaws contain certain provisions that may have an anti-
takeover effect and may delay, discourage or prevent an attempted acquisition or change of control. These provisions include:
• staggered terms for directors, who may be removed from office only for cause;
• a provision establishing certain advance notice procedures for nomination of candidates for election as directors and for
shareholder proposals; and
• a provision that any special meeting of Allegiance's shareholders may be called only by a majority of the Board of Directors,
the President or a holder or group of holders of at least 50% of Allegiance shares entitled to vote at the meeting.
Allegiance's amended and restated certificate of formation does not provide for cumulative voting for directors and authorizes
the Board of Directors to issue shares of preferred stock without shareholder approval and upon such terms as the Board of Directors
may determine. The issuance of Allegiance's preferred stock, while providing desirable flexibility in connection with possible
acquisitions, financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or
of discouraging a third-party from acquiring, a controlling interest. In addition, certain provisions of Texas law, including a provision
29
that restricts certain business combinations between a Texas corporation and certain affiliated shareholders, may delay, discourage or
prevent an attempted acquisition or change in control.
In addition, banking laws impose notice, approval and ongoing regulatory requirements on any shareholder or other party that
seeks to acquire direct or indirect “control” of an FDIC-insured depository institution. These laws include the BHC Act and the
Change in Bank Control Act. These laws could delay or prevent an acquisition.
Furthermore, Allegiance's amended and restated certificate of formation provides that the state and federal courts located in
Harris County, Texas, the county in which the City of Houston lies, will be the exclusive forum for: (a) any derivative action or
proceeding brought on Allegiance's behalf; (b) any action asserting a breach of fiduciary duty; (c) any action asserting a claim against
Allegiance arising pursuant to the Texas Business Organizations Code, Allegiance's certificate of formation, or Allegiance's bylaws; or
(d) any action asserting a claim against Allegiance that is governed by the internal affairs doctrine. Shareholders of Allegiance are
deemed to have notice of and have consented to the provisions of Allegiance's amended and restated certificate of formation related to
choice of forum. The choice of forum provision in Allegiance's amended and restated certificate of formation may limit our
shareholders’ ability to obtain a favorable judicial forum for disputes with Allegiance. Alternatively, if a court were to find the choice
of forum provision contained in Allegiance's amended and restated certificate of formation to be inapplicable or unenforceable in an
action, Allegiance may incur additional costs associated with resolving such action in other jurisdictions, which could harm
Allegiance's business, operating results and financial condition.
Shareholders may be deemed to be acting in concert or otherwise in control of Allegiance, which could impose notice,
approval and ongoing regulatory requirements and result in adverse regulatory consequences for such holders.
Allegiance is a bank holding company regulated by the Federal Reserve. Banking laws impose notice, approval and ongoing
regulatory requirements on any shareholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured
depository institution or a company that controls an FDIC-insured depository institution, such as a bank holding company. These laws
include the BHC Act and the Change in Bank Control Act. The determination whether an investor “controls” a depository institution
or holding company is based on all of the facts and circumstances surrounding the investment.
As a general matter, a party is deemed to control a depository institution or other company if the party (1) owns or controls 25%
or more of any class of voting stock of the bank or other company, (2) controls the election of a majority of the directors of the bank or
other company or (3) has the power to exercise a controlling influence over the management or policies of the bank or other company.
In addition, subject to rebuttal, a party may be presumed to control a depository institution or other company if the investor owns or
controls 10% or more of any class of voting stock. Ownership by affiliated parties, or parties acting in concert, is typically aggregated
for these purposes. “Acting in concert” generally means knowing participation in a joint activity or parallel action towards the
common goal of acquiring control of a bank or a parent company, whether or not pursuant to an express agreement. The manner in
which this definition is applied in individual circumstances can vary and cannot always be predicted with certainty. Any shareholder
that is deemed to “control” Allegiance for regulatory purposes would become subject to notice, approval and ongoing regulatory
requirements and may be subject to adverse regulatory consequences. Potential investors are advised to consult with their legal
counsel regarding the applicable regulations and requirements.
An investment in Allegiance's common stock is not an insured deposit and is not guaranteed by the FDIC, so investors could
lose some or all of their investment.
An investment in Allegiance's common stock is not a bank deposit and, therefore, is not insured against loss or guaranteed by
the FDIC, any other deposit insurance fund or by any other public or private entity. An investment in Allegiance's common stock is
inherently risky for the reasons described herein. As a result, investors could lose some or all of their investment.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive office is located at 8847 W. Sam Houston Parkway N., Suite 200, Houston, Texas 77040. As of
December 31, 2018, we had 28 full-service banking locations, with 27 bank offices and one loan production office located in the
Houston metropolitan area and one bank office location in Beaumont, just outside of the Houston metropolitan area. We lease sixteen
of these offices, including our executive and loan production offices, and own the remaining fourteen. We believe that our current
facilities are in good condition and adequate to meet our operating needs for the present and immediately foreseeable future.
30
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to claims and litigation arising in the ordinary course of business. In the opinion of
management, we are not party to any legal proceedings the resolution of which we believe would have a material adverse effect on our
business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels. However, one or more unfavorable
outcomes in any claim or litigation against us could have a material adverse effect for the period in which such claim or litigation is
resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and
may materially adversely affect our reputation, even if resolved in our favor. We intend to defend ourselves vigorously against any
future claims or litigation.
ITEM 4. MINE SAFETY DISCLOSURES
None.
31
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Common Stock Market Prices
Allegiance's common stock is listed on the NASDAQ Global Market under the symbol “ABTX.” Quotations of the sales volume
and the closing sales prices of the common stock of Allegiance are listed daily in the NASDAQ Global Market’s listings. As of
March 6, 2019, there were 21,671,955 shares outstanding and 1,109 shareholders of record of Allegiance's common stock. The closing
price per share of common stock on December 31, 2018, the last trading day of the year, was $32.37.
Dividends
Historically, Allegiance has not declared or paid any dividends on its common stock. Payments of future dividends, if any, will
be at the discretion of Allegiance's Board of Directors after taking into account various factors, including its business, operating results
and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on Allegiance's
ability to pay dividends.
As a bank holding company, Allegiance's ability to pay dividends is affected by the regulations promulgated by and the policies
and enforcement powers of the Federal Reserve. In addition, because Allegiance is a holding company, it is dependent upon the
payment of dividends by the Bank to Allegiance as its principal source of funds to pay dividends in the future, if any, and to make
other payments. The Bank is also subject to various legal, regulatory and other restrictions on its ability to pay dividends and make
other distributions and payments to Allegiance. See Item 1. “Business—Regulation and Supervision—Regulatory Limits on Dividends
and Distributions.”
In connection with the F&M Bancshares acquisition, Allegiance assumed junior subordinated debentures that allow it to defer
interest payments thereunder for a period of time. To the extent Allegiance elects to defer any interest payments under the junior
subordinated debentures, Allegiance will be prohibited by the terms of the junior subordinated debentures from making dividend
payments on its common stock until it retires the arrearages on the junior subordinated debentures. In addition, Allegiance's existing
credit agreement restricts its ability to pay dividends.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2018, regarding the equity compensation plans under which
Allegiance’s equity securities are authorized for issuance:
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
(c)
503,286 $
21.41
539,916
299,352 $
802,638
12.83
—
539,916
Plan Category
Equity compensation plans approved
by security holders
Equity compensation plans not
approved by security holders(1)
Total
(1) These options were issued under the Post Oak Bancshares, Inc. Stock Option Plan, which was assumed by the Company in
connection with the acquisition of Post Oak Bancshares, Inc.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On September 28, 2018, our board of directors authorized a stock repurchase program, under which we can repurchase up to one
million shares of our outstanding common stock at the discretion of management through October 31, 2019. Repurchases under this
program may be made from time to time through open market purchases, privately negotiated transactions or such other manner as
32
will comply with applicable laws and regulations. Under this program, we repurchased 69,389 shares at a total cost of $2.1 million
during the fourth quarter of 2018.
The following table provides information with respect to purchases made by or on behalf of us or any “affiliated purchaser” (as
defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934) of our common stock during the fourth quarter of 2018.
Total Number of
Shares Purchased
Average Price
Paid Per Share
Maximum Number
(or Approximate
Dollar Value) of
Shares That May
Yet Be Purchased
Under the Plans
at the End of
the Period
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans(1)
— $
— $
—
—
—
—
—
—
85,389 (2) $
30.61
69,389
930,611
Period
October 1, 2018 to
October 31, 2018
November 1, 2018 to
November 30, 2018
December 1, 2018 to
December 31, 2018
(1) Pursuant to a repurchase program announced on October 1, 2018, pursuant to which the Company may repurchase up to one
million shares through October 31, 2019.
(2)
Includes 15,000 shares purchased by Steven F. Retzloff and 1,000 shares purchased by Paul P. Egge, each of whom may be
considered an “affiliated purchaser” under Rule 10b-18(a)(3).
33
Performance Graph
The performance graph compares the cumulative total shareholder return on Allegiance's common stock for the period
beginning at the close of trading on October 8, 2015 (the end of the first day of trading of Allegiance's common stock on the
NASDAQ Global Market) to December 31, 2018, with the cumulative total return of the S&P 500 Total Return Index and the
NASDAQ Bank Index for the same period. Dividend reinvestment has been assumed. The Performance Graph assumes $100 invested
on October 8, 2015 in Allegiance's common stock, the S&P 500 Total Return Index and the NASDAQ Bank Index. The historical
stock price performance for Allegiance's common stock shown on the graph below is not necessarily indicative of future stock
performance.
*
$100 invested on 10/8/15 in Allegiance's common stock or 9/30/15 in index, including reinvestment of dividends. Fiscal year
ending December 31.
Allegiance Bancshares, Inc.
S&P 500
NASDAQ Bank
October 8,
2015
100.00
100.00
100.00
June 30,
2016
December 31,
2015
102.29 107.61
107.04 111.15
103.55 100.25
June 30,
2017
December 31,
2016
156.36 165.66
119.84 131.04
142.33 139.92
June 30,
2018
December 31,
2017
162.85 187.50
146.01 149.88
150.12 156.12
December 31,
2018
140.01
139.61
125.21
(Copyright © 2019 Standard & Poor's, a division of S&P Global. All rights reserved.)
34
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected historical consolidated financial data for the periods and as of the dates indicated. You
should read this information together with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form
10-K. The selected historical consolidated financial data as of and for the years ended December 31, 2018, 2017 and 2016 are derived
from our audited consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. The selected
historical consolidated financial data as of and for the years ended December 31, 2015 and 2014 (except as otherwise noted below) are
derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. Our historical results for
any prior period are not necessarily indicative of future performance.
2018(1)
As of and for the Years Ended December 31,
2015(3)
2016(2)
(Dollars in thousands, except share and per share data)
2017
2014
Selected Period End Balance Sheet Data:
Cash and cash equivalents
Available for sale securities
Loans held for sale
Loans held for investment
Allowance for loan losses
Goodwill and intangible assets, net
Total assets
Noninterest-bearing deposits
Interest-bearing deposits
Total deposits
Total shareholders’ equity
Total tangible shareholders' equity(4)
Selected Income Statement Data:
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Net income before income taxes
Net income
Net income attributable to common shareholders(5)
Selected Per Share Data:
Earnings per common share, basic
Earnings per common share, diluted
Book value per common share
Tangible book value per common share(4)
Weighted average common shares outstanding, basic
Weighted average common shares outstanding, diluted
Shares outstanding at end of period
$
26,331
249,712
142,098 $
316,455
—
182,103 $
309,615
—
268,947 $
337,293
—
148,431 $ 167,540
84,962
165,097
—
27,887
3,708,306 2,270,876 1,891,635 1,653,165 1,002,054
8,246
12,891
4,655,249 2,860,231 2,450,948 2,084,579 1,280,008
1,209,300
620,320 373,795
2,453,236 1,530,864 1,276,432 1,138,813 759,889
3,662,536 2,213,974 1,870,183 1,759,133 1,133,684
258,490 131,778
213,871 118,887
306,865
264,202
702,984
453,272
279,817
236,373
17,911
43,444
23,649
42,663
13,098
44,619
683,110
593,751
$
128,579 $
4,248
124,331
7,713
86,787
45,257
37,309
37,309
103,668 $
13,188
90,480
5,861
69,962
26,379
17,632
17,632
89,864 $
5,469
84,395
7,268
59,258
32,405
22,851
22,851
80,166 $
5,792
74,374
3,992
54,805
23,561
15,786
15,227
46,834
2,150
44,684
2,607
33,458
13,833
9,005
9,005
$
1.34 $
1.31
23.20
19.97
2.41 $
2.37
32.04
20.66
1.29
1.26
17.62
15.90
15,484,757 13,124,900 12,873,326 10,470,465 6,978,025
15,773,039 13,457,718 13,073,932 10,654,003 7,142,377
21,937,740 13,226,826 12,958,341 12,812,985 7,477,309
1.78 $
1.75
21.59
18.24
1.45 $
1.43
20.17
16.69
35
Selected Performance Metrics:
Return on average assets(6)
Return on average common equity(6)
Return on average tangible common equity(4)(6)
Tax equivalent net interest margin(7)
Efficiency ratio(8)
Loans to deposits ratio
Noninterest expense to average assets
Selected Credit Quality Ratios:
Nonperforming assets to total assets(9)
Nonperforming loans to total loans(10)
Allowance for loan losses to nonperforming loans(10)
Allowance for loan losses to total loans
Provision for loan losses to average loans
Net charge-offs to average loans
Capital Ratios:
Common equity Tier 1 capital ratio
Tier 1 risk-based capital
Total risk-based capital
Leverage capital ratio
Total equity to total assets
Tangible common equity to tangible assets(4)
2018(1)
As of and for the Years Ended December 31,
2015(3)
2016(2)
(Dollars in thousands, except share and per share data)
2017
2014
1.11 %
9.02 %
11.20 %
4.27 %
63.68 %
101.25 %
2.58 %
0.72 %
0.89 %
79.90 %
0.71 %
0.16 %
0.06 %
11.76 %
12.01 %
13.70 %
10.61 %
15.10 %
10.29 %
0.65 %
5.92 %
6.93 %
4.34 %
63.89 %
102.57 %
2.59 %
0.49 %
0.59 %
177.44 %
1.04 %
0.63 %
0.36 %
10.54 %
10.92 %
13.43 %
9.84 %
10.73 %
9.38 %
0.98 %
8.36 %
9.96 %
4.37 %
62.34 %
101.15 %
2.53 %
0.75 %
0.88 %
107.26 %
0.95 %
0.31 %
0.04 %
11.30 %
11.73 %
12.57 %
10.35 %
11.42 %
9.82 %
0.81 %
7.43 %
9.52 %
4.68 %
65.27 %
95.56 %
2.83 %
0.25 %
0.31 %
252.66 %
0.78 %
0.38 %
0.06 %
11.72 %
12.21 %
12.92 %
11.02 %
12.40 %
10.48 %
0.75 %
7.73 %
8.70 %
4.31 %
67.79 %
88.39 %
2.80 %
0.25 %
0.32 %
258.98 %
0.82 %
0.23 %
0.06 %
N/A
11.96 %
12.80 %
9.55 %
10.30 %
9.38 %
(1) We completed the acquisition of Post Oak Bancshares, Inc. on October 1, 2018.
(2) We completed the sale of two Central Texas branches acquired from F&M Bancshares during the first quarter of 2016.
(3) We completed the acquisition of F&M Bancshares on January 1, 2015.
(4) This is a non-GAAP financial measure. See our reconciliation of non-GAAP financial measures presented in the foregoing
selected financial information to their most directly comparable GAAP financial measures under the caption Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—GAAP Reconciliation and
Management’s Explanation of Non-GAAP Financial Measures.”
(5) On January 1, 2015, we issued shares of Series A and Series B preferred stock, in connection with the acquisition of F&M
Bancshares, which had preferred stock outstanding pursuant to the U.S. Treasury’s Troubled Asset Relief Program. We paid
$559 thousand in preferred dividends during 2015. On July 15, 2015, we redeemed all of the outstanding shares of Series A and
Series B preferred stock with cash on hand for an aggregate redemption price of $11.7 million (which is the sum of the
liquidation amount plus accrued and unpaid dividends up to, but excluding, the redemption date).
(6) Except as otherwise indicated in this footnote, we calculate our average assets and average common equity for a period by
dividing the sum of total assets or total common shareholders’ equity, as the case may be, as of the close of business on each day
in the relevant period, by the number of days in the period. We calculate return on average assets by dividing net income for that
period by average assets. We calculate return on average common equity for a period by dividing net income attributable to
common shareholders for that period by average common equity and average tangible common equity, as the case may be, for
that period.
(7) Net interest margin represents net interest income divided by average interest-earning assets.
(8) Efficiency ratio represents total noninterest expense divided by the sum of net interest income plus noninterest income,
excluding net gains and losses on the sale of loans, securities and assets (including the sale of the two acquired Central Texas
branches). Additionally, taxes and provision for loan losses are not part of this calculation.
(9) Nonperforming assets include nonaccrual loans, loans past due 90 days or more and still accruing interest, repossessed assets
and other real estate.
(10) Nonperforming loans include nonaccrual loans and loans past due 90 days or more and still accruing interest.
36
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations should be read in
conjunction with Item 6. “Selected Financial Data” and the Company’s consolidated financial statements and the accompanying
notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that
are subject to certain risks and uncertainties and are based on certain assumptions that the Company believes are reasonable but may
prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “ – Cautionary Notice Regarding
Forward-Looking Statements,” in this Item 7, under Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K, may
cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this
discussion and analysis. The Company assumes no obligation to update any of these forward-looking statements.
Cautionary Notice Regarding Forward-Looking Statements
Statements and financial discussion and analysis contained in this Annual Report on Form 10-K that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We
also may make forward-looking statements in our other documents filed or furnished with the SEC. In addition, our senior
management may make forward-looking statements orally to investors, analysts, representatives of the media and others. Statements
preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,”
“plans” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally
forward-looking in nature and not historical facts, although not all forward looking statements include the foregoing. Forward-looking
statements are based on assumptions and involve a number of risks and uncertainties, many of which are beyond our control. Many
possible events or factors could affect our future financial results and performance and could cause such results or performance to
differ materially from those expressed in our forward-looking statements.
While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which
could cause our actual results to differ from those in our forward-looking statements:
risks related to the concentration of our business in the Houston region, including risks associated with volatility or
decreases in oil and gas prices or prolonged periods of lower oil and gas prices;
general market conditions and economic trends nationally, regionally and particularly in the Houston region;
our ability to retain executive officers and key employees and their customer and community relationships;
our ability to recruit and retain successful bankers that meet our expectations in terms of customer and community
relationships and profitability;
risks related to our strategic focus on lending to small to medium-sized businesses;
our ability to implement our growth strategy, including through the identification of acquisition candidates that will be
accretive to our financial condition and results of operations, as well as permitting decision-making authority at the branch
level;
risks related to any businesses we acquire in the future, including exposure to potential asset and credit quality risks and
unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms,
procedures and personnel, the need for additional capital to finance such transactions and possible failures in realizing the
anticipated benefits from such acquisitions;
risks associated with our owner-occupied commercial real estate loan and other commercial real estate loan portfolios,
including the risks inherent in the valuation of the collateral securing such loans;
risks associated with our commercial and industrial loan portfolio, including the risk for deterioration in value of the
general business assets that generally secure such loans;
the accuracy and sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses
and other estimates;
risk of deteriorating asset quality and higher loan charge-offs, as well as the time and effort necessary to resolve
nonperforming assets;
potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate
loans;
risks related to loans originated and serviced under the Small Business Administration’s guidelines;
changes in market interest rates that affect the pricing of our loans and deposits and our net interest income;
37
potential fluctuations in the market value and liquidity of the securities we hold for sale;
risk of impairment of investment securities, goodwill, other intangible assets or deferred tax assets;
the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and
insurance services, which may adversely affect our pricing and terms;
risks associated with negative public perception of the Company;
our ability to maintain an effective system of disclosure controls and procedures and internal controls over financial
reporting;
risks associated with fraudulent and negligent acts by our customers, employees or vendors;
our ability to keep pace with technological change or difficulties when implementing new technologies;
risks associated with system failures or failures to protect against cybersecurity threats, such as breaches of our network
security;
our ability to comply with privacy laws and properly safeguard personal, confidential or proprietary information;
risks associated with data processing system failures and errors;
potential risk of environmental liability related to owning or foreclosing on real property;
the institution and outcome of litigation and other legal proceeding against us or to which we become subject;
our ability to maintain adequate liquidity and to raise necessary capital to fund our acquisition strategy and operations or
to meet increased minimum regulatory capital levels;
our ability to comply with various governmental and regulatory requirements applicable to financial institutions;
the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws
and regulations and their application by our regulators, such as the further implementation of the Dodd-Frank Act;
governmental monetary and fiscal policies, including the policies of the Federal Reserve;
our ability to comply with supervisory actions by federal and state banking agencies;
changes in the scope and cost of FDIC insurance and other coverage;
systemic risks associated with the soundness of other financial institutions;
the effects of war or other conflicts, acts of terrorism (including cyberattacks) or other catastrophic events, including
storms, droughts, tornadoes and flooding, that may affect general economic conditions; and
other risks and uncertainties listed from time to time in our reports and documents filed with the SEC.
Further, these forward-looking statements speak only as of the date on which they were made and we undertake no obligation to
update or revise any forward-looking statements to reflect events or circumstances after the date on which these statements are made
or to reflect the occurrence of unanticipated events, unless required to do so under the federal securities laws. Other factors not
identified above, including those described under the heading Item 1A. “Risk Factors” and elsewhere in this Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” may also cause actual results to differ materially from
those described in our forward looking statements. Most of these factors are difficult to anticipate and are generally beyond our
control. You should consider these factors in connection with considering any forward-looking statements that may be made by us.
Overview
We generate most of our income from interest income on loans, service charges on customer accounts and interest income from
investments in securities. We incur interest expense on deposits and other borrowed funds and noninterest expenses such as salaries
and employee benefits and occupancy expenses. Net interest income is the difference between interest income on earning assets such
as loans and securities and interest expense on liabilities such as deposits and borrowings that are used to fund those assets. Net
interest income is our largest source of revenue. To evaluate net interest income, we measure and monitor (1) yields on our loans and
other interest-earning assets, (2) the interest expenses of our deposits and other funding sources, (3) our net interest spread and (4) our
net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-
bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because
noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets,
net interest margin includes the benefit of these noninterest-bearing sources.
38
Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities,
referred to as a “volume change.” Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other
factors, economic and competitive conditions in Texas and specifically in the Houston region, as well as developments affecting the
real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target market and
throughout the state of Texas.
Our net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing
deposits and borrowed funds, referred to as a “rate change.” Fluctuations in market interest rates are driven by many factors, including
governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply,
political and international conditions and conditions in domestic and foreign financial markets.
On October 1, 2018, we completed the acquisition of Post Oak Bancshares, Inc. and its wholly-owned subsidiary bank, Post Oak
Bank, N.A. (collectively, “Post Oak”). Because the acquisition closed on October 1, 2018, our results of operations included Post Oak
for only a portion of 2018. Our historical financial condition and results of operations as of and for periods ended before December
31, 2018 contained in this Annual Report on Form 10-K do not reflect the financial condition and results of operations of Post Oak. In
connection with the acquisition of Post Oak, we issued 8.4 million shares of Company common stock.
In addition to the impact of the acquisition of Post Oak, the comparability of our consolidated results of operations for the year
ended December 31, 2014 may be affected by our acquisition of F&M Bancshares on January 1, 2015. The results of the acquired
operations of F&M Bancshares were included in our results of operations for 2015, as compared to the full year 2014.
We completed an initial public offering of 2,990,000 shares of Allegiance's common stock at $21.00 per share on October 7,
2015, generating net proceeds of $57.1 million. Allegiance's common stock began trading on the NASDAQ Global Market on October
8, 2015 under the ticker symbol “ABTX.”
Critical Accounting Policies
Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to
make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are
susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these
judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the
financial condition of borrowers. Management believes that determining the allowance for loan losses is its most critical accounting
estimate. Our accounting policies are discussed in detail in Note 1 – Nature of Operations and Summary of Significant Accounting and
Reporting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this Annual Report on
Form 10-K.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance that is established through charges to earnings in the form of a provision
for loan losses. The amount of the allowance for loan losses is affected by the following: (1) charge-offs of loans that decrease the
allowance, (2) subsequent recoveries on loans previously charged off that increase the allowance and (3) provisions for loan losses
charged to income that increase the allowance. Management considers the policies related to the allowance for loan losses as the most
critical to the financial statement presentation. The total allowance for loan losses includes activity related to allowances calculated in
accordance with Accounting Standards Codification (“ASC”) 310, Receivables, and ASC 450, Contingencies.
Throughout the year, management estimates the probable incurred losses in the loan portfolio to determine if the allowance for
loan losses is adequate to absorb such losses. The allowance for loan losses consists of specific and general components. The specific
component relates to loans that are individually classified as impaired. We follow a loan review program to evaluate the credit risk in
the loan portfolio. Loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a
specific reserve is required. The general component covers non-impaired loans and is based on industry and our specific historical
loan loss experience, volume, growth and composition of the loan portfolio, the evaluation of our loan portfolio through our internal
loan review process, general current economic conditions both internal and external to us that may affect the borrower’s ability to pay,
value of collateral and other qualitative relevant risk factors. Based on a review of these estimates, we adjust the allowance for loan
losses to a level determined by management to be adequate. Estimates of loan losses are inherently subjective as they involve an
exercise of judgment.
Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of loan losses expected
to be realized over the remaining lives of the loans. Therefore, no corresponding allowance for loan losses is recorded for these loans
at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-
impaired at acquisition are similar to originated loans. However, the estimate of loss is based on the unpaid principal balance and then
39
compared to any remaining unaccreted purchase discount. To the extent that the calculated loss is greater than the remaining
unaccreted purchase discount, an allowance is recorded for such difference.
Emerging Growth Company
Pursuant to the JOBS Act, an emerging growth company can elect to opt in to any new or revised accounting standards that may
be issued by the FASB or the SEC otherwise applicable to non-emerging growth companies. We have elected to opt in to such
standards, which election is irrevocable.
We will likely continue to take advantage of some of the reduced regulatory and reporting requirements that are available to us
so long as we qualify as an emerging growth company, including, but not limited to, not being required to comply with the auditor
attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden
parachute payments.
Recently Issued Accounting Pronouncements
We have evaluated new accounting pronouncements that have recently been issued and have determined that there are no new
accounting pronouncements that should be described in this section that will have a material impact the Company’s operations,
financial condition or liquidity in future periods. Refer to Note 1 of the Company’s audited consolidated financial statements for a
discussion of recent accounting pronouncements that have been adopted by the Company or that will require enhanced disclosures in
the Company’s financial statements in future periods.
Results of Operations
Net income was $37.3 million, or $2.37 per diluted common share, for the year ended December 31, 2018 compared with $17.6
million, or $1.31 per diluted common share, for the year ended December 31, 2017, an increase of $19.7 million, or 111.6%. The
increase in net income was primarily the result of a $24.9 million increase in net interest income and an $8.9 million decrease in the
provision for loan losses partially offset by a $16.8 million increase in noninterest expense. Net income was $17.6 million, or $1.31
per diluted common share, for the year ended December 31, 2017 compared with $22.9 million, or $1.75 per diluted common share,
for the year ended December 31, 2016. Returns on average common equity were 9.02%, 5.92% and 8.36%, returns on average assets
were 1.11%, 0.65% and 0.98% and efficiency ratios were 63.68%, 63.89% and 62.34% for the years ended December 31, 2018, 2017
and 2016, respectively. The efficiency ratio is calculated by dividing total noninterest expense by the sum of net interest income plus
noninterest income, excluding net gains and losses on the sale of loans, securities and assets (including the sale of the two acquired
Central Texas branches in 2016). Additionally, taxes and provision for loan losses are not part of the efficiency ratio calculation.
Net Interest Income
Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest
expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is our largest source
of revenue, representing 94.3% of total revenue during 2018. Tax equivalent net interest margin is the ratio of taxable-equivalent net
interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and
interest-bearing liabilities impact net interest income and net interest margin.
The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many
financial institutions. Our loan portfolio is affected by changes in the prime interest rate. The prime interest rate, which is the rate
offered on loans to borrowers with strong credit, remained at 3.50% during most of 2016. In December 2016, the prime rate increased
25 basis points to 3.75%. During 2017, the prime rate increased 75 basis points (25 basis points in each of March, June and
December) to end the year at 4.50%. During 2018, the prime rate increased 100 basis points (25 basis points in each of March, June,
September and December) to end the year at to 5.50%. Our loan portfolio is also impacted by changes in the London Interbank
Offered Rate (LIBOR). At December 31, 2018, the one-month and three-month U.S. dollar LIBOR rates were 2.50% and 2.81%,
respectively, while at December 31, 2017, the one-month and three-month U.S. dollar LIBOR rates were 1.57% and 1.69%,
respectively, and at December 31, 2016, the one-month and three-month U.S. dollar LIBOR rates were 0.77% and 1.00%,
respectively.
The effective federal funds rate, which is the cost of immediately available overnight funds, remained at 0.50% during most of
2016. In December 2016, the effective federal funds rate increased 25 basis points to end the year at 0.75%. During 2017, the effective
federal funds rate increased 75 basis points (25 basis points in each of March, June and December) to end the year at 1.50%. During
2018, the effective federal funds rate increased 100 basis points (25 basis points in each of March, June, September and December) to
end the period at 2.50%.
40
Year ended December 31, 2018 compared with the year ended December 31, 2017. Net interest income before the provision for
loan losses for the year ended December 31, 2018 was $128.6 million compared with $103.7 million for the year ended December 31,
2017, an increase of $24.9 million, or 24.0%. The increase in net interest income from the previous year was due to increased average
interest-earning asset balances primarily from the acquisition of Post Oak, as well as organic growth for the year. Average interest-
earning assets increased $582.6 million, or 23.7%, for the year ended December 31, 2018 compared with the year ended December 31,
2017.
Interest income was $158.2 million for the year ended December 31, 2018, an increase of $38.8 million, or 32.5%, compared
with the year ended December 31, 2017 primarily due to an increase of $37.9 million of interest income and fees on loans. This
increase in interest income and fees on loans during the year ended December 31, 2018 was primarily due to the Post Oak acquisition
and organic growth. Average loans outstanding increased $571.0 million, or 27.4%, for the same period. Additionally, interest income
during the years ended December 31, 2018 and 2017, included acquisition accounting loan discount accretion of $2.7 million and
$632 thousand, respectively.
Interest expense was $29.6 million for the year ended December 31, 2018, an increase of $13.9 million, or 88.0%, compared
with the year ended December 31, 2017. This increase was primarily due to an increase in average interest-bearing deposits, the
subordinated debt issued in December 2017 and rising expenses associated with higher funding costs on interest-bearing liabilities.
Average interest-bearing liabilities increased $370.1 million, or 21.5%, for the year ended December 31, 2018 compared with the year
ended December 31, 2017 primarily due to the increase in average interest-bearing deposits. Average interest-bearing deposits
increased $361.3 million primarily due to deposits assumed in the Post Oak acquisition and organic growth. Additionally, average
subordinated debt increased $37.6 million during the year ended December 31, 2018 due to the issuance in December 2017. The
increase in interest-bearing deposits for the year ended December 31, 2018 compared to the year ended December 31, 2017 was
primarily due to the increase in average certificates and other time deposits of $192.3 million, or 25.7%. The cost of average interest-
bearing liabilities increased to 142 basis points for the year ended December 31, 2018 compared to 92 basis points for the same period
in 2017.
Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-
earning assets, for the year ended December 31, 2018 was 4.27%, a decrease of 7 basis points compared to 4.34% for the year ended
December 31, 2017. The decrease in the net interest margin on a tax equivalent basis was primarily due to an increase in funding costs
on certificates of deposit and other borrowed funds partially offset by an increase in the impact of net acquisition accounting
adjustments. The average yield on interest-earning assets and the average rate paid on interest-bearing liabilities increased during
2018. The average yield on interest-earning assets and the average rate paid on interest-bearing liabilities are primarily impacted by
changes in market interest rates as well as changes in the volume and relative mix of the underlying assets and liabilities. The impact
of net acquisition accounting adjustments of $3.1 million and $527 thousand on the tax equivalent net interest margin was an increase
of 10 basis points and 2 basis points for the years ended December 31, 2018 and 2017, respectively. Tax equivalent adjustments to net
interest margin are the result of increasing income from tax-free securities by an amount equal to the taxes that would have been paid
if the income were fully taxable based on a 21% federal tax rate for the year ended December 31, 2018 and 35% rate for the same
period in 2017, thus making tax-exempt yields comparable to taxable asset yields. Beginning January 1, 2018, tax equivalent yields
and the net interest margin were based upon a tax rate of 21% as a result of the Tax Cuts and Jobs Act enacted on December 22, 2017.
Year ended December 31, 2017 compared with the year ended December 31, 2016. Net interest income before the provision for
loan losses for the year ended December 31, 2017 was $103.7 million compared with $89.9 million for the year ended December 31,
2016, an increase of $13.8 million, or 15.4%. The increase in net interest income was primarily due to the increase in average interest-
earning assets of $343.6 million, or 16.3%, for the year ended December 31, 2017 compared with the year ended December 31, 2016.
The increase in our average interest-earning assets during the year ended December 31, 2017 as compared to the year ended 2016 was
primarily due to organic loan growth.
Interest income was $119.4 million for the year ended December 31, 2017, an increase of $18.7 million, or 18.5%, compared
with the year ended December 31, 2016 primarily due to an increase of $17.0 million of interest income and fees on loans during the
year ended December 31, 2017 compared to the same period in 2016 as a result of the increase in average loans outstanding of $326.1
million for the same period. The increase in interest income during the years ended December 31, 2017 and 2016, included acquisition
accounting loan discount accretion of $632 thousand and $1.4 million, respectively.
41
Interest expense was $15.8 million for the year ended December 31, 2017, an increase of $4.9 million, or 44.5%, compared with
the year ended December 31, 2016. This increase was primarily due to an increase in average interest-bearing liabilities and an
increase in the funding costs on interest-bearing liabilities. Average interest-bearing liabilities increased $285.7 million, or 19.9%, for
the year ended December 31, 2017 compared with the year ended December 31, 2016. The increase in average interest-bearing
liabilities was primarily due to the increase in average interest-bearing deposits of $223.3 million and the increase in average
borrowed funds of $60.3 million during the year ended December 31, 2017. The significant increase in interest-bearing deposits for
the year ended December 31, 2017 compared to the year ended December 31, 2016 was impacted by the increase in average
certificates and other time deposits of $100.0 million, or 15.4%.
Tax equivalent net interest margin for the year ended December 31, 2017 was 4.34%, a decrease of 3 basis points compared to
4.37% for the year ended December 31, 2016. The decrease in the net interest margin on a tax equivalent basis was primarily due to an
increase in funding costs on certificates of deposit and other borrowed funds and a decrease in the impact of net acquisition accounting
adjustments. The average yield on interest earning assets and the average rate paid on interest-bearing liabilities increased during
2017. The average yield on interest-earning assets and the average rate paid on interest-bearing liabilities are primarily impacted by
changes in market interest rates as well as changes in the volume and relative mix of the underlying assets and liabilities. The impact
of net acquisition accounting adjustments of $527 thousand and $1.5 million on the tax equivalent net interest margin was an increase
of 2 basis points and 7 basis points for the years ended December 31, 2017 and 2016, respectively. Tax equivalent adjustments to net
interest margin are the result of increasing income from tax-free securities by an amount equal to the taxes that would have been paid
if the income were fully taxable based on a 35% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.
The tax equivalent yields and net interest margin during the comparable periods are presented based upon a tax rate of 35%.
42
The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from
average interest-earning assets and the annualized resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed in both dollars and rates. Any nonaccruing loans have been included in the table as loans carrying a zero yield.
2018
Interest
Earned/
Interest Paid
Average
Balance
Average
Yield/ Rate
Average
Balance
(Dollars in thousands)
For the Years Ended December 31,
2017
Interest
Earned/
Interest Paid
Average
Yield/ Rate
2016
Interest
Earned/
Interest Paid
Average
Yield/ Rate
Average
Balance
Assets
Interest-Earning Assets:
Loans(1)
Securities
Deposits in other financial
institutions
Total interest-earning assets
Allowance for loan losses
Noninterest-earning assets
Total assets
Liabilities and Shareholders'
Equity
Interest-Bearing Liabilities:
Interest-bearing demand
deposits
Money market and savings
deposits
Certificates and other time
deposits
Borrowed funds
Subordinated debt
Total interest-bearing
liabilities
Noninterest-Bearing
Liabilities:
Noninterest-bearing demand
deposits
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities and
shareholders' equity
Net interest rate spread
Net interest income and
margin(2)
Net interest income and
margin (tax equivalent)(3)
$ 2,652,355 $ 148,223
8,527
317,329
5.59 % $ 2,081,370 $ 110,331
8,445
2.69 % 324,926
5.30 % $ 1,755,319 $
2.60 % 270,789
93,356
6,851
70,145
1,473
3,039,829 $ 158,223
(24,077 )
349,408
$ 3,365,160
2.10 %
662
50,917
5.21 % 2,457,213 $ 119,438
(20,536 )
262,549
$ 2,699,226
1.30 %
571
87,485
4.86 % 2,113,593 $ 100,778
(15,200 )
240,202
$ 2,338,595
5.32 %
2.53 %
0.65 %
4.77 %
$ 224,210 $
1,834
0.82 % $ 156,527 $
597
0.38 % $ 104,212 $
334
0.32 %
637,722
4,644
0.73 % 536,415
2,562
0.48 % 465,403
2,103
0.45 %
940,356
240,952
48,776
15,478
4,788
2,900
1.65 % 748,086
1.99 % 269,633
11,208
5.95 %
9,060
2,922
629
1.21 % 648,075
1.08 % 209,379
9,138
5.61 %
7,044
945
488
1.09 %
0.45 %
5.34 %
2,092,016
29,644
1.42 % 1,721,869 $
15,770
0.92 % 1,436,207 $
10,914
0.76 %
848,276
11,427
2,951,719
413,441
$ 3,365,160
672,101
7,629
2,401,599
297,627
620,701
8,476
2,065,384
273,211
$ 2,699,226
$ 2,338,595
3.79 %
3.94 %
4.01 %
$ 128,579
4.23 %
$ 103,668
4.22 %
$
89,864
4.25 %
$ 129,652
4.27 %
$ 106,669
4.34 %
$
92,330
4.37 %
(1)
Includes loans held for sale.
(2) The net interest margin is equal to net interest income divided by average interest-earning assets.
(3)
In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable
investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 21% for the year ended
December 31, 2018 and 35% for the years ended December 31, 2017 and 2016 and other applicable effective tax rates.
43
The following table presents information regarding the dollar amount of changes in interest income and interest expense for the
periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the
changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate
and volume that cannot be segregated have been allocated to rate.
2018 vs. 2017
Increase
(Decrease)
Due to Change in
For the Years Ended December 31,
2017 vs. 2016
Increase
(Decrease)
Due to Change in
Rate
Days
Total
Volume
Rate
Total
Volume
Interest-Earning assets:
Loans
Securities
Deposits in other financial
institutions
Total increase (decrease) in
interest income
Interest-Bearing liabilities:
Interest-bearing demand
deposits
Money market and savings
deposits
Certificates and other time
deposits
Borrowed funds
Subordinated debt
Total increase (decrease) in
interest expense
Increase (decrease) in net
interest income
Provision for Loan Losses
(Dollars in thousands)
$
30,268 $
(198 )
7,625 $
279
37,893 $
81
17,294 $
1,387
(64 ) $
226
(255 ) $
(19 )
16,975
1,594
250
562
812
(237 )
330
(2 )
91
30,320
8,466
38,786
18,444
492
(276 )
18,660
258
979
1,237
169
95
(1 )
263
484
1,598
2,082
327
138
(6 )
459
2,329
(311 )
2,108
4,089
2,177
163
6,418
1,866
2,271
1,106
275
112
929
1,705
30
(19 )
(3 )
(1 )
2,016
1,977
141
4,868
9,006
13,874
1,989
2,897
(30 )
4,856
$
25,452 $
(540 ) $
24,912
$
16,455 $
(2,405 ) $
(246 ) $
13,804
Our allowance for loan losses is established through charges to income in the form of the provision in order to bring our
allowance for loan losses to a level deemed appropriate by management. The allowance for loan losses at December 31, 2018 and
December 31, 2017 was $26.3 million and $23.6 million, respectively, representing 0.71% and 1.04% of total loans as of such dates.
We recorded a $4.2 million provision for loan losses for the year ended December 31, 2018 compared with $13.2 million for the year
ended December 31, 2017. The increased provision for the year ended December 31, 2017 was primarily due to an increase in organic
loan growth, net charge-offs of $7.5 million, estimated losses related to Hurricane Harvey and an increase of $702 thousand of
allowance on impaired loans. The provision for loan losses for the year ended December 31, 2017 was $13.2 million compared with
$5.5 million for the year ended December 31, 2016.
Acquired loans are initially recorded at fair value based on a discounted cash flow valuation methodology that considers, among
other things, projected default rates, losses given existing defaults and recovery rates. Loans acquired from Post Oak were initially
recorded at fair value and no corresponding allowance for loan losses was recorded for these loans at acquisition date. We recognized
a discount on the acquired loans which will be prospectively accreted, increasing our basis in such loans. At December 31, 2018, the
balance of the acquisition accounting discount was $14.2 million.
Noninterest Income
Our primary sources of noninterest income are service charges on deposit accounts, nonsufficient funds fees, rebates from our
correspondent bank and debit card and ATM card income. Noninterest income does not include loan origination fees which are
recognized over the life of the related loan as an adjustment to yield using the interest method.
Year ended December 31, 2018 compared with the year ended December 31, 2017. Noninterest income totaled $7.7 million for
the year ended December 31, 2018 compared to $5.9 million for the year ended December 31, 2017, an increase of $1.9 million, or
44
31.6%. Noninterest income increased in 2018 due to increased rebates from correspondent bank and increased noninterest income
driven primarily from increased deposit and loan balances, mitigated by losses on other real estate owned during 2018.
Year ended December 31, 2017 compared with the year ended December 31, 2016. Noninterest income totaled $5.9 million for
the year ended December 31, 2017 compared to $7.3 million for the year ended December 31, 2016, a decrease of $1.4 million, or
19.4%. This decrease was primarily due to the $2.1 million gain, $1.3 million after-tax, on the sale of the two Central Texas branch
locations completed during the first quarter 2016.
The following table presents, for the periods indicated, the major categories of noninterest income:
For the Years Ended
December 31,
2018
2017
Increase
(Decrease)
For the Years Ended
December 31,
2016
Increase
(Decrease)
$
Nonsufficient funds fees
Service charges on deposit accounts
Gain on sale of branch assets
Gain on sale of securities
(Loss) gain on sale of other real estate
Bank owned life insurance income
Debit card and ATM card income
Rebate from correspondent bank
Other(1)
Total noninterest income
$
755 $
869
—
—
(428 )
579
1,331
2,609
1,998
7,713 $
685 $
783
—
18
6
585
929
1,327
1,528
5,861 $
(1) Other includes wire transfer and letter of credit fees, among other items.
Noninterest Expense
2017
(Dollars in thousands)
70 $
86
—
(18 )
(434 )
(6 )
402
1,282
470
1,852 $
685 $
783
—
18
6
585
929
1,327
1,528
5,861 $
661 $
677
2,050
30
266
626
725
650
1,583
7,268 $
24
106
(2,050 )
(12 )
(260 )
(41 )
204
677
(55 )
(1,407 )
Year ended December 31, 2018 compared with the year ended December 31, 2017. Noninterest expense was $86.8 million for
the year ended December 31, 2018 compared to $70.0 million for the year ended December 31, 2017, an increase of $16.8 million, or
24.0%. This increase was primarily due to core system conversion expenses of $1.8 million, acquisition and merger-related expenses
of $1.7 million, additional expenses related to increased headcount and bank offices from the Post Oak acquisition and increased
expenses to support organic growth initiatives during the year ended December 31, 2018.
Year ended December 31, 2017 compared with the year ended December 31, 2016. Noninterest expense was $70.0 million for
the year ended December 31, 2017 compared to $59.3 million for the year ended December 31, 2016, an increase of $10.7 million, or
18.1%. This increase was primarily due to core system conversion expenses of $1.1 million, professional fees, regulatory assessments
and FDIC insurance and salaries and benefits related to supporting growth initiatives.
45
The following table presents, for the periods indicated, the major categories of noninterest expense:
Salaries and employee benefits(1)
Net occupancy and equipment
Depreciation
Data processing and software
amortization
Professional fees
Regulatory assessments and FDIC
insurance
Core deposit intangibles amortization
Communications
Advertising
Acquisition and merger-related expenses
Other real estate expense
Printing and supplies
Other
Total noninterest expense
$
For the Years Ended
December 31,
2018
2017
$
56,704 $
5,845
2,132
44,745 $
5,452
1,637
For the Years Ended
December 31,
2016
Increase
(Decrease)
2017
(Dollars in thousands)
11,959 $
393
495
44,745 $
5,452
1,637
38,858 $
4,944
1,627
Increase
(Decrease)
5,120
2,009
4,047
2,926
1,073
(917 )
4,047
2,926
2,633
2,234
2,309
1,815
1,185
1,725
1,661
313
388
5,581
86,787 $
2,273
781
983
1,289
—
331
299
5,199
69,962 $
36
1,034
202
436
1,661
(18 )
89
382
16,825 $
2,273
781
983
1,289
—
331
299
5,199
69,962 $
1,581
785
1,055
945
—
189
241
4,166
59,258 $
5,887
508
10
1,414
692
692
(4 )
(72 )
344
—
142
58
1,033
10,704
(1) Total salaries and employee benefits includes $1.7 million, $1.8 million and $1.5 million in stock based compensation expense
for the years ended December 31, 2018, 2017 and 2016, respectively.
Salaries and Employee Benefits. Salaries and benefits were $56.7 million for the year ended December 31, 2018, an increase of
$12.0 million, or 26.7%, compared to the year ended December 31, 2017. We experienced a significant increase in the total size of our
workforce between these periods as our full-time equivalent employees were 569 at December 31, 2018 compared to 375 for the year
ended December 31, 2017. The primary increase in headcount was from employees added through the Post Oak acquisition and to
support organic growth.
Salaries and benefits were $44.7 million for the year ended December 31, 2017, an increase of $5.9 million, or 15.2%, compared
to the year ended December 31, 2016. This increase was primarily attributable to the addition of high quality bankers and key
personnel hired to strengthen our infrastructure to support our future growth plans. The total size of our workforce between these
periods increased to 375 full-time equivalent employees at December 31, 2017 from 334 employees at December 31, 2016.
Net Occupancy and Equipment. Net occupancy and equipment expenses increased $393 thousand, or 7.2%, for the year ended
December 31, 2018 to $5.8 million compared to $5.5 million for the year ended December 31, 2017. This increase was primarily due
to expenses associated with the infrastructure and facilities added through the Post Oak acquisition and continued build-out needed to
support our growth.
Net occupancy and equipment expenses increased $508 thousand, or 10.3%, for the year ended December 31, 2017 to $5.5
million compared to $4.9 million for the year ended December 31, 2016. This increase was primarily due to general business growth
and the continued build-out needed to support our growth.
Data Processing and Software Amortization. Data processing and software amortization increased $1.1 million, or 26.5%, for
the year ended December 31, 2018 compared to the year ended December 31, 2017. This increase was primarily due to expenses
incurred to complete the conversion of our core technology platform to better serve our customers, added scale and expense from the
Post Oak acquisition and increase efficiencies.
Data processing and software amortization increased $1.4 million, or 53.7%, for the year ended December 31, 2017 compared to
the year ended December 31, 2016. This increase was primarily due to expenses related to the conversion of our core technology
platform to better serve our customers and increase efficiencies.
46
Professional Fees. Professional fees decreased $917 thousand, or 31.3%, for the year ended December 31, 2018 to $2.0 million
from $2.9 million for the year ended December 31, 2017 due to elevated expenses in 2017 as we focused on enhancing the operational
infrastructure required to pursue our growth strategy.
Professional fees increased $692 thousand, or 31.0%, for the year ended December 31, 2017 to $2.9 million from $2.2 million
for the year ended December 31, 2016 as we continued to focus on enhancing the operational infrastructure required to pursue our
growth strategy.
Core deposit intangibles amortization. Core deposit intangibles amortization increased $1.0 million, or 132.4%, for the year
ended December 31, 2018 to $1.8 million from $781 thousand for the year ended December 31, 2017 primarily due to increased core
deposit intangibles amortization resulting from the Post Oak acquisition.
Acquisition and merger-related expenses. Acquisition and merger-related expenses are legal, advisory and accounting fees
associated with the Post Oak acquisition. These expenses also include data processing conversion costs and contract termination costs
that resulted from the Post Oak acquisition.
Efficiency Ratio
The efficiency ratio is a supplemental financial measure utilized in management’s internal evaluation of our performance and is
not calculated based on generally accepted accounting principles. We calculate our efficiency ratio by dividing total noninterest
expense by the sum of net interest income and noninterest income, excluding net gains and losses on the sale of loans, securities and
assets (including the sale of the two acquired Central Texas branches). Additionally, taxes and provision for loan losses are not part of
this calculation. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of
income, while a decrease would indicate a more efficient allocation of resources. Our efficiency ratio was 63.68% for the year ended
December 31, 2018 compared with 63.89% for the year ended December 31, 2017. The efficiency ratio for 2018 was impacted by
$1.8 million of core system conversion expenses and $1.7 million of merger-related expenses related to the Post Oak acquisition. The
efficiency ratio for 2017 was impacted by $1.1 million of core system conversion expenses in 2017.
Our efficiency ratio was 63.89% for the year ended December 31, 2017 compared with 62.34% for the year ended December 31,
2016.
We monitor the efficiency ratio in comparison with changes in our total assets and loans, and we believe that maintaining or
reducing the efficiency ratio during periods of growth, as we did from 2017 to 2018, demonstrates the scalability of our operating
platform. We expect to continue to benefit from our scalable platform in future periods as we continue to monitor overhead expenses
necessary to support our growth.
Income Taxes
The amount of federal and state income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt
income and the amount of other nondeductible expenses. Income tax expense decreased $799 thousand, or 9.1%, to $7.9 million for
the year ended December 31, 2018 compared with $8.7 million for the same period in 2017 primarily due to the reduction in the U.S.
federal statutory income tax rate to 21% under the Tax Cuts and Jobs Act enacted on December 22, 2017, partially offset by an
increase in pre-tax net income. For the year ended December 31, 2017, income tax expense decreased $807 thousand, or 8.4%,
compared with $9.6 million for the year ended December 31, 2016. This decrease in income tax expense year over year was primarily
due to a decrease in pre-tax net income.
The effective tax rates were 17.6%, 33.2% and 29.5% for the years ended December 31, 2018, 2017 and 2016, respectively. The
effective tax rate for 2018 was impacted by the reduction in the U.S. federal statutory income tax rate to 21% under the Tax Cuts and
Jobs Act enacted on December 22, 2017. As a result of the reduction in the U.S. federal statutory income tax rate, we recognized a
provisional net income tax expense totaling $2.6 million for the year ended December 31, 2017. Under ASC 740, Income Taxes, the
effect of income tax law changes on deferred taxes should be recognized as a component of income tax expense related to continuing
operations in the period in which the law is enacted. This requirement applies not only to items initially recognized in continuing
operations, but also to items initially recognized in other comprehensive income.
Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act was enacted on December 22, 2017. Among other things, the new law (i)
establishes a new, flat corporate federal statutory income tax rate of 21%, (ii) eliminates the corporate alternative minimum tax and
allows the use of any such carryforwards to offset regular tax liability for any taxable year, (iii) limits the deduction for net interest
expense incurred by U.S. corporations, (iv) allows businesses to immediately expense, for tax purposes, the cost of new investments in
certain qualified depreciable assets, (v) eliminates or reduces certain deductions related to meals and entertainment expenses, (vi)
modifies the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and
47
clarifies the definition of a covered employee and (vii) limits the deductibility of deposit insurance premiums. The Tax Cuts and Jobs
Act also significantly changes U.S. tax law related to foreign operations; however, such changes do not currently impact us.
Quarterly Financial Information
The following table presents certain unaudited consolidated quarterly financial information regarding the results of operations
for the quarters ended December 31, September 30, June 30 and March 31 in the years ended December 31, 2018 and 2017. This
information should be read in conjunction with our consolidated financial statements as of and for the fiscal years ended December 31,
2018 and 2017 appearing elsewhere in this Annual Report on Form 10-K.
Earnings Per Share(1)
Interest Income
Net Interest
Income
Net Income
Attributable to
Common Shareholders
(Dollars in thousands, except per share data)
Basic
Diluted
2018
First quarter
Second quarter
Third quarter
Fourth quarter
2017
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
32,391 $
34,193
35,336
56,303
26,889 $
27,816
28,036
45,838
27,512 $
28,987
30,901
32,038
24,128 $
25,107
26,997
27,436
7,711 $
7,556
8,879
13,163
6,047 $
5,395
2,986
3,204
0.58 $
0.57
0.66
0.60
0.46 $
0.41
0.23
0.24
0.57
0.55
0.65
0.59
0.45
0.40
0.22
0.24
(1) Earnings per share are computed independently for each of the quarters presented and therefore may not total earnings per share
for the year.
Financial Condition
Loan Portfolio
At December 31, 2018, total loans were $3.71 billion, an increase of $1.44 billion, or 63.3%, compared with December 31, 2017
primarily due to loans acquired in the Post Oak acquisition and organic loan growth.
Total loans as a percentage of deposits were 101.3% and 102.6% as of December 31, 2018 and December 31, 2017, respectively.
Total loans as a percentage of assets were 79.7% and 79.4% as of December 31, 2018 and December 31, 2017, respectively.
48
The following table summarizes our loan portfolio by type of loan as of the dates indicated:
2018
2017
As of December 31,
2016
2015
2014
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Loans held for sale(1)
$
—
0.0 % $
—
(Dollars in thousands)
—
0.0 % $
0.0 % $
27,887
1.7 % $
—
0.0 %
Commercial and industrial
Mortgage warehouse
Real estate:
$ 702,037
48,274
18.9 % $ 457,129
69,456
1.3 %
20.1 % $ 416,752
67,038
3.1 %
22.0 % $ 383,044
59,071
3.5 %
22.7 % $ 242,034
28,329
3.5 %
24.2 %
2.8 %
1,650,912
Commercial real estate
(including multi-family
residential)
Commercial real estate
construction and land
development
1-4 family residential
(including home equity) 649,311
186,411
Residential construction
41,233
430,128
Consumer and other
44.6 % 1,080,247
47.5 % 891,989
47.2 % 745,595
44.4 % 429,986
42.9 %
11.6 % 243,389
10.7 % 159,247
8.4 % 154,646
9.2 %
85,484
8.5 %
17.5 % 301,219
5.0 % 109,116
10,320
1.1 %
13.3 % 246,987
98,657
4.8 %
10,965
0.5 %
13.1 % 205,200
93,848
5.2 %
11,761
0.6 %
12.2 % 135,127
72,402
5.6 %
8,692
0.7 %
13.5 %
7.2 %
0.9 %
Total loans held for
investment
Total loans
3,708,306
3,708,306
100.0 % 2,270,876
100.0 % 2,270,876
100.0 % 1,891,635
100.0 % 1,891,635
100.0 % 1,653,165
100.0 % 1,681,052
98.3 % 1,002,054 100.0 %
100.0 % 1,002,054 100.0 %
Allowance for Loan Losses
Loans, net
(26,331 )
$ 3,681,975
(23,649 )
$ 2,247,227
(17,911 )
$ 1,873,724
(13,098 )
$ 1,667,954
(8,246 )
$ 993,808
(1) Consists of loans at two former F&M Bancshares locations in Central Texas that the Company acquired on January 1, 2015. As
of December 31, 2015, loans held for sale consisted of $13.2 million of commercial and industrial loans, $11.6 million of
commercial real estate (including multifamily residential) loans, $2.3 million of l-4 family residential (including home equity)
loans and $803 thousand of consumer and other loans. Loans held for sale are carried at lower of aggregate cost or fair value.
Our lending activities originate from the efforts of our bankers with an emphasis on lending to individuals, professionals, small
to medium-sized businesses and commercial companies generally located in the Houston region. Our strategy for credit risk
management generally includes well-defined, centralized credit policies, uniform underwriting criteria and ongoing risk monitoring
and review processes for all credit exposures. The strategy generally emphasizes regular credit examinations and management reviews
of loans. We have certain lending policies and procedures in place that are designed to maximize loan income within an acceptable
level of risk. We maintain an independent loan review department that reviews and validates the credit risk program on a periodic
basis. In addition, an independent third-party loan review is performed on a semi-annual basis. Results of these reviews are presented
to management. The loan review process complements and reinforces the risk identification and assessment decisions made by
bankers and credit personnel and contained in our policies and procedures.
The principal categories of our loan portfolio (including loans held for sale) are discussed below:
Commercial and Industrial. We make commercial loans in our market area that are underwritten on the basis of the borrower’s
ability to service the debt from income. Our commercial and industrial loan portfolio increased $244.9 million, or 53.6%, to $702.0
million as of December 31, 2018 compared to $457.1 million as of December 31, 2017.
Mortgage Warehouse. We make loans to unaffiliated mortgage loan originators collateralized by mortgage promissory notes
which are segregated in our mortgage warehouse portfolio. These promissory notes originated by our mortgage warehouse customers
carry terms and conditions as would be expected in the competitive permanent mortgage market and serve as collateral under a
traditional mortgage warehouse arrangement whereby such promissory notes are warehoused under a revolving credit facility to allow
for the end investor (or purchaser) of the note to receive a complete loan package and remit funds to the bank. For mortgage
promissory notes secured by residential property, the warehouse time is normally 10 to 20 days. For mortgage promissory notes
secured by commercial property, the warehouse time is normally 40 to 50 days. The funded balance of the mortgage warehouse
portfolio can have significant fluctuation based upon market demand for the product, level of home sales and refinancing activity,
market interest rates and velocity of end investor processing times. Volumes of the portfolio tend to peak at the end of each month.
Our mortgage warehouse portfolio decreased $21.2 million, or 30.5%, to $48.3 million as of December 31, 2018 compared to $69.5
million as of December 31, 2017.
Commercial Real Estate (Including Multi-Family Residential). We make loans collateralized by owner-occupied, nonowner-
occupied and multi-family real estate to finance the purchase or ownership of real estate. As of December 31, 2018 and December 31,
2017, 51.4% of our commercial real estate loans were owner-occupied. Our commercial real estate loan portfolio increased $570.7
million, or 52.8%, to $1.65 billion as of December 31, 2018 from $1.08 billion as of December 31, 2017 as a result of commercial real
estate loans acquired from the Post Oak acquisition and organic loan growth. Included in our commercial real estate portfolio are
multi-family residential loans. Our multi-family loans increased $11.2 million, or 16.6%, to $78.4 million as of December 31, 2018
from $67.2 million as of December 31, 2017. We had 135 multi-family loans with an average loan size of $581.4 thousand as of
December 31, 2018.
49
Commercial Real Estate Construction and Land Development. We make commercial real estate construction and land
development loans to fund commercial construction, land acquisition and real estate development construction. As of December 31,
2018 and December 31, 2017, 29.4% and 26.4%, respectively, of our commercial real estate construction and land development loans
were owner-occupied. Commercial real estate construction and land development land loans increased $186.7 million, or 76.7%, to
$430.1 million as of December 31, 2018 compared to $243.4 million as of December 31, 2017 primarily as a result of loans acquired
from Post Oak and organic loan growth.
1-4 Family Residential (Including Home Equity). Our residential real estate loans include the origination of 1-4 family
residential mortgage loans (including home equity and home improvement loans and home equity lines of credit) collateralized by
owner-occupied residential properties located in our market area. Our residential real estate portfolio (including home equity)
increased $348.1 million, or 115.6%, to $649.3 million as of December 31, 2018 from $301.2 million as of December 31, 2017. The
home equity, home improvement and home equity lines of credit portion of our residential real estate portfolio increased $51.7
million, or 118.2%, to $95.4 million as of December 31, 2018 from $43.8 million as of December 31, 2017. These increases were
primarily the result of loans acquired as part of the Post Oak acquisition.
Residential Construction. We make residential construction loans to home builders and individuals to fund the construction of
single-family residences with the understanding that such loans will be repaid from the proceeds of the sale of the homes by builders
or with the proceeds of a mortgage loan. These loans are secured by the real property being built and are made based on our
assessment of the value of the property on an as-completed basis. Our residential construction loans portfolio increased $77.3 million,
or 70.8%, to $186.4 million as of December 31, 2018 from $109.1 million as of December 31, 2017. This increase was primarily the
result of loans acquired as part of the Post Oak acquisition.
Consumer and Other. Our consumer and other loan portfolio is made up of loans made to individuals for personal purposes.
Our consumer and other loan portfolio increased $30.9 million, or 299.5%, to $41.2 million as of December 31, 2018 from $10.3
million as of December 31, 2017. This increase was primarily the result of loans acquired as part of the Post Oak acquisition.
The contractual maturity ranges of total loans in our loan portfolio and the amount of such loans with predetermined interest
rates in each maturity range and the amount of loans with predetermined (fixed) interest rates and floating interest rates in each
maturity range, in each case as of the date indicated, are summarized in the following tables:
As of December 31, 2018
Due in
One Year
or Less
Due After
One Year
Through
Five Years
Due After
Five Years
Total
$
314,719 $
48,274
(Dollars in thousands)
311,977 $
—
75,341 $
—
702,037
48,274
Commercial and industrial
Mortgage Warehouse
Real estate:
Commercial real estate (including multi
family residential)
Commercial real estate construction
and land development
1-4 family residential (including home
equity)
Residential construction
Consumer and other
Total loans
Loans with predetermined (fixed)
interest rates
Loans with floating interest rates
Total loans
$
$
$
228,988
1,008,121
413,803
1,650,912
99,692
246,814
83,622
430,128
85,143
126,432
24,539
927,787 $
396,085
41,526
16,314
2,020,837 $
168,083
18,453
380
759,682 $
649,311
186,411
41,233
3,708,306
525,973
$
401,814
927,787 $
1,741,140
$
279,697
2,020,837 $
367,746
$
391,936
759,682 $
2,634,859
1,073,447
3,708,306
50
As of December 31, 2017
Due in
One Year
or Less
Due After
One Year
Through
Five Years
Due After
Five Years
Total
$
190,585 $
69,456
(Dollars in thousands)
209,797 $
—
56,747 $
—
457,129
69,456
Commercial and industrial
Mortgage Warehouse
Real estate:
Commercial real estate (including multi-
family residential)
Commercial real estate construction
and land development
1-4 family residential (including
home equity)
Residential construction
Consumer and other
Total loans
Loans with predetermined (fixed)
interest rates
Loans with floating interest rates
Total loans
$
$
$
126,169
716,868
237,210
1,080,247
69,291
139,956
34,142
243,389
48,109
97,189
4,325
605,124 $
148,673
2,839
5,993
1,224,126 $
104,437
9,088
2
441,626 $
301,219
109,116
10,320
2,270,876
363,029
$
242,095
605,124 $
1,119,854
$
104,272
1,224,126 $
263,847
$
177,779
441,626 $
1,746,730
524,146
2,270,876
Concentrations of Credit
The vast majority of our lending activity occurs in the Houston region. Our loans are primarily secured by real estate, including
commercial and residential construction, owner-occupied and nonowner-occupied and multi-family commercial real estate, raw land
and other real estate based loans located in the Houston region. As of December 31, 2018, 2017 and 2016, commercial real estate and
commercial construction loans represented 56.1%, 58.3% and 53.6%, respectively, of our total loans including loans held for sale.
Asset Quality
We have procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established
underwriting guidelines to be followed by our officers and monitor our delinquency levels for any negative or adverse trends.
We had $33.0 million, $13.3 million and $16.7 million in nonperforming loans as of December 31, 2018, 2017 and 2016,
respectively. If interest on nonaccrual loans had been accrued under the original loan terms, $1.0 million, $733 thousand and $892
thousand would have been recorded as income for the years ended December 31, 2018, 2017 and 2016, respectively.
51
The following table presents information regarding nonperforming assets as of the dates indicated:
Nonaccrual loans:
Loans held for sale
Commercial and industrial
Mortgage warehouse
Real estate:
2018
2017
As of December 31,
2016
(Dollars in thousands)
2015
2014
$
— $
10,861
—
— $
6,437
—
— $
3,896
—
$
209
2,664
—
—
1,527
—
Commercial real estate (including
multi-family residential)
Commercial real estate construction
and land development
1-4 family residential
(including home equity)
Residential construction
Consumer and other
Total nonaccrual loans
Accruing loans 90 or more days past due
Total nonperforming loans(1)
Other real estate
Other repossessed assets
Total nonperforming assets(2)
Restructured loans(3)
Nonperforming assets to total assets
Nonperforming loans to total loans
$
$
17,776
6,110
11,663
2,006
1,653
974
—
—
—
—
3,201
—
141
32,953
—
32,953
630
—
33,583 $
13,494 $
0.72 %
0.89 %
781
—
—
13,328
—
13,328
365
205
13,898 $
17,526 $
0.49 %
0.59 %
217
—
12
15,788
911
16,699
1,503
286
18,488 $
4,831 $
0.75 %
0.88 %
239
—
66
5,184
—
5,184
—
131
5,315 $
491 $
0.25 %
0.31 %
—
—
4
3,184
—
3,184
—
—
3,184
—
0.25 %
0.32 %
(1) Nonperforming loans include nonaccrual loans and loans past due 90 days or more and still accruing interest.
(2) Nonperforming assets include nonaccrual loans, loans past due 90 days or more and still accruing interest, repossessed assets
and other real estate.
(3) Restructured loans represent the balance at the end of the respective period for those performing loans modified in a troubled
debt restructuring that are not already presented as a nonperforming loan.
Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has
concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or
financial difficulties. Management monitors these loans closely and reviews their performance on a regular basis. Potential problem
loans contain potential weaknesses that could improve, persist or further deteriorate. At December 31, 2018 and 2017, we had $16.0
million and $17.9 million, respectively, in loans of this type which are not included in any of the nonaccrual or 90 days past due loan
categories. At December 31, 2018, potential problem loans consisted of 23 credit relationships. Of the total outstanding balance at
December 31, 2018, 39.6% related to nine customers in the energy-related industry, 19.6% related to two customers in the customer
service industry, 15.8% related to three customers in the residential real estate rental industry, 7.5% related to one customer in the
manufacturing industry, 5.2% related to one customer in the restaurant industry, 4.3% related to three customers in the commercial
services industry, 2.7% related to one customer in the convenience store industry, 3.1% related to one customer in the commercial real
estate development business, 1.2% related to one customer in the construction material industry and 1.0% related to two customers in
the trucking industry. Weakness in these organizations’ operating performance, financial condition and borrowing base deficits for
certain energy related credits, among other factors, have caused us to heighten the attention given to these credits. As such, all of the
loans identified as potential problem loans at December 31, 2018 were graded as substandard accruing loans. Potential problem loans
impact the allocation of our allowance for loan losses as a result of our risk grade based allocation methodology. See Note 6 – Loans
and Allowance for Loan Losses in the accompanying consolidated financial statements for details regarding our allowance allocation
methodology.
Nonperforming assets increased $19.7 million to $33.6 million at December 31, 2018, from $13.9 million at December 31,
2017. Nonaccrual loans consisted of 87 separate credits at December 31, 2018 compared to 50 separate credits at December 31, 2017.
Nonperforming assets were 0.91% of total loans at December 31, 2018 compared to 0.61% at December 31, 2017. Nonaccrual loans at
December 31, 2018, included $5.3 million of loans acquired from Post Oak. See Note 2 – Acquisitions in the accompanying
consolidated financial statements included elsewhere in this Annual Report on From 10-K for additional information regarding loans
purchased from Post Oak.
52
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance that is established through charges to earnings in the form of a provision
for loan losses. The amount of the allowance for loan losses is affected by the following: (1) charge-offs of loans that decrease the
allowance, (2) subsequent recoveries on loans previously charged off that increase the allowance and (3) provisions for loan losses
charged to income that increase the allowance.
Under accounting standards for business combinations, acquired loans are recorded at fair value on the date of acquisition. This
fair value adjustment eliminates any of the seller’s allowance associated with such loans as of the purchase date as any credit exposure
associated with such loans is incorporated into the fair value adjustment. A provision for loan losses is recorded for the emergence of
new incurred and estimable losses on acquired loans after the acquisition date in excess of the recorded discount.
All loans acquired from Post Oak were recorded at fair value without a carryover of the Post Oak allowance for loan losses. The
discount recognized on acquired loans is prospectively accreted, increasing our basis in such loans. Due to acquisition accounting, our
allowance for loan losses to total loans may not be comparable to our peers particularly as it relates to the allowance to gross loan
percentage and the allowance to nonperforming loans. Recognizing that acquired purchased credit impaired loans have been de
minimis, we monitor credit quality trends on a post-acquisition basis with an emphasis on past due, charge-off, classified loan and
nonperforming trends. The amount of discount recorded by the Company on the acquisition date of the Post Oak acquisition was $17.0
million, or 1.43%, on loans acquired.
The remaining discount on the balance of acquired loans as of December 31, 2018 was $14.2 million. The discount on
purchased loans considers anticipated credit losses on that portfolio; therefore, no allowance for credit losses was established on the
acquisition date. The unaccreted discount represents additional protection against potential losses and is presented as a reduction of the
recorded investment in the loans rather than an allowance for loan losses. We will continue to look at the portfolio for credit
deterioration and establish additional allowances over the remaining discount as needed.
At December 31, 2018, our allowance for loan losses amounted to $26.3 million, or 0.71% of total loans, compared with $23.6
million, or 1.04%, as of December 31, 2017. During 2018, our allowance for loan losses as a percentage of loans decreased primarily
due to the addition of acquired loans from Post Oak that were recorded at fair value without a carryover of the Post Oak allowance for
loan losses.
The increase in the allowance of $2.7 million for the year ended December 31, 2018 as compared to the year ended
December 31, 2017 was primarily due to an increase of $4.4 million of allowance on impaired loans partially offset by the reversal in
2018 of the $1.7 million Hurricane Harvey reserve that was established in the year 2017. We believe that the allowance for loan losses
at December 31, 2018 was adequate to cover probable incurred losses in the loan portfolio as of such date.
The ratio of net charge-offs to average loans outstanding decreased to 0.06% for the year ended December 31, 2018 from 0.36%
at December 31, 2017. Net charge-offs decreased $5.9 million during the year 2018 compared to 2017 primarily due to two
commercial loan relationships that experienced financial difficulty in 2017.
53
The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related
data:
2018
As of and for the Years Ended December 31,
2016
2017
(Dollars in thousands)
2015
2014
$ 2,652,355 $ 2,081,370 $ 1,755,319 $ 1,525,325 $
917,218
3,708,306 2,270,876 1,891,635 1,681,052 1,002,054
6,655
2,150
17,911
13,188
13,098
5,469
23,649
4,248
8,246
5,792
Average loans outstanding
Gross loans outstanding at end of period
Allowance for loan losses at beginning of period
Provision for loan losses
Charge-offs:
Commercial and industrial loans
Mortgage warehouse
Real estate:
Commercial real estate (including
multi-family residential)
Commercial real estate construction and land
development
1-4 family residential (including home equity)
Residential construction
Consumer and other
Total charge-offs for all loan types
Recoveries:
Commercial and industrial loans
Mortgage warehouse
Real estate:
Commercial real estate (including
multi-family residential)
Commercial real estate construction and land
development
1-4 family residential (including home equity)
Residential construction
Consumer and other
Total recoveries for all loan types
Net charge-offs
Allowance for loan losses at end of period
Allowance for loan losses to total loans
Net charge-offs to average loans
Allowance for loan losses to nonperforming loans
$
(2,424 )
—
(7,673 )
—
(722 )
—
(935 )
—
(567 )
—
(42 )
(124 )
(129 )
—
—
(25 )
—
(24 )
(2,515 )
—
—
—
(196 )
(7,993 )
—
—
—
(49 )
(900 )
—
(40 )
—
(65 )
(1,040 )
847
—
516
—
186
—
52
—
102
3
43
—
—
—
—
—
(40 )
(607 )
32
—
—
—
—
—
—
949
(1,566 )
26,331 $
0.71 %
0.06 %
79.90 %
10
10
—
4
543
(7,450 )
23,649 $
1.04 %
0.36 %
177.44 %
—
10
—
5
244
(656 )
17,911 $
0.95 %
0.04 %
107.26 %
18
—
24
6
100
(940 )
13,098 $
0.78 %
0.06 %
252.66 %
—
—
—
16
48
(559 )
8,246
0.82 %
0.06 %
258.98 %
In connection with our review of our loan portfolio, we consider the following risk elements attributable to particular loan types
or categories in assessing the quality of individual loans:
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 commercial real estate (including multi-family 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 commercial real estate construction and land development and residential construction 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 1-4 family residential (including home equity) 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; and
54
for consumer and other loans, the individual borrower’s income, current debt level, past credit history and the value of any
available collateral.
Based on our review of our loan portfolio, we classify our loans by credit risk and track risk ratings. The following is a general
description of the risk ratings we use:
Loans classified as “watch” loans may still be of high quality, but have an element of risk added to the credit such as
declining payment history, deteriorating financial position of the borrower or a decrease in collateral value.
Loans classified as “special mention” have a potential weakness that deserves management’s close attention. If left
uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of our credit
position at some future date. They are characterized by the distinct possibility that we will sustain some loss if the
deficiencies are not corrected.
Loans classified as “substandard” have well-defined weaknesses on a continuing basis and are inadequately protected by
the current net worth and paying capacity of the borrower, impaired or declining collateral values, or a continuing
downturn in their industry which is reducing their profits to below zero and having a significantly negative impact on their
cash flow. Such loans are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not
corrected.
Loans classified as “doubtful” have all the weaknesses inherent in those classified as substandard with the added
characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions
and values highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually are considered to be pass rated loans.
See Note 6 – Loans and Allowance for Loan Losses in our audited consolidated financial statement included elsewhere in this
Annual Report on Form 10-K for additional information regarding how we estimate and evaluate the credit risk in our loan portfolio.
The following table shows the allocation of the allowance for loan losses among our loan categories and the percentage of the
respective loan category to total loans held for investment as of the dates indicated. The allocation is made for analytical purposes and
is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from
any loan category.
2018
2017
Percent
of
Loans to
Total
Loans
Percent
of
Loans to
Total
Loans
Amount
Amount
As of December 31,
2016
Percent
of
Loans to
Total
Loans
Amount
(Dollars in thousands)
2015
2014
Percent
of
Loans to
Total
Loans
Amount
Percent
of
Loans to
Total
Loans
Amount
$ 8,351
—
18.9 % $ 7,694
—
1.3 %
20.1 % $ 5,059
—
3.1 %
22.0 % $ 3,644
—
3.5 %
23.6 % $ 2,334
—
3.5 %
24.2 %
2.8 %
11,901
44.6 %
10,253
47.5 %
8,950
47.2 %
5,914
45.0 %
3,799
42.9 %
2,724
11.6 %
2,525
10.7 %
1,217
8.4 %
1,221
9.2 %
578
8.5 %
2,140
2,242
1,040
73
13.5 %
7.2 %
0.9 %
$ 26,331 100.0 % $ 23,649 100.0 % $ 17,911 100.0 % $ 13,098 100.0 % $ 8,246 100.0 %
17.5 %
5.0 %
1.1 %
12.3 %
5.6 %
0.8 %
13.1 %
5.2 %
0.6 %
13.3 %
4.8 %
0.5 %
475
52
820
67
748
61
942
95
1,008
1,432
1,876
Balance of allowance for loan losses
applicable to:
Commercial and industrial loans
Mortgage Warehouse
Real estate:
Commercial real estate (including
multi-family residential)
Commercial real estate
construction and land
development
1-4 family residential (including
home equity)
Residential construction
Consumer and other
Total allowance for loan losses
Available for Sale Securities
We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage
interest rate risk, to meet pledging requirements and to meet regulatory capital requirements. As of December 31, 2018, the carrying
amount of investment securities totaled $337.3 million, an increase of $27.7 million, or 8.9%, compared with $309.6 million as of
December 31, 2017 primarily due to securities acquired from Post Oak. Securities represented 7.2% and 10.8% of total assets as of
December 31, 2018 and 2017, respectively.
55
All of the securities in our securities portfolio are classified as available for sale. Securities classified as available for sale are
measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as accumulated comprehensive
income or loss until realized. Interest earned on securities is included in interest income.
The following table summarizes the amortized cost and fair value of the securities in our securities portfolio as of the dates
shown:
Available for Sale
U.S. Government and agency securities
Municipal securities
Agency mortgage-backed pass-through securities
Corporate bonds and other
Total
Available for Sale
U.S. Government and agency securities
Municipal securities
Agency mortgage-backed pass-through securities
Corporate bonds and other
Total
December 31, 2018
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
(Dollars in thousands)
Fair
Value
$
$
8,570 $
219,068
66,987
46,303
340,928 $
161 $
1,258
237
15
1,671 $
(46 ) $
(3,541 )
(1,029 )
(690 )
(5,306 ) $
8,685
216,785
66,195
45,628
337,293
December 31, 2017
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
(Dollars in thousands)
Fair
Value
$
$
8,507 $
222,330
32,014
46,247
309,098 $
232 $
2,470
159
62
2,923 $
(24 ) $
(1,842 )
(361 )
(179 )
(2,406 ) $
8,715
222,958
31,812
46,130
309,615
Certain investment securities are valued at less than their historical cost. Management evaluates securities for OTTI at least on a
quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. See “Securities” in Note 5 to
our audited consolidated financial statements included elsewhere in this Annual Report on From 10-K for additional information
regarding how and when management evaluates securities for OTTI.
As of December 31, 2018, we did not expect to sell any securities classified as available for sale with material unrealized losses,
and management believes that we more likely than not will not be required to sell any securities before their anticipated recovery at
which time we will receive full value for the securities. The unrealized losses are largely due to increases in market interest rates over
the yields available at the time the underlying securities were purchased. Management does not believe any of the securities are
impaired due to reasons of credit quality. The fair value is expected to recover as the securities approach their maturity date or
repricing date or if market yields for such investments decline. Accordingly, as of December 31, 2018, management believes any
impairment in our securities is temporary, and no impairment loss has been realized in our consolidated statements of income.
56
The following table summarizes the contractual maturity of securities and their weighted average yields as of the dates
indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures. Available
for sale securities are shown at amortized cost. For purposes of the table below, municipal securities are calculated on a tax equivalent
basis.
After One Year
but Within Five
Years
Amount Yield
December 31, 2018
After Five Years
but Within Ten
Years
Amount Yield
Within One Year
Amount Yield
After Ten Years
Amount Yield
Total
Total
Yield
(Dollars in thousands)
Available for Sale
U.S. government and
agency securities
Municipal securities
Agency mortgage-
backed pass-through
securities
Corporate bonds and
other
Total
Available for Sale
U.S. government and
agency securities
Municipal securities
Agency mortgage-
backed pass-through
securities
Corporate bonds and
other
Total
999
$
3.05 %
3,772 2.06 % 37,422 2.03 % 86,391 3.05 % 91,483 3.84 % 219,068 3.19 %
$ 8,570
$ 2,172
$ 5,399
2.37 %
3.30 %
2.74 %
0.00 %
—
$
—
0.00 %
34
4.05 %
13,466
2.92 %
53,487
3.21 %
66,987
3.15 %
10,106
2.78 %
$ 14,877 2.29 % $ 73,709 2.34 % $ 100,857 3.09 % $ 151,485 3.61 % $ 340,928 3.12 %
46,303
30,854
2.36 %
2.56 %
4.17 %
8.00 %
4,343
1,000
Within One Year
Amount Yield
After One Year
but Within Five
Years
Amount Yield
December 31, 2017
After Five Years
but Within Ten
Years
Amount Yield
(Dollars in thousands)
After Ten Years
Amount Yield
Total
Total
Yield
$ 2,018 1.46 % $ 2,516 3.33 % $ 1,396 3.44 % $ 2,577 2.75 % $ 8,507 2.73 %
1,263 2.56 % 26,841 2.37 % 82,981 3.21 % 111,245 4.48 % 222,330 3.74 %
— 0.00 %
— 0.00 % 5,074 2.29 % 26,940 2.90 % 32,014
2.81 %
7,552
2.51 %
$ 10,833 2.10 % $ 58,895 2.45 % $ 98,608 3.14 % $ 140,762 4.15 % $ 309,098 3.43 %
46,247
29,538
9,157
0.00 %
2.99 %
2.19 %
2.45 %
—
The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of
their expected life because borrowers generally have the right to prepay their obligations. Mortgage-backed securities and
collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans with
varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay
and, in particular, monthly pay downs on mortgage-backed securities tend to cause the average life of the securities to be much
different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not
tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest
rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security.
As of December 31, 2018 and 2017, we did not own securities of any one issuer (other than the U.S. government and its
agencies or sponsored entities) for which the aggregate adjusted cost exceeded 10% of our consolidated shareholders’ equity.
The average yield of our securities portfolio was 2.69% during the year ended December 31, 2018 compared with 2.60% for the
year ended December 31, 2017. The increase in average yield during 2018 compared to 2017 was primarily due to our increased
investment in longer-term securities. This investment in higher-yielding securities replaced lower-yielding securities that matured or
were called or prepaid.
57
Goodwill and Core Deposit Intangibles
Our goodwill as of December 31, 2018 was $223.1 million compared to $39.4 million as of December 31, 2017 due to goodwill
resulting from the Post Oak acquisition. Goodwill resulting from business combinations represents the excess of the consideration
paid over the fair value of the net assets acquired. Goodwill is assessed annually for impairment or when events or changes in
circumstances indicate that the carrying amount of the asset may not be recoverable.
Our core deposit intangibles, net, as of December 31, 2018 was $26.6 million compared to $3.3 million as of December 31,
2017 due to core deposit intangible resulting from the Post Oak acquisition. Core deposit intangibles are amortized over the estimated
useful life of seven to ten years.
Deposits
Our lending and investing activities are primarily funded by deposits. We offer a variety of deposit accounts having a wide range
of interest rates and terms including demand, savings, money market and certificates and other time accounts. We rely primarily on
convenient locations, personalized service and our customer relationships to attract and retain these deposits. We seek customers that
will both engage in a lending and deposit relationship with us.
Total deposits at December 31, 2018 were $3.66 billion, an increase of $1.45 billion, or 65.4%, compared with $2.21 billion at
December 31, 2017. The deposit growth we experienced was largely the result of deposits assumed from the Post Oak acquisition and
growth in our customer base, many of whom also established a deposit relationship with us. Noninterest-bearing deposits at
December 31, 2018 were $1.21 billion, an increase of $526.2 million, or 77.0%, compared with $683.1 million at December 31, 2017.
Interest-bearing deposits at December 31, 2018 were $2.45 billion, an increase of $922.4 million, or 60.3%, compared with $1.53
billion at December 31, 2017.
Total deposits at December 31, 2017 were $2.21 billion, an increase of $343.8 million, or 18.4%, compared with $1.87 billion at
December 31, 2016. Noninterest-bearing deposits at December 31, 2017 were $683.1 million, an increase of $89.4 million, or 15.0%,
compared with $593.8 million at December 31, 2016. Interest-bearing deposits at December 31, 2017 were $1.53 billion, an increase
of $254.4 million, or 19.9%, compared with $1.28 billion at December 31, 2016.
The following table presents the daily average balances and weighted average rates paid on deposits for the periods indicated:
Average
Balance
2018
Average
Rate
Years Ended December 31,
2017
Average
Rate
(Dollars in thousands)
Average
Balance
Average
Balance
2016
Average
Rate
Interest-bearing demand
Money market and savings
Certificates and other time
Total interest-bearing deposits
Noninterest-bearing deposits
Total deposits
$ 224,210
637,722
940,356
1,802,288
848,276
$ 2,650,564
0.82 % $ 156,527
536,415
0.73 %
1.65 %
748,086
1.22 % 1,441,028
672,101
0.83 % $ 2,113,129
—
0.38 % $ 104,212
465,403
0.48 %
1.21 %
648,075
0.85 % 1,217,690
620,701
0.58 % $ 1,838,391
—
0.32 %
0.45 %
1.09 %
0.78 %
—
0.52 %
Our ratio of average noninterest-bearing deposits to average total deposits was 32.0%, 31.8% and 33.8% for the years ended
December 31, 2018, 2017 and 2016, respectively.
The following table sets forth the amount of our certificates of deposit that are $100 thousand or greater by time remaining until
maturity:
As of December 31,
2018
2017
Three months or less
Over three months through six months
Over six months through 12 months
Over 12 months through three years
Over three years
Total
58
$
(Dollars in thousands)
243,169 $
164,687
298,921
219,818
154,389
$ 1,080,984 $
144,741
108,535
175,588
131,244
87,895
648,003
Borrowings
We have an available line of credit with the FHLB of Dallas, which allows us to borrow on a collateralized basis. FHLB
advances are used to manage liquidity as needed. The advances are secured by a blanket lien on certain loans. Maturing advances are
replaced by drawing on available cash, making additional borrowings or through increased customer deposits. At December 31, 2018,
we had a total borrowing capacity of $1.06 billion, of which $765.4 million was available under this agreement and $296.5 million
was outstanding. FHLB advances of $225.0 million were outstanding at December 31, 2018, at a weighted average rate of 2.57%.
Letters of credit were $71.5 million at December 31, 2018, of which $8.8 million expired in January 2019, $10.2 million expired in
February 2019, $7.1 million will expire in April 2019, $7.1 million will expire in May 2019, $5.5 million will expire in August 2019,
$25.0 million will expire in October 2019, $6.3 million will expire in December 2019 and $1.5 million will expire in January 2020.
Credit Agreement
In January 2015, we borrowed an additional $18.0 million under our credit agreement with another financial institution, which
was in addition to the $10.1 million of indebtedness incurred under the same agreement in 2014. We used the funds borrowed in 2015
to repay debt that F&M Bancshares owed. In October 2015, we paid down $27.5 million on the credit agreement using a portion of the
proceeds from the initial public offering of Allegiance common stock. As of December 31, 2018, 2017 and 2016, we had $569
thousand of indebtedness owed under the credit agreement. The interest rate on the outstanding debt under the revolving credit
agreement is the Prime Rate minus 25 basis points, or 5.00% at December 31, 2018, and is paid quarterly. On December 28, 2018, we
amended the credit agreement to increase the maximum commitment to advance funds to $45.0 million which will reduce annually by
$7.5 million beginning in December 2020 and on each December 22nd for the following years thereafter. We are required to repay any
outstanding balance in excess of the then-current maximum commitment amount. The revised agreement will mature in December
2025 and is secured by 100% of the capital stock of the Bank.
Our credit agreement contains certain restrictive covenants, including limitations on our ability to incur additional indebtedness
or engage in certain fundamental corporate transactions, such as mergers, reorganizations and recapitalizations. Additionally, the Bank
is required to maintain a “well-capitalized” rating, a minimum return on assets of 0.65%, measured quarterly, a ratio of loan loss
reserve to non-performing loans equal to or greater than 75%, measured quarterly, and a ratio of non-performing assets to aggregate
equity plus loan loss reserves minus intangible assets of less than 35%, measured quarterly. As of December 31, 2018, we believe we
were in compliance with all such debt covenants and had not been made aware of any noncompliance by the lender.
Subordinated Debt
Junior Subordinated Debentures
In connection with the F&M Bancshares acquisition, we assumed junior subordinated debentures with an aggregate original
principal amount of $11.3 million and a current fair value of $9.4 million at December 31, 2018. At acquisition, we recorded a
discount of $2.5 million on the debentures. The difference between the carrying value and contractual balance will be recognized as a
yield adjustment over the remaining term for the debentures. See Note 11 to our audited consolidated financial statements included
elsewhere in this Annual Report on Form 10-K.
Subordinated Notes
In December 2017, the Bank completed the issuance, through a private placement, of $40.0 million aggregate principal amount
of Fixed-to-Floating Rate Subordinated Notes (the "Notes") due December 15, 2027. The Notes were issued at a price equal to 100%
of the principal amount, resulting in net proceeds to the Bank of $39.4 million. The Bank used the net proceeds from the offering to
support its growth and for general corporate purposes. The Notes are intended to qualify as Tier 2 capital for bank regulatory purposes.
The Notes bear a fixed interest rate of 5.25% per annum until (but excluding) December 15, 2022, payable semi-annually in
arrears. From December 15, 2022, the Notes will bear a floating rate of interest equal to 3-Month LIBOR + 3.03% until the Notes
mature on December 15, 2027, or such earlier redemption date, payable quarterly in arrears. The Notes will be redeemable by the
Bank, in whole or in part, on or after December 15, 2022 or, in whole but not in part, upon the occurrence of certain specified tax
events, capital events or investment company events. Any redemption will be at a redemption price equal to 100% of the principal
amount of Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The
Notes are not subject to redemption at the option of the holders.
59
Contractual Obligations
The following tables summarize our contractual obligations and other commitments to make future payments as of
December 31, 2018 and 2017 (other than deposit obligations), which consist of our future cash payments associated with our
contractual obligations pursuant to our non-cancelable operating leases and our indebtedness owed to another financial institution.
Payments related to leases are based on actual payments specified in underlying contracts.
One Year or Less
More than One
Year but Less
Than Three Years
As of December 31, 2018
Three years or
More but Less
Than Five Years
(Dollars in thousands)
Five Years or
More
Total
$
$
— $
2,559
2,559 $
— $
1,987
1,987 $
— $
3,242
3,242 $
569 $
5,126
5,695 $
569
12,914
13,483
One Year or Less
More than One
Year but Less
Than Three Years
As of December 31, 2017
Three years or
More but Less
Than Five Years
(Dollars in thousands)
Five Years or
More
Total
$
$
— $
1,806
1,806 $
— $
1,030
1,030 $
— $
1,950
1,950 $
569 $
4,673
5,242 $
569
9,459
10,028
Credit agreement
Operating leases
Total
Credit agreement
Operating leases
Total
Off-Balance Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our
consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include
both commitments to extend credit and standby and performance letters of credit, which involve, to varying degrees, elements of
credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.
Our commitments associated with outstanding standby letters of credit and commitments to extend credit expiring by period are
summarized below as of December 31, 2018. Since commitments associated with letters of credit and commitments to extend credit
may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements:
One Year or Less
More than One
Year but Less
Than Three Years
As of December 31, 2018
Three years or
More but Less
Than Five Years
(Dollars in thousands)
Five Years or
More
Total
Commitments to extend credit
Standby letters of credit
Total
$
$
534,388 $
21,702
556,090 $
139,321 $
1,529
140,850 $
38,812 $
53
38,865 $
289,465 $
—
289,465 $
1,001,986
23,284
1,025,270
Commitments to Extend Credit. We enter into contractual commitments to extend credit, normally with fixed expiration dates or
termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent
upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these
commitments by subjecting them to credit approval and monitoring procedures. The amount and type of collateral obtained, if
considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer. Management
assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses.
Standby Letters of Credit. Standby letters of credit are written conditional commitments issued by us to guarantee the
performance of a customer to a third party. If the customer does not perform in accordance with the terms of the agreement with the
third party, we would be required to fund the commitment and we would have the rights to the underlying collateral. The maximum
potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. Our
policies generally require that standby letter of credit arrangements are backed by promissory notes that contain security and debt
covenants similar to those contained in loan agreements.
60
Liquidity and Capital Resources
Liquidity
Liquidity is the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time
meeting our operating, capital and strategic cash flow needs and to maintain reserve requirements to operate on an ongoing basis and
manage unexpected events, all at a reasonable cost. During the years ended December 31, 2018, 2017 and 2016, our liquidity needs
have been met by deposits, borrowed funds, security and loan maturities and amortizing investment and loan portfolios. The Bank has
access to purchased funds from correspondent banks, and advances from the FHLB are available under a security and pledge
agreement to take advantage of investment opportunities.
Average assets totaled $3.37 billion, $2.70 billion and $2.34 billion for the years ended December 31, 2018, 2017 and 2016,
respectively. The following table illustrates, during the periods presented, the mix of our funding sources and the average assets in
which those funds are invested as a percentage of our average total assets for the period indicated.
For the Years Ended December 31,
2017
2018
2016
Sources of Funds:
Deposits:
Noninterest-bearing
Interest-bearing
Borrowed funds
Subordinated debt
Other liabilities
Shareholders’ equity
Total
Uses of Funds:
Loans
Securities
Deposits in other financial institutions
Noninterest-earning assets
Total
Average noninterest-bearing deposits to average deposits
Average loans to average deposits
25.2 %
53.6 %
7.2 %
1.4 %
0.3 %
12.3 %
100.0 %
78.8 %
9.4 %
2.1 %
9.7 %
100.0 %
.
32.0 %
100.1 %
24.9 %
53.4 %
10.0 %
0.4 %
0.3 %
11.0 %
100.0 %
77.1 %
12.0 %
1.9 %
9.0 %
100.0 %
26.5 %
52.0 %
9.0 %
0.4 %
0.4 %
11.7 %
100.0 %
75.1 %
11.6 %
3.7 %
9.6 %
100.0 %
31.8 %
98.5 %
33.8 %
95.5 %
Our largest source of funds is deposits and our largest use of funds is loans. Our average loans increased $571.0 million, or
27.4%, for the year ended December 31, 2018 compared to the year ended December 31, 2017. We predominantly invest excess
deposits in Federal Reserve Bank of Dallas balances, securities, interest-bearing deposits at other banks or other short-term liquid
investments until the funds are needed to fund loan growth. Our securities portfolio had a weighted average life of 6.1 years and
modified duration of 5.1 years at December 31, 2018, and a weighted average life of 6.5 years and modified duration of 5.5 years at
December 31, 2017.
As of December 31, 2018 and December 31, 2017, we had outstanding $1.00 billion and $620.0 million, respectively, in
commitments to extend credit and $23.3 million and $17.2 million, respectively, in commitments associated with outstanding standby
and performance letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire
unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.
As of December 31, 2018, 2017 and 2016, we had no exposure to future cash requirements associated with known uncertainties
or capital expenditures of a material nature.
As of December 31, 2018, we had cash and cash equivalents of $268.9 million compared with $182.1 million at December 31,
2017, an increase of $86.8 million. This increase in cash and cash equivalents was primarily due to $230.4 million of cash acquired in
the Post Oak acquisition.
61
Capital Resources
Capital management consists of providing equity to support our current and future operations. We are subject to capital
adequacy requirements imposed by the Federal Reserve and the Bank is subject to capital adequacy requirements imposed by the
FDIC. Both the Federal Reserve and the FDIC have adopted risk-based capital requirements for assessing bank holding companies
and bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-
balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-
balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to
broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.
Under current guidelines, the minimum ratio of total capital to risk-weighted assets (which are primarily the credit risk
equivalents of balance sheet assets and certain off-balance sheet items such as standby letters of credit) is 8.0%. At least half of total
capital must be composed of tier 1 capital, which includes common shareholders’ equity (including retained earnings), less goodwill,
other disallowed intangibles and disallowed deferred tax assets, among other items. The Federal Reserve also has adopted a minimum
leverage ratio, requiring tier 1 capital of at least 4.0% of average quarterly total consolidated assets, net of goodwill and certain other
intangible assets, for all but the most highly rated bank holding companies. The federal banking agencies have also established risk-
based and leverage capital guidelines that FDIC-insured depository institutions are required to meet. These regulations are generally
similar to those established by the Federal Reserve for bank holding companies.
Under the Federal Deposit Insurance Act, the federal bank regulatory agencies must take “prompt corrective action” against
undercapitalized U.S. depository institutions. U.S. depository institutions are assigned one of five capital categories: “well
capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized,” and are
subjected to different regulation corresponding to the capital category within which the institution falls. A depository institution is
deemed to be “well capitalized” if the banking institution has a total risk-based capital ratio of 10.0% or greater, a tier 1 risk-based
capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% and a leverage ratio of 5.0% or greater, and the
institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a
specific level for any capital measure. Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized
institution may be treated as if the institution were in the next lower capital category.
Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory
agencies, including: termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the
FDIC as conservator or receiver. As of December 31, 2018, 2017 and 2016, the Bank was well-capitalized.
Basel III Capital Rules impact regulatory capital ratios of banking organizations in the following manner, when fully phased in:
create a new requirement to maintain a ratio of “common equity Tier 1 capital” to total risk-weighted assets of not less than 4.5%;
increase the minimum leverage capital ratio to 4.0% for all banking organizations; increase the minimum tier 1 risk-based capital ratio
from 4.0% to 6.0%; and maintain the minimum total risk-based capital ratio at 8.0%.
In addition, the Basel III Capital Rules subject a banking organization to certain limitations on capital distributions and
discretionary bonus payments to executive officers if the organization does not maintain a “capital conservation buffer” of common
equity Tier 1 capital. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and was
phased in over a three-year period (increasing by 0.625% on each subsequent January 1, until it reached 2.5% on January 1, 2019).
The effect of the capital conservation buffer is to increase the minimum common equity Tier 1 capital ratio to 7.0%, the minimum tier
1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5%.
62
The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted capital ratios as of
December 31, 2018 to the minimum and well-capitalized regulatory standards:
ALLEGIANCE BANCSHARES, INC.
(Consolidated)
Total capital (to risk weighted assets)
Common equity Tier 1 capital
(to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Tier 1 capital (to average assets)
ALLEGIANCE BANK:
Total capital (to risk weighted assets)
Common equity Tier 1 capital
(to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Tier 1 capital (to average assets)
Minimum
Required for
Capital
Adequacy Purposes
Minimum Required
Plus Capital
Conservation Buffer
Actual Ratio
To Be
Categorized As
Well Capitalized
Under Prompt
Corrective
Action Provisions
13.70 %
8.00 %
9.875 %
11.76 %
12.01 %
10.61 %
4.50 %
6.00 %
4.00 %
6.375 %
7.875 %
4.000 %
N/A
N/A
N/A
N/A
13.53 %
8.00 %
9.875 %
10.00 %
11.83 %
11.83 %
10.45 %
4.50 %
6.00 %
4.00 %
6.375 %
7.875 %
4.000 %
6.50 %
8.00 %
5.00 %
Total shareholder’s equity was $703.0 million at December 31, 2018, compared with $306.9 million at December 31, 2017, an
increase of $396.1 million, or 129.1%. This increase was primarily due to common equity issued related to the Post Oak acquisition.
Asset/Liability Management and Interest Rate Risk
Our asset liability and interest rate risk policy provides management with the guidelines for effective balance sheet management.
We have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position
within our established guidelines.
As a financial institution, a component of the market risk that we face is interest rate volatility. Fluctuations in interest rates will
ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all
interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the
potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest
income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the
balance sheet to minimize the inherent risk while at the same time maximizing income.
We have not entered into instruments such as leveraged derivatives, interest rate swaps, financial options, financial future
contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are
not subject to foreign exchange rate or commodity price risk. We do not own any trading assets. We manage our exposure to interest
rates by structuring our balance sheet in the ordinary course of a community banking business.
Our exposure to interest rate risk is managed by our Asset Liability Committee (“ALCO”), which is composed of certain
members of our Board of Directors and Bank management, in accordance with policies approved by our Board of Directors. The
ALCO formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk,
the ALCO considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates,
regional economies, liquidity, business strategies and other factors. The ALCO meets regularly to review, among other things, the
sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and
losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally,
the ALCO reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity.
We use an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and the
balance sheet, respectively. All instruments on the balance sheet are modeled at the instrument level, incorporating all relevant
attributes such as next reset date, reset frequency and call dates, as well as prepayment assumptions for loans and securities and decay
rates for nonmaturity deposits. Assumptions based on past experience are incorporated into the model for nonmaturity deposit account
decay rates. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest
63
income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the
model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and
the application and timing of various management strategies.
We utilize static balance sheet rate shocks to estimate the potential impact on net interest income of changes in interest rates
under various rate scenarios. This analysis estimates a percentage of change in the metric from the stable rate base scenario versus
alternative scenarios of rising and falling market interest rates by instantaneously shocking a static balance sheet.
The following table summarizes the simulated change in net interest income and the economic value of equity over a 12-month
horizon as of the dates indicated:
Change in Interest
Rates (Basis Points)
+300
+200
+100
Base
-100
Percent Change in Net Interest Income
Percent Change in Economic Value of Equity
As of December 31, 2018
As of December 31, 2017
As of December 31, 2018
As of December 31, 2017
0.9%
0.9%
0.6%
0.0%
(1.1)%
(6.2)%
(4.1)%
(2.2)%
0.0%
(1.9)%
0.2%
0.9%
1.0%
0.0%
(2.7)%
(9.0)%
(5.4)%
(2.3)%
0.0%
(1.9)%
These results are primarily due to the duration of our loan and securities portfolio, the duration of our borrowings and the
expected behavior of demand, money market and savings deposits during such rate fluctuations. During 2018, the overall duration of
our combined loan and securities portfolios decreased and FHLB borrowings represented a smaller proportion of our funding mix at
year end due primarily to the assets and liabilities acquired in the Post Oak acquisition.
GAAP Reconciliation and Management’s Explanation of Non-GAAP Financial Measures
We identify certain financial measures discussed in this Annual Report on Form 10-K as being “non-GAAP financial measures.”
In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure
excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or
excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with generally accepted
accounting principles as in effect from time to time in the United States in our statements of income, balance sheet or statements of
cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures
calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that
are not non-GAAP financial measures or both.
The non-GAAP financial measures that we discuss in this Annual Report on Form 10-K should not be considered in isolation or
as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the
manner in which we calculate the non-GAAP financial measures that we discuss in this Annual Report on Form 10-K may differ from
that of other companies reporting measures with similar names. You should understand how such other banking organizations
calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this Annual
Report on Form 10-K when comparing such non-GAAP financial measures.
Our management uses these non-GAAP financial measures in its analysis of our performance:
“Tangible Shareholders’ Equity” is a non-GAAP measure generally used by financial analysts and investment bankers to
evaluate financial institutions. Tangible shareholders’ equity is defined as total shareholders’ equity reduced by goodwill
and core deposit intangibles, net of accumulated amortization. This measure is important to investors interested in changes
from period to period in shareholders’ equity, exclusive of changes in intangible assets. For tangible shareholders’ equity,
the most directly comparable financial measure calculated in accordance with GAAP is total shareholders’ equity.
Goodwill and other intangible assets have the effect of increasing total shareholders’ equity while not increasing our
tangible equity.
“Tangible Book Value Per Share” is a non-GAAP measure generally used by financial analysts and investment bankers
to evaluate financial institutions. Tangible book value per share is defined as total shareholders’ equity reduced by
goodwill and core deposit intangibles, net of accumulated amortization, divided by total shares outstanding. This measure
is important to investors interested in changes from period to period in book value per share, exclusive of changes in
intangible assets. For tangible book value per share, the most directly comparable financial measure calculated in
accordance with GAAP is our book value per share.
“Tangible Equity to Tangible Assets” is a non-GAAP measure generally used by financial analysts and investment
bankers to evaluate financial institutions. Tangible equity to tangible assets is defined as total shareholders’ equity reduced
64
by goodwill and core deposit intangibles, net of accumulated amortization, divided by tangible assets, which are total
assets reduced by goodwill and core deposit intangibles, net of accumulated amortization. This measure is important to
investors interested in changes from period to period in equity and total assets, each exclusive of changes in intangible
assets. For tangible equity to tangible assets, the most directly comparable financial measure calculated in accordance with
GAAP is total shareholders’ equity to total assets. Goodwill and other intangible assets have the effect of increasing both
total shareholders’ equity and assets while not increasing our tangible common equity or tangible assets.
We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary
to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that
our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for
results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other
companies use. The following reconciliation tables provide a more detailed analysis of these non-GAAP financial measures:
Total shareholders' equity
Less:
As of and for the Years Ended December 31,
2018
2017
2016
2015
2014
$
702,984 $
306,865 $
279,817 $
258,490 $
131,778
(Dollars in thousands, except share and per share data)
Goodwill and core deposit intangibles, net
Tangible shareholders' equity
249,712
453,272 $
42,663
264,202 $
43,444
236,373 $
44,619
213,871 $
12,891
118,887
$
Shares outstanding at end of period(1)
21,937,740 13,226,826 12,958,341 12,812,985 7,477,309
Tangible book value per share
$
20.66 $
19.97 $
18.24 $
16.69 $
15.90
Net income attributable to shareholders
$
37,309 $
17,632 $
22,851 $
15,227 $
9,005
Average shareholders' equity
Less:
$
413,441 $
297,627 $
273,211 $
204,935 $
116,460
Average goodwill and other intangible
assets, net
Average tangible common shareholders’ equity $
80,384
333,057 $
43,050
254,577 $
43,880
229,331 $
45,055
159,880 $
13,007
103,453
Return on average tangible common equity
11.20 %
6.93 %
9.96 %
9.52 %
8.70 %
Total assets
Less:
Goodwill and core deposit intangibles, net
Tangible assets
Tangible common equity to tangible assets
$ 4,655,249 $ 2,860,231 $ 2,450,948 $ 2,084,579 $ 1,280,008
249,712
12,891
$ 4,405,537 $ 2,817,568 $ 2,407,504 $ 2,039,960 $ 1,267,117
43,444
44,619
42,663
10.29 %
9.38 %
9.82 %
10.48 %
9.38 %
(1) Does not include 1,711 shares of treasury stock as of December 31, 2015. There were no shares of treasury stock outstanding as
of December 31, 2018, 2017, 2016 or 2014.
65
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company’s financial instruments, see Item 7. “Management’s Discussion and
Analysis of Financial Condition and Results of Operation—Financial Condition—Asset/Liability Management and Interest Rate
Risk.” Our principal market risk exposure is to changes in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, the reports thereon, the notes thereto and supplementary data commence at page 72 of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. As of the end of the period covered by this Annual Report on Form 10-K, the
Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In
designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management
was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) were effective as of the end of the period covered by this report. See Exhibits 31.1 and 31.2
for the Certification statements issued by the Company’s Chief Executive Officer and Chief Financial Officer, respectively.
Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the year ended December 31,
2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Reporting on Management’s Assessment of Internal Controls over Financial Reporting. Management of the Company is
responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-
15(e) under the Exchange Act). Our internal control system is a process designed to provide reasonable assurance regarding the
preparation and fair presentation of published financial statements in accordance with GAAP. All internal control systems, no matter
how well designed, have inherent limitations and can only provide reasonable assurance with respect to financial reporting.
As of December 31, 2018, management assessed the effectiveness of the Company’s internal control over financial reporting
based on the criteria for effective internal control over financial reporting established in “Internal Control-Integrated Framework,”
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this assessment, management
determined that the Company maintained effective internal control over financial reporting as of December 31, 2018.
Crowe LLP, the independent registered public accounting firm, audited the consolidated financial statements of the Company
included in this Annual Report on Form 10-K. Their report is included in Part IV, Item 15. under the heading “Report of Independent
Registered Public Accounting Firm.” Pursuant to SEC rules applicable to emerging growth companies, this Annual Report on Form
10-K does not include an attestation report on management’s assessment of internal control over financial reporting from the
Company's independent registered public accounting firm.
ITEM 9B. OTHER INFORMATION
None.
66
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated herein by reference to the Company’s definitive Proxy Statement for its
2019 Annual Meeting of Shareholders (the “2019 Proxy Statement”) to be filed with the SEC pursuant to Regulation 14A under the
Exchange Act within 120 days of the Company’s fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the 2019 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
Certain information required by this Item is included under “Securities Authorized for Issuance under Equity Compensation
Plans” in Part II, Item 5 of this Annual Report on Form 10-K. The other information required by this Item is incorporated herein by
reference to the 2019 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference to the 2019 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the 2019 Proxy Statement.
67
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
PART IV
1. Consolidated Financial Statements. Reference is made to the Consolidated Financial Statements, the report thereon and the
notes thereto commencing at page 72 of this Annual Report on Form 10-K. Set forth below is a list of such Consolidated Financial
Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Income for the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. All supplemental schedules are omitted as inapplicable or because the required information is
included in the Consolidated Financial Statements or notes thereto.
3. The exhibits to this Annual Report on Form 10-K listed below have been included only with the copy of this report filed with
the SEC. The Company will furnish a copy of any exhibit to shareholders upon written request to the Company and payment of a
reasonable fee not to exceed the Company’s reasonable expense.
Each exhibit marked with an asterisk is filed or furnished with this Annual Report on Form 10-K as noted below.
Exhibit
Number
Description
2.1
3.1
3.2
Agreement and Plan of Reorganization by and between Allegiance Bancshares, Inc. and Post Oak Bancshares, Inc. dated
April 30, 2018 (incorporated herein by reference to Exhibit 2.1 to the Company's Form 8-K filed on May 1, 2018)
Amended and Restated Certificate of Formation of Allegiance Bancshares, Inc. (incorporated herein by reference to
Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on November 1, 2018)
Bylaws of Allegiance Bancshares, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Registration
Statement on Form S-1 (Registration No. 333-206536) (the “Registration Statement”)
4.1
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement)
4.2
10.1
10.2
10.3
10.4
10.5
Form of Fixed-to-Floating Rate Subordinated Note due December 15, 2027 Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K filed on December 14, 2017)
Tax Allocation Agreement dated April 1, 2013, by and between Allegiance Bancshares, Inc. and Allegiance Bank (f/k/a
Allegiance Bank Texas) (incorporated by reference to Exhibit 10.1 to the Registration Statement)
Allegiance Bancshares, Inc. 2015 Amended and Restated Stock Awards and Incentive Plan (including form of awards)
(incorporated by reference to Exhibit 10.2 to the Registration Statement)
Credit Agreement dated as of December 22, 2014 by and among Allegiance Bancshares, Inc. and Prosperity Bank
(incorporated by reference to Exhibit 10.3 to the Registration Statement)
Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.4 to Amendment No. 1
to the Registration Statement)
Amendment to the Allegiance Bancshares, Inc. 2015 Amended and Restated Stock Awards and Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 24, 2017)
68
10.6
10.7
10.8
10.9
Allegiance Bancshares, Inc. Form of Non-Employee Director Restricted Stock Agreement (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 5, 2017)
Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-8 ( Registration No. 333-208600))
Amendment to Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.8 to the
Company’s Annual Report on Form 10-K filed on March 9, 2018)
Amendment No. 1 to Credit Agreement, dated as of December 28, 2018, by and among Allegiance Bancshares, Inc. and
Prosperity Bank (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
December 31, 2018)
10.10
Allegiance Bancshares, Inc. Annual Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on January 29, 2019)
21.1*
Subsidiaries of Allegiance Bancshares, Inc.
23.1*
Consent of Crowe LLP
31.1*
31.2*
32.1**
32.2**
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document Exhibit
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
EXHIBITS
*
Filed with this Annual Report on Form 10-K.
**
Furnished with this Annual Report on Form 10-K.
ITEM 16. FORM 10-K SUMMARY
None.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant, has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 11, 2019
ALLEGIANCE BANCSHARES, INC.
By:
/s/ George Martinez
George Martinez
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ George Martinez
George Martinez
/s/ Steven F. Retzloff
Steven F. Retzloff
/s/ Paul P. Egge
Paul P. Egge
/s/ Ramon A. Vitulli, III
Ramon A. Vitulli, III
/s/ John Beckworth
John Beckworth
/s/ Matthew H. Hartzell
Matthew H. Hartzell
/s/ Robert Ivany
Robert Ivany
/s/ Umesh Jain
Umesh Jain
/s/ Frances H. Jeter
Frances H. Jeter
/s/ James J. Kearney
James J. Kearney
Positions
Chairman and Chief Executive Officer
(Principal Executive Officer); Director
Date
March 11, 2019
Director
March 11, 2019
Chief Financial Officer
March 11, 2019
(Principal Financial and Principal Accounting Officer)
March 11, 2019
March 11, 2019
March 11, 2019
March 11, 2018
March 11, 2019
March 11, 2019
March 11, 2019
Director
Director
Director
Director
Director
Director
Director
70
Signature
/s/ P. Michael Mann, M.D.
P. Michael Mann, M.D.
/s/ Robert E. McKee III
Robert E McKee III
/s/ David B. Moulton
David B. Moulton
/s/ William S. Nichols, III
William S. Nichols, III
/s/ Thomas A. Reiser
Thomas A. Reiser
/s/ Raimundo Riojas E.
Raimundo Riojas E.
/s/ Fred S. Robertson
Fred S. Robertson
/s/ Louis A. Waters Jr.
Louis A. Waters Jr.
/s/ Roland L. Williams
Roland L. Williams
Date
March 11, 2019
March 11, 2019
March 11, 2019
March 11, 2019
March 11, 2019
March 11, 2019
March 11, 2019
March 11, 2019
March 11, 2019
Positions
Director
Director
Director
Director
Director
Director
Director
Director
Director
71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of
Allegiance Bancshares, Inc.
Houston, Texas
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Allegiance Bancshares, Inc. (the "Company") as of December 31,
2018 and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "financial
statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Crowe LLP
We have served as the Company's auditor since 2014.
Dallas, Texas
March 11, 2019
72
ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2018
2017
(Dollars in thousands, except share data)
$
$
118,771 $
150,176
268,947
337,293
3,708,306
(26,331 )
3,681,975
17,010
41,717
630
10,941
26,480
223,125
26,587
20,544
4,655,249 $
133,124
48,979
182,103
309,615
2,270,876
(23,649 )
2,247,227
12,194
18,477
365
12,862
22,422
39,389
3,274
12,303
2,860,231
$
1,209,300 $
683,110
366,905
879,840
1,206,491
2,453,236
3,662,536
2,812
225,493
48,899
12,525
3,952,265
215,499
554,051
761,314
1,530,864
2,213,974
610
282,569
48,659
7,554
2,553,366
—
—
21,938
571,803
112,131
(2,888 )
702,984
4,655,249 $
13,227
218,408
74,894
336
306,865
2,860,231
Cash and due from banks
Interest-bearing deposits at other financial institutions
ASSETS
Total cash and cash equivalents
Available for sale securities, at fair value
Loans held for investment
Less: allowance for loan losses
Loans, net
Accrued interest receivable
Premises and equipment, net
Other real estate owned
Federal Home Loan Bank stock
Bank owned life insurance
Goodwill
Core deposit intangibles, net
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing
Interest-bearing
Demand
Money market and savings
Certificates and other time
Total interest-bearing deposits
Total deposits
Accrued interest payable
Borrowed funds
Subordinated debt
Other liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES (See Note 15)
SHAREHOLDERS’ EQUITY:
Preferred stock, $1 par value; 1,000,000 shares authorized; there were
no shares issued or outstanding
Common stock, $1 par value; 80,000,000 shares authorized;
21,937,740 shares outstanding at December 31, 2018 and 13,226,826 shares issued
and outstanding at December 31, 2017
Capital surplus
Retained earnings
Accumulated other comprehensive (loss) income
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
See notes to consolidated financial statements.
73
ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
INTEREST INCOME:
Loans, including fees
Securities:
Taxable
Tax-exempt
Deposits in other financial institutions
Total interest income
INTEREST EXPENSE:
Demand, money market and savings deposits
Certificates and other time deposits
Borrowed funds
Subordinated debt
Total interest expense
NET INTEREST INCOME
Provision for loan losses
Net interest income after provision for loan losses
NONINTEREST INCOME:
Nonsufficient funds fees
Service charges on deposit accounts
Gain on sale of branch assets
Gain on sale of securities
(Loss) gain on sales of other real estate and other repossessed assets
Bank owned life insurance income
Rebate from correspondent bank
Other
Total noninterest income
NONINTEREST EXPENSE:
Salaries and employee benefits
Net occupancy and equipment
Depreciation
Data processing and software amortization
Professional fees
Regulatory assessments and FDIC insurance
Core deposit intangibles amortization
Communications
Advertising
Acquisition and merger-related expenses
Other
Total noninterest expense
INCOME BEFORE INCOME TAXES
Provision for income taxes
NET INCOME
EARNINGS PER SHARE:
Basic
Diluted
2018
For the Years Ended December 31,
2016
2017
(Dollars in thousands, except per share data)
$
148,223 $
110,331 $
93,356
2,725
5,802
1,473
158,223
6,478
15,478
4,788
2,900
29,644
128,579
4,248
124,331
755
869
—
—
(428 )
579
2,609
3,329
7,713
56,704
5,845
2,132
5,120
2,009
2,309
1,815
1,185
1,725
1,661
6,282
86,787
45,257
7,948
37,309 $
2,111
6,334
662
119,438
3,159
9,060
2,922
629
15,770
103,668
13,188
90,480
685
783
—
18
6
585
1,327
2,457
5,861
44,745
5,452
1,637
4,047
2,926
2,273
781
983
1,289
—
5,829
69,962
26,379
8,747
17,632 $
2.41 $
2.37 $
1.34 $
1.31 $
1,807
5,044
571
100,778
2,437
7,044
945
488
10,914
89,864
5,469
84,395
661
677
2,050
30
266
626
650
2,308
7,268
38,858
4,944
1,627
2,633
2,234
1,581
785
1,055
945
—
4,596
59,258
32,405
9,554
22,851
1.78
1.75
$
$
$
See notes to consolidated financial statements.
74
ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive (loss) income, before tax:
Unrealized (loss) gain on securities:
Change in unrealized holding (loss) gain on available
for sale securities during the period
Reclassification of amount realized through the sale of
securities
Total other comprehensive (loss) income
Deferred tax benefit (expense) related to other comprehensive
income
Other comprehensive (loss) income, net of tax
Comprehensive income
$
For the Years Ended December 31,
2018
2017
2016
(Dollars in thousands)
$
37,309 $
17,632 $
22,851
(4,152 )
5,213
(7,799 )
—
(4,152 )
928
(3,224 )
34,085 $
(18 )
5,195
(1,807 )
3,388
21,020 $
(30 )
(7,829 )
2,760
(5,069 )
17,782
See notes to consolidated financial statements.
75
ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Common Stock
Capital
Amount Surplus
Shares
Accumulated
Other
Total
Retained Comprehensive Treasury Shareholders’
Earnings Income (Loss) Stock
Equity
BALANCE AT JANUARY 1, 2016
Net income
Other comprehensive loss
Common stock issued in connection
with the exercise of stock options,
restricted stock awards and the ESPP
Issuance of treasury stock
Stock based compensation expense
BALANCE AT DECEMBER 31, 2016
Net income
Other comprehensive income
Common stock issued in connection
with the exercise of stock options,
restricted stock awards and the ESPP
Stock based compensation expense
BALANCE AT DECEMBER 31, 2017
Net income
Other comprehensive loss
Reclassification of amounts within
AOCI to retained earnings due to tax
reform
Common stock issued in connection
with the exercise of stock options,
restricted stock awards and the ESPP
Common stock issued in connection
with the acquisition of Post Oak
Bancshares, Inc., net of
registration expenses
Repurchase of common stock
Stock based compensation expense
BALANCE AT DECEMBER 31, 2018
(In thousands, except share data)
12,814,696 $ 12,815 $ 209,285 $ 34,411 $
22,851
2,017 $
(5,069 )
(38 ) $ 258,490
22,851
(5,069 )
38
2,006
38
1,501
— $ 279,817
17,632
3,388
4,248
1,780
— $ 306,865
37,309
(3,224 )
(72 )
3,750
358,783
(2,112 )
1,685
— $ 702,984
143,645
143
1,863
12,958,341 $ 12,958 $ 212,649 $ 57,262 $
17,632
1,501
268,485
269
3,979
1,780
13,226,826 $ 13,227 $ 218,408 $ 74,894 $
37,309
(3,052 ) $
3,388
336 $
(3,224 )
(72 )
378,023
378
3,372
8,402,010 8,402 350,381
(2,043 )
1,685
(69,389 )
(69 )
21,937,470 $ 21,938 $ 571,803 $ 112,131 $
(2,888 ) $
See notes to consolidated financial statements.
76
ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and core deposit intangibles amortization
Provision for loan losses
Gain on the sale of securities
Deferred income tax (benefit) expense
Net amortization of premium on investments
Excess tax benefit related to the exercise of stock options
Bank owned life insurance
Net accretion of discount on loans
Net amortization of discount on subordinated debt
Net amortization of discount on certificates of deposit
Net loss (gain) on sale or write down of premises, equipment and other real
estate
Net gain on sale of branch assets
Federal Home Loan Bank stock dividends
Stock based compensation expense
Increase in accrued interest receivable and other assets
Increase (decrease) in accrued interest payable and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal paydowns of available for sale
securities
Proceeds from sales of available for sale securities
Purchase of available for sale securities
Net change in total loans
Purchase of bank premises and equipment
Proceeds from sale of bank premises, equipment and other real estate
Net redemptions (purchases) of Federal Home Loan Bank stock
Net cash paid for the sale of branch assets
Net cash and cash equivalents acquired in the purchase of Post Oak
Bancshares, Inc.
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits
Net increase in interest-bearing deposits
Net change in short-term borrowings
Proceeds from subordinated notes issuance
Proceeds from the issuance of common stock, stock option exercises,
restricted stock awards and the ESPP
Cash paid for fractional shares related to the Post Oak acquisition
Registration expenses related to common stock issued in the Post Oak acquisition
(Repurchase) issuance of treasury stock
Net cash provided by financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD
SUPPLEMENTAL INFORMATION:
Income taxes paid
Interest paid
2018
For the Years Ended December 31,
2017
(Dollars in thousands)
2016
$
37,309 $
17,632 $
22,851
3,947
4,248
-
(256 )
3,533
(587 )
(579 )
(2,702 )
110
(367 )
428
—
(396 )
1,685
(2,136 )
1,822
46,059
2,418
13,188
(18 )
427
3,427
(1,149 )
(585 )
(632 )
108
(3 )
(6 )
—
(273 )
1,780
(6,018 )
3,136
33,432
2,328,864
12,701
(2,334,149 )
(270,314 )
(3,419 )
—
4,746
—
230,416
(31,155 )
2,007,842
39,125
(2,038,323 )
(386,059 )
(2,133 )
1,138
586
—
—
(377,824 )
93,053
64,566
(87,076 )
—
3,750
(21 )
(220 )
(2,112 )
71,940
86,844
182,103
268,947 $
89,359
254,435
(3,000 )
39,355
4,248
—
—
—
384,397
40,005
142,098
182,103 $
6,650 $
27,442
7,850 $
15,442
2,412
5,469
(30 )
(1,608 )
2,785
(371 )
(626 )
(1,487 )
107
(247 )
(60 )
(2,050 )
(101 )
1,501
(259 )
(851 )
27,435
2,566,082
2,500
(2,730,524 )
(229,286 )
(1,511 )
—
(10,505 )
(5,250 )
—
(408,494 )
(20,041 )
157,723
235,000
—
2,006
—
—
38
374,726
(6,333 )
148,431
142,098
11,400
10,500
$
$
See notes to consolidated financial statements.
77
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations and Principles of Consolidation-The consolidated financial statements include Allegiance Bancshares,
Inc. (“Allegiance”) and its wholly-owned subsidiary, Allegiance Bank (the “Bank”, and together with Allegiance, collectively referred
to as the “Company”) provide commercial and retail loans and commercial banking services. Intercompany transactions and balances
are eliminated in consolidation under U.S. generally accepted accounting principles (“GAAP”). The Company derives substantially all
of its revenues and income from the operation of the Bank. Allegiance Bank is a Texas banking association which began operations in
October 2007. The Company is focused on delivering a wide variety of relationship-driven commercial banking products and
community-oriented services tailored to meet the needs of small to mid-sized businesses, professionals and individuals through its 28
offices, with 27 bank offices and one loan production office in the Houston metropolitan area and one office in Beaumont, just outside
of the Houston metropolitan area, as of the year ended December 31, 2018. The Bank provides its customers with a variety of banking
services including checking accounts, savings accounts and certificates of deposit and its primary lending products are commercial,
personal, automobile, mortgage and home improvement loans. The Bank also offers safe deposit boxes, automated teller machines,
drive-through services and 24-hour depository facilities.
Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions based on available information. These estimates and assumptions affect the reporting of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Acquisition – On October 1, 2018, Allegiance completed the acquisition of Post Oak Bancshares, Inc. See Note 2 –
Acquisitions for additional information pertaining to the Post Oak acquisition and the impact of the transaction on the Company’s
consolidated financial statements.
Cash and cash equivalents—Cash and cash equivalents include cash, deposits with other financial institutions with maturities
not greater than one year. Net cash flows are reported for customer loan and deposit transactions.
Securities—Debt securities are classified as available for sale when they might be sold before maturity. Securities available for
sale are carried at fair value. Unrealized gains and losses are excluded from earnings and reported, net of tax, as a separate component
of shareholders’ equity until realized. Securities within the available for sale portfolio may be used as part of the Company’s
asset/liability strategy and may be sold in response to changes in interest rate risk, prepayment risk or other similar economic factors.
Interest earned on these assets is included in interest income. Interest income includes amortization of purchase premium or
discount. Premiums and discounts on securities are amortized on the level-yield method, except for mortgage backed securities where
prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification
method.
Management evaluates debt securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more
frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management
considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management
also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss
position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire
difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet
the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which
must be recognized in the income statement and (2) OTTI related to other factors, which is recognized in other comprehensive
income, net of applicable taxes. The credit loss is defined as the difference between the present value of the cash flows expected to be
collected and the amortized cost basis. The previous amortized cost bases less the OTTI recognized in earnings shall become the new
amortized cost basis of the security.
Loans Held for Investment—Loans held for investment are those that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and
an allowance for loan losses. Loans are typically secured by specific items of collateral including business assets, consumer assets and
commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses.
Interest income is accrued on the unpaid principal balance.
Acquired Loans—Acquired loans are recorded at fair value at the date of acquisition with no initial valuation allowance based
on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification
status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the
Company’s assessment of risk inherent in the cash flow estimates. Certain larger purchased loans are individually evaluated while
certain purchased loans are grouped together according to similar risk characteristics and are treated in the aggregate when applying
78
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
various valuation techniques. These cash flow evaluations are inherently subjective as they require material estimates, all of which
may be susceptible to significant change.
Loans acquired in a business combination that have evidence of deterioration of credit quality since origination and for which it
is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable are considered
purchased credit impaired (“PCI”). PCI loans are individually evaluated and recorded at fair value at the date of acquisition with no
initial valuation allowance based on a discounted cash flow methodology that considers various factors including the type of loan and
related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a
discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. Increases in expected cash flows,
including prepayments, subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan
over its remaining life. Decreases in expected cash flows are recognized as impairment. Valuation allowances on PCI loans reflect
only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately are not to
be received).
For acquired loans not deemed credit-impaired at acquisition, the differences between the initial fair value and the unpaid
principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. Subsequent to the
acquisition date, methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans;
however, a provision for credit losses will be recorded only to the extent the required allowance exceeds any remaining purchase
discounts. Once an acquired loan undergoes new underwriting and meets the criteria for a new loan, such as in the case of a loan
renewal, any remaining fair value adjustments are accreted into interest income and the loan establishes a new amortized cost basis
that is fully subject to the Company's allowance for loan loss methodology.
Nonrefundable Fees and Costs Associated with Lending Activities— Loan commitment and loan origination fees, and
certain direct origination costs, are deferred and recognized in interest income as an adjustment to yield without anticipating
prepayments using the interest method over the related loan life or; if the commitment expires unexercised, balances are recognized in
income upon expiration of the commitment.
Nonperforming 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, and monitors its
delinquency levels for any negative or adverse trends. There can be no assurance, however, that the Company’s loan portfolio will not
become subject to increasing pressures from deteriorating borrower credit due to general economic conditions or other factors.
Past due status is based on the contractual terms of the loan. Loans are considered past due if the required principal and interest
payments have not been received as of the date such payments were due. The Company generally classifies a loan as nonperforming,
automatically places the loan on nonaccrual status, ceases accruing interest and reverses all unpaid accrued interest against interest
income, when, in management’s opinion, the borrower may be unable to meet payment obligations, when the payment of principal or
interest on a loan is delinquent for 90 days, as well as when required by regulatory provisions, unless the loan is in the process of
collection and the underlying collateral fully supports the carrying value of the loan. Any payments received on nonaccrual loans are
applied first to outstanding loan amounts. Interest income is subsequently recognized only to the extent cash payments are received in
excess of principal due. Any excess is treated as recovery of lost interest. Loans are returned to accrual status when all of the principal
and interest amounts contractually due are brought current and future payments are reasonably assured.
In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered
doubtful. If the decision is made to continue accruing interest on the loan, periodic reviews are made to confirm the accruing status of
the loan. Nonaccrual loans and loans past due 90 days include both smaller balance homogeneous loans that are collectively evaluated
for impairment and individually classified impaired loans. When available information confirms that specific loans, or portions
thereof, are uncollectible, these amounts are charged-off against the allowance. All loan types are considered delinquent after 30 days
past due and are typically charged-off or charged-down no later than 120 days past due, with consideration of, but not limited to, the
following criteria in determining the need and optional timing of the charge-off or charge-down: (1) the Bank is in the process of
repossession or foreclosure and there appears to be a likely deficiency, (2) the collateral securing the loan has been sold and there is an
actual deficiency, (3) the Bank is proceeding with lengthy legal action to collect its balance, (4) the borrower is unable to be located or
(5) the borrower has filed bankruptcy. Charge-offs occur when the Company confirms a loss on a loan.
Troubled debt restructurings (TDRs)—Loans on which terms have been modified resulting in a concession have been granted
because of a borrower’s financial difficulty are considered troubled debt restructurings and classified as impaired. The restructuring of
a loan is considered a troubled debt restructuring if both (1) the borrower is experiencing financial difficulties and (2) the creditor has
granted a concession that it would not otherwise consider. Concessions may include reductions of interest rates to a below market
interest rate: extension of the terms of the debt, principal forgiveness, restructuring the payment of the debt obligation; and other
actions intended to minimize potential losses. Subsequent to identification as a troubled debt restructuring such loans are then
evaluated for impairment on an individual basis whereby the loans are measured at the present value of estimated future cash flows
79
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan: the loan is
reported, net, at the fair value of the collateral.
Impaired Loans—On a continuous basis, loans are evaluated for impairment classification. Loans are considered impaired
when based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance
with the original contractual terms of the loan agreement including scheduled principal and interest payments. Impairment is evaluated
in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific
valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using
the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Factors considered by
management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis
taking into consideration all of the circumstances surrounding the loan and the borrower including the length of the delay, the reasons
for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.
Allowance for Loan Losses—The allowance for loan losses is a valuation allowance that is established through charges to
earnings in the form of a provision for loan losses. The amount of the allowance for loan losses is affected by the following: (1)
charge-offs of loans that decrease the allowance, (2) subsequent recoveries on loans previously charged off that increase the allowance
and (3) provisions for loan losses charged to income that increase the allowance.
Throughout the year, management estimates the probable incurred losses in the loan portfolio to determine if the allowance for
loan losses is adequate to absorb such losses. The allowance for loan losses consists of specific and general components. The specific
component relates to loans that are individually classified as impaired. The Company follows a loan review program to evaluate the
credit risk in the loan portfolio. Loans that have been identified as impaired are generally reviewed on a quarterly basis in order to
determine whether a specific reserve is required. The general component covers non-impaired loans and is based on industry and
Company specific historical loan loss experience, volume, growth and composition of the loan portfolio, the evaluation of the
Company’s loan portfolio through its internal loan review process, general current economic conditions both internal and external to
the Company that may affect the borrower’s ability to pay, value of collateral and other qualitative relevant risk factors. Based on a
review of these estimates, the allowance for loan losses is adjusted to a level determined to be adequate. Estimates of loan losses are
inherently subjective as it involves an exercise of judgment. It is the judgment of management that the allowance for loan losses
reflected in the consolidated balance sheets is adequate to absorb probable losses that exist in the loan portfolio as of the reporting
date.
For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with
the accounting policy for the allowance for loan losses. The Company assesses the exposure for each modification, either by collateral
discounting or by calculation of the present value of future cash flows, and determines if a specific allocation to the allowance for loan
losses is needed. Once an obligation has been restructured because of such credit problems, it continues to be considered a troubled
debt restructuring until paid in full. The Company returns troubled debt restructurings to accrual status only if (1) all contractual
amounts due can reasonably be expected to be repaid within a prudent period and (2) repayment has been in accordance with the
contract for a sustained period, typically at least twelve months.
Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of loan losses expected
to be realized over the remaining lives of the loans. Therefore no corresponding allowance for loan losses is recorded for these loans at
acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-
impaired at acquisition are similar to originated loans. However, the estimate of loss is based on the unpaid principal balance and then
compared to any remaining unaccreted purchase discount. To the extent that the calculated loss is greater than the remaining
unaccreted purchase discount, an allowance is recorded for such difference.
Premises and Equipment—Premises and equipment are carried at cost less accumulated depreciation. Depreciation expense is
calculated principally using the straight-line method over the estimated useful lives of the assets which range from 3 to 40 years.
Leasehold improvements are amortized using the straight-line method over the periods of the leases or the estimated useful lives,
whichever is shorter. Land is carried at cost.
Other Real Estate Owned—Assets acquired through or instead of loan foreclosure are held for sale and are initially recorded at
fair value less estimated selling costs when acquired, establishing a new cost basis. Costs after acquisition are generally expensed. If
the fair value of the asset declines, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature
and may be adjusted in the future because of changes in economic conditions. At December 31, 2018, the $630 thousand balance of
other real estate owned was a residential real estate property.
Federal Home Loan Bank (“FHLB”) Stock—The Bank is a member of the FHLB system. Members are required to own a
certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts. FHLB stock is
80
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
carried at cost, classified as a restricted security and periodically evaluated for impairment based on ultimate recovery of par value.
Both cash and stock dividends are reported as income.
Bank Owned Life Insurance—The Company purchased bank owned life insurance policies on certain key executives and
acquired life insurance policies in conjunction with the acquisitions of F&M Bancshares and Post Oak. Bank owned life insurance is
recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value,
which is the most reasonable estimate of fair value, adjusted for other charges or other amounts due that are probable at settlement.
Goodwill—Goodwill resulting from business combinations is generally determined as the excess of the fair value of the
consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets
acquired and liabilities assumed as of the acquisition date.
Goodwill is determined to have an indefinite useful life and is not amortized, but is tested for impairment at least annually or
more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The Company
performs its annual impairment test on October 1. Goodwill is the only intangible asset with an indefinite life on the Company’s
balance sheet.
Core Deposit Intangibles—Core deposit and acquired customer relationship intangibles arising from acquisitions are amortized
using a straight-line amortization method over their estimated useful lives, which is seven to ten years.
Borrowed Funds—The Company has a credit agreement with another financial institution. The Company pledged its shares in
the Bank’s stock as collateral for the borrowing.
Loan Commitments and Related Financial Instruments—Financial instruments include off-balance sheet credit instruments,
such as commitments to extend credit, issued to meet customer financing needs. The face amount for these items represents the
exposure to loss before considering customer collateral or ability to repay. Such financial instruments are recorded when they are
funded.
Stock Based Compensation—Compensation cost is recognized for stock options and restricted stock awards issued to
employees, based on the fair value of these awards at the date of grant. The expense associated with stock based compensation is
recognized over the required service period, generally defined as the vesting period of each individual arrangement. For awards with
graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
The fair value of stock options granted and employee stock purchase plan awards are estimated at the date of grant using the
Black-Scholes option-pricing model and the market price of the Company’s common stock on the date prior to the grant date is used to
value restricted stock awards.
Employee Stock Purchase Plan—The cost of shares issued in the ESPP, but not allocated to participants, is shown as a
reduction of shareholder’s equity. Compensation expense is based on the market price of the shares as they are committed to be
released to participant accounts.
Income Taxes—Income tax expense is the total of the current year income tax due and the change in deferred tax assets or
liabilities. Deferred tax assets and liabilities are recognized for the estimated tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are recorded in other assets on
the Company’s consolidated balance sheets.
The Company records uncertain tax positions on the basis of a two-step process whereby (1) the Company determines whether it
is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax
positions that meet the more likely than not recognition threshold, the Company recognizes the largest amount of tax benefit that is
greater than 50 percent likely of being realized upon ultimate settlement with the related tax authority. For tax positions not meeting
the more likely than not test, no tax benefit is recorded. Any interest and/or penalties related to income taxes are reported as a
component of income tax expense.
The Company files a consolidated federal income tax return.
Comprehensive income—Comprehensive income consists of net income and other comprehensive income which includes
unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.
Fair Value of Financial Instruments—Fair values of financial instruments are estimated using relevant market information
and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular
items. Changes in assumptions or in market conditions could significantly affect these estimates.
81
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating Segments—While management monitors the revenue streams of the various products and services, operations are
managed and financial performance is evaluated on a Company-wide basis. All of the financial service operations are considered by
management to be aggregated in one reportable operating segment.
Reclassifications—Some items in the prior year financial statements were reclassified to conform to the current presentation.
Reclassifications had no effect on prior year net income or shareholders’ equity.
Earnings per Common Share—Basic earnings per common share is calculated as net income divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options, restricted stock awards and the Employee Stock Purchase Plan.
Loss Contingencies—Loss contingencies, including claims and legal actions arising in the ordinary course of business, are
recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Management does not believe there are such matters that will have a material effect on the financial statements.
Dividend Restrictions—Banking regulations require maintaining certain capital levels and may limit the dividends paid by the
Bank to Allegiance or by Allegiance to its shareholders. In addition, Allegiance's credit agreement with another financial institution
also limits its ability to pay dividends.
Revenue from Contracts with Customers-The Company records revenue from contracts with customers in accordance with
Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the
Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction
price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company
satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from
performance obligations satisfied in previous periods.
The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and
other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with
customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond
what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance
obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a
periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices
are fixed, the Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect the
determination of the amount and timing of revenue from contracts with customers.
New Accounting Standards
Adoption of New Accounting Standards
ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 supersedes the revenue recognition
requirements in Revenue Recognition (Topic 605), and most industry-specific guidance throughout the Industry Topics of the
Codification. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. The new standard was effective for the Company on January 1, 2018 and management has completed its analysis of the
impact of the standard’s adoption. Adoption of the ASU did not have a significant impact on the Company’s consolidated financial
statements and related disclosures. The Company’s primary sources of revenue are derived from interest and dividends earned on
loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue
recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit
accounts and gains/losses on the sale of OREO, did not change significantly from current practice. The standard permits the use of
either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective
transition method which requires application of ASU 2014-09 to uncompleted contracts at the date of adoption; however, periods prior
to the date of adoption will not be retrospectively revised as the impact of the ASU on uncompleted contracts at the date of adoption
was not material.
ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition of Financial Assets and Financial
Liabilities.” ASU 2016-01 makes targeted amendments to fair value measurement and disclosure guidance. ASU 2016-01 requires
equity investments (other than equity method investments) to be measured at fair value with changes in fair value recognized in net
income. This change is only applied if a readily determinable fair value can be obtained. Adoption of the standard also resulted in the
use of an exit price rather than an entrance price to determine the fair value of loans not measured at fair value on a non-recurring
basis in the consolidated balance sheets. See Note 7 – Fair Value disclosures for further information regarding the valuation of these
loans. ASU 2016-01 became effective for the Company on January 1, 2018.
82
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” (“ASU 2017-01”) to improve
such definition and, as a result, assist entities with evaluating whether transactions should be accounted for as acquisitions (or
disposals) of assets or as business combinations. The definition of a business impacts many areas of accounting including acquisitions,
disposals, goodwill and consolidation. ASU 2017-01 became effective for the Company on January 1, 2018 and is to be applied under
a prospective approach. The Company expects the adoption of this new guidance to impact the determination of whether future
acquisitions are considered business combinations or asset purchases.
Newly Issued But Not Yet Effective Accounting Standards
ASU 2016-02 “Leases (Topic 842)." ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which
is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is
an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not
significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where
necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” The
new standard was adopted by the Company on January 1, 2019. ASU 2016-02 provides for a modified retrospective transition
approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented
or as of the beginning of the period of adoption. The Company has elected to apply ASU 2016-02 as of the beginning of the period of
adoption (January 1, 2019) and will not restate comparative periods. The Company expects that the adoption of ASU 2016-02 will
result in the recognition of lease liabilities totaling $15,000,000 to $17,000,000 and the recognition of right-of-use assets totaling
$15,000,000 to $17,000,000, which results in an estimated 5 basis point decrease in the tier 1 capital to risk weighted assets ratio as of
the date of adoption. The initial balance sheet gross up upon adoption is primarily related to operating leases of certain real estate
properties. The Company has no material leasing arrangements for which it is the lessor of property or equipment. The Company has
made an accounting policy election to not apply the recognition requirements in the new standard to short-term leases. The Company
has elected to apply the package of practical expedients allowed by the new standard under which the Company need not reassess
whether any expired or existing contracts are or contain leases, the Company need not reassess the lease classification for any expired
or existing lease, and the Company need not reassess initial direct costs for any existing leases. The Company has also elected to use
the practical expedient to make an accounting policy election for leases of certain underlying assets to include both lease and nonlease
components as a single component and account for it as a lease. Adoption of ASU 2016-02 is not expected to materially change the
Company’s recognition of lease expense in future periods.
ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”
Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date
based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other
organizations will now use forward-looking information to better form their credit loss estimates. Many of the loss estimation
techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of
expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and
purchased financial assets with credit deterioration. ASU 2016-13 is effective for the Company on January 1, 2020 and must be
applied using the modified retrospective approach with limited exceptions. Early adoption is permitted for fiscal years, and interim
periods within those years, beginning after December 15, 2018. While the Company is currently unable to reasonably estimate the
impact of adopting ASU 2016-13, the Company expects that the impact of adoption will be significantly influenced by the
composition, characteristics and quality of its loan and securities portfolios as well as the prevailing economic conditions and forecasts
as of the adoption date.
ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-
04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under
ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit
with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the
reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting
unit. ASU 2017-04 will be effective for the Company on January 1, 2020, with earlier adoption permitted and is not expected to have a
significant impact on the Company's financial statements.
ASU 2017-08,“Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased
Callable Debt Securities.” ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to
require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is
applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on
individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not
change the accounting for callable debt securities held at a discount. ASU 2017-08 became effective for the Company on January 1,
2019, with early adoption permitted. The Company will record a $1.7 million impact of ASU 2017-08 in its 2019 financial statements.
ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income.” ASU 2018-02 amends ASC 220, Income Statement - Reporting Comprehensive Income,
to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from
83
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Tax Cuts and Jobs Act. ASU 2018-02 is effective on January 1, 2019, with early adoption permitted. The Company early adopted
ASU 2018-02 and recognized a decrease to retained earnings of $72 thousand due to a reclassification on January 1, 2018.
2. ACQUISITIONS
Acquisitions are accounted for using the acquisition method of accounting. Accordingly, the assets and liabilities of an acquired
entity are recorded at their fair value at the acquisition date. The excess of the purchase price over the estimated fair value of the net
assets is recorded as goodwill. The results of operations for an acquisition have been included in the Company’s consolidated financial
results beginning on the respective acquisition date.
The measurement period for the Company to determine the fair values of acquired identifiable assets and assumed liabilities will
end at the earlier of (1) twelve months from the date of the acquisition or (2) as soon as the Company receives the information it was
seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. The
following acquisition was completed on the date indicated below:
2018 Acquisition
Acquisition of Post Oak Bancshares, Inc.—On October 1, 2018, the Company completed the acquisition of Post Oak
Bancshares, Inc. (“Post Oak”) and its wholly-owned subsidiary Post Oak Bank, N.A. headquartered in Houston, Texas. Post Oak
operated thirteen bank offices, twelve located throughout the greater Houston metropolitan area and one in Beaumont, just outside of
the Houston metropolitan area. The Company acquired Post Oak to further expand its Houston, Texas area market. Goodwill resulted
from a combination of expected operational synergies and an enhanced branching network. Goodwill is not expected to be deductible
for tax purposes.
Pursuant to the merger agreement, the Company issued 8,402,010 shares of Company common stock for all outstanding shares
of Post Oak common stock and paid $21 thousand in cash for any fractional shares held by Post Oak shareholders. Additionally, all
outstanding Post Oak options were assumed by Allegiance and converted using the 0.7017 exchange ratio to 299,352 options at a
weighted average exercise price of $12.83 per option. Based on the $41.70 per share closing price of Allegiance common stock on
September 28, 2018, the total transaction value was approximately $359.0 million. The acquisition was accounted for under the
acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill of
$183.7 million which is calculated as the excess of both the consideration exchanged and liabilities assumed as compared to the fair
value of identifiable assets acquired, none of which is expected to be deductible for tax purposes. The intangible assets recognized in
the transaction will be amortized utilizing an accelerated method over their ten year estimated useful lives. The initial accounting for
the acquisition has not been completed because the fair values of the assets acquired and liabilities assumed have not yet been
finalized.
84
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of October 1, 2018, the Company finalized its valuation of all assets and liabilities acquired, resulting in no changes to
preliminary acquisition accounting adjustments. A summary of the final purchase price allocation is as follows (in thousands):
Fair value of consideration paid:
Common shares issued (8,402,010 shares)
Stock options issued (299,352)
Cash in lieu of fractional shares
Total consideration paid
Fair value of assets acquired:
Cash and cash equivalents
Investment securities
Loans
Premises and equipment
Core deposit intangibles
Other assets
Total assets acquired
Fair value of liabilities assumed:
Deposits
Other borrowed funds
Other liabilities
Total liabilities assumed
Fair value of net assets acquired
Goodwill resulting from acquisition
$
$
$
$
$
$
$
350,364
8,639
21
359,024
230,416
42,779
1,164,279
21,988
25,128
18,078
1,502,668
1,291,310
30,000
6,070
1,327,380
175,288
183,736
The fair value of net assets acquired includes fair value adjustments to certain acquired loans that were not considered impaired
as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. The following presents
details of all loans acquired as of October 1, 2018:
Commercial and industrial
Real estate:
Commercial real estate (including
multi-family residential)
Commercial real estate
construction and land
development
1-4 family residential (including
home equity)
Residential construction
Consumer and other
Total loans
Contractual
Balance
Fair Value
Discount
(Dollars in thousands)
$
221,098 $
217,204 $
(3,894 )
450,947
443,512
(7,435 )
167,386
165,387
(1,999 )
288,304
23,812
29,684
1,181,231 $
285,099
23,812
29,267
1,164,281 $
(3,205 )
—
(417 )
(16,950 )
$
In connection with the Post Oak acquisition, the Company acquired loans both with and without evidence of credit quality
deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan
losses. Acquired loans were segregated between those considered to be purchased credit impaired (“PCI”) loans and those without
credit impairment at acquisition.
85
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PCI Loans.
The following presents information at the acquisition date for PCI loans acquired in the transaction (dollars in thousands):
Contractually required principal and interest payments
Contractual cash flows not expected to be collected (nonaccretable difference)
Expected cash flows at acquisition
Interest component of expected cash flows (accretable yield)
Fair value of loans acquired with deterioration of credit quality
$
$
28,340
3,163
25,177
495
24,682
Non-PCI Loans.
The following table presents information at the acquisition date for non-PCI loans acquired in the transaction (in thousands):
Contractually required principal and interest payments
Accretable discount
Fair value at acquisition
$
$
1,153,317
13,293
1,140,024
The following table presents unaudited pro forma financial information as if the acquisition had occurred at the beginning of
2017. Post Oak’s results of operations were included in the Company’s results beginning October 1, 2018. The pro forma financial
information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the
assumed dates.
For the Years Ended December 31,
2018
2017
(Dollars in thousands, except per share data)
Net interest income
Noninterest income
Net income
Basic earnings per common share
Diluted earnings per common share
$
170,801 $
10,060
41,807
2.70
2.65
165,612
9,543
35,107
1.63
1.61
To determine pro forma information, the Company adjusted its year ended December 31, 2018 and 2017 historical results to
include the historical results for Post Oak for the year ended December 31, 2017 and the nine months ended September 30, 2018.
The pro forma information includes acquisition accounting adjustments to interest on loans, certificates of deposit and
subordinated debt, difference in the rate of borrowed funds, amortization of intangibles arising from the transaction and the related
income tax effects.
Earnings of Post Oak since the acquisition date have not been disclosed as the acquired company was merged into the Company
and separate financial information is not readily available.
The Company incurred approximately $1.7 million of pre-tax acquisition and merger-related expenses during the year ended
December 31, 2018 related to the Post Oak acquisition. The acquisition and merger-related expenses are reflected on the Company’s
income statement for 2018 but are excluded from the calculation of pro forma income above.
86
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. GOODWILL AND CORE DEPOSIT INTANGIBLES
Changes in the carrying amount of the Company’s goodwill and core deposit intangibles were as follows:
Goodwill
Core Deposit
Intangible
Assets
(Dollars in thousands)
Balance as of January 1, 2016
Sale of branch assets
Amortization
Balance as of December 31, 2016
Amortization
Balance as of December 31, 2017
$
Acquisition of Post Oak Bancshares, Inc.
Amortization
Balance as of December 31, 2018
$
39,389 $
—
—
39,389
—
39,389
183,736
—
223,125 $
5,230
(390 )
(785 )
4,055
(781 )
3,274
25,128
(1,815 )
26,587
Goodwill is recorded on the acquisition date of an entity. During the measurement period, the Company may record subsequent
adjustments to goodwill for provisional amounts recorded at the acquisition date. The Company performed its annual impairment test
on October 1, 2018 and determined no impairment was necessary.
The estimated aggregate future amortization expense for core deposit intangibles remaining as of December 31, 2018 is as
follows (dollars in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
4,712
3,922
3,296
3,003
2,323
9,331
26,587
4. CASH AND DUE FROM BANKS
The Bank can be required by the Federal Reserve Bank of Dallas to maintain average reserve balances. “Cash and due from
banks” in the consolidated balance sheets included a restricted amount of $27.7 million at December 31, 2018. The Bank was not
required to maintain reserve balances at December 31, 2017 or 2016.
5. SECURITIES
The amortized cost and fair value of investment securities were as follows:
Available for Sale
U.S. Government and agency securities
Municipal securities
Agency mortgage-backed pass-through securities
Corporate bonds and other
Total
December 31, 2018
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
(Dollars in thousands)
Fair
Value
$
$
8,570 $
219,068
66,987
46,303
340,928 $
161 $
1,258
237
15
1,671 $
(46 ) $
(3,541 )
(1,029 )
(690 )
(5,306 ) $
8,685
216,785
66,195
45,628
337,293
87
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available for Sale
U.S. Government and agency securities
Municipal securities
Agency mortgage-backed pass-through securities
Corporate bonds and other
Total
December 31, 2017
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
(Dollars in thousands)
Fair
Value
$
$
8,507 $
222,330
32,014
46,247
309,098 $
232 $
2,470
159
62
2,923 $
(24 ) $
(1,842 )
(361 )
(179 )
(2,406 ) $
8,715
222,958
31,812
46,130
309,615
As of December 31, 2018, the Company's management did not expect to sell any securities classified as available for sale with
material unrealized losses; and the Company believes that it is more likely than not it will not be required to sell any of these securities
before their anticipated recovery at which time the Company will receive full value for the securities. The fair value is expected to
recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management
does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2018,
management believes the unrealized losses in the previous table are temporary and no other than temporary impairment loss has been
realized in the Company’s consolidated statements of income.
The amortized cost and fair value of investment securities at December 31, 2018, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations at any time with or
without call or prepayment penalties.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Subtotal
Agency mortgage-backed pass through
securities
Total
Amortized
Cost
Fair
Value
$
$
(Dollars in thousands)
14,877
73,675
87,391
97,998
273,941
$
66,987
340,928
$
14,823
72,790
86,880
96,605
271,098
66,195
337,293
Securities with unrealized losses segregated by length of time such securities have been in a continuous loss position are as
follows:
Less than 12 Months
December 31, 2018
More than 12 Months
Total
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(Dollars in thousands)
Available for Sale
U.S. Government and agency
securities
Municipal securities
Agency mortgage-backed pass-
through securities
Corporate bonds and other
Total
$
$
999 $
10,140
$
—
(29 )
1,417
136,934
$
(46 )
(3,512 )
$
2,416
147,074
$
17,168
13,634
41,941 $
(209 )
(35 )
(273 )
$
22,819
29,014
190,184
$
(820 )
(655 )
(5,033 )
$
39,987
42,648
232,125
$
88
(46 )
(3,541 )
(1,029 )
(690 )
(5,306 )
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Less than 12 Months
December 31, 2017
More than 12 Months
Total
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
(Dollars in thousands)
Available for Sale
U.S. Government and agency
securities
Municipal securities
Agency mortgage-backed pass-
through securities
Corporate bonds and other
Total
$
$
3,110 $
42,249
$
(9 )
(517 )
595
56,483
$
(15 )
(1,325 )
$
3,705
98,732
$
13,238
30,203
88,800 $
(105 )
(179 )
(810 )
$
8,921
—
65,999
$
(256 )
—
(1,596 )
$
22,159
30,203
154,799
$
(24 )
(1,842 )
(361 )
(179 )
(2,406 )
There were no realized losses on the securities in the portfolio as the Company believes these securities are temporarily
impaired due to changes in market interest rates. The majority of the securities in an unrealized loss position are related to the
Company's municipal securities.
During 2018, the Company acquired $42.8 million and sold $12.7 million of securities acquired in the Post Oak transaction. No
gains or losses were recognized. During 2017, the Company sold $39.1 million in securities and recorded a net gain on the sales of
$18 thousand. The Company sold $2.5 million in securities during 2016 and recorded a gain on the sale of $30 thousand.
At December 31, 2018 and 2017, the Company did not own securities of any one issuer, other than the U.S. government and its
agencies, in an amount greater than 10% of the consolidated shareholders’ equity at such respective dates.
The carrying value of pledged securities $28.9 million and $5.0 million at December 31, 2018 and 2017, respectively. The
increase in pledged securities during the year ended December 31, 2018 was primarily due to $25.9 million of pledged securities that
were acquired from Post Oak. The majority of the securities were pledged to collateralize public fund deposits.
6. LOANS AND ALLOWANCE FOR LOAN LOSSES
The loan portfolio balances, net of unearned income and fees, consist of various types of loans primarily all made to borrowers
located within Texas and are classified by major type as follows:
Commercial and industrial
Mortgage warehouse
Real estate:
Commercial real estate (including multi-
family residential)
Commercial real estate construction and
land development
1-4 family residential (including home
equity)
Residential construction
Consumer and other
Total loans
Allowance for loan losses
Loans, net
December 31,
2018
2017
(Dollars in thousands)
702,037
48,274
$
457,129
69,456
$
1,650,912
1,080,247
430,128
243,389
649,311
186,411
41,233
3,708,306
(26,331 )
3,681,975 $
301,219
109,116
10,320
2,270,876
(23,649 )
2,247,227
$
(1) Mortgage warehouse loans are to unaffiliated mortgage loan originators collateralized by mortgage promissory notes which are
segregated in the Company’s mortgage warehouse portfolio. These promissory notes originated by the Company’s mortgage
warehouse customers carry terms and conditions as would be expected in the competitive permanent mortgage market and serve
as collateral under a traditional mortgage warehouse arrangement whereby such promissory notes are warehoused under a
revolving credit facility to allow for the end investor (or purchaser) of the note to receive a complete loan package and remit
funds to the bank. The maturity of each revolving line of credit facility is normally less than 24 months, while the promissory
89
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
notes that are warehoused under such facilities may have a much shorter length of time outstanding. For mortgage promissory
notes secured by residential property, the warehouse time is normally 10 to 20 days. For mortgage promissory notes secured by
commercial property, the warehouse time is normally 40 to 50 days. The funded balance of the mortgage warehouse portfolio
can have significant fluctuation based upon market demand for the product, level of home sales and refinancing activity, market
interest rates and velocity of end investor processing times.
Loan Origination/Risk Management
The Company has certain lending policies and procedures in place that are designed to maximize loan income within an
acceptable level of risk. The Company maintains an independent loan review department that reviews and validates the credit risk
program on a periodic basis. In addition, an independent third party loan review is performed on a semi-annual basis.
(i) Commercial and Industrial Loans. The Company makes commercial and industrial loans in its market area that are
underwritten on the basis of the borrower’s ability to service the debt from income. The Company generally takes as collateral a lien
on any available real estate, equipment or other assets owned by the borrower and typically obtains a personal guaranty of the
borrower or principal. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage
loans and therefore typically yield a higher return. The increased risk in commercial loans derives from the expectation that
commercial and industrial loans generally are serviced principally from the operations of the business, which may not be successful
and from the type of collateral securing these loans. As a result, commercial and industrial loans require more extensive underwriting
and servicing than other types of loans.
(ii) Commercial Real Estate. The Company makes loans collateralized by owner-occupied, nonowner-occupied and multi-
family real estate to finance the purchase or ownership of real estate.
The Company’s nonowner-occupied and multi-family commercial real estate lending typically involves higher loan principal
amounts and the repayment of these loans is dependent, in large part, on sufficient income from the properties securing the loans to
cover operating expenses and debt service. The Company generally requires the borrower to have had an existing relationship with the
Company and have a proven record of success. In addition, these loans are generally guaranteed by individual owners of the borrower
and have typically lower loan to value ratios.
Loans secured by owner-occupied properties generally involve less risk and represented 51.4% of the outstanding principal
balance of the Company’s commercial real estate loans at December 31, 2018. The Company is dependent on the cash flows of the
business occupying the property and its owners and requires these loans to be secured by property with adequate margins and to be
guaranteed by the individual owners. The Company’s owner-occupied commercial real estate loans collateralized by first liens on real
estate typically have fixed interest rates and amortize over a 10 to 20 year period.
(iii) Construction and Land Development Loans. The Company makes loans to finance the construction of residential and to
a lesser extent nonresidential properties. Construction loans generally are collateralized by first liens on real estate and have floating
interest rates. The Company generally conducts periodic inspections, either directly or through an agent, prior to approval of periodic
draws on these loans. Underwriting guidelines similar to those described above are also used in the Company’s construction lending
activities. Construction loans involve additional risks as they often involve the disbursement of funds with the repayment dependent
on the ultimate success of the project’s completion. Sources of repayment for these loans may be pre-committed permanent financing
or sale of the developed property. The loans in this portfolio are monitored closely by management. Due to uncertainties inherent in
estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it
can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of
these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on
the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If the Company is forced to
foreclose on a project prior to completion, there is no assurance that the Company will be able to recover all of the unpaid portion of
the loan. In addition, the Company may be required to fund additional amounts to complete a project and may have to hold the
property for an indeterminate period of time.
(iv) Residential Real Estate Loans. The Company’s lending activities also include the origination of 1-4 family residential
mortgage loans (including home equity loans) collateralized by owner-occupied residential properties located in the Company’s
market areas. The Company offers a variety of mortgage loan portfolio products which have a term of 5 to 7 years and generally
amortize over 10 to 20 years. Loans collateralized by 1-4 family residential real estate generally have been originated in amounts of no
more than 90% of appraised value.
90
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(v) Consumer and Other Loans. The Company makes a variety of loans to individuals for personal and household purposes
including secured and unsecured installment and term loans. Consumer loans are underwritten based on the individual borrower’s
income, current debt level, past credit history and the value of any available collateral. The terms of these loans typically range from
12 to 60 months and vary based upon the nature of collateral and size of loan. Generally, consumer loans entail greater risk than
residential real estate loans because they may be unsecured or if secured the value of the collateral, such as an automobile or boat, may
be more difficult to assess and more likely to decrease in value than real estate. In such cases, any repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency
often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition,
consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit
the amount which can be recovered on such loans.
Acquired Loans
PCI loans
The carrying amount of PCI loans included in the consolidated balance sheet and the related outstanding balance owed at
December 31, 2018 are presented in the table below (in thousands):
PCI loans:
Outstanding balance at December 31, 2018
Less: Discount
Recorded investment at December 31, 2018
$
$
26,862
3,599
23,263
Changes in the accretable yield for PCI loans for the year ended December 31, 2018 were as follows (in thousands):
Balance at beginning of period
Additions
Reclassifications from nonaccretable
Accretion
Balance at December 31, 2018
Non-PCI Loans.
$
$
—
495
—
59
436
The carrying amount of Non-PCI loans included in the consolidated balance sheet and the related outstanding balance owed at
December 31, 2018 are presented in the table below (in thousands).
Non-PCI loans:
Outstanding balance at December 31, 2018
Less: Discount
Recorded investment at December 31, 2018
$
$
1,124,342
10,650
1,113,692
Changes in the discount accretion for Non-PCI loans for the years ended December 31, 2018 were as follows (in thousands):
Balance at beginning of period
Additions
Reclassifications from nonaccretable
Accretion
Balance at December 31, 2018
Concentrations of Credit
$
$
—
13,293
—
2,643
10,650
The vast majority of the Company’s lending activity occurs in and around the Houston, Texas area. The Company’s loans are
primarily loans secured by real estate, including commercial and residential construction, owner-occupied and nonowner-occupied and
multi-family commercial real estate, raw land and other real estate based loans.
91
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Related Party Loans
As of December 31, 2018 and 2017, loans outstanding to directors, officers and their affiliates totaled $7.9 million and $4.4
million, respectively.
An analysis of activity with respect to these related-party loans is as follows:
Beginning balance on January 1
New loans and reclassified related loans
Repayments
Ending balance on December 31
2018
(Dollars in
thousands)
$
$
4,368
5,003
(1,501 )
7,870
Nonaccrual and Past Due Loans
An aging analysis of the recorded investment in past due loans, segregated by class of loans, is as follows:
December 31, 2018
Loans Past Due and Still Accruing
90 or More
Days
Total Past
Due Loans
30-89
Days
Nonaccrual
Loans
Current
Loans
Total
Loans
Commercial and industrial
Mortgage warehouse
Real estate:
$
$
1,951
—
$
—
—
$
1,951
—
10,861
—
$
689,225
48,274
$
702,037
48,274
(Dollars in thousands)
Commercial real estate
(including multi-family
residential)
Commercial real estate
construction and land
development
1-4 family residential
(including home equity)
Residential construction
Consumer and other
Total loans
$
3,502
1,300
3,643
-
91
10,487
$
—
—
—
—
—
—
3,502
17,776
1,629,634
1,650,912
1,300
974
427,854
430,128
3,643
-
91
10,487
$
3,201
—
141
32,953
642,467
186,411
41,001
$ 3,664,866
649,311
186,411
41,233
$ 3,708,306
$
December 31, 2017
Loans Past Due and Still Accruing
90 or More
Days
Total Past
Due Loans
30-89
Days
Nonaccrual
Loans
Current
Loans
Total
Loans
Commercial and industrial
Mortgage warehouse
Real estate:
$
$
1,069
—
$
—
—
$
1,069
—
$
6,437
—
449,623
69,456
$
457,129
69,456
(Dollars in thousands)
Commercial real estate
(including multi-family
residential)
Commercial real estate
construction and land
development
1-4 family residential
(including home equity)
Residential construction
Consumer and other
Total loans
$
4,932
5,274
924
674
74
12,947
$
4,932
6,110
1,069,205
1,080,247
5,274
924
674
74
12,947
$
—
238,115
243,389
781
—
—
13,328
299,514
108,442
10,246
$ 2,244,601
301,219
109,116
10,320
$ 2,270,876
—
—
—
—
—
—
$
92
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If interest on nonaccrual loans had been accrued under the original loan terms, approximately $1.0 million and $733 thousand
would have been recorded as income for the years ended December 31, 2018 and 2017, respectively.
Impaired Loans
Impaired loans by class of loans are set forth in the following tables.
With no related allowance recorded:
Commercial and industrial
Mortgage warehouse
Real estate:
Commercial real estate (including
multi-family residential)
Commercial real estate construction
and land development
1-4 family residential (including home
equity)
Residential construction
Consumer and other
Total
With an allowance recorded:
Commercial and industrial
Mortgage warehouse
Real estate:
Commercial real estate (including
multi-family residential)
Commercial real estate construction
and land development
1-4 family residential (including home
equity)
Residential construction
Consumer and other
Total
Total:
Commercial and industrial
Mortgage warehouse
Real estate:
Commercial real estate (including
multi-family residential)
Commercial real estate construction
and land development
1-4 family residential (including home
equity)
Residential construction
Consumer and other
Recorded
Investment
December 31, 2018
Unpaid
Principal
Balance
(Dollars in thousands)
Related
Allowance
$
4,354 $
—
4,771 $
—
11,322
11,322
1,326
1,326
2,742
—
3
19,747
9,150
—
2,741
—
3
20,163
9,545
—
—
—
—
—
—
—
—
—
3,898
—
11,542
11,542
2,641
3,114
3,114
—
—
—
23,806
13,504
—
—
—
—
24,201
14,316
—
190
—
—
—
6,729
3,898
—
22,864
22,864
2,641
4,440
4,440
2,742
—
3
43,553 $
2,741
—
3
44,364 $
190
—
—
—
6,729
$
93
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recorded
Investment
December 31, 2017
Unpaid
Principal
Balance
(Dollars in thousands)
Related
Allowance
With no related allowance recorded:
Commercial and industrial
Mortgage warehouse
Real estate:
Commercial real estate (including
multi-family residential)
Commercial real estate construction
and land development
1-4 family residential (including home
equity)
Residential construction
Consumer and other
Total
With an allowance recorded:
Commercial and industrial
Mortgage warehouse
Real estate:
Commercial real estate (including
multi-family residential)
Commercial real estate construction
and land development
1-4 family residential (including home
equity)
Residential construction
Consumer and other
Total
Total:
Commercial and industrial
Mortgage warehouse
Real estate:
Commercial real estate (including
multi-family residential)
Commercial real estate construction
and land development
1-4 family residential (including home
equity)
Residential construction
Consumer and other
—
—
—
—
—
—
—
—
1,640
—
716
—
—
—
—
2,356
1,640
—
716
—
—
—
—
2,356
$
5,792 $
—
6,666 $
—
12,155
12,155
209
209
948
—
—
19,104
5,600
—
948
—
—
19,978
5,652
—
8,009
8,194
—
—
—
—
—
13,609
11,392
—
—
—
—
13,846
12,318
—
20,164
20,349
209
209
948
—
—
32,713 $
948
—
—
33,824 $
$
94
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the average recorded investment of impaired loans and interest recognized on impaired loans.
Years Ended December 31,
2018
2017
Average Recorded
Investment
Interest Income
Recognized
Average Recorded
Investment
Interest Income
Recognized
$
14,555
—
$
$
423
—
11,972
—
$
(Dollars in thousands)
Commercial and industrial
Mortgage warehouse
Real estate:
Commercial real estate (including
multi-family residential)
Commercial real estate construction
and land development
1-4 family residential (including
home equity)
Residential construction
Consumer and other
Total
$
23,198
4,247
2,815
—
3
44,818
$
756
98
—
—
5
1,282
$
20,606
314
1,167
—
-
34,059
$
418
—
475
10
18
—
1
922
The average recorded investment of impaired loans for the year ended December 31, 2016 was $22.5 million. Interest income
recognized for the year ended December 31, 2016 was $862 thousand.
Credit Quality Indicators
The company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their
debt including factors such as: current financial information, historical payment experience, credit documentation, public information
and current economic trends. The Company analyzes loans individually by classifying the loans by credit risk. 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 risk ratings to be used as credit quality indicators.
The following is a general description of the risk ratings used:
Watch—Loans classified as watch loans may still be of high quality, but have an element of risk added to the credit such as
declining payment history, deteriorating financial position of the borrower or a decrease in collateral value.
Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s
credit position at some future date. They are characterized by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected.
Substandard—Loans classified as substandard have well-defined weaknesses on a continuing basis and are inadequately
protected by the current net worth and paying capacity of the borrower, impaired or declining collateral values, or a continuing
downturn in their industry which is reducing their profits to below zero and having a significantly negative impact on their cash flow.
These loans so classified are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are
not corrected.
Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added
characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values,
highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be
pass rated loans.
95
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on the most recent analysis performed, the risk category of loans by class of loan at December 31, 2018 is as follows:
Pass
Watch
Special
Mention
Substandard
Doubtful
Total
Commercial and industrial
Mortgage warehouse
Real estate:
Commercial real estate
(including multi-family
residential)
Commercial real estate
construction and land
development
1-4 family residential
(including home equity)
Residential construction
Consumer and other
Total loans
$
656,783
48,274
$
$
9,696
—
(Dollars in thousands)
13,874
—
$
21,684
—
$
$
—
—
702,037
48,274
1,570,243
29,702
7,101
43,866
—
1,650,912
424,460
729
2,149
2,790
629,657
186,411
40,673
$ 3,556,501
$
3,797
—
31
43,955
$
4,216
—
301
27,641
$
11,641
—
228
80,209
$
—
—
—
—
—
430,128
649,311
186,411
41,233
$ 3,708,306
The following table presents the risk category of loans by class of loan at December 31, 2017:
Pass
Watch
Special
Mention
Substandard
Doubtful
Total
(Dollars in thousands)
$
427,336
69,456
$
10,274
—
$
$
2,195
—
17,324
—
$
$
—
—
457,129
69,456
1,016,831
23,039
4,685
35,692
—
1,080,247
231,536
4,397
—
7,456
295,744
103,611
10,207
$ 2,154,721
$
2,696
5,505
111
46,022
$
785
—
—
7,665
$
1,994
—
2
62,468
$
—
—
—
—
—
243,389
301,219
109,116
10,320
$ 2,270,876
Commercial and industrial
Mortgage warehouse
Real estate:
Commercial real estate
(including multi-family
residential)
Commercial real estate
construction and land
development
1-4 family residential
(including home equity)
Residential construction
Consumer and other
Total loans
Allowance for Loan Losses
At December 31, 2018, the allowance for loan losses totaled $26.3 million, or 0.71% of total loans. At December 31, 2017, the
allowance totaled $23.6 million or 1.04% of total loans. Acquired loans are carried over without an allowance for loan losses as they
are recorded at fair value at the acquisition date. However, the Company recorded a discount on the acquired loans which will be
prospectively accreted, increasing its basis in such loans. At December 31, 2018, the balance of the acquisition accounting discount
was $14.2 million.
96
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the activity in the allowance for loan losses by portfolio type for the years ended December 31,
2018, 2017 and 2016:
Commercial
Commercial real Commercial real
estate (including estate construction
and
industrial
Mortgage
warehouse
multi-family
residential)
and land
development
1-4 family
residential
(including
home equity)
(Dollars in thousands)
Residential
construction
Consumer
and other
Total
Allowance for loan losses:
Balance December 31, 2017 $
Provision for loan losses
Charge-offs
Recoveries
Net charge-offs
Balance December 31, 2018 $
Allowance for loan losses:
Balance December 31, 2016 $
Provision for loan losses
Charge-offs
Recoveries
Net charge-offs
Balance December 31, 2017 $
Allowance for loan losses:
Balance December 31, 2015 $
Provision for loan losses
Charge-offs
Recoveries
Net charge-offs
Balance December 31, 2016 $
7,694 $
2,234
(2,424 )
847
(1,577 )
8,351 $
5,059 $
9,792
(7,673 )
516
(7,157 )
7,694 $
3,644 $
1,951
(722 )
186
(536 )
5,059 $
— $
—
—
—
—
— $
— $
—
—
—
—
— $
— $
—
—
—
—
— $
10,253 $
1,588
(42 )
102
60
11,901 $
8,950 $
1,424
(124 )
3
(121 )
10,253 $
5,914 $
3,122
(129 )
43
(86 )
8,950 $
2,525 $
199
—
—
—
2,724 $
1,217 $
1,298
—
10
10
2,525 $
1,221 $
(4 )
—
—
—
1,217 $
2,140 $
127
(25 )
—
(25 )
2,242 $
1,876 $
254
—
10
10
2,140 $
1,432 $
434
—
10
10
1,876 $
942 $
98
—
—
—
1,040 $
748 $
194
—
—
—
942 $
820 $
(72 )
—
—
—
748 $
95 $
2
(24 )
—
(24 )
73 $
61 $
226
(196 )
4
(192 )
95 $
67 $
38
(49 )
5
(44 )
61 $
23,649
4,248
(2,515 )
949
(1,566 )
26,331
17,911
13,188
(7,993 )
543
(7,450 )
23,649
13,098
5,469
(900 )
244
(656 )
17,911
The following table presents the balance in the allowance for loan losses by portfolio type based on the impairment method as of
December 31, 2018 and 2017:
Commercial
Commercial real Commercial real
estate (including estate construction
and
industrial
Mortgage
warehouse
multi-family
residential)
and land
development
1-4 family
residential
(including
home equity)
(Dollars in thousands)
Residential
construction
Consumer
and other
Total
Allowance for loan losses
related to:
December 31, 2018
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total allowance for loan
losses
Allowance for loan losses
related to:
December 31, 2017
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total allowance for loan
losses
$
3,898 $
— $
2,641 $
190 $
— $
— $
— $
6,729
4,453
—
9,260
2,534
2,242
1,040
73
19,602
$
8,351 $
— $
11,901 $
2,724 $
2,242 $
1,040 $
73 $
26,331
$
1,640 $
— $
716 $
— $
— $
— $
— $
2,356
6,054
—
9,537
2,525
2,140
942
95
21,293
$
7,694 $
— $
10,253 $
2,525 $
2,140 $
942 $
95 $
23,649
97
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the recorded investment in loans held for investment by portfolio type based on the impairment
method as of December 31, 2018 and 2017:
Commercial
Commercial real Commercial real
estate (including estate construction
and
industrial
Mortgage
warehouse
multi-family
residential)
and land
development
1-4 family
residential
(including
home equity)
(Dollars in thousands)
Residential
construction
Consumer
and other
Total
Recorded investment in loans:
December 31, 2018
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total loans evaluated for
impairment
Recorded investment in loans:
December 31, 2017
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total loans evaluated for
impairment
$
13,504 $
— $
22,864 $
4,440 $
2,742 $
— $
3 $
43,553
688,533
48,274
1,628,048
425,688
646,569
186,411
41,230
3,664,753
$
702,037 $
48,274
1,650,912 $
430,128 $
649,311 $
186,411 $
41,233 $
3,708,306
$
11,392 $
— $
20,164 $
209 $
948 $
— $
— $
32,713
445,737
69,456
1,060,083
243,180
300,271
109,116
10,320
2,238,163
$
457,129 $
69,456 $
1,080,247 $
243,389 $
301,219 $
109,116 $
10,320 $
2,270,876
Troubled Debt Restructurings
As of December 31, 2018 and 2017, the Company had a recorded investment in troubled debt restructurings of $33.1 million
and $25.6 million, respectively. The Company allocated $3.0 million and $2.2 million of specific reserves for these loans at
December 31, 2018 and 2017, respectively, and did not commit to lend additional amounts on these loans.
The following table presents information regarding loans modified in a troubled debt restructuring during the years ended
December 31, 2018, 2017 and 2016:
2018
Pre-
Post-
As of December 31,
2017
Pre-
Post-
2016
Pre-
Post-
Modification of
Modification of
Modification of
Modification of
Modification of
Modification of
Number of
Contracts Recorded Investment Recorded Investment Contracts Recorded Investment Recorded Investment Contracts Recorded Investment Recorded Investment
Number of
Number of
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
Outstanding
Troubled Debt Restructurings
Commercial and industrial
Mortgage warehouse
Real estate:
Commercial real estate
(including multi-family
residential)
Commercial real estate
construction and land
development
1-4 family residential
(including home equity)
Residential construction
Consumer and other
Total
11 $
—
3
1
—
—
—
15 $
(Dollars in thousands)
2,770 $
—
2,770
—
9 $
—
2,399 $
—
2,399
—
21 $
—
3,939 $
—
3,939
—
4,288
4,288
6
11,837
11,837
8
7,144
7,144
3,114
3,114
1
210
210
—
—
—
10,172 $
—
—
—
10,172
1
—
—
17 $
86
—
—
14,532 $
86
—
—
14,532
—
—
—
1
30 $
—
—
—
6
11,089 $
—
—
—
6
11,089
Troubled debt restructurings resulted in charge-offs of $272 thousand, $136 thousand and $211 thousand during the years ended
December 31, 2018, 2017 and 2016, respectively.
As of December 31, 2018, there were four defaults totaling $200 thousand on loans that were modified as troubled debt
restructurings during the preceding 12 months. Default is determined at 90 or more days past due. The modifications primarily related
to extending the amortization periods of the loans. The Company did not grant principal reductions on any restructured loans. There
were no commitments to lend additional amounts for the years 2018 and 2017. During the year ended December 31, 2018, the
Company added $10.2 million in new troubled debt restructurings, of which $9.8 million was still outstanding on December 31, 2018.
98
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FAIR VALUE
The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value
disclosures. Fair value represents the estimated exchange price that would be received from selling an asset or paid to transfer a
liability, otherwise known as an “exit price” in the principal or most advantageous market available to the entity in an orderly
transaction between market participants on the measurement date.
Fair Value Hierarchy
•
•
•
Level 1—Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access as of the
measurement date.
Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data.
Level 3—Significant unobservable inputs that reflect management’s judgment and assumptions that market participants
would use in pricing an asset or liability that are supported by little or no market activity.
The carrying amounts and estimated fair values of financial instruments that are reported on the balance sheet are as follows:
Financial assets
Cash and cash equivalents
Available for sale securities
Loans held for investment, net of
allowance
FHLB stock
Accrued interest receivable
Financial liabilities
Deposits
Accrued interest payable
Borrowed funds
Subordinated debt
Financial assets
Cash and cash equivalents
Available for sale securities
Loans held for investment, net of
allowance
FHLB stock
Accrued interest receivable
Financial liabilities
Deposits
Accrued interest payable
Borrowed funds
Subordinated debt
Carrying
Amount
As of December 31, 2018
Estimated Fair Value
Level 1
Level 2
(Dollars in thousands)
Level 3
Total
$
268,947 $
337,293
268,947 $
—
— $
337,293
— $
—
268,947
337,293
3,681,975
10,941
17,010
—
N/A
65
— 3,674,241
N/A
13,447
N/A
3,498
3,674,241
N/A
17,010
$ 3,662,536 $
2,812
225,493
48,899
— $ 3,653,244 $
—
2,812
—
230,445
—
49,663
— $ 3,653,244
—
2,812
—
230,445
—
49,663
Carrying
Amount
As of December 31, 2017
Estimated Fair Value
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
$
182,103 $
309,615
182,103 $
—
— $
309,615
— $
—
182,103
309,615
2,247,227
12,862
12,194
—
N/A
3
— 2,238,721
N/A
8,895
N/A
3,296
2,238,721
N/A
12,194
$ 2,213,974 $
610
282,569
48,659
— $ 2,209,111 $
—
610
—
288,887
—
48,659
— $ 2,209,111
—
610
—
288,887
—
48,659
99
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value estimates presented herein are based on pertinent information available to management as of the dates indicated.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value, non-financial assets and
non-financial liabilities and for estimating fair value for financial instruments not recorded at fair value:
Cash and Cash Equivalents—For these short-term instruments, the carrying amount is a reasonable estimate of fair value. The
Company classifies the estimated fair value of these instruments as Level 1.
Available for Sale Securities—Fair values for investment securities are based upon quoted market prices, if available, and are
considered Level 1 inputs. For all other available for sale securities, if quoted prices are not available, fair values are measured based
on market prices for similar securities and are considered Level 2 inputs. For these securities, the Company generally obtains fair
value measurements from an independent pricing service. The fair value measurements consider observable data that may include
dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus
prepayment speeds, credit information and the bond’s terms and conditions, among other things.
Available for sale securities are recorded at fair value on a recurring basis.
Loans Held for Investment—The estimated fair value approximates carrying value for variable-rate loans that reprice
frequently and that have no significant change in credit risk resulting in a Level 3 classification. Fair values for fixed-rate loans and
variable rate loans which reprice infrequently are estimated by discounting future cash flows. In accordance with ASU 2016-01, which
was adopted effective January 1, 2018, the discount rates used to determine the fair value of loans at December 31, 2018 used interest
rate spreads that reflect factors such as liquidity, credit and nonperformance risk of the loans. The discount rates used to determine the
fair value of loans at December 31, 2017 were based on interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality resulting in a Level 3 classification.
Federal Home Loan Bank Stock—The fair value of FHLB stock is estimated to be equal to its carrying amount as it is not
practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Deposits—The fair value of demand deposits (e.g., interest and noninterest checking, savings and certain types of money
market deposits) is the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 2
classification. The fair value of fixed rate certificates of deposit is estimated using a discounted cash flows calculation that applies
interest rates currently offered on certificates of deposit to a schedule of aggregated expected monthly maturities on time deposits
resulting in a Level 2 classification.
Accrued Interest—The carrying amounts of accrued interest approximate their fair values resulting in a Level 2 or 3
classification.
Borrowed Funds—The fair value of the Company’s borrowed funds are estimated using discounted cash flow analyses based
on the current borrowing rates for similar types of borrowing arrangements and are measured utilizing Level 2 inputs.
Subordinated Debt—The fair values of subordinated debentures and notes are estimated using discounted cash flow analyses
based on the Company’s current borrowing rates for similar types of borrowing arrangements and are measured utilizing Level 2
inputs.
Off-balance sheet instruments—The fair values of off-balance sheet commitments to extend credit and standby letters of credit
financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of
the agreements and the counterparties’ credit standing. The Company has reviewed the unfunded portion of commitments to extend
credit as well as standby and other letters of credit and has determined that the fair value of such financial instruments is not material.
100
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present fair values for assets measured at fair value on a recurring basis:
Available for sale securities:
U.S. Government and agency securities
Municipal securities
Agency mortgage-backed pass-through
securities
Corporate bonds and other
Total
Available for sale securities:
U.S. Government and agency securities
Municipal securities
Agency mortgage-backed pass-through
securities
Corporate bonds and other
Total
As of December 31, 2018
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
$
$
$
$
—
—
—
—
—
$
$
8,685
216,785
$
66,195
45,628
337,293
$
—
—
—
—
—
$
$
8,685
216,785
66,195
45,628
337,293
As of December 31, 2017
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
—
—
—
—
—
$
$
8,715
222,958
$
31,812
46,130
309,615
$
—
—
—
—
—
$
$
8,715
222,958
31,812
46,130
309,615
There were no liabilities measured at fair value on a recurring basis as of December 31, 2018 or 2017. There were no transfers
between levels during 2018 or 2017.
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is the instruments are not measured at fair
value on an ongoing basis, but are subject to fair value adjustments in certain circumstances such as evidence of impairment.
Impaired loans:
Commercial and industrial
Commercial real estate (including
multi-family residential)
Commercial real estate construction
and land development
Other real estate owned
Impaired loans:
Commercial and industrial
Commercial real estate (including
multi-family residential)
Other real estate owned
Level 1
As of December 31, 2018
Level 2
(Dollars in thousands)
Level 3
$
—
$
—
$
5,647
—
—
—
—
$
—
—
—
—
$
8,901
2,924
630
18,102
$
Level 1
As of December 31, 2017
Level 2
(Dollars in thousands)
Level 3
$
—
$
—
$
4,012
—
—
—
$
—
—
—
$
7,478
365
11,855
$
101
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Historically, the Company measures fair value for certain loans and other real estate owned on a nonrecurring basis as described
below.
Impaired Loans with Specific Allocation of Allowance
Impaired loans are those loans the Company has measured at fair value, generally based on the fair value of the loan’s collateral.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect
all amounts due pursuant to the contractual terms of the loan agreement. Impairment is measured by estimating the fair value of the
loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan’s
collateral. For real estate loans, fair value of the impaired loan’s collateral is determined by third party appraisals, which are then
adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation
methods (income, sales comparable or cost) vary based on the status of the project or property. For example, land is generally based
on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs
may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews
the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically
range from 5% to 10% of the appraised value. For non-real estate loans, fair value of the impaired loan’s collateral may be determined
using an appraisal, net book value per the borrower’s financial statements or aging reports, adjusted or discounted based on
management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and
knowledge of the customer and the customer's business.
During the years ended December 31, 2018 and 2017, certain impaired loans were reevaluated and reported at fair value through
a specific allocation of the allowance for loan losses. At December 31, 2018, the total reported fair value of impaired loans of $17.5
million based on collateral valuations utilizing Level 3 valuation inputs had a carrying value of $24.2 million that was reduced by
specific allowance allocations totaling $6.7 million. At December 31, 2017, the total reported fair value of impaired loans of $11.5
million based on collateral valuations utilizing Level 3 valuation inputs had a carrying value of $13.8 million that was reduced by
specific allowance allocations totaling $2.4 million.
Other Real Estate Owned
Other real estate owned is comprised of real estate acquired in partial or full satisfaction of loans. Other real estate owned is
recorded at its estimated fair value less estimated selling and closing costs at the date of transfer. Any excess of the related loan
balance over the fair value less expected selling costs is charged to the allowance. Subsequent declines in fair value are reported as
adjustments to the carrying amount and are recorded against earnings. The fair value of other real estate owned is determined using
appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in
the marketplace. For this asset class, the actual valuation methods (income, sales comparable or cost) vary based on the status of the
project or property. For example, land is generally based on the sales comparable method while construction is based on the income
and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three
methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value
downward to consider selling and closing costs, which typically range from 5% to 10% of the appraised value.
At December 31, 2018, the balance of other real estate owned consisted of a $630 thousand foreclosed commercial real estate
property recorded as a result of obtaining physical possession of the property. The Company had $365 thousand of other real estate
owned at December 31, 2017.
8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
Land
Buildings
Leasehold improvements
Furniture, fixtures and equipment
Construction in progress
Total
Less: accumulated depreciation
Premises and equipment, net
As of December 31,
2018
2017
(Dollars in thousands)
11,586 $
23,455
5,291
11,858
480
52,670
10,953
41,717 $
5,376
7,977
5,059
8,967
320
27,699
9,222
18,477
$
$
Depreciation expense was $2.1 million for the year ended December 31, 2018 and $1.6 million for each of the years ended
December 31, 2017 and 2016.
102
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. DEPOSITS
Time deposits that meet or exceed the Federal Deposit Insurance Corporation (the “FDIC”) insurance limit of $250 thousand at
December 31, 2018 and December 31, 2017 were $509.3 million and $227.4 million, respectively.
Scheduled maturities of time deposits for the next five years are as follows (dollars in thousands):
Within one year
After one but within two years
After two but within three years
After three but within four years
After four but within five years
Total
$
$
793,284
161,877
89,942
92,790
68,598
1,206,491
The Company has $261.1 million and $314.8 million of brokered deposits, and there were no major concentrations of deposits
with any one depositor at December 31, 2018 and 2017, respectively. Included in the December 31, 2017 amount were reciprocal
deposits that the Company placed through the Certificates of Deposits Account Registry Service (CDARS) Network of $68.4 million.
Related party deposits from principal officers, directors and their affiliates at December 31, 2018 and 2017 were $9.6 million
and $14.8 million, respectively.
10. BORROWINGS AND BORROWING CAPACITY
The Company has an available line of credit with the FHLB of Dallas, which allows the Company to borrow on a collateralized
basis. FHLB advances are used to manage liquidity as needed. The advances are secured by a blanket lien on certain loans. Maturing
advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits. At
December 31, 2018, the Company had total borrowing capacity of $1.06 billion, of which $765.4 million was available under this
agreement and $296.5 million was outstanding. FHLB advances of $225.0 million were outstanding at December 31, 2018, at a
weighted average rate of 2.57%. Letters of credit were $71.5 million at December 31, 2018, of which $8.8 million expired in January
2019, $10.2 million expired in February 2019, $7.1 million will expire in April 2019, $7.1 million will expire in May 2019, $5.5
million will expire in August 2019, $25.0 million will expire in October 2019, $6.3 million will expire in December 2019 and $1.5
million will expire in January 2020.
On December 28, 2018, the Company amended its revolving credit agreement to increase the maximum commitment to advance
funds to $45.0 million which will reduce annually by $7.5 million beginning in December 2020 and on each December 22nd for the
following years thereafter. The Company is required to repay any outstanding balance in excess of the then-current maximum
commitment amount. The revised agreement will mature in December 2025 and is secured by 100% of the capital stock of the Bank.
The credit agreement contains certain restrictive covenants. At December 31, 2018, the Company believes it was in compliance with
all such debt covenants and had not been made aware of any noncompliance by the lender. The interest rate on the debt is the Prime
Rate minus 25 basis points, or 5.00%, at December 31, 2018, and is paid quarterly. Scheduled principal maturities are as follows
(dollars in thousands):
2019
2020
2021
2022
2023 and thereafter
Total
$
$
—
—
—
—
569
569
11. SUBORDINATED DEBT
Junior Subordinated Debentures
On January 1, 2015, the Company acquired F&M Bancshares and assumed Farmers & Merchants Capital Trust II and Farmers
& Merchants Capital Trust III with an aggregate original principal amount of $11.3 million and a current fair value of $9.4 million at
December 31, 2018. At acquisition, the Company recorded a discount of $2.5 million on the debentures. The difference between the
carrying value and contractual balance will be recognized as a yield adjustment over the remaining term for the debentures. Each of
the trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in
the Company’s junior subordinated debentures. The preferred trust securities of each trust represent preferred beneficial interests in the
103
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by
the trust. The common securities of each trust are wholly owned by the Company. Each trust’s ability to pay amounts due on the trust
preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures. The
debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company’s present and
future senior indebtedness. The Company has fully and unconditionally guaranteed each trust’s obligations under the trust securities
issued by such trust to the extent not paid or made by each trust, provided such trust has funds available for such obligations. The
junior subordinated debentures are included in Tier 1 capital under current regulatory guidelines and interpretations.
Under the provisions of each issue of the debentures, the Company has the right to defer payment of interest on the debentures
at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are
deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.
A summary of pertinent information related to the Company's issuances of junior subordinated debentures outstanding at
December 31, 2018 is set forth in the table below:
Description
Issuance
Date
Trust
Preferred
Securities
Outstanding
Interest Rate (1)
Farmers & Merchants Capital Trust II
Farmers & Merchants Capital Trust III
November 13, 2003
$
June 30, 2005
7,500
3,500
3 month LIBOR + 3.00%
3 month LIBOR + 1.80%
Junior
Subordinated
Debt Owed
to Trusts
$
$
7,732
3,609
11,341
Maturity
Date (2)
November 8, 2033
July 7, 2035
(1) The 3-month LIBOR in effect as of December 31, 2018 was 2.7902%.
(2) All debentures are currently callable.
Subordinated Notes
In December 2017, the Bank completed the issuance, through a private placement, of $40.0 million aggregate principal amount
of Fixed-to-Floating Rate Subordinated Notes (the "Notes") due December 15, 2027. The Notes were issued at a price equal to 100%
of the principal amount, resulting in net proceeds to the Bank of $39.4 million. The Bank used the net proceeds from the offering to
support its growth and for general corporate purposes. The Notes are intended to qualify as Tier 2 capital for bank regulatory purposes.
The Notes bear a fixed interest rate of 5.25% per annum until (but excluding) December 15, 2022, payable semi-annually in
arrears. From December 15, 2022, the Notes will bear a floating rate of interest equal to 3-Month LIBOR + 3.03% until the Notes
mature on December 15, 2027, or such earlier redemption date, payable quarterly in arrears. The Notes will be redeemable by the
Bank, in whole or in part, on or after December 15, 2022 or, in whole but not in part, upon the occurrence of certain specified tax
events, capital events or investment company events. Any redemption will be at a redemption price equal to 100% of the principal
amount of Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The
Notes are not subject to redemption at the option of the holders.
12. INCOME TAXES
The components of the provision for federal income taxes are as follows:
Current
Deferred
Total
2018
Years Ended December 31,
2017
(Dollars in thousands)
2016
$
$
8,204 $
(256 )
7,948 $
8,320 $
427
8,747 $
11,162
(1,608 )
9,554
104
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reported income tax expense differs from the amounts computed by applying the U.S. federal statutory income tax rate to
income before income taxes for the years ended December 31, 2018, 2017 and 2016 due to the following:
2018
Years Ended December 31,
2017
(Dollars in thousands)
2016
Taxes calculated at statutory rate
$
9,504 $
9,233 $
11,342
Increase (decrease) resulting from:
Stock based compensation
Effect of tax exempt income
Provisional deferred tax adjustment
related to reduction in U.S. federal
statutory income tax rate
Other, net
Total
$
(400 )
(1,284 )
(755 )
(2,328 )
—
128
7,948 $
2,621
(24 )
8,747 $
67
(1,929 )
—
74
9,554
Income tax expense for 2018 was impacted by the reduction in the U.S. federal statutory income tax rate to 21% under the Tax
Cuts and Jobs Act, which was enacted on December 22, 2017. During 2017, as a result of the new law, the Company recognized a
provisional net tax expense totaling $2.6 million. During 2016, the Company adopted a new accounting standard that requires the
income tax effects associated with stock-based compensation to be recognized as a component of income tax expense. The Company
recognized net tax benefits related to stock-based compensation totaling $587 thousand in 2018 and $1.1 million in 2017.
Year-end deferred taxes are presented in the table below. As a result of the Tax Cuts and Jobs Act enacted on December 22,
2017, deferred taxes as of December 31, 2018 and 2017 are based on the 21% and 35% federal income tax rate, respectively.
Deferred tax assets and liabilities are as follows:
As of December 31,
2018
2017
(Dollars in thousands)
$
5,898 $
Deferred tax assets:
Allowance for credit losses
Net unrealized loss on available for
sale securities
Deferred compensation
Total deferred tax assets
Deferred tax liabilities:
Core deposit intangible and other
purchase accounting adjustments
Net unrealized gain on available for
sale securities
Premises and equipment basis difference
Total deferred tax liabilities
Net deferred tax assets
$
761
366
7,025
(2,718 )
—
(2,035 )
(4,753 )
2,272 $
5,284
—
177
5,461
(1,100 )
(65 )
(321 )
(1,486 )
3,975
Interest and penalties related to tax positions are recognized in the period in which they begin accruing or when the entity claims
the position that does not meet the minimum statutory thresholds. The Company does not have any uncertain tax positions and does
not have any interest and penalties recorded in the income statement for the years ended December 31, 2018, 2017 and 2016. The
Company is no longer subject to examination by the US Federal Tax Jurisdiction for the years prior to 2015.
13. STOCK BASED COMPENSATION
At December 31, 2018, the Company had two stock-based employee compensation plans with awards outstanding. In
connection with the acquisition of Post Oak Bancshares, Inc., on October 1, 2018, the Company assumed the Post Oak Bancshares,
Inc. Stock Option Plan, under which no additional awards will be issued. The Company accounts for stock based employee
compensation plans using the fair value-based method of accounting. The Company recognized total stock based compensation
expense of $1.7 million, $1.8 million and $1.5 million for the years ended December 31, 2018, 2017 and 2016, respectively. During
2015, the Company’s Board of Directors and shareholders approved the 2015 Amended and Restated Stock Awards and Incentive Plan
(the “Plan”) covering certain awards of stock-based compensation to key employees and directors of the Company. The Plan was
105
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amended in 2017 as the shareholders authorized a maximum aggregate number of shares of stock to be issued of 1,900,000, any or all
of which may be issued through incentive stock options and restricted stock.
Stock Options
Options to purchase a total of 1,309,231 shares of Company stock have been granted as of December 31, 2018. Under the Plan,
options are exercisable up to 10 years from the date of the grant and, dependent on the terms of the applicable award agreement
generally vest 4 years after the date of grant. The fair value of stock options granted is estimated at the date of grant using the Black-
Scholes option-pricing model.
As part of the Post Oak acquisition, all outstanding Post Oak options were assumed by Allegiance and converted using the
0.7017 exchange ratio to 299,352 options at a weighted average exercise price of $12.83 per option.
The expected volatility was determined based on historical volatilities of Allegiance's common stock. The expected term of
options granted is based on historical data and represents the period of time that options granted are expected to be outstanding and
takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the
U.S. Treasury yield curve in effect at the time of the grant. The Black-Scholes pricing model utilizes certain assumptions noted in the
table below.
Risk-free interest rate
Expected term
Expected stock price volatility
Dividend yield
2018
2017
2016
2.72 %
10.00
29.26 %
—
2.40 %
10.00
29.70 %
—
1.76 %
10.00
34.60 %
—
A summary of the activity in the stock option plans during the years ended December 31, 2018 and 2017 is set forth below:
Options outstanding, January 1, 2017
Options granted
Options exercised
Options forfeited
Options outstanding, December 31, 2017
Options granted
Options assumed
Options exercised
Options forfeited
Options outstanding, December 31, 2018
Options vested and exercisable,
December 31, 2018
Number of
Options
(In thousands)
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual Term
(In years)
Aggregate
Intrinsic
Value
(In thousands)
935 $
64
(215 )
(9 )
775 $
4
299
(244 )
(32 )
802 $
18.21
36.88
17.50
23.35
19.94
40.40
12.83
13.88
29.53
18.88
6.23 $
16,773
5.72 $
13,718
4.61 $
10,830
677 $
17.32
4.09 $
10,193
The Company expects all outstanding options at December 31, 2018 to vest.
Information related to the stock option plans during each year is as follows:
Intrinsic value of options exercised
Cash received from option exercises
Weighted average fair value of options
granted
$
$
2018
2017
(In thousands)
2016
3,254 $
3,393
3,371 $
3,743
1,128
1,782
18.00 $
16.55 $
10.51
As of December 31, 2018, there was $950 thousand of total unrecognized compensation cost related to nonvested stock options
granted under the plans. The cost is expected to be recognized over a weighted-average period of 1.41 years.
106
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Awards
The Company has issued 226,529 restricted stock awards under the Plan as of December 31, 2018. During 2016, the Company
awarded 15,401 shares of restricted stock with a weighted average grant date fair value of $17.52. During 2017, the Company
awarded 28,106 shares of restricted stock with a weighted average grant date fair value of $36.17. During 2018, the Company
awarded 122,127 shares of restricted stock with a weighted average grant date fair value of $39.04. The shares of restricted stock
generally vest over a period of 4 years and are considered outstanding at the date of issuance. The Company accounts for shares of
restricted stock by recording the fair value of the grant on the award date as compensation expense over the vesting period.
A summary of the activity of the nonvested shares of restricted stock as of December 31, 2018 and 2017 including changes
during the years then ended is as follows:
Nonvested share awards outstanding,
January 1, 2017
Share awards granted
Share awards vested
Unvested share awards forfeited or cancelled
Nonvested share awards outstanding,
December 31, 2017
Share awards granted
Share awards vested
Unvested share awards forfeited or cancelled
Nonvested share awards outstanding,
December 31, 2018
Number of
Shares
Weighted
Average Grant
Date Fair
Value
(Shares in thousands)
24 $
28
(11 )
—
41 $
122
(20 )
—
143 $
18.31
36.17
18.32
—
30.46
39.04
30.12
—
37.48
At December 31, 2018, there was $4.8 million of unrecognized compensation expense related to the restricted stock awards
which is expected to be recognized over a weighted-average period of 3.59 years. The total fair value of restricted stock awards that
fully vested during the years ended December 31, 2018, 2017 and 2016 was approximately $621 thousand, $203 thousand and $172
thousand, respectively.
14. OTHER EMPLOYEE BENEFITS
401(k) benefit plan
The Company has a 401(k) benefit plan whereby participants may contribute a percentage of their compensation. The Company
matches 50% of an employee's contributions up to 6% of the employee’s compensation, for a maximum match of 3% of
compensation. Matching contribution expense as of December 31, 2018, 2017 and 2016 was $962 thousand, $789 thousand and $637
thousand, respectively.
Profit sharing plan
The financial statements include an accrual for $2.5 million, $1.5 million and $1.7 million for a contribution to the plan as a
profit sharing contribution for the years ended December 31, 2018, 2017 and 2016, respectively.
Employee Stock Purchase Plan
The Company offers its employees an opportunity to purchase shares of Allegiance’s common stock, pursuant to the terms of the
Allegiance Bancshares, Inc. Amended and Restated Employee Stock Purchase Plan, as amended (“ESPP”). The ESPP was adopted by
the Board of Directors to provide employees with an opportunity to purchase shares of Allegiance in order to provide employees a
more direct opportunity to participate in the Company’s growth. The Company allows employees to purchase shares at a 15% discount
to market value and thus incurs stock based compensation expense for the fair value of the discount given. The Company recognized
total stock based compensation expense of $48 thousand, $144 thousand and $90 thousand for the years ended December 31, 2018,
2017, and 2016 respectively.
107
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles
generally accepted in the United States are not included in the Company’s consolidated balance sheets. The Company enters into these
transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby and
commercial letters of credit, which involve to varying degrees elements of credit risk and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets. The Company uses the same credit policies in making commitments and conditional
obligations as it does for on balance sheet instruments.
Commitments to Extend Credit
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed do
not necessarily represent future cash funding requirements. The Company evaluates each customer’s creditworthiness on a case-by-
case basis. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and
monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the
level of the allowance for credit losses. The amount and type of collateral, if deemed necessary by the Company upon extension of
credit, is based on management’s credit evaluation of the customer.
Standby Letters of Credit
Standby letters of credit are written conditional commitments issued by the Company to guarantee the performance of a
customer to a third party. In the event of nonperformance by the customer, the Company has the rights to the underlying collateral. The
credit risk to the Company in issuing letters of credit is essentially the same as that involved in extending loan facilities to its
customers. The Company’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in
making commitments to extend credit.
The contractual amounts of financial instruments with off-balance sheet risk are as follows:
Commitments to extend credit
Standby letters of credit
Total
December 31, 2018
December 31, 2017
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
$
$
471,440 $
14,217
485,657 $
(Dollars in thousands)
530,546 $
9,067
539,613 $
369,573 $
15,445
385,018 $
250,467
1,725
252,192
Commitments to make loans are generally made for periods of 120 days or less. As of December 31, 2018, the fixed rate loan
commitments have interest rates ranging from 1.95% to 8.70% with a weighted average maturity and rate of 2.49 years and 5.26%,
respectively.
Leases
The following table presents a summary of non-cancelable future operating lease commitments as of December 31, 2018
(dollars in thousands):
2019
2020
2021
2022
2023
Thereafter
$
$
2,559
1,987
1,731
1,510
1,042
4,083
12,912
It is expected that in the normal course of business, expiring leases will be renewed or replaced by leases on other property. Rent
expense under all noncancelable operating lease obligations aggregated approximately $2.9 million, $2.8 million and $2.7 million for
the years ended December 31, 2018, 2017 and 2016, respectively.
108
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. REGULATORY CAPITAL MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.
Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets,
liabilities and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk weightings and other factors. Failure to meet minimum
capital requirements can initiate actions by regulators that, if undertaken, could have a direct material effect on the Company’s
consolidated financial statements. The final rules implementing Basel Committee on Banking Supervision’s capital guideline for U.S.
Banks (Basel III Rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being
phased in over a multi-year schedule, and were fully phased in on January 1, 2019. Management believes as of December 31, 2018
and 2017, the Company and the Bank met all capital adequacy requirements to which they were subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial
condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital
distributions are limited as is asset growth and expansion, and capital restoration plans are required. At year-end 2018 and 2017, the
most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective
action. There are no conditions or events since that notification that management believes have changed the institution’s category.
109
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the Company’s and the Bank’s actual and required capital ratios at December 31, 2018 and 2017:
Actual
Amount Ratio
For Capital
Adequacy
Purposes
Amount Ratio
Minimum Required
Plus Capital
Conservation Buffer
Amount Ratio
(Dollars in thousands)
To Be Categorized As
Well Capitalized Under
Prompt Corrective
Action
Provisions
Amount Ratio
ALLEGIANCE BANCSHARES, INC.
(Consolidated)
As of December 31, 2018
Total Capital
(to risk weighted assets)
Common Equity Tier 1 Capital
(to risk weighted assets)
Tier I Capital
(to risk weighted assets)
Tier I Capital
(to average tangible assets)
As of December 31, 2017
Total Capital
(to risk weighted assets)
Common Equity Tier 1 Capital
(to risk weighted assets)
Tier I Capital
(to risk weighted assets)
Tier I Capital
(to average tangible assets)
ALLEGIANCE BANK
As of December 31, 2018
Total Capital
(to risk weighted assets)
Common Equity Tier 1 Capital
(to risk weighted assets)
Tier I Capital
(to risk weighted assets)
Tier I Capital
(to average tangible assets)
As of December 31, 2017
Total Capital
(to risk weighted assets)
Common Equity Tier 1 Capital
(to risk weighted assets)
Tier I Capital
(to risk weighted assets)
Tier I Capital
(to average tangible assets)
Dividend Restrictions
$ 531,453 13.70 % $ 310,295 8.00 % $ 383,020 9.875 % N/A
N/A
456,223 11.76 % 174,541 4.50 % 247,266 6.375 % N/A
N/A
465,637 12.01 % 232,721 6.00 % 305,446 7.875 % N/A
N/A
465,637 10.61 % 175,621 4.00 % 175,621 4.000 % N/A
N/A
$ 336,829 13.43 % $ 200,687 8.00 % $ 232,044 9.250 % N/A
N/A
264,521 10.54 % 112,886 4.50 % 144,244 5.750 % N/A
N/A
273,825 10.92 % 150,515 6.00 % 181,872 7.250 % N/A
N/A
273,825 9.84 % 111,274 4.00 % 111,274 4.000 % N/A
N/A
$ 524,660 13.53 % $ 310,179 8.00 % $ 382,877 9.875 % $ 387,724 10.00 %
458,844 11.83 % 174,476 4.50 % 247,174 6.375 % 252,021 6.50 %
458,844 11.83 % 232,634 6.00 % 305,333 7.875 % 310,179 8.00 %
458,844 10.45 % 175,552 4.00 % 175,552 4.000 % 219,440 5.00 %
$ 331,872 13.24 % $ 200,596 8.00 % $ 231,939 9.250 % $ 250,745 10.00 %
268,868 10.72 % 112,835 4.50 % 144,179 5.750 % 162,985 6.50 %
268,868 10.72 % 150,447 6.00 % 181,790 7.250 % 200,596 8.00 %
268,868 9.67 % 111,230 4.00 % 111,230 4.000 % 139,037 5.00 %
Allegiance's principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the
amount of dividends that may be paid without prior approval of regulatory agencies. In addition, Allegiance's credit agreement with
another financial institution also limits its ability to pay dividends. Under applicable banking regulations, the amount of dividends that
may be paid by the Bank in any calendar year is limited to the current year’s net profits combined with the retained net profits of the
preceding two years, subject to the capital requirements described above.
110
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. EARNINGS PER COMMON SHARE
Diluted earnings per common share is computed using the weighted-average number of common shares determined for the basic
earnings per common share computation plus the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock using the treasury stock method. Outstanding stock options issued by the
Company represent the only dilutive effect reflected in diluted weighted average shares. Restricted shares are considered outstanding
at the date of grant, accounted for as participating securities and are included in basic and diluted weighted average common shares
outstanding.
2018
Year Ended December 31,
2017
2016
Amount
Per Share
Amount
Amount
Per Share
Amount
Amount
Per Share
Amount
(Amounts in thousands, except per share data)
Net income attributable to shareholders
$ 37,309
$ 17,632
$ 22,851
Basic:
Weighted average shares outstanding
15,485 $
2.41 13,125 $
1.34 12,873 $
1.78
Diluted:
Add incremental shares for:
Dilutive effect of stock option exercises
Total
288
15,773 $
333
2.37 13,458 $
201
1.31 13,074 $
1.75
Stock options for 69 thousand and 28 thousand shares were not considered in computing diluted earnings per share as of
December 31, 2018 and 2017, respectively, because they were antidilutive. All stock options as of December 31, 2016 were dilutive
and considered in computing diluted earnings per share.
111
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. PARENT COMPANY ONLY FINANCIAL STATEMENTS
ALLEGIANCE BANCSHARES, INC
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
ASSETS
Cash and due from banks
Investment in subsidiary
Other assets
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Other borrowed funds
Subordinated debentures
Accrued interest payable and other liabilities
Total liabilities
SHAREHOLDERS’ EQUITY:
Common stock
Capital surplus
Retained earnings
Accumulated other comprehensive (loss) income
Total shareholders’ equity
TOTAL
December 31,
2018
2017
(Dollars in thousands)
$
$
$
$
6,780 $
705,947
1,026
713,753 $
492 $
9,414
862
10,768
21,938
571,804
112,131
(2,888 )
702,985
713,753 $
4,857
311,553
791
317,201
569
9,304
463
10,336
13,227
218,408
74,894
336
306,865
317,201
112
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLEGIANCE BANCSHARES, INC
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
OPERATING INCOME:
Other income
Total income
OPERATING EXPENSE:
Interest expense on borrowed funds
Other expenses
Total operating expense
INCOME BEFORE INCOME TAX BENEFIT AND
EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARIES
INCOME TAX BENEFIT
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES
EQUITY IN UNDISTRIBUTED EARNINGS OF
SUBSIDIARIES
NET INCOME
2018
For the Years Ended December 31,
2017
(Dollars in thousands)
2016
$
16 $
16
38
1,692
1,730
13 $
13
33
1,465
1,498
11
11
30
1,204
1,234
(1,714 )
360
(1,485 )
756
(1,223 )
428
(1,354 )
(729 )
(795 )
$
38,663
37,309 $
18,361
17,632 $
23,646
22,851
113
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLEGIANCE BANCSHARES, INC
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
2018
For the Years Ended December 31,
2017
(Dollars in thousands)
2016
$
37,309 $
17,632 $
22,851
(38,663 )
110
(236 )
(18,361 )
107
(378 )
(23,646 )
107
(399 )
279
(1,201 )
(377 )
(1,377 )
—
—
(21,000 )
(21,000 )
3,552
—
1,685
(2,113 )
3,124
1,923
4,857
6,780 $
4,248
—
1,780
—
6,028
(16,349 )
21,206
4,857 $
186
(901 )
—
—
2,006
—
1,501
38
3,545
2,644
18,562
21,206
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash used in
operating activities:
Equity in undistributed earnings of subsidiaries
Net amortization of discount on subordinated debentures
Increase in other assets
Increase (decrease) in accrued interest payable and other
liabilities
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investment in bank subsidiary
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
Proceeds from initial public offering
Stock based compensation expense
(Repurchase) issuance of treasury stock
Net cash provided by financing activities
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
114
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Net Income
Interest
Income
Net Interest
Income
Attributable to
Common Shareholders
(Dollars in thousands, except per share data)
Earnings Per Share(1)
Basic
Diluted
2018
First quarter
Second quarter
Third quarter
Fourth quarter
2017
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
32,391 $
34,193
35,336
56,303
26,889 $
27,816
28,036
45,838
27,512 $
28,987
30,901
32,038
24,128 $
25,107
26,997
27,436
7,711 $
7,556
8,879
13,163
6,047 $
5,395
2,986
3,204
0.58 $
0.57
0.66
0.60
0.46 $
0.41
0.23
0.24
0.57
0.55
0.65
0.59
0.45
0.40
0.22
0.24
(1) Earnings per share are computed independently for each of the quarters presented and therefore may not total earnings per share
for the year
20. SUBSEQUENT EVENT
On February 1, 2019, the Bank completed the previously announced acquisition of LoweryBank, the Sugar Land location of
Huntington State Bank. In connection with the purchase, the Bank acquired approximately $44.0 million in loans and $15.0 million in
customer deposits. The Bank consolidated its existing Sugar Land bank office into this new bank office location, which was less than
one mile away. The acquisition of LoweryBank will be accounted for under the acquisition method of accounting in accordance with
ASC Topic 805 – Business Combinations. Allegiance’s assessment of the fair value of assets acquired and liabilities assumed as of the
acquisition date is incomplete at the time of this filing; therefore, certain disclosure have been omitted. Allegiance expects to
recognize goodwill in the transaction, which is expected to be nondeductible for tax purposes.
115