Section 1: 10-K (10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
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
26-3564100
(State or other jurisdiction
of incorporation or organization)
(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)
ABTX
(Trading symbol)
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 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
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Accelerated Filer
Smaller Reporting Company
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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, 2019 was approximately $641.4 million.
As of March 5, 2020, there were 20,354,168 shares of the registrant's common stock, $1.00 par value, outstanding.
Portions of the Proxy Statement relating to the 2020 Annual Meeting of Shareholders of Allegiance Bancshares, Inc., which will be filed within 120 days after
December 31, 2019, 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.
2019 ANNUAL REPORT ON FORM 10-K
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Selected Financial Data
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
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
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
PART I
PART II
PART III
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16.
Signatures
Form 10-K Summary
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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 for serving small to medium-
sized business customers and further enables us to attract talented bankers.
As of December 31, 2019, we operated 27 full-service banking locations in the Houston region, with 26 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 organic growth, including de novo branching, three whole-bank acquisitions and most
recently the purchase of the LoweryBank branch. As of December 31, 2019, we had total assets of $4.99 billion, total gross loans of $3.92 billion, total
deposits of $4.07 billion and total shareholders’ equity of $709.9 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
customized 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 superior external and internal service levels.
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We plan to continue to emphasize our super-community banking strategy to organically grow our presence in the Houston region through:
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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 pre-acquisition historical balances, our acquisitions to date, all of
which were Houston-based:
Acquisition
Independence Bank, N.A.
F&M Bancshares, Inc.
Post Oak Bancshares, Inc.
LoweryBank branch
Date
Completed
Acquired
Assets
Acquired
Loans
Acquired
Deposits
Number of
Branches
November 16, 2013
January 1, 2015
October 1, 2018
February 1, 2019
$
$
$
$
222.1 $
569.7 $
1,490.4 $
48.7 $
132.4 $
410.2 $
1,180.0 $
45.0 $
199.4
488.9
1,289.6
16.0
3
9*
13
1
(Dollars in millions)
*
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.
For additional information pertaining to the most recent acquisitions, 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:
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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 have an increased presence across our market areas.
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.
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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 level 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 larger lending relationships. As of
December 31, 2019, our average funded core loan size was approximately $335 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, 2019, 2.9% 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 1.0% at December 31, 2019, 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, money market accounts, savings
accounts and other time deposits of various types and terms. 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.
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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 when 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, 2019, we employed approximately 588 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
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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:
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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 imposed 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.
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Source of Strength
Under Federal Reserve policy and federal regulations, bank holding companies are required to act as a source of financial and managerial strength
to their subsidiary banks. Under this requirement, Allegiance is expected to commit resources to support the Bank, including at times when Allegiance may
not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in
right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the
bankruptcy trustee and entitled to priority of payment.
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 January 2020, the Federal Reserve approved a final rule that clarifies the framework for when a company controls a bank holding company or
bank under the BHCA. In particular, the final rule sets forth tiered presumptions of control in the Federal Reserve’s regulations. Under the BHCA, a
company controls a bank holding company if it controls 25 percent or more of any class of voting securities of the bank holding company. A company that
controls less than 5 percent of any class of voting securities of a bank holding company is presumed not to control the bank holding company. In instances
in which a company owns at least 5 percent but less than 25 percent, the Federal Reserve considers the full fact and circumstances of the relationship
between the company and the bank holding company to determine whether the company controls the bank holding company. As part of its determination
as to control, the Federal Reserve considers, among other things, level of ownership of voting and non-voting securities, board representation, business
relationships, senior management interlocks, contractual limits on major operational or policy decisions, proxies on issues, threats to dispose of securities
and management agreements. The rule also provides several additional examples of presumptions of control and noncontrol, along with various ancillary
provisions such as definitions of terms used in the presumptions. The changes in the final rule become effective April 1, 2020.
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
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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.
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 July 2013, the federal banking agencies published final capital rules (“Basel III Capital Rules”) implementing the Basel III framework set forth by
the Basel Committee on Banking Supervision (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. 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.
Since being fully phased in on January 1, 2019, the Basel III Capital Rules, among other things, require the Company to maintain an additional
capital conservation buffer, composed entirely of Common Equity Tier 1 (“CET1”), of 2.5%, effectively resulting in minimum ratios of (1) CET1 to risk-
weighted assets of 7.0%, (2) Tier 1 capital to risk-weighted assets of 8.5%, (3) total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of 10.5% and (4)
Tier 1 capital to average quarterly assets as reported on consolidated financial statements ( known as the “leverage ratio”) of 4.0%. As of December 31,
2019, the Company’s ratio of CET1 to risk-weighted assets was 11.42%, Tier 1 capital to risk-weighted assets was 11.66%, total capital to risk-weighted
assets was 14.83% and Tier 1 capital to average tangible quarterly assets was 10.02%.
Banking institutions that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account, as detailed above, will
be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The
severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (that is, four quarter trailing net income,
net of distributions and tax effects not reflected in net income).
The Basel III Capital Rules also changed the capital categories for insured depository institutions for purposes of prompt corrective action as
discussed below under “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.
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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.
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, directed 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
September 17, 2019, the FDIC approved a final rule allowing community banks with a leverage capital ratio of at least 9% to be considered in compliance
with Basel III capital requirements and exempt from the complex Basel III calculation. Under the final rule, banks with less than $10 billion in assets may
elect the community bank leverage ratio framework if they meet the 9% ratio and if they hold 25% or less of assets in off-balance sheet exposures, and 5% or
less of assets in trading assets and liabilities. For institutions that fall below the 9% capital requirement but remain above 8%, the final rule establishes a
two-quarter grace period to either meet the qualifying criteria again or comply with the generally applicable capital rule. We have not elected to use the
community bank leverage ratio framework, but may make such an election in the future.
Prompt Corrective Action
Under the Federal Deposit Insurance Act (“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.
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, 2019, the Bank met the requirements to be “well capitalized” under the prompt corrective action regulations.
Regulatory Limits on Dividends, Distributions and Repurchases
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
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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 could also have the effect of limiting the payment of capital distributions from the Bank.
In July 2019, the federal bank regulators adopted final rules that, among other things, eliminated the standalone prior approval requirement in the
capital rules for any repurchase of common stock. In certain circumstances, Allegiance’s repurchases of its common stock may be subject to a prior
approval or notice requirement under other regulations, policies or supervisory expectations of the Federal Reserve. Any redemption or repurchase of
preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve.
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.
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, 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.
In December 2019, the FDIC proposed new rules to modernize its brokered deposit regulations. The proposal would establish a new framework for
analyzing whether deposits placed through deposit placement arrangements qualify as brokered deposits. Under the proposed rule, the FDIC would revise
the "facilitation" prong of the deposit broker definition so that it applies to any person that engages in specified activities, and provide that a wholly owned
operating subsidiary be eligible for the "insured depository institution exception" to the "deposit broker" definition under certain circumstances. The FDIC
also would amend the "primary purpose" exception to apply when the primary purpose of an agent's or nominee's business relationship with its customers
is not the placement of funds with insured depository institutions. The availability of the primary purpose exception would be clarified for third parties that
place deposits through brokerage sweep accounts, under certain conditions, and to third parties whose primary purpose is enabling customers to make
payments, under certain conditions. The FDIC would establish an application process for any third party that wishes to use the primary purpose exception,
and would require ongoing reporting.
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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. The FDIC has the ability to make discretionary adjustments to the total score based upon significant risk
factors that are not adequately captured in the calculations.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. In
addition, the FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions.
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 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
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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.
Consumer Financial Protection Bureau. The Dodd-Frank Act created the Consumer Financial Protection Bureau (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. The creation of the CFPB by the Dodd-Frank Act has led to enhanced enforcement of
consumer financial protection laws.
Mortgage loan origination. The Dodd-Frank Act authorized 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
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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.
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 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 December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) jointly proposed rules that would significantly change
existing CRA regulations. The proposed rules are intended to increase bank activity in low- and moderate-income communities where there is significant
need for credit, more responsible lending, greater access to banking services, and improvements to critical infrastructure. The proposals change four key
areas: (i) clarifying what activities qualify for CRA credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and objective
method for measuring CRA performance; and (iv) revising CRA-related data collection, record keeping, and reporting. However, the Federal Reserve Board
has not joined the proposed rulemaking. As such, we will continue to evaluate the impact of any changes to the regulations implementing the CRA and
their impact to our financial condition, results of operations and/or liquidity.
Incentive Compensation Guidance
The Federal Reserve Board reviews, as part of its regular, risk-focused examination process, the incentive compensation arrangements of banking
organizations, such as the Company, that are not “large, complex banking organizations.” These reviews are tailored to each organization based on the
scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. Deficiencies will be incorporated into the
organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be
taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk
to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
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
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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.
In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and
incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal
banking law and regulations.
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.
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.
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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, 2019, 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.
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.
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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 Chief Executive Officer, Steven F. Retzloff, and our President, Ramon A. Vitulli, III. 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.
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 a senior level 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;
• 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.
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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.
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 $8 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.
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Implementation of CECL will change the way we calculate our Allowance for Loan Losses.
The Company will adopt a new accounting standard that became effective on January 1, 2020. This standard, referred to as current expected credit
loss, or CECL, requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit
losses through the provision for credit losses. CECL changed the prior method of provisioning for loan losses that are probable, which has required us to
increase our allowance for loan losses, and is increasing the types and amounts of data we need to collect and review to determine the appropriate level of
our allowance for loan losses. In addition, the adoption of CECL may result in more volatility in the level of our allowance for loan losses. An increase, to
the extent material, in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses could have a
material adverse effect on our capital levels, financial condition and results of operations. A reduction in our capital levels could subject us to a variety of
enforcement remedies available to the federal regulatory authorities and would negatively impact our ability to pursue acquisitions or other expansion
opportunities if we are unable to satisfactorily raise additional capital.
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, 2019, our allowance for loan losses was $29.4 million, which represented 0.75% of our total loans and 103.76% of our total
nonperforming loans. As of December 31, 2018, our allowance for loan losses was $26.3 million, which represented 0.71% of our total loans and 79.90% 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 became effective on
January 1, 2020) 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.
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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, 2019, $3.18 billion, or 81.1%, 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, 2019, $1.87 billion, or 47.9%, of our total loans were comprised of commercial real estate loans (including owner-occupied
commercial real estate loans) and $410.5 million, or 10.5%, 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, 2019, $689.4 million, or 17.6%, 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.
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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, 2019, SBA 7(a) and 504 program loans of $182.2 million comprised 4.7% 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, funding unfunded commitments or meeting deposit withdrawal demands, any of which could have a material adverse
impact on our liquidity, business, financial condition and results of operations.
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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.
Interest rates on our outstanding financial instruments might be subject to change based on developments related to LIBOR, which could
adversely affect our revenue, expenses and the value of those financial instruments.
In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or
compelling banks to submit LIBOR rates after 2021. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur
over the course of the next two years. The Alternative Reference Rates Committee, a steering committee comprised of U.S. financial market participants,
selected and the Federal Reserve Bank of New York started in May 2018 to publish the Secured Overnight Finance Rate (“SOFR”) as an alternative to
LIBOR. Uncertainty as to the adoption, market acceptance or availability of SOFR or other alternative reference rates may adversely affect the value of
LIBOR-based loans and securities in the Company’s portfolio and may impact the availability and cost of hedging instruments and borrowings. The
language in the Company’s LIBOR-based contracts and financial instruments has developed over time and may have various events that trigger when a
successor index to LIBOR would be selected. If a trigger is satisfied, contracts and financial instruments may give the Company or the calculation agent, as
applicable, discretion over the selection of the substitute index for the calculation of interest rates. The implementation of a substitute index for the
calculation of interest rates under the Company’s agreements may result in the Company incurring significant expenses in effecting the transition and may
result in disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute index, any of which could have an
adverse effect on the Company’s results of operations.
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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, 2019, the
amortized cost of our securities portfolio was $366.3 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.
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. Factors that could cause an
impairment charge include adverse changes to macroeconomic conditions, declines in the profitability of the reporting unit or declines in the tangible book
value of the reporting unit. Subsequent to December 31, 2019, our stock price was trading below book value due to stock price volatility in the market. 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. As of December 31, 2019,
our goodwill totaled $223.6 million.
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;
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• 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.
Catastrophic events may adversely affect the general economy, financial and capital markets, specific industries and us.
Acts of terrorism, cyber-terrorism, political unrest, war, civil disturbance, armed regional and international hostilities and international responses to
these hostilities, natural disasters (including tornadoes, hurricanes, tropical storms, fires, droughts and floods), global health risks or pandemics or the
threat of or perceived potential for these events could have a negative impact on us. Our business continuity and disaster recovery plans may not be
successful upon the occurrence of one of these scenarios, and a significant catastrophic event could materially adversely affect our operating results.
Our business is generated primarily from the Houston region, which is susceptible to damage by hurricanes, tropical storms, 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. These catastrophic events may have an impact on our customers and in turn, on us.
In addition, these events have had and may continue to have an adverse impact on the U.S. and world economy in general and consumer
confidence and spending in particular, which could harm our operations. Any of these events could increase volatility in the U.S. and world financial
markets, which could harm our stock price and may limit the capital resources available to us and our customers. This could have a material adverse impact
on our operating results, revenues and costs and may result in increased volatility in the market price of our common stock.
Our reputation and business could be damaged by negative publicity.
Reputation risk, or the risk to our earnings and capital by negative public opinion, is inherent in our business. Negative public opinion could
adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could
result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, perception of our environmental,
social and governance practices and disclosures, regulatory compliance, mergers and acquisitions, sharing or inadequate protection of customer
information and from actions taken by government regulators and community organizations in response to that conduct. Negative public opinion could also
result from adverse news or publicity that impairs the reputation of the financial services industry. In addition, adverse publicity or negative information
posted on social media, whether or not factually correct, may adversely impact our business prospects or financial results.
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. In
addition, providing for decision-making authority at the bank office level requires that more employees must follow internal policies to maintain adequate
disclosure controls and procedures. 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 and 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, beginning with the annual report for the fiscal year ending December 31, 2020, 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
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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.
We are subject to certain operational risks, including fraudulent activities and data processing system failures and errors.
We are exposed to many types of operational risk, including the risk of fraudulent activities 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
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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 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.
We could be adversely impacted by fraudulent activity, breaches of our information security and cybersecurity attacks.
As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be
committed against us, our clients or third-parties with whom we interact and that may result in financial losses or increased costs to us or our clients,
disclosure or misuse of confidential information belonging to us or personal or confidential information belonging to our clients, misappropriation of assets
and litigation. The occurrence of any of these could also damage our reputation. Our industry has seen increases in electronic fraudulent activity, hacking,
security breaches, sophisticated social engineering and cyber-attacks, including within the commercial banking sector, as cyber-criminals have been
targeting commercial bank accounts on an increasing basis.
Our business is highly dependent on the security and efficacy of our infrastructure, computer and data management systems, as well as those of
third-parties with whom we interact or on whom we rely. Our business relies on the secure processing, transmission, storage and retrieval of confidential,
proprietary and other information in our computer and data management systems and networks and in the computer and data management systems and
networks of third-parties. In addition, to access our network, products and services, our customers and other third-parties may use personal mobile devices
or computing devices that are outside of our network environment and are subject to their own cybersecurity risks. All of these factors increase our risks
related to cyber-threats and electronic disruptions.
In addition to well-known risks related to fraudulent activity, which take many forms, such as check “kiting” or fraud, wire fraud and other dishonest
acts, information security breaches and cybersecurity-related incidents have become a material risk in the financial services industry. These threats may
include fraudulent or unauthorized access to data processing or data storage systems used by us or by our clients, electronic identity theft, “phishing”,
account takeover, denial or degradation of service attacks and malware or other cyber-attacks.
In recent periods, several governmental agencies and large corporations, including financial service organizations and retail companies, have
suffered major data breaches, in some cases exposing not only their confidential and proprietary corporate information, but also sensitive financial and
other personal information of their employees, clients or other third-parties, and subjecting those agencies and corporations to potential fraudulent activity
and their employees, clients and other third-parties to identity theft and fraudulent activity in their debit card and banking accounts. Therefore, security
breaches and cyber-attacks can cause significant increases in operating costs, including the costs of compensating clients and customers for any resulting
losses they may incur, and the costs and capital expenditures required to correct the deficiencies in and strengthen the security of data processing and
storage systems.
While we invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and we conduct periodic
tests of our security systems and processes, we may not succeed in anticipating or adequately protecting against or preventing all security breaches and
cyber-attacks from occurring. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks
are becoming more sophisticated and are extremely difficult to prevent. Additionally, the existence of cyber-attacks or security breaches at third-parties with
access to our data, such as vendors, may not be disclosed to us in a timely manner. As cyber-threats continue to evolve, we may be required to expend
significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security
vulnerabilities or incidents.
As is the case with non-electronic fraudulent activity, cyber-attacks or other information or security breaches, whether directed at us or third-
parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber-attack on our systems has been
successful, whether or not this perception is correct, may damage our reputation with customers and third-parties with whom we do business. A successful
penetration or circumvention of system security could cause negative consequences, including loss of customers and business opportunities, disruption to
our operations and business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our customers’
and/or third-parties’ computers or systems, and could expose us to additional regulatory scrutiny and result in a violation of applicable privacy laws and
other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement
or other compensatory costs, additional compliance costs and could adversely impact our results of operations, liquidity and financial condition.
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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.
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,
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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
Allegiance, 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 Allegiance, 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.
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 engages 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.
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, 2019, 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.
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Failure to comply with economic and trade sanctions or with applicable anti-corruption laws could have a material adverse impact our
business, financial condition and results of operations.
OFAC administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws,
including designated foreign countries, nationals and others. We are responsible for, among other things, blocking accounts of and transactions with such
persons and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. In
addition, we are subject to the Foreign Corrupt Practices Act, or the FCPA, which prohibits offering, promising, giving, or authorizing others to give
anything of value, either directly or indirectly, to a non-U.S. government official in order to influence official action or otherwise gain an unfair business
advantage. We are also subject to applicable anti-corruption laws in the jurisdictions in which we may operate. Failure to comply with economic and trade
sanctions or with applicable anti-corruption laws, including the FCPA, could have serious legal and 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. 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 $1.7 million and $2.3 million for both of the years ended December 31, 2019
and 2018, respectively. 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.
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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;
• 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 dividends and capital returns;
• 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.
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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. Further, our reporting burden will increase when we no longer qualify for the
scaled disclosure allowed to us as an “emerging growth company” under the JOBS Act. The full disclosure requirements will be applicable beginning with
the annual report for the fiscal year ending December 31, 2020, and we will likely incur additional expenses and devote increased management effort towards
compliance.
These laws, regulations and 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.
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Allegiance’s ability to declare and pay dividends is limited.
We have not paid dividends on our common stock in the past; however, our Board of Directors approved the payment of a quarterly cash dividend
on our common stock during the first quarter of 2020. There can be no assurance of whether or when we may pay dividends on our common stock in the
future. Our ability to pay dividends 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 declared and paid at the discretion of our Board of Directors after taking into account our business, operating
results and financial condition, current and anticipated cash needs, plan 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 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.
30
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.
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 January 2020, the Federal Reserve approved a final rule that clarifies the framework for when a company controls a bank holding company or
bank under the BHC Act. In particular, the final rule sets forth tiered presumptions of control in the Federal Reserve’s regulations. Under the BHC Act, a
company controls a bank holding company if it controls 25 percent or more of any class of voting securities of the bank holding company. A company that
controls less than 5 percent of any class of voting securities of a bank holding company is presumed not to control the bank holding company. In instances
in which a company owns at least 5 percent but less than 25 percent, the Federal Reserve considers the full fact and circumstances of the relationship
between the company and the bank holding company to determine whether the company controls the bank holding company. As part of its determination
as to control, the Federal Reserve considers, among other things, level of ownership of voting and non-voting securities, board representation, business
relationships, senior management interlocks, contractual limits on major operational or policy decisions, proxies on issues, threats to dispose of securities,
and management agreements. The rule also provides several additional examples of presumptions of control and noncontrol, along with various ancillary
provisions such as definitions of terms used in the presumptions. The changes in the final rule become effective April 1, 2020.
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, 2019, we had 27
full-service banking locations, with 26 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 twelve of these bank offices, the loan production office, as well as our executive office,
and own the remaining sixteen bank offices. We believe that our current facilities are in good condition and adequate to meet our operating needs for the
present and immediately foreseeable future.
31
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
Not applicable.
32
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 5, 2020, there were 20,354,168 shares
outstanding and 1,041 shareholders of record of Allegiance's common stock. The closing price per share of common stock on December 31, 2019, the last
trading day of the year, was $37.60.
Dividends
On January 29, 2020, Allegiance announced its first quarterly dividend of $0.10 to be paid in cash on March 16, 2020 to shareholders of record on
February 28, 2020. 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, 2019, 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)
484,035 $
132,035 $
616,070
21.66
13.44
1,775,509
—
1,775,509
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 July 25, 2019, our board of directors authorized a stock repurchase program, under which we may repurchase one million shares of our
outstanding common stock at the discretion of management through July 31, 2020. Repurchases under this program may be made from time to time through
open market purchases, privately negotiated transactions or such other manner as will comply with applicable laws and regulations. During 2019, we
repurchased 1,686,277 shares at a total cost of $58.7 million.
33
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 2019.
Period
October 1, 2019 to October 31, 2019
November 1, 2019 to November 30, 2019
December 1, 2019 to December 31, 2019
Total Number of Shares
Purchased as Part of
Publicly Announced Plan
Remaining
Share
Repurchase
Authorization(1)
Total Number
of Shares
Purchased
14,743
201,429
108,504
554,267
352,838
244,334
14,743 $
201,429 $
108,504 $
Average
Price Paid
Per Share
32.88
35.15
36.34
(1)
Pursuant to a repurchase program announced on July 25, 2019, pursuant to which the Company may repurchase up to one million shares through July
31, 2020.
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, 2019, 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 and on September 30, 2015 in 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 October 8, 2015 in Allegiance's common stock or September 30, 2015 in index, including reinvestment of dividends. Fiscal year
ending December 31.
Allegiance Bancshares, Inc.
S&P 500
NASDAQ Bank
October 8,
2015
December 31,
2015
100.00
100.00
100.00
102.29
107.04
103.55
June 30,
2016
107.61
111.15
100.25
December 31,
2016
156.36
119.84
142.33
June 30,
2017
165.66
131.04
139.92
December 31,
2017
162.85
146.01
150.12
June 30,
2018
187.50
149.88
156.12
December 31,
2018
140.01
139.61
125.21
June 30,
2019
144.20
165.49
142.05
December 31,
2019
162.63
183.56
155.14
(Copyright © 2020 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, 2019, 2018 and 2017 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, 2016 and 2015 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.
As of and for the Years Ended December 31,
2019(1)
2018(2)
2017
2016(3)
2015(4)
(Dollars in thousands, except share and per share data)
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(5)
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(6)
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(5)
Weighted average common shares outstanding, basic
Weighted average common shares outstanding, diluted
Shares outstanding at end of period
$
$
$
35
26,331
249,712
29,438
245,518
268,947 $
337,293
—
346,248 $
372,545
—
142,098 $
316,455
—
182,103 $
309,615
—
148,431
165,097
27,887
3,915,310 3,708,306 2,270,876 1,891,635 1,653,165
13,098
44,619
4,992,654 4,655,249 2,860,231 2,450,948 2,084,579
1,252,232 1,209,300
620,320
2,815,869 2,453,236 1,530,864 1,276,432 1,138,813
4,068,101 3,662,536 2,213,974 1,870,183 1,759,133
258,490
213,871
306,865
264,202
279,817
236,373
709,865
464,347
702,984
453,272
23,649
42,663
17,911
43,444
683,110
593,751
179,537 $
5,939
173,598
13,423
120,635
66,386
52,959
52,959
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
2.41 $
2.37
32.04
20.66
2.50 $
2.47
34.59
22.62
1.45
1.43
20.17
16.69
21,152,255 15,484,757 13,124,900 12,873,326 10,470,465
21,424,366 15,773,039 13,457,718 13,073,932 10,654,003
20,523,816 21,937,740 13,226,826 12,958,341 12,812,985
1.34 $
1.31
23.20
19.97
1.78 $
1.75
21.59
18.24
As of and for the Years Ended December 31,
2019(1)
2018(2)
2017
(Dollars in thousands, except share and per share data)
2016(3)
Selected Performance Metrics:
Return on average assets(7)
Return on average common equity(7)
Return on average tangible common equity(5)(7)
Tax equivalent net interest margin(8)
Efficiency ratio(9)
Loans to deposits ratio
Noninterest expense to average assets
Selected Credit Quality Ratios:
Nonperforming assets to total assets(10)
Nonperforming loans to total loans(11)
Allowance for loan losses to nonperforming loans(11)
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(5)
1.10 %
7.48 %
11.50 %
4.22 %
62.99 %
96.24 %
2.50 %
0.74 %
0.72 %
103.76 %
0.75 %
0.15 %
0.07 %
11.42 %
11.66 %
14.83 %
10.02 %
14.22 %
9.78 %
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 %
2015(4)
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 %
(1) We completed the acquisition of the LoweryBank branch on February 1, 2019.
(2) We completed the acquisition of Post Oak Bancshares, Inc. on October 1, 2018.
(3) We completed the sale of two Central Texas branches acquired from F&M Bancshares during the first quarter of 2016.
(4) We completed the acquisition of F&M Bancshares on January 1, 2015.
(5)
(6)
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.”
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).
(7) 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.
(8)
(9)
Net interest margin represents net interest income divided by average interest-earning assets.
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.
(10) Nonperforming assets include nonaccrual loans, loans past due 90 days or more and still accruing interest, repossessed assets and other real estate.
(11) 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;
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 pandemics, 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
The following discussion and analysis presents the more significant factors that affected our financial condition as of December 31, 2019 and 2018
and results of operations for each of the years then ended. Refer to Management’s Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K filed with the SEC on March 11, 2019 (the “2018 Form 10-K”) for a discussion and analysis of the
more significant factors that affected periods prior to 2018.
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
38
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.
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.
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 that 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.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments” (“ASU 2016-13”). ASU 2016-13 makes significant changes to the accounting for credit losses on financial instruments presented on an
amortized cost basis and related disclosures. The new current expected credit loss (CECL) impairment model will require an estimate of expected credit
losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in
addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with
regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of
expected lifetime losses. In addition, ASU 2016-13 amends the accounting for credit losses on purchased financial assets with credit deterioration. Effective
January 1, 2020, we will adopt ASU 2016-13 as discussed more fully under "Part II - Item 8. Financial Statements and Supplementary Data - Note 1. Nature of
Operations and Summary of Significant Accounting and Reporting Policies" of this Report along with other recent accounting pronouncements that have
been or will be adopted by the Company or that will require enhanced disclosures in the Company’s financial statements in future periods.
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 have been able to take advantage of some of the reduced regulatory and reporting requirements that are available to us as we have qualified 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. The full regulatory and reporting requirements will be applicable beginning
with the annual report for the fiscal year ending December 31, 2020.
Results of Operations
Net income was $53.0 million, or $2.47 per diluted common share, for the year ended December 31, 2019 compared with $37.3 million, or $2.37 per
diluted common share, for the year ended December 31, 2018, an increase of $15.7 million, or 41.9%. The increase in net income was primarily the result of a
$51.0 million increase in net interest income partially offset by a $33.8 million increase in noninterest expense. Returns on average common equity were
7.48% and 9.02%, returns on average assets were 1.10% and 1.11% and efficiency ratios were 62.99% and 63.68% for the years ended December 31, 2019 and
2018, 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. 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 93.0% of total revenue
during 2019. 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 effective federal funds rate, which is the cost of immediately available overnight funds, and the prime interest
rate. The effective federal funds rate increased 75 basis points (25 basis points in each of March, June and December) to end 2017 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%. During
2019, the effective federal funds rate decreased 75 basis points (25 basis points in each of July, September and October) to end the period at
1.75%. Similarly, the prime rate increased 75 basis points (25 basis points in each of March, June and December) during 2017 to end the year at 4.50%.
During 2018, the prime rate increased another 100 basis points (25 basis points in each of March, June, September and December) to end the year at 5.50%.
During 2019, the prime rate decreased 75 basis points (25 basis points in each of August, September and October) to end the year at 4.75%.
40
Net interest income before the provision for loan losses for the year ended December 31, 2019 was $179.5 million compared with $128.6 million for the
year ended December 31, 2018, an increase of $51.0 million, or 39.6%. The increase in net interest income from the previous year was primarily 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 $1.22 billion, or 40.2%, for the year ended December 31, 2019 compared with the year ended December 31, 2018.
Interest income was $232.9 million for the year ended December 31, 2019, an increase of $74.7 million, or 47.2%, compared with the year ended
December 31, 2018 primarily due to an increase of $73.1 million of interest income and fees on loans. This increase in interest income and fees on loans
during the year ended December 31, 2019 was primarily due to the Post Oak acquisition during the fourth quarter of 2018 and organic growth during
2019. Average loans outstanding increased $1.18 billion, or 44.5%, for the same period. Additionally, interest income during the years ended December 31,
2019 and 2018, included acquisition accounting loan discount accretion of $8.9 million and $2.7 million, respectively.
Interest expense was $53.4 million for the year ended December 31, 2019, an increase of $23.7 million, or 80.0%, compared with the year ended
December 31, 2018. This increase was primarily due to an increase in average interest-bearing deposits, rising expenses associated with higher funding
costs on interest-bearing liabilities and the subordinated debt issued at the end of September 2019. Average interest-bearing liabilities increased $759.1
million, or 36.3%, for the year ended December 31, 2019 compared with the year ended December 31, 2018 primarily due to the increase in average interest-
bearing deposits. Average interest-bearing deposits increased $857.2 million primarily due to deposits assumed in the Post Oak acquisition and organic
growth. Additionally, average subordinated debt increased $15.7 million during the year ended December 31, 2019 due to the issuance in September
2019. The increase in interest-bearing deposits for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily due to
the increase in average certificates and other time deposits of $336.3 million, or 35.8% and the increase in average money market deposits of $405.0 million,
or 73.5%. The overall cost of average interest-bearing liabilities increased to 187 basis points for the year ended December 31, 2019 compared to 142 basis
points for the same period in 2018.
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, 2019 was 4.22%, a decrease of 5 basis points compared to 4.27% for the year ended December 31, 2018. 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 2019. 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 $9.6 million and $3.1 million on the tax equivalent net interest margin was an increase of 22 basis points and 10
basis points for the years ended December 31, 2019 and 2018, 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 years ended December 31, 2019 and 2018, thus making tax-exempt yields relatively more comparable to taxable asset yields.
41
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.
2019
Interest
Earned/
Interest Paid
Average
Balance
Average
Yield/ Rate
For the Years Ended December 31,
2018
Interest
Earned/
Interest Paid
(Dollars in thousands)
Average
Balance
Average
Yield/ Rate
2017
Interest
Earned/
Interest Paid
Average
Balance
Average
Yield/ Rate
Assets
Interest-Earning Assets:
Loans
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(1)
Net interest income and
margin (tax equivalent)(2)
$ 3,831,894 $
355,233
221,363
9,909
5.78 % $ 2,652,355 $
2.79 % 317,329
148,223
8,527
5.59 % $ 2,081,370 $
2.69 % 324,926
110,331
8,445
1,635
232,907
74,655
4,261,782 $
(28,129 )
594,981
$ 4,828,634
1,473
158,223
2.19 %
70,145
5.47 % 3,039,829 $
(24,077 )
349,408
$ 3,365,160
2.10 %
50,917
5.21 % 2,457,213 $
(20,536 )
262,549
$ 2,699,226
662
119,438
5.30 %
2.60 %
1.30 %
4.86 %
$ 345,693 $
4,010
1.16 % $ 224,210 $
1,834
0.82 % $ 156,527 $
597
0.38 %
1,037,126
14,297
1.38 % 637,722
4,644
0.73 % 536,415
2,562
0.48 %
1,276,684
127,138
64,451
26,656
4,675
3,732
2.09 % 940,356
3.68 % 240,952
48,776
5.79 %
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 %
1.08 %
5.61 %
2,851,092 $
53,370
1.87 % 2,092,016 $
29,644
1.42 % 1,721,869 $
15,770
0.92 %
1,194,496
74,777
4,120,365
708,269
$ 4,828,634
848,276
11,427
2,951,719
413,441
672,101
7,629
2,401,599
297,627
$ 3,365,160
$ 2,699,226
3.60 %
3.79 %
3.94 %
$
$
179,537
4.21 %
180,036
4.22 %
$
$
128,579
4.23 %
$
103,668
4.22 %
129,652
4.27 %
$
106,669
4.34 %
(1) The net interest margin is equal to net interest income divided by average interest-earning assets.
(2)
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 years ended December 31, 2019 and 2018 and 35% for the
year ended December 31, 2017 and other applicable effective tax rates.
42
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.
For the Years Ended December 31,
2019 vs. 2018
2018 vs. 2017
Increase
(Decrease)
Due to Change in
Volume
Rate
Increase
(Decrease)
Due to Change in
Total
(Dollars in thousands)
Volume
Rate
Total
$
65,917 $
1,018
7,223 $
364
73,140 $
1,382
30,268 $
(198 )
7,625 $
279
37,893
81
95
67
162
250
562
812
67,030
7,654
74,684
30,320
8,466
38,786
994
1,182
2,176
258
979
2,909
6,744
9,653
484
1,598
5,536
(2,262 )
932
5,642
2,149
(100 )
11,178
(113 )
832
2,329
(311 )
2,108
4,089
2,177
163
1,237
2,082
6,418
1,866
2,271
8,109
15,617
23,726
4,868
9,006
13,874
$
58,921 $
(7,963 ) $
50,958 $
25,452 $
(540 ) $
24,912
Interest-Earning assets:
Loans
Securities
Deposits in other financial
institutions
Total increase 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 in interest
expense
Increase (decrease) in net
interest income
Provision for Loan Losses
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, 2019 and December 31, 2018 was $29.4 million and $26.3 million,
respectively, representing 0.75% and 0.71% of total loans as of such dates. We recorded a $5.9 million provision for loan losses for the year ended
December 31, 2019 compared with $4.2 million for the year ended December 31, 2018 primarily due to an increase in organic loan growth and net charge-offs
of $1.3 million.
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, 2019, the balance of the acquisition accounting loan discount was $5.5 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.
Noninterest income totaled $13.4 million for the year ended December 31, 2019 compared to $7.7 million for the year ended December 31, 2018, an
increase of $5.7 million, or 74.0%. Noninterest income increased in 2019 primarily due to additional noninterest income driven primarily from increased
deposit and loan balances resulting from the Post Oak acquisition, additional rebates from correspondent banks along with the gain of $1.5 million on the
sale of securities.
43
The following table presents, for the periods indicated, the major categories of noninterest income:
$
Nonsufficient funds fees
Service charges on deposit accounts
Gain on sale of securities
Gain (loss) on sale of other real estate
and other repossessed assets
Bank owned life insurance income
Debit card and ATM card income
Rebate from correspondent bank
Other(1)
Total noninterest income
$
For the Years Ended
December 31,
2019
2018
658 $
1,472
1,459
26
624
1,984
3,580
3,620
13,423 $
755 $
869
—
(428 )
579
1,331
2,609
1,998
7,713 $
(1) Other includes wire transfer and letter of credit fees, among other items.
Noninterest Expense
For the Years Ended
December 31,
Increase
(Decrease)
2018
(Dollars in thousands)
(97 ) $
603
1,459
755 $
869
—
454
45
653
971
1,622
5,710 $
(428 )
579
1,331
2,609
1,998
7,713 $
2017
685 $
783
18
6
585
929
1,327
1,528
5,861 $
Increase
(Decrease)
70
86
(18 )
(434 )
(6 )
402
1,282
470
1,852
Noninterest expense was $120.6 million for the year ended December 31, 2019 compared to $86.8 million for the year ended December 31, 2018, an
increase of $33.8 million, or 39.0%. This increase was primarily due to additional expenses related to increased headcount and bank offices from the Post
Oak acquisition, expenses to support organic growth initiatives and core deposit intangibles amortization partially offset by a $1.0 million FDIC Small Bank
Assessment Credit.
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,
2019
2018
Increase
(Decrease)
2018
(Dollars in thousands)
For the Years Ended
December 31,
2017
$
77,593 $
8,179
3,192
56,704 $
5,845
2,132
20,889 $
2,334
1,060
56,704 $
5,845
2,132
44,745 $
5,452
1,637
7,464
2,333
5,120
2,009
2,344
324
5,120
2,009
4,047
2,926
1,705
4,711
1,839
2,367
1,326
614
511
8,801
120,635 $
2,309
1,815
1,185
1,725
1,661
313
388
5,581
86,787 $
(604 )
2,896
654
642
(335 )
301
123
3,220
33,848 $
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 $
Increase
(Decrease)
11,959
393
495
1,073
(917 )
36
1,034
202
436
1,661
(18 )
89
382
16,825
(1) Total salaries and employee benefits includes $3.1 million, $1.7 million and $1.8 million in stock based compensation expense for the years ended
December 31, 2019, 2018 and 2017, respectively.
Salaries and Employee Benefits. Salaries and benefits were $77.6 million for the year ended December 31, 2019, an increase of $20.9 million, or 36.8%,
compared to the year ended December 31, 2018 as we experienced a significant increase in the total size of our workforce added through the Post Oak
acquisition and to support organic growth. Additionally, we recorded $1.4 million of severance expense during 2019.
Net Occupancy and Equipment. Net occupancy and equipment expenses increased $2.3 million, or 39.9%, for the year ended December 31, 2019 to
$8.2 million compared to $5.8 million for the year ended December 31, 2018. 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.
44
Data Processing and Software Amortization. Data processing and software amortization increased $2.3 million, or 45.8%, for the year ended
December 31, 2019 compared to the year ended December 31, 2018. This increase was primarily due to expenses from added scale as a result of the Post Oak
acquisition and to increase efficiencies.
Regulatory assessment and FDIC Insurance. Regulatory assessment and FDIC insurance decreased $604 thousand, or 26.2%, for the year ended
December 31, 2019 compared to the year ended December 31, 2018. This decrease was primarily due to a $1.0 million FDIC Small Bank Assessment Credit
received during 2019.
Core deposit intangibles amortization. Core deposit intangibles amortization increased $2.9 million, or 159.6%, for the year ended December 31, 2019
to $4.7 million from $1.8 million for the year ended December 31, 2018 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 and LoweryBank branch acquisitions. 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. 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. 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 decreased to 62.99% for the year ended December 31, 2019 compared to 63.68% for the year ended December 31, 2018 and 63.89% for the year ended
December 31, 2017.
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 and again to 2019, 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 increased $5.5 million, or 68.9%, to $13.4 million for the year ended December 31, 2019 compared with
$7.9 million for the same period in 2018 primarily due to the increase in pre-tax net income.
The effective tax rates were 20.2%, 17.6% and 33.2% for the years ended December 31, 2019, 2018 and 2017, respectively. The effective tax rates for
2019 and 2018 were 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 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.
45
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, 2019 and 2018. This information should be read in conjunction
with our consolidated financial statements as of and for the fiscal years ended December 31, 2019 and 2018 appearing elsewhere in this Annual Report on
Form 10-K.
Earnings Per Share(1)
Interest Income
Income
Net Interest
Net Income Attributable to
Common Shareholders
(Dollars in thousands, except per share data)
Basic
2019
First quarter
Second quarter
Third quarter
Fourth quarter
2018
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
57,149
58,946
58,665
58,147
32,391
34,193
35,336
56,303
$
$
44,603
45,571
44,837
44,526
26,889
27,816
28,036
45,838
$
$
12,678
14,248
12,047
13,986
7,711
7,556
8,879
13,163
$
$
0.58
0.67
0.57
0.68
0.58
0.57
0.66
0.60
$
$
Diluted
0.58
0.66
0.57
0.67
0.57
0.55
0.65
0.59
(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, 2019, total loans were $3.92 billion, an increase of $207.0 million, or 5.6%, compared with December 31, 2018 primarily due to organic
loan growth and loans acquired in the LoweryBank branch acquisition.
Total loans as a percentage of deposits were 96.2% and 101.2% as of December 31, 2019 and December 31, 2018, respectively. Total loans as a
percentage of assets were 78.4% and 79.7% as of December 31, 2019 and December 31, 2018, respectively.
The following table summarizes our loan portfolio by type of loan as of the dates indicated:
2019
2018
As of December 31,
2017
2016
2015
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Loans held for sale(1)
$
—
0.0 % $
—
0.0 % $
(Dollars in thousands)
—
0.0 % $
—
0.0 % $
27,887
1.7 %
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 held for
investment
Total loans
Allowance for Loan Losses
Loans, net
$ 689,360
8,304
17.6 % $ 702,037
48,274
0.2 %
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 %
3.5 %
1,873,782
47.9 % 1,650,912
44.6 % 1,080,247
47.5 %
891,989
47.2 %
745,595
44.4 %
410,471
10.5 % 430,128
11.6 %
243,389
10.7 %
159,247
8.4 %
154,646
9.2 %
698,957
192,515
41,921
17.8 % 649,311
4.9 % 186,411
41,233
1.1 %
17.5 %
5.0 %
1.1 %
301,219
109,116
10,320
13.3 %
4.8 %
0.5 %
246,987
98,657
10,965
13.1 %
5.2 %
0.6 %
205,200
93,848
11,761
12.2 %
5.6 %
0.7 %
3,915,310
3,915,310
(29,438 )
$ 3,885,872
100.0 % 3,708,306
100.0 % 3,708,306
(26,331 )
$ 3,681,975
100.0 % 2,270,876
100.0 % 2,270,876
(23,649 )
$ 2,247,227
100.0 % 1,891,635
100.0 % 1,891,635
(17,911 )
$ 1,873,724
100.0 % 1,653,165
100.0 % 1,681,052
(13,098 )
$ 1,667,954
98.3 %
100.0 %
(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.
46
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. 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. Our commercial and industrial loan portfolio
decreased $12.7 million, or 1.8%, to $689.4 million as of December 31, 2019 compared to $702.0 million as of December 31, 2018.
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
$40.0 million, or 82.8%, to $8.3 million as of December 31, 2019 compared to $48.3 million as of December 31, 2018 as we made the strategic decision in 2019 to
pursue an orderly exit from this line of business.
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. Loans secured by owner-occupied properties generally involve less risk. As of
December 31, 2019 and December 31, 2018, 53.8% and 51.4%, respectively, of our commercial real estate loans were owner-occupied. Our commercial real
estate loan portfolio increased $222.9 million, or 13.5%, to $1.87 billion as of December 31, 2019 from $1.65 billion as of December 31, 2018 primarily as a
result of organic loan growth. Included in our commercial real estate portfolio are multi-family residential loans. Our multi-family loans increased $3.7 million,
or 4.7%, to $82.2 million as of December 31, 2019 from $78.4 million as of December 31, 2018. We had 148 multi-family loans with an average loan size of $555
thousand as of December 31, 2019.
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. 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 includes 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. As of December 31, 2019 and December 31, 2018, 31.9% and 29.4%, respectively, of our
commercial real estate construction and land development loans were owner-occupied. Commercial real estate construction and land development land
loans decreased $19.7 million, or 4.6%, to $410.5 million as of December 31, 2019 compared to $430.1 million as of December 31, 2018.
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 $49.6 million, or 7.6%, to $699.0 million as of December 31, 2019 from
$649.3 million as of December 31, 2018. The home equity, home improvement and home equity lines of credit portion of our residential real estate portfolio
increased $17.0 million, or 17.8%, to $112.5 million as of December 31, 2019 from $95.4 million as of December 31, 2018.
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
47
assessment of the value of the property on an as-completed basis. Our residential construction loans portfolio increased $6.1 million, or 3.3%, to $192.5
million as of December 31, 2019 from $186.4 million as of December 31, 2018.
Consumer and Other. Our consumer and other loan portfolio is made up of loans made to individuals for personal purposes. 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. Our consumer and other loan portfolio
increased $688 thousand, or 1.7%, to $41.9 million as of December 31, 2019 from $41.2 million as of December 31, 2018.
48
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:
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
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
As of December 31, 2019
Due in
One Year
or Less
Due After
One Year
Through
Five Years
Due After
Five Years
Total
$
353,313 $
8,304
260,538 $
—
75,509 $
—
689,360
8,304
(Dollars in thousands)
246,320
1,227,767
399,695
1,873,782
98,953
231,972
79,546
410,471
86,612
128,839
31,593
953,934 $
397,126
39,334
9,556
2,166,293 $
500,662
$
453,272
953,934 $
1,949,762
$
216,531
2,166,293 $
215,219
24,342
772
795,083 $
346,813
$
448,270
795,083 $
698,957
192,515
41,921
3,915,310
2,797,237
1,118,073
3,915,310
As of December 31, 2018
Due in
One Year
or Less
Due After
One Year
Through
Five Years
Due After
Five Years
Total
(Dollars in thousands)
314,719 $
48,274
311,977 $
—
75,341 $
—
702,037
48,274
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 $
525,973
$
401,814
927,787 $
1,741,140
$
279,697
2,020,837 $
168,083
18,453
380
759,682 $
367,746
$
391,936
759,682 $
649,311
186,411
41,233
3,708,306
2,634,859
1,073,447
3,708,306
49
$
$
$
$
$
$
$
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, 2019, 2018 and 2017, commercial real estate and commercial construction loans represented 58.3%, 56.1%
and 58.3%, respectively, of our total loans.
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 $28.4 million, $33.0 million and $13.3 million in nonperforming loans as of December 31, 2019, 2018 and 2017, respectively. If interest on
nonaccrual loans had been accrued under the original loan terms, $1.2 million, $1.0 million and $733 thousand would have been recorded as income for the
years ended December 31, 2019, 2018 and 2017, respectively.
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:
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
2019
2018
As of December 31,
2017
(Dollars in thousands)
2016
2015
$
— $
8,388
—
— $
10,861
—
— $
6,437
—
$
—
3,896
—
6,741
9,050
3,294
746
152
28,371
—
28,371
8,337
—
36,708 $
19,239 $
0.74 %
0.72 %
17,776
6,110
11,663
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 %
$
$
209
2,664
—
2,006
—
239
—
66
5,184
—
5,184
—
131
5,315
491
0.25 %
0.31 %
(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.
50
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, 2019 and 2018, we had $20.2 million and $16.0 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, 2019, potential problem loans consisted of 27 credit relationships. Of the total
outstanding balance at December 31, 2019, 35.2% related to one customer in the hospitality industry, 22.9% related to nine customers in the energy-related
industry, 18.2% related to three customers in the customer service industry, 11.8% related to one customer in the residential real estate rental industry, 5.8%
related to one customer in the manufacturing industry, 3.2% related to three customers in the commercial services industry, 2.0% related to one customer in
the convenience store industry, 0.6% related to five customers in the trucking industry, 0.2% related to two customers in the construction material industry
and 0.1% related to one consumer loan. 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. 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 $3.1 million to $36.7 million at December 31, 2019, from $33.6 million at December 31, 2018. Nonaccrual loans
consisted of 69 separate credits at December 31, 2019 compared to 87 separate credits at December 31, 2018. Nonperforming assets were 0.94% of total loans
at December 31, 2019 compared to 0.91% at December 31, 2018.
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, 2019 was $5.5 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, 2019, our allowance for loan losses amounted to $29.4 million, or 0.75% of total loans, compared with $26.3 million, or 0.71%, as of
December 31, 2018.
The ratio of net charge-offs to average loans outstanding increased slightly to 0.07% for the year ended December 31, 2019 from 0.06% at
December 31, 2018.
51
The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:
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 (1)
Allowance for loan losses to nonperforming loans
2019
2018
As of and for the Years Ended December 31,
2017
(Dollars in thousands)
$ 3,831,894 $ 2,652,355 $ 2,081,370 $ 1,755,319 $ 1,525,325
3,708,306 2,270,876 1,891,635 1,681,052
8,246
5,792
3,915,310
26,331
5,939
13,098
5,469
23,649
4,248
17,911
13,188
2015
2016
(2,688 )
—
(2,424 )
—
(7,673 )
—
(722 )
—
(935 )
—
(80 )
(42 )
(124 )
(129 )
—
(44 )
(295 )
—
(34 )
(3,141 )
—
(25 )
—
(24 )
(2,515 )
—
—
—
(196 )
(7,993 )
—
—
—
(49 )
(900 )
—
(40 )
—
(65 )
(1,040 )
274
—
847
—
516
—
186
—
3
102
—
—
—
32
309
(2,832 )
29,438 $
0.75 %
0.07 %
103.76 %
—
—
—
—
949
(1,566 )
26,331 $
0.71 %
0.06 %
79.90 %
3
10
10
—
4
543
(7,450 )
23,649 $
1.04 %
0.36 %
177.44 %
43
—
10
—
5
244
(656 )
17,911 $
0.95 %
0.04 %
107.26 %
$
52
—
—
18
—
24
6
100
(940 )
13,098
0.78 %
0.06 %
252.66 %
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
52
•
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.
As of December 31,
2019
2018
2017
2016
2015
Percent of
Loans to
Total
Loans
Amount
Amount
Percent of
Loans to
Total
Loans
Percent of
Loans to
Total
Loans
Amount
(Dollars in thousands)
Percent of
Loans to
Total
Loans
Amount
Percent of
Loans to
Total
Loans
Amount
$ 8,818
—
17.6 % $ 8,351
—
0.2 %
18.9 % $ 7,694
—
1.3 %
20.1 % $ 5,059
—
3.1 %
22.0 % $ 3,644
—
3.5 %
23.6 %
3.5 %
11,170
47.9 %
11,901
44.6 %
10,253
47.5 %
8,950
47.2 %
5,914
45.0 %
4,421
10.5 %
2,724
11.6 %
2,525
10.7 %
1,217
8.4 %
1,221
9.2 %
17.8 %
2,242
3,852
1,057
120
12.3 %
5.6 %
942
0.8 %
95
$ 29,438 100.0 % $ 26,331 100.0 % $ 23,649 100.0 % $ 17,911 100.0 % $ 13,098 100.0 %
4.9 % 1,040
73
1.1 %
820
67
748
61
5.0 %
1.1 %
4.8 %
0.5 %
5.2 %
0.6 %
1,432
1,876
2,140
13.3 %
13.1 %
17.5 %
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, 2019, the carrying amount of investment securities totaled
$372.5 million, an increase of $35.3 million, or 10.5%, compared with $337.3 million as of December 31, 2018. Securities represented 7.5% and 7.2% of total
assets as of December 31, 2019 and 2018, respectively.
53
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
Agency collateralized mortgage obligations
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, 2019
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Losses
Gains
(Dollars in thousands)
Fair
Value
$
$
29,420 $
84,200
104,669
106,351
41,691
366,331 $
298 $
3,453
1,713
1,199
346
7,009 $
(243 ) $
(116 )
(214 )
(208 )
(14 )
(795 ) $
29,475
87,537
106,168
107,342
42,023
372,545
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
Certain investment securities are valued at less than their historical cost. Management evaluates securities for other-than-temporary impairment
(“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 Form 10-K for additional information regarding how and when
management evaluates securities for OTTI.
As of December 31, 2019, we did not expect to sell any securities classified as available for sale with 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, 2019, management believes
any impairment in our securities is temporary, and no impairment loss has been realized in our consolidated statements of income.
54
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.
Within One
Year
Amount Yield
After One
Year but
Within Five
Years
Amount Yield
December 31, 2019
After Five
Years but
Within Ten
Years
Amount Yield
After Ten Years
Amount Yield
(Dollars in thousands)
Total
Total
Yield
Available for Sale
U.S. government and
agency securities
Municipal securities
Agency mortgage-backed
pass-through securities
Agency collateralized
mortgage obligations
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
$ —
2.99 %
6,402 2.65 % 2,087 3.73 % 25,792 3.70 % 49,919 3.38 % 84,200 3.43 %
$ 29,420
$ 1,829
$ 5,462
$ 22,129
0.00 %
2.74 %
2.93 %
3.30 %
—
0.00 %
1,160
2.77 %
11,682
3.16 %
91,827
2.98 %
104,669
3.00 %
0.00 %
—
2.55 %
13,820 2.73 % 1,518 2.25 % 4,000 5.56 % 22,353 3.27 % 41,691 3.27 %
$ 20,222 2.71 % $ 10,227 3.17 % $ 89,074 3.26 % $ 246,808 2.92 % $ 366,331 3.00 %
106,351
80,880
—
25,471
2.47 %
2.78 %
0.00 %
Within One Year
Amount Yield
After One Year
but Within Five
Years
Amount Yield
December 31, 2018
After Five Years but
Within Ten Years
Amount Yield
(Dollars in thousands)
After Ten Years
Amount Yield
Total
Total
Yield
$
999
3,772
2.37 % $ 5,399
2.06 % 37,422
3.30 % $ —
2.03 % 86,391
0.00 % $ 2,172
3.05 % 91,483
2.74 % $ 8,570
3.84 % 219,068
3.05 %
3.19 %
—
10,106
$ 14,877
34
0.00 %
2.36 % 30,854
2.29 % $ 73,709
4.05 % 13,466
2.56 %
1,000
2.34 % $ 100,857
2.92 % 53,487
8.00 %
4,343
3.09 % $ 151,485
3.21 % 66,987
4.17 % 46,303
3.61 % $ 340,928
3.15 %
2.78 %
3.12 %
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, 2019 and 2018, 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 2.79% during the year ended December 31, 2019 compared with 2.69% for the year ended
December 31, 2018. The increase in average yield during 2019 compared to 2018 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.
55
Goodwill and Core Deposit Intangibles
Our goodwill as of December 31, 2019 was $223.6 million compared to $223.1 million as of December 31, 2018 primarily due to goodwill resulting from
the LoweryBank branch 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, 2019 was $21.9 million compared to $26.6 million as of December 31, 2018. 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, 2019 were $4.07 billion, an increase of $405.6 million, or 11.1%, compared with $3.66 billion at December 31, 2018. The
deposit growth we experienced was largely the result of growth in our loan customer base, many of whom also established a deposit relationship with
us. Noninterest-bearing deposits at December 31, 2019 were $1.25 billion, an increase of $42.9 million, or 3.6%, compared with $1.21 billion at December 31,
2018. Interest-bearing deposits at December 31, 2019 were $2.82 billion, an increase of $362.6 million, or 14.8%, compared with $2.45 billion at December 31,
2018.
The following table presents the daily average balances and weighted average rates paid on deposits for the periods indicated:
Interest-bearing demand
Money market and savings
Certificates and other time
Total interest-bearing deposits
Noninterest-bearing deposits
Total deposits
2019
Average
Balance
Average
Rate
Years Ended December 31,
2018
Average
Balance
Average
Rate
(Dollars in thousands)
2017
Average
Balance
Average
Rate
$
$
345,693
1,037,126
1,276,684
2,659,503
1,194,496
3,853,999
1.16 % $
1.38 %
2.09 %
1.69 %
—
1.17 % $
224,210
637,722
940,356
1,802,288
848,276
2,650,564
0.82 % $
0.73 %
1.65 %
1.22 %
—
0.83 % $
156,527
536,415
748,086
1,441,028
672,101
2,113,129
0.38 %
0.48 %
1.21 %
0.85 %
—
0.58 %
Our ratio of average noninterest-bearing deposits to average total deposits was 31.0%, 32.0% and 31.8% for the years ended December 31, 2019, 2018
and 2017, respectively.
The following table sets forth the amount of our certificates of deposit that are $100 thousand or greater by time remaining until maturity:
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
56
As of December 31,
2019
2018
(Dollars in thousands)
$
$
211,349 $
126,106
249,699
198,807
33,987
819,948 $
243,169
164,687
298,921
219,818
154,389
1,080,984
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, 2019, we had a total borrowing capacity of $1.72 billion, of which $1.51
billion was available under this agreement and $204.8 million was outstanding. FHLB advances of $75.0 million were outstanding at December 31, 2019, at a
weighted average rate of 2.29%. Letters of credit were $129.8 million at December 31, 2019, of which $8.6 million expired in January 2020, $8.9 million expired
in February 2020, $25.0 million will expire in March 2020, $8.5 million will expire in April 2020, $37.1 million will expire in June 2020, $1.7 million will expire in
July 2020, $8.4 million will expire in August 2020, $25.0 million will expire in October 2020, $4.1 million will expire in December 2020 and $2.5 million will expire
in March 2021.
Credit Agreement
As of December 31, 2019 and 2018, we had $569 thousand of indebtedness owed under our credit agreement with another financial institution. The
interest rate on the outstanding debt under the credit agreement is the Prime Rate minus 25 basis points, or 4.50% at December 31, 2019, 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, 2019, 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 $9.5 million at December 31, 2019. 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
12 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.
In September 2019, we completed the issuance of $60.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the
"Company Notes") due October 1, 2029. The Company Notes were issued at a price equal to 100% of the principal amount, resulting in net proceeds to the
Company of $58.6 million. The Company intends to use the net proceeds from the offering to support its growth and for general corporate purposes.
The Company Notes bear a fixed interest rate of 4.70% per annum until (but excluding) October 1, 2024, payable semi-annually in arrears on April 1
and October 1, commencing on April 1, 2020. Thereafter, from October 1, 2024 through the maturity date, October 1, 2029, or earlier redemption date, the
Company Notes will bear interest at a floating rate equal to the then-current three-
57
month LIBOR, plus 313 basis points (3.13%) for each quarterly interest period (subject to certain provisions set forth under “Description of the Notes—
Interest Rates and Interest Payment Dates” included in the Prospectus Supplement for the Company Notes), payable quarterly in arrears on January 1,
April 1, July 1 and October 1 of each year. Any redemption will be at a redemption price equal to 100% of the principal amount of Company Notes being
redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Company Notes are not subject to
redemption at the option of the holders.
Contractual Obligations
The following tables summarize our contractual obligations and other commitments to make future payments as of December 31, 2019 and 2018 (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
Than Three Years
More than One
Year but Less
As of December 31, 2019
Three years or
More but Less
Than Five Years
Five Years or
More
Total
Credit agreement
Operating leases
Total
$
$
— $
2,867
2,867 $
— $
4,812
4,812 $
— $
2,727
2,727 $
569 $
2,162
2,731 $
569
12,568
13,137
(Dollars in thousands)
One Year or Less
Than Three Years
More than One
Year but Less
As of December 31, 2018
Three years or
More but Less
Than Five Years
Five Years or
More
Total
Credit agreement
Operating leases
Total
Off-Balance Sheet Items
$
$
— $
2,559
2,559 $
— $
1,987
1,987 $
— $
3,242
3,242 $
569 $
5,126
5,695 $
569
12,914
13,483
(Dollars in thousands)
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, 2019. 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:
Commitments to extend credit
Standby letters of credit
Total
One Year or Less
As of December 31, 2019
More than
One Year but
Less Than
Three Years
Three years or
More but Less
Than Five
Years
(Dollars in thousands)
Five Years or
More
Total
$
$
570,868 $
14,900
585,768 $
109,171 $
103
109,274 $
45,660 $
149
45,809 $
313,182 $ 1,038,881
15,152
313,182 $ 1,054,033
—
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.
58
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.
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, 2019, 2018 and 2017, 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 $4.83 billion, $3.37 billion and $2.70 billion for the years ended December 31, 2019, 2018 and 2017, 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,
2019
2018
2017
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
24.7 %
55.2 %
2.6 %
1.3 %
1.5 %
14.7 %
100.0 %
79.4 %
7.4 %
1.5 %
11.7 %
100.0 %
25.2 %
53.6 %
7.2 %
1.4 %
0.3 %
12.3 %
100.0 %
78.8 %
9.4 %
2.1 %
9.7 %
100.0 %
Average noninterest-bearing deposits to average deposits
Average loans to average deposits
31.0 %
99.4 %
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 %
31.8 %
98.5 %
Our largest source of funds is deposits and our largest use of funds is loans. Our average loans increased $1.18 billion, or 44.5%, for the year ended
December 31, 2019 compared to the year ended December 31, 2018. 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 7.4 years and modified duration of 6.0 years at December 31, 2019, and a weighted average life of 6.1 years and
modified duration of 5.1 years at December 31, 2018.
As of December 31, 2019 and December 31, 2018, we had outstanding $1.04 billion and $1.00 billion, respectively, in commitments to extend credit and
$15.2 million and $23.3 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, 2019, 2018 and 2017, we had no exposure to future cash requirements associated with known uncertainties or capital
expenditures of a material nature.
59
As of December 31, 2019, we had cash and cash equivalents of $346.2 million compared with $268.9 million at December 31, 2018, an increase of $77.3
million. This increase in cash and cash equivalents was primarily due to the increase of $405.6 million in deposits, proceeds from the subordinated note
issuance of $58.6 million partially offset by the increase in total loans of $207.0 million.
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, 2019 and 2018, the Bank was well-capitalized.
Basel III Capital Rules impact regulatory capital ratios of banking organizations in the following manner: 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%.
60
The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted capital ratios as of December 31, 2019 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 tangible 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 tangible 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
14.83 %
11.42 %
11.66 %
10.02 %
14.39 %
12.67 %
12.67 %
10.89 %
8.00 %
4.50 %
6.00 %
4.00 %
8.00 %
4.50 %
6.00 %
4.00 %
10.50 %
7.00 %
8.50 %
4.00 %
N/A
N/A
N/A
N/A
10.50 %
10.00 %
7.00 %
8.50 %
4.00 %
6.50 %
8.00 %
5.00 %
Total shareholder’s equity was $709.9 million at December 31, 2019, compared with $703.0 million at December 31, 2018, an increase of $6.9 million, or
1.0%, primarily due to net income during 2019 partially offset by the share repurchases during the year.
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. 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 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.
61
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, 2019
(5.3)%
(3.3)%
(1.6)%
0.0%
2.3%
As of December 31, 2018
0.9%
0.9%
0.6%
0.0%
(1.1)%
As of December 31, 2019
As of December 31, 2018
5.0%
5.3%
3.7%
0.0%
(6.9)%
0.2%
0.9%
1.0%
0.0%
(2.7)%
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 2019, the overall duration of our combined loan and securities portfolios
decreased, money market deposit balances increased and FHLB borrowings represented a smaller proportion of our funding mix at year end due to deposit
growth exceeding loan growth in 2019.
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.
62
•
•
“Return on Average Tangible Shareholders’ Equity” is a non-GAAP measure generally used by financial analysts and investment bankers to
evaluate financial institutions. Return on average tangible shareholders’ equity is computed by dividing net earnings by average total
shareholders’ equity reduced by average goodwill and core deposit intangibles, net of accumulated amortization. For return on average
tangible shareholders’ equity, the most directly comparable financial measure calculated in accordance with GAAP is return on average
shareholders’ equity. This measure is important to investors because it measures the performance of the business consistently, exclusive of
changes in intangible assets.
“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 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:
Goodwill and core deposit intangibles, net
Tangible shareholders' equity
Shares outstanding at end of period(1)
Tangible book value per share
Net income attributable to shareholders
Average shareholders' equity
Less:
Average goodwill and other intangible
assets, net
As of and for the Years Ended December 31,
2019
2018
2017
2016
2015
$
709,865 $
702,984 $
306,865 $
279,817 $
258,490
(Dollars in thousands, except share and per share data)
245,518
464,347 $
249,712
453,272 $
42,663
264,202 $
43,444
236,373 $
44,619
213,871
20,523,816
21,937,740
13,226,826
12,958,341
12,812,985
22.62 $
20.66 $
19.97 $
18.24 $
16.69
52,959 $
37,309 $
17,632 $
22,851 $
15,227
708,269 $
413,441 $
297,627 $
273,211 $
204,935
$
$
$
$
Average tangible common shareholders’ equity
$
247,854
460,415 $
80,384
333,057 $
43,050
254,577 $
43,880
229,331 $
45,055
159,880
Return on average tangible common equity
11.50 %
11.20 %
6.93 %
9.96 %
9.52 %
Total assets
Less:
$
4,992,654 $
4,655,249 $
2,860,231 $
2,450,948 $
2,084,579
Goodwill and core deposit intangibles, net
Tangible assets
Tangible common equity to tangible assets
$
245,518
4,747,136 $
9.78 %
249,712
4,405,537 $
10.29 %
42,663
2,817,568 $
9.38 %
43,444
2,407,504 $
9.82 %
44,619
2,039,960
10.48 %
(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,
2019, 2018, 2017 or 2016.
63
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 71 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, 2019, 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, 2019, 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, 2019.
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.
64
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 2020 Annual Meeting
of Shareholders (the “2020 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.
PART III.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the 2020 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 2020 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 2020 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the 2020 Proxy Statement.
65
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 71 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, 2019 and 2018
Consolidated Statements of Income for the Years Ended December 31, 2019, 2018, and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
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 August 1, 2019)
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*
Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
4.3
4.4
4.5
4.6
Form of Allegiance Bank 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)
Subordinated Debt Indenture, dated as of September 20, 2019, between Allegiance Bancshares, Inc. and U.S. Bank
National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
filed on October 1, 2019)
First Supplemental Indenture, dated as of September 27, 2019, between Allegiance Bancshares, Inc. and U.S. Bank National Association, as
trustee (incorporated herein by reference to Exhibit 4.2 to the Company’s Form 8-K filed on October 1, 2019)
Form of Allegiance Bancshares, Inc. 4.70% Fixed-to-Floating Rate Subordinated Note due 2029 (incorporated by
reference to Exhibit A of Exhibit 4.2 to the Company’s Current Report on Form 8-K filed October 1, 2019)
66
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
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)
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)
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)
Purchase Agreement for Real Property at 8727 W. Sam Houston Parkway, Houston, Texas 77040 (incorporated by
reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 1, 2019)
Purchase Agreement for Real Property at 8807 W. Sam Houston Parkway, Houston, Texas 77040 (incorporated by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 1, 2019)
Allegiance Bancshares, Inc. 2019 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 April 30, 2019)
Allegiance Bancshares, Inc. 2019 Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on April 30, 2019)
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 99.2 to the Company's Form S-8 (Registration No. 333-
231142))
Form of Performance Share Unit Agreement (incorporated by reference to Exhibit 99.3 to the Company's Form S-8 (Registration No. 333-
231142))
Form of Restricted Stock Award Agreement for Non-Employee Director (incorporated by reference to Exhibit 99.4 to the Company's Form S-8
(Registration No. 333-231142))
21.1*
Subsidiaries of Allegiance Bancshares, Inc.
23.1*
Consent of Crowe LLP
31.1*
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
31.2*
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended
32.1**
32.2**
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
67
XBRL Instance Document
XBRL Taxonomy Extension Schema Document Exhibit
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
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.
68
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 9, 2020
SIGNATURES
ALLEGIANCE BANCSHARES, INC.
By:
/s/ Steven F. Retzloff
Steven F. Retzloff
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/ Steven F. Retzloff
Steven F. Retzloff
/s/ Paul P. Egge
Paul P. Egge
/s/ George Martinez
George Martinez
/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
Positions
Chief Executive Officer
(Principal Executive Officer); Director
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
Chairman of the Board
Director
Director
Director
Director
Director
Director
Director
69
Date
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
Signature
/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
Positions
Director
Director
Director
Director
Director
Director
Director
Director
70
Date
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2019, 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 9, 2020
71
ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
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 16)
SHAREHOLDERS’ EQUITY:
Preferred stock, $1 par value; 1,000,000 shares authorized; no
shares issued or outstanding
Common stock, $1 par value; 80,000,000 shares authorized; 20,523,816 shares
issued and outstanding at December 31, 2019 and 21,937,740 shares issued
and outstanding at December 31, 2018
Capital surplus
Retained earnings
Accumulated other comprehensive income (loss)
Total shareholders’ equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See notes to consolidated financial statements.
72
December 31,
2019
2018
(Dollars in thousands, except share data)
$
$
213,347 $
132,901
346,248
372,545
3,915,310
(29,438 )
3,885,872
15,468
66,790
8,337
6,242
27,104
223,642
21,876
18,530
4,992,654 $
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
$
1,252,232 $
1,209,300
367,278
1,258,008
1,190,583
2,815,869
4,068,101
4,326
75,503
107,799
27,060
4,282,789
366,905
879,840
1,206,491
2,453,236
3,662,536
2,812
225,493
48,899
12,525
3,952,265
—
—
20,524
521,066
163,375
4,900
709,865
4,992,654 $
21,938
571,803
112,131
(2,888 )
702,984
4,655,249
$
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 securities
Gain (loss) on sale 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
ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
2019
For the Years Ended December 31,
2018
(Dollars in thousands, except per share data)
2017
$
221,363 $
148,223 $
110,331
6,975
2,934
1,635
232,907
18,307
26,656
4,675
3,732
53,370
179,537
5,939
173,598
658
1,472
1,459
26
624
3,580
5,604
13,423
77,593
8,179
3,192
7,464
2,333
1,705
4,711
1,839
2,367
1,326
9,926
120,635
66,386
13,427
52,959 $
2.50 $
2.47 $
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 $
2.41 $
2.37 $
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
1.34
1.31
$
$
$
See notes to consolidated financial statements.
73
ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income
Other comprehensive income (loss), before tax:
Unrealized gain (loss) on securities:
Change in unrealized holding gain (loss) on
available for sale securities during the period
Reclassification of gain realized through the sale
of securities
Total other comprehensive income (loss)
Deferred tax (expense) benefit related to other
comprehensive income
Other comprehensive income (loss), net of tax
Comprehensive income
$
$
See notes to consolidated financial statements.
74
2019
For the Years Ended December 31,
2018
(Dollars in thousands)
37,309
52,959 $
$
2017
17,632
11,308
(4,152 )
(1,459 )
9,849
(2,061 )
7,788
60,747 $
—
(4,152 )
928
(3,224 )
34,085
$
5,213
(18 )
5,195
(1,807 )
3,388
21,020
ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Common Stock
Shares
Amount
Capital
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total Shareholders’
Equity
(Dollars in thousands, except share data)
BALANCE AT DECEMBER 31, 2016
12,958,341 $
12,958 $
212,649 $
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
Cumulative effect of change in
accounting principle related to
ASU 2017-08
Total shareholders' equity at
beginning of period, as
adjusted (See Note 1)
Net income
Other comprehensive income
Common stock issued in
connection with the exercise
of stock options and restricted
stock awards and the ESPP
Repurchase of common stock
Stock based compensation expense
BALANCE AT DECEMBER 31, 2019
268,485
269
13,226,826 $
13,227 $
3,979
1,780
218,408 $
57,262 $
17,632
74,894 $
37,309
(72 )
(3,052 ) $
3,388
336 $
(3,224 )
378,293
378
3,372
8,402,010
(69,389 )
8,402
(69 )
21,937,740 $
21,938 $
350,381
(2,043 )
1,685
571,803 $
112,131 $
(2,888 ) $
21,937,740
21,938
571,803
(1,715 )
110,416
52,959
(2,888 )
7,788
272,353
(1,686,277 )
272
(1,686 )
20,523,816 $
20,524 $
3,140
(56,977 )
3,100
521,066 $
163,375 $
4,900 $
See notes to consolidated financial statements.
75
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
(1,715 )
701,269
52,959
7,788
3,412
(58,663 )
3,100
709,865
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
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 income
Net accretion of discount on loans
Net accretion of discount on subordinated debt
Net accretion of discount on certificates of deposit
(Gain) loss on sale of other real estate and other repossessed assets
Net gain on sale of securities
Federal Home Loan Bank stock dividends
Stock based compensation expense
Net change in operating leases
Increase in accrued interest receivable and other assets
Increase 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 of Federal Home Loan Bank stock
Net cash paid for the LoweryBank branch acquisition
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 in noninterest-bearing deposits
Net increase in interest-bearing deposits
Net change in other borrowed funds
Proceeds from the credit agreement
Paydowns on the credit agreement
Proceeds from subordinated notes issuance, net of offering expenses
Proceeds from the issuance of common stock, stock option exercises
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 of common 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 CASH FLOW INFORMATION:
Income taxes paid
Interest paid
Cash paid for operating lease liabilities
SUPPLEMENTAL NONCASH DISCLOSURE:
Lease right-of-use asset obtained in exchange for lessee operating lease liabilities
Loans transferred to other real estate
For the Years Ended December 31,
2019
2018
2017
(Dollars in thousands)
$
52,959 $
37,309
$
17,632
7,903
5,939
(87 )
4,051
(11 )
(624 )
(8,853 )
111
(772 )
(26 )
(1,459 )
(403 )
3,100
2,097
(111 )
3,053
66,867
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
427
3,427
(1,149 )
(585 )
(632 )
108
(3 )
(6 )
(18 )
(273 )
1,780
—
(6,018 )
3,136
33,432
3,462,495
173,024
(3,663,770 )
(165,984 )
(13,385 )
1,871
5,102
(32,867 )
2,328,864
12,701
(2,334,149 )
(270,314 )
(3,419 )
—
4,746
—
2,007,842
39,125
(2,038,323 )
(386,059 )
(2,133 )
1,138
586
—
—
(233,514 )
230,416
(31,155 )
—
(377,824 )
29,052
361,536
(149,990 )
34,000
(34,000 )
58,601
3,412
—
—
(58,663 )
243,948
77,301
268,947
346,248 $
15,400 $
51,856
3,543
13,277 $
7,707
93,053
64,566
(87,076 )
—
—
—
3,750
(21 )
(220 )
(2,112 )
71,940
86,844
182,103
268,947
$
6,650 $
27,442
—
— $
265
89,359
254,435
(3,000 )
—
—
39,355
4,248
—
—
—
384,397
40,005
142,098
182,103
7,850
15,442
—
—
—
$
$
$
See notes to consolidated financial statements.
76
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 27
offices, with 26 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, 2019. 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.
Acquisitions – On October 1, 2018, Allegiance completed the acquisition of Post Oak Bancshares, Inc. On February 1, 2019, Allegiance completed
the acquisition of the LoweryBank branch, the Sugar Land location of Huntington State Bank. See Note 2 – Acquisitions for additional information
pertaining to the Post Oak and LoweryBank acquisitions and the impact of the Post Oak 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
77
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
certain purchased loans are grouped together according to similar risk characteristics and are treated in the aggregate when applying 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 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
78
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.
Leases— On January 1, 2019, the Company adopted Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842) through the required
modified retrospective approach by applying the allowed transition method whereby comparative periods were not restated. The Company elected to apply
several of the available practical expedients provided by ASU 2016-12, including carryover of historical lease determination, carryover of historical initial
direct cost balances for existing leases and accounting for lease and non-lease components in contracts in which the Company is a lease as a single lease
component. Upon adoption of the new leasing standard on January 1, 2019, the Company recognized $15.3 million of right-of-use assets, and $15.7 million
of related lease liabilities on the Consolidated Balance Sheet.
79
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company leases certain office facilities under operating leases. We also own certain office facilities which we lease to outside parties under
operating lessor leases; however, such leases are not significant. Under the new standards, for operating leases other than those considered to be short-
term, we recognize lease right-of-use assets and related lease liabilities. Such amounts are reported as components of premises and equipment and other
liabilities, respectively, on our consolidated balance sheet.
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, 2019, the $8.3 million balance of other real estate owned primarily consisted of foreclosed commercial real estate
properties recorded as a result of obtaining physical possession of the 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 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, and 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, restricted stock awards and performance share units (“PSUs”)
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.
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.
The fair value of restricted stock awards and PSUs is generally the market price of our stock on the date of grant. The impact of forfeitures of share-
based payment awards on compensation expense is recognized as forfeitures occur. PSUs are contingent upon performance and service conditions, which
affect the number of shares ultimately issued. The Company periodically evaluates the probable outcome of the performance conditions and makes
cumulative adjustments to compensation expense as appropriate.
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
80
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 2016-02, “Leases (Topic 842)." ASU 2016-02 requires 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
81
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.” ASU 2016-02 became effective for the Company on January 1, 2019. The Company adopted the
standard through the required modified retrospective approach by applying the allowed transition method whereby comparative periods were not restated
and a cumulative effect adjustment to the opening balance of retained earnings was recognized as of January 1, 2019. Topic 842 requires the recognition of
a lease liability measured as the present value of unpaid lease payments for operating leases where the Company is the lessee, and a corresponding right-
of-use (ROU) asset for the right to use the leased properties. The Company elected not to reassess whether contracts are or contain leases, lease
classification or initial direct costs for existing leases, a set of practical expedients for transition provided by ASU 2016-12. Further, the Company elected the
practical expedient to use hindsight in determining the lease term and assessing impairment. The election of the hindsight practical expedient resulted in
longer lease terms for a limited number of strategic locations based on relevant factors as of the adoption date. The Company implemented a lease
management system to assist in centralizing, maintaining and accounting for all leases to ensure the Company meets the ASU’s reporting and disclosure
requirements. Prior comparable periods are presented in accordance with previous guidance under Accounting Standards Codification (ASC) 840, “Leases.”
As of January 1, 2019, right-of-use assets and related lease liabilities totaled $15.3 million and $15.7 million, respectively. See Note 9 – Leases for further
information regarding the Company’s leases on certain properties and equipment under operating leases.
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. Upon adoption, the Company recognized a cumulative effect reduction in retained earnings totaling $1.7 million.
Newly Issued But Not Yet Effective Accounting Standards
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 and requires enhanced disclosures related to the significant estimates and judgments used in
estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. Financial institutions and other
organizations will now use forward-looking information to better form their credit loss estimates. Many of the loss estimation techniques historically applied
today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. ASU 2016-13 requires a
new credit loss methodology, the current expected credit loss (“CECL”) model, which requires the recognition of an allowance for lifetime expected credit
losses on loans. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with
credit deterioration. The Company expects the adoption of CECL will result in an increase of its combined allowance for loan losses and reserve for
unfunded commitments of 25% to 50%. The increase is primarily attributable to applying the CECL model to the Company's acquired loans, which, under
prior guidance, were recorded at fair value without an allowance at acquisition date, and the requirement to record an allowance on unfunded
commitments. In addition, the increase is the result of changing from an incurred loss model, which encompasses allowances for current known and
incurred losses within the portfolio, to an expected loss model, which encompasses allowances for losses expected to be incurred over the life of the
portfolio. The Company will adopt ASU 2016-13 on January 1, 2020 using the modified retrospective approach with a cumulative-effect adjustment to
retained earnings. The Company is currently finalizing the execution of its implementation controls and processes; therefore, the ultimate impact of the
adoption of ASU 2016-13 could differ from our current expectation. The adoption of ASU 2016-13 is not expected to have a significant impact on the
Company’s regulatory capital ratios.
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 became effective for the Company on January 1, 2020 and is not expected to have a
significant impact on the Company's financial statements.
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.
82
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 acquisitions were completed on the dates indicated below:
2019 Acquisition
Acquisition of LoweryBank Branch—On February 1, 2019, the Bank completed the acquisition of the LoweryBank branch, the Sugar Land location
of Huntington State Bank. The Bank paid $32.9 million in cash to acquire certain assets which included approximately $45.0 million in loans and assumed
approximately $16.0 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 was accounted for under the acquisition method of accounting in accordance with ASC Topic 805,
Business Combinations. The Company recognized goodwill of $578 thousand which is calculated as the excess of both the consideration exchanged and
liabilities assumed as compared to the fair value of identifiable assets acquired, which was deductible for tax purposes. Income and expense generated from
acquired assets and liabilities assumed would not have a material impact, therefore, proforma numbers are not presented.
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
and was not 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.
83
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2019, the Company finalized its valuation of all assets and liabilities acquired. A summary of the final purchase price allocation is
as follows (dollars 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
1,164,281
21,988
25,128
18,076
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
288,304
23,812
29,684
1,181,231 $
285,099
23,812
29,267
1,164,281 $
(1,999 )
(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.
84
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
$
$
Non-PCI Loans.
The following table presents information at the acquisition date for non-PCI loans acquired in the transaction (dollars in thousands):
Contractually required principal and interest payments
Accretable discount
Fair value at acquisition
$
$
28,340
(3,163 )
25,177
(495 )
25,672
1,152,892
(13,293 )
1,166,185
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.
Net interest income
Noninterest income
Net income
Basic earnings per common share
Diluted earnings per common share
$
For the Years Ended December 31,
2017
2018
(Dollars in thousands, except per share data)
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 year ended December 31, 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 $1.3 million and $1.7 million of pre-tax acquisition and merger-related expenses during the years ended
December 31, 2019 and 2018, respectively, related to the Post Oak acquisition. The acquisition and merger-related expenses are reflected on the Company’s
income statement for 2019 and 2018 but are excluded from the calculation of pro forma income above.
85
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS
Changes in the carrying amount of the Company’s goodwill and core deposit intangibles were as follows:
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
Acquisition of LoweryBank branch
Measurement period adjustment
Amortization
Balance as of December 31, 2019
Goodwill
Core Deposit
Intangibles
(Dollars in thousands)
$
$
39,389 $
—
39,389
183,736
—
223,125
578
(61 )
—
223,642 $
4,055
(781 )
3,274
25,128
(1,815 )
26,587
—
—
(4,711 )
21,876
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, 2019 and determined no
impairment was necessary.
The estimated aggregate future amortization expense for core deposit intangibles remaining as of December 31, 2019 is as follows (dollars in
thousands):
2020
2021
2022
2023
2024
Thereafter
Total
$
$
3,922
3,296
3,003
2,323
2,188
7,144
21,876
4. CASH AND DUE FROM BANKS
The Bank can be required by the Federal Reserve Bank of Dallas to maintain average reserve balances. The Bank was not required to maintain
reserve balances at December 31, 2019. “Cash and due from banks” in the consolidated balance sheets included a reserve amount of $27.7 million at
December 31, 2018.
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
Agency collateralized mortgage obligations
Corporate bonds and other
Total
December 31, 2019
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
(Dollars in thousands)
Fair
Value
29,420 $
84,200
104,669
106,351
41,691
366,331 $
298 $
3,453
1,713
1,199
346
7,009 $
(243 ) $
(116 )
(214 )
(208 )
(14 )
(795 ) $
29,475
87,537
106,168
107,342
42,023
372,545
$
$
86
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, 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
As of December 31, 2019, 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, 2019, 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, 2019, 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
and collateralized mortgage obligation
securities
Total
$
Amortized
Cost
Fair
Value
(Dollars in thousands)
$
20,222
9,067
51,921
74,101
155,311
20,291
9,374
53,409
75,961
159,035
$
211,020
366,331
$
213,510
372,545
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
Estimated
Fair Value
Unrealized
Losses
December 31, 2019
More than 12 Months
Estimated
Fair Value
Unrealized
Losses
(Dollars in thousands)
Estimated
Fair Value
Total
Unrealized
Losses
Available for Sale
U.S. Government and agency
securities
Agency mortgage-backed
pass-through securities
Agency collateralized mortgage
obligations
Municipal securities
Corporate bonds and other
Total
$
22,295 $
(239 ) $
436
$
(4 ) $
22,731
$
20,792
(155 )
4,369
(59 )
25,161
22,340
9,514
5,492
80,433 $
(208 )
(116 )
(14 )
(732 ) $
—
—
—
4,805
$
$
—
—
—
(63 ) $
22,340
9,514
5,492
85,238
$
(243 )
(214 )
(208 )
(116 )
(14 )
(795 )
87
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Less than 12 Months
Estimated
Fair Value
Unrealized
Losses
December 31, 2018
More than 12 Months
Estimated
Fair Value
Unrealized
Losses
(Dollars in thousands)
Estimated
Fair Value
Total
Unrealized
Losses
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
17,168
13,634
41,941 $
—
$
(29 )
1,417
136,934
$
(46 ) $
(3,512 )
2,416
147,074
$
(209 )
(35 )
(273 ) $
22,819
29,014
190,184
$
(820 )
(655 )
(5,033 ) $
39,987
42,648
232,125
$
(46 )
(3,541 )
(1,029 )
(690 )
(5,306 )
During 2019, the Company received proceeds of $173.0 million related to the available for sale securities sold and recorded gross gains of $2.1 million
and gross losses of $596 thousand for a net gain of $1.5 million. 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.
At December 31, 2019 and 2018, 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 was $24.3 million and $28.9 million at December 31, 2019 and 2018, respectively. 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(1)
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,
2019
December 31,
2018
(Dollars in thousands)
$
689,360 $
8,304
702,037
48,274
1,873,782
1,650,912
410,471
698,957
192,515
41,921
3,915,310
(29,438 )
3,885,872 $
430,128
649,311
186,411
41,233
3,708,306
(26,331 )
3,681,975
$
(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 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.
88
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(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 represented 53.8% of the outstanding principal balance of the Company’s commercial real estate loans
at December 31, 2019. 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. 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.
(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.
Acquired Loans
PCI loans
The Company has loans that were acquired and for which there was, at acquisition, evidence of deterioration of credit quality since origination and
for which it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of PCI loans included in the
consolidated balance sheet and the related outstanding balance owed at December 31, 2019 and 2018 are presented in the table below (dollars in
thousands):
Outstanding balance
Less: Discount
Less: Allowance
Recorded investment
As of December 31, 2019 As of December 31, 2018
26,862
$
(3,599 )
—
23,263
16,589 $
(2,414 )
(259 )
13,916 $
$
89
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the accretable yield for PCI loans for the years ended December 31, 2019 and 2018 were deemed immaterial.
Non-PCI Loans
The carrying amount of Non-PCI loans included in the consolidated balance sheet and the related outstanding balance owed are presented in the
table below (dollars in thousands).
Outstanding balance
Less: Discount
Recorded investment
As of December 31,
2019
As of December 31,
2018
$
$
672,927 $
(3,069 )
669,858 $
1,124,342
(10,650 )
1,113,692
Changes in the discount accretion for Non-PCI loans were as follows (dollars in thousands):
Balance at beginning of period
Additions
Accretion
Balance at end of period
2019
2018
$
$
10,650 $
573
(8,154 )
3,069 $
—
13,293
(2,643 )
10,650
Concentrations of Credit
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.
Related Party Loans
As of December 31, 2019 and 2018, loans outstanding to directors, officers and their affiliates totaled $6.8 million and $7.9 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 and reclassified related loans
Ending balance on December 31
90
2019
(Dollars in
thousands)
$
$
7,870
1,685
(2,773 )
6,782
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonaccrual and Past Due Loans
An aging analysis of the recorded investment in past due loans, segregated by class of loans, is included below. For purposes of this and future
disclosures recorded investment has been defined as the outstanding loan balances including net deferred loan fees, and excluding accrued interest
receivable of $15.5 million and $17.0 million as of December 31, 2019 and 2018, respectively, due to immateriality.
Loans Past Due and Still Accruing
December 31, 2019
30-89
Days
90 or More
Days
Total Past
Due Loans
Nonaccrual
Loans
(Dollars in thousands)
Current
Loans
Total
Loans
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
$
3,098 $
—
— $
—
3,098 $
—
8,388 $
—
677,874 $
8,304
689,360
8,304
4,421
—
4,421
6,741
1,862,620
1,873,782
66
—
66
9,050
401,355
410,471
1,598
564
254
10,001 $
$
—
—
—
— $
1,598
564
254
10,001 $
3,294
746
152
28,371 $
694,065
191,205
41,515
3,876,938 $
698,957
192,515
41,921
3,915,310
Loans Past Due and Still Accruing
December 31, 2018
30-89
Days
90 or More
Days
Total Past
Due Loans
Nonaccrual
Loans
(Dollars in thousands)
Current
Loans
Total
Loans
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
$
1,951 $
—
— $
—
1,951 $
—
10,861 $
—
689,225 $
48,274
702,037
48,274
3,502
—
3,502
17,776
1,629,634
1,650,912
1,300
—
1,300
974
427,854
430,128
3,643
—
91
10,487 $
$
—
—
—
— $
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
If interest on nonaccrual loans had been accrued under the original loan terms, approximately $1.2 million and $1.0 million would have been recorded
as income for the years ended December 31, 2019 and 2018, respectively.
91
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired Loans
Impaired loans by class of loans are set forth in the following tables.
Recorded
Investment
As of December 31, 2019
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
PCI
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
PCI
$
5,721 $
—
6,136 $
—
19,478
19,558
—
2,000
208
38
27,445
—
2,000
208
38
27,940
—
—
—
—
—
—
—
—
7,812
—
7,286
—
3,480
—
5,335
5,335
459
12,142
—
537
26
2,039
27,891
12,142
—
537
26
2,959
28,285
13,533
—
13,422
—
2,085
—
66
26
659
6,775
3,480
—
24,813
24,893
459
12,142
2,000
745
64
2,039
55,336 $
12,142
2,000
745
64
2,959
56,225 $
2,085
—
66
26
659
6,775
$
92
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recorded
Investment
As of December 31, 2018
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
$
4,354 $
—
4,771 $
—
11,322
11,322
1,326
2,742
—
3
19,747
1,326
2,741
—
3
20,163
—
—
—
—
—
—
—
—
9,150
—
9,545
—
3,898
—
11,542
11,542
2,641
3,114
—
—
—
23,806
3,114
—
—
—
24,201
13,504
—
14,316
—
190
—
—
—
6,729
3,898
—
22,864
22,864
2,641
4,440
2,742
—
3
4,440
2,741
—
3
190
—
—
—
$
43,553 $
44,364 $
6,729
93
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.
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
PCI
Total
Years Ended December 31,
2019
2018
Average
Recorded
Investment
Interest
Income
Average
Recorded
Recognized Investment
Interest
Income
Recognized
$
13,376 $
—
(Dollars in thousands)
399 $
—
14,555 $
—
423
—
25,856
489
23,198
756
10,251
2,058
594
75
3,133
55,343 $
185
6
—
1
8
1,088 $
4,247
2,815
—
3
—
44,818 $
98
—
—
5
—
1,282
$
The average recorded investment of impaired loans for the year ended December 31, 2017 was $34.1 million. Interest income recognized for the year
ended December 31, 2017 was $922 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.
94
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, 2019 is 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
Pass
Watch
Special
Mention
Substandard Doubtful
Total
(Dollars in thousands)
$
641,696 $
8,304
14,170 $
—
9,121 $
—
24,295 $
—
78 $
—
689,360
8,304
1,775,789
47,762
9,289
40,942
—
1,873,782
388,151
9,583
639
12,098
—
410,471
669,288
189,209
41,355
3,713,792 $
$
15,798
2,560
6
89,879 $
5,844
—
358
25,251 $
8,027
746
202
86,310 $
—
—
—
78 $
698,957
192,515
41,921
3,915,310
The following table presents the risk category of loans by class of loan at December 31, 2018:
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
Pass
Watch
Special
Mention
Substandard Doubtful
Total
(Dollars in thousands)
$
656,783 $
48,274
9,696 $
—
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
—
430,128
629,657
186,411
40,673
3,556,501 $
$
3,797
—
31
43,955 $
4,216
—
301
27,641 $
11,641
—
228
80,209 $
—
—
—
— $
649,311
186,411
41,233
3,708,306
At December 31, 2019, the allowance for loan losses totaled $29.4 million, or 0.75% of total loans. At December 31, 2018, the allowance totaled $26.3
million or 0.71% 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, 2019, the balance of the acquisition accounting discount was $5.5 million.
95
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, 2019, 2018 and 2017:
Commercial
and industrial
Mortgage
warehouse
Commercial
real estate
(including
multi-family
residential)
Commercial
real estate
construction
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, 2018
Provision for loan losses
Charge-offs
Recoveries
Net charge-offs
$
$
8,351
2,881
(2,688 )
274
(2,414 )
—
—
—
—
—
$
11,901
$
(654 )
(80 )
3
(77 )
$
2,724
1,741
(44 )
—
(44 )
$
2,242
1,905
(295 )
—
(295 )
$
1,040
17
—
—
—
$
73
49
(34 )
32
(2 )
Balance December 31, 2019
$
8,818
$
—
$
11,170
$
4,421
$
3,852
$
1,057
$
120
$
Allowance for loan losses:
Balance December 31, 2017
Provision for loan losses
Charge-offs
Recoveries
Net charge-offs
$
$
7,694
2,234
(2,424 )
847
(1,577 )
—
—
—
—
—
$
$
10,253
1,588
(42 )
102
60
$
2,525
199
—
—
—
$
2,140
127
(25 )
—
(25 )
$
942
98
—
—
—
Balance December 31, 2018
$
8,351
$
—
$
11,901
$
2,724
$
2,242
$
1,040
$
Allowance for loan losses:
Balance December 31, 2016
Provision for loan losses
Charge-offs
Recoveries
Net charge-offs
$
$
5,059
9,792
(7,673 )
516
(7,157 )
$
—
—
—
—
—
$
8,950
1,424
(124 )
3
(121 )
$
1,217
1,298
—
10
10
$
1,876
254
—
10
10
$
748
194
—
—
—
$
95
2
(24 )
—
(24 )
73
$
$
61
226
(196 )
4
(192 )
Balance December 31, 2017
$
7,694
$
—
$
10,253
$
2,525
$
2,140
$
942
$
95
$
26,331
5,939
(3,141 )
309
(2,832 )
29,438
23,649
4,248
(2,515 )
949
(1,566 )
26,331
17,911
13,188
(7,993 )
543
(7,450 )
23,649
The following table presents the balance in the allowance for loan losses by portfolio type based on the impairment method as of December 31, 2019
and 2018:
Allowance for loan losses
related to:
December 31, 2019
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total allowance for loan
losses
Allowance for loan losses
related to:
December 31, 2018
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total allowance for loan
losses
Commercial
and industrial
Mortgage
warehouse
Commercial
real estate
(including
multi-family
residential)
Commercial
real estate
construction
and land
development
1-4 family
residential
(including
home equity)
(Dollars in thousands)
Residential
construction
Consumer
and other
Total
$
4,139 $
— $
459 $
2,085 $
— $
66 $
26 $
6,775
4,679
—
10,711
2,336
3,852
991
94
22,663
$
8,818 $
— $
11,170 $
4,421 $
3,852 $
1,057 $
120 $
29,438
$
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
96
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, 2019 and 2018:
Commercial
and industrial
Mortgage
warehouse
Commercial
real estate
(including
multi-family
residential)
Commercial
real estate
construction
and land
development
1-4 family
residential
(including
home equity)
(Dollars in thousands)
Residential
construction
Consumer
and other
Total
$
15,572
$
—
$
24,813
$
12,142
$
2,000
$
745
$
64
$
55,336
673,788
8,304
1,848,969
398,329
696,957
191,770
41,857
3,859,974
$
689,360
$
8,304
1,873,782
$
410,471
$
698,957
$
192,515
$
41,921
$
3,915,310
$
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
Recorded investment in loans:
December 31, 2019
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total loans evaluated for
impairment
Recorded investment in loans:
December 31, 2018
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total loans evaluated for
impairment
Troubled Debt Restructurings
As of December 31, 2019 and 2018, the Company had a recorded investment in troubled debt restructurings of $28.9 million and $33.1 million,
respectively. The Company allocated $3.2 million and $3.0 million of specific reserves for these loans at December 31, 2019 and 2018, 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, 2019, 2018
and 2017:
2019
Pre-
Modification
of
Outstanding
Recorded
Investment
Post
Modification
of Outstanding
Recorded
Investment
2018
Pre-
Modification
of Outstanding
Recorded
Investment
Number of
Contracts
Number of
Contracts
As of December 31,
Post Modification of Outstanding
Recorded
Investment
(Dollars in thousands)
2017
Pre-
Modification
of Outstanding
Recorded
Investment
Number of
Contracts
Post Modification of
Outstanding Recorded
Investment
13 $
—
4,358 $
—
4,358
—
11 $
—
2,770 $
—
1
303
303
3
4,288
—
1
—
2
—
—
1
3,114
396
—
43
396
—
43
—
—
—
—
—
—
2,770
—
4,288
3,114
—
—
—
9 $
—
2,399 $
—
2,399
6
11,837
11,837
1
210
210
1
—
—
86
—
—
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
17 $
5,100 $
5,100
15 $
10,172 $
10,172
17 $
14,532 $
14,532
Troubled debt restructurings resulted in charge-offs of $251 thousand, $272 thousand and $136 thousand during the years ended December 31, 2019,
2018 and 2017, respectively.
As of December 31, 2019, there were five loans for a total of $472 thousand were modified under a troubled debt restructuring during the previous
twelve-month period that subsequently defaulted during the year 2019. As of December 31, 2018, no loans were modified under a troubled debt
restructurings during the previous twelve-month period that subsequently defaulted during the year 2018. 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 2019 and 2018. During the year ended December 31, 2019, the
Company added $5.1 million in new troubled debt restructurings, of which $4.6 million was still outstanding on December 31, 2019. 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.
97
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
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company groups financial assets and
financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the
assumptions used to determine fair value. These levels are:
•
•
•
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
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
Accrued interest receivable
Financial liabilities
Deposits
Accrued interest payable
Borrowed funds
Subordinated debt
Carrying
Amount
As of December 31, 2019
Estimated Fair Value
Level 1
Level 2
(Dollars in thousands)
Level 3
Total
$
$
346,248 $
372,545
3,885,872
15,468
346,248 $
—
—
13
$
—
372,545
—
1,783
— $
—
3,918,210
13,672
346,248
372,545
3,918,210
15,468
4,068,101 $
4,326
75,503
107,799
— $
—
—
—
4,073,031 $
4,326
83,302
109,607
— $
—
—
—
4,073,031
4,326
83,302
109,607
Carrying
Amount
As of December 31, 2018
Estimated Fair Value
Level 1
Level 2
(Dollars in thousands)
Level 3
Total
$
$
268,947 $
337,293
3,681,975
17,010
268,947 $
—
—
65
$
—
337,293
—
3,498
— $
—
3,674,241
13,447
268,947
337,293
3,674,241
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
98
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 used interest rate spreads that reflect factors such as liquidity, credit and nonperformance risk of the loans.
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 1, 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.
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
Agency collateralized mortgage obligations
Corporate bonds and other
Total
December 31, 2019
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
—
—
—
—
—
—
$
$
29,475
87,537
106,168
107,342
42,023
372,545
$
$
—
—
—
—
—
$
$
29,475
87,537
106,168
107,342
42,023
372,545
$
$
99
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available for sale securities:
U.S. government and agency securities
Municipal securities
Agency mortgage-backed pass-through securities
Corporate bonds and other
Total
Level 1
Level 2
Level 3
Total
December 31, 2018
(Dollars in thousands)
$
$
—
—
—
—
—
$
$
8,685
216,785
66,195
45,628
337,293
$
$
—
—
—
—
—
$
$
8,685
216,785
66,195
45,628
337,293
There were no liabilities measured at fair value on a recurring basis as of December 31, 2019 or 2018. There were no transfers between levels during
2019 or 2018.
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
Residential construction
PCI
Other real estate owned
Impaired loans:
Commercial and industrial
Commercial real estate (including multi-
family residential)
Commercial real estate construction
and land development
Other real estate owned
Level 1
As of December 31, 2019
Level 2
(Dollars in thousands)
Level 3
$
—
$
—
$
4,332
—
—
—
—
—
— $
—
—
—
—
—
—
$
4,876
10,057
471
1,380
8,337
29,453
$
Level 1
As of December 31, 2018
Level 2
(Dollars in thousands)
Level 3
$
—
$
—
$
5,252
—
—
—
— $
—
—
—
—
$
8,901
2,924
630
17,707
$
100
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, 2019 and 2018, certain impaired loans were reevaluated and reported at fair value through a specific allocation
of the allowance for loan losses. At December 31, 2019, the total reported fair value of impaired loans of $21.1 million based on collateral valuations utilizing
Level 3 valuation inputs had a carrying value of $27.9 million that was reduced by specific allowance allocations totaling $6.8 million. At December 31, 2018,
the total reported fair value of impaired loans of $17.1 million based on collateral valuations utilizing Level 3 valuation inputs had a carrying value of $23.8
million that was reduced by specific allowance allocations totaling $6.7 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, 2019, the balance of other real estate owned was $8.3 million consisting primarily of foreclosed commercial real estate properties
recorded as a result of obtaining physical possession of the property. The Company had $630 thousand of other real estate owned at December 31, 2018.
As of December 31, 2019 and 2018, no valuation allowance was recorded.
8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
Land
Buildings
Lease right-of-use assets
Leasehold improvements
Furniture, fixtures and equipment
Construction in progress
Total
Less: accumulated depreciation
Premises and equipment, net
As of December 31,
2019
2018
(Dollars in thousands)
$
$
13,913 $
36,826
11,180
4,522
13,612
250
80,303
13,513
66,790 $
11,586
23,455
—
5,291
11,858
480
52,670
10,953
41,717
101
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense was $3.2 million for the year ended December 31, 2019 and $2.1 million for the year ended December 31, 2018.
9. LEASES
Lease payments over the expected term are discounted using the Company’s incremental borrowing rate for borrowings of similar terms.
Generally, the Company cannot be reasonably certain about whether or not it will renew a lease until such time as the lease is within the last two years of
the existing lease term. When the Company is reasonably certain that a renewal option will be exercised, it measures/remeasures the right-of-use asset and
related lease liability using the lease payments specified for the renewal period or, if such amounts are unspecified, the Company generally assumes an
increase (evaluated on a case-by-case basis in light of prevailing market conditions) in the lease payment over the final period of the existing lease term.
There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the year ended December 31,
2019.
At December 31, 2019, the Company had 14 leases consisting of branch locations and office space along with equipment. On the December 31,
2019 balance sheet, the right-of-use asset is classified within premises and equipment and the lease liability is included in other liabilities. The Company
also owns certain office facilities which it leases to outside parties under operating lessor leases; however, such leases are not significant. All leases were
classified as operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is
recognized on a straight-line basis over the lease term. During the year 2019, Allegiance Bank purchased two previously leased properties for a total of $10.7
million.
Operating lease costs classified as occupancy and equipment expense were $3.6 million for the year ended December 31, 2019. Included in these
amounts were short-term lease costs of $553 thousand for the year ended December 31, 2019.
Certain leases include options to renew, with renewal terms that can extend the lease term from one to five years. Lease assets and liabilities
include related options that are reasonably certain of being exercised. The depreciable life of leased assets are limited by the expected lease term.
Supplemental lease information at or for the year ended December 31, 2019 is as follows (dollars in thousands):
Balance Sheet:
Operating lease right of use asset classified as premises and equipment
Operating lease liability classified as other liabilities
Income Statement:
Operating lease cost classified as occupancy and
equipment expense
Weighted average lease term, in years
Weighted average discount rate
$
$
11,180
11,477
3,554
5.53
3.19 %
A maturity analysis of the Company’s lease liabilities at December 31, 2019 is as follows (dollars in thousands):
Lease payments due:
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
After five years
Total lease payments
Discount on cash flows
Total lease liability
102
$
$
2,867
2,608
2,204
1,596
1,131
2,162
12,568
1,091
11,477
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. DEPOSITS
Time deposits that meet or exceed the Federal Deposit Insurance Corporation (the “FDIC”) insurance limit of $250 thousand at December 31, 2019
and December 31, 2018 were $485.8 million and $509.3 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
$
$
767,273
206,600
105,985
73,145
37,580
1,190,583
The Company had $263.5 million and $261.1 million of brokered deposits. There were no concentrations of deposits with any one depositor at
December 31, 2019 and 2018, respectively.
Related party deposits from principal officers, directors and their affiliates at December 31, 2019 and 2018 were $9.2 million and $9.6 million,
respectively.
11. 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, 2019, the Company had total borrowing capacity of
$1.72 billion, of which $1.51 billion was available under this agreement and $204.8 million was outstanding. FHLB advances of $75.0 million were outstanding
at December 31, 2019, at a weighted average rate of 2.29%. Letters of credit were $129.8 million at December 31, 2019, of which $8.6 million expired in January
2020, $8.9 million expired in February 2020, $25.0 million will expire in March 2020, $8.5 million will expire in April 2020, $37.1 million will expire in June 2020,
$1.7 million will expire in July 2020, $8.4 million will expire in August 2020, $25.0 million will expire in October 2020, $4.1 million will expire in December 2020
and $2.5 million will expire in March 2021.
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, 2019, 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 4.50%, at December 31, 2019, and is paid quarterly. Scheduled principal maturities are as follows (dollars in
thousands):
2020
2021
2022
2023
2024 and thereafter
Total
12. SUBORDINATED DEBT
Junior Subordinated Debentures
$
$
—
—
—
—
569
569
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 carrying value of $9.5 million at December 31, 2019. 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 assets of the respective trusts and are subject to mandatory redemption upon payment of the junior
103
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2019 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
(Dollars in thousands)
$
7,500
3,500
3 month LIBOR + 3.00%
3 month LIBOR + 1.80%
Junior
Subordinated
Debt Owed
to Trusts
Maturity
Date(2)
$
$
7,732 November 8, 2033
3,609
11,341
July 7, 2035
(1) The 3-month LIBOR in effect as of December 31, 2019 was 1.9124%.
(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.
In September 2019, the Company completed the issuance of $60.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes
(the "Company Notes") due October 1, 2029. The Company Notes were issued at a price equal to 100% of the principal amount, resulting in net proceeds to
the Company of $58.6 million. The Company intends to use the net proceeds from the offering to support its growth and for general corporate purposes.
The Company Notes bear a fixed interest rate of 4.70% per annum until (but excluding) October 1, 2024, payable semi-annually in arrears on April 1
and October 1, commencing on April 1, 2020. Thereafter, from October 1, 2024 through the maturity date, October 1, 2029, or earlier redemption date, the
Company Notes will bear interest at a floating rate equal to the then-current three-month LIBOR, plus 313 basis points (3.13%) for each quarterly interest
period (subject to certain provisions set forth under “Description of the Notes—Interest Rates and Interest Payment Dates” included in the Prospectus
Supplement), payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year. Any redemption will be at a redemption price equal to
100% of the principal amount of Company Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory
approval. The Company Notes are not subject to redemption at the option of the holders.
104
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. INCOME TAXES
The components of the provision for federal income taxes are as follows:
Current
Deferred
Total
2019
Years Ended December 31,
2018
(Dollars in thousands)
2017
$
$
13,514 $
(87 )
13,427 $
8,204 $
(256 )
7,948 $
8,320
427
8,747
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, 2019, 2018 and 2017 due to the following:
2019
Years Ended December 31,
2018
(Dollars in thousands)
2017
Taxes calculated at statutory rate
$
13,940 $
9,504 $
Increase (decrease) resulting from:
Stock based compensation
Effect of tax exempt income
Deferred tax adjustment related to
reduction in U.S. federal statutory
income tax rate
Other, net
Total
$
(11 )
(698 )
(400 )
(1,284 )
—
196
13,427 $
—
128
7,948 $
9,233
(755 )
(2,328 )
2,621
(24 )
8,747
The Company recognized net tax benefits related to stock based compensation totaling $11 thousand in 2019, $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, 2019 and 2018 are based on the 21% maximum federal statutory tax rate.
Deferred tax assets and liabilities are as follows:
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
$
$
As of December 31,
2019
2018
(Dollars in thousands)
6,432 $
—
855
7,287
(3,591 )
(1,307 )
(2,099 )
(6,997 )
290 $
5,898
761
366
7,025
(2,718 )
—
(2,035 )
(4,753 )
2,272
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, 2019, 2018 and 2017. The Company is no longer subject to examination by the US
Federal Tax Jurisdiction for the years prior to 2016.
105
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. STOCK BASED COMPENSATION
At December 31, 2019, 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. During 2019, the Company’s Board of Directors and shareholders approved the 2019 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 and its
affiliates. Under the Plan, the Company is authorized to issue a maximum aggregate of 3,200,000 shares of stock, up to 1,800,000 of which may be issued
through incentive stock options. 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 $3.1 million, $1.7 million and $1.8 million for the years ended December 31, 2019, 2018
and 2017, respectively.
Stock Options
Options to purchase a total of 1,309,231 shares of Company stock have been granted as of December 31, 2019. There were no stock options granted
during 2019. 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
2.72 %
10.00
29.26 %
—
2.40 %
10.00
29.70 %
—
A summary of the activity in the stock option plans during the years ended December 31, 2019 and 2018 is set forth below:
Number of
Options
(In thousands)
Weighted Weighted
Average
Average
Remaining
Exercise
Contractual Term
(In years)
Price
Aggregate
Intrinsic
Value
(In thousands)
13,718
5.72 $
Options outstanding, January 1, 2018
Options granted
Options assumed
Options exercised
Options forfeited
Options outstanding, December 31, 2018
Options granted
Options exercised
Options forfeited
Options outstanding, December 31, 2019
Options vested and exercisable,
December 31, 2019
The Company expects all outstanding options at December 31, 2019 to vest.
106
775 $
4
299
(244 )
(32 )
802 $
—
(179 )
(7 )
616 $
19.94
40.40
12.83
13.88
29.53
18.88
—
15.16
24.18
19.90
4.61 $
10,830
4.00 $
10,904
571 $
18.98
3.75 $
10,634
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
(1) There were no options granted in 2019.
2019(1)
2018
(In thousands)
2017
$
$
751 $
2,709
— $
3,254 $
3,393
18.00 $
3,371
3,743
16.55
As of December 31, 2019, there was $402 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 0.88 years.
Restricted Stock Awards
The Company has issued 314,539 restricted stock awards under the Plan as of December 31, 2019. During 2018, the Company awarded 122,127
shares of restricted stock with a weighted average grant date fair value of $39.04. During 2019, the Company awarded 87,950 shares of restricted stock with
a weighted average grant date fair value of $34.97. 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, 2019 and 2018 including changes during the years then
ended is as follows:
Nonvested share awards outstanding,
January 1, 2018
Share awards granted
Share awards vested
Unvested share awards forfeited or cancelled
Nonvested share awards outstanding,
December 31, 2018
Share awards granted
Share awards vested
Unvested share awards forfeited or cancelled
Nonvested share awards outstanding,
December 31, 2019
Number of
Shares
Weighted
Average Grant
Date Fair
Value
(Shares in thousands)
41 $
122
(20 )
—
143 $
88
(45 )
(19 )
30.46
39.04
30.12
—
37.48
34.97
36.70
38.46
167 $
36.23
At December 31, 2019, there was $5.3 million of unrecognized compensation expense related to the restricted stock awards which is expected to be
recognized over a weighted-average period of 2.94 years. The total fair value of restricted stock awards that fully vested during the years ended
December 31, 2019, 2018 and 2017 was approximately $1.6 million, $621 thousand and $203 thousand, respectively.
Performance Share Units (“PSUs”)
PSUs are earned subject to certain performance goals being met after the two-year performance period and will be settled in shares of Allegiance
Common Stock following a one-year service period. During 2019, the Company awarded 34,628 PSUs. At December 31, 2019, there was $888 thousand of
unrecognized compensation expense related to the PSUs, which is expected to be recognized over a weighted-average period of 2.27 years.
107
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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, 2019, 2018 and 2017 was $1.4 million, $962 thousand and $789 thousand, respectively.
Profit sharing plan
The financial statements include an accrual for $3.7 million, $2.5 million and $1.5 million for a contribution to the plan as a profit sharing contribution
for the years ended December 31, 2019, 2018 and 2017, 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. 2019 Amended and Restated Employee Stock Purchase Plan (“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 $210 thousand, $48 thousand and $144 thousand for
the years ended December 31, 2019, 2018, and 2017 respectively.
16. 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, 2019
December 31, 2018
Fixed
Rate
Variable
Fixed
Rate
Rate
(Dollars in thousands)
Variable
Rate
$
$
507,411 $
10,843
518,254 $
531,470 $
4,309
535,779 $
471,440 $
14,217
485,657 $
530,546
9,067
539,613
108
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commitments to make loans are generally made for periods of 120 days or less. As of December 31, 2019, the fixed rate loan commitments have
interest rates ranging from 1.95% to 8.40% with a weighted average maturity and rate of 3.59 years and 5.32%, respectively.
17. 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, 2019 and 2018, 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 2019 and 2018, 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, 2019 and 2018:
To Be Categorized As
Well Capitalized Under
Actual
Amount Ratio
For Capital
Adequacy Purposes
Ratio
(Dollars in thousands)
Amount
Amount
Minimum Required Plus
Capital Conservation Buffer
Prompt Corrective
Action Provisions
Ratio
Amount
Ratio
ALLEGIANCE BANCSHARES,
INC.
(Consolidated)
As of December 31, 2019
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 tangible
assets)
As of December 31, 2018
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 tangible
assets)
ALLEGIANCE BANK
As of December 31, 2019
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 tangible
assets)
As of December 31, 2018
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 tangible
assets)
Dividend Restrictions
$ 596,684
14.83 %
$ 321,775
8.00 %
$
422,330
10.500 %
N/A
459,447
11.42 %
180,999
4.50 %
281,553
7.000 %
N/A
468,972
11.66 %
241,331
6.00 %
341,886
8.500 %
N/A
468,972
10.02 %
187,146
4.00 %
187,146
4.000 %
N/A
$ 531,453
13.70 %
$ 310,295
8.00 %
$
383,020
9.875 %
N/A
456,223
11.76 %
174,541
4.50 %
247,266
6.375 %
N/A
465,637
12.01 %
232,721
6.00 %
305,446
7.875 %
N/A
465,637
10.61 %
175,621
4.00 %
175,621
4.000 %
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$ 578,425
14.39 %
$ 321,556
8.00 %
$
422,043
10.500 %
$ 401,945
10.00 %
509,372
12.67 %
180,875
4.50 %
281,362
7.000 %
261,265
6.50 %
509,372
12.67 %
241,167
6.00 %
341,654
8.500 %
321,556
8.00 %
509,372
10.89 %
187,018
4.00 %
187,018
4.000 %
233,773
5.00 %
$ 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 %
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.
18. 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
110
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company represent the only dilutive effect reflected in diluted weighted average shares. Common shares issuable under restricted stock awards, stock
options and the Employee Stock Purchase Plan are considered outstanding at the date of grant, are accounted for as participating securities and are
included in basic and diluted weighted average common shares outstanding.
2019
Years Ended December 31,
2018
2017
Amount
Per Share
Amount
Amount
Per Share
Amount
Amount
Per Share
Amount
(Amounts in thousands, except per share data)
Net income attributable to shareholders
$
52,959
$
37,309
$
17,632
Basic:
Weighted average shares outstanding
21,152 $
2.50
15,485 $
2.41
13,125 $
1.34
Diluted:
Add incremental shares for:
Dilutive effect of stock option exercises
Total
272
288
333
21,424 $
2.47
15,773 $
2.37
13,458 $
1.31
Stock options for 23,125, 54,175 and 28,300 shares were not considered in computing diluted earnings per share as of December 31, 2019, 2018 and
2017, respectively, because they were antidilutive.
111
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. 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 income (loss)
Total shareholders’ equity
TOTAL
112
December 31,
2019
2018
(Dollars in thousands)
$
$
$
$
17,775 $
760,131
1,665
779,571 $
504 $
68,184
1,018
69,706
20,524
521,066
163,375
4,900
709,865
779,571 $
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
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 income
of subsidiaries
Income tax benefit
Income before equity in undistributed income of subsidiaries
Dividends from subsidiary and equity in undistributed income
of subsidiaries
Net income
113
2019
For the Years Ended December 31,
2018
(Dollars in thousands)
2017
$
25 $
25
1,459
1,922
3,381
(3,356 )
705
(2,651 )
16 $
16
38
1,692
1,730
(1,714 )
360
(1,354 )
$
55,610
52,959 $
38,663
37,309 $
13
13
33
1,465
1,498
(1,485 )
756
(729 )
18,361
17,632
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLEGIANCE BANCSHARES, INC
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
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
Stock based compensation expense
Increase in other assets
Increase (decrease) in accrued interest payable and other
liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividend from subsidiary
Capital investment in bank subsidiary
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
Proceeds from subordinated notes issuance, net of offering expenses
Repurchase 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
2019
For the Years Ended December 31,
2018
(Dollars in thousands)
2017
$
52,959 $
37,309 $
17,632
(55,610 )
169
3,100
(639 )
166
145
7,500
—
7,500
3,412
58,601
(58,663 )
3,350
10,995
6,780
17,775 $
(38,663 )
110
1,685
(236 )
279
484
—
—
—
3,552
—
(2,113 )
1,439
1,923
4,857
6,780 $
(18,361 )
107
1,780
(378 )
(377 )
403
—
(21,000 )
(21,000 )
4,248
—
—
4,248
(16,349 )
21,206
4,857
$
114
ALLEGIANCE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest
Income
Net Interest
Income
Net Income
Attributable to
Common Shareholders
(Dollars in thousands, except per share data)
Basic
Diluted
Earnings Per Share(1)
2019
First quarter
Second quarter
Third quarter
Fourth quarter
2018
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
57,149 $
58,946
58,665
58,147
32,391 $
34,193
35,336
56,303
44,603 $
45,571
44,837
44,526
26,889 $
27,816
28,036
45,838
12,678 $
14,248
12,047
13,986
7,711 $
7,556
8,879
13,163
0.58 $
0.67
0.57
0.68
0.58 $
0.57
0.66
0.60
0.58
0.66
0.57
0.67
0.57
0.55
0.65
0.59
(1) Earnings per share are computed independently for each of the quarters presented and therefore may not total earnings per share for the year
21. SUBSEQUENT EVENT
Dividend Declaration
On January 28, 2020, the Company declared its first quarterly cash dividend of $0.10 per share of common stock to be paid on March 16, 2020 to all
shareholders of record as of February 28, 2020.
Other Real Estate
On February 4, 2020, the Company foreclosed on a loan and recorded a $6.9 million property as other real estate. The loan was classified as impaired
with a specific reserve charged through the allowance for loan loss of $1.9 million at December 31, 2019. At foreclosure, the Company recorded a charge-off
of $2.1 million to record the property at fair value less estimated selling costs.
Stock Repurchase Authorization
On February 26, 2020, the Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to one million shares
of its common stock outstanding at the discretion of management through March 31, 2021. Repurchases under this program may be made from time to time
through open market purchases, privately negotiated transactions or such other manners as will comply with applicable laws and regulations. On February
20, 2020, the Company completed its second one million share repurchase authorization previously approved on July 25, 2019.
(Back To Top)
Section 2: EX-4.2 (EX-4.2)
115
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.2
Allegiance Bancshares, Inc. has one class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended: its common
stock, par value $1.00 per share (the “common stock”). As used in this exhibit, the terms “Allegiance,” “the Company,” “we,” “us” and “our” refer to
Allegiance Bancshares, Inc. and do not refer to its consolidated subsidiaries, unless the context otherwise requires.
General
The following discussion summarizes some of the important rights of the holders of shares of our common stock. This discussion does not purport to be a
complete description of these rights and may not contain all of the information regarding our common stock that is important to you. These rights can be
determined in full only by reference to federal and state banking laws and regulations, the Texas Business Organizations Code, or “the TBOC,” and our
amended and restated certificate of formation and bylaws.
We are incorporated in the State of Texas. The rights of our shareholders are generally covered by Texas law and our amended and restated certificate of
formation and bylaws. The terms of our capital stock are therefore subject to Texas law, including the TBOC, and the common and constitutional law of
Texas. The following discussion describes the terms of our amended and restated certificate of formation and bylaws. Our amended and restated certificate
of formation and bylaws have been filed with the SEC as exhibits to the Annual Report on Form 10-K of which this exhibit is a part.
Our amended and restated certificate of formation authorizes us to issue up to 80,000,000 shares of common stock, par value $1.00 per share, and 1,000,000
shares of preferred stock, par value $1.00 per share. The authorized but unissued shares of our capital stock will be available for future issuance without
shareholder approval, unless otherwise required by applicable law or the rules of any applicable securities exchange.
Voting Rights
Subject to any special voting rights that may be given to any series of preferred stock that we may issue in the future, holders of our common stock are
entitled to one vote per share in the election of directors and on all other matters submitted to a vote of our shareholders. Shareholders are not entitled to
cumulate their votes with respect to the election of directors. Directors are elected by a plurality of the votes cast.
Dividend Rights
Holders of our common stock are entitled to dividends when, as and if declared by our board of directors out of funds legally available therefor.
Liquidation Rights
On liquidation of the Company, the holders of the common stock are entitled to share pro rata with the holders of shares of other common stock of the
Company in any distribution of the assets of the Company after the holders of shares of preferred stock, if any, have received the liquidation preference of
their shares as determined by our board of directors plus any declared but unpaid dividends, if any, and after all other indebtedness of the Company has
been retired.
Other
Our common stock has no preemptive or conversion rights and is not entitled to the benefits of any redemption or sinking fund provision.
Preferred Stock
Our amended and restated certificate of formation permits us to issue one or more series of preferred stock and authorizes our board of directors to
designate the designations, preferences, limitations and relative rights of any such series of preferred stock, in each case, without any further action by our
shareholders. While the terms of preferred stock may vary from series to series, holders of our common stock should assume that all shares of preferred
stock will be senior to our common stock in respect of distributions and on liquidation.
Our board of directors may authorize the issuance of preferred stock with voting rights that affect adversely the voting power or other rights of our other
classes of stock, including the common stock. The issuance of preferred stock also could have the effect of delaying, deferring or preventing a change in
control or causing the market price of our common stock to decline.
We currently have no shares of preferred stock issued or outstanding.
Listing
Our common stock is listed on the NASDAQ Global Market under the symbol “ABTX.”
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare Investor Services, c/o Shareholder Services, whose address is 150 Royall Street,
Canton, MA 02021.
Business Combinations under Texas Law
A number of provisions of Texas law, our amended and restated certificate of formation and our bylaws could have an anti-takeover effect and make more
difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise and the removal of incumbent directors. These provisions
are intended to discourage coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to
negotiate first with our board of directors.
We are subject to the provisions of Title 2, Chapter 21, Subchapter M of the TBOC, or the Texas Business Combination Law, which provides that a Texas
corporation may not engage in specified types of business combinations, including mergers, consolidations and asset sales, with a person, or an affiliate or
associate of that person, who is an “affiliated shareholder.” For purposes of this law, an “affiliated shareholder” is generally defined as the holder of 20% or
more of the corporation’s voting shares, for a period of three years from the date that person became an affiliated shareholder. The law’s prohibitions do
not apply if:
•
•
the business combination or the acquisition of shares by the affiliated shareholder was approved by the board of directors of the corporation
before the affiliated shareholder became an affiliated shareholder; or
the business combination was approved by the affirmative vote of the holders of at least two-thirds of the outstanding voting shares of the
corporation not beneficially owned by the affiliated shareholder, at a meeting of shareholders called for that purpose, not less than six months
after the affiliated shareholder became an affiliated shareholder.
We have more than 100 shareholders and are considered to be an “issuing public corporation” for purposes of this law. The Texas Business Combination
Law does not apply to the following:
•
the business combination of an issuing public corporation: where the corporation’s original certificate of formation or bylaws contain a provision
expressly electing not to be governed by the Texas Business Combination Law; or that adopts an amendment to its certificate of formation or
bylaws, by the affirmative vote of the holders, other than affiliated shareholders, of at least two-thirds of the outstanding voting shares of the
corporation, expressly electing not to be governed by the Texas Business Combination Law and so long as the amendment does not take effect for
18 months following the date of the vote and does not apply
to a business combination with an affiliated shareholder who became affiliated on or before the effective date of the amendment;
•
•
•
a business combination of an issuing public corporation with an affiliated shareholder that became an affiliated shareholder inadvertently, if the
affiliated shareholder divests itself, as soon as possible, of enough shares to no longer be an affiliated shareholder and would not at any time
within the three- year period preceding the announcement of the business combination have been an affiliated shareholder but for the inadvertent
acquisition;
a business combination with an affiliated shareholder who became an affiliated shareholder through a transfer of shares by will or intestacy and
continuously was an affiliated shareholder until the announcement date of the business combination; and
a business combination of a corporation with its wholly owned subsidiary if such subsidiary is a Texas entity and not an affiliate or associate of
the affiliated shareholder other than by reason of the affiliated shareholder’s beneficial ownership of voting shares of the corporation.
Neither our amended and restated certificate of formation nor our bylaws contain any provision expressly providing that the Company will not be subject to
the Texas Business Combination Law. The Texas Business Combination Law may have the effect of inhibiting a nonnegotiated merger or other business
combination involving Allegiance, even if that event would be beneficial to our shareholders.
Action by Written Consent
Under Texas law, no action required or permitted to be taken at an annual or special meeting of shareholders may be taken by written consent in lieu of a
meeting of shareholders without the unanimous written consent of all shareholders entitled to vote on the action unless the certificate of formation
specifically allows action to be taken by a written consent of the shareholders holding at least the minimum number of shares necessary to take the action
that is subject to that consent at a meeting of shareholders, even though such consent is not signed by all of the corporation’s shareholders. Our amended
and restated certificate of formation provides for shareholder action by less than unanimous written consent.
Certain Certificate of Formation and Bylaw Provisions Potentially Having an Anti-takeover Effect
Our amended and restated certificate of formation and bylaws contain certain provisions that could have an anti-takeover effect and thus discourage
potential takeover attempts and make it more difficult for our shareholders to change management or receive a premium for their shares. These provisions
include:
•
•
•
•
•
staggered terms for directors, who may be removed from office only for cause ;
a prohibition on cumulative voting in the election of directors;
authority for our board of directors to issue shares of our preferred stock without shareholder approval and upon such terms as our board of
directors may determine;
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 our shareholders may be called only by a majority of our board of directors, the President or a holder or
group of holders of at least 50 % of our shares entitled to vote at the meeting.
In addition to these provisions of our amended and restated certificate of formation and bylaws, 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 Bank Holding Company Act and the Change in Bank
Control Act. These laws could delay or prevent an acquisition.
Limitation of Liability and Indemnification of Officers and Directors
Our amended and restated certificate of formation provides that our directors and officers will be indemnified by us to the fullest extent permitted under the
TBOC and applicable federal laws and regulations, against all reasonable expenses incurred in connection with their service for or on our behalf. Our
amended and restated certificate of formation also makes mandatory the indemnification permitted under Section 8.101 of the TBOC and makes mandatory
the payment or reimbursement of reasonable expenses under Section 8.10 of the TBOC, and extends this mandatory indemnification and mandatory
payment or reimbursement of expenses to all former or present officers of the Company and all persons who were serving at the request of the Company as
the director, officer, partner, agent or trustee of another foreign or domestic entity. In addition, our amended and restated certificate of formation provides
that our directors and officers will not be personally liable for monetary damages to us to the fullest extent permitted by the TBOC.
We have entered into indemnification agreements with our executive officers and directors pursuant to which they will be indemnified as described above
and will be advanced costs and expenses subject to the condition that such executive officers and directors will reimburse us for all advancements paid if a
final judicial determination is made that such executive officer or director is not entitled to indemnification under applicable law or regulation.
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Section 3: EX-21.1 (EX-21.1)
ALLEGIANCE BANCSHARES, INC.
LIST OF SUBSIDIARIES
Exhibit 21.1
Direct Subsidiaries
Allegiance Bank
Farmers & Merchants Capital Trust II
Farmers & Merchants Capital Trust III
Indirect Subsidiaries
ABTX Financial, Inc.
Jurisdiction of Organization
Texas
Delaware
Delaware
Jurisdiction of Organization
Texas
Parent Entity
Allegiance Bancshares, Inc.
Allegiance Bancshares, Inc.
Allegiance Bancshares, Inc.
Parent Entity
Allegiance Bank
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Section 4: EX-23.1 (EX-23.1)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statements on Forms S-8 (Nos. 333-207342, 333-208600, 333-218732, 333-228119, 333-231141
and 333-231142) and S-3 (No. 333-236103) of Allegiance Bancshares, Inc. of our report dated March 9, 2020 relating to the consolidated financial statements,
appearing in this Annual Report on Form 10-K.
/s/ Crowe LLP
Dallas, Texas
March 9, 2020
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Section 5: EX-31.1 (EX-31.1)
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 31.1
I, Steven F. Retzloff, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Allegiance Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15
(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 9, 2020
/s/ Steven F. Retzloff
Steven F. Retzloff
Chief Executive Officer
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Section 6: EX-31.2 (EX-31.2)
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Exhibit 31.2
I, Paul P. Egge, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Allegiance Bancshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15
(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 9, 2020
/s/ Paul P. Egge
Paul P. Egge
Chief Financial Officer
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Section 7: EX-32.1 (EX-32.1)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 (AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002)
In connection with the Annual Report of Allegiance Bancshares, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2019
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven F. Retzloff, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and operating results of the Company as of the
dates and for the periods expressed in the Report.
IN WITNESS WHEREOF, the undersigned has executed this Certificate, effective as of March 9, 2020.
Exhibit 32.1
/s/ Steven F. Retzloff
Steven F. Retzloff
Chief Executive Officer
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Section 8: EX-32.2 (EX-32.2)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 (AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002)
Exhibit 32.2
In connection with the Annual Report of Allegiance Bancshares, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2019
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul P. Egge, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and operating results of the Company as of the
dates and for the periods expressed in the Report.
IN WITNESS WHEREOF, the undersigned has executed this Certificate, effective as of March 9, 2020.
/s/ Paul P. Egge
Paul P. Egge
Chief Financial Officer
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