2 0 1 8 A n n u a l R e p o r t
B U S I N E S S B A N K I N G \ B E T T E R B A N K I N G
At CommunityBank of Texas, we’re committed to building strong,
Dear Shareholders,
honest relationships. We strive to keep our clients’ and partners’
I am proud to announce to you that a relationship-driven approach to community
needs at the forefront of everything we do. And we measure our
banking is a valid and winning strategy. Our record results for the year ending
success by the success we help create for them.
December 31, 2018, validate our view that concentrating on customer service while
Fort Worth
Dallas
Austin
Houston
Beaumont
San Antonio
Woodville
Jasper
Newton
Southeast
Texas
Kirbyville
Silsbee
Buna
Lumberton
Beaumont
Vidor
Orange
Nederland
Port Arthur
Gulf of Mexico
The Woodlands
Tomball
Champions
Humble
Hwy 290
Houston
Crosby-Main
Crosby-Lobby
Northshore
Baytown
Pasadena
South Belt
Memorial City
Memorial City
Convenience Center
Westchase
Washington
Greenway Plaza
Sugar Land
Wharton
Boling
staying disciplined in our credit quality will produce outstanding results. We view
the world one relationship at a time, providing outstanding service to our existing
customer base through a dedicated staff while concentrating on new relationships that
understand our relationship-driven community banking approach.
This past year was also our first full year as a public
company. Our outstanding staff met the challenges of
new responsibilities associated with public markets
while continuing to deliver value to shareholders. We
are proud of the results that we delivered. Our net
income year over year was up 72 percent, with earnings
for the year of over $47 million. We were able to
increase our operating efficiencies, continue to deliver
organic growth and benefit from the tax decrease
enacted in late 2017. Our asset-sensitive balance sheet
also gave us a boost as the Federal Reserve continued
to raise rates last year.
We are also very pleased to be in one of the most
vibrant economies in the United States. Throughout
our Houston and East Texas markets businesses are
expanding. Although we do see continued expansion
associated with the export of natural gas and oil,
expansion does not stop there – it continues in
petrochemical, health care, our port system and
construction. We continue to see population and job
growth across our markets.
Late last year we decided to enter the Dallas market,
which we feel has great potential and growth prospects
for our franchise. Our newly formed and dedicated
team hit the ground running and we expect great
things out of them in the future as we build out our
presence in another significant market in Texas.
The strong and disciplined culture of CBTX, Inc., and
CommunityBank of Texas is what drives our success.
Our dedication to relationship banking has provided us
with a tremendous balance sheet with over 40 percent
of our deposits in the form of noninterest-bearing
deposits. This allows us maximum flexibility in pricing
our relationships and delivering value to our customers.
This discipline has allowed us to increase our margins
even as we have seen deposit costs in general continue
to rise.
CBTX, Inc. is well positioned for 2019. We are in great
business markets, we have a strong and dedicated staff
and we have a loyal and strong customer base. We
will continue to build our business one relationship at a
time while staying disciplined to our culture. We look
forward to continued progress in building our bank and
delivering value to our shareholders in the year to come.
Thank you for all of your support.
ROBERT R. FRANKLIN, JR. \ Chairman, President & CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission File Number: 001-38280
CBTX, INC.
(Exact name of registrant as specified in its charter)
Texas
(State or other jurisdiction of
incorporation or organization)
20 - 8339782
(I.R.S. employer
identification no.)
9 Greenway Plaza, Suite 110
Houston, Texas 77046
(Address of principal executive offices)
(713) 210 - 7600
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
The Nasdaq Global Select Market
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein and will not be contained
to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part 111 of this Form 10-K or any amendment to this
Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and emerging growth company in Rule 12b - 2 of the Exchange
Act.
Large accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer ☒
Smaller reporting company ☐
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b - 2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2018, the aggregate market value of the registrant's common stock held by non-affiliates was approximately $586.2 million.
As of February 24, 2019, there were 26,002,653 shares of the registrant’s common stock, par value $0.01 per share outstanding, including 224,960 shares of
unvested restricted stock deemed to have beneficial ownership.
Document Incorporated by Reference:
Portions of the registrant’s Definitive Proxy Statement relating to the 2019 Annual Meeting of Shareholders are incorporated by reference into Part III of this
Annual Report on Form 10-K to the extent stated herein. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days
after the end of the registrant’s fiscal year ended December 31, 2018.
CBTX, INC.
PART I.
Page
Item 1. Business
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART I
Item 1.
3
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 48
Cautionary Note Regarding Forward-looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Interest Rate Sensitivity and Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Impact of Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Recently Issued Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . 74
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . 75
Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . . . . . . . . . . . 75
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Item 14.
PART IV
Item 15.
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
The disclosures set forth in this item are qualified by Item 1A. "Risk Factors," and the section captioned
“Cautionary Note Regarding Forward-Looking Statements” in Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” of this Annual Report on Form 10-K and other cautionary statements set
forth elsewhere in this Annual Report on Form 10-K.
CBTX, Inc., is a bank holding company incorporated in Texas in 2007. All references to “we,” “our,” “us,”
“ourselves,” and “the Company” refer to CBTX, Inc. and its consolidated subsidiaries and all references to
“CommunityBank of Texas” or “the Bank” refer to CommunityBank of Texas, National Association, our wholly - owned
bank subsidiary, unless otherwise indicated or the context otherwise requires. All references to “Houston” refer to the
Houston - The Woodlands - Sugar Land Metropolitan Statistical Area, or MSA and surrounding counties references to
“Beaumont” refer to the Beaumont - Port Arthur MSA and surrounding counties and references to “Dallas” refer to the
Dallas-Fort Worth-Arlington MSA and surrounding counties.
The Bank’s headquarters are located at 5999 Delaware Street, Beaumont, Texas 77706 and our telephone number
is (409) 861 - 7200. The majority of our executives are located in our Houston office at 9 Greenway Plaza, Suite 110,
Houston, Texas 77046 and the telephone number is (713) 210 - 7600. As of December 31, 2018, we employed 495 full - time
equivalent employees. We completed an initial public offering of our common stock on November 10, 2017. Our common
stock is listed on the NASDAQ Global Market under the symbol “CBTX.” Our business is conducted through one
reportable segment.
We operate 19 branches located in the Houston market, 15 branches located in the Beaumont market and one
branch in the Dallas market. We have experienced significant organic growth since commencing banking operations, as
well as growth through mergers, acquisitions and de novo branches. We are focused on controlled profitable growth. Our
total assets increased from $2.6 billion at December 31, 2014 to $3.3 billion as of December 31, 2018 and our return on
average assets improved from 0.9% for the year ended December 31, 2014 to 1.5% for the year ended December 31, 2018.
Our merger, acquisition and expansion history includes the following:
Date
Acquired/Added
Assets
Acquired
Branches
Acquired/Added
Location
$
(Dollars in millions)
Bank Acquired (1)
County Bancshares, Inc./County Bank, N.A. . . . . . . . . . August 2007
Crosby Bancshares, Inc. (Crosby State Bank) . . . . . . . . . December 2008
Founders Bank, SSB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 2011
VB Texas, Inc. (Vista Bank Texas) . . . . . . . . . . . . . . . . . July 2013
MC Bancshares, Inc. (Memorial City Bank) . . . . . . . . . . February 2015
Branch Added
Pasadena Branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 2012
Westchase Branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2014
The Woodlands Branch . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2015
South Belt Branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 2019
Dallas Preston Center Branch . . . . . . . . . . . . . . . . . . . . . . January 2019
130
439
124
665
268
—
—
—
—
—
—
8
1
7
2
1
1
1
1
1
Beaumont
Houston
Houston
Houston
Houston
Houston
Houston
Houston
Houston
Dallas
(1) Assets of acquired banks are as of the most recent quarter prior to their respective close dates.
We began our operations in Beaumont and surrounding counties and expanded into the Houston market. Our loan
portfolio at December 31, 2018 was 73.9% in the Houston market and 26.1% in the Beaumont market. In November 2018,
we opened a branch and deposit production office in Dallas, which became a full branch in January 2019. We believe that
there are significant ongoing growth opportunities for us in our markets.
3
We are primarily a business bank and focus on providing commercial banking solutions to small and mid - sized
businesses and professionals including attorneys, accountants and other professional service providers with operations in
our markets. We offer a broad range of banking products, including commercial and industrial loans, commercial real
estate loans, construction and development loans, 1 - 4 family residential mortgage loans, multi-family residential loans
consumer loans, agricultural loans, treasury services, traditional retail deposits and a full suite of online banking services.
At December 31, 2018, 83.7% of our loans were commercial loans. We have a relationship-based approach and at
December 31, 2018, 81.0% of our loan customers had a deposit relationship with us.
The banking and financial services industry is highly competitive and we compete with a wide range of financial
institutions within our markets, including local, regional and national commercial banks and credit unions. We also
compete with mortgage companies, brokerage firms, consumer finance companies, mutual funds, securities firms,
insurance companies, third - party payment processors, financial technology, or fintech companies and other financial
intermediaries for certain of our products and services. Some of our competitors are not subject to the regulatory
restrictions and level of regulatory supervision applicable to us.
Interest rates on loans and deposits, as well as prices on fee - based services, are typically significant competitive
factors within the banking and financial services industry. Many of our competitors are much larger financial institutions
that have greater financial resources than we do and compete aggressively for market share. These competitors attempt to
gain market share through their financial product mix, pricing strategies and banking center locations. Other important
competitive factors in our industry and markets include office locations and hours, quality of customer service, community
reputation, continuity of personnel and services, capacity and willingness to extend credit and ability to offer sophisticated
banking products and services.
We seek to remain competitive with respect to fees charged, interest rates and pricing and we believe that our
broad and sophisticated suite of financial solutions, our high - quality customer service culture, our positive reputation and
our long - standing community relationships will enable us to compete successfully within our markets and enhance our
ability to attract and retain customers.
Our Strategy
Organic Growth. We aim to continuously enhance our customer base, increase loans and deposits and expand
our overall market share. Through our relationship - driven, community banking strategy, a significant portion of our
organic growth has been through referral business from our existing customers and professionals in our markets including
attorneys, accountants and other professional service providers. By understanding our customers’ businesses, appropriately
structuring our loans and applying a solution - minded approach and attitude to our customers’ needs, we believe that we
will continue to attract customers who value our approach of being their financial partners. Our team of seasoned bankers
has been and will continue to be, an important driver of our organic growth by further developing banking relationships
with existing and potential customers.
Maintain Strong Credit Culture. We intend to continue to employ prudent underwriting and proactive credit
administration to manage risk in our loan portfolio. In the past, these practices have resulted in low amounts of
nonperforming and impaired loans and low charge-offs in relation to the size of our loan portfolio. See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Credit
Policies and Risk Management” for further discussion.
Diversified Loan Portfolio. We intend to maintain or increase the diversity in our loan portfolio as a means of
managing risk associated with fluctuations in economic conditions. Our focus on lending to small to medium - sized
businesses and professionals in our market areas has resulted in a diverse loan portfolio comprised primarily of core
relationships. We carefully monitor exposure to certain asset classes to minimize the impact of a downturn in the value of
such assets.
Strategic Acquisitions. We intend to continue to supplement our organic growth through strategic acquisitions.
We expect our markets will afford us opportunities to identify and execute acquisitions designed to strengthen our
franchise, increase shareholder value and contribute meaningful strategic enhancements, including talented bankers and
complementary branch footprints.
Increased Operational Efficiency. We intend to continue to focus on improving our operational efficiency. We
have upgraded our operating capabilities and created a platform for continued efficiencies in the areas of risk management,
technology, data processing, regulatory compliance and human resources, which we believe is capable of handling our
continued growth. Our efficiency ratio has improved from 64.2% for the year ended December 31, 2014, to 59.0% for the
year ended December 31, 2018.
Available Information
The Company’s website address is www.communitybankoftx.com. The Company makes available free of charge
on or through its website its 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, or the Exchange Act, as soon as reasonably practicable after such materials are electronically filed
with or furnished to the Securities and Exchange Commission, or SEC. Information contained on the Company’s 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 the
Company files with or furnishes to the SEC.
Supervision and Regulation
The U.S. banking industry is highly regulated under federal and state law. Consequently, our growth and earnings
performance will be affected not only by management decisions and general and local economic conditions, but also by
the statutes administered by, and the regulations and policies of, various governmental regulatory authorities. These
authorities include the Board of Governors of the Federal Reserve System, or Federal Reserve, Office of the Comptroller
of the Currency, or OCC, Federal Deposit Insurance Corporation, or FDIC, Consumer Financial Protection Bureau, or
CFPB, Internal Revenue Service, or IRS, and state taxing authorities. The effect of these statutes, regulations and policies,
and any changes to such statutes, regulations and policies, can be significant and cannot be predicted.
The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system, facilitate the
conduct of sound monetary policy and promote fairness and transparency for financial products and services. The system
of supervision and regulation applicable to us and our subsidiaries establishes a comprehensive framework for their
respective operations and is intended primarily for the protection of the FDIC’s Deposit Insurance Fund, the Bank’s
depositors and the public, rather than our shareholders or creditors. The description below summarizes certain elements of
the applicable bank regulatory framework. This description is not intended to describe all laws and regulations applicable
to us and our subsidiaries, and the description is qualified in its entirety by reference to the full text of the statutes,
regulations, policies, interpretive letters and other written guidance that are described herein.
Financial Services Industry Reform. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act, or Dodd - Frank Act, was enacted. The Dodd-Frank Act has had a broad impact on the financial services
industry, including significant regulatory and compliance changes such as, among many other things, (i) enhanced
resolution authority of troubled and failing banks and their holding companies; (ii) increased regulatory examination fees;
(iii) creation of the CFPB, an independent organization dedicated to promulgating and enforcing consumer protection laws
applicable to all entities offering consumer financial products or services; and (iv) numerous other provisions designed to
improve supervision and oversight of, and strengthen safety and soundness for, the financial services sector. Additionally,
the Dodd-Frank Act established a new framework for systemic risk oversight within the financial system to be distributed
among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal
Reserve, the OCC and the FDIC.
On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act, or the Regulatory
Relief Act, was enacted. The Regulatory Relief Act repealed or modified several provisions of the Dodd-Frank Act and
included a number of burden reduction measures for community banks, including, among other things, directing the federal
banking regulators to develop a community bank leverage ratio for banks that have less than $10.0 billion in total assets
and have certain risk profiles, exempting community banks with less than $10.0 billion in total assets from the Volcker
Rule (discussed below), narrowing and simplifying the definition of high volatility commercial real estate, and requiring
the federal banking regulators to raise the asset threshold under the Small Bank Holding Company and Savings and Loan
Holding Company Policy Statement from $1.0 billion to $3.0 billion.
The Regulatory Relief Act also expands the eligibility for certain small banks to undergo 18-month examination
cycles, rather than annual cycles, raising the consolidated asset threshold from $1.0 billion to $3.0 billion for eligible
4
5
banks. In addition, the Regulatory Relief Act added certain protections for consumers, including veterans and active duty
military personnel and student borrowers, expanded credit freezes and created an identity theft protection database. The
Regulatory Relief Act requires the enactment of a number of implementing regulations, the details of which may have a
material effect on the ultimate impact of the law.
Regulatory Capital Rules. The Company and the Bank are each required to comply with applicable capital
adequacy standards established by the Federal Reserve and the OCC. The current risk-based capital standards applicable
to the Company and the Bank are based on the December 2010 final capital framework for strengthening international
capital standards, known as Basel III, of the Basel Committee on Banking Supervision, or Basel Committee. In July 2013,
the federal bank regulators approved final rules, the Basel III Capital Rules, implementing the Basel III framework as well
as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules became effective for the Company and the Bank
on January 1, 2015 (subject to a phase-in period for certain provisions). The Basel III Capital Rules require banks and
bank holding companies, including the Company and the Bank, to maintain four minimum capital standards: (1) a Tier 1
capital - to - adjusted total assets ratio, or leverage capital ratio, of at least 4.0%; (2) a Tier 1 capital to risk - weighted assets
ratio, or Tier 1 risk - based capital ratio, of at least 6.0%; (3) a total risk - based capital (Tier 1 plus Tier 2) to risk - weighted
assets ratio, or total risk - based capital ratio, of at least 8.0%; and (4) a Common Equity Tier 1, or CET1, capital ratio of at
least 4.5%.
The Basel III Capital Rules also call for bank holding companies and banks to maintain a “capital conservation
buffer” on top of the minimum risk - based capital requirements. The buffer must be composed of common equity Tier 1
capital. This buffer is intended to help to ensure that banking organizations conserve capital when it is most needed,
allowing them to better weather periods of economic stress. The buffer, which became fully phased in on January 1, 2019,
is 2.5% of risk - weighted assets.
The Basel III Capital Rules also attempt to improve the quality of capital by implementing changes to the
definition of capital. Among the most important changes are stricter eligibility criteria for regulatory capital instruments
that would disallow the inclusion of certain instruments, such as trust preferred securities (other than grandfathered trust
preferred securities), in Tier 1 capital going forward and new constraints on the inclusion of minority interests,
mortgage - servicing assets, deferred tax assets and certain investments in the capital of unconsolidated financial
institutions. In addition, the Basel III Capital Rules require that most regulatory capital deductions be made from CET1
capital.
The Federal Reserve and the OCC may also set higher capital requirements for individual institutions whose
circumstances warrant it. For example, institutions experiencing internal growth or making acquisitions are expected to
maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on
intangible assets. At this time, the bank regulatory agencies are more inclined to impose higher capital requirements to
meet well capitalized standards and future regulatory change could impose higher capital standards as a routine matter.
The Company’s regulatory capital ratios and those of the Bank are in excess of the levels established for “well capitalized”
institutions under the rules.
These rules also set forth certain changes in the methods of calculating certain risk - weighted assets, which in turn
will affect the calculation of risk - based ratios. Under the Basel III Capital Rules, higher or more sensitive risk weights
have been assigned to various categories of assets, including certain credit facilities that finance the acquisition,
development or construction of real property, certain exposures or credits that are 90 days past due or on nonaccrual status,
foreign exposures and certain corporate exposures. In addition, these rules include greater recognition of collateral and
guarantees, and revised capital treatment for derivatives and repo - style transactions.
In September 2017, the federal bank regulators proposed to revise and simplify the capital treatment for certain
deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for
banking organizations, such as the Company and the Bank, that are not subject to the advanced approaches requirements.
In November 2017, the federal banking regulators revised the Basel III Capital Rules to extend the transitional treatment
of these items for non-advanced approaches banking organizations until the September 2017 proposal is finalized. The
September 2017 proposal would also change the capital treatment of certain commercial real estate loans under the
standardized approach, which we use to calculate our capital ratios.
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III
post-crisis regulatory reforms (commonly referred to as Basel IV). Among other things, these standards revise the Basel
Committee’s standardized approach for credit risk (including by recalibrating risk weights and introducing new capital
requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and
provides a new standardized approach for operational risk capital. Under the Basel framework, these standards will
generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the
current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches
institutions, and not to the Company or the Bank. The impact of Basel IV on us will depend on the manner in which it is
implemented by the federal bank regulators.
Pursuant to the Regulatory Relief Act, the Federal Reserve, the OCC and the FDIC issued proposed rules
implementing the community bank leverage ratio in November 2018. Under the proposed rules, a depository institution
would be eligible to elect the community bank leverage ratio framework if it has less than $10.0 billion in total consolidated
assets, meets certain risk-based qualifying criteria, and has a community bank leverage ratio greater than 9 percent. Under
the proposed rules, a qualifying community banking organization that has elected to utilize the community bank leverage
ratio would not be required to calculate the existing risk-based and leverage capital requirements otherwise required. Such
a community banking organization would be considered to have met the capital ratio requirements to be “well capitalized”
for the purpose of its primary federal regulator’s prompt corrective action rules, discussed below, provided it has a
community bank leverage ratio greater than 9 percent.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are required to take prompt corrective
action to resolve problems associated with insured depository institutions whose capital declines below certain levels as
further described below. In the event an institution becomes undercapitalized, it must 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. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment
in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5.0% of the
institution’s assets at the time it became undercapitalized and the amount necessary to cause the institution to become
adequately capitalized. The bank regulators have greater power in situations where an institution becomes significantly or
critically undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling
such an institution can be required to obtain prior Federal Reserve approval of proposed dividends, or might be required
to consent to a consolidation or to divest the troubled institution or other affiliates.
Volcker Rule. As mandated by the Dodd-Frank Act, in December 2013, the OCC, Federal Reserve, FDIC, SEC
and Commodity Futures Trading Commission issued a final rule implementing certain prohibitions and restrictions on the
ability of a banking entity and non-bank financial company supervised by the Federal Reserve to engage in proprietary
trading and have certain ownership interests in, or relationships with, a “covered fund” (commonly referred to as the
“Volcker Rule”). As mentioned above, the Regulatory Relief Act included a provision exempting banking organizations
with $10.0 billion or less in total consolidation assets, and total trading assets and trading liabilities that are 5% or less of
total consolidated assets, from the Volcker Rule. Thus, the Company and the Bank are not currently subject to the Volcker
Rule.
CBTX, Inc.
As a bank holding company, we are subject to regulation under the Bank Holding Company Act of 1956, as
amended, or BHC Act, and to supervision, examination and enforcement by the Federal Reserve. The BHC Act and other
federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage,
and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws
and regulations. The Federal Reserve’s jurisdiction also extends to any company that we directly or indirectly control,
such as any nonbank subsidiaries and other companies in which we own a controlling investment.
Acquisitions by Bank Holding Companies. The BHC Act requires every bank holding company to obtain the
prior approval of the Federal Reserve before it acquires all or substantially all of the assets of any bank, or ownership or
control of any voting shares of any bank or bank holding company if after such acquisition it would own or control, directly
or indirectly, more than 5.0% of the voting shares of such bank or bank holding company. In approving bank holding
company acquisitions by bank holding companies, the Federal Reserve is required to consider, among other things, the
effect of the acquisition on competition, the financial condition, managerial resources and future prospects of the bank
6
7
holding company and the banks concerned, the convenience and needs of the communities to be serve, including the record
of performance under the Community Reinvestment Act of 1977, or CRA, the effectiveness of the applicant in combating
money laundering activities and the extent to which the proposed acquisition would result in greater or more concentrated
risks to the stability of the U.S. banking or financial system. Our ability to make future acquisitions will depend on our
ability to obtain approval for such acquisitions from the Federal Reserve. The Federal Reserve could deny our application
based on the above criteria or other considerations. For example, we could be required to sell banking centers as a condition
to receiving regulatory approval, which condition may not be acceptable to us or, if acceptable to us, may reduce the
benefit of a proposed acquisition.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act, or the Riegle-Neal Act, a bank holding
company may acquire banks in states other than its home state, subject to any state requirement that the bank has been
organized and operating for a minimum period of time, not to exceed five years, and to certain deposit market-share
limitations. Bank holding companies must be well capitalized and well managed, not merely adequately capitalized and
adequately managed, in order to acquire a bank located outside of the bank holding company’s home state.
Control Acquisitions. Under the BHC Act, a company may not acquire “control” of a bank holding company or
a bank without the prior approval of the Federal Reserve. The statute defines control as ownership or control of 25% or
more of any class of voting securities, control of the election of a majority of the board of directors, or any other
circumstances in which the Federal Reserve determines that a company directly or indirectly exercises a controlling
influence over the management or policies of the bank holding company or bank. The Federal Reserve regulations include
a presumption that control does not exist only when a company owns or controls 5% or less of the outstanding shares of
any class of voting securities. Companies that propose to acquire between 5% and 25% of any class of voting securities
usually consult with the Federal Reserve in advance and often must make written commitments not to exercise control. As
a matter of policy, the Federal Reserve has in a number of cases required a company to take certain actions to avoid control
if it proposes to acquire 25% or more but less than 33% of the total equity of a bank or bank holding company through the
acquisition of both voting and non - voting shares, even if the voting shares are less than 25% of a class. The Federal
Reserve deems the acquisition of 33% or more of the total equity of a bank or bank holding company to represent control.
The BHC Act does not apply to acquisitions by individuals or certain trusts, but if an individual, trust, or company
proposes to acquire control of a bank or bank holding company, the Change in Bank Control Act, or CIBC Act, requires
prior notice to the bank’s primary federal regulator or to the Federal Reserve in the case of a bank holding company. The
CIBC Act uses the same definition of control as the BHC Act, but agency regulations under the CIBC Act presume in
many cases that a change in control occurs when an individual, trust, or company acquires 10% or more of any class of
voting securities. The notice is not required for a company required to file an application under the BHC Act for the same
transaction.
The requirements of the BHC Act and the CIBC Act could limit our access to capital and could limit parties who
could acquire shares of our common stock.
Regulatory Restrictions on Dividends; Source of Strength. We are regarded as a legal entity separate and distinct
from CommunityBank of Texas, N.A. The principal source of our revenues is dividends received from the Bank. Federal
law currently imposes limitations upon certain capital distributions by national banks, such as certain cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash - out merger
and other distributions charged against capital. The Federal Reserve and OCC regulate all capital distributions by the Bank
directly or indirectly to the Company, including dividend payments. The Federal Reserve regulates capital dividends paid
by the Company. The Federal Reserve has issued a policy statement that provides that a bank holding company should not
pay dividends unless (1) its net income over the last four quarters (net of dividends paid) has been sufficient to fully fund
the dividends, (2) 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 (3) the bank holding company will
continue to meet minimum required capital adequacy ratios. Accordingly, we should not pay cash dividends that exceed
our net income in any year or that can only be funded in ways that weaken our financial strength, including by borrowing
money to pay dividends.
Under Federal Reserve policy, bank holding companies have historically been required to act as a source of
financial and managerial strength to each of their banking subsidiaries, and the Dodd - Frank Act codified this policy as a
statutory requirement. Under this requirement, we are expected to commit resources to support the Bank, including at
times when we 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 deposits and to certain other indebtedness of such
subsidiary banks. As discussed above, a bank holding company, in certain circumstances, could be required to guarantee
the capital restoration plan of an undercapitalized banking subsidiary. If the capital of the Bank were to become impaired,
the Federal Reserve could assess us for the deficiency. If we failed to pay the assessment within three months, the Federal
Reserve could order the sale of our stock in the Bank to cover the deficiency.
In the event of a bank holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee
will be deemed to have assumed and will be required to cure immediately any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital of an insured depository institution, and
any claim for breach of such obligation will generally have priority over most other unsecured claims.
Scope of Permissible Activities. Under the BHC Act, we may engage or acquire a company engaged solely in
certain types of activities. Permissible activities include banking, managing or controlling banks or furnishing services to
or performing services for the Bank, and certain activities found by the Federal Reserve to be so closely related to banking
or managing and controlling banks as to be a proper incident thereto. These activities include, among others, operating a
mortgage, finance, credit card or factoring company; performing certain data processing operations; providing investment
and financial advice; acting as an insurance agent for certain types of credit - related insurance; leasing personal property
on a full - payout, nonoperating basis; and providing certain stock brokerage and investment advisory services. The BHC
Act also permits certain other specific activities. To engage in such activities, we would in many cases be required to
obtain the prior approval of the Federal Reserve. In its review of applications, the Federal Reserve considers, among other
things, whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public,
such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse effects as
undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.
The Gramm - Leach - Bliley Act, also known as the Financial Services Modernization Act of 1999, effective
March 11, 2000, or the GLB Act, amended the BHC Act to expand the scope of activities available to a bank holding
company. The amendments allow a qualifying bank holding company to elect “financial holding company” status. A
financial holding company may affiliate with securities firms and insurance companies and engage in other activities that
are “financial in nature.” Such activities include, among other things, securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and
activities that the Federal Reserve has determined to be closely related to banking. No regulatory approval is required for
a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are
financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. We qualify
for financial holding company status, but we have not made such an election. We would make such an election in the
future if we plan to engage in any lines of business that are impermissible for bank holding companies but permissible for
financial holding companies.
Safety and Soundness. Bank holding companies are not permitted to engage in unsafe or unsound practices. The
Federal Reserve’s Regulation Y, for example, generally requires a bank holding company to provide the Federal Reserve
with prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with
the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10.0% or more of the bank
holding company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the
transaction would constitute an unsafe or unsound practice or would violate any law or regulation. In certain circumstances,
the Federal Reserve could take the position that paying a dividend would constitute an unsafe or unsound practice.
The Federal Reserve has broad authority to prohibit activities of bank holding companies and their nonbanking
subsidiaries which represent unsafe and unsound practices, result in breaches of fiduciary duty or which constitute
violations of laws or regulations, and to assess civil money penalties or impose enforcement action for such activities. The
penalties can be as high as $1.0 million for each day the activity continues.
Anti - tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision of
certain services, such as extensions of credit, to other nonbanking services offered by a bank holding company or its
affiliates.
8
9
CommunityBank of Texas, N.A.
The Bank is subject to various requirements and restrictions under the laws of the United States, and to regulation,
supervision and examination by the OCC. The Bank is also an insured depository institution and, therefore, subject to
regulation by the FDIC, although the OCC is the Bank’s primary federal regulator. The OCC and the FDIC have the power
to enforce compliance with applicable banking statutes and regulations. Such requirements and restrictions include
requirements to maintain reserves against deposits, restrictions on the nature and amount of loans that may be made and
the interest that may be charged thereon and restrictions relating to investments and other activities of the Bank.
Capital Adequacy Requirements. Under the Basel III Capital Rules, discussed above, the OCC monitors the
capital adequacy of the Bank by using a combination of risk - based guidelines and leverage ratios. The OCC considers the
Bank’s capital levels when taking action on various types of applications and when conducting supervisory activities
related to the safety and soundness of the Bank and the banking system. Higher capital levels may be required if warranted
by the circumstances or risk profiles of individual institutions, or if required by the banking regulators due to the economic
conditions impacting our markets. For example, OCC regulations provide that higher capital may be required to take
adequate account of, among other things, interest rate risk and the risks posed by concentrations of credit, nontraditional
activities or securities trading activities.
Corrective Measures for Capital Deficiencies. The federal banking regulators are required by the Federal Deposit
Insurance Act, or FDI Act, to take “prompt corrective action” with respect to capital - deficient institutions that are
FDIC - insured. Agency regulations define, for each capital category, the levels at which institutions are “well capitalized,”
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under the
current capital rules, which became effective on January 1, 2015, a “well capitalized” bank has a total risk - based capital
ratio of 10.0% or higher, a Tier 1 risk - based capital ratio of 8.0% or higher, a leverage ratio of 5.0% or higher, a CET1
capital ratio of 6.5% or higher and is not subject to any written agreement, order or directive requiring it to maintain a
specific capital level for any capital measure. An “adequately capitalized” bank has a total risk - based capital ratio of 8.0%
or higher, a Tier 1 risk - based capital ratio of 6.0% or higher, a leverage ratio of 4.0% or higher (3.0% or higher if the bank
was rated a composite 1 in its most recent examination report and is not experiencing significant growth), a CET1 capital
ratio of 4.5% or higher and does not meet the criteria for a well capitalized bank. A bank is “undercapitalized” if it fails to
meet any one of the ratios required to be adequately capitalized.
In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency regulations
contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisitions, branch
establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is
prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to
control persons if the institution would be undercapitalized after any such distribution or payment.
As a national bank’s capital decreases, restrictions on the OCC’s enforcement powers become more severe. A
significantly undercapitalized national bank is subject to mandated capital raising activities, restrictions on interest rates
paid and transactions with affiliates, removal of management and other restrictions. The OCC has very limited discretion
in dealing with a critically undercapitalized national bank and is virtually required to appoint a receiver or conservator.
Banks with risk - based capital and leverage ratios below the required minimums may also be subject to certain
administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension
of insurance without a hearing in the event the institution has no tangible capital.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain
standards for all insured depository institutions. These standards relate to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth,
compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines
set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that
an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to
the agency an acceptable plan to achieve compliance with the standard. Failure to implement such a plan can result in
further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Branching. National banks are required by the National Bank Act to adhere to branching laws applicable to state
banks in the states in which they are located. Under the Dodd - Frank Act, de novo interstate branching by national banks
is permitted if, under the laws of the state where the branch is to be located, a state bank chartered in that state would have
been permitted to establish a branch. Under current Texas law, state banks are permitted to establish branch offices
throughout Texas with prior regulatory approval. In addition, with prior regulatory approval, state banks are permitted to
acquire branches of existing banks located in Texas. State banks located in Texas may also branch across state lines by
merging with banks or by purchasing a branch of another bank in other states if allowed by the applicable states’ laws.
Restrictions on Transactions with Affiliates and Insiders. Transactions between the Bank and its nonbanking
subsidiaries and/or affiliates, including the Company, are subject to Section 23A and 23B of the Federal Reserve Act and
Regulation W promulgated under such Sections. In general, Section 23A of the Federal Reserve Act imposes limits on the
amount of such transactions and requires certain levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties which are collateralized by the securities or obligations of the Company or its subsidiaries.
Covered transactions with any single affiliate may not exceed 10.0% of the capital stock and surplus of the Bank, and
covered transactions with all affiliates may not exceed, in the aggregate, 20.0% of the Bank’s capital and surplus. For a
bank, capital stock and surplus refers to the bank’s Tier 1 and Tier 2 capital, as calculated under the risk - based capital
guidelines, plus the balance of the allowance for credit losses excluded from Tier 2 capital. The Bank’s transactions with
all of its affiliates in the aggregate are limited to 20.0% of the foregoing capital. “Covered transactions” are defined by
statute to include a loan or extension of credit to an affiliate, as well as a purchase of securities issued by an affiliate, a
purchase of assets (unless otherwise exempted by the Federal Reserve) from the affiliate, the acceptance of securities
issued by the affiliate as collateral for a loan and the issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate. In addition, in connection with covered transactions that are extensions of credit, the Bank may be required to
hold collateral to provide added security to the Bank, and the types of permissible collateral may be limited. The
Dodd - Frank Act generally enhances the restrictions on transactions with affiliates, including an expansion of what types
of transactions are covered transactions to include credit exposures related to derivatives, repurchase agreement and
securities lending arrangements and an increase in the amount of time for which collateral requirements regarding covered
transactions must be satisfied. Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which
generally requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at
least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other
nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal shareholders and their related interests
(collectively referred to herein as “insiders”) contained in Section 22(h) of the Federal Reserve Act and in Regulation O
promulgated by the Federal Reserve apply to all insured institutions and their subsidiaries and bank holding companies.
These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made.
There is also an aggregate limitation on all loans to insiders and their related interests. Generally, the aggregate of these
loans cannot exceed the institution’s total unimpaired capital and surplus, although a bank’s regulators may determine that
a more stringent limit is appropriate. Loans to senior executive officers of a bank are even further restricted. Insiders are
subject to monetary penalties for knowingly accepting loans in violation of applicable restrictions.
Restrictions on Distribution of Bank Dividends and Assets. Dividends paid by the Bank have provided a
substantial part of our operating funds and for the foreseeable future it is anticipated that dividends paid by the Bank to us
will continue to be our principal source of operating funds. Earnings and capital adequacy requirements serve to limit the
amount of dividends that may be paid by the Bank. In general terms, federal law provides that the Bank’s Board of
Directors may, from time to time and as it deems expedient, declare a dividend out of its net profits. Generally, the total
of all dividends declared in a year shall not, unless approved by the OCC, exceed the net profits of that year combined
with its net profits of the past two years.
In addition, under the Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, the Bank
may not pay any dividend if it is undercapitalized or the payment of the dividend would cause it to become
undercapitalized. The OCC may further restrict the payment of dividends by requiring that the Bank maintain a higher
level of capital than otherwise required for it to be adequately capitalized for regulatory purposes. Moreover, if, in the
opinion of the OCC, the Bank is engaged in an unsound practice (which could include the payment of dividends), it may
require, generally after notice and hearing, that the Bank cease such practice. The OCC has indicated that paying dividends
that deplete a depository institution’s capital base to an inadequate level would be an unsafe banking practice. The OCC
has also issued policy statements providing that insured depository institutions generally should pay dividends only out of
current operating earnings.
10
11
Depositor Preference. 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 an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have
priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect
to any extensions of credit they have made to such insured depository institution.
Incentive Compensation Guidance. The federal banking agencies have issued comprehensive guidance on
incentive compensation policies intended to help ensure that the incentive compensation policies of banking organizations
do not undermine the safety and soundness of those organizations by encouraging excessive risk - taking. The incentive
compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements
and related risk management, control and governance processes. The incentive compensation guidance, which covers all
employees that can materially affect the risk profile of an organization, either individually or as part of a group, is based
upon three primary principles: (1) balanced risk - taking incentives, (2) compatibility with effective controls and risk
management and (3) strong corporate governance. Any deficiencies in compensation practices that are identified may be
incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or take other
actions. In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate
enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of
the organization. Further, a provision of the Basel III capital standards described above would limit discretionary bonus
payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds. A number of
federal regulatory agencies proposed rules that would require enhanced disclosure of incentive - based compensation
arrangements initially in April 2011 and again in April and May 2016. The scope and content of the U.S. banking
regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near
future.
Audits. For insured institutions with total assets of $500 million or more, financial statements prepared in
accordance with accounting principles generally accepted in the U.S., or GAAP, as well as management’s certifications
signed by our and the Bank’s chief executive officer and chief accounting or financial officer concerning management’s
responsibility for the financial statements, must be submitted to the FDIC. If the insured institution has consolidated total
assets of more than $1.0 billion, it must additionally submit an attestation by the auditors regarding the institution’s internal
controls. Insured institutions with total assets of $500 million or more must also have an audit committee consisting
exclusively of outside directors (the majority of whom must be independent of management), and insured institutions with
total assets of $1.0 billion or more must have an audit committee that is entirely independent. The committees of
institutions with total assets of more than $3.0 billion must include members with experience in banking or financial
management, must have access to outside counsel and must not include representatives of large customers. The Bank’s
audit committee consists entirely of independent directors and includes members with experience in banking or related
financial management.
Deposit Insurance Assessments. The FDIC insures the deposits of federally insured banks up to prescribed
statutory limits for each depositor through the Deposit Insurance Fund and safeguards the safety and soundness of the
banking and thrift industries. The maximum amount of deposit insurance for banks and savings institutions is $250,000
per depositor, per ownership category. The amount of FDIC assessments paid by each insured depository institution is
based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors and is calculated
based on an institution’s average consolidated total assets minus average tangible equity.
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. At
least semi - annually, the FDIC will update its loss and income projections for the Deposit Insurance Fund and, if needed,
will increase or decrease assessment rates, following notice - and - comment rulemaking, if required. If there are additional
bank or financial institution failures or if the FDIC otherwise determines to increase assessment rates, the Bank may be
required to pay higher FDIC insurance premiums. Any future increases in FDIC insurance premiums may have a material
and adverse effect on our earnings.
In addition, all FDIC - insured institutions are required to pay assessments to the FDIC to fund interest payments
on bonds issued by the Financing Corporation, or FICO, an agency of the federal government established to recapitalize
the predecessor to the Deposit Insurance Fund. These assessments, which are included in Deposit Insurance Premiums on
the Consolidated Statements of Income, will continue until the FICO bonds mature.
Financial Subsidiaries. Under the GLB Act, banks may establish financial subsidiaries and engage, subject to
limitations on investment, in activities that are financial in nature, other than insurance underwriting as principal, insurance
company portfolio investment, real estate development, real estate investment, annuity issuance and merchant banking
activities. To do so, a bank must be well capitalized, well managed and have a CRA rating from its primary federal
regulator of satisfactory or better. Banks with financial subsidiaries, as well as subsidiary banks of financial holding
companies, must remain well capitalized and well managed to continue to engage in activities that are financial in nature
without regulatory actions or restrictions. Such actions or restrictions could include divestiture of the “financial in nature”
subsidiary or subsidiaries.
Brokered Deposit Restrictions. Insured depository institutions that are categorized as adequately capitalized
institutions under the FDI Act and corresponding federal regulations cannot accept, renew or roll over brokered deposits
without receiving a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on any
deposits. Insured depository institutions that are categorized as undercapitalized institutions under the FDI Act and
corresponding federal regulations may not accept, renew or roll over brokered deposits. The Bank is not currently subject
to such restrictions.
Concentrated Commercial Real Estate Lending Regulations. The federal banking regulatory agencies 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 (1) total reported loans for acquisition,
construction, land development and other land represent 100.0% or more of total capital or (2) total reported loans secured
by multi - family and nonfarm nonresidential properties and loans for acquisition, construction, land development and other
land represent 300.0% 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 loans are excluded from this second category. If a concentration is
present, management must employ heightened risk management practices that address, among other things, 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.
Community Reinvestment Act. The CRA and the regulations issued thereunder are intended to encourage banks
to help meet the credit needs of their entire assessment area, including low and moderate income neighborhoods, consistent
with the safe and sound operations of such banks. These regulations also provide for regulatory assessment of a bank’s
record in meeting the needs of its assessment area when considering applications to establish branches, merger applications
and applications to acquire the assets and assume the liabilities of another bank. The Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 requires federal banking agencies to make public a rating of a bank’s performance
under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in the
transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets
of a bank or to merge with any other bank holding company. An unsatisfactory CRA record could substantially delay
approval or result in denial of an application. The Bank received a “satisfactory” rating in its most recent CRA examination.
Consumer Laws and Regulations. The Bank is subject to numerous federal laws and regulations intended to
protect consumers in transactions with the Bank, including but not limited to the Electronic Fund Transfer Act, the Equal
Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Real Estate Procedures
Act of 1974, the S.A.F.E. Mortgage Licensing Act of 2008, the Truth in Lending Act, the Truth in Savings Act and laws
prohibiting unfair, deceptive or abusive acts and practices in connection with consumer financial products and services.
Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those enacted under
federal law. These laws and regulations mandate certain disclosure requirements and regulate the manner in which
financial institutions must deal with customers when taking deposits, making loans and conducting other types of
transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission
and registration rights, action by state and local attorneys general and civil or criminal liability.
The authority to supervise and examine depository institutions with $10.0 billion or less in assets for compliance
with federal consumer laws remains largely with those institutions’ primary regulators (the OCC, in the case of the Bank).
However, the CFPB may participate in examinations of these smaller institutions on a “sampling basis” and may refer
potential enforcement actions against such institutions to their primary regulators. Accordingly, the CFPB may participate
in examinations of the Bank, which currently has assets of less than $10.0 billion, and could supervise and examine our
other direct or indirect subsidiaries that offer consumer financial products or services.
12
13
Mortgage Lending Rules. CFPB regulations that require lenders to determine whether a consumer has the ability
to repay a mortgage loan became effective on January 10, 2014. These regulations established certain minimum
requirements for creditors when making ability-to-repay determinations and provide certain safe harbors from liability for
mortgages that are “qualified mortgages” and are not “higher-priced.” Generally, these CFPB regulations apply to all
consumer, closed-end loans secured by a dwelling, including home-purchase loans, refinancing and home equity loans
(whether first or subordinate lien). Qualified mortgages must generally satisfy detailed requirements related to product
features, underwriting standards, and requirements where the total points and fees on a mortgage loan cannot exceed
specified amounts or percentages of the total loan amount. Qualified mortgages must: (1) have a term not exceeding 30
years; (2) provide for regular periodic payments that do not result in negative amortization, deferral of principal repayment,
or a balloon payment; (3) and be supported with documentation of the borrower and his or her credit worthiness.
The Regulatory Relief Act included a provision that provides for certain residential mortgages held in portfolio
by banks with less than $10.0 billion in consolidated assets to automatically be deemed “qualified mortgages.” This
relieves such institutions from many of the requirements to satisfy the criteria listed above for “qualified mortgages.”
Mortgages meeting the “qualified mortgage” safe harbor may not have negative amortization, must follow prepayment
penalty limitations included in the Truth in Lending Act, and may not have fees greater than three percent of the total value
of the loan.
Anti - Money Laundering and OFAC. Under federal law, including the Bank Secrecy Act, or BSA, and the USA
PATRIOT Act, certain financial institutions, such as the Bank, must maintain anti - money laundering programs that include
established internal policies, procedures and controls; a designated BSA 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 especially in their dealings with foreign financial institutions and foreign 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. The Financial Crimes Enforcement Network, or FinCEN,
issued final rules under the BSA in 2016, with a compliance deadline of May 2018, that clarified and strengthened the due
diligence requirements for banks with regard to their customers. The final rules included a new requirement for banks to
identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions.
The Office of Foreign Assets Control, or OFAC, administers laws and Executive Orders that prohibit U.S. entities
from engaging in transactions with certain prohibited parties. OFAC publishes lists of persons and organizations suspected
of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons.
Generally, if a bank identifies a transaction, account or wire transfer relating to a person or entity on an OFAC list, it must
freeze the account or block the transaction, file a suspicious activity report and notify the appropriate authorities.
Bank regulators routinely examine institutions for compliance with these obligations and they must consider an
institution’s compliance in connection with the regulatory review of applications, including applications for bank mergers
and acquisitions. In addition, other government agencies have the authority to conduct investigations of an institution’s
compliance with these obligations. Failure of a financial institution to maintain and implement adequate programs to
combat money laundering and terrorist financing and comply with OFAC sanctions, or to comply with relevant laws and
regulations, could have serious legal, reputational and financial consequences for the institution.
Privacy. The federal banking regulators have adopted rules that limit the ability of banks and other financial
institutions to disclose non - public information about consumers to non - affiliated third parties. These limitations require
disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain
personal information to a non - affiliated third-party. These regulations affect how consumer information is transmitted
through financial services companies and conveyed to outside vendors. In addition, consumers may also prevent disclosure
of certain information among affiliated companies that is assembled or used to determine eligibility for a product or service,
such as that shown on consumer credit reports and asset and income information from applications. Consumers also have
the option to direct banks and other financial institutions not to share information about transactions and experiences with
affiliated companies for the purpose of marketing products or services. In addition to applicable federal privacy
regulations, the Bank is subject to certain state privacy laws.
Federal Home Loan Bank System. The Federal Home Loan Bank System, of which the Bank is a member, is
composed of 11 regional Federal Home Loan Banks, or FHLBs, more than 7,300 member financial institutions, and a
fiscal agent. The FHLBs provide long- and short-term advances (i.e., loans) to member institutions within their assigned
regions in accordance with policies and procedures established by the boards of directors of each regional FHLB. Such
advances are primarily collateralized by residential mortgage loans, as well as government and agency securities, and are
priced at a small spread over comparable U.S. Department of the Treasury obligations.
As a member of the Dallas FHLB, the Bank is entitled to borrow from the Dallas FHLB, provided it posts
acceptable collateral. The Bank is also required to own a certain amount of capital stock in the Dallas FHLB. The Bank is
in compliance with the stock ownership rules with respect to such advances, commitments and letters of credit and
collateral requirements with respect to home mortgage loans and similar obligations. All loans, advances and other
extensions of credit made by the Dallas FHLB to the Bank are secured by a portion of the respective mortgage loan
portfolio, certain other investments and the capital stock of the Dallas FHLB held by the Bank.
Enforcement Powers. The federal banking agencies, including our primary federal regulator, the OCC, have
broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil
and criminal penalties and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements, breaches of fiduciary duty or the maintenance of unsafe and unsound conditions or practices could
subject the Company or the Bank and their subsidiaries, as well as their respective officers, directors and other
institution - affiliated parties, to administrative sanctions and potentially substantial civil money penalties. For example, the
regulatory authorities may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint
itself, under certain circumstances) if any one or more of a number of circumstances exist, including, without limitation,
the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized,
fails to become adequately capitalized when required to do so, fails to submit a timely and acceptable capital restoration
plan or materially fails to implement an accepted capital restoration plan.
Effect of Governmental Monetary Policies
The commercial banking business is affected not only by general economic conditions but also by U.S. fiscal
policy and the monetary policies of the Federal Reserve. Some of the instruments of monetary policy available to the
Federal Reserve include changes in the discount rate on member bank borrowings, the fluctuating availability of
borrowings at the “discount window,” open market operations, the imposition of and changes in reserve requirements
against member banks’ deposits and certain borrowings by banks and their affiliates and assets of foreign branches. These
policies influence to a significant extent the overall growth of bank loans, investments, deposits and the interest rates
charged on loans or paid on deposits. We cannot predict the nature of future fiscal and monetary policies or the effect of
these policies on our operations and activities, financial condition, results of operations, growth plans or future prospects.
Impact of Current Laws and Regulations
The cumulative effect of these laws and regulations, while providing certain benefits, adds significantly to the
cost of our operations and thus may have a negative impact on our profitability. There has also been a notable expansion
in recent years of financial service providers that are not subject to the examination, oversight and other rules and
regulations to which we are subject. Those providers, because they are not so highly regulated, may have a competitive
advantage over us and may continue to draw large amounts of funds away from traditional banking institutions, with a
continuing adverse effect on the banking industry in general.
Implications of Being an Emerging Growth Company
As a company with less than $1.07 billion in revenues during our last fiscal year, we qualify as an “emerging
growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company
may take advantage of reduced reporting and other requirements that are otherwise generally applicable to public
companies. As an emerging growth company:
• we may present less than five years of selected historical financial data;
• we are exempt from the requirement to obtain an attestation and report from our auditors on management’s
assessment of our internal control over financial reporting under the Sarbanes-Oxley Act of 2002;
• we are permitted to have an extended transition period for adopting any new or revised accounting standards
that may be issued by the Financial Accounting Standards Board, or FASB, or by the SEC;
14
15
• we are permitted to provide less extensive disclosure about our executive compensation arrangements; and
• we are not required to give our shareholders nonbinding advisory votes on executive compensation or golden
parachute arrangements.
We have elected to take advantage of the scaled disclosures and other relief described above in this Annual Report
on Form 10-K, and we may take advantage of these exemptions until December 31, 2022 or such earlier time that we are
no longer an “emerging growth company.” In general, we would cease to be an “emerging growth company” if we have
$1.07 billion or more in annual revenues, we have more than $700 million in market value of our common stock held by
non-affiliates on any June 30 more than one year after our initial public offering, or we issue more than $1.0 billion of
non-convertible debt over a three-year period. As a result, we could cease to be an “emerging growth company” as soon
as the end of the 2019 fiscal year. For so long as we may choose to take advantage of some or all of these reduced burdens,
the level of information that we provide stockholders may be different than you might get from other public companies in
which you hold stock. In addition, when these exemptions cease to apply, we expect to incur additional expenses and
devote increased management effort toward ensuring compliance with them, which we may not be able to predict or
estimate.
Future Legislation and Regulatory Reform
In recent years, regulators have increased their focus on the regulation of financial institutions. From time to time,
various legislative and regulatory initiatives are introduced in Congress and state legislatures. New regulations and statutes
are regularly proposed that contain wide - ranging proposals for altering the structures, regulations and competitive
relationships of financial institutions operating in the United States. We cannot predict whether or in what form any
proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation
or statute. Future legislation, regulation and policies and the effects of such legislation, regulation and policies, may have
a significant influence on our operations and activities, financial condition, results of operations, growth plans or future
prospects and the overall growth and distribution of loans, investments and deposits. Such legislation, regulation and
policies have had a significant effect on the operations and activities, financial condition, results of operations, growth
plans and future prospects of commercial banks in the past and are expected to continue to do so.
Item 1A. Risk Factors
Our business involves significant risks, some of which are described below. You should carefully consider the
risks and uncertainties described below, together with all the other information in this Annual Report on Form 10-K
including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our
consolidated financial statements and the related notes. If any of the following risks occur, our business, reputation,
financial condition, results of operations, revenue and future prospects could be seriously harmed. Unless otherwise
indicated, references to our business being seriously harmed in these risk factors will include harm to our business,
reputation, financial condition, results of operations, revenue and future prospects. As a result, the trading price of our
common stock could decline and you could lose all or part of your investment. Some statements in this Annual Report on
Form 10-K, including statements in the following risk factors section, constitute forward - looking statements. Please refer
to “Cautionary Note Regarding Forward - Looking Statements” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K.
Risks Related to Our Business
We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.
The business of lending is inherently risky, including risks that the principal of or interest on any loan will not be
repaid timely or at all or that the value of any collateral supporting the loan will be insufficient to cover our outstanding
exposure. These risks may be affected by the strength of the borrower’s business sector and local, regional and national
market and economic conditions. Many of our borrowers are small to medium - sized businesses that may be less able to
withstand competitive, economic and financial pressures than larger borrowers. Our risk management practices, such as
monitoring the concentration of our loans within specific industries and our credit approval practices, may not adequately
reduce credit risk and our credit administration personnel, policies and procedures may not adequately adapt to changes in
economic or any other conditions affecting customers and the quality of our loan portfolio. A failure to effectively measure
and limit the credit risk associated with our loan portfolio could lead to unexpected losses and have a material adverse
effect on our business, financial condition and results of operations.
We are subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings.
Changes in interest rates could have an adverse effect on our net interest income and could have a material adverse
effect on our business, financial condition and results of operations. Many factors outside our control impact interest rates,
including governmental monetary policies, inflation, recession, changes in unemployment, the money supply and
international economic weakness and disorder and instability in domestic and foreign financial markets.
The majority of our banking assets and liabilities are monetary in nature and subject to risk from changes in
interest rates. Like most financial institutions, our earnings are significantly dependent on our net interest income. Different
types of assets and liabilities may react differently and at different times to market rate changes. We may periodically
experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest - bearing
liabilities will be more sensitive to changes in market interest rates than our interest - earning assets, or vice versa. In either
event, if market interest rates should move contrary to our position, this “gap” will negatively impact our earnings. The
impact on earnings is more adverse when short - term interest rates increase more than long - term interest rates or when
long - term interest rates decrease more than short - term interest rates.
Interest rate increases often result in larger payment requirements for our borrowers, which increase the potential
for default. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced
demand resulting from higher interest rates. An increase in interest rates can adversely impact the ability of borrowers to
pay the principal or interest on loans, and may lead to an increase in loans on nonaccrual status and a reduction of interest
income recognized. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest
receivable, which decreases interest income. At the same time, we continue to have a cost to fund the loan, which is
reflected as interest expense, without any interest income to offset the associated funding expense.
In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance
their loans at lower rates. In addition, in a low interest rate environment, loan customers often pursue long - term fixed rate
credits, which could adversely affect our earnings and net interest margin if rates increase. If short - term interest rates
remain at low levels for a prolonged period and longer - term interest rates fall, we could experience net interest margin
compression as our interest - earning assets would continue to reprice downward while our interest - bearing liability rates
could fail to decline in tandem.
Interest rate increases may also reduce the demand for loans and increase competition for deposits. Changes in
interest rates also can affect the value of loans, securities and other assets.
Our business is concentrated in and largely dependent upon the continued growth and welfare of our markets and
adverse economic conditions in these markets could negatively impact our operations and customers.
Our business is concentrated in the Houston and Beaumont, Texas markets and we recently entered the Dallas,
Texas market. Our success depends to a significant extent upon the business activity, population, income levels,
employment trends, deposits and real estate activity in our markets. Economic conditions within our markets and the state
of Texas are influenced by the energy sector, which is impacted by the price of oil and gas. Although our customers’
business and financial interests may extend well beyond our markets, adverse conditions that affect our markets could
reduce our growth rate, the ability of our customers to repay their loans, the value of collateral underlying our loans, our
ability to attract deposits and generally impact our business, financial condition, results of operations and future prospects.
Due to our geographic concentration, we may be less able than other larger regional or national financial institutions to
diversify our credit risks. See “Risk Factors—Risks Related to Our Business—Natural disasters and other catastrophes
that could negatively impact the economies of our markets, our operations or our customers, any of which could have a
material adverse effect on our business, financial condition and results of operations.”
Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio, which may
adversely affect our business, financial condition and results of operations.
We maintain an allowance for loan losses that represents management’s judgment of probable losses and risks
inherent in our loan portfolio. As of December 31, 2018, our allowance for loan losses totaled $23.7 million, or 0.97% of
total loans. The level of the allowance reflects management’s continuing evaluation of general economic conditions,
diversification and seasoning of the loan portfolio, historic loss experience, identified credit problems, delinquency levels
and adequacy of collateral. The determination of the appropriate level of the allowance for loan losses is inherently highly
16
17
subjective and requires us to make significant estimates of and assumptions regarding current credit risks and future trends,
all of which may undergo material changes. Inaccurate management assumptions, deterioration of economic conditions
affecting borrowers, new information regarding existing loans, identification or deterioration of additional problem loans,
acquisition of problem loans and other factors, both within and outside of our control, may require us to increase our
allowance for loan losses.
In addition, our regulators, as an integral part of their periodic examinations, review our methodology for
calculating and the adequacy of our allowance for loan losses and may direct us to make additions to the allowance based
on their judgments about information available to them at the time of their examination. Further, if actual charge - offs in
future periods exceed the amounts allocated to the allowance for loan losses, we may need additional provisions for loan
losses to restore the adequacy of our allowance for loan losses. Finally, the measure of our allowance for loan losses is
dependent on the adoption and interpretation of accounting standards. The Financial Accounting Standards Board, or
FASB, recently issued a new credit impairment model, the Current Expected Credit Loss, or CECL model, which will
become applicable to us on January 1, 2020. CECL will require financial institutions to estimate and develop a provision
for credit losses at origination for the lifetime of the loan, as opposed to reserving for incurred or probable losses up to the
balance sheet date. Under the CECL model, credit deterioration would be reflected in the income statement in the period
of origination or acquisition of the loan with changes in expected credit losses due to further credit deterioration or
improvement reflected in the periods in which the expectation changes. Accordingly, implementation of the CECL model
will change our current method of providing allowances for loan losses, which will likely require us to increase our
allowance for loan losses. Moreover, the CECL model likely will create more volatility in our level of allowance for loan
losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could
adversely affect our business, financial condition and results of operations.
The amount of nonperforming and classified assets may increase significantly, resulting in additional losses and costs
and expenses that will negatively affect our operations and financial condition.
Our nonperforming assets include nonaccrual loans and assets acquired through foreclosure. Loans are placed on
nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations when they
become due. In general, we place loans on nonaccrual status when they become more than 90 days past due, unless the
loan is in the process of collection or renewal and the underlying collateral fully supports the carrying value of the loan. If
the decision is made to continue accruing interest on the loan, periodic reviews are made to confirm the accruing status of
the loan and the probability that the Company will collect all principal and interest amounts outstanding. We may also
place loans on nonaccrual status if they are 90 days or less past due in the collection of principal or interest is in doubt. At
December 31, 2018, we had $3.5 million of nonperforming assets, or 0.11% of total assets.
In addition, the resolution of nonperforming assets requires significant commitments of time from management,
which may materially and adversely impact their ability to perform their other responsibilities. While we seek to reduce
problem assets through loan workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or
in these borrowers’ performance or financial condition could have a material effect on our business, financial condition
and results of operations.
Should the amount of nonperforming assets or classified assets increase in the future, we may incur losses and
the costs and expenses to maintain such assets likewise can be expected to increase and potentially negatively affect
earnings. An increase in the level of nonperforming assets increases our risk profile and may impact the capital levels
regulators believe are appropriate considering the ensuing risk profile. An additional increase in losses due to such assets
could have a material adverse effect on our business, financial condition and results of operations.
Market conditions and economic trends may adversely affect the banking industry and could adversely affect our
business, financial condition and results of operations in the future.
Market conditions and economic trends nationally and locally, such as volatility in the real estate market in some
parts of the country, uncertain regulatory and changing interest rate conditions could adversely impact our business,
financial condition and results of operations. We have direct exposure to the residential and commercial real estate markets
in Texas and thus are impacted by declines in real estate values and home sales volumes. In addition, financial institutions
in Texas have been affected by volatility in the oil and gas industry and relatively low energy prices. Our markets are also
susceptible to hurricanes and other adverse weather conditions. See “Risk Factors—Risks Related to Our Business—Our
primary markets are susceptible to natural disasters and other catastrophes that could negatively impact the economies of
our markets, our operations or our customers, any of which could have a material adverse effect on our business, financial
condition and results of operations.”
Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our loan portfolio is
made more complex by market and economic conditions. A national economic downturn or deterioration of conditions in
our market could adversely effect on our borrowers and cause losses beyond those that are provided for in our allowance
for loan losses and lead to the following consequences:
•
•
•
•
increases in loan delinquencies;
increases in nonperforming assets and foreclosures;
decreases in demand for our products and services, which could adversely affect our liquidity position; and
decreases in the value of the collateral securing our loans, especially real estate, which could reduce
customers’ borrowing power and repayment ability.
The small to medium - sized businesses that we lend to may have fewer resources to endure adverse business
developments, which may impair our borrowers’ ability to repay loans.
We focus our business development and marketing strategy primarily on small to medium - sized businesses. Small
to medium - sized businesses frequently have smaller market shares 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 and medium - sized business often depends on the management skills, talents and efforts of a small group of people
and the death, disability or resignation of one or more of these people could have an adverse effect on the business and its
ability to repay its loan. If our borrowers are unable to repay their loans, our business, financial condition and results of
operations could be adversely affected.
Sustained low oil prices, volatility in oil prices and downturns in the energy industry, including in Texas, could
materially and adversely affect us.
The economy in Texas is dependent upon on the energy industry. Sustained low oil prices or the failure of oil
prices to rise in the future and the resulting downturns or lack of growth in the energy industry and energy - related business,
could have a negative impact on the Texas economy and adversely affect our results of operations and financial condition.
Prolonged or heightened pricing pressure on oil and gas could lead to increased credit stress in our energy portfolio,
increased losses associated with that portfolio and weaker demand for energy lending. As of December 31, 2018, our direct
and indirect energy lending were 8.1% of our gross loans. More significantly for us, sustained low oil prices or general
uncertainty resulting from energy price volatility could have other adverse impacts such as job losses in industries tied to
energy, lower spending habits, lower borrowing needs and a number of other potential impacts that are difficult to isolate
or quantify, all of which could have a material adverse effect on our business, financial condition and results of operations.
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes affecting real
estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and
other losses.
As of December 31, 2018, $1.8 billion, or 74.0%, of our gross loans were loans with real estate as a primary or
secondary component of collateral. Real estate values in many Texas markets have experienced periods of fluctuation and
can fluctuate significantly in a short period. Adverse developments affecting real estate values and the liquidity of real
estate in our markets or in Texas generally, could increase the credit risk associated with our loan portfolio, result in losses
that adversely affect credit quality and cause us to increase our allowance for loan losses. Negative changes in the economy
affecting real estate values and liquidity in our market areas and could significantly impair the value of property pledged
as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses. In
addition, adverse weather events, including hurricanes and flooding, can cause damages to the property pledged as
collateral on loans, which could also result in additional losses upon a foreclosure. Collateral may have to be sold for less
than the outstanding balance of the loan, which could result in losses on such loans. Any declines in real estate values that
are used as collateral for loans, decreased liquidity and increased losses on foreclosure could have a material adverse effect
on our business, financial condition and results of operations.
18
19
Our commercial real estate and real estate construction and development loan portfolio exposes us to credit risks that
may be greater than the risks related to other types of loans.
As of December 31, 2018, $1.0 billion, or 41.5%, of our gross loans were nonresidential real estate loans
(including owner - occupied commercial real estate loans) and $515.5 million, or 21.0%, of our total loans were
construction and development loans. These loans typically involve repayment 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. Owner - occupied commercial real estate is generally less dependent upon income generated directly
from the property but still carries risks from the successful operation of the underlying business or adverse economic
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.
Additionally, non - owner - occupied commercial real estate loans generally involve relatively large balances to single
borrowers or related groups of borrowers. Unexpected deterioration in the credit quality of our non - owner - occupied
commercial real estate loan portfolio could require us to increase our allowance for loan losses, which would reduce our
profitability and could have a material adverse effect on our business, financial condition and results of operations.
Construction and development loans also involve risks because loan funds are secured by a project under
construction and the project is of uncertain value prior to its completion. It can be difficult to accurately evaluate the total
funds required to complete a project and construction and development lending often involves the disbursement of
substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a
borrower or guarantor to repay the loan. If 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, incur taxes, maintenance and compliance costs for a foreclosed property and may have to hold the property for an
indeterminate period, any of which could adversely affect our business, financial condition and results of operations.
A portion of our loan portfolio is comprised of commercial loans secured by receivables, inventory, equipment or other
commercial collateral, which we refer to generally as commercial and industrial loans and the deterioration in value
of which could expose us to credit losses.
As of December 31, 2018, commercial and industrial loans were $519.8 million, or 21.2%, of our gross loans. In
general, these loans are collateralized by general business assets, including, among other things, accounts receivable,
inventory and equipment and most are backed by a personal guaranty of the borrower or principal. These commercial and
industrial loans are typically larger in amount than loans to individuals and, therefore, have the potential for larger losses
on a single loan basis. Additionally, the repayment of commercial and industrial loans is subject to the ongoing business
operations of the borrower. The collateral securing such loans generally includes moveable property such as equipment
and inventory, which may decline in value more rapidly than we anticipate, thus exposing us 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, real estate values and liquidity could impair the value of the collateral
securing these loans. Significant adverse changes in the economy, local market conditions or adverse weather events in
the markets in which our commercial and industrial 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 us to credit losses and could adversely affect our business, financial condition and results of operations. See “Risk
Factors—Risks Related to Our Business—Natural disasters and other catastrophes that could negatively impact the
economies of our markets, our operations or our customers, any of which could have a material adverse effect on our
business, financial condition and results of operations.”
Appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property, other
real estate owned and repossessed personal property may not accurately describe the net value of the asset.
In considering whether to make a loan secured by real property, we generally require an appraisal of the property.
However, an appraisal is only an estimate of the value of the property at the time the appraisal is made and real estate
values may change significantly in relatively short periods of time. This estimate may not accurately describe the net value
of the real property collateral after the loan is made. As a result, we may not be able to realize the full amount of any
remaining indebtedness when we foreclose on and sell the relevant property. In addition, we rely on appraisals and other
valuation techniques to establish the value of our other real estate owned, or OREO, and personal property that we acquire
through foreclosure proceedings and to determine certain loan impairments. If any of these valuations are inaccurate, our
combined and consolidated financial statements may not reflect the correct value of our OREO and our allowance for loan
losses may not reflect accurate loan impairments. This could have a material adverse effect on our business, financial
condition or results of operations.
We engage in lending secured by real estate and may be forced to foreclose on the collateral and own the underlying
real estate, subjecting us to the costs and potential risks associated with the ownership of the real property, or consumer
protection initiatives or changes in state or federal law may substantially raise the cost of foreclosure or prevent us
from foreclosing at all.
Since we originate loans secured by real estate, we may have to foreclose on the collateral and we would then be
exposed to the risks inherent in the ownership of real estate. The amount that we may realize after a default is dependent
upon factors outside of our control, including, but not limited to general or local economic conditions, environmental
cleanup liability, assessments, real estate tax rates, operating expenses of the mortgaged properties, ability to obtain and
maintain adequate occupancy of the properties, zoning laws, governmental and regulatory rules and natural disasters. The
costs or size of the risks associated with the ownership of real estate, or write - downs in the value of other real estate owned,
could have a material adverse effect on our business, financial condition and results of operations. As of December 31,
2018, we held $12,000 of OREO.
Additionally, consumer protection initiatives or changes in state or federal law may substantially increase the
time and expense associated with the foreclosure process or prevent us from foreclosing at all. While historically Texas
has had foreclosure laws that are favorable to lenders, a number of states in recent years have either considered or adopted
foreclosure reform laws that make it substantially more difficult and expensive for lenders to foreclose on properties in
default and we cannot be certain that Texas will not adopt similar legislation in the future. Additionally, federal regulators
have prosecuted a number of mortgage servicing companies for alleged consumer law violations. If new state or federal
laws or regulations are ultimately enacted that significantly raise the cost of foreclosure or raise outright barriers, such
laws and regulations could have a material adverse effect on our business, financial condition and results of operations.
Our largest loan and deposit relationships currently make up material percentages of our total loan portfolio and of
our deposits, respectively.
As of December 31, 2018, our 15 largest loan relationships (including related entities) totaled $297.8 million in
loans, or 12.1% of the total loan portfolio. The concentration risk associated with having a small number of large loan
relationships is that, if one or more of these relationships were to become delinquent or suffer default, we could be at
serious risk of material losses. The allowance for loan losses may not be adequate to cover losses associated with any of
these relationships and any loss or increase in the allowance would negatively affect our earnings and capital. Even if the
loans are collateralized, a large increase in classified assets could harm our reputation with our regulators and inhibit our
ability to execute our business plan.
As of December 31, 2018, our 15 largest depositors (including related entities) accounted for $352.7 million in
deposits, or 12.7% of our total deposits. Several of our large depositors have business, family, or other relationships with
each other, which creates a risk that any one customer’s withdrawal of their deposits could lead to a loss of other deposits
from customers within the relationship. Withdrawals of deposits by any one of our largest depositors or by one of our
related customer groups could force us to rely more heavily on borrowings and other sources of funding for our business
and withdrawal demands, which may be more expensive and less stable. Consequently, the occurrence of any of these
events could have a material adverse effect on our business, financial condition and results of operations.
A material portion of our loans and deposits are with related parties and our ability to continue to do business with
such related parties is highly regulated.
We have made loans to and accepted deposits from certain of our directors and officers and the directors and
officers of the Bank in compliance with applicable regulations and our written policies. As of December 31, 2018, we had
$169.0 million of loans outstanding and $55.7 million in unfunded loan commitments to such persons. In addition, we
held related party deposits of $311.2 million at December 31, 2018. Our business relationships with related parties are
highly regulated. In particular, our ability to do business with related parties is limited with respect to, among other things,
extensions of credit described in the Federal Reserve’s Regulation O and covered transactions described in sections 23A
and 23B of the Federal Reserve Act and the Federal Reserve’s Regulation W. These regulations could prevent us from
20
21
pursuing activities that would otherwise be in our and our shareholders’ best interests. Moreover, if we were to fail to
comply with any of these regulations, we could be subject to enforcement and other legal actions by the Federal Reserve,
which could have a material adverse effect on our business, financial condition and results of operations.
We rely heavily on our executive management team and other key employees and we could be adversely affected by the
unexpected loss of their services.
Our success depends in large part on the performance of our executive management team and other key personnel,
as well as on our ability to attract, motivate and retain highly qualified senior and middle management and other skilled
employees. Our goals, strategies and continued growth are closely tied to the banking philosophy and strengths of our
executive management. Competition for qualified employees is intense and the process of locating key personnel with the
combination of skills, attributes and business relationships required to execute our business plan may be lengthy. We may
not be successful in retaining our key employees and the unexpected loss of services of one or more of our key personnel
could have an adverse effect on our business because of their skills, knowledge of and business relationships within our
primary markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel. If
the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and
hire qualified persons on terms acceptable to us, or at all, which could have a material adverse effect on our business,
financial condition, results of operations and prospects.
We may not be able to manage the risks associated with our anticipated growth and expansion through de novo
branching, which could have a material adverse effect on our business, financial condition and results of operations.
Our business strategy includes evaluating strategic opportunities to grow through de novo branching and we
believe that banking location expansion has been meaningful to our growth since inception. De novo branching carries
with it certain potential risks, including significant startup costs and anticipated initial operating losses; an inability to gain
regulatory approval; an inability to secure the services of qualified senior management to operate the de novo banking
locations and successfully integrate and promote our corporate culture; poor market reception for de novo banking
locations established in markets where we do not have a preexisting reputation; challenges posed by local economic
conditions; challenges associated with securing attractive locations at a reasonable cost; and an additional strain on
management resources and internal systems and controls. Failure to adequately manage the risks associated with our
anticipated growth through de novo branching could have a material adverse effect on our business, financial condition
and results of operations.
We may not be able to implement our expansion strategy, which may adversely affect our ability to maintain our
historical earnings trends.
Our expansion strategy focuses on organic growth, supplemented by strategic acquisitions and expansion of the
Bank’s banking location network, or de novo branching. We may not be able to execute on aspects of our expansion
strategy, which may impair our ability to sustain our historical rate of growth or prevent us from growing at all. More
specifically, we 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 and competition with other financial institutions, may impede or prohibit the growth
of our operations, the opening of new banking locations and the consummation of acquisitions. Further, we may be unable
to attract and retain experienced bankers, which could adversely affect our growth. The success of our strategy also depends
on our ability to effectively manage growth, which is dependent upon a number of factors, including our ability to adapt
our credit, operational, technology and governance infrastructure to accommodate expanded operations. If we fail to
implement one or more aspects of our strategy, we may be unable to maintain our historical earnings trends, which could
have a material adverse effect on our business, financial condition and results of operations.
We may not be able to overcome the integration and other risks associated with acquisitions, which could have a
material adverse effect on our ability to implement our business strategy.
Although we plan to continue to grow our business organically and through de novo branching, we also intend to
pursue acquisition opportunities that we believe complement our activities and have the ability to enhance our profitability
and provide attractive risk - adjusted returns. Our acquisition activities could be material to our business and involve a
number of risks, including the following:
•
intense competition from other banking organizations and other acquirers for potential merger candidates;
• market pricing for desirable acquisitions resulting in returns that are less attractive than we have traditionally
•
•
•
•
•
•
•
•
•
•
•
•
sought to achieve;
incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating
potential transactions, resulting in our attention being diverted from the operation of our existing business;
using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with
respect to the target institution or assets;
failure to achieve expected revenues, earnings or synergies from an acquisition;
potential exposure to unknown or contingent liabilities of banks and businesses we acquire, including
compliance and regulatory issues;
the time and expense required to integrate the operations and personnel of the combined businesses;
experiencing higher operating expenses relative to operating income from the new operations and the failure
to achieve expected cost savings;
losing key employees and customers;
reputational issues if the target’s management does not align with our culture and values;
significant problems relating to the conversion of the financial and customer data of the target;
integration of acquired customers into our financial and customer product systems;
risks of impairment to goodwill; and
regulatory timeframes for review of applications may limit the number and frequency of transactions we may
be able to consummate.
Depending on the condition of any institution or assets or liabilities that we may acquire, that acquisition may, at
least in the near term, adversely affect our capital and earnings and, if not successfully integrated with our organization,
may continue to have such effects over a longer period. We may not be successful in overcoming these risks or any other
problems encountered in connection with pending or potential acquisitions and any acquisition we may consider will be
subject to prior regulatory approval. Our inability to overcome these risks could have an adverse effect on our ability to
implement our business strategy, which, in turn, could have a material adverse effect on our business, financial condition
and results of operations.
A component of our strategy is a focus on decision - making authority at the branch and market level and our business,
financial condition, results of operations and prospects could be adversely affected if our local teams do not follow our
internal policies or are negligent in their decision - making.
To provide the responsive and individualized customer service that distinguishes us from competitors and to
attract and retain management talent, we empower our local management teams to make certain business decisions at the
local level. Certain operational and lending authorities are assigned to managers and their banking teams based on their
experience, with all loan relationships in excess of internal specified maximums being reviewed by the Bank’s Directors
Loan Committee, comprised of senior management of the Bank, or the Bank’s Board of Directors. Our local management
teams may not follow our internal procedures or otherwise act in our best interests with respect to their decision - making.
A failure of our employees to follow our internal policies, or actions taken by our employees that are negligent or not in
our best interests, could have a material adverse effect on our business, financial condition and results of operations.
The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or
estimates used in our critical accounting policies are inaccurate.
The preparation of financial statements and related disclosures in conformity with GAAP requires us to make
judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and
accompanying notes. Our critical accounting policies, which are included in the section captioned “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K, describe
those significant accounting policies and methods used in the preparation of our consolidated financial statements that we
consider “critical” because they require judgments, assumptions and estimates that materially affect our consolidated
financial statements and related disclosures. As a result, if future events or regulatory views concerning such analysis
differ significantly from the judgments, assumptions and estimates in our critical accounting policies, those events or
assumptions could have a material impact on our consolidated financial statements and related disclosures, in each case
resulting in our needing to revise or restate prior period financial statements, which could cause damage to our reputation
and the price of our common stock and adversely affect our business, financial condition and results of operations.
22
23
There could be material changes to our financial statements and disclosures if there are changes in accounting
standards or regulatory interpretations of existing standards.
From time to time the FASB or the SEC change the financial accounting and reporting standards that govern the
preparation of our financial statements. Such changes may result in us being subject to new accounting and reporting
standards or change existing accounting and reporting standards. For example, in June 2016, the FASB issued revised
guidance for impairments on financial instruments which requires the use of CECL models which might increase our
allowance for loan losses. For more information, see “Risk Factors - Risks Related to Our Business — Our allowance for
loan losses may prove to be insufficient to absorb potential losses in our loan portfolio, which may adversely affect our
business, financial condition and results of operations.” In addition, the bodies that interpret the accounting standards
(such as banking regulators or outside auditors) may change their interpretations or positions on how new or existing
standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact
how we record and report our financial condition and results of operations. In some cases, we could be required to apply
a new standard, revised existing standard or change the application of an existing standard in such a way that financial
statements for periods previously reported are revised. Such changes could materially change our financial statements and
related disclosures and depending on the nature of the revision, could cause damage to our reputation and the price of our
common stock and adversely affect our business, financial condition and results of operations.
If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial
results accurately and timely.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting
and for evaluating and reporting on that 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 generally accepted accounting principles. As a public company, we
are required to comply with the Sarbanes - Oxley Act and other rules that govern public companies. Our management is
required to certify our compliance with Section 404 of the Sarbanes - Oxley Act and to make annual assessments of the
effectiveness of our internal control over financial reporting. In addition, when we cease to be an emerging growth
company under the JOBS Act, our independent registered public accounting firm will be required to report on the
effectiveness of our internal control over financial reporting.
In the past, significant deficiencies have been identified in our internal controls over financial reporting. A
significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material
weakness, yet important enough to merit attention by those responsible for oversight of the Company’s financial reporting.
In 2015, significant deficiencies were identified including the Company’s process related to our accounting for allowance
for loan losses and related disclosures of impaired loans, business combination purchase accounting and loan sales process.
In addition, in 2015 and 2016, a significant deficiency was identified relating to financial statement disclosures and related
review controls. We have implemented measures designed to address the internal control significant deficiencies and will
continue to implement measures designed to improve our internal control over financial reporting and disclosure controls
and procedures.
We will continue to periodically test and update, as necessary, our internal control systems, including our financial
reporting controls. In addition, we hired additional accounting personnel as part of our transition from a private company
to a public company. Our actions, however, may not be sufficient to result in an effective internal control environment and
any future failure to maintain effective internal control over financial reporting could impair the reliability of our financial
statements, which in turn could harm our business, impair investor confidence in the accuracy and completeness of our
financial reports, impair our access to the capital markets, cause the price of our common stock to decline and subject us
to increased regulatory scrutiny and/or penalties, and higher risk of shareholder litigation.
We are dependent on the use of data and modeling in our management’s decision - making and faulty data or modeling
approaches could negatively impact our decision - making ability or possibly subject us to regulatory scrutiny in the
future.
The use of statistical and quantitative models and other quantitative analyses is endemic to bank decision - making
and the employment of such analyses is becoming increasingly widespread in our operations. Liquidity stress testing,
interest rate sensitivity analysis and the identification of possible violations of anti - money laundering regulations are all
examples of areas in which we are dependent on models and the data that underlies them. The use of statistical and
quantitative models is also becoming more prevalent in regulatory compliance. While we are not currently subject to
annual Dodd - Frank Act stress testing and the Comprehensive Capital Analysis and Review submissions, we anticipate
that model - derived testing may become more extensively implemented by regulators in the future.
We anticipate data - based modeling will penetrate further into bank decision - making, particularly risk
management efforts, as the capacities developed to meet rigorous stress testing requirements can be employed more widely
and in differing applications. While we believe these quantitative techniques and approaches improve our
decision - making, they also create the possibility that faulty data or flawed quantitative approaches could negatively impact
our decision - making ability or if we become subject to regulatory stress testing in the future, adverse regulatory scrutiny.
Further, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could
similarly result in suboptimal decision - making.
Delinquencies, defaults and foreclosures in residential mortgages create a higher risk of repurchases and indemnity
requests.
We originate residential mortgage loans for sale to correspondent banks who may resell such mortgages to
government - sponsored enterprises, such as Fannie Mae, Freddie Mac and other investors. As a part of this process, we
make various representations and warranties to the purchasers that are tied to the underwriting standards under which the
investors agreed to purchase the loan. If a representation or warranty proves to be untrue, we could be required to
repurchase one or more of the mortgage loans or indemnify the investor. Repurchase and indemnity obligations tend to
increase during weak economic times, as investors seek to pass on the risks associated with mortgage loan delinquencies
to the originator of the mortgage. Although we did not repurchase any residential mortgage loans sold to correspondent
banks in 2017 or 2018, if we are forced to repurchase mortgage loans in the future that we have previously sold to investors,
or indemnify those investors, our business, financial condition and results of operations could be adversely affected.
A lack of liquidity could impair our ability to fund operations and could have a material adverse effect on our business,
financial condition and results of operations.
Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations
as they become due because of an inability to liquidate assets or obtain adequate funding. We require sufficient liquidity
to meet customer loan requests, customer deposit maturities and withdrawals, payments on our debt obligations as they
come due and other cash commitments under both normal operating conditions and unpredictable circumstances, including
events causing industry or general financial market stress. We rely on our ability to generate deposits and effectively
manage the repayment and maturity schedules of our loans and securities to ensure that we have adequate liquidity to fund
our operations. An inability to raise funds through deposits, borrowings, loan repayments, sales of our securities, sales of
loans and other sources could have a substantial negative effect on our liquidity.
Our most important source of funds is deposits and as of December 31, 2018, our deposits totaled $2.8 billion.
As of December 31, 2018, $2.4 billion, or 86.9%, of our total deposits were noninterest - bearing deposits, interest-bearing
demand accounts, savings and money market accounts. These types of deposits have historically been stable sources of
funds. However, these deposits are subject to potentially dramatic fluctuations in availability or price due to factors that
may be outside of our control, such as a loss of confidence by customers in us or the banking sector generally, customer
perceptions of our financial health and general reputation, increasing competitive pressures from other financial services
firms for consumer or corporate customer deposits, changes in interest rates and returns on other investment classes. As a
result, there could be significant outflows of deposits within short periods of time or significant changes in pricing
necessary to maintain current customer deposits or attract additional deposits, increasing our funding costs and reducing
our net interest income and net income.
As of December 31, 2018, $361.0 million of our deposits were certificates of deposit and $242.0 million, or 8.7%
of our certificates of deposits were due to mature within one year. Historically, a majority of our certificates of deposit are
renewed upon maturity as long as we pay competitive interest rates. These customers are, however, interest rate conscious
and move funds into higher - yielding investment alternatives. If customers transfer money out of the Bank’s 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.
Our other primary sources of funds have typically consisted of cash flows from operations, maturities and sales
of securities and loan repayments. We can borrow from third - party lenders, such as other financial institutions and in 2018
24
25
we entered into an amended and restated loan agreement, the Loan Agreement, agreement providing a $30.0 million
revolving line of credit. Additional liquidity is available through our ability to borrow from the Federal Reserve Bank of
Dallas and the FHLB. In 2017, we completed our initial public offering and we may obtain funding in the future from
additional issuances and sales of our equity securities or future sales of debt securities.
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
because of a downturn in Texas or by one or more adverse regulatory actions against us. Any decline in available funding
could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as
repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse
effect on our business, financial condition and results of operations.
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 debt or equity 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.
The borrowing needs of our clients may increase, especially during a challenging economic environment, which could
result in increased borrowing against our contractual obligations to extend credit.
A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of
any condition established under the agreement. The actual borrowing needs of our clients under these credit commitments
have historically been lower than the contractual amount of the commitments. A significant portion of these commitments
expire without being drawn upon. Because of the credit profile of our clients, we typically have a substantial amount of
total unfunded credit commitments, which is not reflected on our balance sheet. As of December 31, 2018, we had
$831.6 million in unfunded credit commitments to our clients. Actual borrowing needs of our clients may exceed our
expectations, especially during a challenging economic environment when our clients’ companies may be more dependent
on our credit commitments due to the lack of available credit elsewhere, the increasing costs of credit, or the limited
availability of financings from venture firms. This could adversely affect our liquidity, which could impair our ability to
fund operations and meet obligations as they become due and could have a material adverse effect on our business,
financial condition and results of operations. See “Risk Factors—Risks Related to Our Business—A lack of liquidity could
impair our ability to fund operations and could have a material adverse effect on our business, financial condition and
results of operations.”
We face strong competition from financial services companies and other companies that offer banking services.
We operate in the highly competitive financial services industry and face significant competition for customers
from financial institutions located both within and beyond our principal markets. We compete with commercial banks,
savings banks, credit unions, nonbank financial services companies and other financial institutions operating within or
near the areas we serve. Additionally, certain large banks headquartered outside of our markets and large community
banking institutions target the same customers we do. 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 mobile devices and for nonbanks to offer products and services traditionally
provided by banks, such as automatic transfer and automatic payment systems. The banking industry has experienced rapid
changes in technology and, as a result, our future success may depend in part on our ability to address our customers’
needs by using technology. Customer loyalty can be influenced by a competitor’s new products, especially offerings that
could provide cost savings or a higher return to the customer. Increased lending activity of competing banks can also lead
to increased competitive pressures on loan rates and terms for high - quality credits. We may not be able to compete
successfully with other financial institutions in our markets and we may have to pay higher interest rates to attract deposits,
accept lower yields to attract loans and pay higher wages for new employees, resulting in lower net interest margins and
reduced profitability.
Many of our nonbank competitors are not subject to the same extensive regulations that govern our activities and
may have greater flexibility in competing for business. The financial services industry could become even more
competitive because of legislative, regulatory and technological changes and continued consolidation. In addition, some
of our current commercial banking customers may seek alternative banking sources as they develop needs for credit
facilities larger than we may be able to accommodate. Our inability to compete successfully in the markets in which we
operate or in new markets could have a material adverse effect on our business, financial condition or results of operations.
Negative public opinion regarding our company or failure to maintain our reputation in the communities we serve
could adversely affect our business and prevent us from growing our business.
As a community bank, our reputation within the communities we serve is critical to our success. We believe we
have set ourselves apart from our competitors by building strong personal and professional relationships with our
customers and being active members of the communities we serve. As such, we strive to enhance our reputation by
recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve
and delivering superior service to our customers. If our reputation is negatively affected by the actions of our employees
or otherwise, we may be less successful in attracting new talent and customers or may lose existing customers and our
business, financial condition and results of operations could be adversely affected. Further, negative public opinion can
expose us to litigation and regulatory action and delay and impede our efforts to implement our expansion strategy, which
could further adversely affect our business, financial condition and results of operations.
We could recognize losses on securities held in our portfolio, particularly if interest rates increase or economic and
market conditions deteriorate.
We invest in securities with the primary objectives of providing a source of liquidity, providing an appropriate
return on funds invested, managing interest rate risk, meeting pledging requirements and meeting regulatory capital
requirements. As of December 31, 2018, our securities were 7.0% of total assets and the fair value of our available for sale
securities portfolio was $229.9 million, which included a net unrealized loss of $3.8 million. Factors beyond our control
can significantly and adversely influence the fair value of securities in our portfolio. 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 instability in the credit markets. Any of the foregoing factors could cause other - than - temporary impairment
or 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 to assess the probability of receiving all contractual principal and interest payments on the security.
Although we have not recognized other - than - temporary impairment related to our investment portfolio as of December 31,
2018, changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities
and the performance of the underlying collateral, among other factors, may cause us to recognize realized and/or unrealized
losses in future periods, which could have a material adverse effect on our business, financial condition and results of
operations.
We depend on our information technology and telecommunications systems, including third-party service providers
and any systems failures, interruptions or data breaches involving these systems could adversely affect our operations
and financial condition.
Our business depends on the successful and uninterrupted functioning of our information technology and
telecommunications systems including with third - party servicers and financial intermediaries. We outsource many of our
major systems. Specifically, we rely on third parties for certain services, including, but not limited to, core systems
processing, website hosting, internet services, monitoring our network and other processing services. Our business depends
26
27
on the successful and uninterrupted functioning of our information technology and telecommunications systems and
third - party servicers. The failure of these systems, an information security or cybersecurity breach involving any of our
third - party service providers, or the termination or change in terms of a third - party software license or service agreement
on which any of these systems is based, could interrupt our operations. Because our information technology and
telecommunications systems interface with and depend on third - party systems, we could experience service denials if
demand for such services exceeds capacity or such third - party systems fail or experience interruptions. Replacing vendors
or addressing other issues with our third - party service providers could entail significant delay, expense and disruption of
service.
If these third - party service providers experience difficulties, are subject to information security or cybersecurity
breaches, 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, our business,
financial condition and results of operations could be adversely affected. Even if we can replace third - party service
providers, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of
operations.
In addition, the Bank’s primary federal regulator, the OCC, has issued guidance outlining the expectations for
third - party service provider oversight and monitoring by financial institutions. The federal banking agencies, including
the OCC, have issued enforcement actions against financial institutions for failure in oversight of third - party providers
and violations of federal banking law by such providers when performing services for financial institutions. Accordingly,
our operations could be interrupted if any of our third - party service providers experience difficulty, are subject to
information security or cybersecurity breaches, terminate their services or fail to comply with banking regulations, which
could adversely affect our business, financial condition and results of operations. In addition, our failure to adequately
oversee the actions of our third - party service providers could result in regulatory actions against the Bank, which could
adversely affect our business, financial condition and results of operations.
The occurrence of fraudulent activity, breaches of our information security, and cybersecurity attacks could adversely
affect our ability to conduct our business, manage our exposure to risk or expand our businesses, result in the disclosure
or misuse of confidential or proprietary information, increase our costs to maintain and update our operational and
security systems and infrastructure, and adversely impact our results of operations, liquidity and financial condition,
as well as cause legal or reputational harm.
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, litigation, or
damage to our reputation. Our industry has seen increases in electronic fraudulent activity, hacking, security breaches,
sophisticated social engineering and cyber-attacks within the financial services industry, including in the commercial
banking sector, as cyber-criminals have been targeting commercial bank and brokerage 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. These electronic viruses or malicious code
are typically designed to, among other things:
obtain unauthorized access to confidential information belonging to us or our clients and customers;
•
• manipulate or destroy data;
•
•
disrupt, sabotage or degrade service on a financial institution’s systems; and
steal money.
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 clients or clients and their
employees or other third-parties, and subjecting those agencies and corporations to potential fraudulent activity and their
clients and other third-parties to identity theft and fraudulent activity in their credit 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.
Unfortunately, it is not always possible to anticipate, detect or recognize these threats to our systems, or to
implement effective preventative measures against all breaches, whether those breaches are malicious or accidental.
Cybersecurity risks for banking organizations have significantly increased in recent years and have been difficult to detect
before they occur because of the following, among other reasons:
•
•
•
•
•
•
the proliferation of new technologies, and the use of the Internet and telecommunications technologies to
conduct financial transactions;
these threats arise from numerous sources, not all of which are in our control, including among others human
error, fraud or malice on the part of employees or third parties, accidental technological failure, electrical or
telecommunication outages, failures of computer servers or other damage to our property or assets, natural
disasters or severe weather conditions, health emergencies or pandemics, or outbreaks of hostilities or
terrorist acts;
the techniques used in cyber-attacks change frequently and may not be recognized until launched or until
well after the breach has occurred;
the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile
foreign governments, disgruntled employees or vendors, activists and other external parties, including those
involved in corporate espionage;
the vulnerability of systems to third parties seeking to gain access to such systems either directly or using
equipment or security passwords belonging to employees, customers, third-party service providers or other
users of our systems; and
our frequent transmission of sensitive information to, and storage of such information by, third parties,
including our vendors and regulators, and possible weaknesses that go undetected in our data systems
notwithstanding the testing we conduct of those 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 us 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
28
29
compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and
financial condition.
During 2018, we experienced a security incident involving the possible unauthorized access of certain personal
information in the possession of the Bank. We take the privacy of personal information seriously and we took steps to
address the incident promptly after it was discovered, including initiating an internal investigation into the incident and
working with an independent forensic investigation firm to assist us in the investigation of and response to the incident.
We also reported the incident to law enforcement authorities. Based on the report of the independent forensic investigation
firm, we believe that a phishing incident occurred where certain emails and attachments from two employee email accounts
may have been accessed by an unauthorized person. We believe that these email accounts contained certain personal
information for approximately 7,800 individuals. Although our investigation has not found any evidence that the incident
involved any unauthorized access to or use of any of the Bank’s internal computer systems or network, and we believe
that the access was limited to information that was contained in the email accounts of the two employees, we may become
subject to claims in the future for purportedly fraudulent transactions or other matters arising out of the breach of
information stored in the affected email accounts. We incurred total out-of-pocket expenses of $65,000 during 2018 related
to this incident and estimate we may incur an additional $40,000 of out-of-pocket expenses related to this incident.
Additionally, the incident may have a negative impact on our reputation if we become subject to claims in the future, and
reputational harm arising out of such claims or litigation may cause our customers to lose confidence in our ability to
safeguard their information.
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, or technology needed to
compete effectively with larger institutions may not be available to us on a cost-effective basis.
The financial services industry has undergone rapid technological changes with frequent introductions of new
technology - driven products and services. In addition to better serving 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 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 impair our ability to realize the anticipated benefits from such new technology or
require us to incur significant costs to remedy any such challenges in a timely manner.
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, they 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. Accordingly, 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.
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). For example, our business is subject to the Gramm - Leach - Bliley
Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about
our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our
information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing
by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain
a written comprehensive information security program containing appropriate safeguards based on our size and
complexity, the nature and scope of our activities and the sensitivity of customer information we process, as well as plans
for responding to data security breaches. 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 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 are subject to certain operational risks, including, but not limited to, customer, employee or third - party fraud and
data processing system failures and errors.
Because we are a financial institution, employee errors and employee or customer misconduct could cause
financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include
hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of
confidential information, each of which can be particularly damaging for financial institutions. It is not always possible to
prevent employee errors and misconduct and the precautions we take to prevent and detect this activity may not be effective
in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls to mitigate operational risks, including data processing system failures
and errors and customer or employee fraud, as well as insurance coverage designed to protect us from material losses
associated with these risks, including losses resulting from any associated business interruption. 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
adversely affect our business, financial condition and results of operations.
We depend on the accuracy and completeness of information provided to us by our borrowers and counterparties and
any misrepresented information could adversely affect our business, financial condition and results of operations.
In deciding whether to approve loans or to enter other transactions with borrowers and counterparties, we rely on
information furnished to us by, or on behalf of, borrowers and counterparties, including financial statements, credit reports
and other financial information. We also rely on representations of borrowers and counterparties as to the accuracy and
completeness of that information and, with respect to financial statements, on reports of independent auditors. If any of
this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan
funding, the value of the loan may be significantly lower than expected and we may be subject to regulatory action.
Whether a misrepresentation is made by the loan applicant, another third-party, or one of our employees, we generally
bear the risk of loss associated with the misrepresentation. Our controls and processes may not have detected, or may not
detect all, misrepresented information in our loan originations or from our business clients. Any such misrepresented
information could adversely affect our business, financial condition and results of operations.
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.
We may purchase real estate in connection with our acquisition and expansion 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.
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
30
31
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. If material environmental problems are discovered before foreclosure, we generally will not foreclose on the
related collateral or will transfer ownership of the loan to a subsidiary. It should be noted, however, that the transfer of the
property or loans to a subsidiary may not protect us from environmental liability. Despite these actions on our part, the
value of the property as collateral will generally be substantially reduced or we may elect not to foreclose on the property
and 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.
Natural disasters and other catastrophes that could negatively impact the economies of our markets, our operations or
our customers, any of which could have a material adverse effect on our business, financial condition and results of
operations.
We operate banking locations throughout Houston and Beaumont areas, which are susceptible to hurricanes,
tropical storms, other adverse weather conditions and other natural disasters. For example, in late August 2017, Hurricane
Harvey caused extensive and costly damage across Southeast Texas. In addition, man - made events such as acts of terror
and governmental responses to acts of terror, malfunctions of the electronic grid and other infrastructure breakdowns,
could adversely affect economic conditions in our markets. These adverse weather and catastrophic events can disrupt our
operations, cause widespread and extensive property damage, force the relocation of residents and significantly disrupt
economic activity in the region, significantly depress the local economies in which we operate and adversely affect our
customers. If the economies in our markets experience an overall decline because of a catastrophic event, demand for loans
and our other products and services could decline. In addition, the rates of delinquencies, foreclosures, bankruptcies and
losses on our loan portfolios may increase substantially after events such as hurricanes, as uninsured property losses,
interruptions of our customers’ operations or sustained job interruption or loss may materially impair the ability of
borrowers to repay their loans. Moreover, the value of real estate or other collateral that secures our loans could be
materially and adversely affected by a catastrophic event. A natural disaster or other catastrophic event could, therefore,
result in decreased revenue and loan losses that could have a material adverse effect on our business, financial condition
and results of operations.
We are subject to claims and litigation pertaining to intellectual property in addition to other litigation in the ordinary
course of business.
Banking and other financial services companies, such as our company, rely on technology companies to provide
information technology products and services necessary to support their day - to - day operations. Technology companies
frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights.
We also use trademarks and logos for marketing purposes, and third parties may allege that our marketing, processes or
systems may infringe their intellectual property rights. In addition, patent holding companies seek to monetize patents they
have purchased or otherwise obtained. Competitors of our vendors, or other individuals or companies, may from time to
time claim to hold intellectual property sold to us by our vendors. Such claims may increase in the future as the financial
services sector becomes more reliant on information technology vendors. The plaintiffs in these actions frequently seek
injunctions and substantial damages.
Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims
by potential or actual litigants, we may have to engage in protracted litigation. Such litigation is often expensive,
time - consuming, disruptive to our operations and distracting to management. If we are found to infringe one or more
patents or other intellectual property rights, we may be required to pay substantial damages or royalties to a third-party. In
certain cases, we may consider entering into licensing agreements for disputed intellectual property, although no assurance
can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may
also significantly increase our operating expenses. If legal matters related to intellectual property claims were resolved
against us or settled, we could be required to make payments in amounts that could have a material adverse effect on our
business, financial condition and results of operations.
In addition to litigation relating to intellectual property, we are regularly involved in litigation matters in the
ordinary course of business. While we believe that these litigation matters should not have a material adverse effect on our
business, financial condition, results of operations or future prospects, we may be unable to successfully defend or resolve
any current or future litigation matters, in which case those litigation matters could have a material adverse effect on our
business, financial condition and results of operations.
We have entered into employment agreements with certain of our officers, which may increase our compensation costs
upon the occurrence of certain events or increase the cost of acquiring us.
We have entered into employment agreements with certain of our officers, which may increase our compensation
costs upon the occurrence of certain events or increase the cost of acquiring us. In the event of termination of employment
other than for cause, or in the event of certain types of termination following a change in control, as set forth in the relevant
employment agreement, the agreement will provide for cash severance benefits based on such officer’s current base salary
and the terms of such agreement.
If the goodwill that we have recorded or may record in connection with a business acquisition becomes impaired, it
could require charges to earnings, which could have a material adverse effect on our business, 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. We review 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. Our goodwill totals $81.0 million at December 31, 2018. While we have not recorded any impairment charges
related to goodwill since we initially recorded the goodwill, there can be no assurance that our future evaluations of our
existing goodwill or goodwill we may acquire in the future will not result in findings of impairment and related
write - downs, which could adversely affect our business, financial condition and results of operations.
Risks Related to the Regulation of Our Industry
We operate in a highly-regulated environment and the laws and regulations that govern our operations, corporate
governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them,
could adversely affect us.
Banking is highly regulated under federal and state law. As such, we are subject to extensive regulation,
supervision and legal requirements 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
Deposit Insurance Fund and the overall financial stability of the United States. These laws and regulations, among other
matters, prescribe minimum capital requirements, impose limitations on the business activities in which we can engage,
limit the dividend or distributions that the Bank can pay to us, restrict the ability of institutions to guarantee our debt and
impose certain specific accounting requirements on us 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 laws and regulations can be
difficult and costly and changes to laws and regulations often impose additional operating costs. Our failure to comply
with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could
subject us to restrictions on our business activities, enforcement actions and fines and other penalties, any of which could
adversely affect our results of operations, regulatory capital levels and the price of our securities. Further, any new laws,
rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business,
financial condition and results of operations.
The ongoing implementation of the Dodd - Frank Wall Street Reform and Consumer Protection Act of 2010, or the
Dodd - Frank Act, could adversely affect our business, financial condition and results of operations.
On July 21, 2010, the Dodd - Frank Act was signed into law and the process of implementation is ongoing. The
Dodd - Frank Act imposes significant regulatory and compliance changes on many industries, including ours. There remains
significant uncertainty surrounding how the provisions of the Dodd - Frank Act will ultimately be implemented by the
various regulatory agencies and the full extent of the impact of the requirements on our operations is unclear, especially
considering the Trump administration’s executive order calling for a full review of the Dodd - Frank Act and the regulations
promulgated under it. The changes resulting from the Dodd - Frank Act may impact the profitability of our business
32
33
activities, require changes to certain of our business practices, require the development of new compliance infrastructure,
impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business.
These changes may also require us to invest significant management attention and resources to evaluate and make any
changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements
or with any future changes in laws or regulations could adversely affect our business, financial condition and results of
operations.
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 we are or become subject as a result of
such examinations could adversely affect us.
As part of the bank regulatory process, the OCC and the Federal Reserve periodically conduct examinations of
our business, including compliance with laws and regulations. If one of these federal banking agencies were to determine
that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, asset sensitivity,
risk management or other aspects of any of our operations have become unsatisfactory, or that our Company, the Bank or
their respective management were in violation of any law or regulation, it may take a number of different remedial actions
as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative
actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in our capital levels, to restrict our growth, to assess civil monetary penalties
against us, 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. Becoming subject to such regulatory actions could adversely affect our reputation, business, financial condition
and results of operations.
We are subject to more stringent capital requirements, which may result in lower returns on equity, require the raising
of additional capital, limit our ability to repurchase shares or pay dividends and discretionary bonuses, or result in
regulatory action.
In July 2013, the federal banking agencies published new capital rules, referred to herein as the Basel III capital
rules, which revised their risk - based and leverage capital requirements and their method for calculating risk - weighted
assets. The Basel III capital rules apply to all bank holding companies with $3.0 billion or more in consolidated assets and
all banks regardless of size. The Basel III capital rules became effective as applied to us on January 1, 2015, with a phase - in
period for the new capital conservation buffer that generally extends from January 1, 2015 through January 1, 2019.
As a result of the enactment of the Basel III capital rules, we became subject to increased required capital levels.
Our inability to comply with these more stringent capital requirements could, among other things, result in lower returns
on equity, require the raising of additional capital, limit our ability to repurchase shares or pay dividends and discretionary
bonuses or result in regulatory actions, any of which could adversely affect our business, financial condition and results
of operations.
Many of our new activities and expansion plans require regulatory approvals and failure to obtain them may restrict
our growth.
We intend to complement and expand our business by pursuing strategic acquisitions of financial institutions and
other complementary businesses and expansion of the Bank’s banking location network, or de novo branching. Generally,
we must receive federal regulatory approval before we can acquire a depository institution or related business insured by
the FDIC, or before we open a de novo branch. 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, 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 its 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 us, or at all. We may also be required to sell
banking locations as a condition to receiving regulatory approval, which condition may not be acceptable to us or, if
acceptable to us, may reduce the benefit of any acquisition.
Financial institutions, such as the Bank, face a risk of noncompliance and enforcement action with the Bank Secrecy
Act and other anti - money laundering statutes and regulations.
The Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, 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. FinCEN, established by the U.S. Department of the Treasury to
administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those
requirements and frequently coordinates enforcement efforts with the individual federal banking regulators, as well as the
U.S. Department of Justice, the Drug Enforcement Administration and the IRS. There is also increased scrutiny of
compliance with the sanctions programs and rules administered and enforced by OFAC.
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, systems and practices are deemed deficient,
we could be subject to liability, including fines, regulatory actions such as restrictions on our ability to pay dividends and
the inability to obtain regulatory approvals to proceed with certain aspects of our business plans, including acquisitions
and de novo branching, and criminal sanctions.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act, or CRA,
and fair lending laws and failure to comply with these laws could lead to a wide variety of sanctions.
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 CFPB, the U.S. Department of Justice and
other federal agencies are responsible for enforcing these laws and regulations. The CFPB was created under the
Dodd - Frank Act to centralize responsibility for consumer financial protection with broad rulemaking authority to
administer and carry out the purposes and objectives of federal consumer financial laws with respect to all financial
institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe
rules applicable to any covered person or service provider, identifying and prohibiting acts or practices that are “unfair,
deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or
the offering of a consumer financial product or service. The ongoing broad rulemaking powers of the CFPB have potential
to have a significant impact on the operations of financial institutions offering consumer financial products or services.
The CFPB has indicated that it may propose new rules on overdrafts and other consumer financial products or services,
which could have a material adverse effect on our business, financial condition and results of operations if any such
rules limit our ability to provide such financial products or services.
A successful regulatory challenge to an institution’s performance under the CRA, fair lending laws or regulations,
or consumer lending laws and regulations could result in a wide variety of sanctions, including damages and civil money
penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on
entering new business lines. Private parties can also challenge an institution’s performance under fair lending laws in
private class action litigation. Such actions could have a material adverse effect on our business, financial condition and
results of operations.
Failure to comply with economic and trade sanctions or with applicable anti - corruption laws could have a material
adverse effect on 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. Through our Company and
the Bank and our agents and employees, 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. We have implemented policies, procedures
and internal controls that are designed to comply with economic and trade sanctions or with applicable anti - corruption
laws, including the FCPA. 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.
34
35
Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase
our risk of liability with respect to such loans and could increase our cost of doing business.
Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered
“predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling
unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that
the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our policy not to
make predatory loans, but these laws create the potential for liability with respect to our lending and loan investment
activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause
us to reduce the average percentage rate or the points and fees on loans that we do make.
The expanding body of federal, state and local regulations and/or the licensing of loan servicing, collections or other
aspects of our business and our sales of loans to third parties may increase the cost of compliance and the risks of
noncompliance and subject us to litigation.
We service some of our own loans and loan servicing is subject to extensive regulation by federal, state and local
governmental authorities, as well as various laws and judicial and administrative decisions imposing requirements and
restrictions on those activities. The volume of new or modified laws and regulations has increased in recent years and, in
addition, some individual municipalities have begun to enact laws that restrict loan servicing activities, including delaying
or temporarily preventing foreclosures or forcing the modification of certain mortgages. If regulators impose new or more
restrictive requirements, we may incur additional significant costs to comply with such requirements, which may further
adversely affect us. In addition, were we to be subject to regulatory investigation or regulatory action regarding our loan
modification and foreclosure practices, our financial condition and results of operations could be adversely affected.
In addition, we have sold loans to third parties. In these sales, we or certain of our subsidiaries or legacy
companies make or have made various representations and warranties. Breaches of these representations and warranties
may result in a requirement that we repurchase the loans, or otherwise make whole or provide other remedies to
counterparties. These aspects of our business or our failure to comply with applicable laws and regulations could possibly
lead to: civil and criminal liability; loss of licensure; damage to our reputation in the industry; fines and penalties and
litigation, including class action lawsuits; and administrative enforcement actions. Any of these outcomes could materially
and adversely affect us.
Potential limitations on incentive compensation contained in proposed federal agency rulemaking may adversely affect
our ability to attract and retain our highest performing employees.
In April 2011 and May 2016, the Federal Reserve, other federal banking agencies and the SEC jointly published
proposed rules designed to implement provisions of the Dodd - Frank Act prohibiting incentive compensation arrangements
that would encourage inappropriate risk taking at covered financial institutions, which includes a bank or bank holding
company with $1 billion or more in assets, such as the Bank. It cannot be determined at this time whether or when a final
rule will be adopted and whether compliance with such a final rule will substantially affect the way we structure
compensation for our executives and other employees. Depending on the nature and application of the final rules, we may
not be able to successfully compete with certain financial institutions and other companies that are not subject to some or
all the rules to retain and attract executives and other high performing employees. If this were to occur, relationships that
we have established with our clients may be impaired and our business, financial condition and results of operations could
be adversely affected, perhaps materially.
Increases in FDIC insurance premiums could adversely affect our earnings and results of operations.
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. As
a result of economic conditions and the enactment of the Dodd - Frank Act, the FDIC has in recent years increased deposit
insurance assessment rates, which in turn raised deposit premiums for many insured depository institutions. In 2010, the
FDIC increased the Deposit Insurance Fund’s target reserve ratio to 2.0% of insured deposits following the Dodd - Frank
Act’s elimination of the 1.5% cap on the insurance fund’s reserve ratio and the FDIC has put in place a restoration plan to
restore the Deposit Insurance Fund to its 1.35% minimum reserve ratio managed by the Dodd - Frank Act by December 31,
2020. If recent increases in premiums are insufficient for the Deposit Insurance Fund to meet its funding requirements,
further special assessments or increases in deposit insurance premiums may be required. Further, if there are additional
financial institution failures that affect the Deposit Insurance Fund, we may be required to pay higher FDIC premiums.
Our FDIC insurance related costs were approximately $1.5 million and $1.6 million for the years ended December 31,
2018 and 2017, respectively. Additional assessments, increases in premiums or required prepayments of FDIC insurance
premiums could adversely affect our earnings and results of operations.
The Federal Reserve may require us to commit capital resources to support the Bank.
The Federal Reserve requires a bank holding company to act as a source of financial and managerial strength to
its subsidiary banks and to commit resources to support its subsidiary banks. Under the “source of strength” doctrine that
was codified by the Dodd - Frank Act, the Federal Reserve may require a bank holding company to make capital injections
into a troubled subsidiary bank at times when the bank holding company may not be inclined to do so and may charge the
bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary
bank. Accordingly, we could be required to provide financial assistance to the Bank if it experiences financial distress.
A capital injection may be required at a time when our resources are limited and we may be required to borrow
the funds or raise capital to make the required capital injection. Any loan by a bank holding company to its subsidiary
bank is subordinate in right with payment to deposits and certain other indebtedness of such subsidiary bank. 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 by a bank holding
company to make a capital injection to a subsidiary bank often becomes more difficult and expensive relative to other
corporate borrowings.
We could be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated because 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 clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client.
In addition, our credit risk may be exacerbated when our collateral cannot be foreclosed upon or is liquidated at prices not
sufficient to recover the full amount of the credit or derivative exposure due. Any such losses could adversely affect our
business, financial condition and results of operations.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and
results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies
of the Federal Reserve. An important function of the Federal Reserve is to regulate the U.S. money supply and credit
conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market purchases
and sales of securities by the Federal Reserve, 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 adversely affect our business, financial condition and results
of operations.
We are subject to commercial real estate lending guidance issued by the federal banking regulators that impacts our
operations and capital requirements.
The OCC and the other federal bank regulatory agencies have promulgated joint guidance on sound risk
management practices for financial institutions regarding concentrations in commercial real estate lending. Under the
guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk
assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending
if, among other factors, (1) total reported loans for construction, land acquisition and development and other land represent
36
37
100% or more of total capital, or (2) total reported loans secured by multi - family and nonfarm nonresidential properties,
loans for construction, land acquisition and development and other land and loans otherwise sensitive to the general
commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total
capital. At December 31, 2018, the Bank’s ratios under these tests were 132.1% and 304.5%, respectively.
The focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from
the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market
(as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose
of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level
and nature of real estate concentrations. The guidance states that management should employ heightened risk management
practices including board and management oversight and strategic planning, development of underwriting standards, risk
assessment and monitoring through market analysis and stress testing. While we believe we have implemented policies
and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators
could require us to implement additional policies and procedures consistent with their interpretation of the guidance that
may result in additional costs to us or that may result in a curtailment of our commercial real estate lending and/or the
requirement that we maintain higher levels of regulatory capital, either of which would adversely affect our loan
originations and profitability.
Risks Related to Ownership of our Common Stock
The market price of our common stock may be subject to substantial fluctuations.
The market price of our common stock may be highly volatile, which may make it difficult for you to resell your
shares at the volume, prices and times desired. There are many factors that may affect the market price and trading volume
of our common stock, including, without limitation:
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated fluctuations in our operating results, financial condition or asset quality;
changes in economic or business conditions;
the effects of and changes in, trade, monetary and fiscal policies, including the interest rate policies of the
Federal Reserve;
publication of research reports about us, our competitors, or the financial services industry generally, or
changes in, or failure to meet, securities analysts’ estimates of our financial and operating performance, or
lack of research reports by industry analysts or ceasing of coverage;
operating and stock price performance of companies that investors deemed comparable to us;
additional or anticipated sales of our common stock or other securities by us or our existing shareholders;
additions or departures of key personnel;
perceptions in the marketplace regarding our competitors or us, including the perception that investment in
Texas is unattractive or less attractive during periods of low oil prices;
significant acquisitions or business combinations, strategic partnerships, joint ventures or capital
commitments by or involving our competitors or us;
other economic, competitive, governmental, regulatory and technological factors affecting our operations,
pricing, products and services; and
other news, announcements or disclosures (whether by us or others) related to us, our competitors, our
primary markets or the financial services industry.
The stock market and especially the market for financial institution stocks have experienced substantial
fluctuations in recent years, which in many cases have been unrelated to the operating performance and prospects of
companies. In addition, significant fluctuations in the trading volume in our common stock may cause significant price
variations to occur. Increased market volatility may materially and adversely affect the market price of our common stock
and could make it difficult to sell your shares at the volume, prices and times desired.
Future sales and issuances of our capital stock or rights to purchase capital stock could result in additional dilution of
the percentage ownership of our shareholders and could cause our stock price to decline.
We may issue additional securities in the future and from time to time. Future sales and issuances of our common
stock or rights to purchase our common stock could result in substantial dilution to our existing shareholders. We may sell
common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner we
may determine from time to time. If we sell any such securities in subsequent transactions, the percentage ownership of
our then existing shareholders may be materially diluted. New investors in such subsequent transactions could gain rights,
preferences and privileges senior to those of holders of our commons stock.
In addition, we may issue shares of our common stock or other securities from time to time as consideration for
future acquisitions and investments and pursuant to compensation and incentive plans. If any such acquisition or
investment is significant, the number of shares of our common stock, or the number or aggregate principal amount of other
securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our
common stock or other securities in connection with any such acquisitions and investments.
We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and
sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common
stock (including shares of our common stock issued in connection with an acquisition or under a compensation or incentive
plan), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock
and could impair our ability to raise capital through future sales of our securities.
The obligations associated with being a public company require significant resources and management attention, which
will increase our costs of operations and may divert focus from our business operations.
We completed our initial public offering in November of 2017. As a public company, our legal, accounting,
administrative and other costs and expenses have increased. We are subject to the reporting requirements of the Exchange
Act, which requires that we file annual, quarterly and current reports with respect to our business and financial condition
and proxy and other information statements and the rules and regulations implemented by the SEC, the Sarbanes - Oxley
Act, the Dodd - Frank Act, the Public Company Accounting Oversight Board, or PCAOB, and the Nasdaq Global Select
Market, each of which imposes additional reporting and other obligations on public companies. As a public company,
compliance with these reporting requirements and other SEC and the Nasdaq Global Select Market rules has made certain
operating activities more time - consuming. We have made and will continue to make changes to our internal controls and
procedures for financial reporting and accounting systems to meet our reporting obligations as a public company.
We are classified as an “emerging growth company” under the JOBS Act. An emerging growth company may
take advantage of reduced reporting and other requirements that are otherwise generally applicable to public companies.
We have elected to take advantage of the scaled disclosures and we may take advantage of these exemptions until
December 31, 2022 or such earlier time that we are no longer an “emerging growth company.” We will cease to be an
“emerging growth company” if we have $1.07 billion or more in annual revenues, we have more than $700 million in
market value of our common stock held by non-affiliates on any June 30 more than one year after our initial public offering,
or we issue more than $1.0 billion of non-convertible debt over a three-year period. We could cease to be an “emerging
growth company” as soon as the end of the 2019 fiscal year. When these exemptions cease to apply, we expect to incur
additional expenses and devote increased management effort toward ensuring compliance with them. However, we cannot
predict or estimate the amount of additional costs we may incur to comply with these requirements.
Securities analysts may not initiate or continue coverage on us.
The trading market for our common stock depends, in part, on the research and reports that securities analysts
publish about us and our business. We do not have any control over these securities analysts and they may not cover us. If
these analysts cease to cover us or fail to publish regular reports on us, we could lose visibility in the financial markets,
which could cause the price or trading volume of our common stock to decline. If we are covered by securities analysts
and are the subject of an unfavorable report, the price of our common stock may decline.
38
39
Our management and Board of Directors have significant control over our business.
Our directors and named executive officers beneficially owned approximately 29.1% of our outstanding common
stock as a group at December 31, 2018. Consequently, our management and Board of Directors may be able to significantly
affect our affairs and policies, including the outcome of the election of directors and the potential outcome of other matters
submitted to a vote of our shareholders, such as mergers, the sale of substantially all our assets and other extraordinary
corporate matters. This influence may also have the effect of delaying or preventing changes of control or changes in
management, or limiting the ability of our other shareholders to approve transactions that they may deem to be in the best
interests of our Company. The interests of these insiders could conflict with the interests of our other shareholders.
that we inform and consult with the Federal Reserve prior to declaring and paying a dividend that exceeds earnings for the
period for which the dividend is being paid or that could result in an adverse change to our capital structure, including
interest on our other debt obligations. If required payments on our other debt obligations are not made or are deferred, or
dividends on any preferred stock we may issue are not paid, we will be prohibited from paying dividends on our common
stock.
In addition, our ability to declare or pay dividends is also subject to the terms of the Loan Agreement, which
prohibits us from declaring or paying dividends upon the occurrence and during the continuation of an event of default (as
defined in the Loan Agreement).
The holders of our existing debt obligations, as well as debt obligations that may be outstanding in the future, will have
priority over our common stock with respect to payment in the event of liquidation, dissolution or winding up and with
respect to the payment of interest.
Our corporate organizational documents and provisions of federal and state law to which we are subject contain certain
provisions that could have an anti - takeover effect and may delay, make more difficult or prevent an attempted
acquisition that you may favor or an attempted replacement of our Board of Directors or management.
We have an established line of credit with another financial institution, although there was no outstanding amount
borrowed at December 31, 2018. In the event of any liquidation, dissolution or winding up of the Company, our common
stock would rank below all claims of debt holders against us. Our debt obligations are senior to our shares of common
stock. As a result, we must make payments on our debt obligations before any dividends can be paid on our common stock.
In the event of our bankruptcy, dissolution or liquidation, the holders of our debt obligations must be satisfied before any
distributions can be made to the holders of our common stock. To the extent that we issue additional debt obligations they
will be of equal rank with, or senior to, our existing debt obligations and senior to our shares of common stock.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us
or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.
Our certificate of formation authorizes us to issue up to 10,000,000 shares of one or more series of preferred
stock. Our Board of Directors will have 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 and the designation of such series, without any
further vote or action by our shareholders. Our preferred stock could be issued with voting, liquidation, dividend and other
rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change
in control of us, discourage bids for our 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 our common stock.
We are dependent upon the Bank for cash flow and the Bank’s ability to make cash distributions is restricted.
Our primary tangible asset is the stock of the Bank. As such, we depend upon the Bank for cash distributions
(through dividends on the Bank’s common stock) that we use to pay our operating expenses, satisfy our obligations
(including our subordinated debentures and our other debt obligations) and to pay dividends on our common stock. Federal
statutes, regulations and policies restrict the Bank’s ability to make cash distributions to us. These statutes and regulations
require, among other things, that the Bank maintain certain levels of capital in order to pay a dividend. Further, the OCC
can restrict the Bank’s payment of dividends by supervisory action. If the Bank is unable to pay dividends to us, we will
not be able to satisfy our obligations or pay dividends on our common stock.
Our dividend policy may change without notice and our future ability to pay dividends is subject to restrictions.
Historically, we have paid a quarterly dividend on our common stock in an amount equal to approximately $0.05
per share per quarter. Although we have historically paid dividends to our shareholders and currently intend to generally
maintain our current dividend levels, we have no obligation to continue doing so and may change our dividend policy at
any time without notice to holders of our common stock. Holders of our common stock are only entitled to receive such
cash dividends as our Board of Directors, in its discretion, may declare out of funds legally available for such payments.
Furthermore, consistent with our strategic plans, growth initiatives, capital availability, projected liquidity needs and other
factors, we have made and will continue to make, capital management decisions and policies that could adversely impact
the amount of dividends paid to holders of our common stock.
As a bank holding company, we are subject to regulation by the Federal Reserve. The Federal Reserve has
indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s
overall asset quality, current and prospective earnings and level, composition and quality of capital. The guidance provides
Our certificate of formation and our bylaws (each as amended and restated) may have an anti - takeover effect and
may delay, discourage or prevent an attempted acquisition or change of control or a replacement of our incumbent Board
of Directors or management. Our governing documents include provisions that:
•
•
•
•
•
•
•
•
•
empower our Board of Directors, without shareholder approval, to issue our preferred stock, the terms of
which, including voting power, are to be set by our Board of Directors;
establish a classified Board of Directors, with directors of each class serving a three - year term upon
completion of a phase - in period;
provide that directors may only be removed from office for cause and only upon a majority shareholder vote;
eliminate cumulative voting in elections of directors;
permit our Board of Directors to alter, amend or repeal our amended and restated bylaws or to adopt new
bylaws;
require the request of holders of at least 50.0% of the outstanding shares of our capital stock entitled to vote
at a meeting to call a special shareholders’ meeting;
prohibit shareholder action by less than unanimous written consent, thereby requiring virtually all actions to
be taken at a meeting of the shareholders;
require shareholders that wish to bring business before annual or special meetings of shareholders, or to
nominate candidates for election as directors at our annual meeting of shareholders, to provide timely notice
of their intent in writing; and
enable our Board of Directors to increase, between annual meetings, the number of persons serving as
directors and to fill the vacancies created as a result of the increase by a majority vote of the directors present
at a meeting of directors.
In addition, certain provisions of Texas law, including a provision which restricts certain business combinations
between a Texas corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition
or change in control. Furthermore, 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 its
holding company. These laws include the BHC Act and the CIBC Act. These laws could delay or prevent an acquisition.
Furthermore, our amended and restated certificate of formation provides that the state or federal courts located in
Jefferson County, Texas, the county in which Beaumont is located, will be the exclusive forum for: (a) any actual or
purported derivative action or proceeding brought on our behalf; (b) any action asserting a claim of breach of fiduciary
duty by any of our directors or officers; (c) any action asserting a claim against us or our directors or officers arising
pursuant to the Texas Business Organizations Code, or TBOC, our certificate of formation, or our amended and restated
bylaws; or (d) any action asserting a claim against us or our officers or directors that is governed by the internal affairs
doctrine. By becoming a shareholder of our Company, you will be deemed to have notice of and have consented to the
provisions of our amended and restated certificate of formation related to choice of forum. The choice of forum provision
in our amended and restated certificate of formation may limit our shareholders’ ability to obtain a favorable judicial forum
for disputes with us. Alternatively, if a court were to find the choice of forum provision contained in our amended and
restated certificate of formation to be inapplicable or unenforceable in an action, we may incur additional costs associated
40
41
with resolving such action in other jurisdictions, which could adversely affect our business, operating results and financial
condition.
Item 3. Legal Proceedings
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Bank operates 35 banking locations, all of which are in Texas. The headquarters of the Bank is located at
5999 Delaware Street, Beaumont, Texas 77706 and the telephone number is (409) 861 - 7200. The majority of the Bank’s
and our executive officers are located in Houston at 9 Greenway Plaza, Suite 110, Houston, Texas 77046 and the telephone
number is (713) 210 - 7600. The Bank operates branches in the following Texas locations:
Number of Branches
Owned
Leased
Houston Market
Baytown . . . . . . . . . . . . . . . . . . . . . . . . .
Boling . . . . . . . . . . . . . . . . . . . . . . . . . . .
Crosby . . . . . . . . . . . . . . . . . . . . . . . . . .
Houston . . . . . . . . . . . . . . . . . . . . . . . . .
Humble . . . . . . . . . . . . . . . . . . . . . . . . .
Pasadena . . . . . . . . . . . . . . . . . . . . . . . .
Sugar Land . . . . . . . . . . . . . . . . . . . . . . .
Wharton . . . . . . . . . . . . . . . . . . . . . . . . .
The Woodlands . . . . . . . . . . . . . . . . . .
Tomball . . . . . . . . . . . . . . . . . . . . . . . . .
Beaumont Market
Beaumont . . . . . . . . . . . . . . . . . . . . . . . .
Buna . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jasper . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kirbyville . . . . . . . . . . . . . . . . . . . . . . . .
Lumberton . . . . . . . . . . . . . . . . . . . . . . .
Nederland . . . . . . . . . . . . . . . . . . . . . . . .
Newton . . . . . . . . . . . . . . . . . . . . . . . . . .
Orange . . . . . . . . . . . . . . . . . . . . . . . . . .
Port Arthur . . . . . . . . . . . . . . . . . . . . . . .
Silsbee . . . . . . . . . . . . . . . . . . . . . . . . . .
Vidor . . . . . . . . . . . . . . . . . . . . . . . . . . .
Woodville . . . . . . . . . . . . . . . . . . . . . . .
Dallas Market
Preston Center . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
2
9
1
1
1
1
1
1
19
4
1
1
1
1
1
1
1
1
1
1
1
15
1
35
1
1
2
3
1
1
—
—
—
1
10
2
1
1
1
1
1
1
1
1
1
1
1
13
—
23
—
—
—
6
—
—
1
1
1
—
9
2
—
—
—
—
—
—
—
—
—
—
—
2
1
12
We opened our Dallas Preston Center branch and our Houston South Belt branch in January 2019. For the leased
locations, we either lease the location entirely, own the building and have a ground lease, or own the drive - in and lease
the branch. We believe that lease terms for the 12 branches that we lease are generally consistent with prevailing market
terms. The expiration dates of the leases range from 2019 to 2045, without consideration of any renewal periods available
to us.
We are not currently subject to any material legal proceedings. We are from time to time subject to claims and
litigation arising in the ordinary course of business.
At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either
individually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial
condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a
material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate
outcomes, such matters are costly, divert management’s attention and may materially and adversely affect our reputation,
even if resolved in our favor.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information for Common Stock
Shares of our common stock are traded on the NASDAQ Global Select Market under the symbol “CBTX”.
Holders of Record
As of February 19, 2019, there were approximately 492 holders of record of our common stock. Additionally a
greater number of holders of our common stock are “street name” or beneficial holders, whose shares are held by banks,
brokers and other financial institutions.
Dividends
We intend to continue to pay regular quarterly dividends, which have historically been of $0.05 per share. Our
dividend policy may change and our Board of Directors may change or eliminate the payment of future dividends at its
discretion, without notice to our shareholders. Any future determination to pay dividends to holders of our common stock
will be dependent upon our results of operations, financial condition, capital requirements, banking regulations, contractual
restrictions and any other factors that our Board of Directors may deem relevant.
Securities Authorized for Issuance Under Equity Compensation Plans
Plan Category
Equity compensation plans approved by shareholders (1) . . . . .
Equity compensation plans not approved by shareholders (2) . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issued Upon Exercise of
Exercise Price of
Outstanding Awards Outstanding Awards
165,400 $ 18.88
—
165,400 $ 18.88
—
Available for
Future Grants
1,307,238
—
1,307,238
Number of Shares to be Weighted-Average Number of Shares
(1) The number of shares available for future issuance includes 348,038 shares available under the Company’s 2017 Omnibus Incentive
Plan (which allows for the issuance of options, as well as various other stock-based awards) and 959,200 shares available under
the Company’s 2014 Stock Option Plan.
(2) The number of shares to be issued upon exercise of outstanding options, warrants and rights excludes 66,922 options with a
weighted-average exercise price of $11.19 to be issued under a stock option plan the Company assumed in a 2006 acquisition.
42
43
Stock Performance Graph
Item 6. Selected Financial Data
The following performance graph compares total stockholders’ return on our common stock for the period
beginning at the close of trading on November 7, 2017 and for each month until the end of 2018, with the cumulative total
return of the NASDAQ Composite Index and the NASDAQ Bank Index for the same period. Cumulative total return is
computed by dividing the difference between our share price at the end and the beginning of the measurement period by
the share price at the beginning of the measurement period. The performance graph assumes $100 is invested on
November 7, 2017, in the Company’s common stock, the NASDAQ Composite Index and the NASDAQ Bank Index.
Historical stock price performance is not necessarily indicative of future stock price performance.
Dollars
CBTX, Inc. . . . . . . . . .
NASDAQ Composite. .
NASDAQ Bank . . . . .
11/7/17 11/17 12/17
106.1
102.5
100.0
102.8
102.4
100.0
101.7
103.5
100.0
1/18
102.4
110.2
106.2
2/18
98.8
108.1
103.8
3/18
105.5
105.3
103.9
4/18
103.9
105.3
106.1
5/18
106.1
110.8
108.6
6/18
118.6
112.0
105.8
7/18
134.2
114.3
106.8
8/18
131.3
120.6
109.2
COMPARISON OF 14 MONTH CUMULATIVE TOTAL RETURN*
Among CBTX, Inc., the NASDAQ Composite Index
and the NASDAQ Bank Index
9/18 10/18 11/18 12/18
105.8
127.7
99.1
119.7
84.8
104.1
124.0
109.3
98.5
119.4
108.6
94.8
$160
$140
$120
$100
$80
$60
$40
$20
$0
11/7/17
11/17
12/17
1/18
2/18
3/18
4/18
5/18
6/18
7/18
8/18
9/18
10/18
11/18
12/18
*$100 invested on 11/7/17 in stock or 10/31/17 in index, including reinvestment of dividends.
Fiscal year ending December 31.
The following consolidated selected financial data as of and for the five-year period ended December 31, 2018,
is derived from our audited financial statements and should be read in conjunction with “Item 7 – Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and
the related notes included elsewhere in this Annual Report on Form 10-K.
(Dollars in thousands, except per share data)
Balance Sheet Data:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . $
Loans, excluding loans held for sale . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible assets, net . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing deposits . . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders' equity . . . . . . . . . . . . . . . . . . . . .
Income Statement Data:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . .
Provision (recapture) for loan losses . . . . . . . .
Net interest income after provision
(recapture) for loan losses . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Share and Per Share Data:
Earnings per share - basic . . . . . . . . . . . . . . . . . $
Earnings per share - diluted . . . . . . . . . . . . . . .
Dividends per share . . . . . . . . . . . . . . . . . . . . . .
Book value per share . . . . . . . . . . . . . . . . . . . . .
Tangible book value per share (1) . . . . . . . . . . .
Weighted-average common shares
2018
As of and for the Years Ended December 31,
2016
2015
2017
2014
382,070 $
326,199 $
382,103 $
434,901 $
2,446,823
(23,693)
2,423,130
86,725
3,279,096
1,183,058
1,583,224
2,766,282
487,625
2,311,544
(24,778)
2,286,766
87,720
3,081,083
1,109,789
1,493,183
2,602,972
446,214
2,154,885
(25,006)
2,129,879
88,741
2,951,522
1,025,425
1,515,335
2,540,760
357,637
2,092,010
(25,315)
2,066,695
89,829
2,882,625
1,053,957
1,429,409
2,483,366
344,313
490,748
1,876,593
(24,952)
1,851,641
67,952
2,628,587
974,571
1,294,482
2,269,053
329,252
135,759 $
11,098
124,661
(1,756)
116,659 $
8,885
107,774
(338)
109,951 $
8,405
101,546
4,575
105,525 $
7,654
97,871
6,950
96,458
6,371
90,087
3,766
126,417
14,252
82,016
58,653
11,364
47,289 $
108,112
14,204
78,292
44,024
16,453
27,571 $
96,971
15,749
73,502
39,218
12,010
27,208 $
90,921
14,967
70,961
34,927
10,791
24,136 $
86,321
13,356
66,359
33,318
10,476
22,842
1.90 $
1.89
0.20
19.6
16.1
1.23 $
1.22
0.20
18.0
14.4
1.23 $
1.22
0.20
16.2
12.2
1.07 $
1.06
0.20
15.4
11.4
1.01
1.00
0.20
14.6
11.6
outstanding- basic . . . . . . . . . . . . . . . . . . . . . .
24,859
22,457
22,049
22,462
22,530
CBTX, Inc.
NASDAQ Composite
NASDAQ Bank
Weighted-average common shares
outstanding- diluted . . . . . . . . . . . . . . . . . . . .
Common shares outstanding at period end . . .
25,018
24,907
22,573
24,833
22,235
22,062
22,675
22,303
22,765
22,534
(table continued on next page)
Unregistered Sales of Equity Securities
None.
Purchases of equity securities by the issuer and affiliated purchasers
None.
44
45
(Dollars in thousands, except per share data)
Performance Ratios:
Return on average assets . . . . . . . . . . . . . . . . . . . .
Return on average shareholder's equity . . . . . . . .
Net interest margin - tax equivalent basis . . . . . .
Efficiency ratio (2) . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Ratios:
Loans to deposits . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing deposits to total deposits . . .
Cost of deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Quality Ratios:
Nonperforming assets to total assets . . . . . . . . . .
Nonperforming loans to total loans . . . . . . . . . . .
Allowance for loan losses to nonperforming
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses to total loans . . . . . . .
Net charge-off (recovery) to average loans . . . . .
Liquidity and Capital Ratios:
Total shareholders' equity to total assets . . . . . . .
Tangible equity to tangible assets (1) . . . . . . . . . .
Common equity tier 1 capital ratio . . . . . . . . . . . .
Tier 1 risk-based capital ratio . . . . . . . . . . . . . . . .
Total risk-based capital ratio . . . . . . . . . . . . . . . .
Tier 1 leverage ratio . . . . . . . . . . . . . . . . . . . . . . .
2018
1.5%
10.2%
4.4%
59.0%
88.5%
42.8%
0.40%
0.11%
0.14%
As of and for the Years Ended December 31,
2016
2015
2017
0.9%
7.2%
4.1%
64.2%
88.8%
42.6%
0.30%
0.27%
0.33%
0.9%
7.8%
4.0%
62.7%
84.8%
40.4%
0.29%
0.27%
0.29%
0.9%
7.2%
3.9%
62.9%
84.2%
42.4%
0.26%
0.52%
0.66%
2014
0.9%
7.1%
3.9%
64.2%
82.7%
43.0%
0.28%
0.93%
1.23%
678.9%
0.97%
(0.03%)
324.1%
1.07%
- %
400.8%
1.16%
0.23%
183.3%
1.21%
0.32%
107.8%
1.33%
0.15%
14.9%
12.6%
14.7%
14.8%
15.6%
12.8%
14.5%
12.0%
14.2%
14.4%
15.4%
12.3%
12.1%
9.4%
11.5%
11.8%
12.9%
9.8%
11.9%
9.1%
10.9%
11.2%
12.2%
9.3%
12.5%
10.2%
N/A
13.4%
14.7%
10.7%
(1) Non-GAAP financial measure. See “Non-GAAP Financial Measures” below.
(2) Efficiency ratio is calculated by dividing noninterest expense by the sum of net interest income and noninterest income.
Non-GAAP Financial Measures
Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry.
However, we also evaluate our performance based on certain additional non - GAAP financial measures. 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 not included or excluded in the most
directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the U.S.
in our statements of income, balance sheets 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 financial measures
calculated in accordance with GAAP. Non - GAAP financial measures 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 way we calculate the non - GAAP financial measures may differ from that of other companies reporting measures with
similar names.
We calculate tangible equity as total shareholders’ equity, less goodwill and other intangible assets, net of
accumulated amortization and tangible book value per share as tangible equity divided by shares of common stock
outstanding at the end of the relevant period. The most directly comparable GAAP financial measure for tangible book
value per share is book value per share. We calculate tangible assets as total assets less goodwill and other intangible
assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible equity to
tangible assets is total shareholders’ equity to total assets. We believe that tangible book value per share and tangible
equity to tangible assets are measures that are important to many investors in the marketplace who are interested in book
value per share and total shareholders’ equity to total assets, exclusive of change in intangible assets.
(Dollars in thousands, except per share data)
Tangible Equity
Total shareholders’ equity . . . . . . . . . . . . . . $
Adjustments:
2018
2017
December 31,
2016
2015
2014
487,625 $
446,214 $ 357,637 $ 344,313 $ 329,252
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . .
Tangible equity . . . . . . . . . . . . . . . . . . . . . . . $
80,950
5,775
400,900 $
Tangible Assets
80,950
6,770
59,049
8,903
358,494 $ 268,896 $ 254,484 $ 261,300
80,950
7,791
80,950
8,879
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,279,096 $ 3,081,083 $ 2,951,522 $ 2,882,625 $ 2,628,587
Adjustments:
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . .
59,049
8,903
Tangible assets . . . . . . . . . . . . . . . . . . . . . . . $ 3,192,371 $ 2,993,363 $ 2,862,781 $ 2,792,796 $ 2,560,635
80,950
7,791
80,950
8,879
80,950
6,770
80,950
5,775
Common shares outstanding (1) (2) . . . . . . . . . . .
24,907
24,833
22,062
22,303
22,534
Book value per share . . . . . . . . . . . . . . . . . . . . . $
Tangible book value per share . . . . . . . . . . . . . $
19.6 $
16.1 $
18.0 $
14.4 $
16.2 $
12.2 $
15.4 $
11.4 $
14.6
11.6
Total shareholders’ equity to total assets . . . . .
Tangible equity to tangible assets . . . . . . . . . .
14.9%
12.6%
14.5%
12.0%
12.1%
9.4%
11.9%
9.1%
12.5%
10.2%
(1) Excludes the dilutive effect, if any, of 232,322, 260,322, 248,314, 647,074 and 575,326 shares of common stock issuable upon
exercise of outstanding stock options as of December 31, 2018, 2017, 2016, 2015 and 2014, respectively.
(2) Excludes the dilutive effect, if any, of 205,773 and 212,580 shares of unvested restricted stock as of December 31, 2018 and 2017,
respectively.
46
47
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward - looking statements. These forward - looking statements
reflect our current views with respect to, among other things, future events and our financial performance. These statements
are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,”
“potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,”
“projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a
future or forward - looking nature. These forward - looking statements are not historical facts and are based on current
expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by
management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution
you that any such forward - looking statements are not guarantees of future performance and are subject to risks,
assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these
forward - looking statements are reasonable as of the date made, actual results may prove to be materially different from
the results expressed or implied by the forward - looking statements.
There are or will be important factors that could cause our actual results to differ materially from those indicated
in these forward - looking statements, including, but not limited to, the risks described in “Part I – Item 1A. – Risk Factors”
and the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
natural disasters and adverse weather, acts of terrorism, an outbreak of hostilities or other international or
domestic calamities and other matters beyond our control;
the geographic concentration of our markets in Beaumont and Houston, Texas;
our ability to prudently manage our growth and execute our strategy;
risks associated with our acquisition and de novo branching strategy, including our entry into new markets;
changes in management personnel;
the amount of nonperforming and classified assets that we hold and the time and effort necessary to resolve
nonperforming assets;
deterioration of our asset quality;
interest rate risk associated with our business;
business and economic conditions generally and in the financial services industry, nationally and within our
primary markets;
volatility and direction of oil prices and the strength of the energy industry, generally and within Texas;
the composition of our loan portfolio, including the identity of our borrowers and the concentration of loans
in specialized industries;
changes in the value of collateral securing our loans;
our ability to maintain important deposit customer relationships and our reputation;
our ability to maintain effective internal control over financial reporting;
operational risks associated with our business;
increased competition in the financial services industry, particularly from regional and national institutions;
volatility and direction of market interest rates;
liquidity risks associated with our business;
systems failures or interruptions involving our information technology and telecommunications systems or
third - party servicers;
interruptions or breaches in our information system security;
the failure of certain third-party vendors to perform;
environmental liability associated with our lending activities;
the institution and outcome of litigation and other legal proceedings against us or to which we may become
subject;
the costs and effects of regulatory or other governmental inquiries, the results of regulatory examinations or
reviews or the ability to obtain required regulatory approvals;
•
•
•
changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting,
tax, trade, monetary and fiscal matters;
further government intervention in the U.S. financial system; and
other risks, uncertainties, and factors that are discussed from time to time in our reports and documents filed
with the SEC.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary
statements included in this Annual Report on Form 10-K. If one or more events related to these or other risks or
uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from
what we anticipate. Accordingly, you should not place undue reliance on any such forward - looking statements. Any
forward - looking statement speaks only as of the date on which it is made and we do not undertake any obligation to
publicly update or review any forward - looking statement, whether as a result of new information, future developments or
otherwise. New factors emerge from time to time and it is not possible for us to predict which will arise. In addition, we
cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any forward - looking statements.
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with “Item 6. Selected Financial Data” and our 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 we believe are reasonable but
may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth in “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. We assume no
obligation to update any of these forward-looking statements.
Overview
We operate through one segment, community banking. Our primary source of funds is deposits and our primary
use of funds is loans. Most of our revenue is generated from interest on loans and investments. We incur interest expense
on deposits and other borrowed funds as well as noninterest expense, such as salaries and employee benefits and occupancy
expenses.
Our operating results depend primarily on our net interest income, calculated as the difference between interest
income on interest - earning assets, such as loans and securities and interest expense on interest - bearing liabilities, such as
deposits and borrowings. Changes in market interest rates and the interest rates we earn on interest - earning assets or pay
on interest - bearing liabilities, as well as in the volume and types of interest - earning assets, interest - bearing and
noninterest - bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin
and net interest income. 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.
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, as well as developments affecting the real estate, technology, financial
services, insurance, transportation, manufacturing and energy sectors within our target markets and throughout the state
of Texas. We maintain diversity in our loan portfolio as a means of managing risk associated with fluctuations in economic
conditions. Our focus on lending to small to medium - sized businesses and professionals in our market areas has resulted
in a diverse loan portfolio comprised primarily of core relationships. We carefully monitor exposure to certain asset classes
to minimize the impact of a downturn in the value of such assets.
We seek to remain competitive with respect to interest rates on loans and deposits, as well as prices on fee - based
services, which are typically significant competitive factors within the banking and financial services industry. Many of
our competitors are much larger financial institutions that have greater financial resources than we do and compete
aggressively for market share. Through our relationship - driven, community banking strategy, a significant portion of our
continued growth has been through referral business from our existing customers and professionals in our markets
including attorneys, accountants and other professional service providers. Our total loans increased from $2.3 billion at
December 31, 2017 to $2.4 billion at December 31, 2018 and deposits increased from $2.6 billion at December 31, 2017
48
49
to $2.8 billion at December 31, 2018. We intend to supplement our organic growth through opening new branches and
through strategic acquisitions designed to strengthen our franchise, increase shareholder value and contribute meaningful
strategic enhancements.
The following table presents for the periods indicated, average outstanding balances for each major category of
interest - earning assets and interest - bearing liabilities, the interest income or interest expense and the average yield or rate
for the periods indicated. Any nonaccrual loans have been included in the table as loans carrying a zero yield.
We employ prudent underwriting and proactive credit administration to manage risk in our loan portfolio. In the
past, these practices have resulted in low amounts in relation to the size of our loan portfolio of nonperforming and
impaired loans and charge-offs. Our nonperforming assets to total assets was 0.11% at December 31, 2018 and 0.27% at
December 31, 2017. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —
—Financial Condition—Credit Policies and Risk Management” for further discussion.
We have focused on improving our operational efficiency and intend to continue to do so. We have upgraded our
operating capabilities and created a platform for continued efficiencies in the areas of risk management, technology, data
processing, regulatory compliance and human resources. The efficiency ratio is calculated by dividing noninterest expense
by the sum of net interest income and noninterest income. Our efficiency ratio improved from 64.2% for the year ended
December 31, 2017, to 59.0% for the year ended December 31, 2018.
Results of Operations Year Ended December 31, 2018 vs Year Ended December 31, 2017
Net income for 2018 was $47.3 million compared to $27.6 million for 2017, an increase of $19.7 million, or
71.5%. This increase is primarily due to a $16.9 million increase in net interest income and a $5.1 million decrease in
income taxes, partially offset by a $3.7 million increase in noninterest expense.
See further analysis of these fluctuations in the related discussions that follow.
For the Years Ended December 31,
(Dollars in thousands, except per share data)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 135,759 $ 116,659 $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (recapture) for loan losses . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
11,098
124,661
(1,756)
14,252
82,016
58,653
11,364
47,289 $
1.90 $
1.89 $
8,885
107,774
(338)
14,204
78,292
44,024
16,453
27,571 $
1.23 $
1.22 $
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share - basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share - diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net Interest Income
Increase (Decrease)
19,100
2,213
16,887
(1,418)
48
3,724
14,629
(5,089)
19,718
0.67
0.67
16.4%
24.9%
15.7%
419.5%
0.3%
4.8%
33.2%
(30.9%)
71.5%
Net interest income for the year ended December 31, 2018 was $124.7 million, compared to $107.8 million for
the year ended December 31, 2017, an increase of $16.9 million, or 15.7%. Interest income increased in 2018, as compared
to 2017 due to higher average loans and securities and higher average yields on loans, securities and federal funds sold.
Interest expense increased in 2018, as compared to 2017, due to higher average interest-bearing deposits and higher rates
on interest-bearing deposits, offset by lower interest expense in 2018 due to the payoff of our note payable in the fourth
quarter of 2017. Increases in rates on interest-earning assets increased net interest income by $10.1 million and increased
rates paid on interest-bearing liabilities decreased net interest income by $3.0 million for the year December 31, 2018,
compared to the year ended December 31, 2017.
For the Years Ended December 31,
(Dollars in thousands)
Assets
Interest-earnings assets:
Average
Outstanding
Balance
2018
Interest
Earned/
Interest
Paid
Average
Yield/ Outstanding
Average
Rate
Balance
2017
Interest
Earned/
Interest
Paid
Average
Yield/
Rate
Total loans (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,392,348 $ 123,895
6,020
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and other interest-earning assets . .
5,030
814
Nonmarketable equity securities . . . . . . . . . . . . . . . . .
2,890,337 $ 135,759
Total interest-earning assets . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-earnings assets . . . . . . . . . . . . . . . . . . . . . . .
(25,063)
290,868
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,156,142
227,384
255,323
15,282
5.18% $ 2,206,541 $ 107,368 4.87%
5,347 2.42%
2.65%
3,204 1.17%
1.97%
740 5.04%
5.32%
2,714,901 $ 116,659 4.30%
4.70%
220,953
272,715
14,692
(25,319)
284,165
$ 2,973,747
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . $ 1,519,643 $
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debt . . . . . . . . . . . . . . . . . . . . . . .
Total interest-bearing liabilities . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing liabilities:
1,601
3,356
—
10,572
1,535,172 $
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest-bearing liabilities . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,134,191
22,082
1,156,273
464,697
Total liabilities and shareholders’ equity . . . . . . . . $ 3,156,142
10,586
4
73
15
420
11,098
0.70% $ 1,503,350 $
0.25%
2.18%
—
3.97%
0.72%
2,254
—
22,164
10,826
1,538,594 $
—
7,652 0.51%
5 0.27%
—
906 4.09%
322 2.97%
8,885 0.58%
1,031,707
19,388
1,051,095
384,058
$ 2,973,747
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest spread (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin—tax equivalent (4) . . . . . . . . . . . . . . .
$ 124,661
$ 107,774
3.97%
4.31%
4.35%
3.72%
3.97%
4.06%
(1)
Includes average outstanding balances of loans held for sale of $589,000 and $769,000 for the year ended December 31, 2018 and
2017, respectively.
(2) Net interest spread is the average yield on interest - earning assets minus the average rate on interest - bearing liabilities.
(3) Net interest margin is equal to net interest income divided by average interest - earning assets.
(4) Tax equivalent adjustments of $1.1 million and $2.3 million for the years ended December 31, 2018 and 2017, respectively, have
been computed using a federal income tax rate of 21% for 2018 and 35% for 2017.
50
51
The following table presents information regarding the 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 attributable to 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.
Deposit Account Service Charges. We earn fees from our customers for deposit - related services and these fees
are a significant component of our noninterest income. Service charges on deposit accounts were $6.3 million for the year
ended December 31, 2018, an increase of $481,000, or 8.3%, over the same period in 2017. This increase was
predominately due to an increase in non - sufficient and overdraft charges incurred by our deposit customers.
(Dollars in thousands)
Interest-earning assets:
For the Year Ended December 31,
2018 Compared to 2017
Increase (Decrease) due to
Volume
Rate
Total
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and other interest-earning assets . . . . . . . . . . . . . . . . . .
Nonmarketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total increase in interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,041 $
156
(204)
30
9,023
7,486 $ 16,527
673
1,826
74
19,100
517
2,030
44
10,077
Interest-bearing liabilities:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total increase (decrease) in interest expense . . . . . . . . . . . . . . . . . . . . . . .
Increase in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
83
(1)
73
(891)
(8)
(744)
9,767 $
2,934
2,851
(1)
—
73
—
(891)
—
98
106
2,957
2,213
7,120 $ 16,887
Provision for Loan Losses
Provision (recapture) for loan losses is an income adjustment used to maintain an allowance for loan losses at a
level management deems appropriate to absorb inherent losses on existing loans. A provision for loan losses is an expense
that increases the allowance for loan losses. If instead the allowance is determined to be higher than necessary, a recapture
is recorded, reducing the allowance for loan losses. For the year ended December 31, 2018, the recapture of $1.8 million
was due to strong credit quality, continuing low nonperforming and impaired loans, minimal charge off history and an
increase in recoveries during the year. A recapture of $338,000 was recorded for the year ended December 31, 2017,
primarily due to the pay - offs of certain classified and problem loans and the resulting reversal of their related allowance
for loan losses. For a description of the factors considered by our management in determining the allowance for loan losses
see ““Management’s Discussion and Analysis of Financial Condition and Results of Operations —Financial Condition—
Allowance for Loan Losses.”
Noninterest Income
For the year ended December 31, 2018, noninterest income totaled $14.3 million, an increase of $48,000, or
0.3%, compared to $14.2 million for the year ended December 31, 2017. Although noninterest income increased minimally
between 2018 and 2017, there were increases in deposit account service charges, card interchange fees and earnings on
bank-owned life insurance, partially offset by decreased gains on sales of fixed assets. The major categories of noninterest
income for the periods indicated below were as follows:
(Dollars in thousands)
Noninterest income:
For the Years Ended December 31,
2018
2017
Increase (Decrease)
Deposit account service charges . . . . . . . . . . . . . . . . . . . . . . . $
Net gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Card interchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,281 $
660
3,741
1,815
1,755
14,252 $
5,800 $
1,524
3,453
1,580
1,847
14,204 $
481
(864)
288
235
(92)
48
8.3%
(56.7%)
8.3%
14.9%
(5.0%)
0.3%
Net Gain on Sale of Assets. Net gain on sale of assets consists of the gains associated with the sale of fixed assets,
SBA loans, mortgage loans and other assets, including OREO and repossessed assets. Net gain on sale of assets was
$660,000 for the year ended December 31, 2018, a decrease of $864,000, or 56.7%, over the same period in 2017. Net
gains on sale of assets for the year ended December 31, 2018, primarily related to sales of SBA and mortgage loans. Net
gain on sale of assets for the year ended December 31, 2017, primarily related to the settlement of a legal matter related to
one of our branches and the sale of certain assets of two branches in 2017.
Card Interchange Fees. We earn card interchange fees from merchants as issuer of debit cards. Card interchange
fees increased $288,000 for the year ended December 31, 2018, compared to the year ended December 31, 2017, due an
increase in the volume of such transactions.
Earnings on Bank-owned Life Insurance. The Company has purchased life insurance policies on certain
employees, which are carried at their cash surrender value. Changes in the cash surrender value of the policies are recorded
in noninterest income. Earnings on bank-owned life insurance increased $235,000 during the year ended December 31,
2018, compared to the year ended December 31, 2017, primarily due to the impact of purchases of additional policies in
the first quarter of 2018.
Noninterest Expense
Generally, noninterest expense is composed of employee expenses and costs associated with operating our
facilities, obtaining and retaining customer relationships and providing bank services. For the year ended December 31,
2018, noninterest expense totaled $82.0 million, an increase of $3.7 million, or 4.8%, compared to $78.3 million for the
year ended December 31, 2017. The major categories of noninterest expense for the periods indicated were as follows:
(Dollars in thousands)
Noninterest expense:
For the Years Ended December 31,
2018
2017
Increase (Decrease)
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . $ 51,524 $ 48,573 $ 2,951
243
Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(123)
48
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
368
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Printing, stationery and office . . . . . . . . . . . . . . . . . . . . . . . .
64
(94)
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . .
432
Professional and director fees . . . . . . . . . . . . . . . . . . . . . . . .
(21)
Correspondent bank and customer related expense . . . . . . .
Loan processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(13)
363
Advertising, marketing and business development . . . . . . .
(537)
Repossessed real estate and other assets . . . . . . . . . . . . . . . .
Security and protection expense . . . . . . . . . . . . . . . . . . . . . .
(79)
214
Telephone and communications . . . . . . . . . . . . . . . . . . . . . .
(92)
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82,016 $ 78,292 $ 3,724
9,394
2,053
2,677
1,576
1,161
985
3,537
265
448
1,824
72
1,276
1,530
3,694
9,151
2,176
2,629
1,208
1,097
1,079
3,105
286
461
1,461
609
1,355
1,316
3,786
6.1%
2.7%
(5.7%)
1.8%
30.5%
5.8%
(8.7%)
13.9%
(7.3%)
(2.8%)
24.8%
(88.2%)
(5.8%)
16.3%
(2.4%)
4.8%
52
53
reflect the impact of this rate change. The tax rate for 2017 would have been 28.6% without the impact of the deferred tax
remeasurement adjustment.
Results of Operations Year Ended December 31, 2017 vs Year Ended December 31, 2016
Net income for 2017 was $27.6 million compared to $27.2 million for 2016, an increase of $363,000, or 1.3%.
This increase is primarily due to a $6.2 million increase in net interest income, a $4.8 million increase in noninterest
expense and a $4.4 million increase in income taxes. See further analysis of these fluctuations in the related discussions
that follow.
For the Years Ended December 31,
(Dollars in thousands, except per share data)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116,659 $ 109,951 $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
8,885
107,774
(338)
14,204
78,292
44,024
16,453
27,571 $
1.23 $
1.22 $
8,405
101,546
4,575
15,749
73,502
39,218
12,010
27,208 $
1.23 $
1.22 $
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share - Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share - Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net Interest Income
Increase (Decrease)
6,708
480
6,228
(4,913)
(1,545)
4,790
4,806
4,443
363
—
—
6.1%
5.7%
6.1%
(107.4%)
(9.8%)
6.5%
12.3%
37.0%
1.3%
Net interest income for the year ended December 31, 2017 was $107.8 million, compared to $101.5 million for
the year ended December 31, 2016, an increase of $6.2 million, or 6.1%. For the year ended December 31, 2017, net
interest margin and net interest spread were 3.97% and 3.72%, respectively, compared to 3.87% and 3.63% for the year
ended December 31, 2016. The increase in the net interest margin and net interest spread was primarily attributable to the
increase in the average outstanding balances for our loans and securities portfolios. Changes in rates paid on
interest - bearing deposits for 2017 and 2016 had a minimal impact on the net interest margin. Increases in rates on interest-
earning assets increased net interest income by $2.6 million and increased rates paid on interest-bearing liabilities
decreased net interest income by $526,000 for the year ended December 31, 2017, compared to the year ended
December 31, 2016.
Salaries and Employee Benefits. The increase in salaries and employee benefit expenses during the year ended
December 31, 2018, as compared to the year ended December 31, 2017, was primarily due to increases in salaries, bonuses
and stock compensation expense during 2018, partially offset by the impact of a change in control charge of $2.5 million
related to our initial public offering recorded in 2017. Salaries increased in 2018, as compared to 2017, primarily due to
annual salary increases and the hiring of additional officer level employees. Stock compensation expense increased in
2018, as compared to 2017 due to the issuance of restricted stock awards during the fourth quarter of 2017 to executives,
officers and other key individuals in conjunction with our initial public offering.
Net Occupancy Expenses. Net occupancy expenses were $9.4 million and $9.2 million for the year ended
December 31, 2018 and 2017, respectively. Although we sold two branches in the third quarter of 2017, costs for repairs
and maintenance and other costs related to occupancy increased in 2018.
Software. Software related expenses increased $368,000 during the year ended December 31, 2018, as compared
to the year ended December 31, 2017, primarily due to increases in software licenses.
Professional and Director Fees. Professional and director fees, which include legal, audit, loan review and
consulting fees, were $3.5 million and $3.1 million for the year ended December 31, 2018 and 2017, respectively. The
increase of $432,000 for the year ended December 31, 2018, compared to the year ended December 31, 2017, is primarily
due to increased legal, audit and consulting fees.
Professional and director fees include expenditures relating to a security incident involving the possible
unauthorized access of certain personal information in the possession of the Bank. Based on a report of an independent
forensic investigation firm, we believe that a phishing incident occurred where certain emails and attachments from two
employee email accounts may have been accessed by an unauthorized person. We believe that these email accounts
contained certain personal information for approximately 7,800 individuals. We stopped the identified unauthorized access
and we have contacted such individuals and reported the incident to law-enforcement authorities. Our investigation has
not found any evidence that the incident involved any unauthorized access to or use of any of the Bank's internal computer
systems or network, and we believe that the access was limited to information that was contained in the email accounts of
the two employees. We incurred total out-of-pocket expenses of $65,000 during 2018 related to this incident and estimate
we may incur an additional $40,000 of out-of-pocket expenses related to this incident.
Advertising and Marketing Expenses. Advertising and promotion - related expenses were $1.8 million and $1.5
million for the year ended December 31, 2018 and 2017, respectively. The increase in 2018 was primarily due to an
increase in media costs associated with the Company’s branding campaign that began early in the second quarter of 2017
and continued into 2018.
Repossessed Real Estate and Other Assets. Costs related to repossessed real estate and other assets decreased
$537,000, or 88.2%, during the year ended December 31, 2018 as compared to the year ended December 31, 2017. The
decrease was due to a reduction in the number of repossessed and other assets in 2018, as compared to 2017, and a resulting
decrease in related costs.
Telephone and Communications. Telephone and communication costs increased $214,000 during 2018, as
compared to 2017, primarily due to increased equipment costs and monthly fees.
Income Tax Expense
The amount of income tax expense we incur is impacted by the amounts of our pre - tax income, tax - exempt
income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at current income tax rates in
effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation
allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
For the years ended December 31, 2018 and 2017, income tax expense totaled $11.4 million and $16.5 million
and our effective tax rate for those periods was 19.4% and 37.4%, respectively. The decrease in tax expense for the year
ended December 31, 2018, compared to the year ended December 31, 2017, is due to the Tax Cuts and Jobs Act of 2017,
or Tax Act, which was effective January 1, 2018. The Tax Act lowered the corporate federal income tax rate in the U.S.
from 35% to 21%. As a result, we recorded a deferred tax asset remeasurement adjustment of $3.9 million in 2017 to
54
55
The following tables present for the periods indicated, average outstanding balances for each major category of
interest - earning assets and interest - bearing liabilities, the interest income or interest expense and the average yield or rate
for the periods indicated.
The following table presents information regarding the 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 attributable to 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,
Average
Outstanding
Balance
2017
Interest
Earned/
Interest
Paid
Average
Yield/
Rate
Average
Outstanding
Balance
2016
Interest
Earned/
Interest
Paid
Average
Yield/
Rate
(Dollars in thousands)
Interest-earning assets:
For the Year Ended December 31,
2017 Compared to 2016
Increase (Decrease) due to
Volume
Rate
Total
(Dollars in thousands)
Assets
Interest-earnings assets:
Total loans (1) . . . . . . . . . . . . . . . . . . . . . $ 2,206,541 $ 107,368 4.87% $ 2,140,917 $
Securities . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and other interest-
5,347 2.42%
220,953
169,509
earning assets . . . . . . . . . . . . . . . . . . . .
Nonmarketable equity securities . . . . . .
Total interest-earning assets . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . .
Noninterest-earnings assets . . . . . . . . . . . . .
(25,319)
284,165
Total assets . . . . . . . . . . . . . . . . . . . . $ 2,973,747
272,715
14,692
3,204 1.17%
740 5.04%
2,714,901 $ 116,659 4.30%
301,018
14,683
2,626,127 $
(26,826)
276,413
$ 2,875,714
103,723 4.84%
3,801 2.24%
1,732 0.58%
695 4.73%
109,951 4.19%
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits . . . . . . . . . . . . $ 1,503,350 $
Repurchase agreements . . . . . . . . . . . . .
Note payable . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debt . . . . . . . . . . . .
Total interest-bearing liabilities . . . . . . . . .
Noninterest-bearing liabilities:
2,254
22,164
10,826
1,538,594 $
Noninterest-bearing deposits . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . .
Total noninterest-bearing liabilities . .
Shareholders’ equity . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’
1,031,707
19,388
1,051,095
384,058
7,652 0.51% $ 1,458,566 $
5 0.27%
906 4.09%
322 2.97%
8,885 0.58%
1,918
29,624
10,826
1,500,934 $
7,073 0.48%
5 0.26%
1,061 3.58%
266 2.46%
8,405 0.56%
1,010,403
15,270
1,025,673
349,107
equity . . . . . . . . . . . . . . . . . . . . . . . $ 2,973,747
$ 2,875,714
Net interest income . . . . . . . . . . . . . . . . . . .
Net interest rate spread (2) . . . . . . . . . . . . . .
Net interest margin (3) . . . . . . . . . . . . . . . . .
Net interest margin—tax equivalent (4) . . . .
$ 107,774
$
101,546
3.72%
3.97%
4.06%
3.63%
3.87%
3.96%
(1) Includes average outstanding balances of loans held for sale of $769,000 and $905,000 for the year ended December 31, 2017 and
2016, respectively.
(2) Net interest spread is the average yield on interest - earning assets minus the average rate on interest - bearing liabilities.
(3) Net interest margin is equal to net interest income divided by average interest - earning assets.
(4) Tax equivalent adjustments of $2.3 million and $2.4 million for the years ended December 31, 2017 and 2016, respectively, have
been computed using a federal income tax rate of 35%.
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and other interest-earning assets . . . . . . . . . . .
Nonmarketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total increase in interest income . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing liabilities:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total increase (decrease) in interest expense . . . . . . . . . . . . . . . .
Increase in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
3,176 $
1,153
(174)
—
4,155
221
—
(267)
—
(46)
4,201 $
469 $
393
1,646
45
2,553
358
—
112
56
526
2,027 $
3,645
1,546
1,472
45
6,708
579
—
(155)
56
480
6,228
Provision for Loan Losses
Provision (recapture) for loan losses is an income adjustment used to maintain an allowance for loan losses at a
level management deems appropriate to absorb inherent losses on existing loans. For the year ended December 31, 2017,
a recapture of $338,000 was recorded, compared to a $4.6 million provision for the year ended December 31, 2016. The
recapture recorded during 2017 is primarily the result of pay - offs of certain classified and problem loans, which resulted
in the reversal of their related allowance for loan losses.
Noninterest Income
For the year ended December 31, 2017, noninterest income totaled $14.2 million, a decrease of $1.5 million, or
9.8%, compared to $15.7 million for the year ended December 31, 2016. The major categories of noninterest income for
the periods indicated were as follows:
(Dollars in thousands)
Noninterest income:
For the Years Ended December 31,
2017
2016
Increase (Decrease)
Deposit account service charges . . . . . . . . . . . . . . . . . . . . . . . $
Net gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Card interchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,800 $
1,524
3,453
1,580
1,847
14,204 $
6,538 $
1,922
3,352
1,356
2,581
15,749 $
(738)
(398)
101
224
(734)
(1,545)
(11.3%)
(20.7%)
3.0%
16.5%
(28.4%)
(9.8%)
Deposit Account Service Charges. Service charges on customer deposit accounts were $5.8 million for the year
ended December 31, 2017, a decrease of $738,000, or 11.3%, over the same period in 2016. These decreases were
predominately due to a reduction of non - sufficient and overdraft charges incurred by our deposit customers.
Net Gain on Sale of Assets. Net gain on sale of assets was $1.5 million for the year ended December 31, 2017, a
decrease of $398,000, or 20.7%, over the same period in 2016. Net gain on sale of assets for the year ended December 31,
2017, primarily related to the settlement of a legal matter related to one of our branches and the sale of certain assets of
two branches. Net gain on sale of assets for the year ended December 31, 2016 was primarily attributed to the sale of one
of our branch locations during that period.
56
57
Other. Other noninterest income decreased $734,000, or 28.4%, from $2.6 million for the year ended
December 31, 2016, to $1.8 million for the year ended December 31, 2017. The decrease is primarily due to the income
generated during the year ended December 31, 2016 by our investments in partnerships and funds associated with the
Small Business Investment Company, or SBIC, program of the SBA of $629,000. Our investments in these partnerships
and funds aid the Company in meeting its CRA requirements. The partnerships and funds are licensed small business
investment companies whose income is primarily derived from investment in small businesses and ultimate liquidation of
these investments at a future date for profit.
Noninterest Expense
For the year ended December 31, 2017, noninterest expense totaled $78.3 million, an increase of $4.8 million, or
6.5%, compared to $73.5 million for the year ended December 31, 2016. The major categories of noninterest expense for
the periods indicated were as follows:
(Dollars in thousands)
Noninterest expense:
For the Years Ended December 31,
2017
2016
Increase (Decrease)
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Printing, stationery and office . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and director fees . . . . . . . . . . . . . . . . . . . . . . . .
Correspondent bank and customer related expense . . . . . . .
Loan processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising, marketing and business development . . . . . . .
Repossessed real estate and other assets . . . . . . . . . . . . . . . .
Security and protection expense . . . . . . . . . . . . . . . . . . . . . .
Telephone and communications . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 48,573
9,151
2,176
2,629
1,208
1,097
1,079
3,105
286
461
1,461
609
1,355
1,316
3,786
$ 78,292
$ 44,239
10,100
2,300
2,484
679
1,194
1,167
2,481
320
509
789
318
1,718
1,444
3,760
$ 73,502
$ 4,334
(949)
(124)
145
529
(97)
(88)
624
(34)
(48)
672
291
(363)
(128)
26
$ 4,790
9.8%
(9.4%)
(5.4%)
5.8%
77.9%
(8.1%)
(7.5%)
25.2%
(10.6%)
(9.4%)
85.2%
91.5%
(21.1%)
(8.9%)
0.7%
6.5%
Salaries and Employee Benefits. Salaries and employee benefits were $48.6 million for the year ended
December 31, 2017, an increase of $4.3 million, or 9.8%, compared to $44.2 million for the same period in 2016. The
increase in 2017 was due to increases in salaries and incentive compensation resulting from bonuses and deferred
compensation expense and a $2.5 million charge for change of control payments to certain employees triggered by to our
initial public offering.
Net Occupancy Expenses. Net occupancy expenses were $9.2 million and $10.1 million for the year ended
December 31, 2017 and 2016, respectively. The decrease during 2017 was primarily due to the closing of multiple branches
during 2017 and 2016 and a reduction in repairs, maintenance and janitorial services.
Professional and Director Fees. Professional and director fees were $3.1 million and $2.5 million for the year
ended December 31, 2017 and 2016, respectively. The increase of $624,000 for the year ended December 31, 2017,
compared to the year ended December 31, 2016, is primarily due to increased audit fees as a result of the Company’s initial
public offering.
Software. The increase in software expense of $529,000, or 77.9%, was primarily due to increases in software
licenses.
Advertising and Marketing Expenses. Advertising and promotion - related expenses were $1.5 million and
$789,000 for the year ended December 31, 2017 and 2016, respectively. The increase in 2017 was primarily due to an
increase in media costs associated with the Company’s branding campaign that began early in the second quarter of 2017.
Income Tax Expense
For the years ended December 31, 2017 and 2016, income tax expense totaled $16.5 million and $12.0 million
and our effective tax rate for those periods was 37.4% and 30.7%, respectively. The increase in tax expense for the year
ended December 31, 2017, compared to the year ended December 31, 2016, is due to the deferred tax asset remeasurement
adjustment of $3.9 million recorded in the fourth quarter of 2017 related to the Tax Cuts and Jobs Act which was effective
January 1, 2018 and true-ups and return to provision adjustments booked in 2017. The tax rate for 2017 would have been
28.6% without the impact of the deferred tax remeasurement adjustment.
Financial Condition
Total assets were $3.3 billion as of December 31, 2018, compared to $3.1 billion as of December 31, 2017. The
increase of $198.0 million, or 6.4%, due primarily to an increase in loans of $135.3 million, a $55.9 million increase in
cash and cash equivalents and a $6.8 million increase in securities.
Total liabilities were $2.8 billion as of December 31, 2018, compared to $2.6 billion as of December 31, 2017.
The increase of $156.6 million, or 5.9%, was due primarily to an increase in deposits of $163.3 million, partially offset by
a decrease of $5.2 million due to the redemption of a portion of our junior subordinated debt.
See further analysis in the related discussions that follow.
Loan Portfolio
As of December 31, 2018, gross loans were $2.5 billion, an increase of $135.3 million, or 5.8%, compared to
$2.3 billion at December 31, 2017. Loans grew from December 31, 2017 to December 31, 2018 due to organic growth,
needs of existing customers and demand. The loan portfolio by loan class as of the dates indicated was as follows:
(Dollars in thousands)
Commercial and industrial . . . . . . . . . . . . . . . . . . . .
Real estate:
Commercial real estate . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less deferred fees and unearned discount . . . . .
Less loans held for sale . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans as a percentage of deposits . . . . . . . . . . . .
Loans as a percentage of total assets . . . . . . . . . .
Credit Policies and Risk Management
December 31,
2018
519,779 $
2017
559,363 $
Increase (Decrease)
(39,584)
(7.1%)
$
795,733
515,533
282,011
221,194
39,421
11,076
68,382
2,453,129
6,306
—
2,446,823
88.5%
74.6%
$
738,293
449,211
258,584
220,305
40,433
11,256
40,344
2,317,789
4,785
1,460
2,311,544 $
88.8%
75.0%
57,440
66,322
23,427
889
(1,012)
(180)
28,038
135,340
1,521
(1,460)
135,279
7.8%
14.8%
9.1%
0.4%
(2.5%)
(1.6%)
69.5%
5.8%
We have lending policies and procedures in place that are designed to maximize loan income within an acceptable
level of risk. We employ centralized and thorough loan underwriting, a diversified loan portfolio and highly experienced
credit officers and credit analysts, including our Chief Credit Officer and Regional Credit Officers.
Our credit culture actively supports the extension of credit based on sound, fundamental lending principles and
we selectively extend credit to establish long - term relationships with our customers. Our credit officers are involved in the
underwriting, structuring and pricing process at inception of the lending opportunity and remain involved through approval
and we believe that our credit approval process provides for thorough underwriting and efficient decision - making. We
receive personal guarantees from the principal or principals on the majority of our commercial credits. Substantially all
our loans are made to borrowers located or operating in our primary market areas with whom we have ongoing
58
59
relationships across various product lines. Our reporting system provides management and our Board of Directors with
frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming
and potential problem loans. We actively manage the composition of our loan portfolio, including credit concentrations.
Our management administers a risk - based approach to effectively identify, measure, monitor, mitigate, control and manage
concentration risks.
The contractual maturity ranges of loans in our loan portfolio and loans with fixed and variable interest rates in
each maturity range as of date indicated were as follows:
(Dollars in thousands)
December 31, 2018
Commercial and industrial . . . . . . . . . . . . . . . . . . . . $
Real estate:
Commercial real estate . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fixed rate loans . . . . . . . . . . . . . . . . . . . . . . . . . . $
Variable rate loans . . . . . . . . . . . . . . . . . . . . . . . .
1 Year
or Less
1 Year Through
5 Years
After
5 Years
Total
272,734 $
219,047 $
27,998 $
519,779
120,563
128,196
15,132
8,742
23,455
9,698
23,390
601,910 $
171,623 $
430,287
483,172
352,032
46,404
35,935
15,865
1,280
42,935
1,196,670 $
634,769 $
561,901
191,998
35,305
220,475
176,517
101
98
2,057
654,549 $
287,420 $
367,129
795,733
515,533
282,011
221,194
39,421
11,076
68,382
2,453,129
1,093,812
1,359,317
Nonperforming Assets
Loans are considered past due if the required principal and interest payments have not been received as of the
date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may
be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may
be placed on nonaccrual status whether or not such loans are considered past due. In general, we place loans on nonaccrual
status when they become more than 90 days past due, unless the loan is in the process of collection or renewal and the
underlying collateral fully supports the carrying value of the loan. If the decision is made to continue accruing interest on
the loan, periodic reviews are made to confirm the accruing status of the loan and the probability that the Company will
collect all principal and interest amounts outstanding. We also place loans on nonaccrual status if they are 90 days or less
past due if the collection of principal or interest is in doubt. When interest accrual is discontinued, all unpaid accrued
interest is reversed from income. Interest income is subsequently recognized only to the extent cash payments are received
in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually
due are brought current and future payments are, in management’s opinion, reasonably assured. We feel that our
historically low percentage of nonperforming assets relative to our loan portfolio reflects our prudent underwriting and
proactive credit administration.
The components of nonperforming assets as of the dates indicated were as follows:
December 31,
(Dollars in thousands)
Nonaccrual loans by category:
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,317 $ 3,280
Real estate:
2018
2017
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruing loans 90 or more days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,517
—
656
—
3,490
—
3,490
3,216
252
898
—
7,646
—
7,646
Foreclosed assets, including other real estate:
298
Commercial real estate, construction and development, land and land development . . . . . . .
407
Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
705
Total foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,502 $ 8,351
0.33%
Nonperforming loans to total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.27%
Nonperforming assets to total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.14%
0.11%
12
—
12
Potential Problem Loans
From a credit risk standpoint, we classify loans in one of five categories: pass, special mention, substandard,
doubtful or loss. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan.
We review the ratings of our credits on a monthly basis. Ratings are adjusted to reflect the degree of risk and loss that is
believed to be inherent in each credit as of each monthly reporting period. Our methodology is structured so that specific
reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk
and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).
Pass— Credits in this category contain an acceptable amount of risk.
Special Mention—Credits in this category contain more than the normal amount of risk and are referred to as
“special mention” in accordance with regulatory guidelines. These credits possess clearly identifiable temporary
weaknesses or trends that, if not corrected or revised, may result in a condition that exposes the Company to higher level
of risk of loss.
Substandard—Credits in this category are “substandard” in accordance with regulatory guidelines and of
unsatisfactory credit quality with well - defined weaknesses or weaknesses that jeopardize the liquidation of the debt.
Credits in this category are inadequately protected by the current sound worth and paying capacity of the obligor or the
collateral pledged, if any. These credits are characterized by the distinct possibility that the Company will sustain some
loss if the deficiencies are not corrected. Often, the assets in this category will have a valuation allowance representative
of management’s estimated loss that is probable to be incurred. Substandard loans may also be placed on nonaccrual status
as deemed appropriate by management. Loans substandard and on nonaccrual status are considered impaired and are
evaluated for impairment.
Doubtful—Credits in this category are considered “doubtful” in accordance with regulatory guidelines, are
placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon
some near - term event which lacks certainty. Generally, these credits will have a valuation allowance based upon
management’s best estimate of the losses probable to occur in the liquidation of the debt.
Loss— Credits in this category are considered “loss” in accordance with regulatory guidelines and are considered
uncollectible and of such little value as to question their continued existence as assets on the Company’s financial
statements. Such credits are to be charged off or charged down when payment is acknowledged to be uncertain or when
60
61
the timing or value of payments cannot be determined. This category does not intend to imply that the debt or some portion
of it will never be paid, nor does it in any way imply that the debt will be forgiven.
The Company had no loans graded “loss” or “doubtful” at December 31, 2018 and 2017.
The internal ratings of our loans as of the dates indicated were as follows:
(Dollars in thousands)
December 31, 2018
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . $ 504,425
Real estate:
Pass
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
781,035
Construction and development . . . . . . . . . . . . . . . . . . .
511,329
1-4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
274,781
Multi-family residential . . . . . . . . . . . . . . . . . . . . . . . . .
221,194
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,140
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,048
61,569
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,404,521
(Dollars in thousands)
December 31, 2017
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . $ 535,589
Real estate:
Pass
722,503
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . . . . . . .
448,124
252,317
1-4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
212,899
Multi-family residential . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,144
11,223
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33,109
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,255,908
Allowance for Loan Losses
Special
Mention
Substandard
Total
$
5,768 $
9,586 $ 519,779
10,370
4,204
2,175
—
246
—
—
22,763 $
4,328
795,733
—
515,533
5,055
282,011
—
221,194
35
39,421
28
11,076
68,382
6,813
25,845 $ 2,453,129
$
Special
Mention
Substandard
Total
$
8,403 $
15,371 $ 559,363
2,951
565
—
7,406
246
—
—
19,571 $
738,293
12,839
449,211
522
258,584
6,267
220,305
—
40,433
43
11,256
33
7,235
40,344
42,310 $ 2,317,789
$
We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks
inherent in our loan portfolio. The amount of the allowance for loan losses should not be interpreted as an indication that
charge - offs in future periods will necessarily occur in those amounts. In determining the allowance for loan losses, we
estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined.
The balance of our allowance for loan losses is based on internally assigned risk classifications of loans, historical loan
loss rates, changes in our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current
economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations —Critical Accounting
Policies—Loans and Allowance for Loan Losses.” and “Item 8—Financial Statements and Supplementary Data—Note 1.”
In reviewing our loan portfolio, we consider risk elements applicable to particular loan types or categories to
assess the quality of individual loans. Some of the risk elements we consider include:
Commercial and industrial loans—the debt service coverage ratio (income from the business in excess of
operating expenses compared to loan repayment requirements), 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;
Commercial real estate loans and multi - family residential loans—the debt service coverage ratio, 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;
1 - 4 family residential mortgage loans— the borrower’s ability to repay the loan, including a consideration of the
debt - to - income ratio and employment and income stability, the loan - to - value ratio and the age, condition and marketability
of the collateral; and
Construction and development 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.
As of December 31, 2018, the allowance for loan losses totaled $23.7 million, or 0.97%, of gross loans and as of
December 31, 2017, the allowance for loan losses totaled $24.8 million, or 1.07%, of gross loans. Our allowance for loan
losses as of December 31, 2018 decreased by $1.1 million, or 4.4%, compared to December 31, 2017, due to recoveries
during 2018 and the reversal of the allowance for loan losses during 2018 as a result of strong credit quality, continuing
low nonperforming and impaired loans and minimal charge off history.
Activity in the allowance for loan losses for the periods indicated was as follows:
For the Years Ended December 31,
(Dollars in thousands)
Allowance for loan losses at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provision (recapture) for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs:
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate:
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
24,778 $
(1,756)
2017
25,006
(338)
1,928
904
171
1
4
1
3
2,108
120
—
8
93
—
1,125
Recoveries:
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate:
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Allowance for loan losses to end of period loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs (recoveries) to average loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,737
1,110
20
6
3
10
3
2,779
671
23,693 $
0.97%
(0.03%)
9
13
43
52
8
1,235
110
24,778
1.07%
0.00%
62
63
The allowance for loan losses by loan category as of the dates shown was as follows.
(Dollars in thousands)
Commercial and industrial . . . . . . . . . . . . . . .
Real estate:
Commercial real estate . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total allowance for loan losses . . . . . . . . . . .
Securities
2018
2017
December 31,
Amount
$
7,719
Percent
32.6 % $
Amount
7,257
Percent
29.3%
6,730
4,298
2,281
1,511
387
62
705
23,693
28.4 %
18.1 %
9.6 %
6.4 %
1.6 %
0.3 %
3.0 %
100.0 % $
10,375
3,482
1,326
1,419
566
68
285
24,778
41.9%
14.0%
5.4%
5.7%
2.3%
0.3%
1.1%
100.0%
$
As of December 31, 2018, the carrying amount of our securities totaled $230.0 million, compared to
$223.2 million as of December 31, 2017, an increase of $6.8 million, or 3.0%. The increase was the result of purchases
outpacing maturities, sales, calls, paydowns and the increase in net unrealized losses. Securities represented 7.0% and
7.2% of total assets as of December 31, 2018 and 2017, respectively.
Amortized cost and estimated fair value of investments in debt securities as of the dates shown were as follows:
(Dollars in thousands)
December 31, 2018
Debt securities available for sale:
State and municipal securities . . . . . . . . . . . . . . . . . . .
U.S. agency securities:
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities held to maturity:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
57,972
$
345
$
(626)
$
57,691
17,315
66,438
90,845
1,129
233,699
$
$
—
98
230
—
673
$
(434)
(1,122)
(2,216)
(41)
(4,439)
16,881
65,414
88,859
1,088
229,933
$
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
$
31
$
1
$
—
$
32
December 31, 2017
Debt securities available for sale:
State and municipal securities . . . . . . . . . . . . . . . . . . .
U.S. agency securities:
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities held to maturity:
$
60,861
$
1,173
$
(118)
$
61,916
17,315
61,878
82,510
1,104
223,668
$
$
—
50
330
—
1,553
$
(370)
(675)
(866)
(17)
(2,046)
16,945
61,253
81,974
1,087
223,175
$
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
$
33
$
2
$
—
$
35
The Company held 167 and 52 debt securities at December 31, 2018 and 2017, respectively, that were in a gross
unrealized loss position for 12 months or more. The unrealized losses are attributable primarily to changes in market
interest rates relative to those available when the securities were acquired. The fair value of these securities is expected to
recover as the securities reach their maturity or re - pricing date, or if changes in market rates for such investments decline.
Management does not believe that any of the debt securities are impaired due to reasons of credit quality. Accordingly, as
of December 31, 2018 and 2017, management believes the unrealized losses in the table above are temporary and no
impairment loss has been recorded.
Our mortgage - backed securities at December 31, 2018 and 2017 are agency securities. We do not hold any Fannie
Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations,
structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt - A or second lien elements
in our portfolio.
Maturities and weighted-average yield based on estimated annual income divided by the average amortized cost
of our debt securities portfolio as of the date indicated was as follows:
(Dollars in thousands)
December 31, 2018
State and municipal securities . . . $ 2,039
U.S. agency securities:
Amount Yield
1 Year
or Less
After 1 Year
to 5 years
Amount Yield
After 5 Years
to 10 Years
Amount Yield
After
10 Years
Total
Amount
Yield
Total
Yield
2.3 % $
4,527
2.6 % $
4,558
2.6 % $
46,567
2.9 % $
57,691
2.8 %
Debt securities . . . . . . . . . .
Collateralized mortgage
—
— %
16,881
1.7 %
—
— %
—
— %
16,881
1.7 %
obligations. . . . . . . . . . . .
Mortgage-backed securities .
Other securities . . . . . . . . . . . . .
—
61
1,088
Total debt securities . . . . . . . $ 3,188
—
— %
962
3.2 %
2.2 %
—
2.3 % $ 22,370
5,124
— %
3,380
3.4 %
— %
—
2.0 % $ 13,062
60,290
2.5 %
84,487
3.5 %
— %
—
2.8 % $ 191,344
65,414
2.8 %
88,890
2.7 %
— %
1,088
2.8 % $ 229,964
2.8 %
2.7 %
2.2 %
2.7 %
The contractual maturity of a collateralized mortgage obligation or mortgage - backed security is the date at which
the underlying mortgage matures and is not a reliable indicator of their expected life because borrowers have the right to
prepay their obligations at any time. The weighted-average life of our securities portfolio was 5.3 years with an estimated
modified duration, or anticipated holding period, of 4.6 years as of December 31, 2018.
A portion of our debt securities have contractual maturities extending beyond 10 years, bear fixed rates of interest
and are collateralized by residential mortgages. Repayment of principal on these bonds is primarily dependent on the cash
flows received from payments on the underlying collateral to the bond issuer and therefore, the likelihood of prepayment
is impacted by the economic environment. During a period of increasing interest rates, fixed rate mortgage-backed
securities do not tend to experience heavy prepayments and as a result, the average lives of these securities are lengthened.
If interest rates fall, prepayments tend to increase and as a result the lives of these securities are shortened.
As of December 31, 2018, we did not own securities of any one issuer, other than the U.S. government and its
agencies, for which aggregate adjusted cost exceeded 10.0% of consolidated shareholders’ equity.
Deposits
Total deposits as of December 31, 2018, were $2.8 billion, compared to $2.6 billion as of December 31, 2017, an
increase of $163.3 million due an $73.3 million increase in noninterest-bearing deposits and an increase of $90.0 million
in interest-bearing deposits. The increase in deposits between 2018 and 2017 is due to organic growth.
We offer a variety of deposit products, which have a wide range of interest rates and terms, including demand,
savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations,
electronic delivery channels and personalized service to attract and retain deposits.
64
65
Deposits as of the dates shown below were as follows:
For the Year Ended December 31,
2018
2017
(Dollars in thousands)
Interest-bearing demand accounts . . . . . . . . . . . . . . . . . . . . . . . . . $
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Saving accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates and other time deposits, $100,000 or greater . . . . . .
Certificates and other time deposits, less than $100,000 . . . . . . .
Total interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent
14.0%
27.0%
3.7%
6.6%
6.1%
57.4%
42.6%
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,766,282 100.0% $ 2,602,972 100.0%
Amount
363,015
702,299
95,842
172,469
159,558
1,493,183
1,109,789
Amount
387,457
737,770
96,962
189,007
172,028
1,583,224
1,183,058
14.0% $
26.7%
3.5%
6.8%
6.2%
57.2%
42.8%
Percent
Certificates of deposit by time remaining until maturity as of the dates indicated were as follows:
December 31,
(Dollars in thousands)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
63,482
57,471
84,476
102,864
23,734
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 361,035 $ 332,027
2018
71,817 $
50,966
119,180
108,436
10,636
Average balances and average rates paid on deposits for the dates indicated were as follows:
For the Year Ended December 31,
2018
2017
(Dollars in thousands)
Average
Balance
Interest-bearing demand accounts . . . . . . . . . . . . . . . . . . . . . . . . $ 362,498
94,754
Savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
714,565
173,160
Certificates and other time deposits, $100,000 or greater . . . . .
174,666
Certificates and other time deposits, less than $100,000 . . . . . .
Total interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,519,643
1,134,191
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,653,834
Rate
Average
Balance
349,672
88,883
721,327
175,793
167,675
1,503,350
1,031,707
0.40 % $ 2,535,057
0.23 % $
0.06 %
0.87 %
0.79 %
1.23 %
0.70 %
—
Rate
0.22 %
0.06 %
0.58 %
0.54 %
1.01 %
0.51 %
—
0.30 %
Average
Average
The ratio of average noninterest - bearing deposits to average total deposits was 42.7% and 40.7% for the years
ended December 31, 2018 and 2017, respectively.
Borrowings
Frost Line of Credit. On December 13, 2017, the Company entered into a loan agreement, or the Loan
Agreement, with Frost Bank, which provides for a $30.0 million revolving line of credit, or Line of Credit. On
December 13, 2018, the Company entered into an amended and restated loan agreement, or the Amended Agreement, with
Frost Bank, which extended the maturity date by one year and increased the Tangible Net worth requirement in the debt
covenants from $240 million to $300 million.
The Company can make draws on the Line of Credit for a period of 12 months beginning on the date of the
Amended Agreement, after which the Company will not be permitted to make further draws and the outstanding balance
will amortize over a period of 60 months. Interest accrues on outstanding borrowings at a rate equal to the maximum
“Latest” U.S. prime rate of interest per annum and payable quarterly in the first 12 months and thereafter quarterly principal
and interest payments are required over a term of 60 months. The entire outstanding balance and unpaid interest is payable
in full on December 13, 2024.
The Company may prepay the principal amount of any loan under the Amended Agreement without premium or
penalty. The obligations of the Company under the Amended Agreement are secured by a valid and perfected first priority
lien on all of the issued and outstanding shares of capital stock of the Bank.
Covenants made under the Amended Agreement include, among other things, the Company maintaining tangible
net worth of not less than $300 million, the Company maintaining free cash flow coverage ratio of not less than 1.25 to
1.00, the Bank’s Texas Ratio (as defined under the Loan Agreement) not to exceed 15%, the Bank’s Total Capital Ratio
(as defined under the Loan Agreement) of not less than 12% and restrictions on the ability of the Company and its
subsidiaries to incur certain additional debt. The Company was in compliance with these covenants at December 31, 2018.
As of December 31, 2018, there were no outstanding borrowings on this line and the Company did not draw on
this line during the period from December 13, 2017, when the Company entered the agreement, to December 31, 2018.
Junior Subordinated Debt. Prior to being acquired in 2008 by the Company, Crosby Bancshares, Inc. received
proceeds of junior subordinated debt held by a trust that is funded by common securities purchased by Crosby
Bancshares, Inc. and trust preferred securities in the amount of $5.0 million that are held by other investors. Funds raised
by the trust totaling $5.2 million were loaned to Crosby Bancshares, Inc. in the form of junior subordinated debt. This debt
was assumed by the Company at the date of acquisition. On December 17, 2018, the Crosby Statutory Trust I, or Crosby
Trust, redeemed all of the Crosby Trust’s issued and outstanding trust preferred securities as a result of the concurrent
redemption made by the Company of its junior subordinated debt securities held by the Crosby Trust. The aggregate
redemption price paid by the Company, including accrued and unpaid interest, was $5.2 million.
Prior to being acquired in 2007 by the Company, County Bancshares, Inc. received proceeds of junior
subordinated debt held by a trust that is funded by common securities, all of which were purchased by County
Bancshares, Inc. and trust preferred securities in the amount of $5.5 million that are held by other investors. Funds raised
by the trust totaling $5.7 million were loaned to County Bancshares, Inc. in the form of junior subordinated debt. This debt
was transferred to the Company at the date of acquisition. In 2015, the Company purchased approximately $4.1 million of
the outstanding preferred securities, reducing the outstanding preferred securities to $1.6 million.
In November 2018, the County Bancshares Trust I, or County Trust, agreed to redeem all of the County Trust’s
issued and outstanding trust preferred securities upon concurrent redemption made by the Company of its junior
subordinated debt securities held by the County Trust on January 7, 2019. The Company paid $5.7 million to pay its
obligation for the junior subordinated debt, including accrued and unpaid interest. The Company received $4.1 million
from the redemption of the preferred securities
Additional Lines of Credit. The FHLB allows us to borrow on a blanket floating lien status collateralized by
certain loans. As of December 31, 2018 and 2017, total borrowing capacity of $919.9 million and $793.3 million,
respectively, was available under this arrangement. During the second and third quarter of 2018, funds were borrowed
under this agreement on a short-term basis. As of December 31, 2018 and 2017, there were no outstanding FHLB advances.
As of December 31, 2018 and 2017, the Company maintained four federal funds lines of credit with commercial
banks that provide for the availability to borrow up to an aggregate of $75.0 million, in federal funds. There were no funds
under these lines of credit outstanding as of December 31, 2018 and 2017.
66
67
Liquidity and Capital Resources
Liquidity
Liquidity involves our ability to raise funds to support asset growth and acquisitions or reduce assets to meet
deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an
ongoing basis and manage unexpected events. Our primary source of funds is deposits and our primary use of funds is
loans. We do not expect a change in the primary source or use of our funds in the foreseeable future.
The composition of our funding sources and uses as a percentage of average total assets for the periods indicated
was as follows.
Sources of funds:
Deposits:
For the Years Ended December 31,
2018
2017
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uses of funds:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and other interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noninterest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total uses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average loans to average deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48.1 %
35.9 %
0.1 %
0.1 %
— %
0.4 %
0.7 %
14.7 %
100.0 %
75.8 %
7.2 %
8.1 %
0.5 %
8.4 %
100.0 %
90.1 %
50.5 %
34.7 %
0.1 %
— %
0.7 %
0.4 %
0.7 %
12.9 %
100.0 %
74.2 %
7.4 %
9.2 %
0.5 %
8.7 %
100.0 %
87.0 %
As of December 31, 2018, we had $831.6 million in outstanding commitments to extend credit and $31.7 million
in commitments associated with outstanding standby and commercial letters of credit. Since commitments associated with
letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the
actual future cash funding requirements.
As of December 31, 2018, we had no exposure to future cash requirements associated with known uncertainties
or capital expenditure of a material nature.
As of December 31, 2018, we had cash and cash equivalents of $382.1 million, compared to $326.2 million as of
December 31, 2017, an increase of $55.9 million. The increase was primarily due to cash provided by operations of $49.3
million due primarily to net income and $154.3 million of cash provided by financing activities, primarily due to increases
in deposits, partially offset by the $147.7 million of cash used in investing, primarily loans and securities. See “Item 8—
Financial Statements and Supplementary Data—Consolidated Statement of Cash Flows” for the year ended December 31,
2018.
Contractual Obligations
In the normal course of operations, the Company enters into certain contractual obligations, such as obligations
for operating leases, certificates of deposits and borrowings. Future cash payments associated with the Company’s
contractual obligations, as of the dates indicated were as follows:
1 year or
less
More than
3 years or
1 year but less more but less
than 5 years
than 3 years
5 years or
more
Total
(Dollars in thousands)
December 31, 2018
Non-cancelable future operating leases . . . . . . . . $
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debt (1) . . . . . . . . . . . . . . . . . . .
2,118
241,963
1,571
$
$
4,363
108,436
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 245,652 $ 112,799 $
December 31, 2017
Non-cancelable future operating leases . . . . . . . . $
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debt . . . . . . . . . . . . . . . . . . . .
1,573 $
2,803 $
205,429
—
102,864
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 207,002 $ 105,667 $
$ 10,048 $
4,565
10,636
—
21,094
361,035
1,571
15,201 $ 10,048 $ 383,700
—
—
2,975 $ 10,833 $
23,734
—
18,184
332,027
—
6,726
6,726
26,709 $ 17,559 $ 356,937
(1) Although the Company’s junior subordinated debt was not due until 2035, the Company had the right to request redemption of the
trust preferred securities to repay these obligations and elected to do so. In December 2018, the trust preferred securities held by
the Crosby Trust were redeemed and in January 2019 the trust preferred securities held by the County Trust were redeemed.
Off - Balance Sheet Items
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not
included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers.
These transactions include 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 our consolidated
balance sheets.
Our commitments associated with outstanding standby letters of credit and commitments to extend credit expiring
by period as of the dates indicated below were as follows:
(Dollars in thousands)
December 31, 2018
Standby letters of credit . . . . . . . . . . . . . . . . . . . . $ 22,789 $
Commitments to extend credit . . . . . . . . . . . . . . .
— $ 31,729
831,636
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 509,269 $ 271,039 $ 19,415 $ 63,642 $ 863,365
5,000 $
14,415
486,480
3,940 $
267,099
63,642
1 year or
less
More than
3 years or
1 year but less more but less
than 5 years
than 3 years
5 years or
more
Total
December 31, 2017
Standby letters of credit . . . . . . . . . . . . . . . . . . . . $ 27,996 $
Commitments to extend credit . . . . . . . . . . . . . . .
— $ 28,977
688,049
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 414,501 $ 258,204 $ 25,546 $ 18,775 $ 717,026
386,505
257,223
981 $
25,546
18,775
— $
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer
to a third-party. In the event of nonperformance by the customer, we have rights to the underlying collateral. Our credit
risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to our
customers.
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 above do not necessarily represent future cash requirements.
68
69
Capital Resources
Interest Rate Sensitivity and Market Risk
Total shareholders’ equity increased to $487.6 million at December 31, 2018 from $446.2 million at
December 31, 2017. Shareholders’ equity increased $47.3 million by current year net income and decreased $5.0 million
due to dividends and $2.6 million as a result of unrealized losses in our securities available for sale. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations —Results of Operations” for a discussion of
net income and “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Financial
Condition–Securities” regarding the change in unrealized losses in our securities available for sale portfolio.
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. At December 31, 2018 and 2017, the Company and
the Bank were in compliance with all applicable regulatory capital requirements and the Bank was classified as “well
capitalized” for purposes of the FDIC’s prompt corrective action regulations.
The OCC or the FDIC may require the Bank to maintain capital ratios above the required minimums and the
Federal Reserve may require the Company to maintain capital ratios above the required minimums. The regulatory capital
ratios for the Company and the Bank as of the dates indicated were as follows:
Minimum
Capital Required
for Capital Adequacy
Purposes
Minimum
Capital Required
Basel III
Fully Phased-in
Required to be
Considered Well
Capitalized
Actual
Amount
Ratio Amount
(Dollars in thousands)
December 31, 2018
Common Equity Tier I to
Risk-Weighted Assets:
Consolidated . . . . . . . . . . . $ 405,012 14.7% $ 123,885 4.5% $ 192,710 7.0%
N/A N/A
Bank Only . . . . . . . . . . . . . $ 363,140 13.2% $ 123,877 4.5% $ 192,697 7.0% $ 178,933 6.5%
Ratio Amount
Ratio Amount
Ratio
Tier I Capital to Risk-
Weighted Assets:
Consolidated . . . . . . . . . . . $ 406,257 14.8% $ 165,180 6.0% $ 234,005 8.5%
N/A N/A
Bank Only . . . . . . . . . . . . . $ 363,140 13.2% $ 165,169 6.0% $ 233,989 8.5% $ 220,225 8.0%
Total Capital to Risk-
Weighted Assets:
Consolidated . . . . . . . . . . . $ 430,238 15.6% $ 220,240 8.0% $ 289,065 10.5%
N/A N/A
Bank Only . . . . . . . . . . . . . $ 387,211 14.1% $ 220,225 8.0% $ 289,046 10.5% $ 275,282 10.0%
Tier 1 Leverage Capital to
Average Assets:
Consolidated . . . . . . . . . . . $ 406,257 12.8% $ 127,350 4.0% $ 127,350 4.0%
N/A N/A
Bank Only . . . . . . . . . . . . . $ 363,140 11.4% $ 127,350 4.0% $ 127,350 4.0% $ 159,188 5.0%
December 31, 2017
Common Equity Tier I to
Risk-Weighted Assets:
Consolidated . . . . . . . . . . . $ 361,322 14.2% $ 114,628 4.5% $ 178,310 7.0%
N/A N/A
Bank Only . . . . . . . . . . . . . $ 322,414 12.7% $ 114,252 4.5% $ 178,150 7.0% $ 165,425 6.5%
Tier I Capital to Risk-
Weighted Assets:
Consolidated . . . . . . . . . . . $ 367,722 14.4% $ 152,837 6.0% $ 216,519 8.5%
N/A N/A
Bank Only . . . . . . . . . . . . . $ 322,414 12.7% $ 152,700 6.0% $ 216,325 8.5% $ 203,600 8.0%
Total Capital to Risk-
Weighted Assets:
Consolidated . . . . . . . . . . . $ 392,878 15.4% $ 203,782 8.0% $ 267,464 10.5%
N/A N/A
Bank Only . . . . . . . . . . . . . $ 347,569 13.7% $ 203,600 8.0% $ 267,726 10.5% $ 254,501 10.0%
Tier 1 Leverage Capital to
Average Assets:
Consolidated . . . . . . . . . . . $ 367,722 12.3% $ 119,769 4.0% $ 119,769 4.0%
N/A N/A
Bank Only . . . . . . . . . . . . . $ 322,414 10.8% $ 119,403 4.0% $ 119,403 4.0% $ 149,253 5.0%
As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and
funds management policy provides management with the guidelines for effective funds management and we have
established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed
our sensitivity position within our established guidelines.
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 of 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 decrease in 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 manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We
do not enter into instruments such as leveraged derivatives, financial options, financial future contracts or forward delivery
contracts to reduce interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or
commodity price risk. We do not own any trading assets.
Our exposure to interest rate risk is managed by the Funds Management Committee of the Bank, in accordance
with policies approved by the Bank’s Board of Directors. The committee formulates strategies based on appropriate levels
of interest rate risk. In determining the appropriate level of interest rate risk, the committee 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 committee 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 committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and
commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis
of relationships between interest - earning assets and interest - bearing liabilities and an interest rate shock simulation model.
We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest
income and fair value of equity and the impact of changes in interest rates on other financial metrics. Contractual maturities
and re - pricing opportunities of loans are incorporated in the model, as are prepayment assumptions, maturity data and call
options within the investment portfolio. Average life of non - maturity deposit accounts are based on standard regulatory
decay assumptions and are incorporated into the model. The assumptions used are inherently uncertain and 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.
On a quarterly basis, we run two simulation models including a static balance sheet and dynamic growth balance
sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates
under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously and ramped rate
changes over a 12 - month horizon based upon parallel and non - parallel yield curve shifts. Parallel shock scenarios assume
instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non - parallel simulation
involves analysis of interest income and expense under various changes in the shape of the yield curve. Our internal policy
regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated
net income at risk for the subsequent one - year period should not decline by more than 10% for a 100 basis-point shift,
20% for a 200 - basis point shift and 30% for a 300 - basis point shift.
70
71
Simulated change in net interest income and fair value of equity over a 12 - month horizon as of the dates indicated
below were as follows:
Condition and Results of Operations —Financial Condition—Allowance for Loan Losses” and “Item 8—Financial
Statements and Supplementary Data—Note 1.”
Change in Interest
Rates (Basis Points)
+ 300
+ 200
+ 100
Base
−100
December 31, 2018
Percent Change
in Net Interest
Income
Percent Change
in Fair Value
of Equity
December 31, 2017
Percent Change
in Net Interest
Income
Percent Change
in Fair Value
of Equity
16.7 %
11.6 %
6.1 %
— %
(6.8)%
(3.1)%
(0.4)%
1.1 %
— %
(7.6)%
19.6 %
13.5 %
6.9 %
— %
(7.2)%
3.9 %
5.5 %
6.4 %
— %
(10.3)%
The results are primarily due to behavior of demand, money market and savings deposits during such rate
fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the
discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully
reflected in a gap analysis. The assumptions incorporated into the model 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 strategies.
Impact of Inflation
Our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K
have been prepared in accordance with GAAP. GAAP requires the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or
recession.
Unlike many industrial companies, substantially all our assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest
rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services.
However, other operating expenses do reflect general levels of inflation.
Critical Accounting Policies
Our accounting policies are integral to understanding our financial condition and results of operations. See “Item
8—Financial Statements and Supplementary Data—Note 1” for a description of our accounting policies. We believe that
of our accounting policies, the following may involve a higher degree of judgment and complexity:
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of probable and reasonably estimable credit
losses inherent in the loan portfolio. In determining the allowance, we estimate losses on individual impaired loans, or
groups of loans which are not impaired, where the probable loss can be identified and reasonably estimated. On a quarterly
basis, we assess the risk inherent in our loan portfolio based on qualitative and quantitative trends in the portfolio, including
the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry
or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the
impacts of local, regional and national economic factors on the quality of the loan portfolio.
Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant
judgment and the use of subjective measurements, including management’s assessment of overall portfolio quality. We
maintain the allowance at an amount we believe is sufficient to provide for estimated losses inherent in our loan portfolio
at each balance sheet date. Fluctuations in the provision for loan losses may result from management’s assessment of the
adequacy of the allowance. Changes in these estimates and assumptions are possible and may have a material impact on
our allowance, and therefore our financial position, liquidity or results of operations. For a description of the factors
considered in determining the allowance for loan losses see “Management’s Discussion and Analysis of Financial
Fair Values of Financial Instruments
The fair values of our financial instruments are based upon quoted market prices, where available. If quoted
market prices are not available, fair value is estimated based upon models that primarily use observable market - based
parameters as inputs. 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 the estimates.
Other - than - temporary Impairment of Debt Securities
We evaluate debt securities for other - than - temporary impairment, or 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. We assess whether we intend to sell, or it is more likely than not that we 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: (i) OTTI related to credit loss, which must be recognized in the income statement and (ii) 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 basis less the OTTI recognized in earnings becomes the new amortized cost basis of the
security.
Goodwill and Other Intangibles
The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for
impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely an impairment
has occurred. We first assesses qualitative factors to determine whether the existence of events or circumstances leads to
a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after
assessing the totality of events or circumstances, we determine it is not more likely than not that the fair value of a reporting
unit is less than its carrying amount then the fair value of the reporting unit is compared with the carrying amount of the
reporting unit. The fair value of net assets is estimated based on an analysis of our market value.
Determining the fair value of goodwill is considered a critical accounting estimate because the allocation of the
fair value of goodwill to assets and liabilities requires significant management judgment and the use of subjective
measurements. Variability in the market and changes in assumptions or subjective measurements used to allocate fair value
are reasonably possible and may have a material impact on our financial position, liquidity or results of operations.
Our other intangible assets include core deposits, loan servicing assets and customer relationship intangibles,
which can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of
being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Other intangible
assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets
may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Emerging Growth Company
The JOBS Act permits an “emerging growth company” to take advantage of an extended transition period to
comply with new or revised accounting standards applicable to public companies. However, we have decided not to take
advantage of this provision and we will comply with new or revised accounting standards to the same extent that
compliance is required for non - emerging growth companies. Our decision to opt out of the extended transition period
under the JOBS Act is irrevocable.
72
73
Recently Issued Accounting Pronouncements
See “Item 8—Financial Statements and Supplementary Data—Note 1.”
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We manage market risk, which, as a financial institution is primarily interest rate volatility, through the Asset-
Liability Committee of the Bank, in accordance with policies approved by our Board of Directors. We use an interest rate
risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity
and the impact of changes in interest rates on other financial metrics. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Interest Rate Sensitivity and Market Risk” for a discussion of how we
manage market risk.
Item 8: Financial Statements and Supplementary Data
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public
accounting firm due to a transition period established by rules of the SEC for an Emerging Growth Company.
Item 9B. Other Information.
None.
PART III.
Item 10. Directors, Executive Officers and Corporate Governance.
The information called for by this item is set forth in the Definitive Proxy Statement relating to the 2019 Annual
Meeting of Shareholders, or the 2019 Proxy Statement, to be filed with the SEC pursuant to Regulation 14A under the
Exchange Act within 120 days of the end of the fiscal year ended December 31, 2018 and is incorporated herein by
reference.
Our financial statements and accompanying notes are included in “Item 15 — Exhibits and Financial Statement
Schedules.”
Item 11. Executive Compensation.
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 Annual Report on Form 10-K.
Changes in internal control over financial reporting. There were no changes in the Company’s internal control
over financial reporting (as defined in Rules 13a - 15(f) and 15d - 15(f) under the Exchange Act) during the quarter ended
December 31, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Report on management’s assessment of internal control 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(f) and 15d - 15(f) under the Exchange Act). The Company’s internal control system is a process designed to
provide reasonable assurance regarding the preparation and fair presentation of published financial statements in
accordance with GAAP. All internal control systems, no matter how well designed, have inherent limitations and can only
provide reasonable assurance with respect to financial reporting.
As of December 31, 2018, management assessed the effectiveness of the Company’s internal control over
financial reporting based on the criteria for effective internal control over financial reporting established in “Internal
Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway
Commission in 2013. This assessment included controls over the preparation of the schedules equivalent to the basic
financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding
Companies (Form FR Y-9C) to meet the reporting requirements of Section 112 of the Federal Deposit Insurance
Improvement Act. Management’s assessment determined that the Company maintained effective internal controls over
financial reporting as of December 31, 2018.
The information called for by this item is set forth in the 2019 Proxy Statement, to be filed with the SEC within
120 days of the end of the fiscal year ended December 31, 2018 and is incorporated herein by reference to the 2019 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain information required by this item is included under the caption “Securities Authorized for Issuance Under
Equity Compensation Plans” in Part II, Item 5 of this Annual Report on Form 10-K. The other information called for by
this item is set forth in the 2019 Proxy Statement, to be filed with the SEC within 120 days of the end of the fiscal year
ended December 31, 2018 and is incorporated herein by reference to the 2019 Proxy Statement.
Item 13. Certain Relationships and Related Transactions and Director Independence.
The information called for by this item is set forth in our Definitive Proxy Statement relating to the 2019 Proxy
Statement, to be filed with the SEC within 120 days of the end of the fiscal year ended December 31, 2018 and is
incorporated herein by reference to the 2019 Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information called for by this item is set forth in our Definitive Proxy Statement relating to the 2019 Proxy
Statement, to be filed with the SEC within 120 days of the end of the fiscal year ended December 31, 2018 and is
incorporated herein by reference to the 2019 Proxy Statement.
74
75
PART IV.
Item 15. Exhibits, Financial Statements Schedules
All supplemental schedules to the consolidated financial statements have been omitted as inapplicable or because
the required information is included in our consolidated financial statements or the notes thereto included in this Annual
Report on Form 10-K.
Exhibit Index
Exhibit
Number
Description of Exhibit
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
First Amended and Restated Certificate of Formation of CBTX, Inc. (incorporated by reference to Exhibit 3.1
to the Company’s Form S-1 filed with the Commission on October 13, 2017, File No. 333-220930)
Second Amended and Restated Bylaws of CBTX, Inc. (incorporated by reference to Exhibit 3.2 to the
Company’s Form S-1 filed with the Commission on October 13, 2017, File No. 333-220930)
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Form S-1
filed with the Commission on October 13, 2017, File No. 333-220930)
Loan Agreement between CBTX, Inc., as borrower and Frost Bank, as lender, dated as of December 13, 2017
(incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the Commission on
December 14, 2017, File No. 001-38280)
Promissory Note between CBTX, Inc., as borrower and Frost Bank, as lender, dated as of December 13, 2017
(incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed with the Commission on
December 14, 2017, File No. 001-38280)
Pledge and Security Agreement between CBTX, Inc., as borrower and Frost Bank, as lender, dated as of
December 13, 2017 (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q filed with the
Commission on December 14, 2017, File No. 001-38280)
Amended and Restated Loan Agreement between CBTX, Inc., as borrower and Frost Bank, as lender, dated
as of December 13, 2018 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with
the Commission on December 14, 2018, File No. 001-38280)
Promissory Note between CBTX, Inc., as borrower and Frost Bank, as lender, dated as of December 13, 2018
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Commission on
December 14, 2018, File No. 001-38280)
Pledge and Security Agreement between CBTX, Inc., as borrower and Frost Bank, as lender, dated as of
December 13, 2018 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the
Commission on December 14, 2018, File No. 001-38280)
10.7†
Amended and Restated Employment Agreement between CBTX, Inc. and Robert R. Franklin, Jr., dated
October 28, 2017 (incorporated by reference to Exhibit 10.4 to the Company’s Form S-1 filed with the
Commission on October 30, 2017, File No. 333-220930)
10.8†
10.9†
Employment Agreement between CBFH, Inc. and Robert T. Pigott, dated March 6, 2013 (incorporated by
reference to Exhibit 10.5 to the Company’s Form S-1 filed with the Commission on October 13, 2017, File
No. 333-220930)
Employment Agreement between CBFH, Inc. and J. Pat Parsons, dated May 21, 2008 (incorporated by
reference to Exhibit 10.6 to the Company’s Form S-1 filed with the Commission on October 13, 2017, File
No. 333-220930)
10.10†
Amendment to Employment Agreement between CBFH, Inc. and J. Pat Parsons, dated December 31, 2008
(incorporated by reference to Exhibit 10.7 to the Company’s Form S-1 filed with the Commission on
October 13, 2017, File No. 333-220930)
10.11†
Amendment to Employment Agreement between CBFH, Inc. and J. Pat Parsons, dated March 6, 2013
(incorporated by reference to Exhibit 10.8 to the Company’s Form S-1 filed with the Commission on
October 13, 2017, File No. 333-220930)
10.12†
CBTX, Inc. 2017 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company’s
Form S-1 filed with the Commission on October 30, 2017, File No. 333-220930)
10.13†
Form of Restricted Stock Award Agreement under the CBTX, Inc. 2017 Omnibus Incentive Plan
(incorporated by reference to Exhibit 10.10 to the Company’s Form S-1 filed with the Commission on
October 13, 2017, File No. 333-220930)
10.14†
Form of Restricted Stock Unit Award Agreement under the CBTX, Inc. 2017 Omnibus Incentive Plan
(incorporated by reference to Exhibit 10.11 to the Company’s Form S-1 filed with the Commission on
October 13, 2017, File No. 333-220930)
10.15†
Form of Stock Option Award Agreement under the CBTX, Inc. 2017 Omnibus Incentive Plan (incorporated
by reference to Exhibit 10.12 to the Company’s Form S-1 filed with the Commission on October 13, 2017,
File No. 333-220930)
10.16†
Form of Stock Appreciation Right Award Agreement under the CBTX, Inc. 2017 Omnibus Incentive Plan
(incorporated by reference to Exhibit 10.13 to the Company’s Form S-1 filed with the Commission on
October 13, 2017, File No. 333-220930)
10.17†
VB Texas, Inc. 2006 Stock Option Plan (incorporated by reference to Exhibit 10.14 to the Company’s Form S-
1 filed with the Commission on October 13, 2017, File No. 333-220930)
10.18†
CBFH, Inc. 2014 Stock Option Plan (incorporated by reference to Exhibit 10.15 to the Company’s Form S-1
filed with the Commission on October 13, 2017, File No. 333-220930)
10.19†
Form of Stock Option Award Agreement and Notice of Stock Option Award under the CBFH, Inc. 2014 Stock
Option Plan (incorporated by reference to Exhibit 10.16 to the Company’s Form S-1 filed with the
Commission on October 13, 2017, File No. 333-220930)
10.20†
Executive Deferred Compensation Agreement between CommunityBank of Texas, NA and J. Pat Parsons,
dated December 30, 2011 (incorporated by reference to Exhibit 10.17 to the Company’s Form S-1 filed with
the Commission on October 13, 2017, File No. 333-220930)
10.7.1†
2017 Salary Continuation Agreement between CommunityBank of Texas, N.A. and Robert R. Franklin, Jr.,
dated October 28, 2017 (incorporated by reference to Exhibit 10.4.1 to the Company’s Form S-1 filed with
the Commission on October 30, 2017, File No. 333-220930)
10.21†
Acknowledgment Agreement between CommunityBank of Texas, NA and J. Pat Parsons, effective as of
January 1, 2015 (incorporated by reference to Exhibit 10.18 to the Company’s Form S-1 filed with the
Commission on October 13, 2017, File No. 333-220930)
76
77
10.22†
Form of Indemnification Agreement between CBTX, Inc. and its directors and certain officers (incorporated
by reference to Exhibit 10.19 to the Company’s Form S-1 filed with the Commission on October 13, 2017,
File No. 333-220930)
21.1* Subsidiaries of CBTX, Inc.
23.1* Consent of Grant Thornton LLP
31.1* Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1** Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2** Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*
The following materials from CBTX’s Annual Report on Form 10‑K for the year ended December 31, 2018,
formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance
Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income
(Loss), (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash
Flows and (vi) Notes to Consolidated Financial Statements.
* Filed with this Annual Report on Form 10 - K
** Furnished with this Annual Report on Form 10 - K
†
Indicates a management contract or compensatory plan.
Item 16. Form 10-K Summary
None.
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly authorized in Houston, Texas, on February 28,
2019.
SIGNATURES
CBTX, INC.
By:
/s/ Robert R. Franklin, Jr.
Robert R. Franklin, Jr.
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the
following persons in the capacities indicated on the dates set forth below.
Signature
Title
Date
Chairman, President and Chief Executive Officer
February 28, 2019
(Principal Executive Officer)
Chief Financial Officer
February 28, 2019
(Principal Financial and Accounting Officer)
Director
Director
Director
February 28, 2019
February 28, 2019
February 28, 2019
Vice Chairman
February 28, 2019
/s/ Robert R. Franklin, Jr.
Robert R. Franklin, Jr.
/s/ Robert T. Pigott, Jr.
Robert T. Pigott, Jr.
/s/ Michael A. Havard
Michael A. Havard
/s/ Tommy W. Lott
Tommy W. Lott
/s/ Glen W. Morgan
Glen W. Morgan
/s/ J. Pat Parsons
J. Pat Parsons
/s/ Joe E. Penland, Sr.
Joe E. Penland, Sr.
/s/ Wayne A. Reaud
Wayne A. Reaud
/s/ Joseph B. Swinbank
Joseph B. Swinbank
/s/ Sheila G. Umphrey
Sheila G. Umphrey
Director
Director
Director
Director
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
/s/ John E. Williams, Jr.
John E. Williams, Jr.
Director
/s/ William E. Wilson, Jr.
William E. Wilson, Jr.
Director
78
79
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for the Years Ended December 31, 2018, 2017 and 2016 . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017
and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31,
2018, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016 . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81
82
83
84
85
86
87
Board of Directors and Shareholders
CBTX, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of CBTX, Inc. (a Texas corporation) and subsidiaries (the
“Company”) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income,
changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and
the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of
its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with
accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence supporting 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/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2015.
Dallas, Texas
February 28, 2019
80
81
Item 1. Financial Statements
CBTX, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except par value and per share amounts)
December 31,
2018
2017
ASSETS
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest-bearing deposits at other financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits in other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net of allowance for loan loss of $23,693 and $24,778 at December 31, 2018
54,450 $
327,620
382,070
—
229,964
13,026
—
59,255
266,944
326,199
600
223,208
12,226
1,460
and 2017, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,423,130
2,286,766
Premises and equipment, net of accumulated depreciation of $29,867 and $26,612 at
December 31, 2018 and 2017, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net of accumulated amortization of $14,915 and $13,930 at
51,622
80,950
53,607
80,950
December 31, 2018 and 2017, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repossessed real estate and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,770
68,010
5,780
705
14,802
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,279,096 $ 3,081,083
5,775
71,525
7,201
12
13,821
Liabilities
LIABILITIES AND SHAREHOLDERS’ EQUITY
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,183,058 $ 1,109,789
1,493,183
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,602,972
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,525
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,726
Junior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23,646
2,634,869
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,583,224
2,766,282
2,498
1,571
21,120
2,791,471
Commitments and contingencies (Note 16)
Shareholders’ equity
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued . . . .
Common stock, $0.01 par value, 90,000,000 shares authorized, 25,777,693 and
25,731,504 shares issued at December 31, 2018 and 2017, 24,907,421 and
24,833,232 shares outstanding at December 31, 2018 and 2017, respectively . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost, 870,272 and 898,272 shares held at December 31, 2018
—
—
258
344,497
160,626
257
343,249
118,353
and 2017, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,781)
(15,256)
Accumulated other comprehensive loss, net of tax of $791 and $104 at
December 31, 2018 and 2017, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(389)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
446,214
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,279,096 $ 3,081,083
(2,975)
487,625
CBTX, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
For the Years Ended December 31,
2017
2018
2016
Interest income
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Funds and interest-bearing deposits . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (recapture) for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision (recapture) for loan losses . . . . . .
Noninterest income
Deposit account service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Card interchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Printing, stationery and office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and director fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Correspondent bank and customer related transaction expenses . . . . .
Loan processing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising, marketing and business development . . . . . . . . . . . . . . . .
Repossessed real estate and other asset expense . . . . . . . . . . . . . . . . . .
Security and protection expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telephone and communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per common share
123,895 $ 107,368 $ 103,723
3,801
2,427
109,951
5,347
3,944
116,659
6,020
5,844
135,759
10,586
4
73
15
420
11,098
124,661
(1,756)
126,417
6,281
660
3,741
1,815
1,755
14,252
7,652
5
—
906
322
8,885
107,774
(338)
108,112
5,800
1,524
3,453
1,580
1,847
14,204
51,524
9,394
2,053
2,677
1,576
1,161
985
3,537
265
448
1,824
72
1,276
1,530
3,694
82,016
58,653
11,364
47,289 $
48,573
9,151
2,176
2,629
1,208
1,097
1,079
3,105
286
461
1,461
609
1,355
1,316
3,786
78,292
44,024
16,453
27,571 $
7,073
5
—
1,061
266
8,405
101,546
4,575
96,971
6,538
1,922
3,352
1,356
2,581
15,749
44,239
10,100
2,300
2,484
679
1,194
1,167
2,481
320
509
789
318
1,718
1,444
3,760
73,502
39,218
12,010
27,208
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.90 $
1.89 $
1.23 $
1.22 $
1.23
1.22
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
82
83
CBTX, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unrealized gains (losses) on debt securities available for sale arising
For the Years Ended December 31,
2017
27,571 $
2018
47,289 $
2016
27,208
during the period, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustments for net realized gains included in net income . .
Change in related deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(3,302)
29
687
(2,586)
44,703 $
897
27
(391)
533
28,104 $
(3,622)
28
1,258
(2,336)
24,872
See accompanying notes to consolidated financial statements.
CBTX, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share amounts)
Additional
Accumulated
Other
Common Stock
Paid-In Retained
Treasury Stock
Comprehensive
Shares
Amount Capital Earnings Shares Amount Income (Loss) Total
Balance at December 31, 2015 . . . . .
Net income . . . . . . . . . . . . . . . . . . . .
Dividends on common stock, $0.20
per share . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . .
Exercise of stock options . . . . . . . . . .
Purchase of shares of treasury stock . .
Other comprehensive loss, net of tax .
Balance at December 31, 2016 . . . . .
Sale of common stock in initial
public offering, net of offering
costs of $7,241 . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . .
Dividends on common stock, $0.20
per share . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . .
Exercise of stock options . . . . . . . . . .
Other comprehensive income, net
22,971,504 $
—
230 $ 281,163 $ 72,461
27,208
—
—
(668,030) $ (10,955) $
—
—
1,414 $ 344,313
27,208
—
—
—
—
—
—
22,971,504
—
—
—
—
—
230
—
43
(2,705)
—
—
278,501
(4,395)
—
—
—
—
95,274
—
—
393,698
(635,100)
—
(909,432)
—
—
6,588
(11,079)
—
(15,446)
—
—
—
—
(2,336)
(922)
(4,395)
43
3,883
(11,079)
(2,336)
357,637
2,760,000
—
—
—
—
27
—
—
—
—
64,492
—
—
27,571
—
—
—
329
(73)
(4,561)
—
—
—
—
11,160
—
—
—
—
190
—
—
—
—
—
64,519
27,571
(4,561)
329
117
of tax . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . .
—
25,731,504
—
257
—
343,249
69
118,353
—
(898,272)
—
(15,256)
533
(389)
602
446,214
Net income . . . . . . . . . . . . . . . . . . . .
Dividends on common stock, $0.20
per share . . . . . . . . . . . . . . . . . . . .
Vesting of restricted stock, net of
shares withheld for employee tax
liabilities . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . .
Stock-based compensation expense . .
Other comprehensive loss, net of tax .
Balance at December 31, 2018 . . . . .
—
—
—
—
—
47,289
—
(5,016)
—
—
46,189
—
—
—
25,777,693 $
—
(172)
1
—
(181)
—
—
1,601
—
—
—
—
258 $ 344,497 $ 160,626
—
28,000
—
—
(870,272) $ (14,781) $
—
—
—
475
—
—
—
47,289
—
(5,016)
(171)
—
294
—
1,601
—
(2,586)
(2,586)
(2,975) $ 487,625
See accompanying notes to consolidated financial statements.
84
85
CBTX, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
CBTX, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except per Share Amounts)
For the Years Ended December 31,
2017
2016
2018
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile consolidated net income to net cash provided
by operating activities:
Provision (recapture) for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of premiums on securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains on debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation adjustments on repossessed real estate and other assets . . . . . . .
Insurance reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in operating assets and liabilities:
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Purchases of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales, calls and maturities of debt securities . . . . . . . . . . . . . .
Principal repayments of debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of loan participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of loan participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net contributions to equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease (increase) in time deposits in other banks . . . . . . . . . . . . . . . . .
Proceeds from sales of U.S. Small Business Administration loans . . . . . . . .
Redemption (purchases) of bank-owned life insurance . . . . . . . . . . . . . . . . .
Proceeds from sales of repossessed real estate and other assets . . . . . . . . . . .
Net sales (purchases) of premises and equipment . . . . . . . . . . . . . . . . . . . . .
Proceeds from insurance claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits . . . . . . . . . . . . . . . . .
Net increase (decrease) in interest-bearing deposits . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in securities sold under agreements to repurchase . .
Proceeds from sale of stock in initial public offering . . . . . . . . . . . . . . . . . . .
Offering costs for initial public offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments to tax authorities for stock-based compensation . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash, cash equivalents and restricted cash . . . . . .
Cash, cash equivalents and restricted cash, beginning . . . . . . . . . . . . . . . . . .
Cash, cash equivalents and restricted cash, ending . . . . . . . . . . . . . . . . . . . .
$
47,289
$
27,571
$
27,208
(1,756)
3,309
985
1,091
(1,815)
1,601
(734)
(54)
(660)
—
(287)
1,921
994
(2,563)
2,032
49,321
(495,870)
462,842
21,962
(147,416)
45,921
(35,281)
(800)
600
1,972
(1,700)
1,054
(1,293)
287
(147,722)
73,269
90,041
973
—
—
294
(171)
—
—
(5,155)
(4,979)
154,272
55,871
326,199
382,070
$
(338)
3,353
1,079
1,294
(1,580)
329
2,932
(50)
(1,524)
341
—
(420)
(3,156)
5,759
8,019
35,590
(355,525)
317,284
20,692
(187,030)
46,067
(18,491)
(162)
—
2,173
(15,000)
2,574
1,985
—
(185,433)
84,364
(22,152)
(818)
71,760
(7,241)
117
—
—
(27,679)
—
(4,412)
93,939
(55,904)
382,103
326,199
4,575
3,259
1,167
1,267
(1,356)
43
601
(52)
(1,922)
65
—
1,408
(1,188)
967
8,834
36,042
(406,173)
322,861
18,595
(78,553)
4,948
—
(52)
(200)
3,490
367
1,657
1,486
—
(131,574)
(28,533)
85,926
253
—
—
3,883
—
(11,079)
(3,321)
—
(4,395)
42,734
(52,798)
434,901
382,103
$
$
See accompanying notes to consolidated financial statements.
NOTE 1: BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING AND REPORTING POLICIES
Nature of Operations— CBTX, Inc., or the Company, or CBTX, operates 35 branches, 19 in the Houston market
area, 15 in Beaumont/East Texas market area and one in Dallas through its wholly-owned subsidiary, CommunityBank of
Texas, N.A., or the Bank. The Bank provides relationship-driven commercial banking products and services primarily to
small and mid-sized businesses and professionals with operations within the Bank’s markets. The Bank operates under a
national charter and therefore is subject to regulation by the Office of the Comptroller of the Currency, or OCC, and the
Federal Deposit Insurance Corporation, or FDIC. The Company is subject to regulation by the Federal Reserve.
Basis of Presentation—The accompanying consolidated financial statements include the accounts of the
Company and the Bank. All material intercompany balances and transactions have been eliminated in consolidation.
Reclassification— Within noninterest expense, software costs for 2017 and 2016 have been reclassified from
printing, stationery and office and other noninterest to a separate line to conform to the 2018 financial statement
presentation in the consolidated statements of income.
Segment Reporting—The Company has one reportable segment. The Company’s activities are interrelated and
each activity is dependent and assessed based on how each of the activities of the Company supports the others. For
example, lending is dependent upon the ability of the Company to fund itself with deposits and borrowings while managing
the interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company
as one segment or unit. The Company’s chief operating decision - maker, the Chief Executive Officer, uses the consolidated
results to make operating and strategic decisions.
Use of Estimates—In preparing financial statements in conformity with accounting principles generally accepted
in the U.S., or GAAP, management is required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the consolidated balance sheets and reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from these estimates. Material estimates that are particularly
susceptible to significant change in the near term include, but are not limited to determination of the allowance for loan
losses and fair values of financial instruments and goodwill and other intangible assets.
Cash and Due from Banks—Cash, cash equivalents and restricted cash include cash, interest - bearing and
noninterest - bearing transaction accounts with other banks and federal funds sold. The majority of cash, cash equivalents
and time deposits of the Company are maintained with major financial institutions in the U.S. and have original maturities
less than 90 days. Interest-bearing deposit accounts with these financial institutions may exceed the amount of insurance
provided on such deposits; however, these deposits typically may be redeemed upon demand and therefore, bear minimal
risk. The Company periodically evaluates the stability of the financial institutions with which it has deposits to monitor
this credit risk. The Company has cash deposits in correspondent financial institutions in excess of the amount insured by
the FDIC in the amount of $99.4 million and $91.8 million at December 31, 2018 and 2017, respectively.
The Bank is required to maintain regulatory reserves with the Federal Reserve Bank and the reserve requirements
for the Bank were $18.5 million and $15.8 million at December 31, 2018 and 2017, respectively. Additionally, as of
December 31, 2018 and 2017, the Company had $1.6 million in cash collateral used in its interest rate swap transactions.
The Federal Reserve Bank reserve requirements and the cash collateral used in interest rate swap transactions are
considered restricted cash.
Loans—Loans that management has the intent and ability to hold for the foreseeable future or until maturity or
pay - off, are measured at historical cost and generally reported at their outstanding unpaid principal balances, net of any
unearned income, charge - offs and unamortized deferred fees and costs. Interest income is accrued on the unpaid principal
balance. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest
86
87
income over the lives of the related loans. The Company records lines of credit at their funded portion. All unfunded
amounts for loans in process and credit lines are reported as unfunded commitments.
as necessary, to reflect the impact of current conditions and further adjusted for general economic conditions and other
risk factors both internal and external to the Company.
Government Guaranteed Loans—The Company originates loans that are partially guaranteed by the Small
Business Administration, or SBA, and the Company may sell the guaranteed portion of these loans as market conditions
and pricing allow for a gain to be recorded on the sale. Loan sales are recorded when control over the transferred asset has
been relinquished. Control over the transferred portion is deemed to be surrendered when the assets have been removed
from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right)
to pledge or exchange the transferred assets and the Company does not maintain effective control over the transferred
assets through an agreement to repurchase them before their maturity.
In calculating the gain on sale of SBA loans, the Company’s investment in the loan is allocated among the
unguaranteed portion of the loan, the servicing amount retained and the guaranteed portion of the loan sold, based on the
relative fair market value of each portion. The gain on the sold portion of the loan is recognized based on the difference
between the sale proceeds and the allocated investment.
Nonperforming and Impaired Loans—Nonperforming loans includes loans which have been categorized by
management as nonaccrual because of delinquency status or because collection of interest is doubtful. Loans restructured
in a troubled debt restructurings are not considered nonperforming if the loans are not delinquent and otherwise performing
in accordance with their restructured terms.
When the payment of principal or interest on a loan is delinquent for 90 days or more, or earlier in some cases,
the loan is placed on nonaccrual status, unless the loan is in the process of collection or renewal and the underlying
collateral fully supports the carrying value of the loan. If the decision is made to continue accruing interest on the loan,
periodic reviews are made to confirm the accruing status of the loan and the probability that the Company will collect all
principal and interest amounts outstanding.
When a loan is placed on nonaccrual status, interest accrued and uncollected during the current year prior to the
judgment of uncollectability is charged to operations, unless the loan is well secured with collateral values sufficient to
ensure collection of both principal and interest. Generally, any payments received on nonaccrual loans are applied first to
outstanding loan amounts, reducing the Company’s recorded investment in the loan and next to the recovery of charged - off
principal or interest amounts. Any excess is treated as recovery of lost interest. Loans are returned to accrual status when
all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Loans are considered impaired if, based on current information and events, it is probable that 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. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Interest income received on impaired loans is either applied against principal or
realized as interest income, according to management’s judgment as to the collectability of principal.
Troubled Debt Restructurings— From time to time, the Company modifies loan agreements with borrowers. A
modified loan is considered a troubled debt restructuring if the borrower is experiencing financial difficulties and the
borrower has been granted a concession. Modifications to loan terms may include interest rate reductions, principal
forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Interest is
generally accrued on such loans in accordance with the new terms. Loans restructured in a troubled debt restructurings are
not considered nonperforming if the loans are not delinquent and otherwise performing in accordance with their
restructured terms.
Allowance for Loan Losses—The allowance for loan losses represents management’s estimate of probable losses
inherent in the loan portfolio. Credit exposures deemed to be uncollectible are charged against these accounts. Cash
recovered on previously charged - off amounts is recorded as a recovery to these accounts. The allowance for loan losses
does not include amounts related to accrued interest receivable as accrued interest receivable is reversed when a loan is
placed on nonaccrual or is charged - off.
The Company employs a systematic methodology for determining the allowance for loan losses that consists of
two components: (i) specific valuation allowances based on probable losses on certain loans and (ii) historical valuation
allowances based on historical average loss experience for similar loans with similar characteristics and trends adjusted,
A specific allowance is established for loans considered impaired when the carrying value of the loan is more
than the present value of expected cash flows discounted at the loan’s effective interest rate or, as a practical expedient,
the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The Company uses
fair market value, less reasonable and customary costs to sell, for collateral dependent loans. In certain instances, a specific
allowance will be established to protect against market deterioration.
The allowance on the remaining portfolio segments is calculated using historical loss rates adjusted for qualitative
factors. Criticized and classified loans, not deemed impaired, are subject to an allowance based on the historical loss
migration analysis by grade adjusted for qualitative factors. Pass loans are subject to an allowance based on historical
losses by product type adjusted for qualitative factors.
The general component of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and historical losses in the portfolio. The general valuation
factor is based upon a more qualitative analysis of risk. Various risks are considered in the determination of the
environmental adjustment factor such as asset quality, lending management and staff, loan policies and procedures, loan
review, credit concentrations, loan volumes, collateral values, compliance and economic trends on both a local and national
level.
A majority of the loan portfolio is comprised of loans to businesses and individuals in the Houston metropolitan
and Beaumont/East Texas area. This geographic concentration subjects the loan portfolio to the general economic
conditions within this area. The risks created by this concentration have been considered by management in the
determination of the adequacy of the allowance for loan losses.
Loans Held for Sale—Loans held for sale include mortgage loans originated with the intent to sell on the
secondary market. These loans are held for an interim period, usually less than 30 days. Accordingly, these loans are
classified as held for sale and are carried at cost, which is determined on an aggregate basis and deemed to be the equivalent
of fair value based on the short-term nature of the loans.
Debt Securities— Debt securities that the Company intends to hold for an indefinite period of time are classified
as available for sale, carried at fair value and unrealized gains and losses are excluded from earnings and reported as a
separate component of shareholders’ equity until realized. Debt securities that the Company has both the positive intent
and ability to hold to maturity are classified as held to maturity and are carried at cost, adjusted for the amortization of
premiums and the accretion of discounts. Securities are evaluated for other - than - temporary impairment, or OTTI, on at
least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation. Premiums
and discounts are amortized and accreted to income using the level - yield method of accounting, adjusted for prepayments
as applicable. The specific identification method of accounting is used to compute gains or losses on the sales of these
assets.
Equity Investments— The Company’s equity investments are carried at cost and evaluated for impairment at least
annually and on an interim basis if an event or circumstance indicates that it is likely that an impairment has occurred as
these investments do not have readily determinable fair values.
Premises and Equipment—Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation expense is computed on the straight - line method over the estimated useful lives of the assets. Land is carried
at cost. Leasehold improvements are amortized over the life of the lease, plus renewal options or the estimated useful lives,
whichever is shorter. Buildings are depreciated over a period not to exceed 32 years. Depending upon the type of furniture
and equipment, the depreciation period will range from three to 10-years. Bank vehicles are amortized over a period of
three years. Gains and losses on dispositions are included in other noninterest income. During periods of real estate
development, interest on construction costs is capitalized if considered material by management.
Goodwill and Other Intangible Assets— Goodwill is not amortized and is evaluated for impairment at least
annually and on an interim basis if an event or circumstance indicates that it is likely that an impairment has occurred.
Impairment would exist if the fair value of the reporting unit at the date of the test is less than the goodwill recorded on
88
89
the financial statements. If an impairment of goodwill exists, a loss would then be recognized in the consolidated financial
statements to the extent of the impairment.
The Company’s identified intangibles are core deposits, customer relationship intangibles and loan servicing
assets. Our core deposit and customer relationship intangible assets are tested for impairment whenever events or changes
in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows.
Our servicing assets are assessed for impairment or increased obligation based on fair value at each reporting date.
Core deposit intangibles are amortized over a seven to 10-year period using an accelerated method in keeping
with the anticipated benefits derived from those core deposits. Customer relationship intangibles are amortized over a
15- year period on a straight-line basis.
Servicing assets are recognized as separate assets when rights are acquired through the sale of financial assets.
Servicing assets are initially recorded at fair market value and amortized in proportion to and over the service period and
assessed for impairment or increased obligation based on fair value at each reporting date. Fair value is based on the gross
coupon less an assumed contractual servicing cost or based upon discounted cash flows using market - based assumptions.
Servicing assets are amortized into noninterest expense in proportion to, and over the period of, the estimated future net
servicing income of the underlying financial assets. Servicing fee income is recorded for fees earned from servicing loans.
The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as
income when earned.
Bank-owned life insurance—The Company has purchased life insurance policies on covered individuals, which
are recorded at their cash surrender value. Changes in the cash surrender value of the policies are recorded in noninterest
income. Gains or losses and proceeds from maturities are recognized upon the death of a covered employee, on receipt of
a death notice or other verified evidence.
Repossessed Real Estate and Other Assets—Real estate and other assets acquired through repossession or
foreclosure are held for sale and are recorded at the fair value of the asset less estimated costs to sell. Outstanding loan
balances are reduced to reflect this value through charges to the allowance for loan losses. If the fair value of the
repossessed real estate and other assets declines after foreclosure, adjustments to reflect changes in fair value are
recognized in income in the period such determinations are assessed. Required developmental costs associated with
foreclosed property under construction are capitalized and considered in determining the fair value of the property.
Operating expenses of these assets, net of related income and gains and losses on their disposition are included in other
noninterest income or expense.
Other Assets—Other assets include accrued interest receivables on loans and investments, prepaid expenses and
other miscellaneous assets.
Repurchase Agreements—The Company utilizes securities sold under repurchase agreements to facilitate the
needs of our customers and to facilitate short-term borrowing needs. Securities sold under agreements to repurchase are
stated at the amount of cash received in the transaction. The Company monitors collateral levels on a continuous basis and
may be required to provide additional collateral based on the fair value of the underlying securities.
Derivative Financial Instruments—All derivatives are recorded at fair value on the balance sheet. Derivatives
executed with the same counterparty are generally subject to master netting arrangements. Fair value amounts recognized
for derivatives and fair value amounts recognized for the right/obligation to reclaim/return cash collateral are not offset
for financial reporting purposes. The Company had no derivative instruments that qualified for hedge accounting during
the periods reported herein, but it may in the future as circumstances arise.
Fair Value Measurements—Fair values of financial instruments are based upon quoted market prices, where
available. If such quoted market prices are not available, fair value is estimated based upon models that primarily use
observable market - based parameters as inputs. 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 the estimates.
Income Taxes—The Company prepares and reports income taxes on a consolidated basis. Deferred tax assets and
liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected
to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most
likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future
taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is
more likely than not that the deferred tax assets will be realized
The Company may recognize the tax benefit of an uncertain tax position if it is more likely than not that the tax
position will be sustained upon examination by the taxing authorities based on the technical merits of the position. For tax
positions meeting the more likely than not threshold, the amount recognized in the financial statements would be the
benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
Transfers of Financial Assets—Transfers of financial assets are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is deemed to be surrendered when the assets have been isolated
from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right)
to pledge or exchange the transferred assets and the Company does not maintain effective control over the transferred
assets through an agreement to repurchase them before their maturity.
The Company’s loan participations sold subject to this guidance which met the conditions to be treated as a sale
were recorded as such. Any securities sold under agreements to repurchase that did not meet the sale criteria are treated as
a secured borrowing with pledge of collateral and included in securities available for sale and repurchase agreements in
the Company’s consolidated balance sheets.
Stock - Based Compensation—Stock-based compensation is recognized as compensation cost in the consolidated
statements of income based on the fair value on the date of grant. A Black - Scholes model is utilized to estimate the fair
value of stock options and the market value of the Company’s common stock at the date of grant is used as the estimate
of fair value of restricted stock. Compensation expense for awards not based on performance criteria is recognized over
the required service period, on a straight-line basis. The impact of forfeitures is recognized as they occur.
The number of shares earned under the Company’s performance-based restricted stock award agreements is based
on the achievement of certain levels of certain performance goals. The fair value of performance-based restricted stock is
estimated based on the market value of the Company’s common stock at the date of grant. Compensation expense for
performance-based restricted stock is recognized for the probable award level over the period estimated to achieve the
performance conditions and other goals, on a straight-line basis. If the probable award level and/or the period estimated to
be achieved change, compensation expense will be adjusted via a cumulative catch-up adjustment to reflect these changes.
The performance conditions and other goals must be achieved within five years or the awards expire.
Earnings Per Share— Basic earnings per common share is computed as net income available to common
shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings
per common share is computed using the weighted-average shares determined for the basic earnings per share computation
plus the potential dilution that could occur if outstanding stock options were exercised and restricted stock awards were
vested and converted into common stock using the treasury stock method.
Accounting Standards Recently Adopted
Accounting Standards Update, or ASU 2014-09 (Topic 606): Revenue from Contracts with Customers. The
Company adopted ASU 2014-09 effective January 1, 2018 with no material impact to the Company’s consolidated
financial statements. The Company elected to use the modified retrospective transition method, which requires application
of ASU 2014-09 to uncompleted contracts at the date of adoption. Periods prior to the date of adoption were not
retrospectively revised as the impact of ASU 2014-09 was not material.
ASU 2014 - 09 requires entities to recognize revenue in a way that depicts the transfer of goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. A majority of the Company’s revenue is derived from interest income on financial assets, which is not
within the scope of ASC 606. Income from changes in the cash surrender value of bank-owned life is also not within the
scope of ASC 606.
90
91
The Company’s revenue-generating activities that are within the scope of ASC 606 are included in its
consolidated income statements in noninterest income. See table below. The Company’s revenue recognition for revenue
streams within the scope of ASC 606 did not materially change from previous practice. The Company generally fully
satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are
typically fixed and charged at a point in time based on activity.
(Dollars in thousands)
Deposit account service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Card interchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
6,281
660
3,741
1,815
$
$
5,800
1,524
3,453
1,580
2016
6,538
1,922
3,352
1,356
For the Years Ended December 31,
2017
Deposit account service charges are fees from the Company’s customers for deposit related services, such as
monthly account maintenance and activity or transaction-based fees. Revenue is recognized when the Company’s
performance obligation is completed, which is generally monthly for account maintenance services or when a transaction
is completed for activity or transaction-based fees. Payment for such performance obligations are received at the time the
performance obligation is satisfied.
Net gain on sale of assets includes gains on sales of fixed assets, gains on sales of loans and gains on sales of
other real estate owned, or OREO. Gains on sales of loans are excluded from ASC 606. The performance obligation in the
sale of OREO or fixed assets is delivery of control over the property to the buyer. The Company does not typically provide
financing and the transaction price is identified in the purchase and sale agreement. If the Company provides financing,
the Company must determine a transaction price depending on if the sales contract is at market terms and taking into
account the credit risk inherent in the sale agreement.
Card interchange fees are fees generated from debit card transactions. Revenue is recognized when the
Company’s performance obligation is completed, which is generally when a transaction is completed. Payment for such
performance obligations are generally received at the time the performance obligation is satisfied.
Other noninterest income includes a variety of items including wire transfer fee income, ATM fee income, letters
of credit fee income and swap fee income. Revenue is recognized when the Company’s performance obligation is
completed, which is generally when a transaction is completed. Payment for such performance obligations are generally
received at the time the performance obligation is satisfied.
ASU 2016 - 01, Financial Instruments - Overall (Subtopic 825 - 10): Recognition and Measurement of Financial
Assets and Financial Liabilities. The amendments in this update address certain aspects of recognition, measurement,
presentation and disclosure of financial instruments. ASU 2016 - 01, among other things, (i) requires equity investments,
with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies
the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative
assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and
significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured
at amortized cost on the balance sheet, (iv) clarifies that entities use the exit price notion when measuring the fair value of
loans for disclosure purposes and not use a practicability exception, (v) requires an entity to present separately in other
comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the
instrument - specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair
value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by
measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial
statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related
to available - for - sale investments. ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—
Overall (Subtopic 825-10) clarifies certain aspects of ASU 2016-01. The Company implemented ASU 2016-01 and
ASU 2018-03 effective January 1, 2018 with no significant impact to the Company’s consolidated financial statements.
See Note 14 — Fair Value Disclosures.
Accounting Standards Not Yet Adopted
ASU 2016 - 02, Leases (Topic 842): ASU 2016 - 02 will, among other things, require lessees to recognize a lease
liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a
right - of - use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the
lease term. ASU 2018-10, Codification Improvements to Topic 842, Leases was issued in July 2018 to clarify narrow
aspects of ASU 2016-02. In addition, ASU 2018-11, Leases (Topic 842) was also issued in July 2018 and allows
application of ASU 2016-02 at the date of the adoption date and recognize a cumulative-effect adjustment to retained
earnings.
The standard applies to all leases existing at the date of initial application using a modified retrospective approach.
An entity may choose to use either (i) the effective date or (ii) the beginning of the earliest comparative period presented
in the financial statements as its date of initial application. If an entity chooses the second option, the transition
requirements for existing leases also apply to leases entered into between the date of initial application and the effective
date and prior period financial statements included for comparison in the current financial statements are revised to reflect
the adoption, including footnote disclosures required by the new standard. The Company is adopting the new standard on
January 1, 2019, using the effective date as our date of initial application as allowed in the first option. Our financial
statements and related footnotes will not be updated for ASU 2016-02 for dates and periods before the date of adoption.
The Company has elected to apply certain practical expedients for transition and under those expedients the
Company will not to reassess prior accounting decisions regarding the identification, classification and initial direct costs
for leases existing at the effective date. The Company has also elected to use hindsight in determining lease term when
considering options to extend the lease and the Company has chosen to exclude short-term leases defined as lease terms
of 12 months or less. The Company has elected to separate non-lease components from lease components in its application
of ASU 2016-02.
The most significant impact will be an increase in assets due to the addition of right-of-use assets for assets
underlying its operating leases and an increase in liabilities reflecting its liability to make the lease payments under these
operating leases. The Company expects to record right-of-use assets totaling approximately $13.2 million and lease
liabilities totaling approximately $15.4 million. Rent expense is not expected to differ significantly from that recognized
in previous years.
ASU 2016 - 13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. 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. In addition, ASU 2016 - 13 amends the accounting for credit
losses on available - for - sale debt securities and purchased financial assets with credit deterioration. ASU 2016 - 13 will be
effective on January 1, 2020.
The Company is in the process of developing its process and methodology, with the assistance of an outside
consultant. Existing technology is being adapted to conform to the requirements of ASU 2016-13. The adoption of ASU
2016-01 will require changes to the Company’s accounting policies and disclosures for credit losses on financial
instruments. The Company is continuing to evaluate the impact of this pronouncement on the allowance for credit losses
and related future provisions.
ASU 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. In addition, the amendment eliminates the requirements
for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that
qualitative test, to perform Step 2 of the goodwill impairment test. For public companies, ASU 2017 - 04 is effective for
fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company will adopt ASU 2017-04 for its goodwill impairment
testing during the year ended December 31, 2019.
92
93
Cash Flow Reporting— Supplemental disclosures of cash flow information are as follows for the years ended
The amortized cost and estimated fair value of debt securities by contractual maturities as of the dates shown
December 31, 2018, 2017 and 2016:
below were as follows:
(Dollars in thousands)
Supplemental disclosures of cash flow information:
Cash paid for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash paid for interest on deposits and repurchase agreements . . . . . . . . . .
Cash paid for interest on notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for interest on junior subordinated debt . . . . . . . . . . . . . . . . . . . .
Supplemental disclosures of non-cash flow information:
Dividends accrued for restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repossessed real estate and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOTE 2: DEBT SECURITIES
For the Years Ended December 31,
2017
2018
2016
$
11,627
10,391
—
412
$
13,752
7,701
1,078
315
43
349
11
881
11,390
7,051
1,063
258
—
2,671
The amortized cost and fair values of investments in debt securities as of the dates shown below were as follows:
(Dollars in thousands)
December 31, 2018
Debt securities available for sale:
State and municipal securities . . . . . . . . . . . . . . . . . . .
U.S. agency securities:
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities held to maturity:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
57,972
$
345
$
(626)
$
57,691
17,315
66,438
90,845
1,129
233,699
$
$
—
98
230
—
673
$
(434)
(1,122)
(2,216)
(41)
(4,439)
16,881
65,414
88,859
1,088
229,933
$
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
$
31
$
1
$
—
$
32
December 31, 2017
Debt securities available for sale:
State and municipal securities . . . . . . . . . . . . . . . . . . .
U.S. agency securities:
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities held to maturity:
$
60,861
$
1,173
$
(118)
$
61,916
17,315
61,878
82,510
1,104
223,668
$
$
—
50
330
—
1,553
$
(370)
(675)
(866)
(17)
(2,046)
16,945
61,253
81,974
1,087
223,175
$
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
$
33
$
2
$
—
$
35
(Dollars in thousands)
December 31, 2018
Amounts maturing in:
1 year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . .
5 years through 10 years . . . . . . . . . . . . . . . . . . . . . .
After 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31, 2017
Amounts maturing in:
1 year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . .
5 years through 10 years . . . . . . . . . . . . . . . . . . . . . .
After 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Debt Securities Available for Sale
Amortized
Cost
Fair
Value
Debt Securities Held to Maturity
Amortized
Cost
Fair
Value
3,224
22,784
13,127
194,564
233,699
6,203
26,811
9,215
181,439
223,668
$
$
$
$
3,188
22,370
13,062
191,313
229,933
6,194
26,635
9,348
180,998
223,175
$
$
$
$
—
—
—
31
31
—
—
—
33
33
$
$
$
$
—
—
—
32
32
—
—
—
35
35
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Debt securities with a carrying amount of $56.5 million, $6.1 million and $302,000 were sold during the years
ended December 31, 2018, 2017 and 2016, respectively.
At December 31, 2018 and 2017, debt securities with a carrying amount of approximately $49.9 million and $58.7
million respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or
permitted by law. Pledged securities are maintained with our safekeeping agent.
The Company held 167 and 52 debt securities at December 31, 2018 and 2017, respectively, that were in a gross
unrealized loss position for 12 months or more as illustrated in the table below. The unrealized losses are attributable
primarily to changes in market interest rates relative to those available when the securities were acquired. The fair value
of these securities is expected to recover as the securities reach their maturity or re - pricing date, or if changes in market
rates for such investments decline. Management does not believe that any of the debt securities are impaired due to reasons
of credit quality. Accordingly, as of December 31, 2018 and 2017, management believes the unrealized losses detailed in
the table below are temporary and no impairment loss has been recorded in the Company’s consolidated statements of
income for the years ended December 31, 2018, 2017 and 2016.
94
95
the SBA. There are limited to no observable price changes in orderly transactions for identical investments or similar
investments from the same issuers that are actively traded and as a result, these investments are stated at cost. At
December 31, 2018 and 2017, the Company had $3.0 million and $3.8 million, respectively, in outstanding unfunded
commitments to these funds, which are subject to call.
The Company’s equity investments are evaluated for impairment based on an assessment of qualitative indicators.
Impairment indicators to be considered include, but are not limited to (i) a significant deterioration in the earnings,
performance, credit rating, asset quality or business prospects of the investee, (ii) a significant adverse change in the
regulatory, economic or technological environment of the investee, (iii) a significant adverse change in the general market
conditions of either the geographical area or the industry in which the investee operates, (iv) a bona fide offer to purchase,
an offer by the investee to sell, or completed auction process for the same or similar investment for an amount less that the
carrying amount of that investment. There were no such qualitative indicators as of December 31, 2018.
NOTE 4: LOANS
Loans by loan class as of the dates shown below were as follows:
(Dollars in thousands)
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate:
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less deferred loan fees and unearned discounts . . . . . . . . . .
Less allowance for loan loss . . . . . . . . . . . . . . . . . . . . . . . . . .
Less loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2018
519,779
$
21.2%
$
2017
559,363
24.1%
795,733
515,533
282,011
221,194
39,421
11,076
68,382
32.4%
21.0%
11.5%
9.0%
1.6%
0.5%
2.8%
2,453,129 100.0%
738,293
449,211
258,584
220,305
40,433
11,256
40,344
31.9%
19.4%
11.2%
9.5%
1.7%
0.5%
1.7%
2,317,789 100.0%
(6,306)
(23,693)
—
2,423,130
$
(4,785)
(24,778)
(1,460)
2,286,766
$
Accrued interest receivable for loans is $6.8 million and $6.1 million at December 31, 2018 and 2017,
respectively and is included in other assets in the consolidated balance sheets.
Debt securities with unrealized losses as of the dates shown below, aggregated by investment category and the
length of time were as follows:
(Dollars in thousands)
December 31, 2018
Debt securities available for sale:
Less Than Twelve Months
Fair
Value
Gross
Unrealized
Losses
Twelve Months or More
Gross
Unrealized
Losses
Fair
Value
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. agency securities:
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
20,892 $
(324) $
6,584 $
(302)
—
8,854
21,745
—
51,491 $
—
(81)
(368)
—
16,882
46,157
46,183
1,088
(773) $ 116,894 $
(434)
(1,041)
(1,848)
(41)
(3,666)
December 31, 2017
Debt securities available for sale:
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. agency securities:
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,494 $
(3) $
6,516 $
(115)
4,464
44,116
22,079
—
73,153 $
(55)
(380)
(123)
—
12,481
9,938
32,538
1,087
(561) $ 62,560 $
(315)
(295)
(743)
(17)
(1,485)
NOTE 3: EQUITY INVESTMENTS
The Company’s unconsolidated investments that are considered equity securities as they represent ownership
interests such as common or preferred stock were as follows for the dates indicated below.
(Dollars in thousands)
Federal Reserve stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Independent Bankers Financial Corporation stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Community Reinvestment Act investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2018
9,271 $
1,250
141
2,364
13,026 $
2017
9,271
1,189
141
1,625
12,226
Banks that are members of the Federal Home Loan Bank System, or FHLB, are required to maintain a stock
investment in the FHLB calculated as a percentage of aggregate outstanding mortgages, outstanding FHLB advances and
other financial instruments. Banks that are members of the Federal Reserve System are required to annually subscribe to
Federal Reserve Bank stock in specific ratios to the Bank’s equity. Although FHLB and Federal Reserve Bank Stock are
considered equity securities, they do not have readily determinable fair values because ownership is restricted and they
lack a market. These investments can be sold back only at their par value of $100 per share and can only be sold to the
Federal Home Loan Banks or Federal Reserve Banks or to another member institution. In addition, the equity ownership
rights are more limited than would be the case for a public company, because of the oversight role exercised by regulators
in the process of budgeting and approving dividends. As a result, these investments are carried at cost and evaluated for
impairment.
The Company also holds an investment in the stock of The Independent Bankers Financial Corporation, or TIB.
This investment has limited marketability. As a result, these investments are carried at cost and evaluated for impairment.
The Company has investments in two private investment funds and a limited partnership. These investments are
qualified Community Reinvestment Act, or CRA, investments under the Small Business Investment Company program of
96
97
Loan Participations Purchased and Sold
The following is an aging analysis of the Company’s loans, segregated by loan class, as of the dates shown below:
From time to time, the Company will acquire and dispose of interests in loans under participation agreements
with other financial institutions. Loan participations purchased and sold during the years ending December 31, 2018, 2017
and 2016, by loan class, are summarized as follows:
(Dollars in thousands)
December 31, 2018
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31, 2017
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31, 2016
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Construction and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Loans Guaranteed by the SBA
Participations
Purchased
During the
Period
Participations
Sold
During the
Period
7,000 $
28,281
—
35,281 $
— $
12,885
5,606
18,491 $
1,620
35,000
9,301
45,921
23,000
20,505
2,562
46,067
— $
—
— $
654
4,294
4,948
The Company participates in the SBA loan program. When advantageous, the Company will sell the guaranteed
portions of these loans with servicing retained. SBA loans that were sold with servicing retained during the years ended
December 31, 2018, 2017 and 2016 were $2.0 million, $2.2 million and $3.5 million. Net gains recognized on sales of
SBA loans were $153,000, $149,000 and $326,000 for the years ended December 31, 2018, 2017 and 2016 and are
included in net gain on sales of assets in the consolidated income statements.
NOTE 5: LOAN PERFORMANCE
Nonaccrual loans, segregated by loan class, as of the dates shown below were as follows:
(Dollars in thousands)
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate:
December 31,
2018
2017
1,317 $
3,280
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,517
—
656
—
3,490 $
3,216
252
898
—
7,646
Interest income that would have been earned under the original terms of the nonaccrual loans was $163,000
$402,000 and $779,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
(Dollars in thousands)
December 31, 2018
Commercial and industrial . . . . . . . . . $
Real estate:
30 to 59 days 60 to 89 days
past due
past due
greater Total past Total current
past due
due
loans
past due and
Total loans still accruing
90 days or
90 days
178 $
881 $
154 $ 1,213 $
518,566 $
519,779 $
Commercial real estate . . . . . . . .
Construction and development . .
1-4 family residential . . . . . . . . .
Multi-family residential . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . $
68
359
395
—
28
—
—
1,028 $
1,089
4,204
111
—
—
—
—
6,285 $
605
—
36
—
—
—
—
795 $ 8,108 $ 2,445,021 $ 2,453,129 $
795,733
515,533
282,011
221,194
39,421
11,076
68,382
793,971
510,970
281,469
221,194
39,393
11,076
68,382
1,762
4,563
542
—
28
—
—
December 31, 2017
Commercial and industrial . . . . . . . . . $
Real estate:
Commercial real estate . . . . . . . .
Construction and development . .
1-4 family residential . . . . . . . . .
Multi-family residential . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . $
943 $
1,071 $
2,535 $ 4,549 $
554,814 $
559,363 $
337
400
807
—
3
—
—
2,490 $
841
—
—
—
25
—
—
1,937 $
1,866
—
143
—
—
—
—
3,044
400
950
—
28
—
—
735,249
448,811
257,634
220,305
40,405
11,256
40,344
738,293
449,211
258,584
220,305
40,433
11,256
40,344
4,544 $ 8,971 $ 2,308,818 $ 2,317,789 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Loans, segregated by loan class, which were restructured due to the borrower’s financial difficulties during the
years ending December 31, 2018 and 2017, which remain outstanding as of the end of those periods were as follows:
(Dollars in thousands)
December 31, 2018
Commercial and industrial . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2017
Commercial and industrial . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-modification
Number
of Loans
Outstanding
Recorded
Investment
Post-modification recorded investment
Extended
Maturity,
Restructured
Maturity and Payments and
Extended
Restructured Extended Restructured
Payments
Maturity Payments
Adjusted
Interest Rate
6 $
3
1
10 $
2 $
4
6 $
1,419 $
1,406
1,646
4,471 $
916 $
1,406
—
2,322 $
— $
—
—
— $
503 $
—
—
503 $
1,178 $
970
2,148 $
— $
146
146 $
— $
667
667 $
1,178 $
157
1,335 $
—
—
1,646
1,646
—
—
—
The recorded investment in troubled debt restructurings was $11.4 million and $18.2 million as of December 31,
2018 and 2017, respectively. As of December 31, 2018 and 2017, $1.8 million and $4.8 million of restructured loans were
nonaccrual loans and $9.6 million and $13.4 million of restructured loans were accruing interest as of those periods. At
December 31, 2018, the Company had an outstanding commitment to potentially fund $2.1 million on a line of credit
restructured prior to 2018. At December 31, 2017, the Company had no commitments to loan additional funds to borrowers
with loans that were restructured.
98
99
There were no loans modified as a troubled debt restructured loan within the previous 12 months and for which
there was a payment default. For purposes of this disclosure, a default is a loan modified as a troubled debt restructuring
where the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral.
NOTE 6: ALLOWANCE FOR LOAN LOSSES
Risk Grading
As part of the on - going monitoring of the credit quality of the Company’s loan portfolio and methodology for
calculating the allowance for loan losses, management assigns and tracks loan grades, as described below, which are used
as credit quality indicators.
Activity in the allowance for loan losses, segregated by loan class, for the periods indicated below was as follows:
Pass—Credits in this category contain an acceptable amount of risk.
(Dollars in thousands)
December 31, 2018
Beginning balance . . . . . . . . . . . . . $
Provision (recapture) for loan loss .
Charge-offs . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . .
Net (charge-offs) recoveries .
Ending balance . . . . . . . . . . . . . . . $
Period-end amount allocated to:
Commercial
and
Real Estate
Construction
and
1-4 family Multi-family
industrial real estate development residential residential Consumer Agriculture Other Total
Commercial
7,257 $
(347)
(1,928)
2,737
809
7,719 $
10,375 $
(3,494)
(171)
20
(151)
6,730 $
3,482 $
817
(1)
—
(1)
4,298 $
1,326 $
953
(4)
6
2
2,281 $
1,419 $
92
—
—
—
1,511 $
566 $
(181)
(1)
3
2
387 $
68 $ 285 $ 24,778
420
(1,756)
(16)
(3)
(2,108)
—
2,779
3
10
10
671
—
62 $ 705 $ 23,693
Specific reserve . . . . . . . . . . . . $
General reserve . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . $
525 $
7,194
7,719 $
44 $
6,686
6,730 $
— $
89 $
4,298
4,298 $
2,192
2,281 $
— $
1,511
1,511 $
— $
387
387 $
— $ 100 $
758
22,935
62
62 $ 705 $ 23,693
605
Real Estate
Commercial
and
Commercial
1-4 family Multi-family
Construction
and
industrial real estate development residential residential Consumer Agriculture Other Total
6,409 $
642
(904)
1,110
206
7,257 $
10,770 $
(284)
(120)
9
(111)
10,375 $
4,598 $
(1,116)
—
—
—
3,482 $
1,286 $
35
(8)
13
5
1,326 $
916 $
503
—
—
—
1,419 $
353 $
263
(93)
43
(50)
566 $
79 $
(63)
—
52
52
68 $
595 $ 25,006
(338)
(318)
(1,125)
—
1,235
8
110
8
285 $ 24,778
(Dollars in thousands)
December 31, 2017
Beginning balance . . . . . . . . . . . . . $
Provision (recapture) for loan loss .
Charge-offs . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . .
Net (charge-offs) recoveries .
Ending balance . . . . . . . . . . . . . . . $
Period-end amount allocated to:
(Dollars in thousands)
December 31, 2016
Beginning balance . . . . . . . . . . . . . $
Provision (recapture) for loan loss .
Charge-offs . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . .
Net (charge-offs) recoveries .
Ending balance . . . . . . . . . . . . . . . $
Period-end amount allocated to:
Specific reserve . . . . . . . . . . . . $
General reserve . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . $
852 $
6,405
7,257 $
64 $
10,311
10,375 $
— $
119 $
3,482
3,482 $
1,207
1,326 $
— $
1,419
1,419 $
— $
566
566 $
— $
68
68 $
— $
1,035
23,743
285
285 $ 24,778
Real Estate
Commercial
and
Construction
and
Commercial
1-4 family Multi-family
industrial real estate development residential residential Consumer Agriculture Other Total
4,746 $
5,537
(4,884)
1,010
(3,874)
6,409 $
7,058 $
4,193
(589)
108
(481)
10,770 $
4,504 $
94
—
—
—
4,598 $
2,295 $
(1,012)
(3)
6
3
1,286 $
762 $
154
—
—
—
916 $
363 $
222
(277)
45
(232)
353 $
93 $ 5,494 $ 25,315
4,575
227
(4,840)
(6,079)
(267)
(59)
1,195
26
—
(59)
(4,884)
(241)
595 $ 25,006
79 $
Specific reserve . . . . . . . . . . . . $
General reserve . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . $
462 $
5,947
6,409 $
206 $
10,564
10,770 $
— $
— $
4,598
4,598 $
1,286
1,286 $
— $
916
916 $
— $
353
353 $
— $
79
79 $
— $
668
24,338
595
595 $ 25,006
Allocation of a portion of the allowance to one category of loans in the tables above does not preclude its
availability to absorb losses in other categories. In addition to the amounts indicated in the tables above, the Company has
an accumulated reserve for loan losses on unfunded commitments of $378,000 and $378,000 recorded in other liabilities
as of December 31, 2018 and 2017, respectively.
Special Mention—Credits in this category contain more than the normal amount of risk and are referred to as
“special mention” in accordance with regulatory guidelines. These credits possess clearly identifiable temporary
weaknesses or trends that, if not corrected or revised, may result in a condition that exposes the Company to higher level
of risk of loss.
Substandard—Credits in this category are “substandard” in accordance with regulatory guidelines and of
unsatisfactory credit quality with well - defined weaknesses or weaknesses that jeopardize the liquidation of the debt.
Credits in this category are inadequately protected by the current sound worth and paying capacity of the obligor or the
collateral pledged, if any. These credits are characterized by the distinct possibility that the Company will sustain some
loss if the deficiencies are not corrected. Often, the assets in this category will have a valuation allowance representative
of management’s estimated loss that is probable to be incurred. Substandard loans may also be placed on nonaccrual status
as deemed appropriate by management. Loans substandard and on nonaccrual status are considered impaired and are
evaluated for impairment.
Doubtful—Credits in this category are considered “doubtful” in accordance with regulatory guidelines, are
placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon
some near - term event which lacks certainty. Generally, these credits will have a valuation allowance based upon
management’s best estimate of the losses probable to occur in the liquidation of the debt.
Loss—Credits in this category are considered “loss” in accordance with regulatory guidelines and are considered
uncollectible and of such little value as to question their continued existence as assets on the Company’s financial
statements. Such credits are to be charged off or charged down when payment is acknowledged to be uncertain or when
the timing or value of payments cannot be determined. This category does not intend to imply that the debt or some portion
of it will never be paid, nor does it in any way imply that the debt will be forgiven.
The Company had no loans graded ‘loss” or “doubtful” at December 31, 2018 and 2017.
Loans by risk grades and loan class as of the dates shown below were as follows:
(Dollars in thousands)
December 31, 2018
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . .
Real estate:
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pass
Special
Mention
Substandard Total Loans
$
504,425
5,768
9,586
$
519,779
781,035
511,329
274,781
221,194
39,140
11,048
61,569
$ 2,404,521
10,370
4,204
2,175
—
246
—
—
22,763
$
4,328
—
5,055
—
35
28
6,813
25,845
795,733
515,533
282,011
221,194
39,421
11,076
68,382
$ 2,453,129
$
100
101
(Dollars in thousands)
December 31, 2017
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . .
Real estate:
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pass
Special
Mention
Substandard Total Loans
$
535,589
$
8,403
$
15,371
$
559,363
722,503
448,124
252,317
212,899
40,144
11,223
33,109
$ 2,255,908
2,951
565
—
7,406
246
—
—
19,571
12,839
522
6,267
—
43
33
7,235
42,310
738,293
449,211
258,584
220,305
40,433
11,256
40,344
$ 2,317,789
$
$
Loan Impairment Assessment
The Company’s recorded investment in impaired loans, as of the dates shown below, by loan class and
disaggregated based on the Company’s impairment methodology was as follows:
(Dollars in thousands)
December 31, 2018
Commercial and industrial . . . . . . . . . . . . . . $ 4,378 $ 3,642 $
Real estate:
balance
Unpaid
contractual
principal
Recorded
investment
with no
Average
recorded
investment
allowance with allowance investment allowance year-to-date
Recorded
investment
Total
recorded
Related
635 $ 4,277 $
525 $
5,771
Commercial real estate . . . . . . . . . . . . . . .
Construction and development . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,128
—
4,551
—
6,814
3,374
—
2,612
—
5,572
Total loans . . . . . . . . . . . . . . . . . . . . . . . . $ 19,871 $ 15,200 $
596
—
1,824
—
1,241
4,296 $ 19,496 $
3,970
—
4,436
—
6,813
6,135
44
139
—
4,597
89
7
—
100
7,841
758 $ 24,490
December 31, 2017
Commercial and industrial . . . . . . . . . . . . . . $ 11,921 $ 6,100 $ 1,192 $ 7,292 $
Real estate:
852 $ 12,090
Commercial real estate . . . . . . . . . . . . . . .
Construction and development . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,438
323
3,369
2
21
1
7,616
Total loans . . . . . . . . . . . . . . . . . . . . . . . . $ 34,018 $ 25,179 $ 3,733 $ 28,912 $ 1,035 $ 32,860
9,292
252
4,924
—
—
—
7,152
8,625
252
3,050
—
—
—
7,152
9,646
296
5,003
—
—
—
7,152
667
—
1,874
—
—
—
—
64
—
119
—
—
—
—
Interest income recognized on impaired loans was $996,000, $1.1 million and $648,000 for the years ended
December 31, 2018, 2017 and 2016, respectively.
The Company’s recorded investment in loans as of the dates shown below by loan class and based on the
Company’s impairment methodology was as follows:
(Dollars in thousands)
Commercial and industrial . . . . . . . $
Real estate:
Individually
December 31, 2018
Collectively
Evaluated for Evaluated for
Impairment Impairment
4,277 $
515,502 $
Individually
December 31, 2017
Collectively
Evaluated for Evaluated for
Impairment Impairment
7,292 $
552,071 $
Total
Loans
519,779 $
Total
Loans
559,363
Commercial real estate . . . . . . . .
Construction and development .
1-4 family residential . . . . . . . . .
Multi-family residential . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . $
3,970
—
4,436
—
—
—
6,813
19,496 $ 2,433,633 $ 2,453,129 $
791,763
515,533
277,575
221,194
39,421
11,076
61,569
795,733
515,533
282,011
221,194
39,421
11,076
68,382
9,292
252
4,924
—
—
—
7,152
738,293
729,001
449,211
448,959
258,584
253,660
220,305
220,305
40,433
40,433
11,256
11,256
40,344
33,192
28,912 $ 2,288,877 $ 2,317,789
At December 31, 2018 and 2017, the allowance allocated to specific reserves for loans individually evaluated for
impairment was $758,000 and $1.0 million, respectively.
NOTE 7: PREMISES AND EQUIPMENT
The components of premises and equipment as the dates shown below were as follows:
(Dollars in thousands)
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31,
2018
2017
13,466
52,188
15,426
232
177
81,489
(29,867)
51,622
$
$
13,466
51,664
14,887
202
—
80,219
(26,612)
53,607
Depreciation expense was $3.3 million, $3.4 million and $3.3 million for the years ended December 31, 2018,
2017 and 2016, respectively, which is included in net occupancy expense on the Company’s consolidated statements of
income. Net gains and losses on dispositions of premises and equipment of $31,000, $742,000 and $1.3 million for the
years ended December 31, 2018, 2017 and 2016, respectively were recognized and are included in net gain on sale of
assets in the consolidated statements of income. See Net Gains on Sales of Premises and Equipment below.
Net Gains on Sales of Premises and Equipment
During the year ended December 31, 2017, the Company completed the sale of a branch and the real estate
associated with another branch and recorded gains totaling $97,000 as a result of these transactions. Also during the year
ended December 31, 2017, the Company settled a legal matter related to one of its branches and recorded a gain of
$554,000.
During the year ended December 31, 2016, the Company completed the sale of the land and building related to
one of its branches and leased space from the owner for the retail branch operations for a ten-year period. The Company
determined it has no continuing involvement with the property other than a normal leaseback and therefore the transaction
qualified as a sale. A gain of $1.5 million was recorded on the sale.
102
103
NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS
NOTE 9: BANK OWNED LIFE INSURANCE
Goodwill was $81.0 million at December 31, 2018 and 2017 and there was no changes in those years. Based on
the results of the Company’s assessment, management does not believe any impairment of goodwill or other intangible
assets existed at December 31, 2018 or 2017.
Other intangibles were as follows as of the dates shown below:
(Dollars in thousands)
December 31, 2018
Other intangible assets, net
Weighted
Amortization
Period
Gross
Intangible
Assets
Accumulated
Amortization
Net
Intangible
Assets
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other intangible assets, net . . . . . . . . . . . . . . . . . . .
December 31, 2017
Other intangible assets, net
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other intangible assets, net . . . . . . . . . . . . . . . . . . .
Servicing Assets
5.2 years $
10.0 years
14.4 years
$
13,750 $
6,629
311
20,690 $
(12,561) $
(2,209)
(145)
(14,915) $
1,189
4,420
166
5,775
6.2 years $
11.0 years
17.3 years
$
13,750 $
6,629
321
20,700 $
(12,051) $
(1,767)
(112)
(13,930) $
1,699
4,862
209
6,770
Changes in the servicing assets as the dates shown below were as follows:
(Dollars in thousands)
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Increase from loan sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease from serviced loans paid off or foreclosed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the Years Ended
December 31,
2018
2017
209 $
38
(48)
(33)
166 $
186
58
—
(35)
209
Estimated future amortization for core deposits and customer relationship intangible assets were as follows at
for the date shown below:
(Dollars in thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2018
860
768
675
584
495
2,227
5,609
Bank-owned life insurance policies and the net change in cash surrender value during the periods shown below
were as follows:
(Dollars in thousands)
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
68,010 $
1,700
—
1,815
71,525 $
2017
51,430 $
15,000
—
1,580
68,010 $
2016
50,441
—
(367)
1,356
51,430
For the Years Ended December 31,
NOTE 10: DEPOSITS
Deposits as of the dates shown below were as follows:
December 31,
(Dollars in thousands)
Interest-bearing demand accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 387,457 $ 363,015
702,299
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Saving accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95,842
172,469
Certificates and other time deposits, $100,000 or greater . . . . . . . . . . . . . . . . . . . . . . . . . .
159,558
Certificates and other time deposits, less than $100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,493,183
1,109,789
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,766,282 $ 2,602,972
737,770
96,962
189,007
172,028
1,583,224
1,183,058
2017
2018
Scheduled maturities of time deposits as of the date shown below were as follows:
(Dollars in thousands)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
December 31, 2018
71,817
50,966
119,180
108,436
10,636
361,035
At December 31, 2018 and 2017, the Company had $51.5 million and $45.3 million in deposits from public
entities and brokered deposits of $104.5 million and $88.3 million, respectively. The Company had no major
concentrations of deposits at December 31, 2018 or 2017 from any single or related groups of depositors.
NOTE 11: NOTE PAYABLE AND LINES OF CREDIT
Frost Line of Credit
On December 13, 2017, the Company entered into a loan agreement, or the Loan Agreement, with Frost Bank,
which provides for a $30.0 million revolving line of credit, or Line of Credit. On December 13, 2018, the Company entered
into an amended and restated loan agreement, or the Amended Agreement, with Frost Bank, which extended the maturity
date by one year and increased the Tangible Net worth requirement in the debt covenants from $240 million to $300
million.
The Company can make draws on the Line of Credit for a period of 12 months beginning on the date of the
Amended Agreement, after which the Company will not be permitted to make further draws and the outstanding balance
104
105
will amortize over a period of 60 months. Interest accrues on outstanding borrowings at a rate equal to the maximum
“Latest” U.S. prime rate of interest per annum and payable quarterly in the first 12 months and thereafter quarterly principal
and interest payments are required over a term of 60 months. The entire outstanding balance and unpaid interest is payable
in full on December 13, 2024.
The Company may prepay the principal amount of any loan under the Amended Agreement without premium or
penalty. The obligations of the Company under the Amended Agreement are secured by a valid and perfected first priority
lien on all of the issued and outstanding shares of capital stock of the Bank.
Covenants made under the Amended Agreement include, among other things, the Company maintaining tangible
net worth of not less than $300 million, the Company maintaining free cash flow coverage ratio of not less than 1.25 to
1.00, the Bank’s Texas Ratio (as defined under the Loan Agreement) not to exceed 15%, the Bank’s Total Capital Ratio
(as defined under the Loan Agreement) of not less than 12% and restrictions on the ability of the Company and its
subsidiaries to incur certain additional debt. The Company was in compliance with these covenants at December 31, 2018.
As of December 31, 2018, there were no outstanding borrowings on this line and the Company did not draw on
this line during the period from December 13, 2017, when the Company entered the agreement, to December 31, 2018.
Additional Lines of Credit
The FHLB allows us to borrow on a blanket floating lien status collateralized by certain loans. As of
December 31, 2018 and 2017, total borrowing capacity of $919.9 million and $793.3 million, respectively, was available
under this arrangement. During the second and third quarter of 2018, funds were borrowed under this agreement on a
short-term basis. As of December 31, 2018 and 2017, there were no outstanding FHLB advances.
As of December 31, 2018 and 2017, the Company maintained four federal funds lines of credit with commercial
banks that provide for the availability to borrow up to an aggregate of $75.0 million, in federal funds. There were no funds
under these lines of credit outstanding as of December 31, 2018 and 2017.
Note Payable
In November 2018, the County Bancshares Trust I, or County Trust, agreed to redeem all of the County Trust’s
issued and outstanding trust preferred securities upon concurrent redemption made by the Company of its junior
subordinated debt securities held by the County Trust on January 7, 2019. The Company paid $5.7 million to pay its
obligation for the junior subordinated debt, including accrued and unpaid interest. The Company received $4.1 million
from the redemption of the preferred securities.
NOTE 13: RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company, through the Bank, has and expects to continue to conduct routine
banking business with related parties, including its executive officers and directors. Related parties also include
stockholders and their affiliates in which they directly or indirectly have 5% or more beneficial ownership in the Company.
Loans—In the opinion of management, loans to related parties were on substantially the same terms, including
interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not
involve more than a normal risk of collectability or present any other unfavorable features to the Company. The Company
had approximately $169.0 million and $205.8 million in loans to related parties at December 31, 2018 and 2017,
respectively. As of December 31, 2018 and 2017, there were no loans made to related parties deemed nonaccrual, past
due, restructured or classified as potential problem loans.
Activity in loans to related parties as of the periods shown below was as follows:
(Dollars in thousands)
Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
For the Years Ended December 31,
2018
205,768
107,303
(144,220)
168,851
$
$
2017
142,516
108,698
(45,446)
205,768
Unfunded Commitments—At December 31, 2018 and 2017, the Company had approximately $55.7 million and
$69.7 million in unfunded loan commitments to related parties, respectively.
In conjunction with an acquisition, the Company entered into a loan agreement on February 1, 2015 for $31.0
million. On November 13, 2017, the Company paid the then remaining outstanding balance in full.
Deposits—The Company held related party deposits of approximately $311.2 million and $224.4 million at
December 31, 2018 and 2017, respectively.
NOTE 12: JUNIOR SUBORDINATED DEBT
Crosby Statutory Trust I
Prior to being acquired in 2008 by the Company, Crosby Bancshares, Inc. received proceeds of junior
subordinated debt held by a trust that is funded by common securities purchased by Crosby Bancshares, Inc. and trust
preferred securities in the amount of $5.0 million that are held by other investors. Funds raised by the trust totaling $5.2
million were loaned to Crosby Bancshares, Inc. in the form of junior subordinated debt. This debt was assumed by the
Company at the date of acquisition. On December 17, 2018, the Crosby Statutory Trust I, or Crosby Trust, redeemed all
of the Crosby Trust’s issued and outstanding trust preferred securities as a result of the concurrent redemption made by
the Company of its junior subordinated debt securities held by the Crosby Trust. The aggregate redemption price paid by
the Company, including accrued and unpaid interest, was $5.2 million.
County Bancshares Trust I
Prior to being acquired in 2007 by the Company, County Bancshares, Inc. received proceeds of junior
subordinated debt held by a trust that is funded by common securities, all of which were purchased by County
Bancshares, Inc. and trust preferred securities in the amount of $5.5 million that are held by other investors. Funds raised
by the trust totaling $5.7 million were loaned to County Bancshares, Inc. in the form of junior subordinated debt. This debt
was transferred to the Company at the date of acquisition. In 2015, the Company purchased approximately $4.1 million of
the outstanding preferred securities, reducing the outstanding preferred securities to $1.6 million.
Advertising—The Company incurred advertising expenses of approximately $94,000 and $192,000 for the years
ended December 31, 2018 and 2017, respectively, to a vendor that is solely owned by a director of the Company.
NOTE 14: FAIR VALUE DISCLOSURES
The Company uses fair value measurements to record fair value adjustments to certain assets and to determine
fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction occurring in the principal market for the asset or liability or, in the absence of a principal market, the
most advantageous market for the asset or liability. In estimating fair value, we use valuation techniques that are consistent
with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently
applied.
Inputs to valuation techniques refer to the assumptions used in pricing the asset or liability. Valuation inputs are
categorized in a three-level hierarchy, that gives the highest priority to quotes prices in active markets for identical assets
or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets and liabilities that the reporting
entity has the ability to access at the measurement date.
Level 2 Inputs—Other inputs observable inputs that may include quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that
are observable for the asset or liability such as interest rates, volatilities, prepayment speeds, loss severities, credit risks
and default rates or inputs that are observable or can be corroborated by observable market data.
106
107
Level 3 Inputs—Unobservable inputs that reflect an entity’s own assumptions that market participants would use
Financial assets and financial liabilities measured at fair value on a recurring basis as of the dates shown below
in pricing the assets or liabilities.
During the years ended December 31, 2018 and 2017, there were no transfers of assets or liabilities within the
levels of the fair value hierarchy.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not
available, fair value is based upon models that primarily use observable market - based parameters as inputs. Valuation
adjustments may be made to ensure that assets and liabilities are recorded at fair value. These adjustments may include
amounts to reflect counterparty credit quality and creditworthiness, among other things, as well as unobservable
parameters. Any such valuation adjustments are applied consistently over time.
The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies
are appropriate and consistent with other market participants, the use of different methodologies or assumptions to
determine the fair value could result in different estimate of fair value. Fair value estimates are based on judgements
regarding current economic conditions, risk characteristics of the various instruments and other factors. These estimates
are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined
with precision.
Financial Instruments Measured at Fair Value on a Recurring Basis
were as follows:
(Dollars in thousands)
Fair value of financial assets:
Level 1 inputs:
December 31,
2018
2017
Debt securities available for sale - other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,088 $
1,087
Level 2 inputs:
Debt securities available for sale
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Agency Securities:
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fair value of financial liabilities:
Level 2 inputs:
57,691
61,916
16,881
65,414
88,859
962
230,895 $
16,945
61,253
81,974
766
223,941
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total fair value of financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
962 $
962 $
766
766
The Company’s assets and liabilities measured at fair value on a recurring basis include the following:
Financial Instruments Measured at Fair Value on a Non-recurring Basis
Debt Securities Available for Sale: Debt securities classified as available for sale are recorded at fair value. For
those debt securities classified as Level 2, the Company 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 prepayments speeds, credit
information and the bond’s terms and conditions, among other things. The Company reviews the prices supplied by the
independent pricing service, as well as their underlying pricing methodologies for reasonableness. The other securities in
the table below are mutual funds and the fair value is determined by using unadjusted quoted market prices which are
considered Level 1 inputs.
Interest Rate Swaps: The Company obtains fair value measurements for its interest rate swaps from an
independent pricing service which uses the income approach. The income approach calls for the utilization of valuation
techniques to convert future cash flows as due to be exchanged per the terms of the financial instrument, into a single
present value amount. Measurement is based on the value indicated by the market expectations about those future amounts
as of the measurement date. The proprietary curves of the independent pricing service utilize pricing models derived from
industry standard analytic tools, considering both Level 1 and Level 2 inputs.
A portion of financial instruments are measured at fair value on a non-recurring basis and are subject to fair value
adjustments in certain circumstances. The Company’s financial assets measured at fair value on a non-recurring basis are
certain impaired loans and as of the dates shown below were as follows:
(Dollars in thousands)
Level 3 inputs
Impaired loans:
December 31,
2018
2017
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
110 $
552
1,735
1,141
3,538 $
340
603
1,755
—
2,698
Non - Financial Assets and Non - Financial Liabilities Measured on a Non-recurring Basis
The fair value portion of non - financial assets or non - financial liabilities is measured on a non-recurring basis in
certain circumstances, such as when there is evidence of impairment and may be subject to impairment adjustments. The
Company’s non-financial assets whose fair value may be measured on a non-recurring basis include repossessed real
estate, other foreclosed assets, goodwill and intangible assets, among other assets.
108
109
The fair value of repossessed real estate and other foreclosed assets is estimated using Level 2 inputs and, as of
NOTE 15: DERIVATIVE FINANCIAL INSTRUMENTS
the dates shown below, were as follows:
(Dollars in thousands)
Foreclosed assets remeasured at initial recognition:
Carrying value of foreclosed assets prior to measurement . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs recognized in the allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreclosed assets remeasured subsequent to initial recognition:
Carrying value of foreclosed assets prior to measurement . . . . . . . . . . . . . . . . . . . . . . . . .
Write-downs included in other noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
December 31,
2018
2017
13
(1)
12
—
—
—
$
$
$
$
881
—
881
227
(51)
176
Financial Instruments Reported at Amortized Cost
Fair market values and carrying amounts of financial instruments that are reported at cost as of the dates shown
below were as follows:
(Dollars in thousands)
Financial assets:
Level 1 inputs:
Year Ended December 31,
2018
Carrying
Amount
2017
Carrying
Amount
Fair Value
Fair Value
Cash and due from banks . . . . . . . . . . . . . . . . . . . . $
Interest bearing deposits in banks . . . . . . . . . . . . .
54,450 $
327,620
54,450
327,620
$
59,255 $
266,944
59,255
266,944
Level 2 inputs:
Time deposits in other banks . . . . . . . . . . . . . . . . .
Debt securities held to maturity . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . .
Servicing asset . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
32
71,525
8,227
166
—
31
71,525
8,227
166
600
35
68,010
7,429
209
600
33
68,010
7,429
209
Level 3 inputs:
Loans, including held for sale, net . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . .
2,423,130
13,026
Total financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,907,799 $ 2,898,175
Financial liabilities:
Level 1 inputs:
2,432,753
13,026
2,299,742
12,226
2,288,226
12,226
$ 2,714,450 $ 2,702,932
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . $ 1,183,058 $ 1,183,058
$ 1,109,789 $ 1,109,789
Level 2 inputs:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debt . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . .
1,583,224
2,498
1,571
653
Total financial liabilities . . . . . . . . . . . . . . . . . . . . . . . $ 2,710,146 $ 2,771,004
1,522,366
2,498
1,571
653
1,437,013
1,525
6,726
374
1,493,183
1,525
6,726
374
$ 2,555,427 $ 2,611,597
The estimated fair value amounts of financial instruments have been determined by the Company using available
market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data
to develop the estimates of fair value and as such the fair values shown above are not necessarily indicative of the amounts
the Company will realize. The use of different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
The Company has outstanding interest rate swap contracts in which the Bank entered into an interest rate swap
with a customer and entered into an offsetting interest rate swap with another financial institution at the same time. These
interest rate swap contracts are not designated as hedging instruments for mitigating interest rate risk of the Bank. The
objective of the transactions is to allow the Bank’s customers to effectively convert a variable rate loan to a fixed rate.
In connection with each swap transaction, the Bank agrees to pay interest to the customer on a notional amount
at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At
the same time, the Bank agrees to pay a third - party financial institution the same fixed interest rate on the same notional
amount and receive the same variable interest rate on the same notional amount. Because the Bank acts as an intermediary
for its customer, changes in the fair value of the underlying derivative contracts are designed to offset each other and would
not significantly impact the Company’s operating results except in certain situations where there is a significant
deterioration in the customer’s credit worthiness or that of the counterparties. At December 31, 2018 and 2017, no such
deterioration was determined by management.
At December 31, 2018 and 2017, the Company had 13 and 14 interest rate swap agreements outstanding with
borrowers and financial institutions, respectively. These derivative instruments are not designated as accounting hedges
and changes in the net fair value are recognized in noninterest income or expense. Fair value amounts are included in other
assets and other liabilities. Interest rates on the Company’s swap agreements are based on the London Interbank Offered
Rate of the U.S. Dollar deposits in Europe, or Libor. Derivative instruments outstanding as of the dates shown below were
as follows:
Interest rate swaps with financial
Other Assets
32,923
(Dollars in thousands)
December 31, 2018
Interest rate swaps with customers . . .
institution . . . . . . . . . . . . . . . . . . .
Interest rate swaps with customers . . .
Interest rate swaps with financial
institution . . . . . . . . . . . . . . . . . . .
Total derivatives not designated
as hedging instruments . . . . . . .
Classification
Notional
Amounts
Fair
Value
Fixed Rate
Floating Rate
Other Assets
$
8,901
$
169
793
(793)
(169)
5.45% -
7.25%
4.00% -
5.37%
4.00% -
5.37%
5.45% -
7.25%
LIBOR 1M +
2.50% - 3.20%
LIBOR 1M +
2.50% - 3.25%
LIBOR 1M +
2.50% - 3.25%
LIBOR 1M +
2.50% - 3.20%
Other
Liabilities
Other
Liabilities
32,923
8,901
$
83,648
$
—
(Dollars in thousands)
December 31, 2017
Interest rate swaps with customers . . .
Other Assets
$
25,882
$
340
Classification
Notional
Amounts
Fair
Value
Fixed Rate
Floating Rate
Interest rate swaps with financial
Other Assets
16,579
institution . . . . . . . . . . . . . . . . . . .
Interest rate swaps with customers . . .
Interest rate swaps with financial
institution . . . . . . . . . . . . . . . . . . .
Total derivatives not designated
as hedging instruments . . . . . . .
Other
Liabilities
Other
Liabilities
16,579
25,882
$
84,922
$
—
426
(426)
(340)
4.75% -
7.25%
4.00% -
5.15%
4.00% -
5.15%
4.75% -
7.25%
LIBOR 1M +
2.50% - 3.20%
LIBOR 1M +
2.50% - 3.25%
LIBOR 1M +
2.50% - 3.25%
LIBOR 1M +
2.50% - 3.20%
Weighted
Average
Maturity
6.22 years
7.78 years
7.78 years
6.22 years
Weighted
Average
Maturity
7.83 years
8.12 years
8.12 years
7.83 years
110
111
NOTE 16: COMMITMENTS AND CONTINGENCIES
NOTE 17: EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION ARRANGEMENTS
Financial Instruments with Off-Balance-Sheet Risk
Employee Benefit Plans
In the normal course of business, the Company enters into various transactions, which in accordance with GAAP
are not included in its consolidated balance sheets. The Company enters into these transactions to meet the financing needs
of its customers. These financial instruments include commitments to extend credit for loans in process and standby letters
of credit. The Company uses the same credit policies in making these commitments and conditional obligations as it does
for on - balance - sheet instruments.
Commitments to extend credit and standby letters of credit as of the dates shown below were as follows:
(Dollars in thousands)
Commitments to extend credit, variable interest rate . . . . . . . . . . . . . . . . . . . . . . . .
Commitments to extend credit, fixed interest rate . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2018
726,277
105,359
831,636
31,729
$
$
$
2017
626,441
61,608
688,049
28,977
$
$
$
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 above do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a
customer to a third-party. The credit risk involved in issuing letters of credit is essentially the same as that involved in
extending loan facilities to our customers.
Lease Commitments
Future minimum rent commitments under non-cancelable leases as of the date shown below were as follows:
(Dollars in thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2018
2,118
2,139
2,224
2,285
2,280
10,048
21,094
The Company leases several of its banking facilities under operating leases. Total rent expense for operating
leases was approximately $1.9 million, $1.8 million and $2.9 million for the years ended December 31, 2018, 2017 and
2016, respectively and is reflected in net occupancy expense on the consolidated statements of income.
Litigation
The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. Based
on information presently available and advice received from legal counsel representing the Company, it is the opinion of
management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse
effect on the financial position or results of operations of the Company.
The Company maintains a 401(k) employee benefit plan and substantially all employees that complete
three months of service may participate. The Company, at its discretion, may match a portion of each employee’s
contribution and may make additional contributions. During the years ended December 31, 2018 and 2017, the Company
contributed $1.7 million and $1.7 million to the plan, respectively.
Executive Deferred Compensation Arrangements
The Company established an executive incentive compensation arrangement with several officers of the Bank, in
which these officers are eligible for performance-based incentive bonus compensation. As part of this compensation
arrangement, the Company contributes one - fourth of the incentive bonus amount into a deferred compensation account.
The deferred amounts accrue at a market rate of interest and are payable to the employees upon separation from the Bank
provided vesting arrangements have been met. At December 31, 2018 and 2017, the amount payable, including interest,
for this deferred plan was $2.5 million and $2.4 million, respectively and is included in other liabilities in the consolidated
balance sheets.
Salary Continuation Agreements
The Company entered into a salary continuation arrangement in 2008 with the Company’s then President and
CEO that calls for payments of $100,000 per year for a period of 10 years commencing at age 65. Payments under the plan
began during 2014. The Company’s liability was $421,000 and $503,000 at December 31, 2018 and 2017, respectively.
and is included in other liabilities in the consolidated balance sheets. The amount accrued at December 31, 2018 equals
the present value of the benefits expected to be provided.
In October 2017, the Company entered into a salary continuation arrangement with the Company’s President and
CEO that calls for payments of $200,000 per year payable for a period of 10 years commencing at age 70. Payments under
the plan will begin in 2024. The Company’s liability was $219,000 and $32,000 at December 31, 2018 and 2017,
respectively is included in other liabilities in the consolidated balance sheets. The liability will continue to accrue over
the remaining period until payments commence such that the accrued amount at the eligibility date will equal the present
value of all the future benefits expected to be paid.
Change of Control Agreements
In 2017, the Company entered into employment agreements with certain executive officers. These agreements
provide for severance benefits if the Company terminates the executive without cause or the executive resigns with good
reason, as defined in the agreements. In addition, upon a change of control, as that term is defined in the agreements, these
employees, will be entitled to an aggregate amount estimated to be $4.4 million at December 31, 2018, in accordance to
terms of their respective agreements. No compensation has been recorded to date as a change of control condition is not
deemed probable.
VB Texas, Inc. and Vista Bank Texas entered into change of control and non - competition agreements with certain
employees of VB Texas, Inc., who are now employees of the Bank. The Company’s initial public offering completed
November 10, 2017 triggered the change of control provisions in these agreements entitling the employees to an aggregate
amount of $2.5 million, which was accrued in the year ended December 31, 2017 and paid during the year ended
December 31, 2018.
NOTE 18: STOCK-BASED COMPENSATION
The Company acquired a stock option plan which originated under VB Texas, Inc. as a part of a merger of the
two companies. The options granted to employees must be exercised within 10 years from the date of grant and vesting
schedules are determined on an individual basis. At the merger date, all outstanding options became fully vested and were
converted to options of the Company’s common stock at an exchange ratio equal to the acquisition exchange rate for
common shares. No options were granted under this plan after October 24, 2016.
112
113
In May 2014, the Company adopted the 2014 Stock Option Plan, or the 2014 Plan. The 2014 Plan was approved
by the Company’s shareholders and limits the number of shares that may be optioned to 1,127,200. The 2014 Plan provides
that no options may be granted after May 20, 2024. Options granted under the 2014 Plan expire 10 years from the date of
grant and become exercisable in installments over a period of one to five years, beginning on the first anniversary of the
date of grant. At December 31, 2018, 959,200 shares were available for future grant under the 2014 Plan.
In September 2017, the Company adopted the 2017 Omnibus Incentive Plan, or the 2017 Plan. The 2017 Plan
authorizes the Company to grant options and performance-based and non-performance based restricted stock awards as
well as various other types of stock-based and other awards that are not stock-based to eligible employees, consultants and
non - employee directors up to an aggregate of 600,000 shares of common stock. At December 31, 2018, 348,038 shares
were available for future grant under the 2017 Plan.
Stock option activity for the periods shown below was as follows:
(Dollars in thousands, except per share data)
Outstanding at beginning of period . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at end of period . . . . . . . . . . . . . . . . .
For the Years Ended December 31,
2018
$
Number of
Shares
Underlying
Options
260,322
—
(28,000)
—
232,322
Weighted
Average
Exercise
Price
16.00
—
10.52
—
16.66
2017
$
Number of
Shares
Underlying
Options
248,314
80,000
(11,160)
(56,832)
260,322
Weighted
Average
Exercise
Price
12.80
21.00
10.47
10.14
16.00
The fair value of options granted is estimated on the date of grant using the Black - Scholes option pricing model.
The assumptions below were used for the 2017 grants.
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
December 31, 2017
0.95 %
35.97 %
2.42 %
6.0
The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. Expected
volatility is based on the volatility of certain comparable public company peers. The risk - free interest rate is based upon
the U.S. Treasury yield curve in effect at the time of grant. Expected life is based on the ten-year option expiration term
or historical exercise experience.
A summary of stock options as of the date shown below was as follows:
Stock Options
Number of shares underlying options . . . . . . . . . . . . . . . .
Weighted-average exercise price per share . . . . . . . . . . . . $
Aggregate intrinsic value (in thousands) . . . . . . . . . . . . . . $
Weighted-average remaining contractual term (years) . . .
Exercisable
Unvested
Outstanding
December 31, 2018
133,123
14.52 $
1,981 $
5.3
99,199
19.54 $
978 $
7.7
232,322
16.66
2,959
6.3
The fair value of the Company’s restricted stock awards is estimated based on the market value of the Company’s
common stock at the date of grant. Restricted stock shares are considered fully issued at the time of the grant and the
grantee becomes the record owner of the restricted stock and has voting, dividend and other shareholder rights. The shares
of restricted stock are non-transferable and subject to forfeiture until the restricted stock vests and any dividends with
respect to the restricted stock are subject to the same restrictions, including the risk of forfeiture.
Non-performance based restricted stock grants vest over the service period in equal increments over a period of
two to five years, beginning on the first anniversary of the date of grant.
During 2018, the Company issued performance-based restricted stock. The number of shares earned under the
Company’s performance-based restricted stock award agreements is based on the achievement of certain branch
production goals. Compensation expense for performance-based restricted stock is recognized for the probable award level
over the period estimated to achieve the performance conditions and other goals, on a straight-line basis. If the probable
award level and/or the period estimated to be achieved change, compensation expense will be adjusted via a cumulative
catch-up adjustment to reflect these changes. The performance conditions goals must be achieved within five years or the
awards expire. The number of performance-based shares granted presented in the table below is based upon the attainment
of the maximum number of shares possible to be earned.
Restricted stock activity for the periods shown below was as follows:
(Dollars in thousands, except per share data)
Outstanding at 12/31/2016 . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at 12/31/2017 . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at 12/31/2018 . . . . . . . . . . . . . . . . . .
Non-performance Based
Performance-based
Number of
Shares
—
212,580
—
—
212,580
21,500
(51,307)
(1,000)
181,773
$
$
$
Weighted
Average
Grant Date
Fair Value
—
26.71
—
—
26.71
30.44
27.04
28.64
27.05
Number of
Shares
—
—
—
—
—
24,000
—
—
24,000
$
$
$
Weighted
Average
Grant Date
Fair Value
—
—
—
—
—
34.46
—
—
34.46
The Company’s stock compensation plans allow the employee to elect to have shares withheld to satisfy their tax
liability related to restricted stock vesting or stock option exercises. The number of shares issued and withheld for the
period shown below was as follows:
Restricted stock vested - 2018 . . . . . . . . . . . . .
Shares
Issued
46,189
Shares
Withheld
5,118
Total
Vested
51,307
A summary of restricted stock as of the date shown below was as follows:
Restricted Stock
Number of shares underlying restricted stock . . . . . . . . . . . . . . . . .
Weighted-average grant date fair value per share . . . . . . . . . . . . . .
Aggregate fair value (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average remaining vesting period (years) . . . . . . . . . . .
$
$
December 31, 2018
Non-performance
Based
Performance-based
181,773
27.05
5,344
3.7
$
$
24,000
34.46
706
3.2
For the years ended December 31, 2018, 2017 and 2016, stock compensation expense was $1.6 million, $329,000
and $43,000, respectively. As of December 31, 2018, there was approximately $5.9 million of total unrecognized
compensation expense related to the stock - based compensation arrangements, which is expected to be recognized in the
Company’s consolidated statements of income over a weighted-average period of 3.6 years.
114
115
NOTE 19: REGULATORY MATTERS
Regulatory Capital
As of December 31, 2018 and 2017, the Company and the Bank, were “well capitalized” based on the ratios
presented below. Actual and required capital ratios as the dates shown below for the Company and the Bank were as
follows for the dates presented:
Banks and bank holding companies are subject to various regulatory capital requirements administered by state
and 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 weighting and other factors.
The Company and the Bank’s Common Equity Tier 1 capital includes common stock and related capital surplus,
net of treasury stock and retained earnings. In connection with the adoption of the Basel III Capital Rules, the Company
and the Bank elected to opt - out of the requirement to include most components of accumulated other comprehensive
income in Common Equity Tier 1. Common Equity Tier 1 for both the Company and the Bank is reduced by goodwill and
other intangible assets, net of associated deferred tax liabilities and subject to transition provisions.
When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and the Bank to
maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk - weighted assets of at least 4.5%, plus a 2.5% “capital
conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital ratio as that buffer is phased in, effectively
resulting in a minimum ratio of Common Equity Tier 1 capital to risk - weighted assets of at least 7.0% upon full
implementation), (ii) a minimum ratio of Tier 1 capital to risk - weighted assets of at least 6.0%, plus the capital
conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a
minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus
Tier 2) to risk - weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total
capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full
implementation) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly
assets.
The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be
phased in over a four - year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on
January 1, 2019). The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only
certain covered institutions and does not have any current applicability to the Company and the Bank. The capital
conservation buffer is designed to absorb losses during periods of economic stress and, as detailed above, effectively
increases the minimum required risk - weighted capital ratios. Banking institutions with a ratio of Common Equity Tier 1
capital to risk - weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable,
the countercyclical capital buffer) will face constraints on dividends, equity repurchases and compensation based on the
amount of the shortfall.
The Company and the Bank are subject to the regulatory capital requirements administered by the Federal Reserve
and, for the Bank, the OCC. Regulatory authorities can initiate certain mandatory actions if the Company or the Bank fail
to meet the minimum capital requirements, which could have a direct material effect on our financial statements.
Management believes, as of December 31, 2018 and 2017, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
Dividend Restrictions
In the ordinary course of business, the Company may be dependent upon dividends from the Bank to provide
funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may
limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends
declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required
if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years.
Minimum
Capital Required
for Capital Adequacy
Purposes
Minimum
Capital Required
Basel III
Fully Phased-in
Required to be
Considered Well
Capitalized
Actual
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
December 31, 2018
Common Equity Tier I to
Risk-Weighted Assets:
Consolidated . . . . . . . . . . . . . . . $ 405,012 14.7% $ 123,885
Bank Only . . . . . . . . . . . . . . . . . $ 63,140 13.2% $ 123,877
4.5% $ 192,710 7.0%
N/A N/A
4.5% $ 192,697 7.0% $ 178,933 6.5%
Tier I Capital to Risk-Weighted
Assets:
Consolidated . . . . . . . . . . . . . . . $ 406,257 14.8% $ 165,180
Bank Only . . . . . . . . . . . . . . . . . $ 363,140 13.2% $ 165,169
6.0% $ 234,005 8.5%
N/A N/A
6.0% $ 233,989 8.5% $ 220,225 8.0%
Total Capital to Risk-Weighted
Assets:
Consolidated . . . . . . . . . . . . . . . $ 430,238 15.6% $ 220,240
Bank Only . . . . . . . . . . . . . . . . . $ 387,211 14.1% $ 220,225
8.0% $ 289,065 10.5%
N/A N/A
8.0% $ 289,046 10.5% $ 275,282 10.0%
Tier 1 Leverage Capital to
Average Assets:
Consolidated . . . . . . . . . . . . . . . $ 406,257 12.8% $ 127,350
Bank Only . . . . . . . . . . . . . . . . . $ 363,140 11.4% $ 127,350
N/A N/A
4.0% $ 127,350 4.0%
4.0% $ 127,350 4.0% $ 159,188 5.0%
December 31, 2017
Common Equity Tier I to Risk-
Weighted Assets:
Consolidated . . . . . . . . . . . . . . . $ 361,322 14.2% $ 114,628
Bank Only . . . . . . . . . . . . . . . . . $ 322,414 12.7% $ 114,252
4.5% $ 178,310 7.0%
N/A N/A
4.5% $ 178,150 7.0% $ 165,425 6.5%
Tier I Capital to Risk-Weighted
Assets:
Consolidated . . . . . . . . . . . . . . . $ 367,722 14.4% $ 152,837
Bank Only . . . . . . . . . . . . . . . . . $ 322,414 12.7% $ 152,700
6.0% $ 216,519 8.5%
N/A N/A
6.0% $ 216,325 8.5% $ 203,600 8.0%
Total Capital to Risk-Weighted
Assets:
Consolidated . . . . . . . . . . . . . . . $ 392,878 15.4% $ 203,782
Bank Only . . . . . . . . . . . . . . . . . $ 347,569 13.7% $ 203,600
N/A N/A
8.0% $ 267,464 10.5%
8.0% $ 267,726 10.5% $ 254,501 10.0%
Tier 1 Leverage Capital to
Average Assets:
Consolidated . . . . . . . . . . . . . . . $ 367,722 12.3% $ 119,769
Bank Only . . . . . . . . . . . . . . . . . $ 322,414 10.8% $ 119,403
N/A N/A
4.0% $ 119,769 4.0%
4.0% $ 119,403 4.0% $ 149,253 5.0%
116
117
NOTE 20: INCOME TAXES
The components of the provision for income tax expense for the periods listed below were as follows:
Deferred income taxes are provided for differences between the financial statement carrying amount of existing
assets and liabilities and their respective tax basis. The components of the net deferred tax asset for the periods shown
below were as follows:
(Dollars in thousands)
Current federal income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Current state income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the Years Ended December 31,
2017
13,364 $
157
2,932
16,453 $
2018
11,908 $
190
(734)
11,364 $
2016
11,269
140
601
12,010
Income tax expense for the periods listed below differs from the applicable statutory rate of 21% for the year
ended December 31, 2018 and 35% for the years ended December 31, 2017 and 2016 as follows:
(Dollars in thousands)
Tax expense calculated at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Increase (decrease) resulting from:
State income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax exempt interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of tax law rate change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended December 31,
2017
15,408 $
2018
12,317 $
2016
13,726
150
(834)
(381)
—
112
11,364 $
19.4%
102
(1,504)
(553)
3,857
(857)
16,453 $
37.4%
140
(1,585)
(485)
—
214
12,010
30.7%
The Tax Cuts and Jobs Act of 2017 became effective January 1, 2018 and lowered the corporate federal income
tax rate in the U.S. from 35% to 21%. Based upon this tax law enactment, the Company analyzed and remeasured its
deferred tax positions to the new tax rate and recorded a $3.9 million adjustment to income tax expense in the consolidated
income statement for the year ended December 31, 2017. The Company has completed its analysis related to tax reform
and no material changes are included in the financial statements for the year ended December 31, 2018. The financial
statements for the year ended December 31, 2018 reflect federal tax expense at the enacted tax rate of 21%. The Company
had no other material impact to the financials related to tax reform for the year ended December 31, 2018.
(Dollars in thousands)
Deferred tax assets:
December 31,
2018
2017
Allowance for possible credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan origination fees and loan costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation 481(a) adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Deferred Tax Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
4,976
2,681
1,312
137
790
230
10,126
(1,203)
(476)
(1,178)
(68)
(2,925)
7,201
$
$
5,203
2,228
988
423
103
215
9,160
(1,228)
(713)
(1,378)
(61)
(3,380)
5,780
Due to an acquisition in 2015, the Company had approximately $1.5 million tax - effected federal net operating
loss carryforwards which were fully utilized during the year ended December 31, 2017.
As of December 31, 2018, the tax years that remain subject to examination by the major tax jurisdictions under
the statute of limitations are from the year 2014 forward for the State of Texas and from the year 2015 forward for federal.
When necessary, the Company would include interest expense assessed by taxing authorities in interest expense and
penalties related to income taxes in other expense on its consolidated statements of income. The Company did not record
any interest or penalties related to income tax for the years ended December 31, 2018, 2017 and 2016. For the years ended
December 31, 2018 and 2017, management has determined there were no material uncertain tax positions.
NOTE 21: EARNINGS PER SHARE
The computation of basic and diluted earnings per share for the periods shown is below.
(Dollars in thousands, except per share data)
Net income for common shareholders . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average shares (thousands)
Basic weighted-average shares outstanding . . . . . . . . . . . . . . . .
Dilutive effect of outstanding stock options and unvested
restricted stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted weighted-average shares outstanding . . . . . . . . . . . . . . .
Earnings per share:
2018
Year Ended December 31,
2017
2016
$
47,289 $
27,571 $
27,208
24,859
22,457
22,049
159
25,018
116
22,573
186
22,235
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.90 $
1.89 $
1.23 $
1.22 $
1.23
1.22
For the year ended December 31, 2018, the Company has excluded from diluted weighted-average shares, the
impact of 3,000 shares of unvested non-performance based restricted stock as they are anti-dilutive and 24,000 shares of
performance-based restricted stock as they are contingently issuable and the performance conditions for these issuances
have not been met.
118
119
NOTE 22: PARENT COMPANY
The following balance sheets, statements of income and statements of cash flow for CBTX, Inc. should be read
in conjunction with the consolidated financial statements and the related notes.
CBTX, INC.
(Parent Company Only)
Condensed Balance Sheets
(Dollars in thousands)
December 31,
2018
2017
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45,636
407,305
141
2,460
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 490,999 $ 455,542
44,189 $
445,754
145
911
Liabilities and shareholders' equity
Liabilities
Junior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,571 $
1,803
3,374
6,726
2,602
9,328
Shareholders’ equity
257
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
343,249
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118,353
(15,256)
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(389)
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
446,214
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 490,999 $ 455,542
258
344,497
160,626
(14,781)
(2,975)
487,625
CBTX, INC.
(Parent Company Only)
Condensed Income Statements
(Dollars in thousands)
Interest income
For the Years Ended December 31,
2017
2016
2018
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
187 $
142 $
120
Interest expense
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income
Dividend income from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Printing, stationery and office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and director fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax benefit and equity in undistributed income of
15
420
435
(248)
7,800
7,800
755
—
44
12
728
196
1,735
906
322
1,228
(1,086)
8,806
8,806
344
—
37
20
842
17
1,260
1,061
266
1,327
(1,207)
12,250
12,250
225
14
28
10
341
31
649
subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before equity in undistributed income of subsidiary . . . . . . . . . . . . .
Equity in undistributed income of subsidiary . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,817
(437)
6,254
41,035
47,289 $
6,460
(1,518)
7,978
19,593
27,571 $
10,394
(639)
11,033
16,175
27,208
120
121
CBTX, INC.
(Parent Company Only)
Condensed Statements of Cash Flows
NOTE 23: QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial data for the periods indicated below was as follows:
(Dollars in thousands)
Cash flows from operating activities:
For the Years Ended December 31,
2017
2016
2018
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile consolidated net income to net cash
provided by operating activities:
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income loss of subsidiary . . . . . . . . . . . . . . .
Deferred tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in operating assets and liabilities:
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
47,289
$
27,571
$
27,208
1,601
(41,035)
(4)
1,549
(836)
(38,725)
8,564
329
(19,593)
391
(1,216)
552
(19,537)
8,034
43
(16,175)
295
1,808
(97)
(14,126)
13,082
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
Cash flows from financing activities:
Proceeds from sale of common stock in initial public offering . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments to tax authorities for stock-based compensation . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided (used) in financing activities . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
294
(171)
—
—
(5,155)
(4,979)
(10,011)
(1,447)
45,636
44,189
64,519
117
—
—
(27,679)
—
(4,412)
32,545
40,579
5,057
45,636
$
—
3,883
—
(11,079)
(3,321)
—
(4,395)
(14,912)
(1,830)
6,887
5,057
$
Year Ended December 31, 2018
(Dollars in thousands)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (recapture) for loan losses . . . . . . . . . . . . . . . . . . . .
Net interest income after provision (recapture) for loan
First Quarter Second Quarter Third Quarter Fourth Quarter
36,882
3,662
33,220
(2,169)
33,127 $
2,251
30,876
690
31,085 $
2,046
29,039
865
34,665 $
3,139
31,526
(1,142)
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
28,174
3,361
20,284
11,251
2,139
9,112 $
30,186
3,506
20,012
13,680
2,638
11,042 $
32,668
3,526
19,964
16,230
3,207
13,023 $
35,389
3,859
21,756
17,492
3,380
14,112
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.37 $
0.37 $
0.44 $
0.44 $
0.52 $
0.52 $
0.57
0.56
Year Ended December 31, 2017
(Dollars in thousands)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (recapture) for loan losses . . . . . . . . . . . . . . . . . . . .
Net interest income after provision (recapture) for loan
First Quarter Second Quarter Third Quarter Fourth Quarter
30,366
2,201
28,165
1,050
28,726 $
2,201
26,525
(694)
27,998 $
2,165
25,833
960
29,569 $
2,318
27,251
(1,654)
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
24,873
3,448
18,427
9,894
3,032
6,862 $
27,219
3,526
18,859
11,886
3,181
8,705 $
28,905
4,086
19,017
13,974
3,927
10,047 $
27,115
3,144
21,989
8,270
6,313
1,957
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.31 $
0.31 $
0.39 $
0.39 $
0.46 $
0.45 $
0.08
0.08
122
123
(This page has been left blank intentionally.)
(This page has been left blank intentionally.)
Corporate Information
CBTX, Inc. Directors
MARK FERTIT TA
Fertitta Realty
ROBERT R. FR ANKLIN, JR.
CBTX, Inc.
ROBERT R. FR ANKLIN, JR.
CommunityBank of Texas
CommunityBank of Texas,
N.A. Advisory Directors
JAMES DISHMAN, JR.
Stallion Oilfield Services
CBTX, Inc. Management
ROBERT R. FR ANKLIN, JR.
Chairman, President
and Chief Executive Officer
(This page has been left blank intentionally.)
MICHAEL HAVARD
Havard Law Firm
TOMMY W. LOT T
Investments
GLEN W. MORGAN
Reaud, Morgan & Quinn, LLP
J. PAT PARSONS
CBTX, Inc.
JOE PENL AND, SR.
Quality Mat Company, Inc.
WAYNE A . REAUD
Reaud, Morgan & Quinn, LLP
JOSEPH B. SWINBANK
The Sprint Companies
SHEIL A UMPHREY
The Decorating Depot
JOHN EDDIE WILLIAMS, JR.
Williams, Kherkher, Hart
& Boundas, LLP
W.E. “BILL” WIL SON, JR.
Wilson & Company
CBTX, Inc. Advisory
Directors
R AY MOORE
Investments
MICHAEL HAVARD
Havard Law Firm
TIMOTHY HOR AN, JR.
Fairway Real Estate
Management, LLC
MAR ALYN HARE
Investments
R AY MOORE
Investments
TR AVIS JAGGERS
CommunityBank of Texas
ROBERT T. PIGOT T, JR.
CommunityBank of Texas
TOMMY W. LOT T
Investments
DENNIS MALLOY
Malloy Interests
MIKE R AMSEY
Ramsey Law Firm
JERRY REESE
Reese Minerals
STEVE McREYNOLDS
Groves Equipment Rental Co., Inc.
DR. JAMES SIMMONS
Lamar University
GLEN W. MORGAN
Reaud, Morgan & Quinn, LLP
DR. R. LELDON SWEET
R. Leldon Sweet, MD
SCOT T PARKER
Parker’s Building Supply
THOMAS WALTER UMPHREY
Investments
J. PAT PARSONS
CommunityBank of Texas
Investor Relations Contact
GRIER P. PAT TON
Mach Energy Services LLC /
Magnolia 23 Properties, LLC
JAMES L . STURGEON
281.325.5013
investors@CBoTX.com
JOE PENL AND, SR.
Quality Mat Company, Inc.
DOAK C. PROC TER, III
The Procter Company
ROBERT T. PIGOT T, JR.
CBTX, Inc.
WAYNE A . REAUD
Reaud, Morgan & Quinn, LLP
CommunityBank of Texas,
N.A. Directors
JEFF BR ANICK
Jefferson County Judge
JAMES R. BROOKS
Lockton Companies
MICK DUBEA
Dubea Investments
JOSEPH B. SWINBANK
The Sprint Companies
BART UMPHREY
Trinity Industrial Services LLC
JOHN EDDIE WILLIAMS, JR.
Williams, Kherkher, Hart
& Boundas, LLP
RICKEY WILLIAMS
WFI Properties, Inc.
W.E. “BILL” WIL SON, JR.
Wilson & Company
Transfer Agent
BY REGUL AR MAIL:
Computershare
P.O. Box 505000
Louisville, KY 40233-5000
BY OVERNIGHT DELIVERY:
Computershare
462 South 4th Street
Suite 1600
Louisville, KY 40202
TELEPHONE
Toll Free: 877.373.6374
Toll: 781.575.3100
J. PAT PARSONS
Vice Chairman
ROBERT T. PIGOT T, JR.
Chief Financial Officer
CommunityBank of Texas,
N.A. Management
ROBERT R. FR ANKLIN, JR.
Chairman
and Chief Executive Officer
J. PAT PARSONS
Vice Chairman
ROBERT T. PIGOT T, JR.
Senior Executive Vice President
and Chief Financial Officer
DONNA B. DILLON
Senior Executive Vice President
and Chief Administration Officer
DEBOR AH DINSMORE
Senior Executive Vice President
and Chief Information Officer
W. ALLEN GAGE
Senior Executive Vice President
Special Projects
TR AVIS JAGGERS
President
TR ACY O’NEIL
Senior Executive Vice President
and Chief Human Resources Officer
JAMES L . STURGEON
Senior Executive Vice President
and Chief Risk Officer
JOE F. WEST
Senior Executive Vice President
and Chief Credit Officer
Media Contact
ASHLEY K. WARREN
713.210.7622
awarren@CBoTX.com
NASDAQ: CBTX
B U S I N E S S B A N K I N G \ B E T T E R B A N K I N G
CommunityBankofTX.com 866.55.COMMUNITY
Member FDIC
Equal Housing Lender NMLS #423137