20
22 0 2 0 \ A N N U A L R E P O R T
O U R C O M M U N I T I E S
HOUSTON
Champions
Houston 77069
713.210.7690
Greenway Plaza
9 Greenway Plaza,
Suite 110
Houston 77046
713.210.7600
Highway 290
Houston 77040
713.210.7773
Memorial City
820 Gessner Road,
Suite 140
Houston 77024
713.973.8000
Memorial City
Convenience Center
10097 Katy Freeway
Houston 77024
713.973.8000
Northshore
13909 East Freeway
Houston 77015
713.330.4500
South Belt
11550 Fuqua St.,
Suite 100
Houston 77034
281.925.4787
Suite 100
Houston 77007
713.526.1700
Westchase
Suite 100
Houston 77042
713.830.1017
5700 Garth Road
Baytown 77521
281.421.1942
BOLING
100 Texas Ave.
Boling 77420
979.657.4411
CROSBY
6200 FM 2100
Crosby 77532
281.328.4811
Crosby Lobby II
14100 FM 2100
Crosby 77532
281.328.4822
HUMBLE
19010 West Lake
Houston Parkway
Humble 77346
281.852.2020
6461 FM 1960 West
6226 Washington Ave.,
3498 East Sam Houston
Washington
PASADENA
EAST & SOUTHEAST TEXAS
10333 Richmond Ave.,
4690 Sweetwater Blvd.,
14561 Northwest Freeway
BAYTOWN
TOMBALL
28515 State Highway 249
409.861.2900
NEDERLAND
2008 Highway 365
Nederland 77627
409.861.7270
NEWTON
319 Rusk St.
Newton 75966
409.379.8587
ORANGE
Orange 77630
409.670.9300
3300 Edgar Brown Drive
PORT ARTHUR
4749 Twin City Highway
Port Arthur 77642
409.861.7200
SILSBEE
645 North 5th St.
Silsbee 77656
409.386.6058
VIDOR
1475 North Main St.
Vidor 77662
409.783.0880
WOODVILLE
501 South Magnolia St.
1610 North Alabama Road
Beaumont 77701
THE WOODLANDS
296 State Highway 62
Parkway South
Pasadena 77505
281.991.4600
SUGAR LAND
Suite 100
Sugar Land 77479
281.325.5000
Tomball 77377
281.290.0301
WHARTON
Wharton 77488
979.282.2555
1900 Research
Forest Drive
The Woodlands 77381
832.325.2335
DALLAS
Dallas Preston Center
8222 Douglas Ave.,
Suite 100
Dallas 75225
214.259.7600
Delaware
5999 Delaware St.
Beaumont 77706
409.861.7200
Highway 105
7410 Highway 105
Beaumont 77713
409.898.1850
Phelan
6378 Phelan Blvd.
Beaumont 77706
Stedman
490 Park St.,
Suite 105
409.861.7286
BUNA
Buna 77612
409.994.5954
JASPER
Jasper 75951
409.383.0999
KIRBYVILLE
637 South Wheeler St.
Kirbyville 75956
409.423.4602
LUMBERTON
111 Country Lane Drive
(Highway 421)
Lumberton 77657
409.861.7275
918 South Margaret Ave.
Woodville 75979
409.283.8100
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
At CommunityBank of Texas, relationships are the bedrock of our
business. Th ey are a refl ection of our deep commitment to building
strong, honest partnerships in all we do, and our mandate to
measure our performance by the success we create for our partners.
Service to others, both fi nancially and philanthropically, is a core
pillar of our brand, and we pledge that every time is the right time
to put our clients’ and our communities’ needs fi rst.
We’re proud to be here, to live in and serve the cities and
communities of Southeast Texas. Th ank you for trusting our
dedicated team at CommunityBank of Texas to be your better
business banking partner.
C O R P O R A T E I N F O R M A T I O N
CBTX, Inc. Directors
ROBERT R. FR ANKLIN, JR.
CBTX, Inc.
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.
REAGAN REAUD
Privateer Capital, LP
JOSEPH B. SWINBANK
Sprint Sand & Clay
MARK FERTIT TA
Fertitta Realty & Property
ROBERT R. FR ANKLIN, JR.
CommunityBank of Texas
MICHAEL HAVARD
Havard Law Firm
TIMOTHY HOR AN, JR.
Fairway Real Estate
Management, LLC
TR AVIS JAGGERS
CommunityBank of Texas
TOMMY W. LOT T
Investments
DENNIS MALLOY
Malloy Interests
STEVE McREYNOLDS
Groves Equipment
Rental Co., Inc.
SHEIL A UMPHREY
The Decorating Depot
GLEN W. MORGAN
Reaud, Morgan & Quinn, LLP
JOHN EDDIE WILLIAMS, JR.
SCOT T PARKER
Williams Hart
Parker’s Building Supply
W.E. “BILL” WIL SON, JR.
J. PAT PARSONS
Wilson & Company
CommunityBank of Texas
CommunityBank of Texas,
BART UMPHREY
Directors
R AY MOORE
Investments
ROBERT T. PIGOT T, JR.
CBTX, Inc.
N.A. Directors
JEFF BR ANICK
Jefferson County Judge
JAMES R. BROOKS
Lockton Companies
MICK DUBEA
Dubea Investments
DOAK C. PROC TER, III
The Procter Company
REAGAN REAUD
Privateer Capital, LP
JOSEPH B. SWINBANK
Sprint Sand & Clay
Trinity Industrial Services LLC
JOHN EDDIE WILLIAMS, JR.
Williams Hart
RICKEY WILLIAMS
WFI Properties, Inc.
W.E. “BILL” WIL SON, JR.
Wilson & Company
CommunityBank of Texas,
CBTX, Inc. Management
Investor Relations Contact
JUSTIN M. LONG
281.325.5013
ROBERT T. PIGOT T, JR.
Senior Executive Vice President
and Chief Financial Offi cer
investors@CBoTX.com
TAWN VANDENBERG
N.A. Advisory Directors
JAMES DISHMAN, JR.
Stallion Oilfi eld Services
MAR ALYN HARE
Investments
R AY MOORE
Investments
ROBERT T. PIGOT T, JR.
CommunityBank of Texas
MIKE R AMSEY
Ramsey Law
JERRY REESE
Reese Minerals
DR. JAMES SIMMONS
Lamar University
DR. R. LELDON SWEET
R. Leldon Sweet, MD
ASHLEY K. WARREN
713.210.7622
awarren@CBoTX.com
NASDAQ: CBTX
Transfer Agent
BY REGUL AR MAIL:
Computershare
P.O. Box 505000
Louisville, KY 40233-5000
BY OVERNIGHT DELIVERY:
Computershare
462 South 4th St.,
Suite 1600
Louisville, KY 40202
TELEPHONE
Toll Free: 877.373.6374
Toll: 781.575.3100
ROBERT R. FR ANKLIN, JR.
Chairman, President
and Chief Executive Offi cer
J. PAT PARSONS
Vice Chairman
ROBERT T. PIGOT T, JR.
Senior Executive Vice President
and Chief Financial Offi cer
JUSTIN M. LONG
Senior Executive Vice President
and General Counsel
CommunityBank of Texas,
N.A. Management
ROBERT R. FR ANKLIN, JR.
Chairman and
Chief Executive Offi cer
J. PAT PARSONS
Vice Chairman
Senior Executive Vice President
and Chief Administration Offi cer
DEBOR AH DINSMORE
Senior Executive Vice President
and Chief Information Offi cer
W. ALLEN GAGE
Senior Executive Vice President
Special Projects
TR AVIS JAGGERS
President
JUSTIN M. LONG
Senior Executive Vice President
and General Counsel
CAMBREA R. MERRIWETHER
Senior Executive Vice
President and Chief Human
Resources Offi cer
JAMES L . STURGEON
Senior Executive Vice President
and Chief Risk Offi cer
JOE F. WEST
Senior Executive Vice President
and Chief Credit Offi cer
CBTX, Inc. Advisory
JOE PENL AND, SR.
Quality Mat Company, Inc.
Media Contact
Dear Shareholders,
What can I say about 2020 that has not already been said? The year was challenging for
our families, customers, communities and employees as we worked to protect our well-
being. As I write this letter to recount 2020, I am pleased that we see bright days ahead.
The beginning of 2020 was stressful as the economy
shut down, impacting every business in the country. Our
fellow Americans and people around the world were
dying at a remarkable rate, and a cure was not in sight.
We stayed very close to our customers, understanding
their challenges and providing relief through deferrals.
We also participated in the Paycheck Protection Program
and many of our customers were able to utilize the
program to gain additional relief as debates raged about
when and how to re-open the economy.
As the months passed, the hope for a vaccine to battle
COVID-19 became more of a reality. The economy
strengthened, though not fully recovering, with many
businesses still shut down and many employees still
working from home. During this time, we worked with
customers to help them find a way to recuperate. We
also continued to work with our employees to
accommodate their needs, whether they had illness,
were exposed to illness, had children at home, or one
of many other factors that affected their daily lives.
Today, we have several vaccines available and distributed,
our deferral requests are nominal, and we can focus on
the customers that have been hurt most by the
pandemic. By mid-2021, it appears that many people in
our communities will be vaccinated and most of the
population will be returning to work.
We have faced down difficulties including record low
interest rates, pandemics, hurricanes and record low
temperatures but have stayed focused on success. We
have an incredible staff at CommunityBank of Texas, one
that is battle tested and strong. Throughout these
challenges, we have shown loyalty to our customers and
employees and we have received the same in return.
Our markets are strong and resilient. Although we
anticipate that the first half of 2021 will be slower as
businesses regain footing, we look forward to a much
more robust second half as the country continues to
recover. Our credit metrics are strong; our earnings are
good; and our capital and liquidity afford us opportunity
to participate in the recovery. Our balance sheet
strength gives us many options, and we will work to find
the best path for CBTX in 2021. We remain focused on
creating value for our shareholders.
Thank you for your faith in CBTX, Inc.
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
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
For the fiscal year ended December 31, 2020
or
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
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
CBTX
The Nasdaq Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and emerging growth
company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐
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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☐
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, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $363.7 million.
As of February 24, 2021, there were 24,594,388 shares of the registrant’s common stock, par value $0.01 per share outstanding, including 152,133
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 2021 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, 2020.
CBTX, INC.
Page
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
3
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 44
Cautionary Note Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Interest Rate Sensitivity and Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Impact of Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Recently Issued Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . 71
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . . . . . . . . . . 72
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Item 14.
PART IV
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Item 15.
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Item 16.
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
PART I.
Item 1. Business
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 “Part II—Item 7.—Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and other cautionary statements set forth elsewhere in this
Annual Report on Form 10-K.
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, its 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.
CBTX, Inc. is a Texas corporation and bank holding company incorporated in 2007 that offers banking services
through its wholly owned subsidiary, CommunityBank of Texas, a national bank.
The Bank’s headquarters are located at 5999 Delaware Street, Beaumont, Texas 77706 and the telephone number
is (409) 861-7200. A majority of the Company’s executives are located in the Company’s Houston office at 9 Greenway
Plaza, Suite 110, Houston, Texas 77046 and the telephone number is (713) 210-7600. The Company completed an initial
public offering of its common stock on November 10, 2017. The Company’s common stock is listed on the Nasdaq Global
Select Market, or Nasdaq, under the symbol “CBTX.”
The Bank operates 19 branches located in the Houston market, 15 branches located in the Beaumont market and
one branch in the Dallas market. The Company has experienced significant organic growth since commencing banking
operations, as well as growth through mergers, acquisitions and opening new, or de novo branches. The Company is
focused on controlled profitable growth. Total assets increased from $2.6 billion at December 31, 2014 to $3.9 billion as
of December 31, 2020. The loan portfolio at December 31, 2020 was 76.6% in the Houston market and 21.4% in the
Beaumont market. The Company believes that there are significant ongoing growth opportunities in its markets.
The Bank is primarily a business bank with a 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 its markets. The Bank offers 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. The Bank has a relationship-based approach, and at December 31, 2020, 85.1% of the Bank’s loan
customers also had a deposit relationship with the Bank.
The banking and financial services industry is highly competitive, and the Company competes with a wide range
of financial institutions within its markets, including local, regional and national commercial banks and credit unions. The
Company also competes with mortgage companies, brokerage firms, consumer finance companies, mutual funds,
securities firms, insurance companies, third-party payment processors, financial technology companies and other financial
intermediaries for certain of the Company’s products and services. Some of the Company’s competitors are not subject to
the same regulatory restrictions and the level of regulatory supervision applicable to the Company.
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 the Company’s competitors are much larger financial
institutions that have greater financial resources 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 the Company’s industry and markets include office locations and hours, quality of customer service,
community reputation, continuity of personnel and services, technology resources capacity and willingness to extend credit
and ability to offer sophisticated banking products and services.
The Bank seeks to remain competitive with respect to fees charged, interest rates and pricing and the Bank
believes that its broad and sophisticated suite of financial solutions, high-quality customer service culture, positive
3
reputation and long-standing community relationships enables it to compete successfully within its markets and enhances
its ability to attract and retain customers.
Human Capital
The Company’s success depends on its ability to attract and retain highly qualified senior and middle management
and other skilled employees. Competition for qualified employees can be intense and it may be difficult to locate personnel
with the necessary combination of skills, attributes and business relationships.
The Company believes that its employees are the primary key to the Company’s success as a financial institution.
The Company is committed to attracting, retaining and promoting top quality talent regardless of sex, sexual orientation,
gender identity, race, color, national origin, age, religion and physical ability. The Company strives to identify and select
the best candidates for all open positions based on qualifying factors for each job. The Company is dedicated to providing
a workplace for its employees that is inclusive, supportive and free of any form of discrimination or harassment; rewarding
and recognizing its employees based on their individual results and performance; and recognizing and respecting all of the
characteristics and differences that make each of the Company’s employees unique.
Additionally, the Company is committed to employee development, including through a mentorship program,
which provides retail staff with one-on-one training with experienced employees. Further, the Company has an officer
development program with formal in-house training programs for junior bankers including guidance from senior banking
team members.
As of December 31, 2020, the Company employed 511 full-time equivalent employees.
Available Information
The Company’s website address is www.communitybankoftx.com. The Company makes available free of charge
on or through its website, under the investor relations tab, 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. The SEC
maintains an internet site that contains reports, proxy statements and other information that the Company files with or
furnishes to the SEC and these reports may be accessed at http://www.SEC.gov.
Supervision and Regulation
The United States, or U.S., banking industry is highly regulated under federal and state law. Consequently, the
Company’s 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 the
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 the Company and its 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 the Company’s 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 the Company and its 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.
4
Financial Services Industry Reform. The Dodd-Frank Wall Street Reform and Consumer Protection Act, or
Dodd-Frank Act, mandates certain requirements on the financial services industry, including, among many other things:
(i) enhanced resolution authority with respect to 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, and strengthen safety and soundness, of
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 banking organizations that have less than $10.0 billion
in total assets and have certain risk profiles (discussed in “Part II—Item 8.—Financial Statements and Supplementary
Data—Note 19”), exempting certain banking organizations with less than $10.0 billion or less 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
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.
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 implementing the Basel III framework, or the Basel III Capital Rules, 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: (i) a
Tier 1 capital-to-adjusted total assets ratio, or leverage capital ratio, of at least 4.0%; (ii) a Tier 1 capital to risk-weighted
assets ratio, or Tier 1 risk-based capital ratio, of at least 6.0%; (iii) 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 (iv) a Common Equity Tier 1, or CET1,
capital ratio of at least 4.5%.
The Basel III Capital Rules also require bank holding companies and banks to maintain a “capital conservation
buffer” on top of the minimum risk-based capital ratios. The buffer is intended to help 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, requires banking organizations to hold CET1 capital in excess of the minimum
risk-based capital ratios by at least 2.5% to avoid limits on capital distributions and certain discretionary bonus payments
to executive officers and similar employees.
The Basel III Capital Rules implemented changes to the definition of capital. Among the most important changes
were stricter eligibility criteria for regulatory capital instruments that disallow the inclusion of certain instruments, such
as trust preferred securities (other than grandfathered trust preferred securities), in Tier 1 capital, new constraints on the
inclusion of minority interests, mortgage-servicing assets, deferred tax assets and certain investments in the capital of
unconsolidated financial institutions, and the requirement that most regulatory capital deductions be made from CET1
capital. The Basel III Capital Rules also changed the methods of calculating certain risk-weighted assets, which in turn
affected the calculation of risk-based ratios. Under the Basel III Capital Rules, higher or more sensitive risk weights are
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.
5
The Basel III Capital Rules permit the Federal Reserve and the OCC to 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.
The federal banking regulators have modified certain aspects of the Basel III Capital Rules since the rules were
initially published, and additional modifications may be made in the future. 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 the Company will depend on the manner in which it is implemented by the federal banking regulators.
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 nonbank financial company supervised by the Federal Reserve to engage in proprietary
trading and have certain ownership interests in, or relationships with, a “covered fund”, or the Volcker Rule. The
Regulatory Relief Act discussed above included a provision exempting banking entities with $10.0 billion or less in total
consolidated assets, and total trading assets and trading liabilities that are 5.0% 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, the Company is 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 the Company directly or
indirectly controls, such as any nonbank subsidiaries and other companies in which it owns 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 holding company
6
and the banks concerned, the convenience and needs of the communities to be served, 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. The Company’s ability to make future acquisitions will depend on
its ability to obtain approval for such acquisitions from the Federal Reserve. The Federal Reserve could deny the
Company’s application based on the above criteria or other considerations. For example, the Company could be required
to sell banking centers as a condition to receiving regulatory approval, which condition may not be acceptable to the
Company or, if acceptable, 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 25.0% 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 BHC Act includes a presumption
that control does not exist when a company owns or controls less than 5.0% of any class of voting securities. Companies
that propose to acquire between 5.0% and 24.99% 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 the company proposes to acquire
25.0% or more but less than 33.3% 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 25.0% of a class. The Federal Reserve generally deems
the acquisition of 33.3% or more of the total equity of a bank or bank holding company to represent control. In March of
2020, the Federal Reserve published a final rule to revise its regulations related to determinations of whether a company
has the ability to exercise a controlling influence over another company. The final rule expands the number of presumptions
for use in such determinations and provides additional transparency on the types of relationships that the Federal Reserve
generally views as supporting a determination of 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 a similar definition of control as the BHC Act, and agency regulations under the CIBC Act presume in
many cases that a change in control occurs when an individual, trust, or company acquires 10.0% 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 the Company’s access to capital and could limit
parties who could acquire shares of the Company’s common stock.
Regulatory Restrictions on Payment of Dividends, Stock Redemptions, and Stock Repurchases. The Federal
Reserve regulates the payment of dividends, stock redemptions, and stock repurchases by bank holding companies,
including the Company. With respect to dividends, the Federal Reserve has issued a policy statement that provides that a
bank holding company should not pay dividends unless: (i) its net income over the last four quarters (net of dividends
paid) has been sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention appears to be consistent
with the capital needs, asset quality and overall financial condition of the bank holding company and its subsidiaries; and
(iii) the bank holding company will continue to meet minimum required capital adequacy ratios. Accordingly, the
Company should not pay cash dividends that exceed its net income in any year or that can only be funded in ways that
weaken its financial strength, including by borrowing money to pay dividends.
The Company is also subject to significant restrictions with respect to redemptions and repurchases of its
securities. The Federal Reserve has issued guidance indicating that a bank holding company should not repurchase its
common stock, preferred stock, trust preferred securities, or other regulatory capital instruments in the market if such
action would be inconsistent with the bank holding company’s prospective capital needs and continued safe and sound
7
operation. In certain circumstances, a bank holding company is also required to notify the Federal Reserve in advance of
a proposed redemption of repurchase. For example, a bank holding company is generally required to notify the Federal
Reserve of actions that would reduce the company’s consolidated net worth by 10.0% or more; most instruments included
in Tier 1 capital with features permitting redemption at the option of the issuing bank holding company (e.g., perpetual
preferred stock and trust preferred securities) may qualify as regulatory capital only if redemption is subject to prior Federal
Reserve approval; and bank holding companies are generally required to consult with the Federal Reserve before
redeeming any equity or other capital instrument included in Tier 1 or Tier 2 capital prior to stated maturity, if such
redemption could have a material effect on the level or composition of the organization’s capital base. The Federal Reserve
has also indicated that bank holding companies experiencing financial weaknesses (or at significant risk of developing
financial weaknesses) or considering expansion (either through acquisitions or new activities) should consult with the
Federal Reserve before redeeming or repurchasing common stock or other regulatory capital instruments for cash or other
valuable consideration. In evaluating the appropriateness of a bank holding company’s proposed redemption or repurchase,
the Federal Reserve will generally consider: (i) the potential losses that the company may suffer from the prospective need
to increase reserves and write down assets from continued asset deterioration; (ii) the company’s ability to raise additional
common stock and other Tier 1 capital to replace capital instruments that are redeemed or repurchased; and (iii) the
potential negative effects on the company’s capital resulting from the replacement of common stock with lower-quality
forms of regulatory capital or from the redemption or repurchase of capital instruments from investors with cash or other
value that could be better used to strengthen the company’s regulatory capital base or its overall financial condition.
Source of Strength. Under Federal Reserve policy, bank holding companies have historically been required to act
as a source of financial and managerial strength to each of their banking subsidiaries, and the Dodd-Frank Act codified
this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support
the Bank, including at times when the Company 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 the Company for the deficiency. If the
Company failed to pay the assessment within three months, the Federal Reserve could order the sale of the Company’s
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, the Company 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, the Company 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, effective March 11, 2000, or the GLB Act, expanded 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
8
determined by the Federal Reserve. The Company qualifies for financial holding company status, but it has not made such
an election. The Company will make such an election in the future if it plans 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 Deposit Insurance Act, or FDIA, requires the federal bank regulatory agencies to prescribe standards, by
regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation,
fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. Guidelines
adopted by the federal bank regulatory agencies establish general standards relating to internal controls and information
systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and
compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices
to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation
as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition,
the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given
notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If,
after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to
implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and
may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt
corrective action” provisions of the FDIA. See “Prompt Corrective Action” above. If an institution fails to comply with
such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.
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.
CommunityBank of Texas, N.A.
The Bank is subject to various requirements and restrictions under the laws of the U.S. 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 acting 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 the Company’s 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
9
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, 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, the OCC is statutorily required to take increasingly severe actions against
the bank. If a national bank is significantly undercapitalized, the OCC must, among other actions, require the bank to
engage in capital raising activities, restrict interest rates paid by the bank, restrict the bank’s activities or asset growth,
require the bank to dismiss certain directors and senior executive officers, restrict the bank’s transactions with its affiliates,
or require the bank to divest itself of or liquidate certain subsidiaries. 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 refer 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, or ACL, 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
10
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 the Company’s operating funds and for the foreseeable future it is anticipated that dividends paid by the
Bank to the Company will continue to be the Company’s 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.
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: (i) balanced risk-taking incentives; (ii) compatibility with effective controls and risk
management; and (iii) 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.
11
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 the Company’s 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.
The Bank is generally unable to control the amount of premiums that it is 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 the Company’s earnings.
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 may be exposed to heightened commercial real estate lending concentration risk and subject to further
supervisory analysis if (i) total reported loans for construction, land development and other land represent 100.0% or more
of total capital or (ii) total reported loans secured by multi-family residential properties and nonfarm nonresidential
properties and loans for 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 by 50.0% or more during the prior 36 months. If a concentration
is present, management is expected to 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 regulations issued thereunder are intended to encourage banks to
help meet the credit needs of their communities, including low- and moderate-income neighborhoods, consistent with safe
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and sound operations. The CRA and implementing regulations provide for, among other things, regulatory assessment of
a bank’s record in meeting the needs of its entire community when considering applications by the bank to establish
branches, merge or consolidate with another bank, or acquire the assets and assume the liabilities of another bank. 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 by the bank holding company to acquire ownership or control of shares or
assets of a bank or to merge with any other bank holding company. The CRA, as amended by 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. An unsatisfactory CRA rating could substantially delay approval or result in denial of an
application. The Bank received an “Outstanding” rating on its most recent CRA performance evaluation.
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 the
Companies other direct or indirect subsidiaries that offer consumer financial products or services.
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: (i) have a term not exceeding 30
years; (ii) provide for regular periodic payments that do not result in negative amortization, deferral of principal repayment,
or a balloon payment; and (iii) 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 Office of Foreign Assets Control. A major focus of governmental policy on banks
and other financial institutions in recent years has been combating money laundering and terrorist financing. The Bank
Secrecy Act, or BSA, 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 federal laws impose significant obligations on
certain financial institutions, including the Bank, to detect and deter money laundering and terrorist financing. The
principal obligations of an insured depository institution include, among other things, the need to: (i) establish an anti-
money laundering, or AML, program that includes training and audit components; (ii) designate a BSA officer;
(iii) establish a “know your customer” program involving due diligence to confirm the identity of persons seeking to open
accounts and to deny accounts to those persons unable to demonstrate their identities; (iv) identify and verify the identity
of beneficial owners of legal entity customers, subject to certain exclusions and exemptions; (v) take additional precautions
with respect to customers that pose heightened risk; (vi) monitor, investigate and report suspicious transactions or activity;
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(vii) file currency transaction reports for deposits and withdrawals of large amounts of cash; (viii) verify and certify money
laundering risk with respect to private banking and foreign correspondent banking relationships; (ix) maintain records for
certain minimum periods of time; and (x) respond to requests for information by law enforcement. The Financial Crimes
Enforcement Network, or FinCEN, and the federal banking regulators have imposed significant civil money penalties
against banks found to be violating these obligations.
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.
On June 18, 2020, the Bank and the OCC entered into a formal agreement, or the Agreement, with regard to
BSA/AML compliance matters. For further information regarding the Agreement, please see “Part II—Item 7.—
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.”
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 12 regional Federal Home Loan Banks, more than 8,000 member financial institutions, and a fiscal agent.
The Federal Home Loan Banks 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 Federal
Home Loan Bank. 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 Federal Home Loan Bank, the Bank is entitled to borrow from the Dallas Federal
Home Loan Bank, provided it posts acceptable collateral. The Bank is also required to own a certain amount of capital
stock in the Dallas Federal Home Loan Bank. 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 Federal Home Loan Bank to the
Bank are secured by a portion of the respective mortgage loan portfolio, certain other investments and the capital stock of
the Dallas Federal Home Loan Bank held by the Bank.
Enforcement Powers. The federal banking agencies, including the Company’s 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,
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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. The Company cannot predict the nature of future fiscal and monetary policies or the
effect of these policies on the Company’s 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 the Company’s operations and thus may have a negative impact on its 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 the Company is subject. Those providers, because they are not so highly regulated, may have a
competitive advantage over the Company 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 total annual gross revenues during its last fiscal year and satisfying
other applicable standards, the Company qualifies 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. Emerging growth company are:
•
•
•
•
exempt from the requirement to obtain an attestation and report from the Company’s auditors on management’s
assessment of internal control over financial reporting under the Sarbanes-Oxley Act of 2002;
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 the FASB, or by the SEC;
permitted to provide less extensive disclosure about the Company’s executive compensation arrangements; and
not required to give shareholders nonbinding advisory votes on executive compensation or golden parachute
arrangements.
The Company has elected to take advantage of the scaled disclosures and other relief described above in this
Annual Report on Form 10-K, and may take advantage of these exemptions until December 31, 2022 or such earlier time
that it is are no longer an “emerging growth company.” In general, the Company would cease to be an “emerging growth
company” if it had $1.07 billion or more in annual revenues, more than $700 million in market value of its common stock
held by non-affiliates on any June 30 more than one year after its initial public offering, or issued more than $1.0 billion
of non-convertible debt over a three-year period. As a result, the Company could cease to be an “emerging growth
company” as soon as the end of the 2021 fiscal year. For so long as the Company may choose to take advantage of some
or all of these reduced burdens, the level of information that it provides shareholders may be different than what
shareholders might get from other public companies in which they hold stock. In addition, when these exemptions cease
to apply, the Company expects to incur additional expenses and devote increased management effort toward ensuring
compliance with them, which the Company 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
15
are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive
relationships of financial institutions operating in the U.S. The Company cannot predict whether or in what form any
proposed regulation or statute will be adopted or the extent to which its 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 the Company’s 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
Summary of Risk Factors
The Company’s business is subject to a number of risks, including risks that may prevent it from achieving its
business objectives or may adversely affect its business, reputation, financial condition, results of operations, revenue and
future prospects. These risks are discussed more fully in “Item 1A.—Risk Factors” of this Annual Report on Form 10-K.
These risks include, but are not limited to, the following:
Risks Related to the COVID-19 Pandemic
•
•
the Company’s ability to manage the economic, strategic, and operational risks related to the impact of the
COVID-19 pandemic (including, but not limited to, risks related to its customers’ credit quality, deferrals
and modifications to loans, its ability to borrow, the impact of a resultant recession generally and the safety
and viability of its workforce, Board of Directors and management);
governmental or regulatory responses to the COVID-19 pandemic and the newly enacted fiscal stimulus,
which affects its loan portfolio and forbearance practice.
Risks Related to the Company’s Business and Operations
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•
•
•
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•
lack of growth and welfare of the Company’s markets and of the banking industry in general;
failure to adequately measure and limit the Company’s credit risk;
increases in nonperforming and classified assets;
the reduced resources of the Company’s small to medium-sized business customers and their ability to repay
loans;
credit losses from borrowers under the Coronavirus Aid, Relief and Economic Security Act, or CARES Act;
credit risks of loans in the Company’s loan portfolio with real estate as a primary or secondary component
of collateral;
credit risk related to loans collateralized by general business assets;
significance of large loan and deposit relationships;
unexpected losses of the services of the Company’s executive management team and other key employees;
lack of liquidity could impair the Company’s ability to fund operations;
interest rate risk and fluctuations in interest rates;
dependence on the use of data and modeling in the Company’s decision-making;
accounting estimates rely on analytical and forecasting models;
the Company’s goodwill and other intangibles may become impaired;
valuation of securities held in the Company’s portfolio;
failure to maintain effective internal control over financial reporting;
changes in accounting standards;
repurchase and indemnity requests for loans to correspondent banks;
risks related to acquisitions and de novo branching due to the Company’s growth strategy.
Risks Related to the Economy and the Company’s Industry
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adverse impact of natural disasters, pandemics and other catastrophes;
sustained low oil prices, volatility in oil prices and downturns in the energy industry;
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•
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competition from financial services companies and other companies that offer banking services;
the soundness of other financial institutions.
Risks Related to Cybersecurity, Third-Parties and Technology
•
systems failures, interruptions or cybersecurity breaches and attacks involving information technology and
telecommunications systems or third-party servicers.
Risks Related to Legal, Reputational and Compliance Matters
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laws regarding the privacy, information security and protection of personal information;
employee errors and customer or employee fraud;
the accuracy and completeness of information provided by the Company’s borrowers and counterparties;
the initiation and outcome of litigation and other legal proceedings against the Company or to which it may
become subject;
failure to maintain important deposit customer relationships and the Company’s reputation.
Risks Related to the Regulation of the Company’s Industry
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the Company’s highly regulated environment, stringent capital requirements and regulatory approvals;
failure to comply with any supervisory actions;
the Bank’s Agreement with the OCC and the restrictions as a result of such agreement;
the Bank’s investigation by FinCEN regarding the Bank’s compliance with the BSA/AML laws and
regulations;
failure to comply with economic and trade sanctions or with applicable anti-corruption laws;
cost of compliance and litigation regarding federal, state and local regulations and/or the licensing of loan
servicing, collections and the Company’s sales of loans to third-parties;
changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting,
tax, trade, monetary and fiscal matters.
Risks Related to Ownership of the Company’s Common Stock
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fluctuations in the market price of the Company’s common stock;
additional dilution of the percentage ownership of the Company’s shareholders from future sales and
issuances of its capital stock or rights to purchase capital stock;
the obligations associated with being a public company;
the control of the Company’s management and Board of Directors over its business;
priority of the holders of the Company’s debt obligations over its common stock with respect to payment;
future issuance of shares of preferred stock;
dependence upon the Bank for cash flow and restrictions on the Bank’s ability to make cash distributions;
changes to the Company’s dividend policy or ability to pay dividends without notice;
anti-takeover effect of certain provisions of the Company’s corporate organizational documents and
provisions of federal and state law.
Risk Factors
The Company’s business involves significant risks, some of which are described below. Shareholders should
carefully consider the risks and uncertainties described below, together with all the other information in this Annual Report
on Form 10-K including “Part II—Item 7.—Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and the consolidated financial statements and the related notes in “Part II—Item 8.—Financial Statements
and Supplementary Data.” If any of the following risks occur, the Company’s business, reputation, financial condition,
results of operations, revenue and future prospects could be seriously harmed. As a result, the trading price of the
Company’s common stock could decline, and shareholders could lose all or part of their 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 “Part II—Item 7.—
Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on
Form 10-K.
17
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic has and will likely continue to adversely impact the Company’s business, and the ultimate
impact on the business and financial results will depend on future developments, which are highly uncertain and cannot
be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in
response to the pandemic.
The COVID-19 pandemic has created extensive disruptions to the global economy and to the lives of individuals
throughout the world. While the scope, duration, and full effects of COVID-19 are evolving, remain uncertain and cannot
be predicted, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the
functioning of financial markets, impacted interest prices, increased economic and market uncertainty, and disrupted trade
and supply chains. As the result of the COVID-19 pandemic and the related adverse local and national economic
consequences, the Company is subject to many risks, including but not limited to:
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•
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the risk of operational failures due to changes in the Company’s normal business practices necessitated by the
pandemic and related governmental and non-governmental actions (including temporarily closing branches and
offices, remote workings, and the temporary or permanent loss of key employees and management due to illness);
credit losses resulting from financial stress being experienced by the Company’s borrowers as a result of the
pandemic and related governmental actions (including risks related to the Paycheck Protection Program, or PPP,
under the CARES Act and related credit risks resulting from PPP lending due to forbearance or failure of
customers to qualify for loan forgiveness);
collateral for loans, such as real estate, may continue to decline in value, which could cause credit losses to
increase;
increased demands on capital and liquidity;
the risk that the Company’s net interest income, lending activities, deposits, swap activities, and profitability may
be negatively affected by volatility of interest rates caused by uncertainties stemming from the pandemic; and
cybersecurity and information security risks as the result of an increase in the number of employees working
remotely.
As noted in “Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Information Regarding COVID-19 Impact and Uncertain Economic Outlook—Legislative and Regulatory
Developments,” the Federal Reserve has taken various actions and the U.S. government has enacted several fiscal stimulus
measures to counteract the economic disruption caused by the COVID-19 pandemic and provide economic assistance to
individual households and businesses, stabilize the markets and support economic growth. The ultimate success of these
measures is unknown and they may not be sufficient to fully mitigate the negative impact of the COVID-19 pandemic. If
the effects of COVID-19 continue for a prolonged period or result in sustained economic stress or recession, many of the
risk factors identified above and elsewhere in this “Item 1A.—Risk Factors” could be exacerbated. While the Company
does not yet know the full extent of the impact of the COVID-19 pandemic on its business, operations or the global
economy as a whole, the effects could have a material adverse effect on the Company’s business, financial condition,
results of operations, liquidity and capital levels. Moreover, many risk factors set forth in this “Item 1A.—Risk Factors”
should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.
Risks Related to Business and Operations
The Company’s business is concentrated in and largely dependent upon the continued growth and welfare of its markets
and on the banking industry in general.
The Company’s business is concentrated in the Houston and Beaumont, Texas markets and it entered the Dallas,
Texas market in 2019. The Company’s success depends, to a significant extent, upon the economic activity and conditions
in its markets. Adverse economic conditions that impact the Company’s markets could reduce its growth rate, the ability
of customers to repay their loans, the value of collateral underlying loans, the Company’s ability to attract deposits and
generally impact its business, financial condition, results of operations and future prospects. Due to the Company’s
geographic concentration, it may be less able than other larger regional or national financial institutions to diversify the
Company’s credit risks.
A national economic downturn or deterioration of conditions in the Company’s market, such as the COVID-19
pandemic or the sustained declines in oil and gas prices, could adversely impact the Company’s borrowers and cause losses
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beyond those that are provided for in its ACL due to increases in loan delinquencies, nonperforming assets, foreclosures,
loan charge-offs and decreases in demand for its products and services, which could adversely impact the Company’s
liquidity position and decrease the value of the collateral. Increased economic uncertainty and increased unemployment
resulting from the economic impacts of the spread of COVID-19 may also result in borrowers seeking sources of liquidity,
withdrawing deposits and drawing down credit commitments at rates greater than previously expected. In addition, the
effects of the COVID-19 pandemic, including actions taken by individuals, businesses, government agencies and others
in response to the COVID-19 pandemic, may aggravate the impact of the risk factors discussed herein on the Company’s
business.
The Company may not be able to adequately measure and limit its 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 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. The Company’s risk management practices, such as monitoring the concentration of its
loans within specific industries and credit approval practices, may not adequately reduce credit risk and credit
administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions
affecting customers and the quality of the loan portfolio. Failure to effectively measure and limit the credit risk associated
with the Company’s loan portfolio could lead to unexpected losses.
The Company maintains an ACL that represents management’s judgment of expected losses and risks of losses
inherent in its loan portfolio. The determination of the appropriate level of the ACL is inherently highly subjective and
requires significant estimates of and assumptions regarding current credit risks, future trends and forecasts, 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, significant changes in forecasted periods and other factors, both within and outside of the
Company’s control, may require an increase its ACL.
In addition, regulators, as an integral part of their periodic examinations, review the Company’s methodology
for calculating and the adequacy of its ACL and may direct the Company 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 ACL, the Company may need additional provisions for credit losses to restore
the adequacy of its ACL.
The amount of nonperforming and classified assets may increase significantly, resulting in additional losses and costs
and expenses.
The Company’s 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. 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 the
Company seeks 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 and any increase in the amount of
nonperforming or classified assets could have a material impact on the Company’s business, financial condition and results
of operations, including through increased capital requirements from regulators.
The small to medium-sized businesses that the Company lends to may have fewer resources to endure adverse business
developments, which may impair its borrowers’ ability to repay loans.
The Company focuses its 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 and may experience substantial volatility in
operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the collateral securing such
loans generally includes real property and general business assets, which may decline in value more rapidly than
anticipated, exposing the Company to increased credit risk.
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The Company’s primary markets in Houston, Beaumont and Dallas have experienced limitations on commercial
activity since the outbreak of COVID-19. In addition, many businesses, particularly those in the Company’s primary
markets, were subject to shutdowns at the onset of the pandemic and may become subject to additional shutdowns and
restrictions in light of the periodic increases of COVID-19 cases in Texas. These challenging market conditions in which
borrowers operate could cause rapid declines in loan collectability and the values associated with general business assets,
resulting in inadequate collateral coverage that may expose the Company to credit losses and could adversely affect its
business, financial condition and results of operations. Moreover, 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 health, death, disability or
resignation of one or more of the key management, the inefficiency caused by the current remote working arrangement or
the limited availability to work due to health concerns in response to COVID-19 could have an adverse impact on
borrower’s businesses and their ability to repay their loans.
The Company participates in the small business loan program under the CARES Act, which may further expose it to
credit losses from borrowers under such programs.
Among other components, the CARES Act provides for payment forbearance on mortgages or loans to borrowers
experiencing a hardship during the COVID-19 pandemic. The Bank has offered deferral and forbearance plans and has
participated in the PPP by making loans to small businesses consistent with the CARES Act that are fully guaranteed by
the Small Business Administration, or SBA. Various governmental programs such as the PPP are complex and the
Company’s participation may lead to additional litigation and governmental, regulatory and third-party scrutiny, negative
publicity and damage to its reputation. In addition, participation in the PPP as a lender may adversely affect the Company’s
revenue and results of operations depending on the timing and amount of forgiveness, if any, to which borrowers will be
entitled and the Company is subject to the risk of PPP fraud cases.
The Company is subject to risks arising from loans in its loan portfolio with real estate as a primary or secondary
component of collateral.
As of December 31, 2020, $2.1 billion, or 70.2%, of the Company’s 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 could increase the credit risk associated with the Company’s loan portfolio, cause it to increase the ACL,
significantly impair the value of property pledged as collateral on loans and affect the ability to sell the collateral upon
foreclosure without additional losses.
As of December 31, 2020, $1.3 billion, or 44.3%, of the Company’s gross loans were nonresidential real estate
loans (commercial real estate loans and multi-family residential 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. As of December 31, 2020, the Company’s nonresidential real estate loans
included $334.8 million of owner-occupied commercial real estate loans, which are generally less dependent upon income
generated directly from the property, but still carry risks from the successful operation of the underlying business or
adverse economic conditions. Additionally, as of December 31, 2020, the Company’s nonresidential real estate loans
included $635.6 million of non-owner-occupied commercial real estate loans, which generally involve relatively large
balances to single borrowers or related groups of borrowers. Nonresidential real estate loans expose a lender to greater
credit risk because the collateral securing these loans is typically more difficult to liquidate due to fluctuations of the value
of the collateral.
As of December 31, 2020, $522.7 million, or 17.8%, of the Company’s loans were construction and development
loans, which typically are secured by a project under construction. 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 the Company is forced to foreclose on a project prior to completion, it may be unable to
recover the entire unpaid portion of the loan. In addition, the Company 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.
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In considering whether to make a loan secured by real property, the Company generally requires an appraisal of
the property. However, an appraisal is only an estimate of the value of the property at the time of appraisal. These estimates
may not accurately describe the value of the real property collateral and the Company may not be able to realize the full
amount of any remaining indebtedness when it forecloses on and sells the relevant property.
If the Company forecloses on a loan with real estate assets as collateral, it will own the underlying real estate,
subjecting it to the costs and potential risks associated with the ownership. The amount that may be realized after a default
is dependent upon factors outside of the Company’s 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 Company is subject to risks arising from loans in its loan portfolio collateralized by general business assets.
As of December 31, 2020, commercial and industrial loans were $743.0 million, or 25.3%, of the Company’s
gross loans. Commercial and industrial loans are generally 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. 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 and repayment is subject to the ongoing business operations risks 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 the Company anticipates, thus exposing it to increased credit risk.
The Company’s largest loan and deposit relationships currently make up significant percentages of the loan portfolio
and deposits.
As of December 31, 2020, the Company’s 15 largest loan relationships, including related entities, totaled $494.4
million, or 16.8%, of its gross loans. 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, the Company could
be at serious risk of material losses. The ACL may not be adequate to cover losses associated with any of these relationships
and any loss or increase in the allowance would negatively impact the Company’s earnings and capital. Even if the loans
are collateralized, a large increase in classified assets could harm the Company’s reputation with regulators and inhibit its
ability to execute its business plan.
As of December 31, 2020, the Company’s 15 largest depositors, including related entities, totaled $550.8 million,
or 16.7%, of total deposits. Several of the Company’s 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 the Company’s largest depositors or by the
related customer groups could force the Company to rely more heavily on borrowings and other sources of funding for its
business and withdrawal demands, which may be more expensive and less stable.
The Company could be adversely impacted by the unexpected loss of the services of its executive management team and
other key employees.
The Company’s success depends in large part on the performance of its executive management team and other
key personnel, as well as on its ability to attract, motivate and retain highly qualified senior and middle management and
other skilled employees. Competition for qualified employees is intense and the process of locating qualified key personnel
may be lengthy and expensive. If any of the executive management team contract COVID-19, the Company may lose their
services for an extended period of time, which would likely have a negative impact on its business and operations.
A significant percentage of the Company’s key employees and executive leaders live and work in Houston and
Beaumont, Texas. This concentration of its personnel, technology, and facilities increases the Company’s risk of business
disruptions if the COVID-19 pandemic (or a significant outbreak of another contagious disease) continues to impact the
Houston, Beaumont or Dallas metropolitan areas negatively. The Houston market in particular experienced a dramatic rise
in COVID-19 cases during a portion of the latter half of 2020. As a result, some of the Company’s employees and
management contracted COVID-19. If the Company continues to experience cases of COVID-19 among the employees
or such cases become widespread at the Company, it will place more pressure on the remaining employees to perform all
functions across the organization while maintaining their health. Although certain remedial measures have been taken,
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including quarantine, temporary branch closure, remote working, and shift working, increased COVID-19 diagnoses may
require the Company to take additional remediation measures and could impair its ability to conduct business. The
Company may not be successful in retaining its key employees or finding adequate replacements for lost personnel.
The Company is subject to interest rate risk.
Changes in interest rates could have an adverse impact on the Company’s net interest income, business, financial
condition and results of operations. Many factors outside the Company’s control impact interest rates, including
governmental monetary policies and macroeconomic conditions. A majority of banking assets and liabilities are monetary
in nature and subject to risk from changes in interest rates. Like most financial institutions, the Company’s earnings are
significantly dependent on its net interest income and are subject to “gaps” in the interest rate sensitivities of assets and
liabilities that may negatively impact earnings. Interest rate increases often result in larger payment requirements for
borrowers, which increase the potential for default and delayed payment, and reduces demand for collateral securing the
loan. Further, loans in nonaccrual status require continued funding costs, but result in decreased interest income. Interest
rate increases may also reduce the demand for loans and increase competition for deposits. Declining interest rates can
increase loan prepayments and long-term fixed rate credits, which could adversely impact 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,
the Company could experience net interest margin compression as interest-earning assets would continue to reprice
downward while interest-bearing liability rates could fail to decline in tandem. Changes in interest rates can also impact
the value of loans, securities and other assets.
The Company is subject to liquidity risk.
Liquidity risk is the potential that the Company will be unable to meet its obligations as they become due because
of an inability to liquidate assets or obtain adequate funding. The Company requires sufficient liquidity to meet customer
loan requests, customer deposit maturities and withdrawals, payments on 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. The Company relies on its ability to generate deposits and effectively manage the
repayment and maturity schedules of loans and securities to ensure that it has adequate liquidity to fund operations. An
inability to raise funds through deposits, borrowings, loan repayments, sales of the Company’s securities, sales of loans
and other sources could have a negative impact liquidity.
The Company’s most important source of funds is deposits, which have historically been stable sources of funds.
However, deposits are subject to potentially dramatic fluctuations in availability or price due to factors that may be outside
of the Company’s control, including increasing competitive pressure 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 funding costs and reducing net interest income and net income.
The Company has unfunded commitments to extend credit, which are formal agreements to lend funds to
customers as long as there are no violations of any conditions established in the contracts. Unfunded credit commitments
are not reflected on the Company’s consolidated balance sheet and are generally not drawn upon. Borrowing needs of
customers may exceed the Company’s expectations, especially during a challenging economic environment where clients
are more dependent on credit commitments. Increased borrowings under these commitments could adversely impact
liquidity.
The Company’s access to funding sources, such as through its line of credit, capital markets offerings, borrowing
from the Federal Reserve Bank of Dallas and the Federal Home Loan Bank, or from other third-parties, in amounts
adequate to finance or capitalize its activities, or on terms that are acceptable, could be impaired by factors that affect the
Company 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.
The Company is dependent on the use of data and modeling in its decision-making.
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 the Company’s operations. Liquidity stress
testing, interest rate sensitivity analysis and the identification of possible violations of AML regulations are all examples
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of areas which 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 the Company is not currently subject to annual Dodd-Frank
Act stress testing and Comprehensive Capital Analysis and Review submissions, it anticipates that model-derived testing
may become more extensively implemented by regulators in the future.
The Company anticipates 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 the Company believes these quantitative techniques and approaches improve
decision-making, they also create the possibility that faulty data or flawed quantitative approaches could negatively impact
its decision-making ability or if the Company became 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.
The Company’s accounting estimates rely on analytical and forecasting models.
The processes the Company uses to estimate its ACL, assess the value of financial instruments, goodwill and
other intangibles for potential credit losses or impairment depend upon the use of analytical and forecasting models,
judgments, assumptions and estimates that impact the amounts reported in the Company’s consolidated financial
statements and accompanying notes. The accounting policies the Company considers to be the most significant accounting
policies and methods requiring judgments, assumptions and estimates are discussed further in “Part II—Item 7.—
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.”
The Company’s goodwill, other intangibles and other long-lived assets may become impaired.
The Company reviews goodwill, other intangibles and other long-lived assets for impairment at least annually,
or more frequently if a triggering event occurs which indicates that the carrying value of these assets might be impaired.
While the Company has not recorded any impairment charges related to these assets, future evaluations may result in
findings of impairment and related write-downs.
Potential credit losses on securities held in the Company’s portfolio.
The Company invests in securities with the primary objectives of providing a source of liquidity, providing an
appropriate return on funds invested, managing interest rate risk, meeting pledge requirements and meeting regulatory
capital requirements. Factors beyond the Company’s control can significantly and adversely influence the fair value of
securities in its 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 or issuers, 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 an expected credit loss which would require the Company to record an ACL and related
provision which would impact earnings. The process for determining whether securities are impaired requiring an ACL
usually requires 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
the Company has not recorded an ACL related to its securities portfolio as of December 31, 2020, 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 it to record an ACL in future periods.
The Company is subject to risk arising from failure to maintain internal control over financial reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting
and for evaluating and reporting on that system of internal control. In the past, significant deficiencies have been identified
in the Company’s 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 financial reporting. The Company’s actions to maintain effective controls and remedy
any weakness or deficiency 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 its financial statements,
which in turn could harm its business, impair investor confidence in the accuracy and completeness of its financial reports,
impair access to the capital markets, cause the price of the Company’s common stock to decline and subject it to increased
regulatory scrutiny and/or penalties, and higher risk of shareholder litigation.
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Changes in accounting standards could materially impact the Company’s financial statements.
From time to time the FASB or the SEC change the financial accounting and reporting standards that govern the
preparation of the Company’s financial statements. Such changes may result in the Company’s financial statements being
subject to new accounting and reporting standards or change existing accounting and reporting standards. 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 the
Company’s control, can be hard to predict and can materially impact how it records and reports the Company’s financial
condition and results of operations. In some cases, the Company may be required to apply a new standard, a revision to an
existing standard or change the application of a standard in such a way that financial statements for periods previously
reported are revised.
Potential repurchase and indemnity requests for loans sold to correspondent banks.
The Company originates residential mortgage loans for sale to correspondent banks who may resell such
mortgages to government-sponsored enterprises, such as Federal National Mortgage Loan Association, or Fannie Mae,
Federal Home Loan Mortgage Corporate, or Freddie Mac, and other investors. As a part of this process, the Company
makes 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, the Company 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 the Company did not repurchase any residential mortgage loans sold to
correspondent banks in 2020, if it is forced to repurchase mortgage loans in the future that it previously sold to investors,
or indemnify those investors, the Company’s business, financial condition and results of operations could be adversely
impacted.
The Company’s growth strategy, which includes acquisitions and de novo branching, includes a number of risks.
The Company intends to pursue acquisition opportunities that it believes complement its activities and may
enhance profitability and provide attractive risk-adjusted returns. The Company’s acquisition activities could be material
to its business and involve a number of risks, including, but not limited to, the following:
competition from other banking organizations and other acquirers;
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• market pricing for desirable acquisitions resulting in lower than traditional returns;
•
the time and expense associated with identifying, evaluating, and negotiating acquisitions, including
diversion of management time from the operation of the Company’s existing business;
using inaccurate estimates and judgments with respect to the health or value of acquisition targets;
failure to achieve expected revenues, earnings, savings or synergies from an acquisition;
unknown or contingent target liabilities, including compliance and regulatory issues;
the time and expense required of integration of target customers and data;
loss of key employees and customers;
reputational issues if the target’s management does not align with the Company’s culture and values;
risks of impairment to goodwill; and
regulatory delays.
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The Company’s business strategy includes evaluating strategic opportunities to grow through de novo branching
which 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 difficulties successfully integrating and promoting the Company’s corporate culture among
other challenges. Failure to adequately manage the risks associated with the Company’s growth through de novo branching
could have a material adverse impact on its business, financial condition and results of operations.
Risks Related to the Economy and the Company’s Industry
The Company could be adversely impacted by natural disasters, pandemics and other catastrophes.
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The Company operates banking locations throughout the Houston and Beaumont areas, which are susceptible to
hurricanes, tropical storms, other adverse weather conditions, pandemics and other catastrophes. In addition, man-made
events such as acts of terror, governmental responses to acts of terror, malfunctions of the electronic grid and other
infrastructure breakdowns (such as the grid failures in February 2021 resulting from unusually cold weather for the region)
could adversely affect economic conditions in its markets. These adverse weather and catastrophic events can disrupt
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 the Company operates and adversely
affect its customers. If the economies in the Company’s markets experience an overall decline because of a catastrophic
event, demand for loans and its other products and services could decline. In addition, the rates of delinquencies,
foreclosures, bankruptcies and losses on the Company’s loan portfolios may increase substantially after events such as
hurricanes, as uninsured property losses, interruptions of its 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 the Company’s loans could be materially and adversely affected by a catastrophic event.
The Company be adversely impacted by sustained low oil prices, volatility in oil prices and downturns in the energy
industry.
The economy in Texas is dependent 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 impact the Company’s results of operations and financial
condition. Since 2014, the oil and gas industry has experienced a sustained downturn due to low oil and gas prices. The
unprecedented sharp decline in crude oil prices in the first quarter of 2020 negatively impacted the oil and gas industry
and the overall Texas economy. Prolonged weak oil and gas prices may cause further worsening conditions of energy
companies, oilfield services companies, related businesses and overall economic activities in the Company’s primary
markets and could lead to increased credit stress in its loan portfolio, increased losses and weaker demand for lending.
More significantly for the Company, sustained low oil prices or general uncertainty resulting from energy price volatility
could have other adverse impacts such as significant job losses in industries tied to energy, lower spending habits, lower
borrowing needs, negative impact on construction and real estate related to energy and a number of other potential impacts
that are difficult to isolate or quantify. Oil and gas pricing and the resultant economic conditions may not recover
meaningfully in the near term.
The Company operates in a highly competitive industry and market area.
The Company operates in the highly competitive financial services industry and face significant competition for
customers from financial institutions located both within and beyond the Company’s principal markets. The Company
competes with commercial banks, savings banks, credit unions, nonbank financial services companies and other financial
institutions operating within or near the areas it serves. Certain large banks headquartered outside of the Company’s
markets and large community banking institutions target the same customers it does. 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, the
Company’s future success may depend in part on its ability to address customer 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. The Company may not be able to compete successfully with other financial
institutions in its markets and it 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 the Company’s nonbank competitors are not subject to the same extensive regulations that govern its
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 the Company’s current commercial banking customers may seek alternative banking sources as they develop
needs for credit facilities larger than the Company may be able to accommodate.
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The Company could be adversely impacted by the soundness of other financial institutions.
Financial services institutions are interrelated because of trading, clearing, counterparty or other relationships.
The Company has exposure to many different industries and counterparties and routinely executes 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 the Company to credit risk in the event of a default by a
counterparty or client. In addition, credit risk may be exacerbated when collateral cannot be foreclosed upon or is liquidated
at prices not sufficient to recover the full amount of the credit or derivative exposure due.
Risks Related to Cybersecurity, Third-Parties and Technology
The Company depends on information technology and telecommunications systems, including third-party service
providers.
The Company’s business depends on the successful and uninterrupted functioning of its information technology
and telecommunications systems including with third-party servicers and financial intermediaries. The Company relies on
third-parties for certain services, including, but not limited to, core systems processing, website hosting, internet services,
monitoring its network and other processing services. The Company’s business depends on the successful and
uninterrupted functioning of information technology and telecommunications systems and third-party service providers.
The failure of these systems, an information security or cybersecurity breach involving any of the Company’s 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 adversely impact the Company’s business, financial condition and results of
operations.
In addition, the Company’s primary federal regulator, the OCC, has issued guidance outlining the expectations
for third-party service provider oversight and monitoring by financial institutions. Any failure on the Company’s part to
adequately oversee the actions of its third-party service providers could result in regulatory actions against the Bank.
The Company could be adversely impacted by fraudulent activity, breaches of its information security and cybersecurity
attacks.
As a financial institution, the Company is susceptible to fraudulent activity, information security breaches and
cybersecurity-related incidents that may be committed against it, its clients, or third-parties with whom the Company
interacts and that may result in financial losses or increased costs to it or its clients, disclosure or misuse of confidential
information belonging to the Company or personal or confidential information belonging to its clients, misappropriation
of assets, litigation, or damage to the Company’s reputation. The Company’s industry has seen increases in electronic
fraudulent activity, hacking, security breaches, sophisticated social engineering and cyber-attacks, including within the
commercial banking sector, as cyber-criminals have been targeting commercial bank and brokerage accounts on an
increasing basis.
The Company’s business is highly dependent on the security and efficacy of its infrastructure, computer and data
management systems, as well as those of third-parties with whom it interacts or on whom it relies. The Company’s business
relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in its
computer and data management systems and networks and in the computer and data management systems and networks
of third-parties. In addition, to access the Company’s network, products and services, its customers and other third-parties
may use personal mobile devices or computing devices that are outside of the Company’s network environment and are
subject to their own cybersecurity risks. All of these factors increase the Company’s 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 to the Company and in the financial services industry in general. These threats may include fraudulent or
unauthorized access to data processing or data storage systems used by the Company or by its 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
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confidential information belonging to the Company or its clients and customers; manipulate or destroy data; disrupt,
sabotage or degrade service on a financial institution’s systems; or steal money.
Unfortunately, it is not always possible to anticipate, detect or recognize these threats to the Company’s 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:
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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 the Company’s 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 its 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 by using
equipment or security passwords belonging to employees, customers, third-party service providers or other
users of the Company’s systems; and
the Company’s frequent transmission of sensitive information to, and storage of such information by, third-
parties, including its vendors and regulators, and possible weaknesses that go undetected in the Company’s
data systems notwithstanding the testing it conducts of those systems.
While the Company invests in systems and processes that are designed to detect and prevent security breaches
and cyber-attacks and it conduct periodic tests of its security systems and processes, the Company 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. As cyber-threats continue to evolve,
the Company may be required to expend significant additional resources to continue to modify or enhance its 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 the Company or third-parties, may result in a material loss or have material consequences. Furthermore,
the public perception that a cyber-attack on the Company’s systems has been successful, whether or not this perception is
correct, may damage its reputation with customers and third-parties with whom it does business. A successful penetration
or circumvention of system security could expose the Company 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 the Company’s security measures, reputational damage, reimbursement or other compensatory costs, additional
compliance costs, and could adversely impact its results of operations, liquidity and financial condition.
During 2018, the Company experienced a security incident involving the possible unauthorized access of certain
personal information in the possession of the Bank. The Company takes the privacy of personal information seriously and
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 in the investigation of and response to the
incident. The Company also reported the incident to law enforcement authorities. Based on the report of the independent
forensic investigation firm, the Company believes that a phishing incident occurred where certain emails and attachments
from two employee email accounts may have been accessed by an unauthorized person. The Company believes that these
email accounts contained certain personal information for approximately 7,800 individuals. Although the Company’s
investigation did not find any evidence that the incident involved any unauthorized access to or use of any of the Bank’s
internal computer systems or network, and it believes that the access was limited to information that was contained in the
email accounts of the two employees, the Company 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. Additionally,
the incident may have a negative impact on the Company’s reputation if it becomes subject to claims in the future, and
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reputational harm arising out of such claims or litigation may cause its customers to lose confidence in the Company’s
ability to safeguard their information.
Risks Related to Legal, Reputational and Compliance Matters
The Company is subject to laws regarding the privacy, information security and protection of personal information.
The Company’s business requires the collection and retention of large volumes of customer data, including
personally identifiable information in various information systems that it maintains and in those maintained by third-parties
with whom the Company contracts to provide data services. The Company also maintains important internal company data
such as personally identifiable information about its employees and information relating to its operations. The Company
is 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, the Company’s business is
subject to the GLB Act which, among other things: (i) imposes certain limitations on its ability to share nonpublic personal
information about customers with nonaffiliated third-parties; (ii) requires that it to provide certain disclosures to customers
about information collection, sharing and security practices and afford customers the right to “opt out” of any information
sharing by the Company with nonaffiliated third-parties (with certain exceptions); and (iii) requires that it develops,
implements and maintains a written comprehensive information security program containing appropriate safeguards based
on its size and complexity, the nature and scope of the Company’s activities and the sensitivity of customer information it
processes, as well as plans for responding to data security breaches. There are various state and federal 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 the Company’s collection, use, transfer and storage of
personal information complies with all applicable laws and regulations can increase its costs.
Furthermore, the Company may not be able to ensure that all of its clients, suppliers, counterparties and other
third-parties have appropriate controls in place to protect the confidentiality of the information that they exchange with it,
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), the Company could be exposed to litigation or regulatory sanctions under
personal information laws and regulations. Concerns regarding the effectiveness of the Company’s measures to safeguard
personal information, or even the perception that such measures are inadequate, could cause it to lose customers or potential
customers for its products and services and thereby reduce its revenues. Accordingly, any failure or perceived failure to
comply with applicable privacy or data protection laws and regulations may subject the Company 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 the Company’s reputation and otherwise adversely impact its
operations and financial condition.
The Company could be adversely impacted by employee errors and customer or employee fraud.
As a financial institution, employee errors and employee or customer misconduct could cause financial losses or
regulatory sanctions and seriously harm the Company’s reputation. Misconduct by employees could include hiding
unauthorized activities, improper or unauthorized activities on behalf of customers or improper use of confidential
information, each of which can be damaging to the Company. It is not always possible to prevent employee errors and
misconduct and the precautions taken to prevent and detect this activity may not be effective in all cases. Employee errors
could also subject the Company to financial claims for negligence.
The Company maintains 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 it from
material losses associated with these risks, including losses resulting from any associated business interruption. If these
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 impact the Company’s business, financial condition and results of operations.
The Company depends on the accuracy and completeness of information provided by its borrowers and counterparties.
In deciding whether to approve loans or to enter into other transactions with borrowers and counterparties, the
Company relies on information furnished by, or on behalf of, borrowers and counterparties, including financial statements,
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credit reports, auditors reports, other financial information and representations as to accuracy and completeness of that
information. Any intentional or negligent misrepresentation, if undetected prior to loan funding, may significantly lower
the value of the loan, and the Company may be subject to regulatory action. The Company generally bears the risk of loss
associated with these misrepresentations. The Company’s controls and processes may not detect misrepresented
information. Any such misrepresented information could adversely impact the Company’s business, financial condition
and results of operations.
The Company may be subject to environmental liabilities in connection with the real properties it owns and the
foreclosure on real estate assets securing the loan portfolio.
The Company may purchase real estate in connection with its acquisition and expansion efforts, or it 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. The Company could be subject to environmental investigation, remediation, or liabilities with respect to those
properties. The costs associated with investigation or remediation activities or based on third-party common law claims
could be substantial and may substantially exceed the value of the affected properties or the loans secured by those
properties. The Company may not have adequate remedies against the prior owners or other responsible parties and may
not be able to resell the affected properties either before or after completion of any removal or abatement procedures.
The Company is 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 the Company, rely on technology companies to provide
information technology products and services necessary to support their day-to-day operations. Technology companies
frequently enter litigation based on allegations of patent infringement or other violations of intellectual property rights.
The Company also uses trademarks and logos for marketing purposes, and third-parties may allege that the Company’s
marketing, processes or systems may infringe their intellectual property rights. Competitors of the Company’s vendors, or
other individuals or companies, may from time to time claim to hold intellectual property sold to the Company. 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, the Company
may have to engage in protracted litigation that can be expensive, time-consuming, and disruptive to operations and
distracting to management.
In addition to litigation relating to intellectual property, the Company is regularly involved in litigation matters
in the ordinary course of business. While the Company believes that these litigation matters should not have a material
adverse impact on its business, financial condition, results of operations or future prospects, it may be unable to
successfully defend or resolve any current or future litigation matters.
Negative public opinion regarding the Company or its failure to maintain the Company’s or the Bank’s reputation in
the communities served could adversely impact business.
As a community bank, the Company’s reputation within the communities served is critical to its success. The
Company believes it has set itself apart from competitors by building strong personal and professional relationships with
its customers and by being an active member of the communities it serves. The Company strives to enhance its reputation
by recruiting, hiring and retaining employees who share the Company’s core values of being an integral part of the
communities it serves and delivering superior service to customers. If the Company’s reputation is negatively affected by
the actions of its employees or otherwise, the Company may be less successful in attracting new talent and customers or
may lose existing customers. Further, negative public opinion can expose the Company to litigation and regulatory action
and could delay and impede efforts to implement its expansion strategy.
Risks Related to the Regulation of the Company’s Industry
The Company operates in a highly regulated environment.
The Company is subject to extensive regulation, supervision and legal requirements that govern almost all aspects
of its operations. These laws and regulations are not intended to protect the Company’s shareholders, but rather, they are
intended to protect customers, depositors, the Deposit Insurance Fund and the overall financial stability of the U.S.
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Compliance with laws and regulations can be difficult and costly and changes to laws and regulations often impose
additional operating costs. Failure to comply with these laws and regulations could subject the Company to restrictions on
business activities, enforcement actions and fines and other penalties, any of which could adversely affect the Company’s
results of operations, regulatory capital levels and the price of its securities. Further, any new laws, rules and regulations
could make compliance more difficult or expensive or otherwise adversely impact the Company’s business, financial
condition and results of operations. See “Part I—Item 1.—Business—Supervision and Regulation.”
The Company could be adversely impacted if it fails to comply with any supervisory actions.
As part of the bank regulatory process, the OCC and the Federal Reserve periodically conduct examinations of
the Company’s 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 the Company’s operations have become unsatisfactory, or that the
Company, the Bank or their respective management were in violation of any law or regulation, it may take a number of
different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices,
to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative
order that can be judicially enforced, to direct an increase in capital levels, to restrict growth, to assess civil monetary
penalties against the Company, the Bank or their respective officers or directors, to remove officers and directors and, if
it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the
Bank’s deposit insurance. Becoming subject to such regulatory actions could adversely impact the Company’s reputation,
business, financial condition and results of operations.
The Bank entered into an Agreement with the OCC which subjects it to restrictions and will require it to designate a
significant amount of resources to comply with the terms of the Agreement.
On June 18, 2020, the Bank and the OCC entered into an Agreement with regard to BSA/AML compliance
matters. The Agreement generally requires that the Bank enhance its policies and procedures to comply with BSA/AML
laws and regulations. See “Part II Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Overview” for additional information regarding the Agreement. The Bank is working to promptly address
the requirements of the Agreement. However, if the Bank does not successfully address the OCC’s concerns in the
Agreement or fully comply with its provisions, the Bank could be subject to further regulatory scrutiny, civil monetary
penalties, further regulatory sanctions and/or other enforcement actions. The Company or the Bank may also become
subject to formal or informal enforcement actions by other regulatory agencies. Any of those events could have a material
adverse impact on future operations, financial condition, growth, or other aspects of the Company’s business.
While subject to the Agreement, the Company expects that management and the Board of Directors will be
required to focus considerable time and attention on taking corrective actions to comply with its terms. The Bank has hired
and may continue to hire third-party consultants and advisors to assist in complying with the Agreement, which is expected
to increase non-interest expense and reduce earnings.
Many of the Company’s new activities and expansion plans require regulatory approvals and failure to obtain them
may restrict growth.
The Company intends to complement and expand its business by pursuing strategic acquisitions of financial
institutions and other complementary businesses and de novo branching. Generally, the Company must receive federal
regulatory approval before it can acquire a depository institution or related business insured by the FDIC, or before it can
open a new branch. Such regulatory approvals may not be granted on acceptable terms or at all. The Company may also
be required to sell banking locations as a condition to receiving regulatory approval, which may not be acceptable or may
reduce the benefit of any acquisition.
The Company faces a risk of noncompliance and enforcement action related to AML statutes and regulations.
The BSA, the USA PATRIOT Act, and other laws and regulations require financial institutions, among other
duties, to institute and maintain an effective AML program and file suspicious activity and currency transaction reports as
appropriate. FinCEN, established by the U.S. Department of the Treasury to administer the BSA, 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
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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, the Company has
dedicated significant resources to its AML program. If the Company’s policies, procedures, systems and practices are
deemed deficient, it could be subject to liability, including fines, regulatory actions such as restrictions on its ability to pay
dividends and the inability to obtain regulatory approvals to proceed with certain aspects of its business plans, including
acquisitions and de novo branching, and criminal sanctions.
The Bank is the subject of an investigation by FinCEN regarding the Bank’s compliance with the BSA and AML laws
and regulations.
The Bank is the subject of an investigation by FinCEN and the Bank is cooperating with this investigation. The
Bank has incurred material fees and expenses regarding with this matter and may continue to incur material fees and
expenses regarding this matter at least through the completion of FinCEN’s investigation. Additionally, the Bank could be
subject to additional liability or restrictions on its operations in the event the investigation results in some type of finding
of a deficiency in its program that results in an enforcement action or civil money penalty which could have a material
adverse impact on the Company and its operations.
The Company is subject to numerous laws designed to protect consumers 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 impact on the Company’s business, financial condition and results of operations if
any such rules limit the Company’s ability to provide such financial products or services.
A successful regulatory challenge to the Company’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 the Bank’s performance under fair lending laws in private
class action litigation. Such actions could have a material adverse impact on the Company’s 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 impact on the Company’s 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. The Company is 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. The Company is
subject to the Foreign Corrupt Practices Act, or the FCPA through the Bank and the Company’s agents and employees,
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. The
Company is also subject to applicable anti-corruption laws in the jurisdictions in which it may operate. The Company has
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 the
Company.
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Federal, state and local consumer lending laws may restrict the Company’s ability to originate certain mortgage loans
or increase the risk of liability with respect to such loans.
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 the Company’s
policy not to make predatory loans, but these laws create the potential for liability with respect to the Company’s lending
and loan investment activities. They increase the Company’s cost of doing business and, ultimately, may prevent it from
making certain loans and cause it to reduce the average percentage rate or the points and fees on loans that the Company
makes.
Federal, state and local regulations and/or the licensing of loan servicing, collections and the Company’s sales of loans
to third-parties may increase the cost of compliance and the risks of noncompliance and subject it to litigation.
The Company services some of its 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, the Company may incur additional significant costs to comply with such requirements,
which may further adversely affect it. In addition, if the Company were subject to regulatory investigation or regulatory
action regarding its loan modification and foreclosure practices, the Company’s financial condition and results of
operations could be adversely impacted.
In addition, the Company sells loans to third-parties and as part of these sales, the Company makes various
representations and warranties. Breaches of these representations and warranties may result in a requirement that the
Company repurchases the loans, or otherwise make whole or provide other remedies to counterparties. These aspects of
the Company’s business or its failure to comply with applicable laws and regulations could possibly lead to civil and
criminal liability, loss of licensure, damage the Company’s reputation in the industry, fines, penalties and litigation,
including class action lawsuits and administrative enforcement actions.
Potential limitations on incentive compensation contained in proposed federal agency rulemaking may adversely
impact the Company’s ability to attract and retain its 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 the Company structures
compensation for its executives and other employees. Depending on the nature and application of the final rules, the
Company 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 the Company has established with its clients may be impaired and the Company’s business, financial
condition and results of operations could be adversely impacted.
Increases in FDIC insurance premiums could adversely impact earnings and results of operations.
The Bank is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. 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 Deposit Insurance Fund’s reserve ratio and the FDIC is required to
put in place a restoration plan should the Deposit Insurance Fund fall below its 1.35% minimum reserve ratio. If the
Deposit Insurance Fund falls below its minimum reserve ratio or fails to meet its funding requirements, 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, the Bank may be required to pay higher FDIC premiums.
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The Federal Reserve may require the Company 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, the Company 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 resources are limited and the Company 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.
The Company could be adversely impacted by monetary policies and regulations of the Federal Reserve.
In addition to being affected by general economic conditions, the Company’s 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, 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 impact on
the operating results of commercial banks in the past and are expected to continue to do so in the future. Although the
Company cannot determine the effects of such policies on it, such policies could adversely impact the Company’s business,
financial condition and results of operations.
The Company is subject to commercial real estate lending guidance issued by the federal banking regulators that
impacts its 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. See “Item 1.
Business—Supervision and Regulation—Concentrated Commercial Real Estate Lending Obligations.” Under the
guidance, a financial institution that, like the Bank is actively involved in commercial real estate lending should perform
a risk assessment to identify concentrations.
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 provides 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 the Company believes it has
implemented policies and procedures with respect to its commercial real estate loan portfolio consistent with this guidance,
bank regulators could require the Company to implement additional policies and procedures consistent with their
interpretation of the guidance that may result in additional costs to the Company or that may result in a curtailment of its
commercial real estate lending and/or the requirement that the Bank maintains higher levels of regulatory capital, either
of which would adversely impact the Company’s loan originations and profitability.
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The Company has made loans to and accepted deposits from related parties.
From time to time, the Bank has made loans to and accepted deposits from certain of the Company’s directors
and officers and the directors and officers of the Bank in compliance with applicable regulations and the Company’s
written policies. The Company’s business relationships with related parties are highly regulated. In particular, the
Company’s 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. If the Company fails to comply with any of these regulations, it
could be subject to enforcement and other legal actions by the Federal Reserve.
Risks Related to Ownership of the Company’s Common Stock
The market price of the Company’s common stock may be volatile.
The market price of the Company’s common stock may be highly volatile, which may make it difficult for
shareholders to resell their shares at the volume, prices and times desired. There are many factors that may affect the
market price and trading volume of the Company’s common stock, including, without limitation:
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actual or anticipated fluctuations in 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 the Company, its competitors, or the financial services industry
generally, or changes in, or failure to meet, securities analysts’ estimates of the Company’s 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 the Company;
additional or anticipated sales of the Company’s common stock or other securities by the Company or its
existing shareholders;
additions or departures of key personnel;
perceptions in the marketplace regarding competitors or the Company, 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 the Company or the Company’s competitors;
other economic, competitive, governmental, regulatory and technological factors affecting the Company’s
operations, pricing, products and services; and
other news, announcements or disclosures (whether by the Company or others) related to the Company, its
competitors, its 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 of the Company’s common stock may cause
significant price variations to occur. Increased market volatility may materially and adversely affect the market price of
the Company’s common stock and could make it difficult to sell shares at the volume, prices and times desired.
Future sales and issuances of the Company’s capital stock or rights to purchase capital stock could result in additional
dilution of the percentage ownership of its shareholders.
The Company may issue additional securities in the future and from time to time, including as consideration in
future acquisitions or under compensation or incentive plan. Future sales and issuances of the Company’s common stock
or rights to purchase its common stock could result in substantial dilution to the Company’s existing shareholders. New
investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of the
Company’s common stock. The Company may grant registration rights covering shares of its common stock or other
securities in connection with acquisitions and investments.
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The obligations associated with being a public company require significant resources and management attention.
As a public company, the Company’s legal, accounting, administrative and other costs and expenses are
substantial. The Company is subject to the reporting requirements of the Exchange Act and the rules and regulations
implemented by the SEC, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, the Public Company Accounting
Oversight Board, or PCAOB and the Nasdaq, 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 Nasdaq rules has made
certain operating activities more time-consuming. Further, the Company’s reporting burden will increase when it no longer
qualifies for the scaled disclosure allowed as an “emerging growth company” under the JOBS Act. When these exemptions
cease to apply, the Company will likely incur additional expenses and devote increased management effort toward
compliance.
The Company’s management and Board of Directors have significant control over its business.
The Company’s directors and named executive officers beneficially owned approximately 25.8% of its
outstanding common stock as a group at December 31, 2020. Consequently, the Company’s management and Board of
Directors may be able to significantly affect its affairs and policies, including the outcome of the election of directors and
the potential outcome of other matters submitted to a vote of the Company’s shareholders, such as mergers, the sale of
substantially all the Company’s 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 the Company’s other
shareholders to approve transactions that they may deem to be in the best interests of the Company. The interests of these
insiders could conflict with the interests of the Company’s other shareholders.
The holders of the Company’s debt obligations have priority over its common stock with respect to payment in the event
of liquidation, dissolution or winding up and with respect to the payment of interest.
In the event of any liquidation, dissolution or winding up of the Company, its common stock would rank below
all claims of debt holders against the Company. The Company’s debt obligations are senior to its shares of common stock.
As a result, the Company must make payments on its debt obligations before any dividends can be paid on its common
stock. In the event of bankruptcy, dissolution or liquidation, the holders of the Company’s debt obligations must be
satisfied before any distributions can be made to the holders of the Company’s common stock. To the extent that the
Company issues additional debt obligations, they will be of equal rank with, or senior to, the Company’s existing debt
obligations and senior to shares of the Company’s common stock.
The Company may issue shares of preferred stock in the future.
The Company’s certificate of formation authorizes it to issue up to 10,000,000 shares of one or more series of
preferred stock. The Company’s 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 the Company’s shareholders. The Company’s preferred stock could be
issued with voting, liquidation, dividend and other rights superior to the rights of its common stock. The potential issuance
of preferred stock may delay or prevent a change in control of the Company, discourage bids for its common stock at a
premium over the market price and materially adversely impact the market price and the voting and other rights of the
holders of the Company’s common stock.
The Company is dependent upon the Bank for cash flow and the Bank’s ability to make cash distributions is restricted.
The Company’s primary tangible asset is the stock of the Bank. As such, the Company depends upon the Bank
for cash distributions that it uses to pay its operating expenses, satisfy obligations and to pay dividends on its common
stock. Federal statutes, regulations and policies restrict the Bank’s ability to make cash distributions to the Company.
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 the Company, it will not be able to pay dividends on its common stock.
35
The Company’s dividend policy may change without notice and its future ability to pay dividends is subject to
restrictions.
Although the Company has historically paid dividends to its shareholders, the Company has no obligation to
continue doing so and may change its dividend policy at any time without notice to holders of its common stock. Holders
of the Company’s common stock are only entitled to receive such cash dividends as its Board of Directors may declare
out of funds legally available for such payments. Furthermore, consistent with the Company’s strategic plans, growth
initiatives, capital availability, projected liquidity needs and other factors, the Company has made and will continue to
make, capital management decisions and policies that could adversely impact the amount of dividends paid to holders of
its common stock.
The Company is also subject to regulation by the Federal Reserve requiring that it 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 the Company’s capital structure, including interest on its debt
obligations. If required payments on the Company’s debt obligations are not made or are deferred, or dividends on any
preferred stock the Company may issue are not paid, the Company will be prohibited from paying dividends on its common
stock.
In addition, the Company’s ability to declare or pay dividends is also subject to the terms of its loan agreement,
which prohibits it from declaring or paying dividends upon the occurrence and during the continuation of an event of
default. See “Part II—Item 8.—Financial Statements and Supplementary Data—Note 11.”
The Company’s corporate organizational documents and provisions of federal and state law to which it is subject
contain certain provisions that could have an anti-takeover effect.
The Company’s certificate of formation and its 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 the
Company’s incumbent Board of Directors or management. The Company’s governing documents include provisions that:
•
•
•
•
•
•
•
•
•
empower its Board of Directors, without shareholder approval, to issue preferred stock, the terms of which,
including voting power, are to be set by the 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 its Board of Directors to alter, amend or repeal the Company’s amended and restated bylaws or to
adopt new bylaws;
calling a special shareholders’ meeting requires the request of holders of at least 50.0% of the outstanding
shares of the Company’s capital stock entitled to vote;
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 the Company’s annual meeting of shareholders, to provide
timely notice of their intent in writing; and
enable the Company’s 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, the Company’s bylaws provide that the state or federal courts located in Jefferson County, Texas,
the county in which Beaumont is located, will be the exclusive forum for: (i) any actual or purported derivative action or
36
proceeding brought on the Company’s behalf; (ii) any action asserting a claim of breach of fiduciary duty by any of the
Company’s directors or officers; (iii) any action asserting a claim against the Company or its directors or officers arising
pursuant to the Texas Business Organizations Code, the Company’s certificate of formation, or its bylaws; or (iv) any
action asserting a claim against the Company or its officers or directors that is governed by the internal affairs doctrine.
Shareholders of the Company will be deemed to have notice of and have consented to the provisions of the Company’s
bylaws related to choice of forum. The choice of forum provision in the Company’s bylaws may limit its shareholders’
ability to obtain a favorable judicial forum for disputes with it. Alternatively, if a court were to find the choice of forum
provision contained in the Company’s bylaws to be inapplicable or unenforceable in an action, the Company may incur
additional costs associated with resolving such action in other jurisdictions.
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. A majority of the Company’s
executives 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 . . . . . . . . . . . . . . . . . . . . . . .
Tomball . . . . . . . . . . . . . . . . . . . . . . . . .
Wharton . . . . . . . . . . . . . . . . . . . . . . . . .
The Woodlands . . . . . . . . . . . . . . . . . .
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
37
1
1
2
3
1
1
1
1
—
—
11
2
1
1
1
1
1
1
1
1
1
1
1
13
—
24
—
—
—
6
—
—
—
—
1
1
8
2
—
—
—
—
—
—
—
—
—
—
—
2
1
11
For the leased locations, the Company either leases the location entirely, owns the building and has a ground
lease, or owns the drive-in and leases the branch. The Company believes that lease terms for the 11 branches that it leases
are generally consistent with prevailing market terms. The expiration dates of the leases range from 2023 to 2045, without
consideration of any renewal periods available.
Item 3. Legal Proceedings
The Company is not currently subject to any material legal proceedings. The Company is 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 the Company’s consolidated results of operations,
financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against the
Company 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 the Company’s reputation, even if resolved in its 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 the Company’s common stock are traded on the Nasdaq under the symbol “CBTX”.
Holders of Record
As of February 17, 2021, there were approximately 442 holders of record of the Company’s common stock.
Additionally, a greater number of holders of the Company’s common stock are “street name” or beneficial holders, whose
shares are held by banks, brokers and other financial institutions.
Securities Authorized for Issuance Under Equity Compensation Plans
Plan Category
Equity compensation plans approved by shareholders(1) . . . .
Equity compensation plans not approved by shareholders . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise Price of
Number of Shares to be Weighted-Average Number of Shares
Issued Upon Exercise of
Available for
Outstanding Awards Outstanding Awards Future Grants
1,272,057
—
1,272,057
156,000
—
156,000
$18.95
—
$18.95
(1) The number of shares available for future issuance includes 308,857 shares available under the Company’s 2017 Omnibus Incentive
Plan and 963,200 shares available under the Company’s 2014 Stock Option Plan.
Unregistered Sales of Equity Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In July 2019, the Company’s Board of Directors authorized a share repurchase program, or the 2019 Repurchase
Program, under which the Company was authorized to repurchase up to $40.0 million of the Company’s common stock
through September 30, 2020. On March 18, 2020, the Company temporarily suspended the 2019 Repurchase Program in
light of the challenges presented by the COVID-19 pandemic and surrounding events. On September 9, 2020, the Company
reinstated the 2019 Repurchase Program. During 2020, 282,363 shares were repurchased under the Company’s 2019
Repurchase Program at an average price of $21.41 per share and during 2019, 100 shares were repurchased under this plan
at $27.98 per share. The 2019 Repurchase Program expired on September 30, 2020.
38
On September 9, 2020, the Company’s Board of Directors authorized a subsequent share repurchase program, or
the 2020 Repurchase Program, under which the Company may repurchase up to $40.0 million of the Company’s common
stock starting October 1, 2020 through September 30, 2021. Repurchases under the 2020 Repurchase Program may be
made from time to time at the Company’s discretion in open market transactions, through block trades, in privately
negotiated transactions, and pursuant to any trading plan that may be adopted by the Company’s management in
accordance with Rule 10b5-1 of the Exchange Act or otherwise. The timing and actual number of shares repurchased will
depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other
corporate liquidity requirements and priorities. The repurchase program does not obligate the Company to acquire a
specific dollar amount or number of shares and may be modified, suspended or discontinued at any time. During 2020,
149,451 shares were repurchased under the 2020 Repurchase Program at an average price of $19.13 per share.
Shares repurchased in 2020 and 2019 were retired and returned to the status of authorized but unissued shares.
The following table provides information with respect to purchases of shares of the Company’s common stock
during the three months ended December 31, 2020 that the Company made or were made on behalf of the Company or
any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act.
Number of
Number of Shares That
Shares Purchased May Yet be Purchased
Maximum
Period
October 1, 2020 - October 31, 2020 . . . . . . . .
November 1, 2020 - November 30, 2020 . . .
December 1, 2020 - December 31, 2020 . . . .
Number of
Average Price as Part of Publicly Purchased Under the Plan
Shares Purchased(1) Paid per Share Announced Plan(2) at the End of the Period(3)
2,109,533
1,815,513
1,562,154
129,829
19,622
—
—
7,699
118
$ 19.02
$ 19.79
$ 21.95
(1) Represents shares employees have elected to have withheld to satisfy their tax liabilities related to options exercised or restricted
stock vested or to pay the exercise price of the options as allowed under the Company’s stock compensation plans. When this
settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock.
(2) Purchased under the 2020 Repurchase Plan described above.
(3) Computed based on the closing share price of the Company’s common stock as of the end of the periods shown.
39
Stock Performance Graph
The following performance graph compares total stockholders’ return on the Company’s common stock for the
period beginning at the close of trading on November 7, 2017 and for the last trading date of each year from 2017 to 2020,
with the cumulative total return of the Nasdaq Composite Index and the Nasdaq Bank Index for the same periods.
Cumulative total return is computed by dividing the difference between the Company’s 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, including reinvestment of
dividends and October 31, 2017 in the Nasdaq Composite Index and the Nasdaq Bank Index. Historical stock price
performance is not necessarily indicative of future stock price performance. This performance graph and related
information shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the
Exchange Act of 1934, or incorporated by reference into any future SEC filing, except as shall be expressly set forth by
specific reference in such filing.
Dollars
CBTX, Inc. . . . . . . . . . . . . . . . . . . . .
NASDAQ Composite . . . . . . . . . . . .
NASDAQ Bank . . . . . . . . . . . . . . . .
11/7/17
12/17
12/18
12/19
12/20
100.0
100.0
100.0
106.11
102.83
101.83
105.84
99.91
84.68
113.55
136.58
105.03
94.99
197.92
97.19
Cumulative Total Return
$250
$200
$150
$100
$50
$0
11/7/17
12/17
12/18
12/19
12/20
CBTX, Inc.
NASDAQ Composite
NASDAQ Bank
40
Item 6. Selected Financial Data
The following consolidated selected financial data as of and for the five-year period ended December 31, 2020,
is derived from the Company’s audited financial statements and should be read in conjunction with “Part II—Item 7.—
Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s
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 credit losses . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible assets, net . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing deposits . . . . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank Advances . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . .
Income Statement Data:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . .
Provision (recapture) for credit losses . . . . . . . . .
Net interest income after provision (recapture)
for credit 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
2020
As of and for the Years Ended December 31,
2018
2019
2017
2016
538,007 $
372,064 $
382,070 $
326,199 $
2,924,117
(40,637)
2,883,480
85,121
3,949,217
1,476,425
1,825,369
3,301,794
50,000
546,451
2,639,085
(25,280)
2,613,805
85,888
3,478,544
1,184,861
1,667,527
2,852,388
50,000
535,721
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
382,103
2,154,885
(25,006)
2,129,879
88,741
2,951,522
1,025,425
1,515,335
2,540,760
-
357,637
138,693 $
10,087
128,606
18,892
153,395 $
17,407
135,988
2,385
135,759 $
11,098
124,661
(1,756)
116,659 $
8,885
107,774
(338)
109,951
8,405
101,546
4,575
109,714
14,781
92,100
32,395
6,034
26,361 $
133,603
18,628
90,143
62,088
11,571
50,517 $
126,417
14,252
82,016
58,653
11,364
47,289 $
108,112
14,204
78,292
44,024
16,453
27,571 $
1.06 $
1.06
0.40
22.20
18.74
2.03 $
2.02
0.40
21.45
18.01
1.90 $
1.89
0.20
19.58
16.10
1.23 $
1.22
0.20
17.97
14.44
96,971
15,749
73,502
39,218
12,010
27,208
1.23
1.22
0.20
16.21
12.19
outstanding- basic . . . . . . . . . . . . . . . . . . . . . . . .
24,761
24,926
24,859
22,457
22,049
Weighted-average common shares
outstanding- diluted . . . . . . . . . . . . . . . . . . . . . .
Common shares outstanding at period end . . . . .
24,803
24,613
25,053
24,980
25,018
24,907
22,573
24,833
22,235
22,062
(table continued on next page)
41
(Dollars in thousands, except per share data)
Performance Ratios:
Return on average assets . . . . . . . . . . . . . . . . . . . . .
Return on average shareholders' equity . . . . . . . . .
Net interest margin - tax equivalent basis . . . . . . .
Efficiency ratio(2) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Ratios:
Loans excluding loans held for sale to deposits . .
Noninterest-bearing deposits to total deposits . . . .
Cost of total deposits . . . . . . . . . . . . . . . . . . . . . . . .
Credit Quality Ratios:
Nonperforming assets to total assets . . . . . . . . . . .
Nonperforming loans to loans excluding loans
held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to nonperforming
2020
0.70%
4.85%
3.73%
64.23%
88.56%
44.72%
0.30%
As of and for the Years Ended December 31,
2018
2017
2019
1.50%
9.81%
4.42%
58.30%
92.52%
41.54%
0.58%
1.50%
10.18%
4.35%
59.04%
88.45%
42.77%
0.40%
0.93%
7.18%
4.06%
64.19%
88.80%
42.64%
0.30%
2016
0.94%
7.79%
3.96%
62.66%
84.81%
40.36%
0.29%
0.61%
0.03%
0.11%
0.27%
0.27%
0.82%
0.04%
0.14%
0.33%
0.29%
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
169.20%
2,587.51%
678.88%
324.06%
400.80%
Allowance for credit losses to loans excluding
loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . .
1.39%
0.13%
13.84%
11.94%
15.45%
15.45%
16.71%
12.00%
0.96%
0.03%
15.40%
13.26%
15.52%
15.52%
16.41%
13.11%
0.97%
(0.03)%
14.87%
12.56%
14.71%
14.76%
15.63%
12.74%
1.07%
—
14.48%
11.98%
14.19%
14.44%
15.42%
12.30%
1.16%
0.23%
12.12%
9.39%
11.52%
11.78%
12.85%
9.78%
(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.
42
Non-GAAP Financial Measures
The Company’s accounting and reporting policies conform to GAAP and the prevailing practices in the banking
industry. However, the Company also evaluates its performance based on certain additional non-GAAP financial measures.
The Company classifies 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 the statements of income, balance sheets or statements of cash flows. Non-GAAP financial
measures do not include operating, other statistical measures or ratios 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 the Company calculates non-GAAP financial measures may differ from that of other companies reporting
measures with similar names.
The Company calculates 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.
The Company calculates 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.
The Company believes 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.
The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible equity, total
assets to tangible assets and presents book value per share, tangible book value per share, total shareholders’ equity to
total assets and tangible equity to tangible assets:
(Dollars in thousands, except per share data)
Tangible Equity
Total shareholders’ equity . . . . . . . . . .
Adjustments:
Goodwill . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . .
Tangible equity . . . . . . . . . . . . . . . . . . .
Tangible Assets
Total assets . . . . . . . . . . . . . . . . . . . . . .
Adjustments:
Goodwill . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . .
Tangible assets . . . . . . . . . . . . . . . . . . .
2020
2019
December 31,
2018
2017
2016
$
546,451
$
535,721
$
487,625
$
446,214
$
357,637
80,950
4,171
461,330
$
80,950
4,938
449,833
$
80,950
5,775
400,900
$
80,950
6,770
358,494
$
80,950
7,791
268,896
$
$
3,949,217
$
3,478,544
$
3,279,096
$
3,081,083
$
2,951,522
80,950
4,171
3,864,096
80,950
4,938
3,392,656
80,950
5,775
3,192,371
$
$
80,950
6,770
2,993,363
$
$
80,950
7,791
2,862,781
$
Common shares outstanding . . . . . . . . . . .
24,613
24,980
24,907
24,833
22,062
Book value per share . . . . . . . . . . . . . . . . .
Tangible book value per share . . . . . . . . . .
$
$
22.20
18.74
$
$
21.45
18.01
$
$
19.58
16.10
$
$
17.97
14.44
$
$
16.21
12.19
Total shareholders’ equity to total assets . .
Tangible equity to tangible assets . . . . . . .
13.84%
11.94%
15.40%
13.26%
14.87%
12.56%
14.48%
11.98%
12.12%
9.39%
43
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 the Company’s current views with respect to, among other things, future events and the Company’s 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 the Company’s industry, management’s
beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond
the Company’s control. Accordingly, the Company cautions 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 the
Company believes 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 the Company’s 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 (including the effects of recent hurricanes, tropical storms, tropical
depressions and winter storms on the Company’s market area), acts of terrorism, pandemics, an outbreak of
hostilities or other international or domestic calamities and other matters beyond the Company’s control;
the Company’s ability to manage the economic risks related to the impact of the COVID-19 pandemic and
the sustained instability in the oil and gas industry (including risks related to its customers’ credit quality,
deferrals and modifications to loans, the Company’s ability to borrow, and the impact of a resultant recession
generally);
the geographic concentration of the Company’s markets in Houston and Beaumont, Texas;
the Company’s ability to manage changes and the continued health or availability of management personnel;
the amount of nonperforming and classified assets that the Company holds and the time and effort necessary
to resolve nonperforming assets;
deterioration of asset quality;
interest rate risk associated with the Company’s business;
national business and economic conditions in general and in the financial services industry and within the
Company’s primary markets;
volatility and direction of oil prices, including risks related to the collapse and instability in oil prices, and
the strength of the energy industry, generally and within Texas;
the composition of the Company’s loan portfolio, including the identity of the Company’s borrowers and the
concentration of loans in specialized industries, including the creditworthiness of energy company
borrowers;
changes in the value of collateral securing the Company’s loans;
the Company’s ability to maintain important deposit customer relationships and its reputation;
the Company’s ability to maintain effective internal control over financial reporting;
the Company’s ability to pursue available remedies in the event of a loan default for PPP loans and the risk
of holding such loans at unfavorable interest rates and on terms that are less favorable than those with
customers to whom the Company would have otherwise lent;
volatility and direction of market interest rates;
liquidity risks associated with the Company’s business;
systems failures, interruptions or breaches involving the Company’s information technology and
telecommunications systems or third-party servicers;
the failure of certain third-party vendors to perform;
44
•
•
•
•
•
•
•
•
the institution and outcome of litigation and other legal proceedings against the Company or to which it may
become subject;
the operational risks associated with the Company’s business;
the costs, effects and results of regulatory examinations, investigations, including the ongoing investigation
by the FinCEN, or reviews or the ability to obtain required regulatory approvals;
the Company’s ability to meet the requirements of the Agreement with the OCC, and the risk that such
Agreement may have a negative impact on the Company’s financial performance and results of operations;
changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting,
tax, trade, monetary and fiscal matters;
governmental or regulatory responses to the COVID-19 pandemic and newly enacted fiscal stimulus that
impact the Company’s loan portfolio and forbearance practice;
further government intervention in the U.S. financial system that may impact how the Company achieves its
performance goals; and
other risks, uncertainties, and factors that are discussed from time to time in 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 the Company’s underlying assumptions prove to be incorrect, actual results may differ
materially from what is anticipated. Additionally, many of these risks and uncertainties are currently elevated by and may
or will continue to be elevated by the COVID-19 pandemic and the sustained instability of the oil and gas industry. Undue
reliance should not be placed on any such forward-looking statements. Any forward-looking statement speaks only as of
the date made, and the Company does 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 to predict which will arise. In addition, the Company cannot assess the impact of each factor
on its 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 the Company’s financial condition and results of operations should be
read in conjunction with “Part II—Item 6.—Selected Financial Data” and the consolidated financial statements and the
accompanying notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis includes
forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that the
Company believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including
those set forth in “Part I—Item 1A.—Risk Factors” and elsewhere in this Annual Report on Form 10-K, may cause actual
results to differ materially from those projected results discussed in the forward-looking statements appearing in this
discussion and analysis. The Company assumes no obligation to update any of these forward-looking statements.
Overview
The Company operates through one segment, community banking. The Company’s primary source of funds is
deposits and its primary use of funds is loans. Most of the Company’s revenue is generated from interest on loans and
investments. The Company incurs interest expense on deposits and other borrowed funds as well as noninterest expense,
such as salaries and employee benefits and occupancy expenses.
The Company’s operating results depend primarily on 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 earned on interest-earning assets
or paid on interest-bearing liabilities, as well as in the volume and types of interest-earning assets and interest-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 the Company’s loan portfolio are affected by, among other
factors, economic and competitive conditions in Texas, as well as developments affecting the real estate, technology,
45
financial services, insurance, transportation, manufacturing and energy sectors within the Company’s target markets and
throughout the state of Texas. The Company maintains diversity in its loan portfolio as a means of managing risk associated
with fluctuations in economic conditions. The Company’s focus on lending to small to medium-sized businesses and
professionals in its market areas has resulted in a diverse loan portfolio comprised primarily of core relationships. The
Company carefully monitors exposure to certain asset classes to minimize the impact of a downturn in the value of such
assets.
The Company seeks 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 the Company’s competitors are much larger financial institutions that have greater financial resources
and compete aggressively for market share. Through the Company’s relationship-driven, community banking strategy, a
significant portion of its growth has been through referral business from its existing customers and professionals in the
Company’s markets including attorneys, accountants and other professional service providers.
The Bank is the subject of an investigation by FinCEN regarding the Bank’s compliance with the BSA/AML.
The Bank is cooperating with this investigation. The costs to respond to and cooperate with FinCEN’s investigation have
been material over the course of the period of the investigation, and the Bank may continue to incur material fees and
expenses regarding this matter at least through the completion of FinCEN’s investigation.
On June 18, 2020, the Bank and the OCC entered into an Agreement, with regard to BSA/AML compliance
matters. The Agreement generally requires that the Bank enhance its policies and procedures to comply with BSA/AML
laws and regulations. Specifically, the Agreement requires the Bank to take certain actions, including, but not limited to:
(i) establishing a Compliance Committee to oversee the Bank’s compliance with the Agreement; (ii) ensuring that the
BSA/AML staff has sufficient authority and resources to fulfill its responsibilities; (iii) developing, implementing, and
adhering to a written program of policies and procedures to provide for compliance with the BSA, including with respect
to model risk management for automated monitoring systems; (iv) establishing policies and procedures for performing
customer due diligence/enhanced due diligence and customer risk identification processes; (v) adopting and adhering to
an independent BSA/AML audit program; (vi) developing, implementing, and adhering to a comprehensive training
program for all appropriate Bank employees to ensure their awareness of their responsibility for compliance with the
requirements of the BSA, the Bank’s relevant policies, procedures, and processes, and of relevant examples of red flags
for money laundering, terrorist financing, and suspicious activity; and (vii) performing a review of account and transaction
activity for certain time periods.
The Bank’s Board of Directors and management are committed to taking the necessary actions to fully address
the provisions of the Agreement within the timeframes identified in the Agreement. Numerous actions have already been
taken or commenced by the Bank to strengthen its BSA/AML compliance practices, policies, procedures and controls.
However, a finding by the OCC that the Bank failed to comply with the Agreement could result in additional regulatory
scrutiny, further constraints on the Bank’s business, or a further enforcement action, including civil money penalties. Any
of those events could have a material adverse impact on the Company’s future operations, financial condition, growth or
other aspects of its business. Further, the Bank has hired and expects to continue to hire third-party consultants and advisors
to assist in complying with the Agreement, which will increase non-interest expense and reduce earnings.
Information Regarding COVID-19 Impact and Uncertain Economic Outlook
Since the latter half of the first quarter of 2020, the COVID-19 pandemic and actions taken in response to it,
combined with the sustained instability in the oil and gas industry, have negatively impacted the global economy and
financial markets. The Company’s markets, including its primary markets in Houston and Beaumont are particularly
subject to the financial impact of the sustained instability in the oil and gas industry. As a result of these factors and the
impact on the loan portfolio, the Company increased the ACL and provision for credit losses during the year ended
December 31, 2020, which negatively impacted the Company’s net income. The COVID-19 pandemic is ongoing, and the
future impact cannot be determined at this point, but it could materially affect the Company’s future financial and
operational results. See “Part I—Item 1A.—Risk Factors.”
46
Loans with a risk grade of substandard, past due loans, loans individually evaluated for credit losses and
nonperforming assets increased during 2020, primarily as a result of the impact of the COVID-19 pandemic and sustained
instability in the oil and gas industry on the Company’s borrowers. The risk gradings of the Company’s loan portfolio,
past due loans, loans individually evaluated and nonperforming loans as of the dates indicated below were as follows:
(Dollars in thousands)
Pass . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special mention . . . . . . . . . . . . . . . . .
Substandard . . . . . . . . . . . . . . . . . . . .
Gross loans . . . . . . . . . . . . . . . . . .
Past due loans:
30 to 59 days past due . . . . . . . . . . . .
60 to 89 days past due . . . . . . . . . . . .
90 days or greater past due . . . . . . . .
Total past due loans . . . . . . . . . . .
Loans individually evaluated:
Accruing troubled debt
December 31,
2020
September 30,
2020
$ 2,835,768 $ 2,883,026
5,953
89,348
$ 2,936,670 $ 2,978,327
14,088
86,814
June 30,
2020
$ 2,874,412
3,245
70,110
$ 2,947,767
March 31,
2020
$ 2,613,087
14,155
51,169
$ 2,678,411
December 31,
2019
$ 2,582,970
34,742
28,961
$ 2,646,673
$
$
1,463 $
2,074
2,375
5,912 $
14,629
7,464
5,103
27,196
$
$
5,329
—
57
5,386
$
$
6,202
7
32
6,241
$
$
2,071
563
240
2,874
restructurings . . . . . . . . . . . . . . . . .
$
32,880 $
35,494
$
33,781
$
14,858
$
8,441
Non-accrual troubled debt
restructurings . . . . . . . . . . . . . . . . .
Total troubled debt
restructurings . . . . . . . . . . . . . . .
Other non-accrual . . . . . . . . . . . . . . .
Other accruing . . . . . . . . . . . . . . . . . .
Total loans individually
19,173
10,123
1,019
1,044
52,053
4,844
746
45,617
5,453
9,844
34,800
10,149
2,458
15,902
404
3,530
393
8,834
584
3,499
evaluated . . . . . . . . . . . . . . . . . .
$
57,643 $
60,914
$
47,407
$
19,836
$
12,917
Nonperforming assets:
Nonaccrual loans . . . . . . . . . . . . . . .
Accruing loans 90 or more days
past due . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming loans . . . . .
Foreclosed assets . . . . . . . . . . . . . . . .
Total nonperforming assets . . . . .
$
24,017 $
15,576 $
11,168
$
1,448
$
—
24,017
—
24,017 $
—
15,576
—
15,576
$
—
11,168
—
11,168
$
—
1,448
—
1,448
$
$
977
—
977
—
977
In support of customers impacted by the COVID-19 pandemic, the Company offered relief through payment
deferrals during 2020. The deferral periods ranged from one to six-months, with the majority of the deferrals involving
three-month arrangements. As of December 31, 2020, the Company had 21 loans subject to such deferral arrangements
with total outstanding principal of $38.4 million, down from 41 loans subject to deferral arrangement with total outstanding
principal of $82.4 million as of September 30, 2020 and down from 689 loans subject to deferral arrangement with total
outstanding principal of $545.0 million at June 30, 2020. Of the 21 loans subject to deferral arrangements at December 31,
2020, 18 loans totaling $35.1 million were scheduled to revert to their original payment schedules in the first quarter of
2021.
During the year ended December 31, 2020, the Company participated in PPP financing under the CARES Act.
See “Part II—Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Financial Condition—Loan Portfolio” and “Part I—Item 1A.—Risk Factors.”
47
Results of Operations
Year Ended December 31, 2020 vs Year Ended December 31, 2019
Net income was $26.4 million for the year ended December 31, 2020 and $50.5 million for the year ended
December 31, 2019. The decrease of $24.1 million was primarily due to an increase of $16.5 million in the provision for
credit losses during 2020 and a $7.4 million decrease in net interest income. See further analysis of these changes in the
related discussions that follow.
Years Ended December 31,
(Dollars in thousands, except per share data and percentages)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share - basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share - diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average shareholders' equity . . . . . . . . . . . . . . . . . . .
2020
138,693 $
10,087
128,606
18,892
14,781
92,100
32,395
6,034
26,361 $
1.06 $
1.06
0.40
0.70%
4.85%
2019
153,395 $
17,407
135,988
2,385
18,628
90,143
62,088
11,571
50,517 $
2.03
2.02
0.40
1.50%
9.81%
Increase (Decrease)
(14,702)
(7,320)
(7,382)
16,507
(3,847)
1,957
(29,693)
(5,537)
(24,156)
(9.6)%
(42.1)%
(5.4)%
692.1%
(20.7)%
2.2%
(47.8)%
(47.9)%
(47.8)%
Net Interest Income
Net interest income was $128.6 million for the year ended December 31, 2020, compared to $136.0 million for
the year ended December 31, 2019. Net interest income decreased $7.4 million during the year ended December 31, 2020,
compared to the year ended December 31, 2019, primarily due to higher average interest-bearing deposits, lower rates on
loans, securities and other interest-earning assets, partially offset by the impact of lower rates on deposits and increased
average loans and other interest-earning assets.
The yield on interest-earning assets was 3.98% for the year ended December 31, 2020, compared to 4.95% for
the year ended December 31, 2019. The cost of interest-bearing liabilities was 0.57% for the year ended December 31,
2020 and 1.07% for the year ended December 31, 2019. The Company’s net interest margin on a tax equivalent basis was
3.73% for the year ended December 31, 2020, compared to 4.42% for the year ended December 31, 2019. Yields on
interest-earning assets decreased and the costs of interest-bearing liabilities did not decrease to the same extent, which
caused compression of the Company’s net interest margin on a tax equivalent basis during 2020.
The yield on loans for the year ended December 31, 2020 was impacted by the Company’s participation in PPP
financing as PPP loans are at unfavorable interest rates relative to other loans the Company originates. The Company
recognized a net yield of 2.79% on PPP loans during the year ended December 31, 2020. Without PPP loans, the
Company’s average yield on loans would have been 4.75% instead of 4.60%.
Interest earned on PPP loans for the year ended December 31, 2020 included the recognition of $4.0 million of
origination fee income, net of associated costs, related to PPP loans. At December 31, 2020, the Company had $4.2 million
of deferred loan fees and costs related to PPP loans outstanding.
On January 19, 2021, the Company began participating in the second round of PPP financing, which may
negatively impact the average yield on loans in 2021 depending on the number of loans the Company originates under the
PPP.
48
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.
Years Ended December 31,
(Dollars in thousands)
Assets
Interest-earning assets:
Average
Outstanding
Balance
2020
Interest
Earned/
Average
Yield/ Outstanding
Average
Interest Paid Rate
Balance
2019
Interest
Earned/
Average
Yield/
Interest Paid Rate
Total loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,862,911 $ 131,678 4.60% $ 2,608,505 $ 141,388 5.42%
5,954 2.55%
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,333 2.19%
Other interest-earning assets. . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . .
720 4.85%
3,100,249 $ 153,395 4.95%
Total interest-earning assets . . . . . . . . . . . . . . . . .
Allowance for credit losses for loans . . . . . . . . . . . . . .
Noninterest-earning assets . . . . . . . . . . . . . . . . . . . . . .
4,768 2.02%
1,568 0.43%
679 4.57%
3,481,038 $ 138,693 3.98%
(35,448)
312,672
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,758,262
(24,971)
299,387
$ 3,374,665
233,543
243,349
14,852
236,625
366,628
14,874
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . $ 1,703,543 $
Federal Home Loan Bank advances . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . .
Note payable and junior subordinated debt . . . . . .
Total interest-bearing liabilities . . . . . . . . . . . . . .
55,205
1,631
—
1,760,379 $
9,168 0.54% $ 1,566,038 $
903 1.64%
1 0.06%
—
15
10,087 0.57%
61,589
1,046
—
1,628,673 $
15,999 1.02%
1,386 2.25%
3 0.29%
—
19
17,407 1.07%
Noninterest-bearing liabilities:
Noninterest-bearing deposits . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest-bearing liabilities . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . .
1,404,027
50,464
1,454,491
543,392
Total liabilities and shareholders’ equity . . . . . $ 3,758,262
1,193,527
37,458
1,230,985
515,007
$ 3,374,665
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest spread(2) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin(3) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin - tax equivalent(4) . . . . . . . . . . . . .
$ 128,606
$ 135,988
3.41%
3.69%
3.73%
3.88%
4.39%
4.42%
Includes average outstanding balances related to loans held for sale.
(1)
(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 $1.0 million for the years ended December 31, 2020 and 2019, respectively, were
computed using a federal income tax rate of 21%.
49
The following table presents information regarding 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.
(Dollars in thousands)
Interest-earning assets:
Year Ended December 31, 2020,
Compared to Year Ended December 31, 2019
Increase (Decrease) due to
Volume
Days
Rate
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest-earning assets . . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . .
Total increase (decrease) in interest income . . . .
Interest-bearing liabilities:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . .
Note payable and junior subordinated debt . . . . . .
Total increase (decrease) in interest expense . . . .
Increase (decrease) in net interest income . . . . . . . . . . $
(23,886) $
(1,281)
(6,480)
(44)
(31,691)
(8,278)
(343)
(4)
(4)
(8,629)
(23,062) $
13,789 $
79
2,700
1
16,569
1,403
(144)
2
—
1,261
15,308 $
387 $
16
15
2
420
44
4
—
—
48
372 $
Provision for Credit Losses
Total
(9,710)
(1,186)
(3,765)
(41)
(14,702)
(6,831)
(483)
(2)
(4)
(7,320)
(7,382)
The provision for credit losses is an income adjustment used to maintain the ACL at a level deemed appropriate
by management to absorb inherent losses on existing loans. The provision for credit losses was $18.9 million for the year
ended December 31, 2020, an increase of $16.5 million compared to the year ended December 31, 2019, primarily due to
the impact of the COVID-19 pandemic, the sustained instability of the oil and gas industry, an increase in adversely graded
loans and an increase in charge-offs.
Noninterest Income
The following table presents components of noninterest income for the years ended December 31, 2020 and 2019
and the period-over-period changes in the categories of noninterest income:
(Dollars in thousands)
Deposit account service charges . . . . . . . . . . . . . . . . . . . . . . . $
Card interchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . .
Net gain on sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2020
2019
5,026 $
3,831
2,422
755
2,747
14,781 $
6,554 $
3,720
5,011
652
2,691
18,628 $
Increase (Decrease)
(1,528)
111
(2,589)
103
56
(3,847)
(23.3)%
3.0%
(51.7)%
15.8%
2.1%
(20.7)%
Noninterest income was $14.8 million for the year ended December 31, 2020 and $18.6 million for the year ended
December 31, 2019. The decrease in noninterest income during the year ended December 31, 2020, compared to the year
ended December 31, 2019, was primarily due to earnings on bank-owned life insurance. During the year ended
December 31, 2020, the Company received nontaxable death proceeds of $2.0 million under the bank-owned life insurance
policies and recorded a gain of $769,000 over the carrying value recorded. During the year ended December 31, 2019, the
Company received nontaxable death benefit proceeds of $4.7 million under bank-owned life insurance policies and a gain
of $3.3 million over the carrying value recorded. In addition, deposit account service charges decreased due to a reduction
in the amount of insufficient funds and overdraft fees charged on deposit accounts and lower transactional volumes.
50
Noninterest Expense
Generally, noninterest expense is composed of employee expenses and costs associated with operating facilities,
obtaining and retaining customer relationships and providing bank services. See further analysis of these changes in the
related discussions that follow.
Years Ended December 31,
(Dollars in thousands)
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . .
Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and director fees . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing and software . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising, marketing and business development . . . . . . . .
Telephone and communications . . . . . . . . . . . . . . . . . . . . . . .
Security and protection expense . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . .
2020
55,415 $
10,106
8,348
5,369
1,798
1,500
1,752
1,447
846
5,519
92,100 $
2019
56,222 $
9,506
7,048
4,435
1,138
1,831
1,774
1,464
894
5,831
90,143 $
$
$
Increase (Decrease)
(807)
600
1,300
934
660
(331)
(22)
(17)
(48)
(312)
1,957
(1.4)%
6.3%
18.4%
21.1%
58.0%
(18.1)%
(1.2)%
(1.2)%
(5.4)%
(5.4)%
2.2%
Noninterest expense was $92.1 million for the year ended December 31, 2020 and $90.1 million for the
year ended December 31, 2019. The increase in noninterest expense of $2.0 million between the year ended
December 31, 2020 and 2019 was primarily due to a $1.3 million increase in professional and director fees, a
$934,000 increase in data processing and software costs, a $660,000 increase in regulatory fees, partially offset by
an $807,000 decrease in salaries and employee benefits. The increase in professional and director fees during the
year ended December 31, 2020 was primarily due to $3.9 million in consulting related fees associated with
BSA/AML compliance matters, compared to $18,000 during the year ended December 31, 2019, partially offset
by lower legal fees of $721,000 during the year ended December 31, 2020, compared to $3.7 million during the
year ended December 31, 2019.
Income Tax Expense
Income tax expense was $6.0 million and $11.6 million for the years ended December 31, 2020 and 2019,
respectively. The amount of income tax expense for each year was impacted by the amounts of pre-tax income, tax-exempt
income and other nondeductible expenses. Income tax expense and effective tax rates for the periods shown below were
as follows:
Years Ended December 31,
(Dollars in thousands)
2020
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,034
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.63%
2019
$ 11,571
18.64%
The differences between the federal statutory rate of 21% and the effective tax rates presented in the table above
were primarily related to tax-exempt interest and bank-owned life insurance. The decrease in the effective rate for the year
ended December 31, 2020 was primarily due to tax-exempt gains related to the bank-owned life insurance.
51
Year Ended December 31, 2019 vs Year Ended December 31, 2018
Net income for the year ended December 31, 2019 increased 6.8%, compared to the year ended December 31,
2018. This increase was primarily due to increased net interest income and noninterest income, partially offset by a higher
provision for credit losses and higher noninterest expense. See further analysis of these changes in the related discussions
that follow.
Years Ended December 31,
(Dollars in thousands, except per share data and percentages)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (recapture) for credit losses . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share - basic . . . . . . . . . . . . . . . . . . . . . . . $
Earnings per share - diluted . . . . . . . . . . . . . . . . . . . . .
Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . .
Return on average shareholders’ equity . . . . . . . . . . . .
Average shareholders’ equity to average assets . . . . .
2019
153,395 $
17,407
135,988
2,385
18,628
90,143
62,088
11,571
50,517 $
2.03 $
2.02
0.40
1.50%
9.81%
15.26%
2018
135,759 $
11,098
124,661
(1,756)
14,252
82,016
58,653
11,364
47,289 $
1.90
1.89
0.20
1.50%
10.18%
14.72%
Net Interest Income
Increase (Decrease)
17,636
6,309
11,327
4,141
4,376
8,127
3,435
207
3,228
13.0%
56.8%
9.1%
235.8%
30.7%
9.9%
5.9%
1.8%
6.8%
Net interest income for the year ended December 31, 2019 was $136.0 million, compared to $124.7 million for
the year ended December 31, 2018, an increase of $11.3 million, or 9.1%. Net interest income increased in 2019, compared
to 2018, primarily due to increases in average loan yields and volume, partially offset by increased average rates on
interest-bearing deposits and higher average Federal Home Loan Bank advances. Loan growth during 2019 was funded
through increased interest-bearing deposits, noninterest-bearing deposits and Federal Home Loan Bank advances. During
2019, the costs of interest-bearing deposits trended upward due to competitive stress on rates but remain a low-cost source
of funds, as compared to other sources of funds such as debt.
52
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.
Years Ended December 31,
2019
Interest
2018
Interest
Average
Outstanding
Balance
Earned/ Average
Yield/
Interest
Rate
Paid
Average
Outstanding
Balance
Earned/ Average
Interest
Paid
Yield/
Rate
(Dollars in thousands)
Assets
Interest-earnings assets:
Total loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,608,505 $ 141,388 5.42%
5,954 2.55%
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,333 2.19%
Other interest-earning assets. . . . . . . . . . . . . . . . .
720 4.85%
Equity investments . . . . . . . . . . . . . . . . . . . . . . . .
Total interest-earning assets . . . . . . . . . . . . . . . .
3,100,249 $ 153,395 4.95%
Allowance for credit losses for loans . . . . . . . . . . . . .
Noninterest-earnings assets . . . . . . . . . . . . . . . . . . . .
(24,971)
299,387
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,374,665
233,543
243,349
14,852
$ 2,392,348 $ 123,895
6,020
5,030
814
2,890,337 $ 135,759
227,384
255,323
15,282
5.18%
2.65%
1.97%
5.32%
4.70%
(25,063)
290,868
$ 3,156,142
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . $ 1,566,038 $ 15,999 1.02%
1,386 2.25%
Federal Home Loan Bank advances . . . . . . . . . . .
3 0.29%
Repurchase agreements . . . . . . . . . . . . . . . . . . . .
Note payable and junior subordinated debt . . . . .
—
19
Total interest-bearing liabilities . . . . . . . . . . . . .
1,628,673 $ 17,407 1.07%
61,589
1,046
—
$ 1,519,643 $ 10,586
73
4
435
1,535,172 $ 11,098
3,356
1,601
10,572
0.70%
2.18%
0.25%
4.11%
0.72%
Noninterest-bearing liabilities:
Noninterest-bearing deposits . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest-bearing liabilities . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . .
1,193,527
37,458
1,230,985
515,007
Total liabilities and shareholders’ equity . . . . $ 3,374,665
1,134,191
22,082
1,156,273
464,697
$ 3,156,142
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest spread(2) . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin(3) . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin - tax equivalent(4) . . . . . . . . . . . .
$ 135,988
$ 124,661
3.88%
4.39%
4.42%
3.98%
4.31%
4.35%
Includes average outstanding balances of loans held for sale.
(1)
(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 $1.0 million and $1.1 million for the years ended December 31, 2019 and 2018, respectively, were
computed using a federal income tax rate of 21%.
53
The following tables present information regarding 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 these
tables, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
(Dollars in thousands)
Interest-earning assets:
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total increase in interest income . . . . . . . . . . . . . . . . . . . .
Interest-bearing liabilities:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable and junior subordinated debt . . . . . . . . . . . . .
Total increase in interest expense . . . . . . . . . . . . . . . . . . . .
Increase in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Provision for Credit Losses
Year Ended December 31, 2019, Compared to
Year Ended December 31, 2018
Increase (Decrease) due to
Rate
Volume
Total
6,299 $
(230)
540
(71)
6,538
5,090
46
—
—
5,136
1,402 $
11,194 $
164
(237)
(23)
11,098
323
1,267
(1)
(416)
1,173
9,925 $
17,493
(66)
303
(94)
17,636
5,413
1,313
(1)
(416)
6,309
11,327
The provision for credit losses is an income adjustment used to maintain the ACL at a level deemed appropriate
by management to absorb inherent losses on existing loans. The provision for credit loss was $2.4 million for 2019,
compared to a recapture of $1.8 million for 2018. The provision in 2019 resulted from increases in loans during that period.
The recapture in 2018 resulted from strong credit quality, continuing low nonperforming and impaired loans, minimal
charge-off history and an increase in recoveries during the year.
Noninterest Income
The following table presents components of noninterest income for the years ended December 31, 2019 and 2018
and the period-over-period changes in the categories of noninterest income
(Dollars in thousands)
Deposit account service charges . . . . . . . . . . . . . . . . . . . . . . . $
Card interchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . .
Net gain on sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2019
2018
Increase (Decrease)
6,554 $
3,720
5,011
652
2,691
18,628 $
6,281 $
3,741
1,815
660
1,755
14,252 $
273
(21)
3,196
(8)
936
4,376
4.3%
(0.6)%
176.1%
(1.2)%
53.3%
30.7%
During the year ended December 31, 2019, noninterest income increased $4.4 million, compared to the year
ended December 31, 2018, primarily due to increased earnings on bank-owned life insurance and increased swap
origination fees.
The Company has purchased life insurance policies on certain employees, that are carried at their cash surrender
value on the consolidated balance sheet and changes in the cash surrender value of the policies are recorded in noninterest
income. Earnings on bank-owned life insurance increased $3.2 million, during the year ended December 31, 2019,
compared to the year ended December 31, 2018, due to nontaxable death benefit proceeds of $4.7 million received under
bank-owned life insurance policies. The Company recorded a gain of $3.3 million over the carrying value during the year
ended December 31, 2019.
54
Other interest income includes a variety of other income-producing activities, including partnership and
investment fund income, other loan fees, swap origination charges, wire transfer fees, credit card program income and fee
income. Other noninterest income increased during the year ended December 31, 2019, compared to the year ended
December 31, 2018, primarily due to an increase of $832,000 in swap origination fee income.
Noninterest Expense
Generally, noninterest expense is composed of employee expenses and costs associated with operating facilities,
obtaining and retaining customer relationships and providing bank services. For the year ended December 31, 2019,
compared to the year ended December 31, 2018, noninterest expense increased $8.1 million, primarily due to increased
salaries and employee benefits and professional and director fees, partially offset by decreased regulatory fees. See further
analysis of these fluctuations in the related discussions that follow.
Years Ended December 31,
(Dollars in thousands)
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . .
Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and director fees . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing and software . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising, marketing and business development . . . . . . . .
Telephone and communications . . . . . . . . . . . . . . . . . . . . . . .
Security and protection expense . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . .
2019
56,222 $
9,506
7,048
4,435
1,138
1,831
1,774
1,464
894
5,831
90,143 $
2018
51,524 $
9,394
3,537
4,253
2,053
1,824
1,530
1,276
985
5,640
82,016 $
$
$
Increase (Decrease)
4,698
112
3,511
182
(915)
7
244
188
(91)
191
8,127
9.1%
1.2%
99.3%
4.3%
(44.6)%
0.4%
15.9%
14.7%
(9.2)%
3.4%
9.9%
Salaries and benefits increased $4.7 million during the year ended December 31, 2019, compared to the year
ended December 31, 2018, as a result of annual salary increases in 2019, increased bonus expense and increased stock
compensation expense due to restricted stock grants.
Regulatory fees decreased $915,000 during 2019, compared to 2018, primarily due to an FDIC deposit assessment
credit received in 2019.
Professional and director fees include legal, audit, loan review and consulting fees. The increase in professional
and director fees of $3.5 million during the year ended December 31, 2019, compared to the year ended December 31,
2018, was primarily due to increased legal fees incurred in the Bank’s response and cooperation with an investigation by
FinCEN regarding the Bank’s compliance with the BSA and AML laws and regulations. The Bank incurred legal fees
related to this investigation of $3.7 million and $193,000 during the years ended December 31, 2019 and 2018,
respectively.
Income Tax Expense
The amount of income tax expense is impacted by the amounts of 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.
55
Income tax expense and effective tax rates for the periods shown below were as follows:
(Dollars in thousands)
2019
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,571
18.64%
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
$ 11,364
19.37%
Years Ended December 31,
For 2019, the difference between the federal statutory rate of 21% and the effective tax rates presented in the
table above was largely attributable to the non-taxable gain related to bank-owned life insurance and the effective tax rates
for both 2019 and 2018 were impacted by tax-exempt interest income.
Financial Condition
Total assets were $3.9 billion as of December 31, 2020, compared to $3.5 billion as of December 31, 2019, an
increase of $470.7 million primarily due to an increase in loans excluding loans held for sale, of $285.0 million and a
$165.9 million increase in cash and cash equivalents, partially offset by an increase in the ACL for loans of $15.4 million.
Total liabilities were $3.4 billion as of December 31, 2020, compared to $2.9 billion as of December 31, 2019, an increase
of $459.9 million primarily due to an increase in deposits of $449.4 million. See further analysis in the related discussions
that follow.
(Dollars in thousands)
Assets
Loans excluding loans held for sale . . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . .
Goodwill and other intangibles . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . .
Operating lease right-to-use asset . . . . . . . . . . . . .
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders' equity . . . . .
December 31,
2020
2019
Increase (Decrease)
$
2,924,117 $
(40,637)
2,883,480
538,007
237,281
18,652
2,673
61,152
85,121
72,338
13,285
10,700
26,528
3,949,217
$
3,301,794 $
50,000
16,447
34,525
3,402,766
546,451
3,949,217
$
$
$
$
2,639,085 $
(25,280)
2,613,805
372,064
231,262
16,710
1,463
50,875
85,888
71,881
12,926
7,432
14,238
3,478,544
$
2,852,388 $
50,000
15,704
24,731
2,942,823
535,721
3,478,544 $
285,032
(15,357)
269,675
165,943
6,019
1,942
1,210
10,277
(767)
457
359
3,268
12,290
470,673
449,406
—
743
9,794
459,943
10,730
470,673
10.8%
60.7%
10.3%
44.6%
2.6%
11.6%
82.7%
20.2%
(0.9)%
0.6%
2.8%
44.0%
86.3%
13.5%
15.8%
0.0%
4.7%
39.6%
15.6%
2.0%
13.5%
56
Loan Portfolio
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 . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross loans . . . . . . . . . . . . . . . . . . . . . .
Less deferred fees and unearned
discount . . . . . . . . . . . . . . . . . . . . . . .
Less loans held for sale . . . . . . . . . . . .
Loans excluding loans held for sale . . . . .
Less allowance for credit losses for
2020
742,957 $
2019
527,607 $
December 31,
2018
519,779 $
2017
559,363 $
2016
511,554
1,041,998
522,705
239,872
258,346
33,884
8,670
88,238
2,936,670
900,746
527,812
280,192
277,209
36,782
9,812
86,513
2,646,673
795,733
515,533
282,011
221,194
39,421
11,076
68,382
2,453,129
738,293
449,211
258,584
220,305
40,433
11,256
40,344
2,317,789
697,794
491,626
236,882
133,210
39,694
11,106
38,180
2,160,046
(9,880)
(2,673)
2,924,117
(6,125)
(1,463)
2,639,085
(6,306)
—
2,446,823
(4,785)
(1,460)
2,311,544
(4,548)
(613)
2,154,885
loans . . . . . . . . . . . . . . . . . . . . . . . . . .
(25,006)
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,883,480 $ 2,613,805 $ 2,423,130 $ 2,286,766 $ 2,129,879
(25,280)
(23,693)
(24,778)
(40,637)
As of December 31, 2020, loans excluding loans held for sale, totaled $2.9 billion, an increase of $285.0 million,
or 10.8%, compared to $2.6 billion at December 31, 2019. The increase from December 31, 2019 to December 31, 2020
was impacted by the Company’s participation in PPP financing. PPP loans were $275.4 million at December 31, 2020. On
January 19, 2021, the Company began participating in the second round of PPP financing.
PPP loans are subject to the regulatory requirements that would require forbearance of loan payments for a
specified time or that would limit the Company’s ability to pursue all available remedies in the event of a loan default. If
the borrower under the PPP loan fails to qualify for loan forgiveness, the Company is at heightened risk of holding these
loans that are at unfavorable interest rates and underwriting standards as compared to the loans to customers to whom the
Company would have otherwise lent. For a more detailed risk discussion about PPP loans please see “Part II—Item 1A.—
Risk Factors.”
The contractual maturity of loans in the 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, 2020
Commercial and industrial . . . . . . . . . . . . . . . . . $
Real estate:
1 Year or Less
1 Year
Through 5 Years
After 5 Years
Total
252,676 $
458,595 $
31,686 $
742,957
Commercial real estate . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fixed rate loans . . . . . . . . . . . . . . . . . . . . . . . . . . $
Variable rate loans . . . . . . . . . . . . . . . . . . . . . . . .
126,345
156,876
11,407
55,028
20,834
7,369
25,017
655,552 $
200,704 $
454,848
712,163
317,679
40,969
10,977
12,951
1,301
62,821
1,617,456 $
977,608 $
639,848
203,490
48,150
187,496
192,341
99
—
400
663,662 $
274,507 $
389,155
1,041,998
522,705
239,872
258,346
33,884
8,670
88,238
2,936,670
1,452,819
1,483,851
57
Nonperforming Assets
Nonperforming assets include nonaccrual loans, loans that are accruing over 90 days past due and foreclosed
assets. Generally, loans are placed on nonaccrual status when they become more than 90 days past due and/or the collection
of principal or interest is in doubt. The components of nonperforming assets as of the dates indicated were as follows:
(Dollars in thousands)
Nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . $
Accruing loans 90 or more days past due . . . . . .
Total nonperforming loans . . . . . . . . . . . . . . .
Foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets . . . . . . . . . . . . . . . $
2020
24,017 $
—
24,017
—
24,017 $
2019
December 31,
2018
3,490 $
—
3,490
12
3,502 $
977 $
—
977
—
977 $
2017
7,646 $
—
7,646
705
8,351 $
2016
6,239
—
6,239
1,861
8,100
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,949,217 $ 3,478,544 $ 3,279,096 $ 3,081,083 $ 2,951,522
2,639,085 2,446,823 2,311,544 2,154,885
Loans excluding loans held for sale . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . . . . . . . . . .
25,006
Nonaccrual loans to loans excluding loans
2,924,117
40,637
24,778
23,693
25,280
held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses to nonaccrual loans .
Nonperforming loans to loans excluding loans
held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets to total assets . . . . . . . . . .
0.82%
0.04%
169.20% 2,587.51%
0.14%
678.88%
0.33%
324.06%
0.29%
400.80%
0.82%
0.61%
0.04%
0.03%
0.14%
0.11%
0.33%
0.27%
0.29%
0.27%
Nonperforming assets remain low relative to total assets at $24.0 million, or 0.61% of total assets, at
December 31, 2020, compared to $977,000, or 0.03% of total assets, at December 31, 2019. The increase in nonperforming
assets during the year ended December 31, 2020 was largely the result of increases in adversely graded loans and increases
in past due loans primarily associated with businesses impacted by the COVID-19 pandemic. The Company expects that
number of nonperforming loans may continue to increase during 2021. Please see “Part II—Item 7.—Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Information Regarding COVID-19 and
Uncertain Economic Outlook.”
Troubled Debt Restructurings
The Company has certain loans that have been restructured due to borrower’s financial difficulties. The troubled
debt restructurings granted during the years ending December 31, 2020 and 2019 which remain outstanding at period end
were as follows:
Post-modification Recorded Investment
Extended Maturity,
Pre-modification
Outstanding
Recorded
Investment
Number
of Loans
Maturity and
Restructured Extended Restructured
Payments
Maturity Payments
Extended
Restructured
Payments
and Adjusted
Interest Rate
(Dollars in thousands)
December 31, 2020
Commercial and industrial . . . . . . . . . .
Real estate:
Commercial real estate . . . . . . . .
1-4 family residential . . . . . . . . . .
Construction and development . .
Total . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2019
Commercial and industrial . . . . . . . . . .
Real estate:
1-4 family residential . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . .
17 $
10,343 $
7,475 $
— $
2,637 $
9
5
5
36 $
18,867
1,629
12,905
43,744 $
18,867
1,651
12,648
40,641 $
—
—
—
— $
—
—
—
2,637 $
3 $
202 $
39 $
— $
163 $
1
4 $
111
313 $
—
39 $
—
— $
—
163 $
231
—
—
257
488
—
115
115
58
The troubled debt restructurings for the year ended December 31, 2020 in the table above include 34 loans totaling
$43.1 million that were provided a deferral arrangement during 2020 as the borrower was impacted by the COVID-19
pandemic. As of December 31, 2020, 10 of the COVID-19 related troubled debt restructurings with principal balances
totaling $22.4 million were still subject to a deferral arrangement. The Company expects that the number of troubled debt
restructurings may continue to increase during 2021. Please see “Part II—Item 7.—Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Information Regarding COVID-19 and Uncertain Economic
Outlook.”
Risk Gradings
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio and methodology for
calculating the ACL, management assigns and tracks loan grades, as described below, that are used as credit quality. The
risk grades are described in “Part II—Item 8.—Financial Statements and Supplementary Data—Note 6.” The internal
ratings of loans as of the dates indicated were as follows:
(Dollars in thousands)
December 31, 2020
Commercial and industrial . . . . . . . . . . . . . . .
Real estate:
Commercial real estate . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross loans . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in thousands)
December 31, 2019
Commercial and industrial . . . . . . . . . . . . . . .
Real estate:
Commercial real estate . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . .
Multi-family residential . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross loans . . . . . . . . . . . . . . . . . . . . . . . . .
Pass
Special
Mention
Substandard
Total
$
720,465
$
3,404
$
19,088
$
742,957
1,000,503
502,933
230,654
258,346
33,884
8,597
80,386
2,835,768
$
$
7,519
—
3,165
33,976
19,772
6,053
—
—
—
—
$
14,088
—
—
73
7,852
86,814
$
1,041,998
522,705
239,872
258,346
33,884
8,670
88,238
2,936,670
Pass
Special
Mention
Substandard
Total
$
513,417
$
2,963
$
11,227
$
527,607
876,207
515,247
274,731
277,209
36,566
9,733
79,860
2,582,970
$
$
18,570
12,565
594
—
—
50
—
$
34,742
5,969
—
4,867
—
216
29
6,653
28,961
$
900,746
527,812
280,192
277,209
36,782
9,812
86,513
2,646,673
During the year ended December 31, 2020, loans rated pass increased $252.8 million, primarily due to new loans,
including PPP loans, loans rated special mention decreased $20.7 million and loans with an internal rating of substandard
increased $57.8 million primarily due to the impact of the COVID-19 pandemic.
Allowance for Credit Losses
The Company maintains an ACL for loans that represents management’s best estimate of the expected credit
losses and risks inherent in the loan portfolio. The amount of the ACL for loans should not be interpreted as an indication
that charge-offs in future periods will necessarily occur in those amounts. In determining the ACL for loans, the Company
estimates expected losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably
determined. The balance of the ACL for loans is based on internally assigned risk classifications of loans, historical loan
loss rates, changes in the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current and
forecasted economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.
59
The ACL by loan category as of the dates shown was as follows:
(Dollars in thousands)
Commercial and
2020
2019
December 31,
2018
2017
2016
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
industrial . . . . . . . . . . . . . $ 13,035 32.1 % $ 7,671 30.3 % $ 7,719 32.6 % $ 7,257 29.3 % $ 6,409 25.6 %
Real estate:
Commercial real
estate . . . . . . . . . . . . . 13,798 34.0 %
7,975 31.6 %
6,730 28.4 % 10,375 41.9 % 10,770 43.1 %
Construction and
development . . . . . . .
1-4 family residential . .
Multi-family
residential . . . . . . . . .
Consumer . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . .
Total allowance for
6,089 15.0 %
6.3 %
2,578
4,446 17.6 %
8.9 %
2,257
4,298 18.1 %
9.6 %
2,281
3,482 14.0 %
5.4 %
1,326
4,598 18.4 %
5.1 %
1,286
2,513
440
137
2,047
6.2 %
1.1 %
0.3 %
5.0 %
1,699
388
74
770
6.7 %
1.5 %
0.3 %
3.1 %
1,511
387
62
705
6.4 %
1.6 %
0.3 %
3.0 %
1,419
566
68
285
5.7 %
2.3 %
0.3 %
1.1 %
916
353
79
595
3.7 %
1.4 %
0.3 %
2.4 %
credit losses . . . . . . . . . . $ 40,637 100.0 % $ 25,280 100.0 % $ 23,693 100.0 % $ 24,778 100.0 % $ 25,006 100.0 %
The ACL was $40.6 million, or 1.39% of loans excluding loans held for sale, at December 31, 2020, compared
to $25.3 million, or 0.96% of loans excluding loans held for sale, at December 31, 2019. The increase in the ACL for loans
of $15.3 million during 2020 was primarily due to the impact of the COVID-19 pandemic, the sustained instability of the
oil and gas industry and increased adversely graded loans and charge-offs. Please see “Part II—Item 7.—Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Information Regarding COVID-19 and
Uncertain Economic Outlook” and “Part I.—Item 1A.—Risk Factors.”
The increase during the year ended December 31, 2020 was also impacted by the adoption of Accounting
Standards Update, or ASU, 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments, or CECL, effective January 1, 2020, which resulted in an increase of $874,000 in the ACL for loans.
Please refer to “Part II—Item 8.—Financial Statements and Supplementary Data—Note 6.” for a description of the model,
factors and the methodology used by the Company to determine the ACL. Also see “Part II.—Item 7.—Management’s
Discussion and Analysis—Critical Accounting Policies—Allowance for Credit Losses.”
60
Activity in the ACL for loans for the periods indicated was as follows:
(Dollars in thousands)
Allowance for credit losses at
beginning of period . . . . . . . . . . . . . .
Impact of CECL adoption . . . . . . . . . . .
Provision (recapture) for credit losses .
Charge-offs:
Commercial and industrial . . . . . . . .
Real estate:
Commercial real estate . . . . . . . .
Construction and development . .
1-4 family residential . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .
Total charge-offs . . . . . . . . . . . . .
Recoveries:
Commercial and industrial . . . . . . . .
Real estate:
Commercial real estate . . . . . . . .
1-4 family residential . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . .
Other
Total recoveries . . . . . . . . . . . . . .
Net (charge-offs) recoveries . . . . . . . . .
Allowance for credit losses . . . . . . . . . .
Loans excluding loans held for sale . . .
Total average loans . . . . . . . . . . . . . . . .
Allowance for credit losses to loans
excluding loans held for sale . . . . . . .
Net charge-offs (recoveries) to total
average loans . . . . . . . . . . . . . . . . . . .
Securities
2020
Years Ended December 31,
2018
2019
2017
2016
$
25,280 $
874
18,074
23,693 $
—
2,385
24,778 $
—
(1,756)
25,006 $
—
(338)
25,315
—
4,575
714
1,252
1,928
904
4,884
163
—
71
112
—
3,500
4,560
45
—
12
97
—
52
1,458
171
1
4
1
—
3
2,108
120
—
8
93
—
—
1,125
589
—
3
277
267
59
6,079
794
489
2,737
1,110
1,010
147
1
14
12
1
969
(3,591)
40,637 $
108
6
45
26
—
1,195
(4,884)
$
25,006
$ 2,924,117 $ 2,639,085 $ 2,423,130 $ 2,286,766 $ 2,129,879
2,140,917
2,392,348
2,862,911
9
13
43
52
8
1,235
110
24,778 $
81
3
71
10
6
660
(798)
25,280 $
20
6
3
10
3
2,779
671
23,693 $
2,608,505
2,206,541
1.39%
0.96%
0.98%
1.08%
0.13%
0.03%
(0.03)%
—
1.17%
0.23%
As of December 31, 2020, the fair value of the Company’s securities totaled $237.3 million compared to
$231.3 million as of December 31, 2019, an increase of $6.0 million, or 2.6%. During 2020, the amortized cost of the
Company’s securities portfolio increased $437,000 due to an increase in the amortized cost of the state and municipal
securities primarily due to purchases outpacing maturities and the amortized cost of the Company’s collateralized mortgage
obligations and mortgage-backed securities decreased primarily due to repayments exceeding purchases. The net
unrealized gain on the Company’s securities increased $5.6 million due to increases in the net unrealized gains related to
the Company’s state and municipal securities and mortgage-backed securities. The fair value of the securities portfolio as
of the dates indicated below was as follows:
(Dollars in thousands)
Securities available for sale:
Debt securities:
December 31,
2020
2019
Increase (Decrease)
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency securities:
Collateralized mortgage obligations . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . .
Equity securities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
93,037 $
53,279 $
39,758
74.6%
35,402
107,649
1,193
237,281 $
55,989
120,847
1,147
231,262 $
(20,587)
(13,198)
46
6,019
(36.8)%
(10.9)%
4.0%
2.6%
$
61
The Company’s mortgage-backed securities at December 31, 2020 and 2019, were agency securities. The
Company does not hold any Federal National Mortgage Loan Association, or Fannie Mae, or Federal Home Loan
Mortgage Corporation, 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 the securities portfolio.
Contractual maturities and weighted-average yields by security type based on estimated annual income divided
by the average amortized cost of the Company’s available for sale securities portfolio as of the date indicated was as
follows:
1 Year or Less
Amount Yield
After 1 Year to 5 Years
Amount
Yield Amount Yield Amount Yield
Total
Yield
After 5 Years
to 10 Years
After 10 Years
Total
(Dollars in thousands)
December 31, 2020
Debt securities:
State and municipal
securities . . . . . . . . . $ 512 2.60% $
1,298 2.32% $ 9,540 2.76% $ 81,687 2.47% $ 93,037 2.50%
U.S. agency securities:
Collateralized
mortgage
obligations . . . . . .
Mortgage-backed
—
—
—
—
5,075 2.17%
30,327 0.66%
35,402 0.87%
securities . . . . . . . .
Equity securities: . . . . . . .
33 3.84%
1,193 1.78%
1,565 3.58%
—
—
829 2.35% 105,222 2.05% 107,649 2.07%
1,193 1.78%
—
—
—
—
Total securities . . . . . . $ 1,738 2.06% $
2,863 2.49% $ 15,444 2.54% $ 217,236 2.01% $ 237,281 2.05%
The contractual maturity of a collateralized mortgage obligation or mortgage-backed security is the date at which
the last 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 the securities portfolio was 3.9 years with an estimated
modified duration of 3.6 years as of December 31, 2020. A portion of the 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.
At December 31, 2020 and 2019, securities with a carrying amount of approximately $27.3 million and $50.8
million, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or
permitted by law.
Deposits
Total deposits as of December 31, 2020 were $3.3 billion, an increase of $449.4 million, or 15.8%, compared to
December 31, 2019. Noninterest-bearing deposits as of December 31, 2020 were $1.5 billion, an increase of
$291.6 million, or 24.6%, compared to December 31, 2019. Total interest-bearing account balances as of December 31,
2020 were $1.8 billion, an increase of $157.8 million, or 9.5%, from December 31, 2019, primarily due to increases in
money market and savings accounts, partially offset by decreases in certificates and other time deposits.
62
The components of deposits as of the dates shown below were as follows:
December 31,
(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 . . . . . . . . . . . . . . . . . . . . . . . . . .
1,039,617
108,167
152,592
144,818
1,825,369
1,476,425
2020
380,175 $
2019
369,744 $
805,942
92,183
208,018
191,640
1,667,527
1,184,861
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,301,794 $ 2,852,388 $
Increase (Decrease)
10,431
233,675
15,984
(55,426)
(46,822)
157,842
291,564
449,406
2.8%
29.0%
17.3%
(26.6)%
(24.4)%
9.5%
24.6%
15.8%
The scheduled maturities of uninsured certificates of deposits or other time deposits as of the date indicated
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
December 31,
2020
30,320
7,421
23,081
11,703
72,525
Securities pledged and the letter of credit issued under the Company’s Federal Home Loan blanket lien
arrangement which secure public deposits were not considered in determining the amount of uninsured time deposits.
Average balances and average rates paid on deposits for the dates indicated were as follows:
Year Ended December 31, 2020 Year Ended December 31, 2019
(Dollars in thousands)
Interest-bearing demand accounts . . . . . . . . . . . . . . . . . . . . . . . $
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings 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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average
Balance
363,014
868,915
97,982
192,268
181,364
1,703,543
1,404,027
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,107,570
Rate
Average
Balance
352,678
745,435
93,192
191,770
182,963
1,566,038
1,193,527
0.30 % $ 2,759,565
0.10 % $
0.42 %
0.04 %
1.27 %
1.50 %
0.54 %
—
Rate
0.25 %
1.28 %
0.06 %
1.36 %
1.61 %
1.02 %
—
0.58 %
Average
Average
The ratio of average noninterest-bearing deposits to average total deposits was 45.2% and 43.3% for the years
ended December 31, 2020 and 2019, respectively.
Equity Investments
Equity investments increased $1.9 million during the year ended December 31, 2020, primarily due to an increase
in the investment in Federal Home Loan Bank stock. As a member of the Federal Home Loan Bank, the Bank is required
to maintain a stock investment in the Federal Home Loan Bank calculated as a percentage of aggregate outstanding
mortgages, outstanding Federal Home Loan Bank advances and other financial instruments.
Premises and Equipment, Net
Premises and equipment, net increased $10.3 million during the year ended December 31, 2020, primarily due to
the purchase of the land and building of a branch that was previously leased for $10.7 million.
63
Derivative Financial Instruments
The Company has outstanding interest rate swap contracts with certain customers and equal and offsetting interest
rate swaps with other financial institutions entered into at the same time. These interest rate swap contracts are not
designated as hedging instruments for mitigating interest rate risk. The objective of the transactions is to allow customers
to effectively convert a variable rate loan to a fixed rate.
At December 31, 2020 and 2019, the Company had 23 and 19 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 other noninterest income. Fair value amounts are included in other
assets and other liabilities.
The Company entered into a credit risk participation agreement with another financial institution during the year
ended December 31, 2020. This agreement is associated with an interest rate swap related to a loan for which the Company
is the lead agent bank and provides credit protection to the Company should the borrower fail to perform under the terms
of the interest rate swap agreement. The fair value of the agreement is determined based on the market value of the
underlying interest rate swap adjusted for credit spreads and recovery rates.
Derivative instruments outstanding as of the dates shown below were as follows:
(Dollars in thousands)
December 31, 2020
Interest rate swaps with customers . . . . . . . . . . . . . . . . . . Other assets
Other assets
Credit risk participation agreement with financial
Classification
institution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps with financial institutions . . . . . . . . . Other liabilities
Total derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2019
Interest rate swaps with customers . . . . . . . . . . . . . . . . . . Other assets
Interest rate swaps with financial institutions . . . . . . . . . Other assets
Interest rate swaps with financial institutions . . . . . . . . Other liabilities
Interest rate swaps with customers . . . . . . . . . . . . . . . . . . Other liabilities
Total derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net
Notional
Amounts
Fair Value
$
146,491 $
14,084
8,618
40
146,491
307,066 $
(8,618)
40
69,189 $
5,987
69,189
5,987
150,352 $
2,599
39
(2,599)
(39)
—
$
$
$
Deferred income taxes are provided for differences in financial statement carrying amounts of assets and liabilities
and their respective tax basis. The increase in deferred taxes, net during the year ended December 31, 2020 primarily
related to timing differences for the ACL. Please see “Part II—Item 8.—Financial Statements and Supplementary Data—
Note 20.”
Other assets
Other assets increased $12.3 million during the year ended December 31, 2020, primarily due to an increase in
the fair value of interest rate swaps of $6.0 million as noted in the table above and a $4.6 million increase in interest
receivable on loans, primarily due to interest that was deferred as part of the Company’s assistance to borrowers impacted
by the COVID-19 pandemic.
Other liabilities
Other liabilities increased $9.8 million during the year ended December 31, 2020, primarily due to an increase in
the fair value of interest rate swaps of $6.0 million as noted in the table above and a $3.8 million increase in the ACL for
unfunded commitments.
The Company’s unfunded commitments are standby letters of credit and commitments to extend credit that are
not unconditionally cancellable by the Company. See “Part II—Item 7.—Management’s Discussion and Analysis—
64
Liquidity and Capital Resources—Off-Balance Sheet Arrangements.” The liability associated with the ACL for unfunded
commitments was $4.2 million at December 31, 2020, compared to $378,000 at December 31, 2019. The adoption of
CECL increased the ACL for unfunded commitments by $2.9 million.
Liquidity and Capital Resources
Liquidity
Liquidity measures the ability to meet current and future cash flow needs as they become due. Liquidity involves
having funds for operations on an ongoing basis, maintaining reserve requirements, supporting asset growth and
acquisitions or reducing assets to meet deposit withdrawals and other payment obligations and manage unexpected events.
The Company’s primary source of funds has been customer deposits and the primary use of funds has been funding of
loans. Historically, the cost of the Company’s deposits has been lower than other sources of funds available.
As of December 31, 2020, the Company had no exposure to future cash requirements associated with known
uncertainties or capital expenditure of a material nature. The Company monitors its liquidity and may seek to obtain
additional financing to further support its business if necessary. The composition of funding sources and uses as a
percentage of average total assets for the periods indicated was as follows:
Years Ended December 31,
2019
2020
Sources of funds:
Deposits:
Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uses of funds:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noninterest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total uses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average loans to average deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45.3 %
37.4 %
1.5 %
1.3 %
14.5 %
100.0 %
76.2 %
6.3 %
9.7 %
0.4 %
7.4 %
100.0 %
92.1 %
46.4 %
35.4 %
1.8 %
1.1 %
15.3 %
100.0 %
77.3 %
6.9 %
7.2 %
0.5 %
8.1 %
100.0 %
94.5 %
Cash and Cash Equivalents
As of December 31, 2020, cash and cash equivalents was $538.0 million, compared to $372.1 million at
December 31, 2019. The net increase of $165.9 million was primarily due to net deposit inflows of $449.4 million, partially
offset by outflows to fund the $285.0 million increase in loans excluding loans held for sale.
Borrowings
At December 31, 2020, the Company had access to additional liquidity through various borrowing arrangements
as shown below:
(Dollars in thousands)
Federal Home Loan Bank Facility(1) . . . . . . .
Frost Facility . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Funds . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Capacity
Outstanding
Availability
1,079,507
30,000
65,000
1,174,507
$
$
(60,800)
—
—
(60,800)
$
$
1,018,707
30,000
65,000
1,113,707
(1) Outstanding amount includes $50.0 million of Federal Home Loans Bank advances and a $10.8 million letter of credit.
65
The Federal Home Loan Bank allows the Company to borrow on a blanket floating lien status collateralized by
certain loans and the blanket lien amount was $1.1 billion at both December 31, 2020 and 2019. Federal Home Loan Bank
advances outstanding totaled $50.0 million at both December 31, 2020 and 2019 and these borrowings were on a long-
term basis. See contractual obligations table below. At December 31, 2020, there was a $10.8 million letter of credit that
was issued under this agreement and used as collateral to secure certain public deposits. After considering the outstanding
advances and letter of credit, the net capacity available under the Federal Home Loan Bank Facility was $1.0 billion at
both December 31, 2020 and 2019.
During the years ended December 31, 2020 and 2019, the Company also borrowed under this agreement on a
short-term basis. The average outstanding balance for Federal Home Loan Bank advances for the years ended
December 31, 2020 and 2019 was $55.2 million and $61.6 million, respectively. The weighted-average interest rate for
the years ended December 31, 2020 and 2019 was 1.64% and 2.25%, respectively.
In addition to the Federal Home Loan Bank borrowings mentioned above, the Company had additional available
borrowing capacity at December 31, 2020. The Company has a loan agreement with Frost Bank, which provides for a
$30.0 million revolving line of credit. At December 31, 2020, there were no outstanding borrowings on this line of credit
and the Company did not draw on this line of credit during 2020 or 2019. The Company maintained federal funds lines of
credit with commercial banks that provided for the availability to borrow up to an aggregate of $65.0 million at
December 31, 2020 and $75.0 million at December 31, 2019. There were no funds outstanding under these lines of credit
as of December 31, 2020 and 2019.
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:
(Dollars in thousands)
December 31, 2020
Federal Home Loan Bank advances . . . . . . . . . . . . $
Non-cancellable future operating leases . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . .
Less than
1 Year
1 Year to
3 Years
3 Years to
5 Years
Greater
than 5 Years
Total
— $ 30,000 $ 20,000 $
1,968
204,165
4,452
74,708
3,747
18,537
9,345
—
— $ 50,000
19,512
297,410
9,345 $ 366,922
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 206,133 $ 109,160 $ 42,284 $
December 31, 2019
Federal Home Loan Bank advances . . . . . . . . . . . . $
Non-cancellable future operating leases . . . . . . . .
Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . .
— $ 50,000
21,486
399,658
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300,243 $ 85,326 $ 75,344 $ 10,231 $ 471,144
$ 10,000
4,836
70,490
$ 40,000
4,394
30,950
—
2,025
298,218
10,231
—
$
Off-Balance Sheet Arrangements
In the normal course of business, the Company enters into various transactions, which in accordance with GAAP,
are not included in the consolidated balance sheets. These transactions are entered into to meet the customer financing
needs. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying
degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the Company’s consolidated
balance sheets.
66
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:
Less than
1 Year
1 Year to
3 Years
3 Years to
5 Years
Greater
than 5 Years
Total
(Dollars in thousands)
December 31, 2020
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . $ 18,713 $
Commitments to extend credit . . . . . . . . . . . . . . . .
498,238
7,365 $
— $
177,710
63,783
— $ 26,078
—
739,731
— $ 765,809
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 516,951 $ 185,075 $ 63,783 $
December 31, 2019
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . $ 14,990 $
Commitments to extend credit . . . . . . . . . . . . . . . .
— $ 23,547
794,050
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500,294 $ 272,204 $ 34,425 $ 10,674 $ 817,597
263,647
485,304
8,557 $
34,425
10,674
— $
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a
third-party. In the event of nonperformance by the customer, the Company would be required to fund the commitment to
the third-party, but the Company has rights to the collateral underlying the commitment, which can include commercial
real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. The Company’s credit
risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to its
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 may expire without being fully drawn upon, the total
commitment amounts disclosed above do not necessarily represent future cash requirements.
Capital Resources
Total shareholders’ equity increased to $546.5 million as of December 31, 2020, compared to $535.7 million as
of December 31, 2019. The increase of $10.7 million was primarily due to current year income of $26.4 million, a $4.4
million increase in other comprehensive income and $1.9 million of stock compensation expense, partially offset by
$8.9 million paid to repurchase shares of common stock, $3.0 million due to the implementation of CECL and $9.9 million
of dividends to common shareholders declared during 2020.
During the year ended December 31, 2020, the Company repurchased 431,814 shares under its share repurchase
programs at an average price of $20.62 per share and during the year ended December 31, 2019, the Company repurchased
100 shares at an average price of $27.98 per share. Shares repurchased during 2020 and 2019 were retired and returned to
the status of authorized but unissued.
As a general matter, FDIC insured depository institutions and their holding companies are required to maintain
minimum capital relative to the amount and types of assets they hold. The Company and the Bank are both subject to
regulatory capital requirements. At December 31, 2020 and 2019, the Company and the Bank were in compliance with all
applicable regulatory capital requirements at the bank holding company and bank levels, 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. See “Part II—Item 8.—Financial Statements and Supplementary
Data—Note 20.”
Interest Rate Sensitivity and Market Risk
Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange
rates, commodity prices and other relevant market rates and prices. As a financial institution, the Company’s primary
component of market risk is interest rate volatility. The Company is not subject to foreign exchange or commodity price
risk and does not own any trading assets. The Company does not enter into instruments such as leveraged derivatives,
financial options, financial future contracts or forward delivery contracts to reduce interest rate risk.
67
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. Fluctuations in interest rates will ultimately impact both the level of income and expense
recorded on most of the Company’s 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.
The Company has asset, liability and funds management policies that provide the guidelines for effective funds
management and has established a measurement system for monitoring the net interest rate sensitivity position. The
Company’s exposure to interest rate risk is managed by the Funds Management Committee of the Bank. The committee
formulates strategies based on appropriate levels of interest rate risk with consideration of 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 relationships between
interest-earning assets and interest-bearing liabilities, 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.
The Company uses 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, two simulation models are run, 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. The Company’s
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.
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:
December 31, 2020
December 31, 2019
Change in Interest
Rates (Basis Points)
+ 300 . . . . . . . . . . . . . . . . . . . . . . . . .
+ 200 . . . . . . . . . . . . . . . . . . . . . . . . .
+ 100 . . . . . . . . . . . . . . . . . . . . . . . . .
Base . . . . . . . . . . . . . . . . . . . . . . . . . .
−100 . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent Change in
Percent Change
Net Interest Income Fair Value of Equity
35.7 %
32.8 %
21.0 %
—%
(37.0)%
21.5 %
14.1 %
6.5 %
—%
(1.5)%
Percent Change
Percent Change in
Net Interest Income Fair Value of Equity
10.2 %
10.4 %
8.7 %
—%
(14.6)%
15.8 %
10.9 %
5.4 %
—%
(4.5)%
The results are primarily due to behavior of demand, money market and savings deposits during such rate
fluctuations. Historically, interest rates on these deposits have changed 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.
68
LIBOR Transition
The London Interbank Offered Rate, or LIBOR, is used as an index rate for a majority of the Company’s interest-
rate swaps and approximately 12.0% of the Company’s loans at December 31, 2020. It is expected that a number of private-
sector banks that have been reporting information used to set LIBOR will stop doing so after 2021 when their reporting
commitment ends. As a result, LIBOR may no longer be available as an index or may be seen as no longer representative
of the market. Alternative reference rates are being identified, but existing contracts may not have been written to allow
the use of these alternatives.
The Company has created a taskforce to identify and evaluate loans and interest-rate swaps that are indexed to
LIBOR. For new loan originations and interest-rate swaps, the Company has transitioned away from utilizing LIBOR as
a variable rate index and has started utilizing U.S. prime rate. During 2020, the Company modified three loans to transition
the pricing index from LIBOR to U.S. prime rate. These loans had an outstanding principal balance of $5.0 million as of
December 31, 2020. The Company is evaluating the risks related to this transition and its evaluation and mitigation of
risks related to the discontinuation of LIBOR may span several reporting periods through 2022.
Impact of Inflation
The Company’s 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 the Company’s assets and liabilities are monetary in nature.
As a result, interest rates have a more significant impact on the Company’s 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
The Company’s accounting policies are described in “Part II—Item 8.—Financial Statements and Supplementary
Data—Note 1.” The Company believes that the following accounting policies involve a higher degree of judgment and
complexity:
Allowance for Credit Losses
Determining the amount of the ACL is considered a critical accounting estimate, as it requires significant
judgment and the use of subjective measurements, including forecasted national and local economic conditions and
management’s assessment of overall portfolio quality. Changes in these estimates and assumptions are possible and may
have a material impact on the ACL, and therefore the Company’s financial position, liquidity or results of operations.
The Company adopted CECL effective January 1, 2020 and as a result of this adoption, the Company’s ACL for
the loan portfolio has two main components: a reserve for expected losses determined from the historical loss rates,
adjusted for qualitative factors, and forecasted expected losses on the segments associated with the individual loan classes
with similar risk characteristics, or general reserve; and a separate allowance representing the reserves assigned to
individually evaluated loans that do not share similar risk characteristics with other loans, or specific reserves.
There are multiple qualitative factors, both internal and external, that could impact the potential collectability of
the underlying loans. The various internal factors that may be considered include, among other things: (i) effectiveness of
loan policies, procedures and internal controls; (ii) portfolio growth and changes in loan concentrations; (iii) changes in
loan quality; (iv) experience, ability and effectiveness of lending management and staff; (v) legal and regulatory
compliance requirements associated with underwriting, originating and servicing a loan and the impact of exceptions; and
(vi) the effectiveness of the internal loan review function. The various external factors that may be considered include,
among other things: (i) current national and local economic conditions; (ii) changes in the political, legal and regulatory
landscape; (iii) industry trends, in particular those related to loan quality; and (iv) forecasted changes in the economy.
69
As part of its assessment, the Company considers the need to adjust historical information to reflect the extent to
which current conditions and forecasts differ from the conditions that existed for the period over which historical
information was evaluated. The Company uses an economic forecast qualitative factor as noted above to adjust the
expected loss rates for the effects of forecasted changes in the economy. The Company uses economic indicators and
indexes including, but not limited to: (i) inflation indexes; (ii) unemployment rates; (iii) interest rates; (iv) economic
growth; (v) government expenditures; (vi) gross domestic product indexes; (vii) productivity indicators; (viii) leading
indexes; (ix) debt levels; and (x) narratives such as those supplied by the Federal Reserve’s beige book and Moody’s
Analytics that provide information for determining an appropriate impact ratio for macro-economic conditions.
The COVID-19 pandemic, sustained instability in the oil and gas industry, increased adversely graded loans and
charge-offs caused fluctuations in the Company’s estimates and assumptions during the year ended December 31, 2020
and increased the provision for credit losses. As the COVID-19 pandemic is ongoing, further fluctuations in the Company’s
estimates and forecasts may occur.
For further detail of the factors considered in determining the ACL see “Part II—Item 8.—Financial Statements
and Supplementary Data—Note 1 and Note 6.”
Fair Values of Financial Instruments
Determining the amount of the fair values of financial instruments is considered a critical accounting estimate, as
it requires significant judgment and the use of subjective measurements. In general, the fair values of the Company’s
financial instruments are 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. Fair value estimates are
based on judgments regarding: (i) current economic conditions; (ii) interest rates; (iii) credit risk; (iv) prepayments; (v) risk
characteristics of the various instruments; and (vi) other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be determined with precision. 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 estimates of fair value.
Goodwill and Other Intangibles
Determining the fair value of goodwill and other intangibles is considered a critical accounting estimate because
it requires significant management judgment and the use of subjective measurements. Goodwill, which is excess purchase
price over the fair value of net assets from acquisitions, is evaluated for impairment at least annually and on an interim
basis if events or circumstances indicate that it is likely 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 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.
Qualitative factors are first assessed to determine if it is more likely than not that the fair value of a reporting unit
is less than its carrying amount. The various qualitive factors considered include: (i) general economic conditions;
(ii) industry conditions; (iii) conditions in the Company’s markets; (iv) overall financial performance of the Company;
(v) market value of the Company’s stock; and (vi) other Company-specific events. If the Company determines that it is
more likely than not that the fair value of a reporting unit is less than its carrying amount based on the assessment of
qualitative factors, the Company then estimates the fair value of the reporting unit based on an analysis of market value,
which includes estimates of quantitative factors such as: (i) estimated futures cash flows of the reporting unit; (ii) the
discount rate used to discount estimated cash flows to their net present value; and (iii) the control premium. Impairment
exists if the estimated fair value of the reporting unit at the date of the test is less than the goodwill recorded. If goodwill
is impaired, a loss would then be recognized in the consolidated financial statements to the extent of the impairment.
Variability in the market and changes in assumptions or subjective measurements used to determine fair value are
reasonably possible and may have a material impact on the Company’s financial position, liquidity or results of operations.
During 2020, the Company’s stock price was volatile and declined significantly. The Company’s closing stock
price was $25.51 per share as of December 31, 2020, down from the December 31, 2019 closing price of $31.12 per share.
The Company’s peers have also experienced similar declines in their stock prices. Based on an assessment of the
70
performance of the Company’s stock relative to its peers and the overall market, along with the other qualitative factors
considered, the Company has not determined that it is more likely than not that the fair value of a reporting unit is less
than its carrying amount at December 31, 2020.
The Company’s other intangible assets include core deposits, loan servicing assets and customer relationship
intangibles. Other intangible assets are tested for impairment at least annually and on an interim basis 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. Based on the Company’s assessment, there was no indication of
impairment at December 31, 2020.
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. The Company decided not to take
advantage of this provision and is complying with new or revised accounting standards to the same extent that compliance
is required for non-emerging growth companies. The decision to opt out of the extended transition period under the JOBS
Act is irrevocable.
Recently Issued Accounting Pronouncements
See “Part II—Item 8.—Financial Statements and Supplementary Data—Note 1.”
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See “Part II—Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Interest Rate Sensitivity and Market Risk” for a discussion of how the Company manages market risk.
Item 8. Financial Statements and Supplementary Data
The Company’s financial statements and accompanying notes are included in “Part IV—Item 15.—Exhibits and
Financial Statement Schedules.”
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, 2020, 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
71
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, 2020, 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, or 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 FDICIA. Management’s assessment
determined that the Company maintained effective internal controls over financial reporting as of December 31, 2020.
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
Code of Ethics
The Company has adopted a code of business conduct and ethics, or the Code of Ethics, that applies to all
employees, including executive officers, and to directors. The Code of Ethics is available on the Corporate Governance
page of the Company’s website at www.communitybankoftx.com. If the Company were to amend or waive any provision
of its Code of Ethics that applies to principal executive officer, principal financial officer, principal accounting officer or
any person performing similar functions, the Company intend to satisfy its disclosure obligations with respect to any such
waiver or amendment by posting such information on its internet website set forth above.
All other information called for by this item is set forth in the Definitive Proxy Statement relating to the 2021
Annual Meeting of Shareholders, or the 2021 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, 2020 and is incorporated herein by
reference.
Item 11. Executive Compensation
The information called for by this item is set forth in the 2021 Proxy Statement, to be filed with the SEC within
120 days of the end of the fiscal year ended December 31, 2020 and is incorporated herein by reference to the 2021 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.—Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities” of this Annual Report on Form 10-K. The other information called for by this
item is set forth in the 2021 Proxy Statement, to be filed with the SEC within 120 days of the end of the fiscal year ended
December 31, 2020 and is incorporated herein by reference to the 2021 Proxy Statement.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information called for by this item is set forth in the 2021 Proxy Statement, to be filed with the SEC within
120 days of the end of the fiscal year ended December 31, 2020 and is incorporated herein by reference to the 2021 Proxy
Statement.
72
Item 14. Principal Accounting Fees and Services
The information called for by this item is set forth in the 2021 Proxy Statement, to be filed with the SEC within
120 days of the end of the fiscal year ended December 31, 2020 and is incorporated herein by reference to the 2021 Proxy
Statement.
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 the Company’s 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
4.2
10.1
10.2
10.3†
10.3.1†
10.4†
10.5†
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)
Description of Registrant’s Securities (incorporated by reference to Exhibit 4.2 to the Company’s
Form 10-K filed with the Commission on February 26 ,2020, File No. 001-38280)
Revolving Promissory Note between CBTX, Inc., as borrower and Frost Bank, as lender, dated as of
December 13, 2019 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the
Commission on December 17, 2019, 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)
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)
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)
Employment Agreement between CBFH, Inc. and Robert T. Pigott, Jr., 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)
73
10.6†
10.7†
10.8†
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)
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)
Employment Agreement between Community Bank of Texas, N.A. and Travis Jaggers, dated January 4,
2016 (incorporated by reference to Exhibit 10.9 to the Company’s Form 10-K filed with the Commission on
February 26, 2020, File No. 001-38280)
10.9†
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)
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18†
10.19†
10.20
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
Second Amended and Restated Loan Agreement between CBTX, Inc., as borrower and Frost Bank, as
lender, dated as of December 13, 2019 (incorporated by reference to Exhibit 10.1 to the Company’s
Form 8-K filed with the Commission on December 17, 2019, File No. 001-38280)
74
10.21
Formal Agreement dated June 18, 2020, by and between CommunityBank of Texas, N.A. and the Office of
the Comptroller of the Currency (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed
with the Commission on June 19, 2020, File No. 001-38280)
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, 2020,
formatted in Inline XBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance
Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income,
(iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash
Flows and (vi) Notes to Consolidated Financial Statements.
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* 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.
75
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 26, 2021.
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 Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities and the dates indicated.
Signature
Title
Date
/s/ Robert R. Franklin, Jr.
Robert R. Franklin, Jr.
/s/ Robert T. Pigott, Jr.
Robert T. Pigott, Jr.
Chairman, President and Chief Executive Officer
February 26, 2021
(Principal Executive Officer)
Senior Executive Vice President and Chief Financial Officer February 26, 2021
(Principal Financial and Accounting Officer)
February 26, 2021
February 26, 2021
February 26, 2021
/s/ Michael A. Havard
Michael A. Havard
Director
Director
Director
/s/ Tommy W. Lott
Tommy W. Lott
/s/ Glen W. Morgan
Glen W. Morgan
/s/ J. Pat Parsons
J. Pat Parsons
Vice Chairman
February 26, 2021
/s/ Joe E. Penland, Sr.
Joe E. Penland, Sr.
Director
/s/ Reagan A. Reaud
Reagan A. Reaud
Director
/s/ Joseph B. Swinbank
Joseph B. Swinbank
Director
/s/ Sheila G. Umphrey
Sheila G. Umphrey
Director
/s/ John E. Williams, Jr.
John E. Williams, Jr.
Director
/s/ William E. Wilson, Jr.
William E. Wilson, Jr.
Director
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
76
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Consolidated Balance Sheets as of December 31, 2020 and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Consolidated Statements of Income for the Years Ended December 31, 2020, 2019 and 2018 . . . . . . . . . . . . . . . . . 80
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018 . . . . 81
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2020, 2019
and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 . . . . . . . . . . . . . . 83
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 subsidiary (the
“Company”) as of December 31, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of
its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with
accounting principles generally accepted in the United States of America.
Adoption of new accounting standard
As discussed in Note 1 and Note 6 to the consolidated financial statements, the Company has changed its method of
accounting for allowance for credit losses as of January 1, 2020 due to the adoption of Accounting Standards Update
2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2015.
Dallas, Texas
February 26, 2021
78
Item 1. Financial Statements
CBTX, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except par value and share amounts)
Assets:
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest-bearing deposits at other financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net of allowance for credit losses of $40,637 and $25,280 at December 31, 2020
December 31,
2020
2019
46,814 $
491,193
538,007
237,281
18,652
2,673
51,259
320,805
372,064
231,262
16,710
1,463
and 2019, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,883,480
2,613,805
Premises and equipment, net of accumulated depreciation of $35,826 and $32,923 at
December 31, 2020 and 2019, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net of accumulated amortization of $16,607 and $15,809 at
61,152
80,950
50,875
80,950
December 31, 2020 and 2019, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right-to-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,938
71,881
12,926
7,432
14,238
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,949,217 $ 3,478,544
4,171
72,338
13,285
10,700
26,528
Liabilities:
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,476,425 $ 1,184,861
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,667,527
2,852,388
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,000
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
485
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,704
24,246
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,942,823
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,825,369
3,301,794
50,000
—
16,447
34,525
3,402,766
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, 25,458,816 and
25,837,048 shares issued at December 31, 2020 and 2019, respectively; 24,612,828
and 24,979,702 shares outstanding at December 31, 2020 and 2019, respectively . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost, 845,988 and 857,346 shares held at December 31, 2020 and
—
—
255
339,334
214,456
258
346,559
201,080
2019, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,369)
(14,562)
Accumulated other comprehensive income, net of tax of $1,801 and $634 at
December 31, 2020 and 2019, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,386
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
535,721
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,949,217 $ 3,478,544
6,775
546,451
See accompanying notes to consolidated financial statements.
79
CBTX, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
Interest income
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Interest expense
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable and junior subordinated debt . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses
Provision (recapture) for credit losses for loans . . . . . . . . . . . . .
Provision for credit losses for unfunded commitments . . . . . . .
Total provision (recapture) for credit losses . . . . . . . . . . . . . . . .
Net interest income after provision (recapture) for credit
2020
Years Ended December 31,
2019
2018
$
$
131,678
4,768
1,568
679
138,693
9,168
903
1
15
10,087
128,606
18,074
818
18,892
141,388
5,954
5,333
720
153,395
15,999
1,386
3
19
17,407
135,988
2,385
—
2,385
123,895
6,020
5,030
814
135,759
10,586
73
4
435
11,098
124,661
(1,756)
—
(1,756)
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109,714
133,603
126,417
Noninterest income
Deposit account service charges . . . . . . . . . . . . . . . . . . . . . . . . .
Card interchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . .
Net gain on sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and director fees . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing and software . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising, marketing and business development . . . . . . . . . .
Telephone and communications . . . . . . . . . . . . . . . . . . . . . . . . .
Security and protection expense . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income before income tax expense . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
5,026
3,831
2,422
755
2,747
14,781
55,415
10,106
8,348
5,369
1,798
1,500
1,752
1,447
846
5,519
92,100
32,395
6,034
26,361
1.06
1.06
$
$
$
6,554
3,720
5,011
652
2,691
18,628
56,222
9,506
7,048
4,435
1,138
1,831
1,774
1,464
894
5,831
90,143
62,088
11,571
50,517
2.03
2.02
$
$
$
6,281
3,741
1,815
660
1,755
14,252
51,524
9,394
3,537
4,253
2,053
1,824
1,530
1,276
985
5,640
82,016
58,653
11,364
47,289
1.90
1.89
See accompanying notes to consolidated financial statements.
80
CBTX, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2019
50,517 $
2020
26,361 $
2018
47,289
Change in unrealized gains (losses) on securities available for sale
arising during the period, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,547
6,728
(3,302)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
10
(1,168)
4,389
30,750 $
57
(1,424)
5,361
55,878 $
29
687
(2,586)
44,703
See accompanying notes to consolidated financial statements.
81
CBTX, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share amounts)
Additional
Accumulated
Other
Paid-In Retained
Treasury Stock
Comprehensive
Common Stock
Shares
Amount Capital Earnings Shares Amount Income (Loss) Total
Balance at December 31, 2017 . . . . .
25,731,504 $
257 $ 343,249 $ 118,353
(898,272) $ (15,256) $
(389) $ 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 . . . . .
Net income . . . . . . . . . . . . . . . . . . . .
Dividends on common stock, $0.40
per share . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . .
Vesting of restricted stock, net of
shares withheld for employee tax
liabilities . . . . . . . . . . . . . . . . . . . .
Exercise of stock options, net of
shares withheld for employee tax
liabilities . . . . . . . . . . . . . . . . . . . .
Shares repurchased . . . . . . . . . . . . . .
Other comprehensive income, net of
—
—
—
—
—
—
47,289
(5,016)
—
—
—
—
—
—
47,289
(5,016)
46,189
—
—
—
25,777,693
1
—
—
—
258
(172)
(181)
1,601
—
344,497
—
—
—
—
160,626
—
28,000
—
—
(870,272)
—
475
—
—
(14,781)
—
—
—
—
—
—
—
50,517
—
2,402
(10,063)
—
—
—
—
—
—
—
—
—
—
(2,586)
(2,975)
(171)
294
1,601
(2,586)
487,625
—
50,517
—
—
(10,063)
2,402
59,455
—
(239)
—
—
—
—
(239)
—
(100)
—
—
(98)
(3)
—
—
12,926
—
219
—
—
—
121
(3)
tax . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2019 . . . . .
—
25,837,048
—
258
—
346,559
—
201,080
—
(857,346)
—
(14,562)
5,361
2,386
5,361
535,721
Net income . . . . . . . . . . . . . . . . . . . .
Cumulative effect of accounting
changes from adoption of CECL, net
of deferred tax asset . . . . . . . . . . . .
Dividends on common stock, $0.40
per share . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . .
Vesting of restricted stock, net of
shares withheld for employee tax
liabilities . . . . . . . . . . . . . . . . . . . .
Exercise of stock options, net of
shares withheld for employee tax
liabilities . . . . . . . . . . . . . . . . . . . .
Shares repurchased . . . . . . . . . . . . . .
Other comprehensive income, net of
tax . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2020 . . . . .
—
—
—
26,361
—
—
—
26,361
—
—
—
—
—
—
—
(3,045)
—
1,935
(9,940)
—
—
—
—
—
—
—
—
(3,045)
—
—
(9,940)
1,935
53,582
1
(199)
—
—
—
—
(198)
—
(431,814)
—
(4)
(60)
(8,901)
—
—
11,358
—
193
—
—
—
133
(8,905)
—
25,458,816 $
—
—
—
255 $ 339,334 $ 214,456
—
—
(845,988) $ (14,369) $
4,389
4,389
6,775 $ 546,451
See accompanying notes to consolidated financial statements.
82
CBTX, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile consolidated net income to net cash provided by
26,361
$
50,517
$
47,289
Years Ended December 31,
2019
2018
2020
operating activities:
Provision (recapture) for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of premiums on securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of lease right-to-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sales of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in operating assets and liabilities:
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Purchases of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales, calls and maturities of securities . . . . . . . . . . . . . . . . . .
Principal repayments of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales of loan participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of Small Business Administration loans . . . . . . . . . . . .
Net contributions to equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption (purchases) of bank-owned life insurance . . . . . . . . . . . . . . . . .
Net purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of repossessed real estate and other assets . . . . . . . . . . .
Net decrease in time deposits in other banks . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from insurance claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Net increase in noninterest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in securities sold under agreements to repurchase . .
Redemption of trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments to tax authorities for stock-based compensation . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of 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 . . . . . . . . . . . . . . . . . . . . $
18,892
3,238
846
1,836
1,517
464
(2,422)
1,935
(3,625)
(755)
(46)
(494)
(11,842)
(2,046)
6,502
14,000
40,361
(677,813)
603,965
71,606
(292,724)
125
3,976
(1,942)
1,965
(13,565)
—
—
—
(304,407)
291,564
157,842
—
(485)
—
(9,962)
(198)
133
(8,905)
429,989
165,943
372,064
538,007
2,385
3,203
894
1,194
1,343
534
(5,011)
2,402
(1,657)
(652)
(18)
(1,185)
81
(1,895)
3,955
5,573
56,090
(651,908)
625,550
30,726
(226,817)
29,554
4,423
(3,684)
4,655
(2,488)
141
—
108
(189,740)
1,803
84,303
50,000
(2,013)
(1,571)
(8,757)
(239)
121
(3)
123,644
(10,006)
382,070
372,064
(1,756)
3,309
985
1,091
—
—
(1,815)
1,601
(734)
(660)
(54)
1,921
994
—
(2,850)
2,032
49,321
(495,870)
462,842
21,962
(147,416)
10,640
1,972
(800)
(1,700)
(1,293)
1,054
600
287
(147,722)
73,269
90,041
—
973
(5,155)
(4,979)
(171)
294
—
154,272
55,871
326,199
382,070
$
$
See accompanying notes to consolidated financial statements.
83
CBTX, INC. AND SUBSIDIARY
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 the 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.
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 for 2019 and 2018, data processing and software have been
combined together. In addition, printing, stationery and office, correspondent bank and customer related transaction fees,
loan processing costs and repossessed real estate and other asset expenses have been combined with other expenses. These
reclassifications were made to conform to the 2020 financial statement presentation in the consolidated statements of
income.
Segment Reporting—The Company has one reportable segment. The Company’s activities are inter-related, 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 United States, 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 credit
losses, or ACL, 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. A majority of cash, cash equivalents and
time deposits of the Company are maintained with major financial institutions in the United States, or 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 Federal Deposit Insurance Corporation in the amount of $143.8 million and $100.0 million
at December 31, 2020 and 2019, respectively.
The Bank is required to maintain regulatory reserves with the Federal Reserve Bank and the reserve requirements
for the Bank were $17.6 million and $18.6 million at December 31, 2020 and 2019, respectively. At December 31, 2020
and 2019, the Company had $8.4 million and $3.1 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
income over the lives of the related loans, in accordance with the effective interest method. The Company records lines of
84
credit at their funded portion. All unfunded amounts for loans in process and credit lines are reported as unfunded
commitments.
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 and reported in net gain
on sale of assets in the consolidated statements of income based on the difference between the sale proceeds and the
allocated investment.
During 2020, the Company participated in the Paycheck Protection Program, or PPP, under the Coronavirus Aid,
Relief and Economic Security Act, or CARES Act, which facilitates loans to small businesses. The Company originated
loans under PPP financing that are fully guaranteed by the SBA and subject to forgiveness by the SBA based on the
borrowers’ applications submitted to the SBA. The loans were originated with a 1.0% effective annual interest rate under
a two-year maturity period in accordance with the CARES Act. Origination fees and costs related to the funding of these
loans were deferred and are recognized in interest income over the two-year maturity period.
Nonperforming Loans—Nonperforming loans includes loans which have been categorized by management as
nonaccrual because of delinquency status or because collection of principal and interest is doubtful. 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 any period 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.
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 restructuring are
not considered nonperforming if the loans are not delinquent and otherwise performing in accordance with their
restructured terms.
Allowance for Credit Losses—The ACL for loans represents management’s estimate of expected credit losses
inherent in the loan portfolio. In determining the ACL, the Company evaluates loans individually, or in groups of loans
that share similar risk characteristics, where the expected loss can be identified and reasonably estimated. On a quarterly
basis, the risk inherent in the loan portfolio based on qualitative and quantitative trends in the portfolio is assessed,
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 and reasonable and supportable forecasts to
determine the expected credit losses on the loan portfolio. Loan balances that are partially or fully guaranteed by the SBA
are excluded from the computation to determine an ACL as there are no expected risk of losses associated with these loans.
85
The Company adopted Accounting Standards Update, or ASU, 2016-13 Financial Instruments—Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments, or CECL, effective January 1, 2020. See
“Accounting Standards Recently Adopted” below for the impact of this implementation and see Note 6: Allowance for
Credit Losses for further discussion related to CECL and related disclosures.
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 ACL.
Loans Held for Sale—Loans held for sale include mortgage loans originated with the intent to sell on the
secondary market. Loans held for sale are carried at the lower of cost or estimated fair value on an individual loan basis.
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.
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
accumulated other comprehensive income (loss), net of taxes in shareholders’ equity until realized. 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.
Equity 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 included in earnings and reported as other noninterest income
in the consolidated statements of income.
There are multiple qualitative factors considered by the Company in its assessment to determine if an ACL was
necessary for those securities where the amortized cost basis exceeds the fair value. See Note 2: Securities for further
discussions of the Company’s assessment.
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. The Company’s equity investments are evaluated for
impairment based on an assessment of qualitative indicators. See Note 3: Equity Investments.
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 net gains on sales of assets in the consolidated statements of
income. During periods of real estate development, interest on construction costs is capitalized if considered material by
management.
Operating Leases—The Company leases certain office space, stand-alone buildings and land, which are
recognized as operating lease right-of-use assets in the consolidated balance sheets. Operating lease right-of-use assets
represent the Company’s right to use, or control the use of, leased assets for their lease term and are amortized over the
lease term of the related lease agreement. Operating lease liabilities represent the Company’s obligation to make lease
payments under these leases, on a discounted basis and are amortized on a straight-line basis over the lease term for each
related lease agreement. The discount rate used is estimated based on Federal Home Loan Bank advance rates applicable
to the remaining terms. The Company does not recognize short-term operating leases on the consolidated balance sheets.
A short-term lease has a term of 12 months or less and does not have a purchase option that is likely to be exercised. The
Company subleases certain facilities to outside parties. The Company’s leases have no variable costs.
86
Goodwill and Other Intangible Assets—Goodwill is not amortized and is evaluated for impairment at least
annually as of December 31 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 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. 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.
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 initially 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 ACL. 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 net income in the
period such determinations are assessed. Any developmental costs associated with foreclosed property under construction
are capitalized and considered in determining the fair value of the property. Any operating expenses of these assets, net of
related income and gains and losses on their disposition are included in other noninterest income or expense in the
consolidated statements of income.
Other Assets—Other assets include accrued interest receivables on loans and investments, derivative financial
instruments assets, prepaid expenses, repossessed real estate and other assets.
Other Liabilities—Other liabilities include accrued interest payable on deposits and borrowings, accrued bonuses,
deferred compensation, derivative financial instruments liabilities and other liabilities.
Repurchase Agreements—The Company utilizes securities sold under repurchase agreements to facilitate the
needs of customers and 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.
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
87
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. As such, the Company determined a valuation allowance
was not necessary at December 31, 2020 and 2019.
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.
The Company includes any interest expense assessed by taxing authorities in interest expense and any penalties
related to income taxes in other expense on its consolidated statements of income.
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.
Advertising expense—Advertising costs are expensed as incurred.
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.
Share Repurchase Program—During 2020, 431,814 shares were repurchased under the Company’s share
repurchase programs at an average price of $20.62 per share and during 2019, 100 shares were repurchased at $27.98
88
per share. Shares repurchased in 2020 and 2019 were retired and returned to the status of authorized but unissued shares.
Accounting Standards Recently Adopted
The Company adopted CECL, effective January 1, 2020. The scope of CECL includes loans, debt securities
classified as held to maturity, other receivables, off-balance sheet credit exposures and any other financial assets not
excluded from the scope that have the contractual right to receive cash. In addition, CECL amends the accounting and
reporting for credit losses on available for sale securities.
Through a one-time cumulative effect reduction of retained earnings of $3.0 million, the adoption of ASU
2016-13 increased the ACL for loans by $874,000, increased the liability related to the ACL for unfunded commitments
by $2.9 million, with the associated deferred tax assets increasing by $809,000.
CECL 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. As part of the implementation of CECL, the Company changed its
methodology for determining the ACL for loans and the ACL associated with the Company’s off-balance sheet credit
exposures, which are primarily unfunded commitments to borrowers.
The adoption of CECL did not have any impact on securities held to maturity as the Company did not hold any
as of January 1, 2020. Additionally, the Company assessed the impact of CECL on its available for sale securities utilizing
various qualitative factors and determined there were no credit losses within the portfolio requiring an allowance upon
adoption. The Company did not have any purchased financial assets with credit deterioration as of January 1, 2020.
See Note 6: Allowance for Credit Losses for further discussion related to CECL and related disclosures.
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on
Financial Reporting provides optional expedients and exceptions for applying generally accepted accounting principles to
contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate, or LIBOR, or
another reference rate expected to be discontinued, if certain criteria are met. LIBOR is used as an index rate for a majority
of the Company’s interest-rate swaps and 12.0% of the Company’s loans as of December 31, 2020.
If reference rates are discontinued, the existing contracts will be modified to replace the discontinued rate with a
replacement rate. For accounting purposes, such contract modifications would have to be evaluated to determine whether
the modified contract is a new contract or a continuation of an existing contract. If they are considered new contracts, the
previous contract would be extinguished. Under one of the optional expedients of ASU 2020-04, modifications of contracts
within the scope of Topic 310, Receivables, and 470, Debt, will be accounted for by prospectively adjusting the effective
interest rates and no such evaluation is required. When elected, the optional expedient for contract modifications must be
applied consistently for all eligible contracts or eligible transactions. The expedients and exceptions in this update are
available to all entities starting March 12, 2020 through December 31, 2022. The Company applied the expedients and
exceptions to three loans modified during 2020. The adoption of ASU 2020-04 did not significantly impact the Company’s
financial statements.
89
Cash Flow Reporting—Supplemental disclosures of cash flow information were as follows for the periods
indicated below:
(Dollars in thousands)
Supplemental disclosures of cash flow information:
Years Ended December 31,
2019
2020
2018
Cash paid for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,307 $
10,679
13,710 $
17,040
11,627
10,803
Supplemental disclosures of non-cash flow information:
Net operating lease right-to-use asset obtained in exchange for lease
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repossessed real estate and other assets . . . . . . . . . . . . . . . . . . . . . . . . . .
1,876
22
—
14,499
1,306
121
—
43
349
NOTE 2: SECURITIES
The amortized cost, related gross unrealized gains and losses and fair values of investments in securities as of the
dates shown below were as follows:
(Dollars in thousands)
December 31, 2020
Debt securities available for sale:
State and municipal securities . . . . . . . . . . . . . . . . . . .
U.S. agency securities:
Collateralized mortgage obligations . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2019
Debt securities available for sale:
State and municipal securities . . . . . . . . . . . . . . . . . . .
U.S. agency securities:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
88,741
$
4,296
$
—
$
93,037
35,085
103,686
1,176
228,688
$
$
347
3,963
17
8,623
$
(30)
—
—
(30)
35,402
107,649
1,193
237,281
$
$
51,525
$
1,761
$
(7)
$
53,279
Collateralized mortgage obligations . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55,784
119,787
1,155
228,251
$
$
324
1,315
—
3,400
$
(119)
(255)
(8)
(389)
55,989
120,847
1,147
231,262
$
90
The amortized cost and estimated fair value of securities by contractual maturities as of the dates shown below
were as follows:
(Dollars in thousands)
December 31, 2020
Amortized cost:
Debt securities available for sale:
1 Year or Less
After 1 Year
to 5 Years
After 5 Years
to 10 Years
After 10
Years
Total
State and municipal securities . . . . . . . .
U.S. agency securities:
Collateralized mortgage obligations . .
Mortgage-backed securities . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value:
Debt securities available for sale:
State and municipal securities . . . . . . . .
U.S. agency securities:
Collateralized mortgage obligations . .
Mortgage-backed securities . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
509 $
1,292 $
9,154 $
77,786 $
88,741
—
33
1,176
1,718 $
—
1,485
—
2,777 $
4,910
798
—
35,085
103,686
1,176
14,862 $ 209,331 $ 228,688
30,175
101,370
—
512 $
1,298 $
9,540 $
81,687 $
93,037
—
33
1,193
1,738 $
—
1,565
—
2,863 $
5,075
829
—
35,402
107,649
1,193
15,444 $ 217,236 $ 237,281
30,327
105,222
—
$
$
$
(Dollars in thousands)
December 31, 2019
Amortized cost:
Debt securities available for sale:
1 Year or Less
After 1 Year
to 5 Years
After 5 Years
to 10 Years
After 10
Years
Total
State and municipal securities . . . . . . . .
U.S. agency securities:
Collateralized mortgage obligations . .
Mortgage-backed securities . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value:
Debt securities available for sale:
State and municipal securities . . . . . . . .
U.S. agency securities:
Collateralized mortgage obligations . .
Mortgage-backed securities . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,356
$
1,399
$
7,920
$
40,850
$
51,525
—
24
1,155
2,535
$
—
1,682
—
3,081
4,742
1,903
—
14,565
51,042
116,178
—
$ 208,070
55,784
119,787
1,155
$ 228,251
$
$
$
1,360
$
1,409
$
8,132
$
42,378
$
53,279
—
25
1,147
2,532
$
—
1,736
—
3,145
4,803
1,939
—
14,874
51,186
117,147
—
$ 210,711
55,989
120,847
1,147
$ 231,262
$
$
Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Securities with a carrying amount of $20.4 million and $56.5 million were sold during the years ended
December 31, 2019 and 2018, respectively. No securities were sold in the year ended December 31, 2020. At
December 31, 2020 and 2019, securities with a carrying amount of approximately $27.3 million and $50.8 million,
respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted
by law.
The scope of CECL includes debt securities classified as held to maturity and amended the accounting and
reporting for credit losses on available for sale securities. There are multiple qualitative factors considered by the Company
in its assessment to determine if an ACL was necessary for those securities where the amortized cost basis exceeds the fair
value. These factors include, among other things: (i) the extent to which the fair value was less than the amortized cost
basis of the security and the length of time; (ii) the structure of the payments and likelihood that the issuer has the ability
91
to make future payments; (iii) adverse conditions related to the security, industry or geographic area; (iv) changes in any
credit ratings or financial conditions of the issuer; (v) failure by the issuer to make previous payments; and (vi) past events
related to the security, current economic conditions and reasonable and supportable forecasts. Management did not believe
that any of the securities the Company held at December 31, 2020 and 2019 were impaired due to reasons of credit quality
and believed any unrealized losses were temporary. No ACL for available for sale securities was recorded in the
Company’s consolidated balance sheets at December 31, 2020 or upon adoption of CECL on January 1, 2020 and no
impairment loss was recorded in 2019 or 2018 under previous accounting guidance.
Amortized costs, as defined by GAAP, include acquisition costs, applicable accrued interest and accretion or
amortization of premiums and discounts. The Company made a policy election to exclude accrued interest from amortized
costs in the determination of ACL. The Company continues its policy of reversing previously accrued interest when it has
been deemed uncollectible. Accrued interest receivable for securities was $1.2 million and $1.1 million at December 31,
2020 and 2019, respectively, and is included in other assets in the consolidated balance sheets.
The Company held 18 and 27 securities at December 31, 2020 and 2019, respectively, that were in a gross
unrealized loss position. Securities with unrealized losses as of the dates shown below, aggregated by category and the
length of time were as follows:
(Dollars in thousands)
December 31, 2020
Debt securities available for sale:
State and municipal securities . . . . . . . . . . .
U.S. agency securities:
Collateralized mortgage obligations . . . . .
Mortgage-backed securities . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2019
Debt securities available for sale:
State and municipal securities . . . . . . . . . . .
U.S. agency securities:
Collateralized mortgage obligations . . . . .
Mortgage-backed securities . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . .
NOTE 3: EQUITY INVESTMENTS
$
$
$
Less than Twelve Months
Gross
Unrealized
Losses
Fair
Value
Twelve Months or More
Fair
Value
Gross
Unrealized
Losses
$
263
$
—
$
—
$
6,913
—
—
7,176
$
(30)
—
—
(30)
$
—
—
—
—
$
—
—
—
—
—
3,539
$
(7)
$
106
$
—
10,687
11,628
—
25,854
$
(46)
(26)
—
(79)
$
7,994
21,745
1,147
30,992
$
(73)
(229)
(8)
(310)
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 Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Independent Bankers Financial Corporation stock . . . . . . . . . . . . . . . . . . . . . . .
Community Reinvestment Act investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2020
2019
$
$
9,271
5,941
141
3,299
18,652
$
$
9,271
4,249
141
3,049
16,710
Banks that are members of the Federal Home Loan Bank are required to maintain a stock investment in the
Federal Home Loan Bank calculated as a percentage of aggregate outstanding mortgages, outstanding Federal Home Loan
Bank advances and other financial instruments. As a member of the Federal Reserve, the Bank is required to annually
subscribe to Federal Reserve Bank stock in specific ratios to the Bank’s equity. Although Federal Home Loan Bank and
92
Federal Reserve Bank stock are considered equity securities, they do not have readily determinable fair values because
ownership is restricted, and they lack a readily-available 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 the 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, which
has limited marketability. As a result, this investment is carried at cost and evaluated for impairment.
The Company has investments in investment funds and limited partnerships that are qualified Community
Reinvestment Act, or CRA, investments and investments under the Small Business Investment Company program of 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, 2020 and 2019, the Company had $4.4 million and $4.9 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; and (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 than the carrying amount of the investment. There were no such qualitative indicators as of December 31, 2020.
NOTE 4: LOANS
Loans by loan class, or major loan category, 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 allowance for credit losses for loans . . . . . . . . . . . . . . . . . .
Less deferred loan fees and unearned discounts . . . . . . . . . . . . .
Less loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2020
742,957
$
25.3%
$
2019
527,607
19.9%
1,041,998
522,705
239,872
258,346
33,884
8,670
88,238
35.5%
17.8%
8.2%
8.8%
1.1%
0.3%
3.0%
2,936,670 100.0%
900,746
527,812
280,192
277,209
36,782
9,812
86,513
34.0%
19.9%
10.6%
10.5%
1.4%
0.4%
3.3%
2,646,673 100.0%
(40,637)
(9,880)
(2,673)
$ 2,883,480
(25,280)
(6,125)
(1,463)
$ 2,613,805
Accrued interest receivable for loans is $12.1 million and $7.5 million at December 31, 2020 and 2019,
respectively, and is included in other assets in the consolidated balance sheets.
93
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, 2020, 2019
and 2018, by loan class, are summarized as follows:
(Dollars in thousands)
December 31, 2020
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2019
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2018
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . . . . . . . . . . . .
Participations
Purchased
Participations
Sold
— $
2,500
2,625
—
2,314 $
31,868
7,000 $
28,281
—
35,281 $
1,620
35,000
9,301
45,921
$
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, 2020, 2019 and 2018 were $4.0 million, $4.4 million and $2.0 million, respectively. Net gains recognized
on sales of SBA loans were $349,000, $330,000 and $153,000 for the years ended December 31, 2020, 2019 and 2018,
respectively, and are included in net gain on sales of assets in the consolidated income statements.
NOTE 5: LOAN PERFORMANCE
The following is an aging analysis of the Company’s past due loans, segregated by loan class, as of the dates
shown below:
90 Days or
30 to 59 Days 60 to 89 Days Greater
Past Due
Past Due
Past Due and
Past Due Past Due Current Loans Total Loans Still Accruing
Total
Total
90 Days
(Dollars in thousands)
December 31, 2020
Commercial and industrial . . . . . . $
Real estate:
Commercial real estate . . . .
Construction and
development . . . . . . . . . . .
1-4 family residential . . . . . .
Multi-family residential . . . .
Consumer . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . $
December 31, 2019
Commercial and industrial . . . . . . $
Real estate:
Commercial real estate . . . .
Construction and
development . . . . . . . . . . .
1-4 family residential . . . . . .
Multi-family residential . . . .
Consumer . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . $
51 $
2,055 $ 2,269 $ 4,375 $
738,582 $ 742,957 $
—
—
1,357
—
5
50
—
1,463 $
—
—
19
—
—
—
—
—
—
1,041,998
1,041,998
—
106
—
—
—
—
—
1,482
—
5
50
—
522,705
238,390
258,346
33,879
8,620
88,238
522,705
239,872
258,346
33,884
8,670
88,238
2,074 $ 2,375 $ 5,912 $ 2,930,758 $ 2,936,670 $
664 $
31 $
240 $
935 $
526,672 $ 527,607 $
865
—
—
865
899,881
900,746
—
—
—
—
—
—
240 $ 2,874 $ 2,643,799 $ 2,646,673 $
527,812
280,192
277,209
36,782
9,812
86,513
527,280
279,693
277,209
36,739
9,812
86,513
532
499
—
43
—
—
—
499
—
43
—
—
2,071 $
532
—
—
—
—
—
563 $
94
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
The Company places loans on nonaccrual status because of delinquency or because collection of principal or
interest is doubtful. Nonaccrual loans, segregated 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonaccrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2020
12,588 $
10,665
238
526
24,017 $
2019
596
67
—
314
977
Interest income that would have been earned under the original terms of the nonaccrual loans was $804,000,
$57,000 and $163,000 for the years ended December 31, 2020, 2019 and 2018, respectively.
Loans restructured due to the borrower’s financial difficulties, or troubled debt restructurings, which remain
outstanding as of the end of the periods indicated below were as follows:
Post-modification Recorded Investment
Extended Maturity,
(Dollars in thousands)
December 31, 2020
Commercial and industrial . . . . . . . . . .
Real estate:
Commercial real estate . . . . . . . .
1-4 family residential . . . . . . . . . .
Construction and development . .
Total . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2019
Commercial and industrial . . . . . . . . . .
Real estate:
Pre-modification
Outstanding
Recorded
Investment
Number
of Loans
Maturity and
Restructured Extended Restructured
Payments
Maturity Payments
Extended
17 $
10,343 $
7,475 $
— $
2,637 $
9
5
5
36 $
18,867
1,629
12,905
43,744 $
18,867
1,651
12,648
40,641 $
—
—
—
— $
—
—
—
2,637 $
3 $
202 $
39 $
— $
163 $
1-4 family residential . . . . . . . . . .
1
111
—
—
—
Total . . . . . . . . . . . . . . . . . . . . . . .
4 $
313 $
39 $
— $
163 $
Restructured
Payments
and Adjusted
Interest Rate
231
—
—
257
488
—
115
115
Loan modifications related to a loan refinancing or restructuring other than a troubled debt restructuring are
accounted for as a new loan if the terms provided to the borrower are at least as favorable to the Company as terms for
comparable loans to other borrowers with similar collection risks that is not a loan refinancing or restructuring. If the loan
refinancing or restructuring does not meet this condition or if only minor modifications are made to the original loan
contract, it is not considered a new loan and is considered a renewal or modification of the original contract. Restructured
or modified loans are not considered past due if they are performing under the terms of the modified or restructured
payment schedule.
In support of customers impacted by the COVID-19 pandemic, the Company provided contract modifications
through the deferral of principal and/or interest payments, or COVID-19 deferrals. The deferral periods granted primarily
ranged from one to six-months, with the majority of the deferrals involving three-month arrangements. The troubled debt
restructurings for the year ended December 31, 2020 in the table above include 34 loans totaling $43.1 million that were
subject to COVID-19 deferrals. As of December 31, 2020, the Company had 21 loans totaling $38.4 million still subject
to COVID-19 related deferrals, which included 10 loans totaling $22.4 million that were restructured as troubled debt
restructurings.
A troubled debt restructuring is considered in default when a payment in accordance with the terms of the
restructuring is more than 30 days past due. All loans restructured in troubled debt restructurings are individually evaluated
based on the underlying collateral for the determination of an ACL. See Note 6: Allowance for Credit Losses for further
discussions on specific reserves.
95
Troubled debt restructuring during the twelve months ended indicated below with payment defaults were as
follows:
December 31, 2020
December 31, 2019
Number
Number
(Dollars in thousands)
Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
of Loans
Balance
of Loans
Balance
3
3
4
2
12
$
$
1,983
3,370
12,270
94
17,717
—
—
—
1
1
$
$
—
—
—
111
111
Loans individually evaluated for credit losses were as follows for the dates indicated below:
(Dollars in thousands)
December 31, 2020
Commercial and industrial . . . . . . . $
Real estate:
Commercial real estate . . . . . . . .
Construction and development .
1-4 family residential . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2019
Commercial and industrial . . . . . . . $
Real estate:
Commercial real estate . . . . . . . .
1-4 family residential . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . $
Troubled Debt Restructurings
Accruing
Non-Accrual
Total
Other Non-
Accrual
Other
Accruing
Total Loans
Individually
Evaluated
2,594 $
8,228 $
10,822 $
4,360 $
746 $
15,928
8,103
12,648
1,684
7,851
32,880 $
10,601
238
106
—
19,173 $
18,704
12,886
1,790
7,851
52,053 $
64
—
420
—
4,844 $
—
—
—
—
746 $
18,768
12,886
2,210
7,851
57,643
397 $
282 $
679 $
314 $
6 $
999
1,337
54
—
6,653
8,441 $
—
111
—
—
393 $
1,337
165
—
6,653
8,834 $
67
203
—
—
584 $
—
3,283
210
—
3,499 $
1,404
3,651
210
6,653
12,917
At December 31, 2020 and 2019, the Company had an outstanding commitment to potentially fund $593,000 and
$2.0 million on a line of credit previously restructured.
96
NOTE 6: ALLOWANCE FOR CREDIT LOSSES
The Company adopted CECL effective January 1, 2020 and as a result of this adoption, the Company’s ACL for
the loan portfolio has two main components: a reserve for expected losses determined from the historical loss rates,
adjusted for qualitative factors and current conditions and forecasted expected losses on the segments associated with the
individual loan classes with similar risk characteristics, or general reserve, and a separate allowance representing the
reserves assigned to individually evaluated loans that do not share similar risk characteristics with other loans, or specific
reserves. The Company defines the loan class to be the grouping of the loan receivable based on risk characteristics and
the method for monitoring and assessing credit risk, which is represented by the loan type or major category of loans.
For specific reserves, loans identified as not sharing similar risk characteristics with other assets are individually
evaluated for the net amount expected to be collected and reserves are determined for them outside of the general reserve
computation. For loans individually evaluated, the Company utilizes various methods such as discounted cash flow
analysis, appraisal valuation on collateral, among others, in the measurement of credit losses of the loan and need for any
additional ACL.
For the general reserve computation, the Company utilized an aged-based vintage model, or the Vintage model,
based on the model’s ability to predict credit risks associated with the loan portfolio and capture the expected life of loan
losses associated with each segment of loans. The Company primarily manages credit quality and determines credit risk
of its loans based on the risk grade assigned to each individual loan within the loan class. See the risk grade discussion
later in this footnote. The factors considered include: (i) the age of the loan; (ii) interest rate; (iii) loan size; (iv) payment
structure; (v) term; (vi) loan to value; (vii) collateral type; (viii) geographical pattern; and (ix) industrial sector. The
breakdown of the loan classes into portfolio segments was a judgement election based upon identified risk criteria. The
Company has limited specific historical loss experience to directly tie to an attribute and thus the use of one factor over
another is based on management’s perceived risk of the identified factor in combination with the data analyzed.
After consideration of the factors previously discussed, the Company segmented the portfolio based on the
identified risk characteristics present within each segment. These risk characteristics are determined based on various
factors including call code, collateral types and loan terms. The Company believes that this segmentation best represents
the portfolio segments at a level to develop the systematic methodology in the determination of the ACL.
Historical net losses are used to calculate a historical loss rate for each vintage within each portfolio segment and
then subjective adjustments for internal and external qualitative risk factors are applied to the historical loss rates to
generate a total expected loss rate for each vintage within each portfolio segment. For portfolio segments of loans with no
historical losses, the Company is using the weighted-average of its annual historical loss rates as a proxy loss rate floor,
or specifically, for oil and gas and oil and gas real estate portfolio segments, historical average loss rate based on peer
group data.
There are multiple qualitative factors, both internal and external, that could impact the potential collectability of
the underlying loans. The various internal factors that may be considered include, among other things: (i) effectiveness of
loan policies, procedures and internal controls; (ii) portfolio growth and changes in loan concentrations; (iii) changes in
loan quality; (iv) experience, ability and effectiveness of lending management and staff; (v) legal and regulatory
compliance requirements associated with underwriting, originating and servicing a loan and the impact of exceptions; and
(vi) the effectiveness of the internal loan review function. The various external factors that may be considered include,
among other things: (i) current national and local economic conditions; (ii) changes in the political, legal and regulatory
landscape; (iii) industry trends, in particular those related to loan quality; and (iv) forecasted changes in the economy.
As part of its assessment, the Company considers the need to adjust historical information to reflect the extent to
which current conditions and forecasts differ from the conditions that existed for the period over which historical
information was evaluated. The Company uses an economic forecast qualitative factor as noted above to adjust the
expected loss rates for the effects of forecasted changes in the economy. The Company uses economic indicators and
indexes including, but not limited to: (i) inflation indexes; (ii) unemployment rates; (iii) fluctuations of interest rates;
(iv) economic growth; (v) government expenditures; (vi) gross domestic product indexes; (vii) productivity indicators;
(viii) leading indexes; (ix) debt levels; and (x) narratives such as those supplied by the Federal Reserve’s beige book and
Moody’s Analytics that provide information for determining an appropriate impact ratio for macro-economic conditions.
The Company determined that a two-year forecast period provides a balance between the level of forecast periods
97
reasonably available and forecast accuracy and choose to revert to historical levels immediately afterward as adjusted
current loss history is the more relevant indicator of expected losses beyond the forecast period.
The historical loss rates, adjusted for current conditions and forecasting assumptions, are multiplied by the
respective loan’s amortized cost balances in each vintage within each segment to compute an estimated quantitative reserve
for expected losses in the portfolio. The quantitative reserve for expected credit losses and the qualitative reserve for
expected credit losses combined together make up the total estimated credit loss reserve.
Loan amortized costs, as defined by GAAP, includes principal, deferred fees or costs associated with the loan,
premiums, discounts and accrued interest. The Company made a policy election to exclude accrued interest and deferred
fees and costs in the determination of an ACL. The Company continues its policy of reversing previously accrued interest
when it has been deemed uncollectible. Loans held for sale are excluded from the computation of expected credit losses
as they are carried at the lower of cost or market value.
As part of the implementation of CECL, the Company changed its methodology for determining the ACL for
loans. As a result of the adoption of CECL, the ratio of the ACL for loans to total loans increased from 0.96% at
December 31, 2019 to 0.99% at January 1, 2020. At December 31, 2020, the ratio of the ACL for loans to total loans was
1.39%, reflecting the expected impact of COVID-19 and the sustained instability in the oil and gas industry during 2020
on the local and national economy and on current and forecasted expected credit losses. Additionally, the increase in
adversely graded loans within the portfolio has resulted in an increase in the ACL related to those loans. The total of the
Company’s qualitative and quantitative factors ranged from 0.67% to 2.42% at January 1, 2020 and ranged from 0.92% to
2.48% at December 31, 2020. All factors were reassessed on a quarterly basis during 2020.
The review of the appropriateness of the ACL, which includes evaluation of historical loss trends, qualitative
adjustments and forecasted economic conditions applied to general reserves, is performed by executive management and
presented to the Board of Directors for its review on a quarterly basis as part of the Company’s interim and annual
consolidated financial statements. The ACL at December 31, 2020, reflects the Company’s assessment based on the
information available at the time.
Prior to the adoption of CECL on January 1, 2020, the Company calculated an allowance for loan losses that
represented an estimate of probable losses inherent in the loan portfolio. The Company utilized an incurred loss model that
employed a systematic methodology for determining the allowance for loan losses consisting of two components: (i) a
specific valuation based on probable losses on certain loans and (ii) a historical valuation allowance based on historical
average loss experience for similar loans with similar characteristics and trends adjusted, as necessary, to reflect the impact
of current conditions and other factors both internal and external to the Company.
Risk Grading
The methodology used by the Company in the determination of its ACL, which is performed at least on a quarterly
basis, is designed to be responsive to changes in the credit quality of the loan portfolio as well as forecasted economic
conditions. The credit quality of the loan portfolio is assessed through different processes. At origination, a risk grade is
assigned to each loan based on underwriting procedures and criteria. The risk grades used are described below. The
Company monitors the credit quality of the loan portfolio on an on-going basis by performing loan reviews, both internally
and through a third-party vendor, on loans meeting certain risk and exposure criteria. Through these reviews, loans that
require risk grade changes are approved by executive management. In addition, executive management reviews classified
and criticized loans to assess changes in credit quality of the underlying loan, and when determined appropriate, based on
individual evaluation, approve specific reserves.
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 a 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.
98
Credits in this category are inadequately protected by the current sound worth and paying capacity of the obligor or the
collateral pledged, if any. Often, the assets in this category will have a valuation allowance representative of management’s
estimated loss that is probable to be incurred. Loans deemed substandard and on nonaccrual status are individually
evaluated for expected credit losses.
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 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, 2020 and 2019.
The loans by risk grades, loan class and year of origination, or vintage, at December 31, 2020 were as follows:
(Dollars in thousands)
Commercial and industrial:
2020
2019
2018
2017
2016
Prior
Revolving
Loans
Converted
Revolving
Loans
Total
Pass . . . . . . . . . . . . . . . .
Special mention . . . . . . . .
Substandard . . . . . . . . . .
$ 349,697 $
—
1,001
81,131 $
—
2,633
46,973 $
33
6,177
13,161 $
—
15
8,349 $
—
20
3,432 $ 214,160 $
—
2,021
3,371
779
3,562 $
—
6,442
720,465
3,404
19,088
Total commercial and
industrial . . . . . . . . . . . . . .
350,698
83,764
53,183
13,176
8,369
5,453
218,310
10,004
742,957
Commercial real estate:
Pass . . . . . . . . . . . . . . . .
Special mention . . . . . . . .
Substandard . . . . . . . . . .
Total commercial real estate . .
Construction and development:
Pass . . . . . . . . . . . . . . . .
Substandard . . . . . . . . . .
Total construction and
262,072
—
—
262,072
210,954
1,224
11,532
223,710
196,630
—
9,599
206,229
138,424
—
476
138,900
68,468
—
1,059
69,527
84,453
1,390
1,985
87,828
30,020
—
9,325
39,345
9,482
4,905
—
14,387
1,000,503
7,519
33,976
1,041,998
165,894
—
163,658
238
92,455
8,386
20,146
10,532
6,707
—
273
616
53,800
—
—
—
502,933
19,772
development . . . . . . . . . . .
165,894
163,896
100,841
30,678
6,707
889
53,800
—
522,705
1-4 family residential:
Pass . . . . . . . . . . . . . . . .
Special mention . . . . . . . .
Substandard . . . . . . . . . .
Total 1-4 family residential . .
Multi-family residential:
Pass . . . . . . . . . . . . . . . .
Total multi-family residential .
Consumer:
Pass . . . . . . . . . . . . . . . .
Total consumer . . . . . . . . . .
Agriculture:
Pass . . . . . . . . . . . . . . . .
Substandard . . . . . . . . . .
Total agriculture . . . . . . . . . .
Other:
Pass . . . . . . . . . . . . . . . .
Substandard . . . . . . . . . .
Total other . . . . . . . . . . . . . .
Total
27,002
1,548
—
28,550
20,823
20,823
8,937
8,937
3,937
—
3,937
14,624
1,211
15,835
30,978
—
534
31,512
48,561
—
1,211
49,772
34,970
—
1,571
36,541
24,386
1,617
15
26,018
57,122
—
1,215
58,337
3,119
3,119
3,073
3,073
105
—
105
3,239
—
3,239
36,971
36,971
10,655
10,655
2,153
2,153
184,539
184,539
1,855
1,855
1,875
1,875
338
—
338
3,562
—
3,562
86
—
86
24
—
24
146
146
16
—
16
23
23
—
23
23
84
1,232
1,316
1,250
—
1,250
7,004
—
—
7,004
86
86
17,573
17,573
4,108
50
4,158
57,603
5,409
63,012
Pass . . . . . . . . . . . . . . . .
Special mention . . . . . . . .
Substandard . . . . . . . . . .
Total . . . . . . . . . . . . . . . $ 856,746 $ 512,418 $ 452,751 $ 231,935 $ 114,252 $ 338,342 $ 403,288 $
496,257
1,224
14,937
427,345
33
25,373
852,986
1,548
2,212
331,092
1,390
5,860
219,341
—
12,594
384,354
3,371
15,563
110,309
1,617
2,326
631
—
1,507
2,138
—
—
402
402
7
—
7
—
—
—
230,654
3,165
6,053
239,872
258,346
258,346
33,884
33,884
8,597
73
8,670
80,386
7,852
88,238
14,084
4,905
7,949
2,835,768
14,088
86,814
26,938 $ 2,936,670
99
Loans by risk grades and loan class as of the dates shown below were as follows:
(Dollars in thousands)
December 31, 2020
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
720,465 $
3,404 $
19,088 $
742,957
1,000,503
502,933
230,654
258,346
33,884
8,597
80,386
2,835,768 $
7,519
—
3,165
—
—
—
—
14,088 $
33,976
19,772
6,053
—
—
73
7,852
86,814 $
1,041,998
522,705
239,872
258,346
33,884
8,670
88,238
2,936,670
(Dollars in thousands)
December 31, 2019
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
513,417 $
2,963 $
11,227 $
527,607
876,207
515,247
274,731
277,209
36,566
9,733
79,860
2,582,970 $
18,570
12,565
594
—
—
50
—
34,742 $
5,969
—
4,867
—
216
29
6,653
28,961 $
900,746
527,812
280,192
277,209
36,782
9,812
86,513
2,646,673
Loans individually evaluated and collectively evaluated as of the dates shown below were as follows:
December 31, 2020
December 31, 2019
Individually Collectively
Evaluated
Evaluated
(Dollars in thousands)
Loans
Commercial and industrial . . . . . . . . $ 15,928 $ 727,029 $ 742,957 $
Real estate:
Total
Loans
Loans
Individually Collectively
Evaluated
Evaluated
Loans
Loans
Total
Loans
999 $ 526,608 $ 527,607
Commercial real estate . . . . . . . . .
Construction and development . .
1-4 family residential . . . . . . . . . .
Multi-family residential . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . .
900,746
1,023,230
527,812
509,819
280,192
237,662
277,209
258,346
36,782
33,884
9,812
8,670
86,513
80,387
Total . . . . . . . . . . . . . . . . . . . . . . . $ 57,643 $ 2,879,027 $ 2,936,670 $ 12,917 $ 2,633,756 $ 2,646,673
1,041,998
522,705
239,872
258,346
33,884
8,670
88,238
18,768
12,886
2,210
—
—
—
7,851
899,342
527,812
276,541
277,209
36,572
9,812
79,860
1,404
—
3,651
—
210
—
6,653
100
Activity in the ACL for loans, segregated by loan class, for the years indicated below was as follows:
Commercial
Construction
and
Commercial
and
1-4 Family Multi-family
Real Estate
Industrial Real Estate Development Residential Residential Consumer Agriculture Other
Total
7,671 $
852
7,975 $
(140)
4,446 $
100
2,257 $
(275)
1,699 $
294
388 $
(25)
74 $
64
770 $ 25,280
874
4
(Dollars in thousands)
December 31, 2020
Beginning balance . . . . . . . . . $
Impact of CECL adoption . . .
Provision (recapture) for
credit losses for loans . . . . .
Charge-offs . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . .
4,432
(714)
794
5,979
(163)
147
1,543
—
—
666
(71)
1
520
—
—
175
(112)
14
(13)
—
12
4,772
(3,500)
1
18,074
(4,560)
969
Net (charge-offs)
recoveries . . . . . . . . . .
Ending balance . . . . . . . . . . . $
Period-end amount allocated
to:
Specific reserve . . . . . . . . $
General reserve . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . $
December 31, 2019
Beginning balance . . . . . . . . . $
Provision (recapture) for
credit losses for loans . . . . .
Charge-offs . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . .
Net (charge-offs)
recoveries . . . . . . . . . .
Ending balance . . . . . . . . . . . $
Period-end amount allocated
to:
Specific reserve . . . . . . . . $
General reserve . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . $
December 31, 2018
Beginning balance . . . . . . . . . $
Provision (recapture) for
credit losses for loans . . . . .
Charge-offs . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . .
Net (charge-offs)
recoveries . . . . . . . . .
Ending balance . . . . . . . . . . . $
Period-end amount allocated
to:
80
13,035 $
(16)
13,798 $
—
6,089 $
(70)
2,578 $
—
2,513 $
(98)
440 $
(3,499)
12
(3,591)
137 $ 2,047 $ 40,637
5,004 $
8,031
13,035 $
323 $
13,475
13,798 $
— $
— $
6,089
6,089 $
2,578
2,578 $
— $
2,513
2,513 $
— $
440
440 $
206 $ 5,533
— $
137
35,104
137 $ 2,047 $ 40,637
1,841
7,719 $
6,730 $
4,298 $
2,281 $
1,511 $
387 $
62 $
705 $ 23,693
715
(1,252)
489
1,209
(45)
81
148
—
—
(15)
(12)
3
188
—
—
27
(97)
71
2
—
10
111
(52)
6
2,385
(1,458)
660
(763)
7,671 $
36
7,975 $
—
4,446 $
(9)
2,257 $
—
1,699 $
(26)
388 $
10
74 $
(46)
(798)
770 $ 25,280
416 $
7,255
7,671 $
— $
7,975
7,975 $
— $
15 $
4,446
4,446 $
2,242
2,257 $
— $
1,699
1,699 $
— $
388
388 $
— $
74
74 $
6 $
437
764
24,843
770 $ 25,280
7,257 $
10,375 $
3,482 $
1,326 $
1,419 $
566 $
68 $
285 $ 24,778
(347)
(1,928)
2,737
(3,494)
(171)
20
817
(1)
—
953
(4)
6
92
—
—
(181)
(1)
3
(16)
—
10
420
(3)
3
(1,756)
(2,108)
2,779
809
7,719 $
(151)
6,730 $
(1)
4,298 $
2
2,281 $
—
1,511 $
2
387 $
10
62 $
—
671
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 $
— $
62
62 $
758
100 $
605
22,935
705 $ 23,693
The ACL for loans by loan class as of the periods 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total allowance for credit losses for loans . . . . . . . . . . . . . . . . . .
December 31, 2020
December 31, 2019
Amount
13,035
$
Percent
32.1 % $
Amount
7,671
Percent
30.3 %
13,798
6,089
2,578
2,513
440
137
2,047
40,637
34.0 %
15.0 %
6.3 %
6.2 %
1.1 %
0.3 %
5.0 %
100.0 % $
7,975
4,446
2,257
1,699
388
74
770
25,280
31.6 %
17.6 %
8.9 %
6.7 %
1.5 %
0.3 %
3.1 %
100.0 %
$
101
Allocation of a portion of the ACL to one class of loans above does not preclude its availability to absorb losses
in other classes. The Company had no collateral dependent loans pending foreclosure at December 31, 2020.
Charge-offs and recoveries by loan class and vintage for the year ended December 31, 2020 were as follows:
(Dollars in thousands)
Commercial and industrial:
2020
2019
2018
2017
2016
Prior
Revolving
Loans
Converted
Revolving
Loans
Total
Charge-off . . . . . . . . . . . .
Recovery . . . . . . . . . . . . .
$
— $
—
(38) $
3
(57) $
170
(35) $
46
(42) $
29
— $
326
(542) $
220
— $
—
(714)
794
Total commercial and
industrial . . . . . . . . . . . . . . .
Commercial real estate:
Charge-off . . . . . . . . . . . .
Recovery . . . . . . . . . . . . .
Total commercial real estate
loans . . . . . . . . . . . . . . . . . .
1-4 family residential:
Charge-off . . . . . . . . . . . .
Recovery . . . . . . . . . . . . .
Total 1-4 family residential . .
Consumer:
Charge-off . . . . . . . . . . . .
Recovery . . . . . . . . . . . . .
Total consumer . . . . . . . . . . .
Agriculture:
Recovery . . . . . . . . . . . . .
Total agriculture . . . . . . . . . .
Other:
Charge-off . . . . . . . . . . . .
Recovery . . . . . . . . . . . . .
Total other . . . . . . . . . . . . . .
Total:
Charge-off . . . . . . . . . . . .
Recovery . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . $
—
—
—
—
—
—
—
—
5
5
—
—
—
—
—
—
5
(35)
113
11
(13)
326
(322)
—
—
—
(64)
—
(64)
(3)
2
(1)
—
—
(3,500)
—
(3,500)
—
2
2
—
—
—
(14)
6
(8)
—
—
—
—
—
—
—
—
—
—
—
(95)
—
(95)
—
—
—
1
1
—
—
(163)
145
—
(18)
—
—
—
—
—
—
12
12
—
—
—
(7)
1
(6)
—
1
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,605)
5
(71)
178
(130)
47
(42)
41
(170)
473
(542)
220
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
80
(163)
147
(16)
(71)
1
(70)
(112)
14
(98)
12
12
(3,500)
1
(3,499)
(4,560)
969
5 $ (3,600) $
107 $
(83) $
(1) $
303 $
(322) $
— $ (3,591)
The recorded investment in impaired loans as of December 31, 2019, prior to the Company’s adoption of CECL
was as follows:
(Dollars in thousands)
December 31, 2019
Commercial and industrial . . . . . . . . . . . . . . $
Real estate:
Unpaid
Contractual
Principal
Balance
Recorded
Investment
with No
Average
Recorded
Investment
Allowance with Allowance Investment Allowance Year-to-Date
Recorded Related
Recorded
Investment
Total
1,111 $
300 $
699 $
999 $
416 $
2,452
Commercial real estate . . . . . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . . .
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,407
3,761
210
6,653
1,404
2,166
210
5,411
Total loans . . . . . . . . . . . . . . . . . . . . . . . . $ 13,142 $ 9,491 $
—
1,485
—
1,242
3,426 $ 12,917 $
1,404
3,651
210
6,653
—
15
—
6
2,165
4,020
128
6,825
437 $ 15,590
102
The Company has unfunded commitments, comprised of letters of credit and commitments to extend credit that
are not unconditionally cancellable by the Company. See Note 16: Commitments and Contingencies and Financial
Instruments with Off-Balance-Sheet Risk. Unfunded commitments have similar characteristics as funded loans based on
segment type and their expected credit losses were determined using the Vintage model and established qualitative factors
as well as consideration for historical and expected utilization levels. Activity in the ACL for unfunded commitments for
the year ended December 31, 2020, was as follows:
(Dollars in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of CECL adoption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses for unfunded commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
December 31,
2020
378
2,981
818
4,177
There was no provision for credit losses for unfunded commitments for the years ended December 31, 2019 and
2018.
NOTE 7: PREMISES AND EQUIPMENT
The components of premises and equipment as of 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,
2020
15,484
64,113
16,777
216
388
96,978
(35,826)
61,152
$
$
2019
13,466
53,869
15,917
203
343
83,798
(32,923)
50,875
Depreciation expense was $3.2 million, $3.2 million and $3.3 million for the years ended December 31, 2020,
2019 and 2018, respectively, which is included in net occupancy expense in the Company’s consolidated statements of
income.
NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $81.0 million at December 31, 2020 and 2019 and there have been no changes in goodwill during
those years. During the year ended December 31, 2020, the Company evaluated potential triggering events, including the
economic disruption and uncertainties related to the COVID-19 pandemic and the sustained instability in the oil and gas
industry, that could be indicators of impairment. Based on the results of these assessments, management does not believe
any impairment of goodwill or other intangible assets existed at December 31, 2020 or 2019.
Other intangibles, net of accumulated amortization, were as follows as of the dates shown below:
103
(Dollars in thousands)
December 31, 2020
Weighted-
Average
Remaining
Amortization
Period
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other intangible assets, net . . . . . . . . . . . . . . . . . . . . .
December 31, 2019
Core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other intangible assets, net . . . . . . . . . . . . . . . . . . . . .
3.2 years
8.0 years
10.4 years
4.2 years
9.0 years
12.8 years
Servicing Assets
Gross
Intangible
Assets
$
$
$
$
13,750
6,629
399
20,778
13,750
6,629
368
20,747
Accumulated
Amortization
$
$
$
$
(13,305)
(3,093)
(209)
(16,607)
(12,979)
(2,651)
(179)
(15,809)
Net
Intangible
Assets
$
$
$
$
445
3,536
190
4,171
771
3,978
189
4,938
Changes in servicing assets as of 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Years Ended December 31,
2020
2019
189
79
—
(78)
190
$
$
166
87
(30)
(34)
189
Estimated future amortization for core deposits and customer relationship intangible assets was as follows for
the date shown below:
(Dollars in thousands)
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2020
675
$
584
495
459
442
1,326
3,981
$
NOTE 9: BANK-OWNED LIFE INSURANCE
During 2020, the Company received proceeds in the amount of $2.0 million as the owner and beneficiary under
a bank-owned life insurance policy as the result of the death of a former employee, and the Company recorded a gain of
$769,000 over the carrying value recorded. During 2019, the Company received proceeds in the amount of $4.7 million
as the owner and beneficiary under a bank-owned life insurance policy as the result of the death of a former employee,
and the Company recorded a gain of $3.3 million over the carrying value recorded. 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 period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in cash surrender value . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2020
71,881
—
(1,965)
2,422
72,338
$
$
2019
71,525
—
(4,655)
5,011
71,881
$
$
2018
68,010
1,700
—
1,815
71,525
Years Ended December 31,
104
NOTE 10: DEPOSITS
Deposits as of the dates shown below were as follows:
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
380,175
1,039,617
108,167
152,592
144,818
1,825,369
1,476,425
3,301,794
$
$
2019
369,744
805,942
92,183
208,018
191,640
1,667,527
1,184,861
2,852,388
$
$
December 31,
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,
2020
66,493
48,484
89,188
74,708
18,537
297,410
At December 31, 2020 and 2019, the Company had $29.3 million and $56.8 million in deposits from public
entities and brokered deposits of $88.0 million and $128.9 million, respectively. At December 31, 2020 and 2019,
overdrafts of $336,000 and $680,000, respectively, were reclassified to loans. Accrued interest payable for deposits was
$324,000 and $931,000 at December 31, 2020 and 2019, respectively, and is included in other liabilities in the consolidated
balance sheets. The Company had no major concentrations of deposits at December 31, 2020 or 2019 from any single or
related groups of depositors. At December 31, 2020, $72.5 million of certificates of deposits or other time deposits were
uninsured. Securities pledged and the letter of credit issued under the Company’s Federal Home Loan blanket lien
arrangement which secure public deposits were not considered in determining the amount of uninsured time deposits.
NOTE 11: LINES OF CREDIT
Frost Line of Credit
The Company has entered into a loan agreement with Frost Bank, or Loan Agreement, which has been
periodically amended and provides for a $30.0 million revolving line of credit. At December 31, 2020, there were no
outstanding borrowings on this line of credit and the Company did not draw on this line of credit during 2020 or 2019.
The Company can make draws on the line of credit for a period of 24 months, which began on December 13, 2019, 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 over 24 months beginning December 13, 2019 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, 2026.
The Company may prepay the principal amount of the line of credit without premium or penalty. The obligations
of the Company under the Loan 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 Loan Agreement include, among other things, the Company maintaining tangible net
worth of not less than $300 million, the Company maintaining a free cash flow coverage ratio of not less than 1.25 to 1.00,
105
the Bank’s Texas Ratio (as defined in 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, 2020.
Additional Lines of Credit
The Federal Home Loan Bank allows the Company to borrow on a blanket floating lien status collateralized by
certain loans and the blanket lien amount was $1.1 billion at both December 31, 2020 and 2019. Federal Home Loan Bank
advances outstanding totaled $50.0 million at both December 31, 2020 and 2019 and these borrowings were on a long-
term basis. See maturity information below. At December 31, 2020, there was a $10.8 million letter of credit that was
issued under this agreement and used as collateral to secure certain public deposits. After considering the outstanding
advances and letter of credit, the net capacity available under the Federal Home Loan Bank facility was $1.0 billion at
both December 31, 2020 and 2019.
During the years ended December 31, 2020 and 2019, the Company also borrowed under this agreement on a
short-term basis. The average outstanding balance for Federal Home Loan Bank advances for the years ended
December 31, 2020 and 2019 was $55.2 million and $61.6 million, respectively. The weighted-average interest rate for
the years ended December 31, 2020 and 2019 was 1.64% and 2.25%, respectively.
The scheduled maturities of Federal Home Loan Bank advances as of the date shown below were as follows:
(Dollars in thousands)
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2020
$
$
—
10,000
20,000
20,000
—
—
50,000
At December 31, 2020 and 2019, the Company maintained federal funds lines of credit with commercial banks
that provided for the availability to borrow up to an aggregate of $65.0 million at December 31, 2020 and $75.0 million at
December 31, 2019. There were no funds under these lines of credit outstanding at December 31, 2020 or 2019.
NOTE 12: 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
shareholders and their affiliates who 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 $167.6 million and $158.7 million in loans to related parties at December 31, 2020 and 2019,
respectively. At December 31, 2020 and 2019, there were no loans made to related parties deemed nonaccrual, past due,
restructured in a troubled debt restructuring or classified as potential problem loans.
Activity in loans to related parties as of the periods shown below was as follows:
(Dollars in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Years Ended December 31,
2020
158,727
43,638
(34,746)
167,619
$
$
2019
168,851
15,934
(26,058)
158,727
106
Unfunded Commitments—At December 31, 2020 and 2019, the Company had approximately $47.3 million and
$48.7 million in unfunded loan commitments to related parties, respectively.
Deposits—The Company held related party deposits of approximately $210.1 million and $233.9 million at
December 31, 2020 and 2019, respectively.
Advertising—The Company incurred advertising expenses of approximately $52,000 and $97,000 for the years
ended December 31, 2020 and 2019, respectively, to a vendor that is solely owned by a director of the Company.
NOTE 13: FAIR VALUE DISCLOSURES
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities 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, the Company uses 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 quoted 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 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.
Level 3 Inputs—Unobservable inputs that reflect an entity’s own assumptions that market participants would use
in pricing the assets or liabilities.
During the years ended December 31, 2020 and 2019, 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 estimates of fair value. Fair value estimates are based on judgments
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 judgment and therefore cannot be determined
with precision.
Financial Instruments Measured at Fair Value on a Recurring Basis
The Company’s assets and liabilities measured at fair value on a recurring basis include the following:
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,
107
the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit
information and the security’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.
Equity Securities Available for Sale—Equity securities are classified as available for sale and are recorded at fair
value. The fair value measurements are based on observable data obtained from a third-party pricing service. The Company
reviews the prices supplied by the service against publicly available information. The equity securities are mutual funds
publicly traded on the National Association of Securities Dealers Automated Quotations 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. Interest rate swaps are classified as Level 2.
Financial assets and financial liabilities measured at fair value on a recurring basis as of the dates shown below
were as follows:
(Dollars in thousands)
Fair value of financial assets:
Level 1 inputs: securities available for sale - equity securities . . . . . . . . . . . . . . . . . . . . .
Level 2 inputs:
Debt securities available for sale:
State and municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. agency securities:
Collateralized mortgage obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit risk participation agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of financial liabilities:
Level 2 inputs:
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2020
2019
$
1,193
$
1,147
93,037
53,279
35,402
107,649
8,618
40
245,939
8,618
8,618
55,989
120,847
2,638
—
233,900
2,638
2,638
$
$
$
$
$
$
Financial Instruments Measured at Fair Value on a Non-recurring Basis
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. Financial assets measured at fair value on a non-recurring basis during the dates
shown below include certain loans reported at the fair value of the underlying collateral if repayment is expected solely
from the collateral or a discounted cash flow method if not. Prior to foreclosure, estimated fair values for collateral is
estimated based on Level 3 inputs based on customized discounting criteria.
108
The Company’s financial assets measured at fair value on a non-recurring basis are certain loans individually
evaluated and as of the dates shown below were as follows:
(Dollars in thousands)
Level 3 inputs:
Loans evaluated individually
Recorded
Investment
December 31, 2020
Specific
ACL
Net
Recorded
Investment
December 31, 2019
Specific
ACL
Net
Commercial and industrial . . . . . . . . . . . $ 10,509
5,727
Commercial real estate . . . . . . . . . . . . . .
1-4 family residential . . . . . . . . . . . . . . .
—
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,232
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,468 $
$ 5,004
323
—
205
$ 5,505
5,404
—
1,027
5,532 $ 11,936
$
$
699 $
—
1,485
1,242
3,426 $
416 $
—
15
6
437 $
283
—
1,470
1,236
2,989
Non-Financial Assets and Non-Financial Liabilities Measured at Fair Value on a Non-recurring Basis
The Company’s non-financial assets measured at fair value on a non-recurring basis for the periods reported are
foreclosed assets (upon initial recognition or subsequent impairment). The Company’s other non-financial assets whose
fair value may be measured on a non-recurring basis when there is evidence of impairment and may be subject to
impairment adjustments include goodwill and intangible assets, among other assets.
The fair value of foreclosed assets may be estimated using Level 2 inputs based on observable market data or
Level 3 inputs based on customized discounting criteria less estimated selling costs. There were no write-downs of
foreclosed assets for fair value remeasurement subsequent to initial foreclosure during the years ended December 31, 2020
and 2019. There were no outstanding foreclosed assets as of December 31, 2020 and 2019.
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:
December 31, 2020
December 31, 2019
Fair Value
Carrying
Amount
Fair Value
Carrying
Amount
Cash and due from banks . . . . . . . . . . . . . . . . . . . . $
538,007 $
538,007
$
372,064 $
372,064
Level 2 inputs:
Bank-owned life insurance . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . .
Servicing asset . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,338
13,350
190
72,338
13,350
190
71,881
8,742
189
71,881
8,742
189
Level 3 inputs:
Loans, including held for sale, net . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . .
2,886,153
18,652
Total financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,562,391 $ 3,528,690
Financial liabilities:
Level 1 inputs:
2,919,854
18,652
2,654,362
16,710
2,615,268
16,710
$ 3,123,948 $ 3,084,854
Noninterest-bearing deposits . . . . . . . . . . . . . . . . . $ 1,476,425 $ 1,476,425
$ 1,184,861 $ 1,184,861
Level 2 inputs:
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . .
Repurchase agreements . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . .
1,825,369
50,000
—
398
Total financial liabilities . . . . . . . . . . . . . . . . . . . . . . . $ 3,423,107 $ 3,352,192
1,894,558
51,726
—
398
1,651,359
48,822
485
1,005
1,667,527
50,000
485
1,005
$ 2,886,532 $ 2,903,878
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
109
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.
NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS
The Company has outstanding interest rate swap contracts with certain customers and equal and offsetting interest
rate swaps with other financial institutions entered into at the same time. These interest rate swap contracts are not
designated as hedging instruments for mitigating interest rate risk. The objective of the transactions is to allow customers
to effectively convert a variable rate loan to a fixed rate.
In connection with each swap transaction, the Company agreed 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 Company agreed 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 Company acts
as an intermediary for its customer, changes in the fair value of the underlying derivative contracts are designed to offset
each other and do 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, 2020 and 2019,
management determined there was no such deterioration.
At December 31, 2020 and 2019, the Company had 23 and 19 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 other noninterest income. Fair value amounts are included in other
assets and other liabilities.
The Company entered into a credit risk participation agreement with another financial institution during the year
ended December 31, 2020. This agreement is associated with an interest rate swap related to a loan for which the Company
is the lead agent bank and provides credit protection to the Company should the borrower fail to perform under the terms
of the interest rate swap agreement. The fair value of the agreement is determined based on the market value of the
underlying interest rate swap adjusted for credit spreads and recovery rates.
Derivative instruments outstanding as of the dates shown below were as follows:
Notional
Amounts
Fair
Value
Fixed Rate
Floating Rate
Weighted
Average
Maturity
(Years)
(Dollars in thousands)
December 31, 2020
Interest rate swaps with customers . . . Other assets
Classification
Interest rate swaps with customers . . . Other assets
Interest rate swaps with financial
institutions . . . . . . . . . . . . . . . . . . . .
Interest rate swaps with financial
institutions . . . . . . . . . . . . . . . . . . . .
Credit risk participation agreement
with financial institution . . . . . . . . . .
Total derivatives . . . . . . . . . . . . . . .
Other
liabilities
Other
liabilities
Other assets
$ 141,241
$
8,146
5,250
5,250
472
(472)
141,241
(8,146)
14,084
40
$ 307,066
$
40
December 31, 2019
Interest rate swaps with customers . . . Other assets
$
69,189
$
2,599
Interest rate swaps with financial
Other assets
5,987
39
institutions . . . . . . . . . . . . . . . . . . . .
Interest rate swaps with customers . . . Other
5,987
(39)
4.00%
liabilities
Interest rate swaps with financial
Other
69,189
(2,599)
institutions . . . . . . . . . . . . . . . . . . . .
Total derivatives . . . . . . . . . . . . . . .
liabilities
$ 150,352
$
—
4.40% -
5.89%
110
3.25% -
5.89%
4.99%
4.99%
3.25% -
5.89%
3.50%
4.40% -
5.89%
4.00%
LIBOR 1M +
2.50% - 3.00%
U.S. Prime
U.S. Prime
LIBOR 1M +
2.50% - 3.00%
LIBOR 1M +
2.50%
LIBOR 1M +
2.50% - 3.00%
LIBOR 1M +
2.50%
LIBOR 1M +
2.50%
LIBOR 1M +
2.50% - 3.00%
6.14
6.96
6.96
6.14
9.24
6.65
6.71
6.71
6.65
NOTE 15: OPERATING LEASES
The Company leases certain office space, stand-alone buildings and land, which are recognized as operating lease
right-of-use assets in the consolidated balance sheets. The Company adopted ASU 2016-02, Leases (Topic 842) on
January 1, 2019. At adoption, the Company recorded operating lease right-of-use assets totaling $13.2 million, which
represented the Company’s right to use, or control the use of, specified assets for their lease terms, and the Company
recorded operating lease liabilities totaling $15.5 million, which represented the Company’s obligation to make lease
payments under these leases. Accrued lease obligations and lease incentive liabilities totaling $2.3 million that were in
other liabilities at December 31, 2018 were reversed as part of the adoption during the first quarter of 2019. The Company
elected to apply certain practical expedients for transition, and under those expedients the Company did not reassess prior
accounting decisions regarding the identification, classification and initial direct costs for leases existing at the effective
date. The Company also elected to use hindsight in determining lease term when considering options to extend the lease
and excluded short-term leases (defined as lease terms of 12 months or less). The Company elected to separate non-lease
components from lease components.
During the year ended December 31, 2020, the operating lease right-of-use assets increased $1.7 million in
exchange for new operating lease liabilities related to two new leases commenced in that period. Two leases were modified
during the year ended December 31, 2020 and $1.0 million was added to both the operating lease right-of-use assets and
lease liabilities. The Company terminated a lease related to a branch during the year ended December 31, 2020 and, as a
result, the operating lease right-of-use assets were reduced by $831,000 and the operating lease liabilities were reduced by
$866,000. During the year ended December 31, 2019, the Company obtained $1.3 million of operating lease right-of-use
assets in exchange for new operating lease liabilities related to two leases commenced in that period.
Lease costs for the periods shown below were as follows:
(Dollars in thousands)
Operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sublease income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Years Ended December 31,
2020
2019
1,980
40
(378)
1,642
$
$
1,876
61
(153)
1,784
Other information related to operating leases for the periods shown below was as follows:
(Dollars in thousands)
Amortization of lease right-to-use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for amounts included in the measurement of lease liabilities . . . .
Weighted-average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average remaining lease term in years . . . . . . . . . . . . . . . . . . . . . .
$
Years Ended December 31,
2020
2019
$
1,517
464
2,046
2.64%
10.8
1,343
534
1,895
3.54%
11.2
111
A maturity analysis of operating lease liabilities as of the date shown below was as follows:
(Dollars in thousands)
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total undiscounted lease liability . . . . . . . . . . . . . . .
Less:
Discount on cash flows . . . . . . . . . . . . . . . . . . . . . . . .
Total operating lease liability . . . . . . . . . . . . . . . . . . .
$
$
December 31, 2020
1,968
2,225
2,227
1,930
1,817
9,345
19,512
(3,065)
16,447
NOTE 16: COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-
BALANCE-SHEET RISK
Financial Instruments with Off-Balance-Sheet Risk
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 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,
2020
659,385
80,346
739,731
26,078
$
$
$
2019
652,611
141,439
794,050
23,547
$
$
$
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 may 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 the Company’s customers.
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.
112
NOTE 17: EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION ARRANGEMENTS
Employee Benefit Plans
The Company maintains a 401(k) employee benefit plan and substantially all employees that complete
three months of service may participate. The Company matches a portion of each employee’s contribution and may, at its
discretion, make additional contributions. During the years ended December 31, 2020 and 2019, the Company contributed
$2.1 million and $1.9 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, 2020 and 2019, the amount payable, including interest,
for this deferred plan was $2.0 million and $2.7 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
Chief Executive Officer, or 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 $246,000 and $335,000 at December 31,
2020 and 2019, respectively, which is included in other liabilities in the consolidated balance sheets and 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 $640,000 and $437,000 at December 31, 2020 and 2019,
respectively, which 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.
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 under this plan 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 to acquire 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.
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, 2020, 963,200 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 awards 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, 2020,
308,857 shares were available for future grant under the 2017 Plan.
113
Stock option activity for the periods shown below was as follows:
Outstanding at beginning of period . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited/expired . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at end of period . . . . . . . . . . . . . . . . .
Years Ended December 31,
2020
$
Number of
Shares
Underlying
Options
213,078
—
(11,358)
—
201,720
Weighted
Average
Exercise
Price
16.92
—
11.67
—
17.22
2019
$
Number of
Shares
Underlying
Options
232,322
—
(15,244)
(4,000)
213,078
Weighted
Average
Exercise
Price
16.66
—
12.74
17.73
16.92
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
169,721
16.51
1,528
4.3
December 31, 2020
Unvested
31,999
Outstanding
201,720
17.22
1,672
4.6
21.00 $
144 $
6.5
$
$
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.
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 and
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:
Outstanding at December 31, 2018 . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2019 . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2020 . . . . . . . . . . .
Non-performance Based
Performance-based
Number of
Shares
181,773
44,492
(61,590)
(3,232)
161,443
41,594
(63,160)
(10,210)
129,667
$
$
$
Weighted
Average
Grant Date
Fair Value
27.05
31.64
27.20
29.99
28.20
28.24
28.28
27.53
28.22
Number of
Shares
24,000
—
(6,000)
—
18,000
—
—
(15,750)
2,250
$
$
$
Weighted
Average
Grant Date
Fair Value
34.46
—
34.46
—
34.46
—
—
34.47
34.40
114
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, 2020
Non-
performance
Based
129,667
28.22
3,308
2.1
Performance-
based
2,250
34.40
57
1.8
$
$
The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax
liabilities related to options exercised or restricted stock vested or to pay the exercise price of the options. During the
periods shown below, the shares of stock subject to options exercised, restricted stock vested, shares withheld and shares
issued were as follows:
Exercised/Vested
Shares Withheld
Shares Issued
Year Ended December 31, 2020
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performance based restricted stock . . . . . . . . . . .
Year Ended December 31, 2019
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performance based restricted stock . . . . . . . . . . .
Performance-based restricted stock . . . . . . . . . . . . . . .
11,358
63,160
15,244
61,590
6,000
—
(9,578)
11,358
53,582
(2,318)
(6,672)
(1,463)
12,926
54,918
4,537
For the years ended December 31, 2020, 2019 and 2018, stock compensation expense was $1.9 million, $2.4
million and $1.6 million, respectively. As of December 31, 2020, there was approximately $3.4 million of unrecognized
compensation expense related to unvested stock options, non-performance based restricted stock and performance-based
restricted stock, which is expected to be recognized in the Company’s consolidated statements of income over a weighted-
average period of 2.0 years.
115
NOTE 19: REGULATORY MATTERS
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 capital. Common Equity Tier 1 capital for both the Company and the Bank is reduced
by goodwill and other intangible assets, net of associated deferred tax liabilities.
The Basel III Capital Rules 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, effectively resulting in a minimum ratio of Common Equity Tier 1 capital
to risk-weighted assets of at least 7.0%); (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, effectively resulting in a minimum
Tier 1 capital ratio of 8.5%); (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, effectively resulting in a
minimum total capital ratio of 10.5%); and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital
to average quarterly assets.
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.
In November 2019, the federal bank regulatory agencies published a final rule, the Community Bank Leverage
Ratio Framework, or the Framework, to simplify capital calculations for community banks. The Framework provides for
a simple measure of capital adequacy for certain community banking organizations. The Framework is optional and is
designed to reduce burden by removing requirements for calculating and reporting risk-based capital ratios. Depository
institutions and depository institution holding companies that have less than $10.0 billion in total consolidated assets and
meet other qualifying criteria, including a leverage ratio of greater than 9.0%, are considered qualifying community
banking organizations and are eligible to opt into the Framework. A qualifying community banking organization that elects
to use the community bank leverage ratio framework and that maintains a Tier 1 capital-to-adjusted total assets ratio, or
leverage capital ratio, of greater than 9.0% is considered to have satisfied the generally applicable risk-based and leverage
capital requirements under the Basel III Capital Rules and, if applicable, is considered to have met the “well capitalized”
ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules. The final rule became
effective January 1, 2020, and organizations that opt into the Framework and meet the criteria established by the rule can
use the Framework for regulatory reports for the year ended December 31, 2020. In April 2020, the federal bank regulatory
agencies announced two interim final rules to provide relief associated with Section 4012 of the CARES Act. For
institutions that elect the Framework, the interim rules temporarily lower the leverage ratio requirement to 8.0% for the
second quarter of 2020 through the end of calendar year 2020 and to 8.5% for the 2021 calendar year. An institution will
have until January 1, 2022 before the 9.0% leverage ratio requirement is re-established. The Company determined not to
opt into the Framework and will continue to compute regulatory capital ratios based on the Basel III Capital Rules
discussed above.
In September 2020, the federal bank regulatory agencies finalized an interim final rule that allows banking
organizations to mitigate the effects of CECL on their regulatory capital computations. The rule permits banking
organizations that were required to adopt CECL for purposes of GAAP (as in effect January 1, 2020) for a fiscal year
beginning during the calendar year 2020, the option to delay for up to two years an estimate of CECL’s effect on regulatory
capital, followed by a three-year transition period (i.e., a transition period of five years in total). The Company determined
116
not to use the transition provision and has reported the full effect of CECL upon adoption and for the current reporting
period in its regulatory capital calculation and ratios.
The Company is subject to the regulatory capital requirements administered by the Board of Governors of the
Federal Reserve System and, for the Bank, those administered by the Office of Comptroller of Currency, or 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 the Company’s financial statements. Management believes, as
of December 31, 2020 and 2019, that the Company and the Bank met all capital adequacy requirements to which they
were subject.
On June 18, 2020, the Bank and the OCC entered into a formal agreement, or the Agreement, with regard to
BSA/AML compliance matters. The Agreement generally requires that the Bank enhance its policies and procedures to
comply with BSA/AML laws and regulations. Specifically, the Agreement requires the Bank to take certain actions,
including, but not limited to: (i) establishing a Compliance Committee to oversee the Bank’s compliance with the
Agreement; (ii) ensuring that the BSA/AML staff has sufficient authority and resources to fulfill its responsibilities; (iii)
developing, implementing, and adhering to a written program of policies and procedures to provide for compliance with
the BSA, including with respect to model risk management for automated monitoring systems; (iv) establishing policies
and procedures for performing customer due diligence/enhanced due diligence and customer risk identification processes;
(v) adopting and adhering to an independent BSA/AML audit program; (vi) developing, implementing, and adhering to a
comprehensive training program for all appropriate Bank employees to ensure their awareness of their responsibility for
compliance with the requirements of the BSA, the Bank’s relevant policies, procedures, and processes, and of relevant
examples of red flags for money laundering, terrorist financing, and suspicious activity; and (vii) performing a review of
account and transaction activity for certain time periods.
The Board of Directors and management are committed to taking the necessary actions to fully address the
provisions of the Agreement. The Bank has appointed a Compliance Committee to oversee the Bank’s compliance with
the Agreement and is working to promptly address the requirements of the Agreement. Numerous actions have already
been taken or commenced by the Bank to strengthen its BSA/AML compliance practices, policies, procedures and controls
and comply with the terms of the Agreement. The Bank has hired and may continue to hire third-party consultants and
advisors to assist in complying with the Agreement. While subject to the Agreement, the Company expects that
management and the Board of Directors will be required to focus considerable time and attention on taking corrective
actions to comply with its terms.
If the Bank does not successfully address the OCC’s concerns in the Agreement or fully comply with the
provisions of the Agreement, the Bank could be subject to further regulatory scrutiny, civil monetary penalties, further
regulatory sanctions and/or other enforcement actions. The Company or the Bank may also become subject to formal or
informal enforcement actions by other regulatory agencies. Any of those events could have a material adverse impact on
the Company’s future operations, financial condition, growth, or other aspects.
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.
117
At December 31, 2020 and 2019, the Company and the Bank, were “well capitalized” based on the ratios
presented below. Actual and required capital ratios for the Company and the Bank were as follows for the dates presented:
Actual
Amount
Ratio
Minimum
Capital Required
Basel III
Required to be
Considered Well
Capitalized
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
December 31, 2020
Common Equity Tier 1 to Risk-
Weighted Assets:
Consolidated . . . . . . . . . . . . . . . . .
Bank Only . . . . . . . . . . . . . . . . . . .
Tier 1 Capital to Risk-Weighted
Assets:
Consolidated . . . . . . . . . . . . . . . . .
Bank Only . . . . . . . . . . . . . . . . . . .
Total Capital to Risk-Weighted
Assets:
Consolidated . . . . . . . . . . . . . . . . .
Bank Only . . . . . . . . . . . . . . . . . . .
Tier 1 Leverage Capital to Average
Assets:
Consolidated . . . . . . . . . . . . . . . . .
Bank Only . . . . . . . . . . . . . . . . . . .
December 31, 2019
Common Equity Tier 1 to Risk-
Weighted Assets:
Consolidated . . . . . . . . . . . . . . . . .
Bank Only . . . . . . . . . . . . . . . . . . .
Tier 1 Capital to Risk-Weighted
Assets:
Consolidated . . . . . . . . . . . . . . . . .
Bank Only . . . . . . . . . . . . . . . . . . .
Total Capital to Risk-Weighted
Assets:
Consolidated . . . . . . . . . . . . . . . . .
Bank Only . . . . . . . . . . . . . . . . . . .
Tier 1 Leverage Capital to Average
Assets:
Consolidated . . . . . . . . . . . . . . . . .
Bank Only . . . . . . . . . . . . . . . . . . .
NOTE 20: INCOME TAXES
$ 455,391
$ 421,952
15.45%
14.32%
$ 206,296
$ 206,281
7.00%
7.00%
N/A
$ 191,547
N/A
6.50%
$ 455,391
$ 421,952
15.45%
14.32%
$ 250,502
$ 250,484
8.50%
8.50%
N/A
$ 235,750
N/A
8.00%
$ 492,328
$ 458,886
16.71%
15.57%
$ 309,444
$ 309,421
10.50%
10.50%
N/A
$ 294,687
N/A
10.00%
$ 455,391
$ 421,952
12.00%
11.12%
$ 151,797
$ 151,772
4.00%
4.00%
N/A
$ 189,715
N/A
5.00%
$ 448,445
$ 406,675
15.52%
14.08%
$ 202,218
$ 202,203
7.00%
7.00%
N/A
$ 187,760
N/A
6.50%
$ 448,445
$ 406,675
15.52%
14.08%
$ 245,550
$ 245,532
8.50%
8.50%
N/A
$ 231,089
N/A
8.00%
$ 474,104
$ 432,334
16.41%
14.97%
$ 303,327
$ 303,304
10.50%
10.50%
N/A
$ 288,861
N/A
10.00%
$ 448,445
$ 406,675
13.11%
11.90%
$ 136,798
$ 136,754
4.00%
4.00%
N/A
$ 170,943
N/A
5.00%
The components of the provision for income tax expense for the periods listed below were as follows:
(Dollars in thousands)
Current federal income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current state income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
118
2020
$
For the Years Ended December 31,
2019
12,988
240
(1,657)
11,571
9,419
240
(3,625)
6,034
$
$
$
2018
11,908
190
(734)
11,364
Income tax expense for the periods listed below differs from the applicable statutory rate of 21% for the years
ended December 31, 2020, 2019 and 2018 as follows:
(Dollars in thousands)
Tax expense calculated at statutory rate . . . . . . . . . . . . . . . . . . .
Increase (decrease) resulting from:
State income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax exempt interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended December 31,
2020
$
6,803
$
2019
13,038
$
2018
12,317
190
(832)
(506)
379
6,034
18.63%
$
190
(807)
(1,047)
197
11,571
18.64%
$
150
(834)
(381)
112
11,364
19.37%
$
The differences between the federal statutory rate of 21% and the effective tax rates presented in the table above
were largely attributable to permanent differences primarily related to tax exempt interest income and bank-owned life
insurance related earnings.
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)
Deferred tax assets:
Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan origination fees and loan costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right-to-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation 481(a) adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
December 31,
2020
2019
8,534
2,427
2,025
1,254
3,454
29
17,723
(1,550)
(2,790)
—
(836)
(1,801)
(46)
(7,023)
10,700
$
$
5,308
3,068
1,261
253
3,298
8
13,196
(1,140)
(2,714)
(238)
(997)
(634)
(41)
(5,764)
7,432
As of December 31, 2020, the tax years that remain subject to examination by the major tax jurisdictions under
the statute of limitations are from the year 2016 forward for the State of Texas and from the year 2017 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 in its consolidated statements of income. The Company did not record
any interest or penalties related to income tax for the years ended December 31, 2020, 2019 and 2018. For the years ended
December 31, 2020 and 2019, management has determined there were no material uncertain tax positions.
119
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:
2020
26,361 $
Years Ended December 31,
2019
50,517 $
$
2018
47,289
24,761
24,926
24,859
42
24,803
127
25,053
159
25,018
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.06 $
1.06 $
2.03 $
2.02 $
1.90
1.89
For the years ended December 31, 2020, 2019 and 2018, the Company excluded from diluted weighted-average
shares, the impact of 117,790, 2,400 and 3,000 shares of unvested non-performance based restricted stock as they are anti-
dilutive and 2,250, 18,000 and 24,000 shares of performance-based restricted stock, respectively, as they are contingently
issuable and the performance conditions for these issuances have not been met. For the year ended December 31, 2020,
the Company excluded from diluted weighted-average shares, the impact of 80,000 stock options as they are anti-dilutive.
No stock options were anti-dilutive at December 31, 2019 or 2018.
NOTE 22: PARENT COMPANY
The following balance sheets, statements of income and statements of cash flows for CBTX, Inc. should be read
in conjunction with the consolidated financial statements and the related notes.
Balance Sheets
(Dollars in thousands)
Assets:
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
December 31,
2020
2019
35,645
513,012
130
548
549,335
2,884
2,884
255
339,334
214,456
(14,369)
6,775
546,451
549,335
$
$
$
$
44,130
493,951
131
438
538,650
2,929
2,929
258
346,559
201,080
(14,562)
2,386
535,721
538,650
120
Statements of Income
(Dollars in thousands)
Interest income
Years Ended December 31,
2019
2018
2020
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
5 $
187
Interest expense
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income
15
—
15
(15)
Dividend income from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,350
10,350
Noninterest expense
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional and director fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising, marketing and business development . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax benefit and equity in undistributed income of
698
1,107
100
45
206
2,156
15
4
19
(14)
8,901
8,901
673
652
13
—
209
1,547
15
420
435
(248)
7,800
7,800
755
728
44
—
208
1,735
subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before equity in undistributed income of subsidiary . . . . . . . . . . . . . .
Equity in undistributed income of subsidiary . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8,179
(465)
8,644
17,717
26,361 $
7,340
(341)
7,681
42,836
50,517 $
5,817
(437)
6,254
41,035
47,289
Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities:
Years Ended December 31,
2020
2019
2018
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile consolidated net income to net cash provided
26,361
$
50,517
$
47,289
by operating activities:
Equity in undistributed net income loss of subsidiary . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax benefit (provision) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in operating assets and liabilities:
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
(17,717)
1,935
1
(110)
(23)
(15,914)
10,447
—
Redemption of trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments to tax authorities for stock-based compensation . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
(9,962)
(198)
133
(8,905)
(18,932)
(8,485)
44,130
35,645
$
(42,836)
2,402
14
473
(180)
(40,127)
10,390
—
(1,571)
(8,757)
(239)
121
(3)
(10,449)
(59)
44,189
44,130
(41,035)
1,601
(4)
1,549
(836)
(38,725)
8,564
—
(5,155)
(4,979)
(171)
294
—
(10,011)
(1,447)
45,636
44,189
$
121
NOTE 23: QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial data for the periods indicated below was as follows:
Year Ended December 31, 2020
(Dollars in thousands)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (recapture) for credit losses . . . . . . . . . . . . . . . . . . .
Net interest income after provision (recapture) for credit
First Quarter Second Quarter Third Quarter Fourth Quarter
34,294
1,774
32,520
(135)
34,425 $
2,267
32,158
9,870
36,211 $
3,991
32,220
5,049
2,055
31,708
4,108
33,763 $
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
27,171
4,327
22,089
9,409
1,868
7,541 $
22,288
2,909
22,495
2,702
539
2,163 $
27,600
4,023
23,858
7,765
1,344
6,421 $
32,655
3,522
23,658
12,519
2,283
10,236
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.30 $
0.30 $
0.09 $
0.09 $
0.26 $
0.26 $
0.42
0.41
Year Ended December 31, 2019
(Dollars in thousands)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (recapture) for credit losses . . . . . . . . . . . . . . . . . . .
Net interest income after provision (recapture) for credit
First Quarter Second Quarter Third Quarter Fourth Quarter
38,568
4,782
33,786
(148)
38,649 $
4,350
34,299
807
36,985 $
3,657
33,328
1,147
4,618
34,575
579
39,193 $
losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
32,181
3,493
22,585
13,089
2,599
10,490 $
33,492
7,303
23,403
17,392
3,077
14,315 $
33,996
4,115
22,045
16,066
2,990
13,076 $
33,934
3,717
22,110
15,541
2,905
12,636
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.42 $
0.42 $
0.57 $
0.57 $
0.52 $
0.52 $
0.51
0.50
122
At CommunityBank of Texas, relationships are the bedrock of our
business. Th ey are a refl ection of our deep commitment to building
strong, honest partnerships in all we do, and our mandate to
measure our performance by the success we create for our partners.
Service to others, both fi nancially and philanthropically, is a core
pillar of our brand, and we pledge that every time is the right time
to put our clients’ and our communities’ needs fi rst.
We’re proud to be here, to live in and serve the cities and
communities of Southeast Texas. Th ank you for trusting our
dedicated team at CommunityBank of Texas to be your better
business banking partner.
CommunityBank of Texas,
N.A. Advisory Directors
JAMES DISHMAN, JR.
Stallion Oilfi eld Services
CBTX, Inc. Management
ROBERT R. FR ANKLIN, JR.
Chairman, President
and Chief Executive Offi cer
C O R P O R A T E I N F O R M A T I O N
CBTX, Inc. Directors
ROBERT R. FR ANKLIN, JR.
CBTX, Inc.
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.
REAGAN REAUD
Privateer Capital, LP
JOSEPH B. SWINBANK
Sprint Sand & Clay
MARK FERTIT TA
Fertitta Realty & Property
ROBERT R. FR ANKLIN, JR.
CommunityBank of Texas
MICHAEL HAVARD
Havard Law Firm
TIMOTHY HOR AN, JR.
Fairway Real Estate
Management, LLC
TR AVIS JAGGERS
CommunityBank of Texas
TOMMY W. LOT T
Investments
DENNIS MALLOY
Malloy Interests
STEVE McREYNOLDS
Groves Equipment
Rental Co., Inc.
SHEIL A UMPHREY
The Decorating Depot
GLEN W. MORGAN
Reaud, Morgan & Quinn, LLP
JOHN EDDIE WILLIAMS, JR.
Williams Hart
SCOT T PARKER
Parker’s Building Supply
W.E. “BILL” WIL SON, JR.
Wilson & Company
J. PAT PARSONS
CommunityBank of Texas
MAR ALYN HARE
Investments
R AY MOORE
Investments
ROBERT T. PIGOT T, JR.
CommunityBank of Texas
MIKE R AMSEY
Ramsey Law
JERRY REESE
Reese Minerals
DR. JAMES SIMMONS
Lamar University
DR. R. LELDON SWEET
R. Leldon Sweet, MD
Investor Relations Contact
JUSTIN M. LONG
281.325.5013
investors@CBoTX.com
CBTX, Inc. Advisory
Directors
R AY MOORE
Investments
ROBERT T. PIGOT T, JR.
CBTX, Inc.
CommunityBank of Texas,
N.A. Directors
JEFF BR ANICK
Jefferson County Judge
JAMES R. BROOKS
Lockton Companies
MICK DUBEA
Dubea Investments
JOE PENL AND, SR.
Quality Mat Company, Inc.
Media Contact
DOAK C. PROC TER, III
The Procter Company
REAGAN REAUD
Privateer Capital, LP
JOSEPH B. SWINBANK
Sprint Sand & Clay
BART UMPHREY
Trinity Industrial Services LLC
JOHN EDDIE WILLIAMS, JR.
Williams Hart
RICKEY WILLIAMS
WFI Properties, Inc.
W.E. “BILL” WIL SON, JR.
Wilson & Company
ASHLEY K. WARREN
713.210.7622
awarren@CBoTX.com
NASDAQ: CBTX
Transfer Agent
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TELEPHONE
Toll Free: 877.373.6374
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J. PAT PARSONS
Vice Chairman
ROBERT T. PIGOT T, JR.
Senior Executive Vice President
and Chief Financial Offi cer
JUSTIN M. LONG
Senior Executive Vice President
and General Counsel
CommunityBank of Texas,
N.A. Management
ROBERT R. FR ANKLIN, JR.
Chairman and
Chief Executive Offi cer
J. PAT PARSONS
Vice Chairman
ROBERT T. PIGOT T, JR.
Senior Executive Vice President
and Chief Financial Offi cer
TAWN VANDENBERG
Senior Executive Vice President
and Chief Administration Offi cer
DEBOR AH DINSMORE
Senior Executive Vice President
and Chief Information Offi cer
W. ALLEN GAGE
Senior Executive Vice President
Special Projects
TR AVIS JAGGERS
President
JUSTIN M. LONG
Senior Executive Vice President
and General Counsel
CAMBREA R. MERRIWETHER
Senior Executive Vice
President and Chief Human
Resources Offi cer
JAMES L . STURGEON
Senior Executive Vice President
and Chief Risk Offi cer
JOE F. WEST
Senior Executive Vice President
and Chief Credit Offi cer
20
22 0 2 0 \ A N N U A L R E P O R T
O U R C O M M U N I T I E S
HOUSTON
Champions
6461 FM 1960 West
Houston 77069
713.210.7690
Greenway Plaza
9 Greenway Plaza,
Suite 110
Houston 77046
713.210.7600
Highway 290
14561 Northwest Freeway
Houston 77040
713.210.7773
Memorial City
820 Gessner Road,
Suite 140
Houston 77024
713.973.8000
Memorial City
Convenience Center
10097 Katy Freeway
Houston 77024
713.973.8000
Northshore
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Houston 77015
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South Belt
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Houston 77034
281.925.4787
Washington
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Suite 100
Houston 77007
713.526.1700
Westchase
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Suite 100
Houston 77042
713.830.1017
BAYTOWN
5700 Garth Road
Baytown 77521
281.421.1942
BOLING
100 Texas Ave.
Boling 77420
979.657.4411
CROSBY
6200 FM 2100
Crosby 77532
281.328.4811
Crosby Lobby II
14100 FM 2100
Crosby 77532
281.328.4822
HUMBLE
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Houston Parkway
Humble 77346
281.852.2020
EAST & SOUTHEAST TEXAS
PASADENA
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Parkway South
Pasadena 77505
281.991.4600
SUGAR LAND
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Suite 100
Sugar Land 77479
281.325.5000
TOMBALL
28515 State Highway 249
Tomball 77377
281.290.0301
WHARTON
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Wharton 77488
979.282.2555
THE WOODLANDS
1900 Research
Forest Drive
The Woodlands 77381
832.325.2335
DALLAS
Dallas Preston Center
8222 Douglas Ave.,
Suite 100
Dallas 75225
214.259.7600
Delaware
5999 Delaware St.
Beaumont 77706
409.861.7200
Highway 105
7410 Highway 105
Beaumont 77713
409.898.1850
Phelan
6378 Phelan Blvd.
Beaumont 77706
409.861.2900
Stedman
490 Park St.,
Suite 105
Beaumont 77701
409.861.7286
BUNA
296 State Highway 62
Buna 77612
409.994.5954
JASPER
637 South Wheeler St.
Jasper 75951
409.383.0999
KIRBYVILLE
918 South Margaret Ave.
Kirbyville 75956
409.423.4602
LUMBERTON
111 Country Lane Drive
(Highway 421)
Lumberton 77657
409.861.7275
NEDERLAND
2008 Highway 365
Nederland 77627
409.861.7270
NEWTON
319 Rusk St.
Newton 75966
409.379.8587
ORANGE
3300 Edgar Brown Drive
Orange 77630
409.670.9300
PORT ARTHUR
4749 Twin City Highway
Port Arthur 77642
409.861.7200
SILSBEE
645 North 5th St.
Silsbee 77656
409.386.6058
VIDOR
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Vidor 77662
409.783.0880
WOODVILLE
501 South Magnolia St.
Woodville 75979
409.283.8100
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