UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
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CBTX, INC.
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. 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 18 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 $4.5 billion as of December 31, 2021. The loan portfolio at December 31, 2021 was 77.7% in the Houston market and 20.0% 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 medium-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, 2021, 79.9% 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 reputation and long-standing community relationships enable it to compete successfully within its markets and enhances its ability to attract and retain customers.
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Pending Merger
On November 8, 2021, Allegiance Bancshares, Inc., or Allegiance, the holding company of Allegiance Bank, and the Company jointly announced that they entered into a definitive merger agreement pursuant to which the companies will combine in an all-stock merger of equal. Under the terms of the definitive merger agreement, Allegiance shareholders will receive 1.4184 shares of the Company’s common stock for each share of Allegiance common stock they own. Based on the number of outstanding shares of Allegiance and the Company as of November 5, 2021, Allegiance shareholders are expected to own approximately 54% and the Company’s shareholders will own approximately 46% of the combined company’s common stock. The companies have submitted the required regulatory filings and the parties anticipate closing the transaction in the second quarter of 2022.
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, 2021, the Company employed 506 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, national 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
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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.
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
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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.
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, 2023, 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.
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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 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
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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 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.
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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 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 shareholder. 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, as 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.
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Corrective Measures for Capital Deficiencies. The federal banking regulators are required by the Federal Deposit Insurance Act, or FDI Act, to take “prompt corrective action” with respect to capital-deficient institutions that are FDIC-insured. Agency regulations define, for each capital category, the levels at which institutions are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” Under the current capital rules, which became effective on January 1, 2015, a well capitalized bank has a total risk-based capital ratio of 10.0% or higher, a Tier 1 risk-based capital ratio of 8.0% or higher, a leverage ratio of 5.0% or higher, a CET1 capital ratio of 6.5% or higher and is not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital measure. An adequately capitalized bank has a total risk-based capital ratio of 8.0% or higher, a Tier 1 risk-based capital ratio of 6.0% or higher, a leverage ratio of 4.0% or higher, 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”
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are defined by statute to include a loan or extension of credit to an affiliate, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve) from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In addition, in connection with covered transactions that are extensions of credit, the Bank may be required to hold collateral to provide added security to the Bank, and the types of permissible collateral may be limited. The Dodd-Frank Act generally enhances the restrictions on transactions with affiliates, including an expansion of what types of transactions are covered transactions to include credit exposures related to derivatives, repurchase agreement and securities lending arrangements and an increase in the amount of time for which collateral requirements regarding covered transactions must be satisfied. Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to herein as “insiders”) contained in Section 22(h) of the Federal Reserve Act and in Regulation O promulgated by the Federal Reserve apply to all insured institutions and their subsidiaries and bank holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. Generally, the aggregate of these loans cannot exceed the institution’s total unimpaired capital and surplus, although a bank’s regulators may determine that a more stringent limit is appropriate. Loans to senior executive officers of a bank are even further restricted. Insiders are subject to monetary penalties for knowingly accepting loans in violation of applicable restrictions.
Restrictions on Distribution of Bank Dividends and Assets. Dividends paid by the Bank have provided a substantial part of 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
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enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization. Further, a provision of the Basel III capital standards described above would limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds. A number of federal regulatory agencies proposed rules that would require enhanced disclosure of incentive-based compensation arrangements initially in April 2011 and again in April and May 2016. The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future.
Audits. For insured institutions with total assets of $500 million or more, financial statements prepared in accordance with accounting principles generally accepted in the U.S., or GAAP, as well as management’s certifications signed by 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
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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 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 Company’s 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
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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; (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 Formal Agreement, with regard to BSA/AML compliance matters. On September 7, 2021, the Company was informed by the OCC that it terminated the Formal Agreement, between the Bank and the OCC.
On December 16, 2021, the Bank, entered into a consent order with the Office of the Comptroller of the Currency, or OCC, regarding BSA/AML compliance matters, or OCC Consent Order. Under the OCC Consent Order, the Bank paid a civil money penalty of $1.0 million.
On December 15, 2021, the Bank entered into a consent order with FinCEN regarding BSA compliance matters, or the FinCEN Consent Order. Under the terms of the FinCEN Consent Order, the Bank paid a civil money penalty of $8.0 million; provided, however, that FinCEN agreed to credit the Bank the $1.0 million civil money penalty imposed by the OCC described above. As a result, the Bank paid an aggregate sum of $8.0 million under both the OCC Consent Order and the FinCEN Consent Order. The OCC Consent Order and the FinCEN Consent Order each respectively settle the civil money proceedings against the Bank initiated by the OCC and FinCEN.
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
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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 Federal Home Loan Bank of Dallas, or the FHLB Dallas, the Bank is entitled to borrow from the FHLB Dallas, provided it posts acceptable collateral. The Bank is also required to own a certain amount of capital stock in the FHLB Dallas. 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 FHLB Dallas to the Bank are secured by a portion of the respective mortgage loan portfolio, certain other investments and the capital stock of the FHLB Dallas held by the Bank.
Enforcement Powers. The federal banking agencies, including the Bank’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, 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 |
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| ● | 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 2022 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 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. |
Risks Related to the Pending Merger
| ● | the risks related to the market price and rights of the holders of the Company’s common stock; |
| ● | the possible substantial costs related to the merger and integration; |
| ● | the risk that the cost savings and any revenue synergies from the merger may not be fully realized or may take longer than anticipated to be realized; |
| ● | the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; |
| ● | the ability to retain the Company’s or Allegiance’s personnel successfully after the merger is completed; |
| ● | the ability by each of Allegiance and the Company to obtain required governmental approvals of the merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction); |
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| ● | the occurrence of any event, change or other circumstances that could give rise to the right of us and/or Allegiance to terminate the merger agreement with respect to the merger; |
| ● | disruption to the parties’ businesses as a result of the announcement and pendency of the merger; |
| ● | the risks related to the Company’s assumption of certain of Allegiance’s outstanding debt obligations and the combined company’s level of indebtedness following the completion of the merger; |
| ● | the dilution caused by the Company’s issuance of additional shares of its common stock in the merger; |
| ● | the failure of the closing conditions in the merger agreement to be satisfied, or any unexpected delay in closing the merger; |
| ● | the failure to obtain the necessary approvals by the shareholders of Allegiance or the Company; |
| ● | reputational risk and the reaction of each company’s customers, suppliers, employees or other business partners to the merger. |
Risks Related to the Company’s Business and Operations
| ● | 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
| ● | adverse impact of natural disasters, pandemics and other catastrophes; |
| ● | volatility in oil prices and sustained downturns in the regional energy industry; |
| ● | 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
| ● | 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; |
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| ● | 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
| ● | the Company’s highly regulated environment, stringent capital requirements and regulatory approvals; |
| ● | failure to comply with any supervisory actions; |
| ● | 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
| ● | 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.
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.
The COVID-19 pandemic 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 remain uncertain and cannot be predicted, the pandemic and related efforts to contain it 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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| ● | 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 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. |
The future impact of the COVID-19 pandemic is uncertain but could materially affect the Company’s future financial and operational results.
Risks Related to the Proposed Merger
Because the market price of the Company’s common stock may fluctuate, holders of Allegiance common stock cannot be certain of the market value of the merger consideration they will receive.
In the merger, each share of Allegiance common stock issued and outstanding immediately prior to the effective time (other than certain shares held by the Company or Allegiance) will be converted into 1.4184 shares of the Company’s common stock. This exchange ratio is fixed and will not be adjusted for changes in the market price of either the Company’s common stock or Allegiance common stock. Changes in the price of the Company’s common stock prior to the merger will affect the value that holders of Allegiance common stock will receive in the merger. Neither the Company nor Allegiance is permitted to terminate the merger agreement as a result, in and of itself, of any increase or decrease in the market price of the Company’s common stock or Allegiance common stock.
Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the Company’s or Allegiance’s businesses, operations and prospects and regulatory considerations, many of which factors are beyond the Company’s or Allegiance’s control. Therefore, at the time of the Company’s special meeting and the Allegiance special meeting, holders of the Company’s common stock and holders of Allegiance common stock will not know the market value of the consideration to be received by holders of Allegiance common stock at the effective time. Investors should obtain current market quotations for shares of the Company’s common stock and for shares of Allegiance common stock.
The market price of the Company’s common stock after the merger may be affected by factors different from those affecting shares of Allegiance common stock or the Company’s common stock currently.
In the merger, holders of Allegiance common stock will become holders of the Company’s common stock. The Company’s business differs from that of Allegiance. Accordingly, the results of operations of the combined company and the market price of the Company’s common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations of each of the Company and Allegiance.
The Company and Allegiance are expected to incur substantial costs related to the merger and integration.
The Company and Allegiance have incurred and expect to incur a number of non-recurring costs associated with the merger. These costs include legal, financial advisory, accounting, consulting and other advisory fees, severance/employee benefit-related costs, public company filing fees and other regulatory fees, financial printing and other printing costs and other related costs. Some of these costs are payable by either the Company or Allegiance regardless of whether or not the merger is completed.
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The combined company is expected to incur substantial costs in connection with the related integration. There are a large number of processes, policies, procedures, operations, technologies and systems that may need to be integrated, including core processing, accounting and finance, payroll, compliance, treasury management, branch operations, vendor management, risk management, lines of business, pricing and benefits. While Allegiance and the Company have assumed that a certain level of costs will be incurred, there are many factors beyond their control that could affect the total amount or the timing of the integration costs. Moreover, many of the costs that will be incurred are, by their nature, difficult to estimate accurately. These integration costs may result in the combined company taking charges against earnings following the completion of the merger, and the amount and timing of such charges are uncertain at present.
Combining the Company and Allegiance may be more difficult, costly or time consuming than expected and the Company and Allegiance may fail to realize the anticipated benefits of the merger.
The success of the merger will depend, in part, on the ability to realize the anticipated cost savings from combining the businesses of the Company and Allegiance. To realize the anticipated benefits and cost savings from the merger, the Company and Allegiance must successfully integrate and combine their businesses in a manner that permits those cost savings to be realized. If the Company and Allegiance are not able to successfully achieve these objectives, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings and anticipated benefits of the merger could be less than anticipated, and integration may result in additional unforeseen expenses.
The Company and Allegiance have operated and, until the completion of the merger, must continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the companies’ ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. Integration efforts between the two companies may also divert management attention and resources. These integration matters could have an adverse effect on each of the Company and Allegiance during this transition period and for an undetermined period after completion of the merger on the combined company.
The future results of the combined company following the merger may suffer if the combined company does not effectively manage its expanded operations.
Following the merger, the size of the business of the combined company will increase significantly beyond the current size of either the Company’s or Allegiance’s business. The combined company’s future success will depend, in part, upon its ability to manage this expanded business, which may pose challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. The combined company may also face increased scrutiny from governmental authorities as a result of the significant increase in the size of its business. There can be no assurances that the combined company will be successful or that it will realize the expected operating efficiencies, cost savings, revenue enhancements or other benefits currently anticipated from the merger.
The combined company may be unable to retain the Company’s or Allegiance’s personnel successfully after the merger is completed.
The success of the merger will depend in part on the combined company’s ability to retain the talents and dedication of key employees currently employed by the Company and Allegiance. It is possible that these employees may decide not to remain with the Company or Allegiance, as applicable, while the merger is pending or with the combined company after the merger is consummated. If the Company and Allegiance are unable to retain key employees, including management, who are critical to the successful integration and future operations of the companies, the Company and Allegiance could face disruptions in their operations, loss of existing customers, loss of key information, expertise or know-how and unanticipated additional recruitment costs. In addition, if key employees terminate their employment, the combined company’s business activities may be adversely affected and management’s attention may be diverted from successfully integrating the Company and Allegiance to hiring suitable replacements, all of which may cause the combined company’s business to suffer. In addition, the Company and Allegiance may not be able to identify or retain suitable replacements for any key employees who leave either company.
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Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the merger.
Before the merger and the bank merger may be completed, various approvals, consents and non-objections must be obtained from the Federal Reserve Board, the FDIC, the Texas Department of Banking and other authorities in the United States. These approvals could be delayed or not obtained at all, including due to an adverse development in either party’s regulatory standing, or any other factors considered by regulators in granting such approvals; governmental, political or community group inquiries, investigations or opposition; or changes in legislation or the political environment.
The approvals that are granted may impose terms and conditions, limitations, obligations or costs, or place restrictions on the conduct of the combined company’s business or require changes to the terms of the transactions contemplated by the merger agreement. There can be no assurance that regulators will not impose any such conditions, limitations, obligations or restrictions and that such conditions, limitations, obligations or restrictions will not have the effect of delaying the completion of any of the transactions contemplated by the merger agreement, imposing additional material costs on or materially limiting the revenues of the combined company following the merger or otherwise reduce the anticipated benefits of the merger if the merger were consummated successfully within the expected timeframe. In addition, there can be no assurance that any such conditions, limitations, obligations or restrictions will not result in the delay or abandonment of the merger. Additionally, the completion of the merger is conditioned on the absence of certain orders, injunctions or decrees by any court or regulatory agency of competent jurisdiction that would prohibit or make illegal the completion of any of the transactions contemplated by the merger agreement.
Despite the parties’ commitments to use their reasonable best efforts to respond to any request for information and resolve any objection that may be asserted by any governmental entity with respect to the merger agreement, under the terms of the merger agreement, neither the Company nor Allegiance is required to take any action or agree to any condition or restriction in connection with obtaining these approvals that would reasonably be expected to have a material adverse effect on the combined company and its subsidiaries, taken as a whole, after giving effect to the merger.
Termination of the merger agreement could negatively affect the Company.
If the merger is not completed for any reason, including as a result of the Company’s shareholders failing to approve the Company’s merger proposal or Allegiance shareholders failing to approve the Allegiance merger proposal, there may be various adverse consequences and the Company and/or Allegiance may experience negative reactions from the financial markets and from their respective customers and employees. For example, the Company’s or Allegiance’s businesses may have been affected adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of the Company’s or Allegiance’s common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be completed. If the merger agreement is terminated under certain circumstances, either the Company or Allegiance may be required to pay a termination fee of $32.5 million to the other party.
Additionally, each of the Company and Allegiance has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement, including certain outside consulting costs relating to integration preparation, as well as the costs and expenses of filing, printing and mailing this joint proxy statement/prospectus, and all filing and other fees paid to the SEC in connection with the merger. If the merger is not completed, the Company and Allegiance would have to pay these expenses without realizing the expected benefits of the merger.
The Company will be subject to business uncertainties and contractual restrictions while the merger is pending.
Uncertainty about the effect of the merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. In addition, subject to certain exceptions, the Company and Allegiance
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have agreed to operate their respective businesses in the ordinary course prior to closing, which could cause the Company to be unable to pursue other beneficial opportunities that may arise prior to the completion of the merger.
The shares of the Company’s common stock to be received by holders of Allegiance common stock as a result of the merger will have different rights from shares of Allegiance common stock.
In the merger, holders of Allegiance common stock will become holders of the Company’s common stock and their rights as shareholders will be governed by Texas law and the governing documents of the combined company. The rights associated with the Company’s common stock are different in some respects from the rights associated with Allegiance common stock.
In connection with the merger, the Company will assume certain of Allegiance’s outstanding debt obligations, and the combined company’s level of indebtedness following the completion of the merger could adversely affect the combined company’s ability to raise additional capital and to meet its obligations under its existing indebtedness.
In connection with the merger, the Company will assume certain of Allegiance’s outstanding indebtedness, including trust preferred securities, which consist of junior subordinated debentures with an aggregate original principal amount of $11.3 million and a current carrying value of $9.7 million at September 30, 2021, and $60.0 million aggregate principal amount of fixed-to-floating rate subordinated notes due October 1, 2029. Allegiance Bank also has outstanding $40.0 million aggregate principal amount of fixed-to-floating rate subordinated notes due December 15, 2027 that will be obligations of the combined bank. The Company’s existing debt, together with any future incurrence of additional indebtedness, and the assumption of Allegiance’s outstanding indebtedness, could have important consequences for the combined company’s shareholders. For example, it could:
| ● | limit the combined company’s ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes; |
| ● | restrict the combined company from making strategic acquisitions or cause the combined company to make non-strategic divestitures; |
| ● | restrict the combined company from paying dividends to its shareholders; |
| ● | increase the combined company’s vulnerability to general economic and industry conditions; and |
| ● | require a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on the combined company’s indebtedness and dividends on the preferred stock, thereby reducing the combined company’s ability to use cash flows to fund its operations, capital expenditures and future business opportunities. |
Holders of the Company’s common stock and holders of Allegiance common stock will have a reduced ownership and voting interest in the combined company after the merger and will exercise less influence over management.
Holders of the Company’s common stock and holders of Allegiance common stock currently have the right to vote in the election of the board of directors and on other matters affecting the Company and Allegiance, respectively. When the merger is completed, each holder of Allegiance common stock who receives shares of the Company’s common stock will become a holder of common stock of the Company, with a percentage ownership of the combined company that is smaller than the holder’s percentage ownership of Allegiance. Based on the number of shares of the Company and Allegiance common stock outstanding as of the close of business on the respective record dates, and based on the number of shares of the Company’s common stock expected to be issued in the merger, the former holders of Allegiance common stock, as a group, are estimated to own approximately 54% of the fully diluted shares of the combined company immediately after the merger and current holders of the Company’s common stock as a group are estimated to own approximately 46% of the fully diluted shares of the combined company immediately after the merger. Because of this, holders of Allegiance common stock may have less influence on the management and policies of the combined company than they now have on the management and policies of Allegiance, and holders of the Company’s common stock may have less influence on the management and policies of the combined company than they now have on the management and policies of the Company.
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The issuance of shares of the Company’s common stock in connection with the merger may adversely affect the market price of the Company’s common stock.
In connection with the payment of the merger consideration, the Company expects to issue more than one million shares of the Company’s common stock to Allegiance shareholders. The issuance of these new shares of the Company’s common stock may result in fluctuations in the market price of the Company’s common stock, including a stock price decrease.
Holders of the Company’s common stock will not have appraisal rights or dissenters’ rights in the merger.
Appraisal rights (also known as dissenters’ rights) are statutory rights that, if applicable under law, enable shareholders to dissent from an extraordinary transaction, such as a merger, and to demand that the corporation pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to shareholders in connection with the extraordinary transaction.
Under Section 10.354 of the TBOC, the holders of the Company’s common stock and the holders of Allegiance common stock will not be entitled to appraisal or dissenters’ rights in connection with the merger if, on the record date for the applicable special meeting, such shares of common stock are listed on a national securities exchange or held of record by more than 2,000 shareholders, holders of such common stock are not required to accept as consideration for their shares any consideration that is different from the consideration to be provided to any other holder of such common stock, other than cash instead of fractional shares, and holders of such common stock are not required to accept as consideration for their shares anything other than the shares of a domestic (Texas) entity which immediately after the effective date of the merger are either listed on a national securities exchange or held of record by more than 2,000 shareholders, cash paid in lieu of fractional shares or any combination of the foregoing.
The Company’s common stock is currently listed on the Nasdaq Global Select Market, a national securities exchange, and was so listed on the record date for the Company’s special meeting. If the merger is completed, holders of the Company’s common stock will not receive any consideration, and their shares of the Company’s common stock will remain outstanding and will constitute shares of the combined company, which shares are expected to continue to be listed on the Nasdaq Global Select Market at the effective time of the merger. Accordingly, holders of the Company’s common stock are not entitled to any appraisal or dissenters’ rights in connection with the merger.
Allegiance common stock is currently listed on the Nasdaq Global Market, a national securities exchange, and was so listed on the record date for the Allegiance special meeting. In addition, the holders of Allegiance common stock will receive shares of the Company’s common stock as consideration in the merger, which shares are currently listed on the Nasdaq Global Select Market, and are expected to continue to be so listed at the effective time. Accordingly, the holders of Allegiance common stock are not entitled to any appraisal or dissenters’ rights in connection with the merger.
Shareholder litigation could prevent or delay the closing of the merger or otherwise negatively affect the business and operations of the Company and Allegiance.
The Company and Allegiance may incur costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with the merger. Such litigation could have an adverse effect on the financial condition and results of operations of the Company and Allegiance and could prevent or delay the consummation of the merger.
The merger agreement limits the Company’s ability to pursue alternatives to the merger and may discourage other companies from trying to acquire the Company.
The merger agreement contains “no shop” covenants that restrict each of the Company’s and Allegiance’s ability to, directly or indirectly, initiate, solicit, knowingly encourage or knowingly facilitate any inquiries or proposals with respect to any acquisition proposal, engage or participate in any negotiations with any person concerning any acquisition proposal, provide any confidential or nonpublic information or data to, or have or participate in any discussions with, any person relating to any acquisition proposal, subject to certain exceptions, or, unless the merger agreement has been terminated in accordance with its terms, approve or enter into any term sheet,
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letter of intent, commitment, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement or other agreement in connection with or relating to any acquisition proposal.
The merger agreement further provides that, during the 12-month period following the termination of the merger agreement under specified circumstances, including the entry into a definitive agreement or consummation of a transaction with respect to an alternative acquisition proposal, the Company or Allegiance may be required to pay to the other party a cash termination fee equal to $32.5 million.
These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of the Company from considering or proposing that acquisition.
The merger agreement subjects the Company to certain restrictions on its business activities prior to the effective time.
The merger agreement subjects the Company and Allegiance to certain restrictions on their respective business activities prior to the effective time. The merger agreement obligates each of the Company and Allegiance to, and to cause each of its subsidiaries to, subject to certain specified exceptions, conduct its business in the ordinary course in all material respects and use reasonable best efforts to maintain and preserve intact its business organization, employees and advantageous business relationships. These restrictions could prevent the Company from pursuing certain business opportunities that arise prior to the effective time and are outside the ordinary course of business.
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 instability of the oil and gas industry, could adversely impact the Company’s borrowers and cause losses 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
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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 of 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.
The Company’s primary markets in Houston, Beaumont and Dallas experienced limitations on commercial activity since the outbreak of COVID-19. 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 if COVID-19 cases increase. These challenging market conditions in which borrowers operate could cause 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 team, the inefficiency caused by remote working 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 offered deferral and forbearance plans and 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.
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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, 2021, $2.1 billion, or 73.6%, 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, 2021, $1.4 billion, or 48.0%, 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, 2021, the Company’s nonresidential real estate loans included $545.7 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, 2021, the Company’s nonresidential real estate loans included $479.3 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, 2021, $460.7 million, or 16.0%, 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.
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, 2021, commercial and industrial loans were $634.4 million, or 22.0%, 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.
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The Company’s largest loan and deposit relationships currently make up significant percentages of the loan portfolio and deposits.
As of December 31, 2021, the Company’s 15 largest loan relationships, including related entities, totaled $346.8 million, or 12.1%, 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, 2021, the Company’s 15 largest depositors, including related entities, totaled $656.4 million, or 17.1%, 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) impacts the Houston, Beaumont or Dallas metropolitan areas negatively. 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, 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.
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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 FHLB Dallas, 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 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.
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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, 2021, 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.
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.
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Potential repurchases 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 2021, 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; |
| ● | 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. |
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.
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Risks Related to the Economy and the Company’s Industry
The Company could be adversely impacted by natural disasters, pandemics and other catastrophes.
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 volatility in oil prices and downturns in the energy industry.
The economy in Texas is dependent on the energy industry. Volatile oil prices, instability in the industry 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. The oil and gas industry experienced a sustained downturn due to low oil and gas prices. Although oil prices increased in 2022, the oil and gas industry has remained unstable and prolonged instability 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, 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. The oil and gas industry 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:
| ● | 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 conducts 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.
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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 it 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, credit reports, audit 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
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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. Negative public opinion could result from the Company’s actual or alleged conduct in any number of activities, including (i) lending practices, (ii) expansion strategy, (iii) product and service offerings, (iv) corporate governance, (v) regulatory compliance, (vi) mergers and acquisitions, (vii) disclosure, (viii) sharing or inadequate protection of customer information, (ix) successful or attempted cyber-attacks against the Company, its customers or its third-party partners or vendors and (x) failure to discharge any publicly announced commitments to employees or environmental, social and governance initiatives or to respond adequately to social and sustainability concerns from the viewpoint of its stakeholders from actions taken by government regulators and community organizations in response to the Company’s conduct. 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.
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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. 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.
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 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.
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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.
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
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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.
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
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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.
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:
| ● | actual or anticipated fluctuations in operating results, financial condition or asset quality; |
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| ● | 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.
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 26.0% of its outstanding common stock as a group at December 31, 2021. 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
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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.
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.”
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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 a director 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 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.
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Item 2. Properties
The Bank operates 34 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 | 1 | 1 | — | |||
Boling | 1 | 1 | — | |||
Crosby | 2 | 2 | — | |||
Houston | 8 | 3 | 5 | |||
Humble | 1 | 1 | — | |||
Pasadena | 1 | 1 | — | |||
Sugar Land | 1 | 1 | — | |||
Tomball | 1 | 1 | — | |||
Wharton | 1 | — | 1 | |||
The Woodlands | 1 | — | 1 | |||
18 | 11 | 7 | ||||
Beaumont market: | ||||||
Beaumont | 4 | 2 | 2 | |||
Buna | 1 | 1 | — | |||
Jasper | 1 | 1 | — | |||
Kirbyville | 1 | 1 | — | |||
Lumberton | 1 | 1 | — | |||
Nederland | 1 | 1 | — | |||
Newton | 1 | 1 | — | |||
Orange | 1 | 1 | — | |||
Port Arthur | 1 | 1 | — | |||
Silsbee | 1 | 1 | — | |||
Vidor | 1 | 1 | — | |||
Woodville | 1 | 1 | — | |||
15 | 13 | 2 | ||||
Dallas market: | ||||||
Preston Center | 1 | — | 1 | |||
Total | 34 | 24 | 10 |
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 10 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.
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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 18, 2022, there were approximately 511 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.
Unregistered Sales of Equity Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In 2020, the Company’s board of directors authorized a share repurchase program, or the 2020 Repurchase Program, under which the Company could repurchase up to $40.0 million of the Company’s common stock starting October 1, 2020 through September 30, 2021. In 2021, the Company’s board of directors authorized a share repurchase program, or the 2021 Repurchase Program, under which the Company may repurchase up to $40.0 million of the Company’s common stock starting September 16, 2021 through September 30, 2022.
Repurchases under the 2021 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 2021, 214,219 shares were repurchased under the Company’s share repurchase programs at an average price of $27.19 per share and during 2020, 431,814 shares were repurchased under the Company’s share repurchase programs at an average price of $20.62 per share. Shares repurchased in 2021 and 2020 were retired and returned to the status of authorized but unissued shares.
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The following table provides information with respect to purchases of shares of the Company’s common stock during the three months ended December 31, 2021 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.
Shares Purchased | Number of Shares That | ||||||||
Total Number of | Average Price | as Part of Publicly | May Yet be Purchased | ||||||
Period | Shares Purchased(1) | Paid per Share | Announced Plan(2) | Under the Plan(3) | |||||
October 1, 2021 - October 31, 2021 | — | — | — | 1,470,588 | |||||
November 1, 2021 - November 30, 2021 | 6,430 | $ 28.36 | — | 1,438,849 | |||||
December 1, 2021 - December 31, 2021 | 5,526 | $ 28.68 | — | 1,379,310 | |||||
| (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) | No shares were purchased under the 2021 Repurchase Plan during the fourth quarter of 2021. |
| (3) | Computed based on the closing share price of the Company’s common stock as of the end of the periods shown. |
Stock Performance Graph
The following performance graph compares total shareholder’s 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 2021, 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.
11/7/17 | 12/17 | 12/18 | 12/19 | 12/20 | 12/21 | |||||||||||||
CBTX, Inc. | $ | 100.00 | $ | 106.11 | $ | 105.84 | $ | 113.55 | $ | 94.99 | $ | 109.99 | ||||||
NASDAQ Composite | 100.00 | 102.83 | 99.91 | 136.58 | 197.92 | 241.82 | ||||||||||||
NASDAQ Bank | 100.00 | 101.83 | 84.68 | 105.03 | 97.19 | 138.69 | ||||||||||||
Item 6. Reserved
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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 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 continued impact of the COVID-19 pandemic (including risks related to its customers’ credit quality, deferrals and modifications to loans); |
| ● | 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, in the financial services industry and within the Company’s primary markets; |
| ● | sustained instability of the oil and gas industry in general 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; |
| ● | 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 Paycheck Protection Program, or 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- or fourth-party servicers; |
| ● | the failure of certain third- or fourth-party vendors to perform; |
| ● | 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; |
47
| ● | the costs, effects and results of regulatory examinations, investigations, or reviews or the ability to obtain required regulatory approvals; |
| ● | changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting, tax, trade, monetary and fiscal matters; |
| ● | governmental or regulatory responses to the COVID-19 pandemic that may 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; |
| ● | the possible substantial costs related to the merger and integration; |
| ● | the risk that the cost savings and any revenue synergies from the merger may not be fully realized or may take longer than anticipated to be realized; |
| ● | the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; |
| ● | the ability to retain the Company’s or Allegiance personnel successfully after the merger is completed; |
| ● | the ability by each of Allegiance and the Company to obtain required governmental approvals of the merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction); |
| ● | the occurrence of any event, change or other circumstances that could give rise to the right of us and/or Allegiance to terminate the merger agreement with respect to the merger; |
| ● | disruption to the parties’ businesses as a result of the announcement and pendency of the merger; |
| ● | the risks related to the Company’s assumption of certain of Allegiance’s outstanding debt obligations and the combined company’s level of indebtedness following the completion of the merger; |
| ● | the dilution caused by the Company’s issuance of additional shares of its common stock in the merger; |
| ● | the failure of the closing conditions in the merger agreement to be satisfied, or any unexpected delay in closing the merger; |
| ● | the failure to obtain the necessary approvals by the shareholders of Allegiance or the Company; |
| ● | reputational risk and the reaction of each company’s customers, suppliers, employees or other business partners to the merger; |
| ● | and other risks, uncertainties, and factors that are discussed from time to time in the Company’s reports and documents filed with the SEC. |
Pending Merger
On November 8, 2021, Allegiance (NASDAQ:ABTX) and the Company jointly announced that they entered into a definitive merger agreement pursuant to which the companies will combine in an all-stock merger of equals. Under the terms of the definitive merger agreement, Allegiance shareholders will receive 1.4184 shares of the Company’s common stock for each share of Allegiance common stock they own. Based on the number of outstanding shares of Allegiance and the Company as of November 5, 2021, Allegiance shareholders will own approximately 54% and the Company’s shareholders will own approximately 46% of the combined company. The companies have submitted the required regulatory filings and the parties anticipate closing in the second quarter of 2022.
There are or will be important factors that could cause the actual results of the merger 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”.
| ● | the risk that the cost savings and any revenue synergies from the merger may not be fully realized or may take longer than anticipated to be realized; |
| ● | disruption to the parties’ businesses as a result of the announcement and pendency of the merger; |
| ● | the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; |
| ● | the risk that the integration of each party’s operations will be materially delayed or will be more costly or difficult than expected or that the parties are otherwise unable to successfully integrate each party’s businesses into the other’s businesses; |
48
| ● | the failure to obtain the necessary approvals by the shareholders of Allegiance or the Company; |
| ● | the amount of the costs, fees, expenses and charges related to the merger; the ability by each of Allegiance and the Company to obtain required governmental approvals of the merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction); |
| ● | reputational risk and the reaction of each company’s customers, suppliers, employees or other business partners to the merger; the failure of the closing conditions in the merger agreement to be satisfied, or any unexpected delay in closing the merger; |
| ● | the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; |
| ● | the dilution caused by the Company’s issuance of additional shares of its common stock in the merger; general competitive, economic, political and market conditions; |
| ● | and other factors that may affect future results of the Company and Allegiance, including changes in asset quality and credit risk; |
| ● | the inability to sustain revenue and earnings growth; |
| ● | changes in interest rates and capital markets; |
| ● | inflation; customer borrowing, repayment, investment and deposit practices; |
| ● | the impact, extent and timing of technological changes; |
| ● | capital management activities; and other actions of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and OCC and legislative and regulatory actions and reforms; |
| ● | and other risks, uncertainties, and factors that are discussed from time to time in the Company’s reports and documents filed with the SEC. |
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with Part IV.—Item 15.—Exhibits and Financial Statement Schedules” 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.
Allegiance and the Company disclaim any obligation and do not intend to update or revise any forward-looking statements contained in this Annual Report on Form 10-K, which speak only as of the date hereof, whether as a result of new information, future events or otherwise, except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.
Information about the Merger and Where to Find It
This Annual Report on Form 10-K does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval.
In connection with the proposed merger, the Company has filed a registration statement on Form S-4 with the SEC to register the shares of the Company’s common stock that will be issued to Allegiance shareholders in connection with the merger. The registration statement will include a joint proxy statement/prospectus and other relevant materials in connection with the proposed merger, which will be sent to the shareholders of the Company and Allegiance seeking their approval of the proposed merger.
WE URGE INVESTORS AND SECURITY HOLDERS TO READ THE REGISTRATION STATEMENT ON FORM S-4, THE JOINT PROXY STATEMENT/PROSPECTUS INCLUDED WITHIN THE REGISTRATION STATEMENT ON FORM S-4 AND ANY OTHER RELEVANT DOCUMENTS FILED OR TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IN CONNECTION WITH THE PROPOSED MERGER BECAUSE
49
THEY CONTAIN IMPORTANT INFORMATION ABOUT ALLEGIANCE, THE COMPANY AND THE PROPOSED MERGER.
Investors and security holders may obtain free copies of these documents, once they are filed, and other documents filed with the SEC by Allegiance or the Company through the website maintained by the SEC at https://www.sec.gov. Documents filed with the SEC by the Company will be available free of charge by accessing the Company’s website at www.communitybankoftx.com under the heading “Investor Relations” or, alternatively, by directing a request by mail or telephone to CBTX, Inc., 9 Greenway Plaza, Suite 110, Houston, Texas 77046, Attn: Investor Relations, (713) 210-7600, and documents filed with the SEC by Allegiance will be available free of charge by accessing Allegiance’s website at www.allegiancebank.com under the heading “Investor Relations” or, alternatively, by directing a request by mail or telephone to Allegiance Bancshares, Inc., 8847 West Sam Houston Parkway, N., Suite 200, Houston, Texas 77040, (281) 894-3200.
Participants in the Solicitation
The Company, Allegiance and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the shareholders of the Company and Allegiance in connection with the proposed merger. Certain information regarding the interests of these participants and a description of their direct or indirect interests, by security holdings or otherwise, will be included in the joint proxy statement/prospectus regarding the proposed merger when it becomes available. Additional information about the directors and executive officers of the Company and their ownership of the Company’s common stock is set forth in the Company’s proxy statement for its annual meeting of shareholders, filed with the SEC on April 14, 2021. Additional information about the directors and executive officers of Allegiance and their ownership of Allegiance’s common stock is set forth in Allegiance’s proxy statement for its annual meeting of shareholders, filed with the SEC on March 10, 2021. These documents can be obtained free of charge from the sources described above.
Overview
The Company operates through one segment. 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, 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.
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On September 7, 2021, the Company was informed by the OCC that it terminated the Formal Agreement, between the Bank and the OCC regarding BSA/AML compliance matters. On December 16, 2021, the Bank entered into an OCC Consent Order regarding BSA/AML compliance matters. Under the OCC Consent Order, the Bank paid a civil money penalty of $1.0 million.
On December 15, 2021, the Bank entered into the FinCEN Consent Order. Under the terms of the FinCEN Consent Order, the Bank paid a civil money penalty of $8.0 million; provided, however, that FinCEN agreed to credit the Bank the $1.0 million civil money penalty imposed by the OCC described above. As a result, the Bank paid an aggregate sum of $8.0 million under the OCC Consent Order and the FinCEN Consent Order. The OCC Consent Order and the FinCEN Consent Order each settle the civil money proceedings against the Bank initiated by the OCC and FinCEN. See “Item 1A.—Risk Factors.”
Information Regarding COVID-19 Impact and Uncertain Economic Outlook
The COVID-19 pandemic and actions taken in response to it, combined with the sustained instability in the oil and gas industry, 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. Although oil prices increased in January 2022, the industry remains in a downturn. As a result of these factors and the impact on the loan portfolio, the Company increased the ACL and provision for credit losses during 2020, which negatively impacted the Company’s net income and due to improvements in the national and local economies and related forecasts and the reduction of the loan portfolio, the Company reduced the ACL in during 2021. The future impact of the COVID-19 pandemic is uncertain but could materially affect the Company’s future financial and operational results. See “Part I.—Item 1A.—Risk Factors.”
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The risk grades of the Company’s loan portfolio, past due loans, loans individually evaluated and nonperforming loans, or loan performance indicators, as of the dates indicated below were as follows:
December 31, | September 30, | June 30, | March 31, | December 31, | |||||||||||
(Dollars in thousands) | 2021 | 2021 | 2021 | 2021 | 2020 | ||||||||||
Risk grades: | |||||||||||||||
Pass | $ | 2,783,385 | $ | 2,526,395 | $ | 2,645,811 | $ | 2,810,248 | $ | 2,835,768 | |||||
Special mention |
| 12,807 |
| 4,661 |
| 14,276 |
|
| 10,508 |
|
| 14,088 | |||
Substandard |
| 80,235 |
| 86,501 |
| 80,535 |
|
| 83,032 |
|
| 86,814 | |||
Total gross loans | $ | 2,876,427 | $ | 2,617,557 | $ | 2,740,622 |
| $ | 2,903,788 |
| $ | 2,936,670 | |||
Past due loans: | |||||||||||||||
30 to 59 days past due | $ | 905 | $ | 2,755 | $ | 39 |
| $ | 1,377 |
| $ | 1,463 | |||
60 to 89 days past due |
| 34 |
| 143 |
| — |
|
| 495 |
|
| 2,074 | |||
90 days or greater past due | 197 | 104 | 217 | 4,019 | 2,375 | ||||||||||
Total past due loans | $ | 1,136 | $ | 3,002 | $ | 256 |
| $ | 5,891 |
| $ | 5,912 | |||
Loans individually evaluated: | |||||||||||||||
Accruing troubled debt restructurings | $ | 30,709 | $ | 31,656 | $ | 31,789 |
| $ | 27,709 |
| $ | 32,880 | |||
Non-accrual troubled debt restructurings |
| 20,019 |
| 17,834 |
| 18,196 |
|
| 18,913 |
|
| 19,173 | |||
Total troubled debt restructurings | 50,728 | 49,490 | 49,985 | 46,622 | 52,053 | ||||||||||
Other non-accrual | 2,549 | 2,751 | 2,777 | 4,595 | 4,844 | ||||||||||
Other accruing | 5,995 | 5,260 | 836 | 836 | 746 | ||||||||||
Total loans individually evaluated | $ | 59,272 | $ | 57,501 | $ | 53,598 |
| $ | 52,053 |
| $ | 57,643 | |||
Nonperforming assets: | |||||||||||||||
Nonaccrual loans | $ | 22,568 | $ | 20,585 | $ | 20,973 | $ | 23,508 | $ | 24,017 | |||||
Accruing loans 90 or more days past due | — | — | — | — | — | ||||||||||
Total nonperforming loans | 22,568 | 20,585 | 20,973 | 23,508 | 24,017 | ||||||||||
Foreclosed assets | — | — | — | 106 | — | ||||||||||
Total nonperforming assets | $ | 22,568 | $ | 20,585 | $ | 20,973 | $ | 23,614 | $ | 24,017 | |||||
The table above shows the trend of loan performance indicators over the past five reporting periods. Loan performance indicators reflected worsening loan performance 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. Substantially all of the loan performance indicators have shown improvement during 2021. Although national and local economies and economic forecasts improved during 2021, the COVID-19 pandemic continues to have an ongoing impact through supply disruptions and other uncertainties and the oil and gas industry is still experiencing instability. If the national and/or local economies and economic forecasts and loan performance indicators worsen in the future, increases in the ACL through additional provisions for credit losses may occur which would negatively impact net income.
In support of customers impacted by the COVID-19 pandemic, the Company offered relief through payment deferrals during 2020 and 2021. A majority of borrowers with deferral arrangements have returned to normal contractual payment schedules and the Company continues to provide deferred payment arrangements to a small number of businesses. The Company had 7 loans subject to such deferral arrangements with outstanding principal balances of $18.5 million at December 31, 2021 and 21 loans on deferral arrangements with total outstanding principal balances totaling $38.4 million at December 31, 2020.
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During the years ended December 31, 2021 and 2020, the Company participated in PPP lending under the CARES Act, which facilitates loans to small businesses 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.”
Results of Operations
Year Ended December 31, 2021 vs Year Ended December 31, 2020
The increase in net income during the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to fluctuations in the provision (recapture) for credit losses, increased noninterest expense, decreased net interest income, increased noninterest income and increased income tax expense. See further analysis of the material fluctuations in the related discussions that follow.
Years Ended December 31, | |||||||||||
(Dollars in thousands) |
| 2021 | 2020 | Increase (Decrease) | |||||||
Interest income | $ | 132,093 | $ | 138,693 | $ | (6,600) | (4.8)% | ||||
Interest expense | 5,926 | 10,087 | (4,161) | (41.3)% | |||||||
Net interest income | 126,167 | 128,606 | (2,439) | (1.9)% | |||||||
Provision (recapture) for credit losses | (10,773) | 18,892 | (29,665) | (157.0)% | |||||||
Noninterest income | 16,264 | 14,781 | 1,483 | 10.0% | |||||||
Noninterest expense | 107,686 | 92,100 | 15,586 | 16.9% | |||||||
Income before income taxes | 45,518 | 32,395 | 13,123 | 40.5% | |||||||
Income tax expense | 9,920 | 6,034 | 3,886 | 64.4% | |||||||
Net income | $ | 35,598 | $ | 26,361 | $ | 9,237 | 35.0% | ||||
Earnings per share - basic | $ | 1.46 | $ | 1.06 | |||||||
Earnings per share - diluted | 1.45 | 1.06 | |||||||||
Dividends per share | 0.52 | 0.40 | |||||||||
Net Interest Income
Net interest income decreased $2.4 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to lower average loans, lower rates on interest-earning assets and higher average interest-bearing deposits, which was partially offset by higher average securities and interest-bearing deposits at other financial institutions and lower rates on interest-bearing deposits.
The yield on interest-earning assets was 3.43% for the year ended December 31, 2021, compared to 3.98% for the year ended December 31, 2020. The cost of interest-bearing liabilities was 0.31% for the year ended December 31, 2021 and 0.57% for the year ended December 31, 2020. The Company’s net interest margin on a tax equivalent basis was 3.31% for the year ended December 31, 2021, compared to 3.73% for the year ended December 31, 2020. 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 2021. Although competitive pressures have caused the costs of interest-bearing deposits to not drop in tandem with decreases in market rates for interest-earning assets, they remain a low-cost source of funds, as compared to other sources of funds.
The yield on loans for the years ended December 31, 2021 and 2020 was impacted by the Company’s participation in PPP financing. The Company recognized a net yield of 5.80% and 2.79% on PPP loans during the years ended December 31, 2021 and 2020, respectively. Without PPP loans, the Company’s average yield on loans would have been 4.39% and 4.75% for those same periods.
Interest earned on PPP loans for the years ended December 31, 2021 and 2020 included the recognition of $8.4 million and $4.0 million, respectively, of origination fee income, net of associated costs, related to PPP loans. At December 31, 2021 and 2020, the Company had $1.5 million and $4.2 million of deferred loan fees and costs related to PPP loans outstanding.
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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 below.
Years Ended December 31, | ||||||||||||||||
2021 | 2020 | |||||||||||||||
Average | Interest | Average | Average | Interest | Average | |||||||||||
Outstanding | Earned/ | Yield/ | Outstanding | Earned/ | Yield/ | |||||||||||
(Dollars in thousands) | Balance | Interest Paid | Rate | Balance | Interest Paid | Rate | ||||||||||
Assets | ||||||||||||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
| ||||||
Total loans(1) | $ | 2,784,663 | $ | 124,605 |
| 4.47% | $ | 2,862,911 | $ | 131,678 |
| 4.60% | ||||
Securities |
| 323,952 |
| 5,736 |
| 1.77% |
| 236,625 | 4,768 |
| 2.02% | |||||
Interest-bearing deposits at other financial institutions |
| 731,996 |
| 1,123 |
| 0.15% |
| 366,628 | 1,568 |
| 0.43% | |||||
Equity investments |
| 14,350 |
| 629 |
| 4.38% |
| 14,874 | 679 |
| 4.57% | |||||
Total interest-earning assets |
| 3,854,961 | $ | 132,093 |
| 3.43% |
| 3,481,038 | $ | 138,693 |
| 3.98% | ||||
Allowance for credit losses for loans |
| (37,892) |
|
|
|
|
| (35,448) |
|
|
|
| ||||
Noninterest-earning assets |
| 316,575 |
|
|
|
|
| 312,672 |
|
|
|
| ||||
Total assets | $ | 4,133,644 |
|
|
|
| $ | 3,758,262 |
|
|
|
| ||||
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing deposits | $ | 1,870,148 | $ | 5,024 |
| 0.27% | $ | 1,703,543 | $ | 9,168 |
| 0.54% | ||||
Federal Home Loan Bank advances |
| 50,000 |
| 885 |
| 1.77% |
| 55,205 |
| 903 |
| 1.64% | ||||
Other interest-bearing liabilities |
| 8 |
| 17 |
| — |
| 1,631 |
| 16 |
| 0.98% | ||||
Total interest-bearing liabilities |
| 1,920,156 | $ | 5,926 |
| 0.31% |
| 1,760,379 | $ | 10,087 |
| 0.57% | ||||
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Noninterest-bearing deposits |
| 1,603,006 |
|
|
|
|
| 1,404,027 |
|
|
|
| ||||
Other liabilities |
| 51,885 |
|
|
|
|
| 50,464 |
|
|
|
| ||||
Total noninterest-bearing liabilities |
| 1,654,891 |
|
|
|
|
| 1,454,491 |
|
|
|
| ||||
Shareholders’ equity |
| 558,597 |
|
|
|
|
| 543,392 |
|
|
|
| ||||
Total liabilities and shareholders’ equity | $ | 4,133,644 |
|
|
|
| $ | 3,758,262 |
|
|
|
| ||||
Net interest income |
|
| $ | 126,167 |
|
|
|
| $ | 128,606 |
|
| ||||
Net interest spread(2) |
|
|
|
|
| 3.12% |
|
|
|
|
| 3.41% | ||||
Net interest margin(3) |
|
|
|
|
| 3.27% |
|
|
|
|
| 3.69% | ||||
Net interest margin - tax equivalent(4) |
|
|
|
|
| 3.31% |
|
|
|
|
| 3.73% | ||||
| (1) | Includes average outstanding balances related to loans held for sale. |
| (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 $1.4 million and $1.1 million for the years ended December 31, 2021 and 2020, respectively, were computed using a federal income tax rate of 21%. |
54
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.
Year Ended December 31, 2021, | ||||||||||||
Compared to Year Ended December 31, 2020 | ||||||||||||
| Increase (Decrease) due to |
| ||||||||||
(Dollars in thousands) | Rate | Volume | Days | Total | ||||||||
Interest-earning assets: | ||||||||||||
Total loans | $ | (3,113) | $ | (3,599) | $ | (361) | $ | (7,073) | ||||
Securities |
| (783) |
| 1,764 | (13) |
| 968 | |||||
Interest-bearing deposits at other financial institutions |
| (2,012) |
| 1,571 | (4) |
| (445) | |||||
Equity investments |
| (24) |
| (24) | (2) |
| (50) | |||||
Total decrease in interest income | (5,932) | (288) | (380) | (6,600) | ||||||||
Interest-bearing liabilities: |
|
|
|
|
|
| ||||||
Interest-bearing deposits | (5,019) | 900 | (25) | (4,144) | ||||||||
Federal Home Loan Bank advances |
| 69 |
| (85) | (2) |
| (18) | |||||
Other interest-bearing liabilities |
| 2 |
| (1) | — |
| 1 | |||||
Total increase (decrease) in interest expense | (4,948) | 814 | (27) | (4,161) | ||||||||
Decrease in net interest income | $ | (984) | $ | (1,102) | $ | (353) | $ | (2,439) | ||||
Provision (Recapture) for Credit Losses
The provision (recapture) 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 recapture of credit losses of $10.8 million in 2021 primarily resulted from the adjustment of certain qualitative factors used to determine the ACL due to the continued improvements in the national and local economies and forecast assumptions. The provision for credit losses of $18.9 million in 2020 primarily resulted from the impact of the COVID-19 pandemic, sustained instability of the oil and gas industry, an increase in adversely graded loans and an increase in charge-offs of $3.1 million from 2019 to 2020.
The ACL for loans was $31.3 million, or 1.09%, of loans excluding loans held for sale at December 31, 2021 and $40.6 million, or 1.39%, at December 31, 2020. The decrease in the ACL for loans during 2021, as compared to 2020, was primarily the result of the adjustment of certain qualitative factors utilized in the Company’s ACL estimate due to the continued improvements in the national and local economies and forecast assumptions.
Noninterest Income
The following table presents components of noninterest income for the years ended December 31, 2021 and 2020 and the period-over-period changes in the categories of noninterest income:
Years Ended December 31, | ||||||||||
(Dollars in thousands) | 2021 | 2020 | Increase (Decrease) | |||||||
Deposit account service charges | $ | 5,082 | $ | 5,026 | $ | 56 |
| 1.1% | ||
Card interchange fees |
| 4,200 |
| 3,831 |
| 369 |
| 9.6% | ||
Earnings on bank-owned life insurance |
| 3,488 |
| 2,422 |
| 1,066 |
| 44.0% | ||
Net gain on sales of assets |
| 1,828 |
| 755 |
| 1,073 |
| 142.1% | ||
Other |
| 1,666 |
| 2,747 |
| (1,081) |
| (39.4)% | ||
Total noninterest income | $ | 16,264 | $ | 14,781 | $ | 1,483 |
| 10.0% | ||
The increase of $1.5 million for 2021, compared to 2020, was primarily due to gains of $1.9 million related to bank-owned life insurance policies recorded during 2021, compared to gains of $769,000 related to bank-owned life insurance policies recorded during 2020. Net gains on sales of assets increased $1.1 million from $755,000 for 2020 to $1.8 million for 2021.
55
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) | 2021 | 2020 | Increase (Decrease) | ||||||||
Salaries and employee benefits | $ | 60,531 | $ | 55,415 | $ | 5,116 |
| 9.2% | |||
Occupancy expense | 10,384 | 10,106 | 278 |
| 2.8% | ||||||
Professional and director fees | 6,467 | 8,348 | (1,881) |
| (22.5)% | ||||||
Data processing and software | 6,582 | 5,369 | 1,213 |
| 22.6% | ||||||
Regulatory fees | 9,901 | 1,798 | 8,103 |
| 450.7% | ||||||
Advertising, marketing and business development | 1,551 | 1,500 | 51 |
| 3.4% | ||||||
Telephone and communications | 2,000 | 1,752 | 248 |
| 14.2% | ||||||
Security and protection expense | 1,791 | 1,447 | 344 |
| 23.8% | ||||||
Amortization of intangibles | 738 | 846 | (108) |
| (12.8)% | ||||||
Other expenses | 7,741 | 5,519 | 2,222 |
| 40.3% | ||||||
Total noninterest expense | $ | 107,686 | $ | 92,100 | $ | 15,586 |
| 16.9% | |||
The increase in noninterest expense of $15.6 million for 2021, compared to 2020, was primarily due to the payment of $8.0 million in civil money penalties to resolve BSA/AML compliance matters included in regulatory fees, $1.7 million of costs related to the pending merger with Allegiance in 2021 included in other expenses and a $5.1 million increase in salaries and employee benefits. The increase in salaries and employee benefits during 2021, compared to 2020, resulted from increased claims under the Company’s self-funded health plan, increased bonus expense, increased stock-based compensation expense and increased salary expense. Professional and director fees decreased $1.9 million primarily due to lower consulting fees incurred in 2021 associated with BSA/AML compliance matters.
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. Income tax expense and effective tax rates for the periods shown below were as follows:
Years Ended December 31, | |||||
(Dollars in thousands) | 2021 | 2020 | |||
Income tax expense | $ 9,920 | $ 6,034 | |||
Effective tax rate | 21.79% | 18.63% | |||
The differences between the federal statutory rate of 21% and the effective tax rates were largely attributable to permanent differences primarily related to tax exempt interest income and bank-owned life insurance earnings. The tax rate for the year ended December 31, 2021 was also impacted by the resolution of the BSA/AML compliance matters as the civil money penalty payments are not tax deductible.
56
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) |
| 2020 | 2019 | Increase (Decrease) | |||||||
Interest income | $ | 138,693 | $ | 153,395 | $ | (14,702) | (9.6)% | ||||
Interest expense | 10,087 | 17,407 | (7,320) | (42.1)% | |||||||
Net interest income | 128,606 | 135,988 | (7,382) | (5.4)% | |||||||
Provision for credit losses | 18,892 | 2,385 | 16,507 | 692.1% | |||||||
Noninterest income | 14,781 | 18,628 | (3,847) | (20.7)% | |||||||
Noninterest expense | 92,100 | 90,143 | 1,957 | 2.2% | |||||||
Income before income taxes | 32,395 | 62,088 | (29,693) | (47.8)% | |||||||
Income tax expense | 6,034 | 11,571 | (5,537) | (47.9)% | |||||||
Net income | $ | 26,361 | $ | 50,517 | $ | (24,156) | (47.8)% | ||||
Earnings per share - basic | $ | 1.06 | $ | 2.03 | |||||||
Earnings per share - diluted | 1.06 | 2.02 | |||||||||
Dividends per share | 0.40 | 0.40 | |||||||||
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.
57
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, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
Average | Interest | Average | Average | Interest | Average | |||||||||||
Outstanding | Earned/ | Yield/ | Outstanding | Earned/ | Yield/ | |||||||||||
(Dollars in thousands) | Balance | Interest Paid | Rate | Balance | Interest Paid | Rate | ||||||||||
Assets | ||||||||||||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
| ||||||
Total loans(1) | $ | 2,862,911 | $ | 131,678 |
| 4.60% | $ | 2,608,505 | $ | 141,388 |
| 5.42% | ||||
Securities |
| 236,625 |
| 4,768 |
| 2.02% |
| 233,543 | 5,954 |
| 2.55% | |||||
Other interest-earning assets |
| 366,628 |
| 1,568 |
| 0.43% |
| 243,349 | 5,333 |
| 2.19% | |||||
Equity investments |
| 14,874 |
| 679 |
| 4.57% |
| 14,852 | 720 |
| 4.85% | |||||
Total interest-earning assets |
| 3,481,038 | $ | 138,693 |
| 3.98% |
| 3,100,249 | $ | 153,395 |
| 4.95% | ||||
Allowance for credit losses for loans |
| (35,448) |
|
|
|
|
| (24,971) |
|
|
|
| ||||
Noninterest-earning assets |
| 312,672 |
|
|
|
|
| 299,387 |
|
|
|
| ||||
Total assets | $ | 3,758,262 |
|
|
|
| $ | 3,374,665 |
|
|
|
| ||||
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest-bearing deposits | $ | 1,703,543 | $ | 9,168 |
| 0.54% | $ | 1,566,038 | $ | 15,999 |
| 1.02% | ||||
Federal Home Loan Bank advances |
| 55,205 |
| 903 |
| 1.64% |
| 61,589 |
| 1,386 |
| 2.25% | ||||
Other interest-bearing liabilities | 1,631 | 16 | 0.98% | 1,046 | 22 | 2.10% | ||||||||||
Total interest-bearing liabilities |
| 1,760,379 | $ | 10,087 |
| 0.57% |
| 1,628,673 | $ | 17,407 |
| 1.07% | ||||
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Noninterest-bearing deposits |
| 1,404,027 |
|
|
|
|
| 1,193,527 |
|
|
|
| ||||
Other liabilities |
| 50,464 |
|
|
|
|
| 37,458 |
|
|
|
| ||||
Total noninterest-bearing liabilities |
| 1,454,491 |
|
|
|
|
| 1,230,985 |
|
|
|
| ||||
Shareholders’ equity |
| 543,392 |
|
|
|
|
| 515,007 |
|
|
|
| ||||
Total liabilities and shareholders’ equity | $ | 3,758,262 |
|
|
|
| $ | 3,374,665 |
|
|
|
| ||||
Net interest income |
|
| $ | 128,606 |
|
|
|
| $ | 135,988 |
|
| ||||
Net interest spread(2) |
|
|
|
|
| 3.41% |
|
|
|
|
| 3.88% | ||||
Net interest margin(3) |
|
|
|
|
| 3.69% |
|
|
|
|
| 4.39% | ||||
Net interest margin - tax equivalent(4) |
|
|
|
|
| 3.73% |
|
|
|
|
| 4.42% | ||||
| (1) | Includes average outstanding balances related to loans held for sale. |
| (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%. |
58
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.
Year Ended December 31, 2020, | ||||||||||||
Compared to Year Ended December 31, 2019 | ||||||||||||
| Increase (Decrease) due to |
| ||||||||||
(Dollars in thousands) | Rate | Volume | Days | Total | ||||||||
Interest-earning assets: | ||||||||||||
Total loans | $ | (23,886) | $ | 13,789 | $ | 387 | $ | (9,710) | ||||
Securities |
| (1,281) |
| 79 | 16 |
| (1,186) | |||||
Other interest-earning assets |
| (6,480) |
| 2,700 | 15 |
| (3,765) | |||||
Equity investments |
| (44) |
| 1 | 2 |
| (41) | |||||
Total increase (decrease) in interest income | (31,691) | 16,569 | 420 | (14,702) | ||||||||
Interest-bearing liabilities: |
|
|
|
|
|
| ||||||
Interest-bearing deposits | (8,278) | 1,403 | 44 | (6,831) | ||||||||
Federal Home Loan Bank advances |
| (343) |
| (144) | 4 |
| (483) | |||||
Other interest-bearing liabilities |
| (8) |
| 2 | — |
| (6) | |||||
Total increase (decrease) in interest expense | (8,629) | 1,261 | 48 | (7,320) | ||||||||
Increase (decrease) in net interest income | $ | (23,062) | $ | 15,308 | $ | 372 | $ | (7,382) | ||||
Provision for Credit Losses
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:
Years Ended December 31, | |||||||||||
(Dollars in thousands) | 2020 | 2019 | Increase (Decrease) | ||||||||
Deposit account service charges | $ | 5,026 | $ | 6,554 | $ | (1,528) |
| (23.3)% | |||
Card interchange fees |
| 3,831 |
| 3,720 |
| 111 |
| 3.0% | |||
Earnings on bank-owned life insurance |
| 2,422 |
| 5,011 |
| (2,589) |
| (51.7)% | |||
Net gain on sales of assets |
| 755 |
| 652 |
| 103 |
| 15.8% | |||
Other |
| 2,747 |
| 2,691 |
| 56 |
| 2.1% | |||
Total noninterest income | $ | 14,781 | $ | 18,628 | $ | (3,847) |
| (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
59
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.
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) | 2020 | 2019 | Increase (Decrease) | ||||||||
Salaries and employee benefits | $ | 55,415 | $ | 56,222 | $ | (807) |
| (1.4)% | |||
Occupancy expense | 10,106 | 9,506 | 600 |
| 6.3% | ||||||
Professional and director fees | 8,348 | 7,048 | 1,300 |
| 18.4% | ||||||
Data processing and software | 5,369 | 4,435 | 934 |
| 21.1% | ||||||
Regulatory fees | 1,798 | 1,138 | 660 |
| 58.0% | ||||||
Advertising, marketing and business development | 1,500 | 1,831 | (331) |
| (18.1)% | ||||||
Telephone and communications | 1,752 | 1,774 | (22) |
| (1.2)% | ||||||
Security and protection expense | 1,447 | 1,464 | (17) |
| (1.2)% | ||||||
Amortization of intangibles | 846 | 894 | (48) |
| (5.4)% | ||||||
Other expenses | 5,519 | 5,831 | (312) |
| (5.4)% | ||||||
Total noninterest expense | $ | 92,100 | $ | 90,143 | $ | 1,957 |
| 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 | 2020 | ||
Income tax expense | $ 6,034 | $ 11,571 | ||
Effective tax rate | 18.63% | 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 income and bank-owned life insurance earnings. 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.
60
Financial Condition
Total assets were $4.5 billion as of December 31, 2021, compared to $3.9 billion as of December 31, 2020. The increase of $536.8 million, or 13.6%, was primarily due to a $412.1 million increase in cash and cash equivalents and a $187.8 million increase in securities, partially offset by a $47.3 million decrease in net loans. Total liabilities were $3.9 billion as of December 31, 2021, compared to $3.4 billion as of December 31, 2020, an increase of $521.1 million primarily due to an increase in deposits of $529.5 million. See further analysis in the related discussions that follow.
December 31, | |||||||||||
(Dollars in thousands) |
| 2021 |
| 2020 | Increase (Decrease) | ||||||
Assets: | |||||||||||
Loans excluding loans held for sale | $ | 2,867,524 |
| $ | 2,924,117 | $ | (56,593) |
| (1.9)% | ||
Allowance for credit losses |
| (31,345) |
| (40,637) |
| (9,292) |
| (22.9)% | |||
Loans, net | 2,836,179 | 2,883,480 | (47,301) |
| (1.6)% | ||||||
Cash and cash equivalents | 950,146 | 538,007 | 412,139 |
| 76.6% | ||||||
Securities | 425,046 | 237,281 | 187,765 |
| 79.1% | ||||||
Premises and equipment, net | 58,417 | 61,152 | (2,735) | (4.5)% | |||||||
Goodwill | 80,950 | 80,950 | — | — | |||||||
Other intangibles | 3,658 | 4,171 | (513) | (12.3)% | |||||||
Loans held for sale | 164 | 2,673 | (2,509) | (93.9)% | |||||||
Operating lease right-to-use asset | 11,191 | 13,285 | (2,094) |
| (15.8)% | ||||||
Other assets | 120,250 | 128,218 | (7,968) |
| (6.2)% | ||||||
Total assets | $ | 4,486,001 | $ | 3,949,217 | $ | 536,784 |
| 13.6% | |||
Liabilities: |
| ||||||||||
Deposits | $ | 3,831,284 |
| $ | 3,301,794 | $ | 529,490 |
| 16.0% | ||
Federal Home Loan Bank advances | 50,000 | 50,000 | — |
| — | ||||||
Operating lease liabilities | 14,142 | 16,447 | (2,305) |
| (14.0)% | ||||||
Other liabilities | 28,450 | 34,525 | (6,075) |
| (17.6)% | ||||||
Total liabilities | 3,923,876 | 3,402,766 | 521,110 |
| 15.3% | ||||||
Shareholders' equity | 562,125 | 546,451 | 15,674 |
| 2.9% | ||||||
Total liabilities and shareholders' equity | $ | 4,486,001 | $ | 3,949,217 | $ | 536,784 |
| 13.6% | |||
Loan Portfolio
The loan portfolio by loan class as of the dates indicated below was as follows:
December 31, | |||||||||||
(Dollars in thousands) |
| 2021 |
| 2020 | Increase (Decrease) | ||||||
Commercial and industrial | $ | 634,384 |
| $ | 742,957 | $ | (108,573) |
| (14.6)% | ||
Real estate: |
|
|
|
|
|
|
|
| |||
Commercial real estate |
| 1,091,969 |
| 1,041,998 |
| 49,971 |
| 4.8% | |||
Construction and development |
| 460,719 |
| 522,705 |
| (61,986) |
| (11.9)% | |||
1-4 family residential |
| 277,273 |
| 239,872 |
| 37,401 |
| 15.6% | |||
Multi-family residential |
| 286,396 |
| 258,346 |
| 28,050 |
| 10.9% | |||
Consumer |
| 28,090 |
| 33,884 |
| (5,794) |
| (17.1)% | |||
Agriculture |
| 7,941 |
| 8,670 |
| (729) |
| (8.4)% | |||
Other |
| 89,655 |
| 88,238 |
| 1,417 |
| 1.6% | |||
Gross loans |
| 2,876,427 |
| 2,936,670 |
| (60,243) |
| (2.1)% | |||
Less deferred fees and unearned discount |
| (8,739) |
| (9,880) |
| (1,141) |
| (11.5)% | |||
Less loans held for sale | (164) | (2,673) | (2,509) |
| 93.9% | ||||||
Loans excluding loans held for sale | 2,867,524 | 2,924,117 | (56,593) |
| (1.9)% | ||||||
Less allowance for credit losses for loans | (31,345) | (40,637) | (9,292) |
| (22.9)% | ||||||
Loans, net | $ | 2,836,179 |
| $ | 2,883,480 | $ | (47,301) |
| (1.6)% | ||
61
Loans excluding loans held for sale were $2.9 billion at December 31, 2021 and $2.9 billion at December 31, 2020. The decrease of $56.6 million from December 31, 2020 to December 31, 2021 was primarily due to loan paydowns outpacing loan originations, which were partially offset by the purchase of loans from a third party totaling $81.4 million.
The decrease in loans was also impacted by the decrease in the Company’s PPP loans which were $52.8 million, net of deferred fees and unearned discounts, at December 31, 2021 and $271.2 million at December 31, 2020. The PPP program has been closed to further borrowings and the Company has not originated any new loans under this program since the second quarter of 2021. At December 31, 2021, the Company has 330 PPP loans outstanding and 260 of these were originated in 2021 and are not due for any payment until July 2022 at the earliest.
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 below were as follows:
|
| 1 Year |
| 5 Years | After |
| |||||||||
(Dollars in thousands) | 1 Year or Less | Through 5 Years | Through 15 Years | 15 years | Total | ||||||||||
December 31, 2021 | |||||||||||||||
Commercial and industrial: | |||||||||||||||
Fixed rate | $ | 68,658 | $ | 207,140 | $ | 4,328 | $ | — | $ | 280,126 | |||||
Variable rate | 178,917 | 124,374 | 50,471 | 496 | 354,258 | ||||||||||
247,575 | 331,514 | 54,799 | 496 | 634,384 | |||||||||||
Real estate: |
|
|
| ||||||||||||
Commercial real estate: |
| ||||||||||||||
Fixed rate | 58,134 | 485,587 | 25,410 | 1,388 | 570,519 | ||||||||||
Variable rate | 72,184 | 269,762 | 156,397 | 23,107 | 521,450 | ||||||||||
130,318 | 755,349 | 181,807 | 24,495 | 1,091,969 | |||||||||||
Construction and development: |
| ||||||||||||||
Fixed rate | 56,581 | 79,877 | 12,454 | 12,163 | 161,075 | ||||||||||
Variable rate | 61,378 | 221,903 | 6,530 | 9,833 | 299,644 | ||||||||||
117,959 | 301,780 | 18,984 | 21,996 | 460,719 | |||||||||||
1-4 family residential: |
| ||||||||||||||
Fixed rate | 5,847 | 35,660 | 21,782 | 91,633 | 154,922 | ||||||||||
Variable rate | 1,136 | 4,094 | 13,318 | 103,803 | 122,351 | ||||||||||
6,983 | 39,754 | 35,100 | 195,436 | 277,273 | |||||||||||
Multi-family residential: |
| ||||||||||||||
Fixed rate | 1,313 | 8,437 | 235,528 | — | 245,278 | ||||||||||
Variable rate | 3,385 | 36,465 | 1,268 | — | 41,118 | ||||||||||
4,698 | 44,902 | 236,796 | — | 286,396 | |||||||||||
Consumer: |
|
| |||||||||||||
Fixed rate | 6,946 | 8,501 | — | — | 15,447 | ||||||||||
Variable rate | 11,382 | 1,261 | — | — | 12,643 | ||||||||||
18,328 | 9,762 | — | — | 28,090 | |||||||||||
Agriculture: |
|
| |||||||||||||
Fixed rate | 4,961 | 825 | — | — | 5,786 | ||||||||||
Variable rate | 2,118 | 37 | — | — | 2,155 | ||||||||||
7,079 | 862 | — | — | 7,941 | |||||||||||
Other: | |||||||||||||||
Fixed rate | 1,041 | 1,744 | 393 | — | 3,178 | ||||||||||
Variable rate | 21,616 | 64,470 | 391 | — | 86,477 | ||||||||||
22,657 | 66,214 | 784 | — | 89,655 | |||||||||||
Total: | |||||||||||||||
Fixed rate loans | 203,481 | 827,771 | 299,895 | 105,184 | 1,436,331 | ||||||||||
Variable rate loans |
| 352,116 | 722,366 | 228,375 | 137,239 | 1,440,096 | |||||||||
Total gross loans | $ | 555,597 | $ | 1,550,137 | $ | 528,270 | $ | 242,423 | $ | 2,876,427 | |||||
62
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 below were as follows:
| December 31, | |||||
(Dollars in thousands) | 2021 | 2020 | ||||
Nonaccrual loans | $ | 22,568 | $ | 24,017 | ||
Accruing loans 90 or more days past due | — | — | ||||
Total nonperforming loans | 22,568 | 24,017 | ||||
Foreclosed assets | — | — | ||||
Total nonperforming assets | $ | 22,568 | $ | 24,017 | ||
Total assets | $ | 4,486,001 | $ | 3,949,217 | ||
Loans excluding loans held for sale | 2,867,524 | 2,924,117 | ||||
Allowance for credit losses for loans | 31,345 | 40,637 | ||||
Allowance for credit losses for loans to nonaccrual loans | 138.89% | 169.20% | ||||
Nonperforming loans to loans excluding loans held for sale | 0.79% | 0.82% | ||||
Nonperforming assets to total assets | 0.50% | 0.61% | ||||
Nonperforming assets to total assets improved to 0.50% of total assets at December 31, 2021 from 0.61% of total assets at December 31, 2020 due to the $536.8 million increase in total assets discussed above and the $1.5 million decrease in NPA between those periods.
Troubled Debt Restructurings
The Company has certain loans that have been restructured due to the borrower’s financial difficulties. The troubled debt restructurings granted during the years ending December 31, 2021 and 2020 which remain outstanding at period end were as follows:
Post-modification Recorded Investment | |||||||||||||||||
Extended | |||||||||||||||||
Maturity, | |||||||||||||||||
Pre-modification | Extended | Restructured | |||||||||||||||
Outstanding | Maturity and | Payments | |||||||||||||||
Number | Recorded | Restructured | Extended | Restructured | and Adjusted | ||||||||||||
(Dollars in thousands) |
| of Loans |
| Investment |
| Payments |
| Maturity |
| Payments |
| Interest Rate | |||||
December 31, 2021 | |||||||||||||||||
Commercial and industrial | 3 | $ | 3,256 | $ | 3,256 | $ | — | $ | — | $ | — | ||||||
Real estate: | |||||||||||||||||
Commercial real estate |
| 1 | 1,206 | 1,206 | — | — | — | ||||||||||
1-4 family residential | 1 | 1,548 | 1,548 | — | — | — | |||||||||||
Consumer | 1 | 42 | — | — | 42 | — | |||||||||||
Total |
| 6 | $ | 6,052 | $ | 6,010 | $ | — | $ | 42 | $ | — | |||||
December 31, 2020 | |||||||||||||||||
Commercial and industrial |
| 17 | $ | 10,343 | $ | 7,475 | $ | — | $ | 2,637 | $ | 231 | |||||
Real estate: | |||||||||||||||||
Commercial real estate |
| 9 |
| 18,867 |
| 18,867 |
| — |
| — |
| — | |||||
Construction and development | 5 | 12,905 | 12,648 | — | — | 257 | |||||||||||
1-4 family residential | 5 | 1,629 | 1,651 | — | — | — | |||||||||||
Total |
| 36 | $ | 43,744 | $ | 40,641 | $ | — | $ | 2,637 | $ | 488 | |||||
63
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 that are used as credit quality indicators. The internal ratings of loans as of the dates indicated below were as follows:
| Special |
|
| |||||||||
(Dollars in thousands) | Pass | Mention | Substandard | Total | ||||||||
December 31, 2021 | ||||||||||||
Commercial and industrial | $ | 613,419 | $ | 3,482 |
| $ | 17,483 |
| $ | 634,384 | ||
Real estate: |
|
|
|
|
|
|
|
|
|
| ||
Commercial real estate |
| 1,038,401 |
| 8,855 |
|
| 44,713 |
|
| 1,091,969 | ||
Construction and development |
| 447,533 |
| 470 |
|
| 12,716 |
|
| 460,719 | ||
1-4 family residential |
| 272,217 |
| — |
|
| 5,056 |
|
| 277,273 | ||
Multi-family residential |
| 286,396 |
| — |
|
| — |
|
| 286,396 | ||
Consumer |
| 27,865 |
| — |
|
| 225 |
|
| 28,090 | ||
Agriculture |
| 7,899 |
| — |
|
| 42 |
|
| 7,941 | ||
Other |
| 89,655 |
| — |
|
| — |
|
| 89,655 | ||
Total gross loans | $ | 2,783,385 | $ | 12,807 |
| $ | 80,235 |
| $ | 2,876,427 | ||
| Special |
|
| |||||||||
(Dollars in thousands) | Pass | Mention | Substandard | Total | ||||||||
December 31, 2020 | ||||||||||||
Commercial and industrial | $ | 720,465 | $ | 3,404 |
| $ | 19,088 |
| $ | 742,957 | ||
Real estate: |
|
|
|
|
|
|
|
|
|
| ||
Commercial real estate |
| 1,000,503 |
| 7,519 |
|
| 33,976 |
|
| 1,041,998 | ||
Construction and development |
| 502,933 |
| — |
|
| 19,772 |
|
| 522,705 | ||
1-4 family residential |
| 230,654 |
| 3,165 |
|
| 6,053 |
|
| 239,872 | ||
Multi-family residential |
| 258,346 |
| — |
|
| — |
|
| 258,346 | ||
Consumer |
| 33,884 |
| — |
|
| — |
|
| 33,884 | ||
Agriculture |
| 8,597 |
| — |
|
| 73 |
|
| 8,670 | ||
Other |
| 80,386 |
| — |
|
| 7,852 |
|
| 88,238 | ||
Total gross loans | $ | 2,835,768 | $ | 14,088 |
| $ | 86,814 |
| $ | 2,936,670 | ||
During the year ended December 31, 2021, loans with an internal rating of pass decreased $52.4 million primarily due to loan payoffs and payments collected. Loans with an internal rating of special mention decreased $1.3 million and loans with an internal rating of substandard decreased $6.6 million during the same period, primarily due to loan payoffs and payments collected.
Allowance for Credit Losses
The Company maintains an ACL that represents management’s best estimate of the expected credit losses and risks inherent in the loan portfolio. The amount of the ACL should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the ACL, the Company estimates losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the ACL 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. Please refer to “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 6” and “Part II.—Item 7.—Management’s Discussion and Analysis—Critical Accounting Policies—Allowance for Credit Losses.”
64
The ACL by loan category as of the dates indicated below was as follows:
December 31, 2021 | December 31, 2020 | |||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | ||||||||
Commercial and industrial | $ | 11,214 |
| 35.7 | % | $ | 13,035 |
| 32.1 | % | ||
Real estate: |
|
|
|
|
|
|
| |||||
Commercial real estate |
| 11,015 |
| 35.1 | % |
| 13,798 |
| 34.0 | % | ||
Construction and development |
| 3,310 |
| 10.6 | % |
| 6,089 |
| 15.0 | % | ||
1-4 family residential |
| 2,105 |
| 6.7 | % |
| 2,578 |
| 6.3 | % | ||
Multi-family residential |
| 1,781 |
| 5.7 | % |
| 2,513 |
| 6.2 | % | ||
Consumer |
| 406 |
| 1.3 | % |
| 440 |
| 1.1 | % | ||
Agriculture |
| 88 |
| 0.3 | % |
| 137 |
| 0.3 | % | ||
Other |
| 1,426 |
| 4.6 | % |
| 2,047 |
| 5.0 | % | ||
Total allowance for credit losses for loans | $ | 31,345 |
| 100.0 | % | $ | 40,637 |
| 100.0 | % | ||
Loans excluding loans held for sale | 2,867,524 | 2,924,117 | ||||||||||
ACL for loans to loans excluding loans held for sale | 1.09% | 1.39% | ||||||||||
The ACL for loans was $31.3 million, or 1.09%, of loans excluding loans held for sale at December 31, 2021 and $40.6 million, or 1.39%, at December 31, 2020. The decrease in the ACL for loans during 2021, as compared to 2020, was primarily the result of the adjustment of certain qualitative factors utilized in the Company’s ACL estimate due to the continued improvements in the national and local economies and forecast assumptions.
Activity in the ACL for loans for the dates indicated below was as follows:
Years Ended December 31, | |||||||
(Dollars in thousands) | 2021 | 2020 | |||||
Beginning balance | $ | 40,637 | $ | 25,280 | |||
Impact of CECL adoption | — | 874 | |||||
Provision (recapture): |
|
| |||||
Commercial and industrial | (2,255) | 4,432 | |||||
Real estate: | |||||||
Commercial real estate | (2,783) | 5,979 | |||||
Construction and development | (2,779) | 1,543 | |||||
1-4 family residential | (469) | 666 | |||||
Multi-family residential | (732) | 520 | |||||
Consumer | (127) | 175 | |||||
Agriculture | (96) | (13) | |||||
Other | (621) | 4,772 | |||||
Total provision (recapture) | (9,862) | 18,074 | |||||
Net (charge-offs) recoveries: |
|
|
|
| |||
Commercial and industrial |
| 434 |
| 80 | |||
Real estate: |
|
|
|
| |||
Commercial real estate |
| — |
| (16) | |||
1-4 family residential |
| (4) |
| (70) | |||
Consumer |
| 93 |
| (98) | |||
Agriculture | 47 | 12 | |||||
Other | — | (3,499) | |||||
Total net (charge-offs) recoveries |
| 570 |
| (3,591) | |||
Ending balance | $ | 31,345 | $ | 40,637 | |||
Total average loans | 2,784,663 | 2,862,911 | |||||
Net charge-offs (recoveries) to total average loans | (0.02)% | 0.13% | |||||
65
Annualized net charge-off (recoveries) to average loans by loan category for the periods shown below were as follows:
Years Ended December 31, | ||||||
(Dollars in thousands) | 2021 | 2020 | ||||
Commercial and industrial | (0.06)% | (0.01)% | ||||
Real estate: | ||||||
Commercial real estate | — |
| — | |||
Construction and development | — |
| — | |||
1-4 family residential | — |
| (0.03)% | |||
Multi-family residential | — |
| 0.00% | |||
Consumer | (0.30)% |
| (0.28)% | |||
Agriculture | (0.57)% | 0.13% | ||||
Other | — | (4.00)% | ||||
The ACL for unfunded commitments was $3.3 million and $4.2 million at December 31, 2021 and 2020, respectively. The decrease in the ACL for unfunded commitments was primarily due an adjustment to qualitative factors associated with the national and local economies and forecast assumptions as these factors improved, which was partially offset by an increase in the availability on the unfunded commitments.
Securities
The amortized cost, related gross unrealized gains and losses and fair values of investments in securities as of the dates indicated below were as follows:
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | ||||||||||
(Dollars in thousands) |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
December 31, 2021 |
|
|
|
|
|
|
|
| ||||
Debt securities available for sale: |
|
|
|
|
|
|
|
| ||||
State and municipal securities | $ | 168,541 | $ | 4,451 | $ | (392) | $ | 172,600 | ||||
U.S. Treasury securities | 11,888 | — | (91) | 11,797 | ||||||||
U.S. agency securities: |
|
|
|
|
| |||||||
Callable debentures | 3,000 | — | (27) | 2,973 | ||||||||
Collateralized mortgage obligations |
| 63,129 |
| 115 |
| (862) |
| 62,382 | ||||
Mortgage-backed securities |
| 173,446 |
| 1,805 |
| (1,130) |
| 174,121 | ||||
Equity securities |
| 1,189 |
| — |
| (16) |
| 1,173 | ||||
Total | $ | 421,193 | $ | 6,371 | $ | (2,518) | $ | 425,046 | ||||
December 31, 2020 | ||||||||||||
Debt securities available for sale: |
|
|
|
|
|
|
|
| ||||
State and municipal securities | $ | 88,741 | $ | 4,296 | $ | — | $ | 93,037 | ||||
U.S. agency securities: |
|
|
|
|
| |||||||
Collateralized mortgage obligations |
| 35,085 |
| 347 |
| (30) |
| 35,402 | ||||
Mortgage-backed securities |
| 103,686 |
| 3,963 |
| — |
| 107,649 | ||||
Equity securities |
| 1,176 |
| 17 |
| — |
| 1,193 | ||||
Total | $ | 228,688 | $ | 8,623 | $ | (30) | $ | 237,281 | ||||
As of December 31, 2021, the fair value of the Company’s securities totaled $425.0 million, compared to $237.3 million as of December 31, 2020, an increase of $187.8 million. Amortized cost increased $192.5 million during the year ended December 31, 2021, primarily as a result of purchases totaling $858.4 million outpacing maturities, sales, calls and paydowns totaling $664.3 million and amortization of $1.6 million. Net unrealized gains on the securities portfolio were $3.9 million at December 31, 2021, compared to $8.6 million at December 31, 2020. This decrease of $4.7 million was due to a reduction in fair value as a result of market fluctuations.
The Company’s mortgage-backed securities at December 31, 2021 and 2020 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
66
loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A or second lien elements in the securities portfolio.
Weighted-average yields by security type and maturity 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 below were as follows:
(Dollars in thousands) | 1 Year or Less | After 1 Year to 5 Years | After 5 Years to 10 Years | After 10 Years | Total | |||||
December 31, 2021 | ||||||||||
Debt securities: | ||||||||||
State and municipal securities | 2.42% | — | 2.66% | 2.17% | 2.21% | |||||
U.S. Treasury securities | — | 1.01% | 1.25% | — | 1.25% | |||||
U.S. agency securities: |
|
|
|
|
| |||||
Callable debentures | — | — | 1.37% | — | 1.37% | |||||
Collateralized mortgage obligations | — | — | 1.95% | 1.52% | 1.55% | |||||
Mortgage-backed securities | 3.39% | 3.49% | 2.09% | 1.77% | 1.79% | |||||
Equity securities: | 1.18% | — | — | — | 1.18% | |||||
Total securities | 1.71% | 1.34% | 2.07% | 1.89% | 1.90% |
The weighted-average life of the securities portfolio was 5.8 years with an estimated modified duration of 5.3 years as of December 31, 2021. See “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 2” for securities by contractual maturity.
At December 31, 2021 and 2020, securities with a carrying amount of approximately $25.6 million and $27.3 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
Deposits
The components of deposits as of the dates indicated below were as follows:
| December 31, | ||||||||||
(Dollars in thousands) |
| 2021 | 2020 | Increase (Decrease) | |||||||
Interest-bearing demand accounts | $ | 468,361 | $ | 380,175 | $ | 88,186 | 23.2% | ||||
Money market accounts |
| 1,209,659 |
| 1,039,617 | 170,042 | 16.4% | |||||
Savings accounts |
| 127,031 |
| 108,167 | 18,864 | 17.4% | |||||
Certificates and other time deposits, $100,000 or greater |
| 134,775 |
| 152,592 | (17,817) | (11.7)% | |||||
Certificates and other time deposits, less than $100,000 |
| 106,477 |
| 144,818 | (38,341) | (26.5)% | |||||
Total interest-bearing deposits |
| 2,046,303 |
| 1,825,369 | 220,934 | 12.1% | |||||
Noninterest-bearing deposits |
| 1,784,981 |
| 1,476,425 | 308,556 | 20.9% | |||||
Total deposits | $ | 3,831,284 | $ | 3,301,794 | $ | 529,490 | 16.0% | ||||
Total deposits as of December 31, 2021 were $3.8 billion, an increase of $529.5 million, or 16.0%, compared to December 31, 2020. Noninterest-bearing deposits as of December 31, 2021 were $1.8 billion, an increase of $308.6 million, or 20.9%, compared to December 31, 2020. Total interest-bearing account balances as of December 31, 2021 were $2.0 billion, an increase of $220.9 million, or 12.1%, from December 31, 2020, primarily due to increases in money market accounts, interest-bearing demand deposits and savings accounts, partially offset by decreases in certificates and other time deposits.
67
The scheduled maturities of uninsured certificates of deposits or other time deposits as of the date indicated below were as follows:
| |||
(Dollars in thousands) | December 31, 2021 | ||
Three months or less | $ | 23,929 | |
Over three months through six months |
| 26,771 | |
Over six months through 12 months |
| 15,201 | |
Over 12 months |
| 4,639 | |
Total | $ | 70,540 | |
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.
Cash and Cash Equivalents
Cash and cash equivalents increased $412.1 million during the year ended December 31, 2021, primarily due to loan payments received and net deposit inflows.
Other Assets
Other assets decreased $8.0 million from December 31, 2020 to December 31, 2021, primarily due to a reduction in the fair value of the Company’s interest rate swap contracts of $5.1 million and a decrease in interest receivable and deferred interest for loans of $2.6 million. See “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 14” for further discussion of the Company’s interest rate swap contracts.
Other Liabilities
Other liabilities decreased $6.1 million from December 31, 2020 to December 31, 2021, primarily due to a reduction in the fair value of the Company’s interest rate swap contracts of $5.1 million. See “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 14” for further discussion of the Company’s interest rate swap contracts.
Liquidity and Capital Resources
The Company monitors its liquidity and may seek to obtain additional financing to further support its business if necessary. The Company’s primary source of funds has been customer deposits and the primary use of funds has been funding of loans.
At December 31, 2021, the Company had $950.1 million in cash and cash equivalents and $425.0 million of securities, which are considered to be liquid assets, compared to $538.0 million in cash and cash equivalents and $237.3 million of securities at December 31, 2020. This increase in liquid assets of $599.9 million during the year ended December 31, 2021 was primarily due to a $529.5 million increase in deposits and a decrease of $56.6 million in loans excluding loans held for sale.
68
The composition of funding sources and uses as a percentage of average total assets for the periods indicated was as follows:
| December 31, | |||||
2021 | 2020 | |||||
Sources of funds: |
|
|
|
| ||
Deposits: |
|
|
|
| ||
Interest-bearing |
| 45.2 | % | 45.3 | % | |
Noninterest-bearing |
| 38.8 | % | 37.4 | % | |
Federal Home Loan Bank advances |
| 1.2 | % | 1.5 | % | |
Other liabilities |
| 1.3 | % | 1.3 | % | |
Shareholders’ equity |
| 13.5 | % | 14.5 | % | |
Total sources |
| 100.0 | % | 100.0 | % | |
Uses of funds: |
|
|
|
| ||
Loans |
| 67.4 | % | 76.2 | % | |
Securities |
| 7.8 | % | 6.3 | % | |
Interest-bearing deposits at other financial institutions |
| 17.7 | % | 9.7 | % | |
Equity securities |
| 0.4 | % | 0.4 | % | |
Other noninterest-earning assets |
| 6.7 | % | 7.4 | % | |
Total uses |
| 100.0 | % | 100.0 | % | |
Average loans to average deposits |
| 80.2 | % | 92.1 | % | |
Historically, the cost of the Company’s deposits has been lower than other sources of funds available. Average balances and average rates paid on deposits for the periods indicated are shown in the table below. Average rates paid on deposits for the dates indicated below were as follows:
Year Ended | Year Ended | |||||||||||
December 31, 2021 | December 31, 2020 | |||||||||||
| Average |
| Average | Average |
| Average | ||||||
(Dollars in thousands) | Balance | Rate | Balance | Rate | ||||||||
Interest-bearing demand accounts | $ | 391,388 |
| 0.05 | % | $ | 363,014 |
| 0.10 | % | ||
Money market accounts |
| 1,094,042 |
| 0.27 | % |
| 868,915 |
| 0.42 | % | ||
Savings accounts |
| 115,972 |
| 0.03 | % |
| 97,982 |
| 0.04 | % | ||
Certificates and other time deposits, $100,000 or greater |
| 142,605 |
| 0.37 | % |
| 192,268 |
| 1.27 | % | ||
Certificates and other time deposits, less than $100,000 |
| 126,141 |
| 1.07 | % |
| 181,364 |
| 1.50 | % | ||
Total interest-bearing deposits |
| 1,870,148 |
| 0.27 | % |
| 1,703,543 |
| 0.54 | % | ||
Noninterest-bearing deposits | 1,603,006 | — | 1,404,027 | — | ||||||||
Total deposits | $ | 3,473,154 |
| 0.14 | % | $ | 3,107,570 |
| 0.30 | % | ||
The ratio of average noninterest-bearing deposits to average total deposits was 46.2% and 45.2% for the years ended December 31, 2021 and 2020, respectively.
69
In addition to the liquid assets discussed above, the Company had $1.0 billion of available funds under various borrowing arrangements at both December 31, 2021 and 2020. See “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 11” for additional details of these arrangements. At December 31, 2021, the capacity, amounts outstanding and availability under these arrangements were as follows:
(Dollars in thousands) | Capacity | Outstanding(1) | Availability | ||||||
Federal Home Loan Bank Facility | $ | 999,327 | $ | (76,000) | $ | 923,327 | |||
Loan Agreement | 30,000 | — | 30,000 | ||||||
Federal Funds | 65,000 | — | 65,000 | ||||||
Total | $ | 1,094,327 | $ | (76,000) | $ | 1,018,327 | |||
| (1) | Outstanding amount for the Federal Home Loan Bank Facility includes $50.0 million of advances and $26.0 million of letters of credit pledged to secure public funds’ deposit balances. |
A portion of the Company’s liquidity capacity will be used for contractual obligations entered into in the normal course of business, such as obligations for operating leases, certificates of deposits and borrowings. Future cash payments associated with the Company’s contractual obligations, as of the dates indicated were as follows:
|
|
|
| |||||||||
1 Year | Over 1 Year | Greater | ||||||||||
(Dollars in thousands) | or Less | to 3 Years | than 3 Years | Total | ||||||||
December 31, 2021 | ||||||||||||
Federal Home Loan Bank advances | $ | 10,000 | $ | 40,000 | $ | — | $ | 50,000 | ||||
Non-cancellable future operating leases | 1,812 | 3,823 | 11,164 | 16,799 | ||||||||
Certificates of deposit | 162,153 | 68,956 | 10,143 | 241,252 | ||||||||
Total | $ | 173,965 | $ | 112,779 | $ | 21,307 | $ | 308,051 | ||||
December 31, 2020 | ||||||||||||
Federal Home Loan Bank advances | $ | — | $ | 30,000 | $ | 20,000 | $ | 50,000 | ||||
Non-cancellable future operating leases |
| 1,968 | 4,452 | 13,092 | 19,512 | |||||||
Certificates of deposit |
| 204,165 | 74,708 | 18,537 | 297,410 | |||||||
Total | $ | 206,133 | $ | 109,160 | $ | 51,629 | $ | 366,922 | ||||
As of December 31, 2021, the Company had no exposure to future cash requirements associated with known uncertainties or capital expenditure of a material nature.
The Company also enters into commitments to extend credit and standby letters of credit to meet customer financing needs and, in accordance with GAAP, these commitments are not reflected as liabilities in the consolidated balance sheets. Due to the nature of these commitments, the amounts disclosed in the table below do not necessarily represent future cash requirements.
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, generally have fixed expiration dates or other termination clauses and may expire without being fully drawn upon.
Standby letters of credit are conditional commitments issued 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.
70
Commitments to extend credit and standby letters of credit expiring by period as of the dates indicated were as follows:
1 Year | Over 1 Year | Greater | ||||||||||
(Dollars in thousands) | or Less | to 3 Years | than 3 Years | Total | ||||||||
December 31, 2021 | ||||||||||||
Commitments to extend credit | $ | 400,006 | $ | 293,606 | $ | 81,348 | $ | 774,960 | ||||
Standby letters of credit |
| 16,532 |
| 1,415 |
| 162 |
| 18,109 | ||||
Total | $ | 416,538 | $ | 295,021 | $ | 81,510 | $ | 793,069 | ||||
December 31, 2020 | ||||||||||||
Commitments to extend credit | $ | 498,238 | $ | 177,710 | $ | 63,783 | $ | 739,731 | ||||
Standby letters of credit |
| 18,713 |
| 7,365 |
| — |
| 26,078 | ||||
Total | $ | 516,951 | $ | 185,075 | $ | 63,783 | $ | 765,809 | ||||
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, 2021 and 2020, 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 19.”
During 2021, 214,219 shares were repurchased under the Company’s share repurchase programs at an average price of $27.19 per share. During 2020, 431,814 shares were repurchased under the Company’s share repurchase programs at an average price of $20.62 per share. Shares repurchased in 2021 and 2020 were retired and returned to the status of authorized but unissued shares.
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 risk due to future interest rate changes. Fluctuations in interest rates impact both 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 period.
The Company manages exposure to interest rates by structuring its balance sheet in the ordinary course of business. 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. The Company enters into interest rate swaps as an accommodation to customers. The Company is not subject to foreign exchange or commodity price risk and does not own any trading assets.
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
71
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 may 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.
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. The results from these models are impacted by the behavior of interest-rate sensitive assets and liabilities as well as the mixture of those assets and liabilities. 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 10.0% for a 100 basis-point shift, 20.0% for a 200-basis point shift and 30.0% 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, 2021 | December 31, 2020 | |||||||||||
Change in Interest | Percent Change in | Percent Change | Percent Change in | Percent Change | ||||||||
Rates (Basis Points) | Net Interest Income | Fair Value of Equity | Net Interest Income | Fair Value of Equity | ||||||||
+ 300 |
| 25.4 | % | 6.7 | % |
| 21.5 | % | 35.7 | % | ||
+ 200 |
| 16.9 | % | 13.0 | % |
| 14.1 | % | 32.8 | % | ||
+ 100 |
| 7.9 | % | 8.8 | % |
| 6.5 | % | 21.0 | % | ||
Base |
| — | % | — | % |
| — | % | — | % | ||
−100 |
| (2.5) | % | (37.2) | % |
| (1.5) | % | (37.0) | % | ||
The model simulation as of December 31, 2021 indicates that the Company’s projected balance sheet was more asset sensitive in comparison to December 31, 2020. The percent change increases in net interest income compared to December 31, 2020 was primarily due to the decrease of $218.4 million in lower yielding PPP loans. The percent change decrease in the fair values of equity were primarily due to an increase in cash and cash equivalents in interest-bearing deposits held at other financial institutions of $431.3 million and an increase in securities of $187.8 million compared to December 31, 2020. The increase of $308.6 million in noninterest-bearing deposits contributed to the increase in interest-earning assets during 2021, which had the effect of creating a higher economic value of equity. Subsequent rate shocks due to the change in interest rates result in differing percentages given the level of economic equity.
LIBOR Transition
LIBOR was used as an index rate for a majority of the Company’s interest-rate swaps and approximately 7.9% of the Company’s loans at December 31, 2021. In March 2021, the UK Financial Conduct authority formally confirmed that a number of U.S. dollar LIBOR rates will be available until the end of June 2023 to support the rundown of legacy contracts. The Company’s transition away from LIBOR for its interest-rates swaps and loans using LIBOR as an index rate 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
72
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.
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.
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.
73
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 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.
During 2021, the capital markets continued to stabilize and improve as businesses and the economy continued down the path of recovery after realizing the impact of COVID-19. The Company’s stock price was less volatile and traded in the range of $24.08 and $33.29 per share during 2021. The Company’s closing stock price was $29.00 per share as of December 31, 2021. Based on the results of the Company’s assessment, management does not believe any impairment of goodwill existed at December 31, 2021.
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, 2021 or 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.”
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Financial Data
The following consolidated financial data as of and for the five-year period ended December 31, 2021, 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.
As of and for the Years Ended December 31, | |||||||||||||||
(Dollars in thousands, except per share data) |
| 2021 |
| 2020 | 2019 | 2018 | 2017 | ||||||||
Balance Sheet Data: |
|
|
|
|
|
| |||||||||
Cash and cash equivalents | $ | 950,146 | $ | 538,007 | $ | 372,064 | $ | 382,070 | $ | 326,199 | |||||
Loans excluding loans held for sale | 2,867,524 | 2,924,117 | 2,639,085 | 2,446,823 | 2,311,544 | ||||||||||
Allowance for credit losses | (31,345) | (40,637) | (25,280) | (23,693) | (24,778) | ||||||||||
Loans, net | 2,836,179 | 2,883,480 | 2,613,805 | 2,423,130 | 2,286,766 | ||||||||||
Goodwill and other intangible assets, net | 84,608 | 85,121 | 85,888 | 86,725 | 87,720 | ||||||||||
Total assets | 4,486,001 | 3,949,217 | 3,478,544 | 3,279,096 | 3,081,083 | ||||||||||
Noninterest-bearing deposits | 1,784,981 | 1,476,425 | 1,184,861 | 1,183,058 | 1,109,789 | ||||||||||
Interest-bearing deposits | 2,046,303 | 1,825,369 | 1,667,527 | 1,583,224 | 1,493,183 | ||||||||||
Total deposits | 3,831,284 | 3,301,794 | 2,852,388 | 2,766,282 | 2,602,972 | ||||||||||
Federal Home Loan Bank Advances | 50,000 | 50,000 | 50,000 | — | — | ||||||||||
Shareholders’ equity | 562,125 | 546,451 | 535,721 | 487,625 | 446,214 | ||||||||||
Income Statement Data: | |||||||||||||||
Interest income | $ | 132,093 | $ | 138,693 | $ | 153,395 | $ | 135,759 | $ | 116,659 | |||||
Interest expense | 5,926 | 10,087 | 17,407 | 11,098 | 8,885 | ||||||||||
Net interest income | 126,167 | 128,606 | 135,988 | 124,661 | 107,774 | ||||||||||
Provision (recapture) for credit losses | (10,773) | 18,892 | 2,385 | (1,756) | (338) | ||||||||||
Net interest income after provision (recapture) for credit losses | 136,940 | 109,714 | 133,603 | 126,417 | 108,112 | ||||||||||
Noninterest income | 16,264 | 14,781 | 18,628 | 14,252 | 14,204 | ||||||||||
Noninterest expense | 107,686 | 92,100 | 90,143 | 82,016 | 78,292 | ||||||||||
Income before income taxes | 45,518 | 32,395 | 62,088 | 58,653 | 44,024 | ||||||||||
Income tax expense | 9,920 | 6,034 | 11,571 | 11,364 | 16,453 | ||||||||||
Net income | $ | 35,598 | $ | 26,361 | $ | 50,517 | $ | 47,289 | $ | 27,571 | |||||
Share and Per Share Data: | |||||||||||||||
Earnings per share - basic | $ | 1.46 | $ | 1.06 | $ | 2.03 | $ | 1.90 | $ | 1.23 | |||||
Earnings per share - diluted | 1.45 | 1.06 | 2.02 | 1.89 | 1.22 | ||||||||||
Dividends per share | 0.52 | 0.40 | 0.40 | 0.20 | 0.20 | ||||||||||
Book value per share | 22.96 | 22.20 | 21.45 | 19.58 | 17.97 | ||||||||||
Tangible book value per share(1) | 19.50 | 18.74 | 18.01 | 16.10 | 14.44 | ||||||||||
Weighted-average common shares outstanding- basic | 24,456 | 24,761 | 24,926 | 24,859 | 22,457 | ||||||||||
Weighted-average common shares outstanding- diluted | 24,572 | 24,803 | 25,053 | 25,018 | 22,573 | ||||||||||
Common shares outstanding at period end | 24,488 | 24,613 | 24,980 | 24,907 | 24,833 | ||||||||||
(table continued on next page)
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As of and for the Years Ended December 31, | |||||||||||||||
(Dollars in thousands, except per share data) |
| 2021 |
| 2020 | 2019 | 2018 | 2017 | ||||||||
Performance Ratios: | |||||||||||||||
Return on average assets | 0.86% | 0.70% | 1.50% | 1.50% | 0.93% | ||||||||||
Return on average shareholders' equity | 6.37% | 4.85% | 9.81% | 10.18% | 7.18% | ||||||||||
Net interest margin - tax equivalent basis | 3.31% | 3.73% | 4.42% | 4.35% | 4.06% | ||||||||||
Efficiency ratio(2) | 75.61% | 64.23% | 58.30% | 59.04% | 64.19% | ||||||||||
Selected Ratios: | |||||||||||||||
Loans excluding loans held for sale to deposits | 74.84% | 88.56% | 92.52% | 88.45% | 88.80% | ||||||||||
Noninterest-bearing deposits to total deposits | 46.59% | 44.72% | 41.54% | 42.77% | 42.64% | ||||||||||
Cost of total deposits | 0.14% | 0.30% | 0.58% | 0.40% | 0.30% | ||||||||||
Credit Quality Ratios: | |||||||||||||||
Nonperforming assets to total assets | 0.50% | 0.61% | 0.03% | 0.11% | 0.27% | ||||||||||
Nonperforming loans to loans excluding loans held for sale | 0.79% | 0.82% | 0.04% | 0.14% | 0.33% | ||||||||||
Allowance for credit losses to nonperforming loans | 138.89% | 169.20% | 2,587.51% | 678.88% | 324.06% | ||||||||||
Allowance for credit losses to loans excluding loans held for sale | 1.09% | 1.39% | 0.96% | 0.97% | 1.07% | ||||||||||
Net charge-off (recovery) to average loans | 0.00% | 0.13% | 0.03% | (0.03)% | — | ||||||||||
Liquidity and Capital Ratios: | |||||||||||||||
Total shareholders' equity to total assets | 12.53% | 13.84% | 15.40% | 14.87% | 14.48% | ||||||||||
Tangible equity to tangible assets(1) | 10.85% | 11.94% | 13.26% | 12.56% | 11.98% | ||||||||||
Common equity tier 1 capital ratio | 15.31% | 15.45% | 15.52% | 14.71% | 14.19% | ||||||||||
Tier 1 risk-based capital ratio | 15.31% | 15.45% | 15.52% | 14.76% | 14.44% | ||||||||||
Total risk-based capital ratio | 16.42% | 16.71% | 16.41% | 15.63% | 15.42% | ||||||||||
Tier 1 leverage ratio | 11.22% | 12.00% | 13.11% | 12.74% | 12.30% | ||||||||||
| (1) | Non-GAAP financial measure. See “Non-GAAP Financial Measures” below. |
| (2) | Efficiency ratio is calculated by dividing noninterest expense by the sum of net interest income and noninterest income. |
Non-GAAP Financial Measures
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 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.
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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:
December 31, | |||||||||||||||
(Dollars in thousands, except per share data) |
| 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||
Tangible Equity |
|
|
|
|
|
| |||||||||
Total shareholders’ equity | $ | 562,125 | $ | 546,451 | $ | 535,721 | $ | 487,625 | $ | 446,214 | |||||
Adjustments: |
|
|
|
|
|
|
|
|
|
| |||||
Goodwill |
| (80,950) |
| (80,950) |
| (80,950) |
| (80,950) |
| (80,950) | |||||
Other intangibles |
| (3,658) |
| (4,171) |
| (4,938) |
| (5,775) |
| (6,770) | |||||
Tangible equity | $ | 477,517 | $ | 461,330 | $ | 449,833 | $ | 400,900 | $ | 358,494 | |||||
Tangible Assets |
|
|
|
|
|
|
|
|
|
| |||||
Total assets | $ | 4,486,001 | $ | 3,949,217 | $ | 3,478,544 | $ | 3,279,096 | $ | 3,081,083 | |||||
Adjustments: |
|
|
|
|
|
|
|
|
|
| |||||
Goodwill |
| (80,950) |
| (80,950) |
| (80,950) |
| (80,950) |
| (80,950) | |||||
Other intangibles |
| (3,658) |
| (4,171) |
| (4,938) |
| (5,775) |
| (6,770) | |||||
Tangible assets | $ | 4,401,393 | $ | 3,864,096 | $ | 3,392,656 | $ | 3,192,371 | $ | 2,993,363 | |||||
Common shares outstanding |
| 24,488 |
| 24,613 |
| 24,980 |
| 24,907 |
| 24,833 | |||||
Book value per share | $ | 22.96 | $ | 22.20 | $ | 21.45 | $ | 19.58 | $ | 17.97 | |||||
Tangible book value per share | $ | 19.50 | $ | 18.74 | $ | 18.01 | $ | 16.10 | $ | 14.44 | |||||
Total shareholders’ equity to total assets |
| 12.53% |
| 13.84% |
| 15.40% |
| 14.87% |
| 14.48% | |||||
Tangible equity to tangible assets |
| 10.85% |
| 11.94% |
| 13.26% |
| 12.56% |
| 11.98% | |||||
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, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Report on management’s assessment of internal control over financial reporting. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control system is a process designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with GAAP. All internal control systems, no matter how well designed, have inherent limitations and can only provide reasonable assurance with respect to financial reporting.
As of December 31, 2021, 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, 2021.
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.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
None.
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Board of Directors
The following table sets forth the name, age, and positions with the Company for each member of the Company’s board of directors:
Name | Position with the Company | Age | ||
Robert R. Franklin, Jr. | Director, Chairman, President and Chief Executive Officer | 67 | ||
J. Pat Parsons | Director, Vice Chairman | 73 | ||
Michael A. Havard | Director | 65 | ||
Tommy W. Lott | Director | 85 | ||
Glen W. Morgan | Director | 68 | ||
Joe E. Penland, Sr. | Director | 71 | ||
Reagan A. Reaud | Director | 43 | ||
Joseph B. Swinbank | Director | 70 | ||
Sheila G. Umphrey | Director | 82 | ||
John E. Williams, Jr. | Director | 67 | ||
William E. Wilson, Jr. | Director | 66 |
Robert R. Franklin, Jr. Mr. Franklin, 67, serves as Chairman, President and Chief Executive Officer and has served as a director of the Company and the Bank since 2013. Mr. Franklin joined the Company in 2013 in connection with the merger of equals with VB Texas, Inc. From June 2013 until January 2014, Mr. Franklin served as the Co-Chief Executive Officer of the Company and the Bank. In January 2014, he became Chief Executive Officer of the Bank and the Company. He became Chairman of the Bank in January 2015 and Chairman and President of the Company in December 2015. Mr. Franklin began his 40-year Houston banking career working for a small community bank in Houston upon graduation from the University of Texas. He then moved to a large, regional bank before gravitating back to his primary
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interest of community banking. He became President of American Bank in 1988, where he served until the bank was sold to Whitney Holding Corp. in early 2001. Mr. Franklin and his team then joined Horizon Capital Bank, where Mr. Franklin raised sufficient capital to match the bank’s existing capital and took the position of President of Horizon Capital Bank. He served as President until the bank was sold to Cullen/Frost Bankers, Inc. in 2005. Mr. Franklin then started VB Texas, Inc. in November of 2006 as Chairman, President and Chief Executive Officer, serving until a merger of equals between VB Texas, Inc. and the Company in 2013. Mr. Franklin graduated from the University of Texas in 1977 with a B.B.A. in Finance. He is currently serving on the Board of Junior Achievement of Southeast Texas and previously served on the Board of the Texas Bankers Association. Mr. Franklin has actively served various charitable organizations over the years, along with serving on the board of a local private school. Mr. Franklin adds financial services experience, especially lending, oil and gas expertise and asset liability management to the Company’s board of directors, as well as a deep understanding of the Company’s business and operations. Mr. Franklin also brings risk and operations management and strategic planning expertise to the board of directors, skills that are important as the Company continues to implement its business strategy and acquire and integrate growth opportunities.
J. Pat Parsons. Mr. Parsons, 73, serves as Vice Chairman of the Company and the Bank. Mr. Parsons was one of the original founders of the Company and has served as a director of the Company and the Bank since 2007. He served as President and Chief Executive Officer of the Company from 2007 until 2013. Mr. Parsons also served as the Bank’s Chairman and Chief Executive Officer from 2007 until 2013. From June 2013 until January 2014, Mr. Parsons served as the Co-Chief Executive Officer of the Company and Chairman and Co-Chief Executive Officer of the Bank. In January 2014, he became Chairman of the Bank and President of the Company. In January 2015, Mr. Parsons was named Vice Chairman of the Company and the Bank. He began his banking career in 1973 with First City National Bank of Houston as a Management Trainee and has served in various capacities at numerous commercial banks within the Company’s market areas, including Community Bank & Trust, SSB, as President and Chief Operating Officer. From 1992 until its sale to Texas Regional Bancshares, Inc. in 2004, Mr. Parsons oversaw Community Bank & Trust’s expansion, through organic growth and five acquisitions, to over $1.1 billion in assets and a network spanning 15 Southeast Texas communities. He currently serves on the board of directors of the Lamar University Foundation. Mr. Parsons earned a B.B.A. in Accounting from Lamar University in 1971 and an M.B.A. in Finance from the University of Houston in 1973. With more than 46 years of experience working in the banking industry in Texas and serving as chief executive officer of several institutions, Mr. Parsons brings significant leadership skills and a deep understanding of the local banking market and issues facing the banking industry to the Company’s board of directors.
Michael A. Havard. Mr. Havard, 65, has served as a director of the Company since 2017 and is Chairman of the Company’s Compensation Committee and a member of the Company’s Audit Committee and Corporate Governance and Nominating Committees. In addition, Mr. Havard has served as a director of the Bank since 2007, and is a member of its Audit, Budget and Compensation and Funds Management Committees. Mr. Havard has been a practicing attorney since 1988 and he handles commercial litigation and complex business transactions and is a member of numerous professional organizations and societies, including the State Bar of Texas, American Institute of Certified Public Accountants, Texas Society of Certified Public Accountants and the Association of Trial Lawyers of America. Prior to his legal career, Mr. Havard was an auditor with a prominent national accounting firm and has been a licensed Certified Public Accountant since 1982. He also serves as a director of several private companies. Mr. Havard graduated from Lamar University in 1979 with a B.B.A. in Accounting and received his J.D. from the University of Houston Law Center in 1987. Mr. Havard’s prior experience as a Certified Public Accountant and auditor, which included performing audits for various banks in the Houston marketplace, as well as his experience as an attorney, qualify him to serve on the Company’s board. His knowledge accumulated from serving on the Company’s Audit, Compensation, Corporate Governance and Nominating Committees as well as various Bank committees provide him with a unique perspective of the inner workings of the Company’s organization.
Tommy W. Lott. Mr. Lott, 85, has served as a director of the Company and the Bank since 2013, and since 2017, he has served on the Company’s Corporate Governance and Nominating Committee, and the Company’s Compensation Committee. Mr. Lott served on the Company’s Audit Committee from 2017 until March 2021. Mr. Lott served as a director of VB Texas, Inc. and Vista Bank Texas from 2006 until the merger of equals with the Company and the Bank in 2013. From 2014 to 2019, he was a consultant for Acosta, Inc., a company that provides sales, marketing and retail merchandising solutions to consumer-packaged goods companies and retailers in the U.S. and Canada. Mr. Lott founded Lott Marketing, Inc. in 1970 and served as its Chairman and Chief Executive Officer until its sale to Acosta Inc. in 2012. Lott Marketing, Inc. was a sales and marketing agency representing a wide array of food and nonfood products to the food service industry. Mr. Lott has served as a director of Horizon Bank and currently serves as a director of Enviro Water Minerals Company, Inc. Mr. Lott also has been a partner and developer of apartment and independent living complexes in
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the Houston area during the last 21 years. Mr. Lott received his B.B.A. in Marketing from the University of Houston in 1959. Mr. Lott’s broad experience serving on boards of banks and other companies provide the Company with important skills regarding the oversight of its business.
Glen W. Morgan. Mr. Morgan, 68, has served as a director of the Company and the Bank since 2007, and since 2017, he has served on the Company’s Corporate Governance and Nominating Committee. Mr. Morgan has been the managing partner of Reaud, Morgan & Quinn, L.L.P. since 1996, where he has practiced since 1978. Mr. Morgan is a trial lawyer who specializes in personal injury and business litigation. Mr. Morgan has been named a Super Lawyer by the Texas Monthly’s Super Lawyer Section Top Texas Lawyers from 2004 to 2017. He has been listed in Best Lawyers in America since 2006 and National Law Journal Top 50 Verdicts. He is a member of the Texas Bar Association, Jefferson County Bar Association, State Bar of Texas, Association of Trial Lawyers of America, and a Life Fellow of the Texas Bar Foundation. In addition to his leadership of many organizations in his profession, Mr. Morgan has served as a board member of the Lamar University Foundation and the Lamar University College of Education and Human Development Advisory Board, and is an honorary member of the International Brotherhood of Electrical Workers’ Local 479, Beaumont Professional Firefighters Local 399, Beaumont Police Officers Association and Texas State Building and Construction Trades Association. A strong supporter of Lamar University, he contributes to Cardinal Athletics, the Cardinal Club, and Friends of the Arts. He also established the Donald E. Morgan Scholarship at Lamar University in honor of his father, created the Morgan Charitable Fund, and established and is a permanent board member of the Cris E. Quinn Charitable Foundation. Mr. Morgan earned a B.B.A. from Lamar University and a J.D. from South Texas College of Law. Mr. Morgan has significant management, risk management and strategic planning skills important to the oversight of the Company’s enterprise and operational risk management.
Joe E. Penland, Sr. Mr. Penland, 71, has served as a director of the Company and the Bank since 2007, and since 2017, he has served on the Company’s Corporate Governance and Nominating Committee and the Company’s Compensation Committee. Mr. Penland founded Quality Mat Company, based in Beaumont, Texas, and served as its President from 1974 until August of 2019, when he assumed the title of Chief Executive Officer. Quality Mat Company is one of the largest mat producers in the world and is one of the oldest companies in the business, with the capabilities of producing everything from logging mats to temporary road matting. Quality Mat Company’s products carry exclusive patents that serve a variety of major industries. Mr. Penland started the Penland Foundation in 2006, a foundation that helps local organizations in his community. Mr. Penland has significant experience serving on both public and private boards of directors for community banks. Prior to joining the Company’s board of directors, Mr. Penland served as a director of Texas Regional Bancshares, Inc., a Nasdaq listed bank holding company, from 2004 until its merger with BBVA in 2006, and as a director of Southeast Texas Bancshares, Inc. prior to its acquisition by Texas Regional Bancshares, Inc. Mr. Penland brings key leadership, risk management, operations, strategic planning and oil and gas industry expertise that assists the board of directors in overseeing the Company’s operations in addition to his knowledge of the communities the Company serves.
Reagan A. Reaud. Mr. Reaud, 43, has served as a director of the Company since 2020, and since 2021, he has served on the Company’s Audit Committee and the Company’s Compensation Committee. Mr. Reaud is the founder and CEO of Privateer Capital Management, LP which was formed in 2013. Privateer is a family-owned, multi-strategy investment company headquartered in Austin, Texas. He is also the founder and Chairman of the Lucena Group, which provides security and intelligence solutions to individuals and large corporations around the world. Mr. Reaud attended college at Washington and Lee University, where he studied European History, graduating Magna Cum Laude. After college, Mr. Reaud enrolled in the University of Texas School of Law, from which he received a J.D. with honors. He served as a law clerk to Justice Harriet O’Neill of the Texas Supreme Court. He then worked as a prosecutor for the Travis County Attorney’s Office. Mr. Reaud left his position as a prosecutor to attend the Wharton School of the University of Pennsylvania, where he earned an MBA with a double major in Finance and Strategic Management. Mr. Reaud sits on the boards of three charitable foundations, The Reaud Foundation, the Beaumont Foundation of America, and the University of Texas Law School Foundation. He is also a trustee of the Austin Symphony, a member of Business Executives for National Security, and a Life Fellow of the American Bar Foundation. Mr. Reaud’s excellent credentials, board-level experience, and knowledge of the Texas market enhances the Company’s risk management and assists in identifying and executing strategic business goals.
Joseph B. Swinbank. Mr. Swinbank, 70, has served as a director of the Company and the Bank since 2013, and since 2017, he has served on the Company’s Audit Committee, the Company’s Corporate Governance and Nominating Committee, and the Company’s Compensation Committee. Mr. Swinbank served as a director of VB Texas, Inc. and Vista Bank Texas from 2006 until the merger of equals with the Company and the Bank in 2013. Mr. Swinbank is the co-founder of The Sprint Companies, Inc., a Houston based sand and gravel company, and is
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Partner of Sprint Ft. Bend County Landfill, Sprint Sand & Clay, Sprint Waste Services, and Sprint Transports. In 2014, he became a Partner of River Aggregates and A & B Valves. Mr. Swinbank received his B.S. in Agricultural Economics from Texas A&M University in 1974. Mr. Swinbank brings a wealth of business experience, as well as a sharp focus on the financial efficiency and profitability of the Company’s customers, to the board of directors.
Sheila G. Umphrey. Ms. Umphrey, 82, has served as a director of the Company since 2017. Ms. Umphrey is the owner of The Decorating Depot Inc., an interior and exterior design firm, where she has served as President since 1990. Ms. Umphrey has served on the board of Christus St. Elizabeth Hospital, as well as the Foundations Board of Christus St. Elizabeth, the Education Board at Lamar University Port Arthur, and the Board of Gift of Life Beaumont, which is a charitable organization. She is also active with the Humane Society of Beaumont. Ms. Umphrey studied Fine Arts at the University of Colorado and Commercial Art at Lamar University. Ms. Umphrey brings vast business and management experience as a business owner for over 31 years, as well as deep knowledge of the communities that the Company serves through her active involvement with local charities and on numerous boards and foundations.
John E. Williams, Jr. Mr. Williams, 67, has served as a director of the Company and the Bank since 2007. He has served as Chairman of the Company’s Corporate Governance and Nominating Committee since 2017. Mr. Williams is the managing partner of Williams Hart Law Firm, L.L.P. in Houston, Texas, where he practices in the area of mass tort cases. Mr. Williams currently serves on the Board of Directors for the Houston Astros, and the Houston Police Foundation, and serves on the Board of Advisors for the James A. Baker III Institute for Public Policy at Rice University. Mr. Williams is listed in Top Attorneys in Texas, Best Attorneys in Texas, The Best Lawyers in America, and Texas’ Best Lawyers, and he has been selected as a Super Lawyer every year since 2003. Mr. Williams received a B.B.A. from Baylor University and a J.D. from Baylor School of Law, where he graduated first in his class. Mr. Williams has significant risk management and strategic planning skills. In addition, he brings strong legal, lending and financial skills important to the oversight of the Company’s enterprise and operational risk management.
William E. Wilson, Jr. Mr. Wilson, 66, has served as a director of the Company since 2017. Mr. Wilson has served as a director of the Bank since 2007. He became Chairman of the Bank’s Audit Committee in 2008, and Chairman of the Company’s Audit Committee in 2017. Since 1979, Mr. Wilson has served as President and Chief Executive Officer of Bar C Ranch Company, retiring in 2019 as President and assuming the role of Chairman of the Board. The Bar C. Ranch Company is a real estate development company developing and investing in industrial, commercial and office properties in Texas. He has served as Manager and General Partner of Wilson Realty, Ltd., an owner of industrial buildings in Beaumont, Texas, since 1977. As Trustee of the Caldwell McFaddin Mineral Trust and the Rosine Blount McFaddin Mineral Trust, Mr. Wilson has managed large oil and gas mineral holdings across the State of Texas, creating operating leases and purchasing minerals on behalf of the trusts. Mr. Wilson founded Wilson Realty, Ltd. and Wilson & Company, a brokerage and management company. He is a retired Real Estate Broker in the State of Texas and has served as a director and President of the Beaumont Board of Realtors and a director of Texas Association of Realtors. Mr. Wilson has also served on numerous civic and charitable boards in the southeast Texas region. He joined the board of directors of First Security National Bank of Beaumont in 1979 and joined its audit committee in 1981, serving First Security National Bank of Beaumont and its holding company until the bank was acquired by First City Bancorporation of Texas. From 1994 until 2004, he was a director of CommunityBank of Texas, serving on the loan committee and investment committee and as Chairman of the audit committee. Mr. Wilson received his B.B.A. in Accounting from The University of Texas at Austin in 1976 and is a licensed Certified Public Accountant. Mr. Wilson’s service as a bank director at other institutions, coupled with his investment, accounting and financial skills adds administration and operational management experiences, as well as corporate governance expertise to the board of directors. In addition, as a Certified Public Accountant, Mr. Wilson brings extensive accounting, management, strategic planning and financial skills important to the oversight of the Company’s financial reporting, enterprise and operational risk management.
Board and Committee Matters
Board Meetings
The Company’s board met fourteen times during 2021 (including regularly scheduled and special meetings). During 2021, each director participated in at least 75% or more of the aggregate of (i) the total number of meetings of the board (held during the period for which he or she was a director) and (ii) the total number of meetings of all committees of the board on which he or she served (during the period that he or she served).
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Board Composition
The size of the Company’s board is currently set at eleven members. In accordance with the Company’s bylaws, members of the board are divided into three classes, Class I, Class II and Class III. The members of each class are elected for a term of office to expire at the third succeeding annual meeting of shareholders following their election. The term of office of Class I, Class II and Class III directors will expire at the annual shareholders’ meeting to be held in 2022, 2023 and 2024, respectively. There are no family relationships of first cousin or closer among the Company’s directors or officers by blood, marriage or adoption.
In accordance with the Company’s bylaws, the Company’s board is divided into three classes, Class I, Class II and Class III, with each class serving staggered three-year terms as follows:
• | The Class I directors are Mr. Robert R. Franklin, Jr., Mr. J. Pat Parsons, Mr. Michael A. Havard, and Mr. Tommy W. Lott, and their term will expire at the annual meeting of shareholders to be held in 2022; |
• | The Class II directors are Mr. Glen W. Morgan, Mr. Joe E. Penland, Sr., Mr. Reagan A. Reaud, and Mr. Joseph B. Swinbank, and their term will expire at the annual meeting of shareholders to be held in 2023; and |
• | The Class III directors are Ms. Sheila G. Umphrey, Mr. John E. Williams, Jr., and Mr. William E. Wilson, Jr., and their term will expire at the annual meeting of shareholders to held in 2024. |
Any director vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, even if the remaining directors constitute less than a quorum of the full board, and in the event that there is only one director remaining in office, by such sole remaining director. In accordance with the Company’s bylaws, a director appointed to fill a vacancy will be appointed to serve until such director’s successor shall have been duly elected and qualified. During a period between two successive annual meetings of shareholders, the board cannot fill more than two vacancies created by an increase in the number of directors. Notwithstanding the foregoing, a vacancy to be filled because of an increase in the number of directors may be filled by election at an annual or special meeting of shareholders called for that purpose.
As discussed in greater detail below, the board determined that nine of the eleven current directors qualify as independent directors under the applicable rules of the NASDAQ Global Select Market and the SEC.
Board Leadership Structure
Robert R. Franklin, Jr. currently serves as Chairman, President and Chief Executive Officer. Mr. Franklin joined the Company in 2013 in connection with its merger of equals with VB Texas, Inc. He became Chairman and President of the Company in December 2015. Mr. Franklin’s primary duties are to lead the board in establishing the Company’s overall vision and strategic plan and to lead the Company’s management in carrying out that plan.
The Company’s board does not have a policy regarding the separation of the roles of Chief Executive Officer and Chairman of the Board, as the board believes that it is in the best interests of the Company to make that determination from time to time based on the position and direction of the Company and the membership of the board. The board has determined that having the Chief Executive Officer serve as Chairman of the Board is in the best interests of the Company’s shareholders at this time. This structure makes best use of the Chief Executive Officer’s extensive knowledge of the Company and the banking industry. The board views this arrangement as also providing an efficient nexus between the Company and the board, enabling the board to obtain information pertaining to operational matters expeditiously and enabling the Company’s Chairman to bring areas of concern before the board in a timely manner. The board does not have a lead or presiding independent director.
Risk Management and Oversight
The Company’s board is responsible for oversight of management and the business and affairs of the Company, including those relating to management of risk. The full board determines the appropriate risk for the Company generally, assesses the specific risks faced, and reviews the steps taken by management to manage those risks. While the full board maintains the ultimate oversight responsibility for the risk management process, its committees oversee risk in certain specified areas as described in the section entitled “—Committees of the Board”.
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Director Nominations
The Corporate Governance and Nominating Committee considers nominees to serve as directors of the Company and recommends such persons to the board. The Corporate Governance and Nominating Committee also considers director candidates recommended by shareholders who appear to be qualified to serve on the board and meet the criteria for nominees considered by such committee. The Corporate Governance and Nominating Committee may choose not to consider an unsolicited recommendation if no vacancy exists on the board and the Corporate Governance and Nominating Committee does not perceive a need to increase the size of the board. In order to avoid the unnecessary use of the Corporate Governance and Nominating Committee’s resources, it will consider only those director candidates proposed by shareholders that are recommended in accordance with the procedures set forth in the Company’s bylaws, which are summarized generally in the section titled “—Procedures to be Followed by Shareholders for Director Nominations”.
Criteria for Director Nominees
The Corporate Governance and Nominating Committee has adopted a set of criteria that it considers when it identifies and recommends individuals to be selected as nominees for election to the board. In addition to reviewing the background and qualifications of the individuals considered in the selection of candidates, the Corporate Governance and Nominating Committee looks at a number of attributes and criteria, including: experience, skills, expertise, diversity, personal and professional integrity, character, business judgment, time availability in light of other commitments, dedication, conflicts of interest and such other relevant factors that the Corporate Governance and Nominating Committee considers appropriate in the context of the needs of the board. The Corporate Governance and Nominating Committee does not have a formal policy with respect to diversity; however, the board and Corporate Governance and Nominating Committee believe that it is essential that the board members represent diverse viewpoints.
In addition, prior to nominating an existing director for re-election to the board, the Corporate Governance and Nominating Committee considers and reviews such director’s board and committee attendance and performance; length of board service; experience, skills and contributions that the existing director brings to the board; independence; and any significant change in the director’s status, including the attributes considered for initial membership on the Company’s board of directors.
Process for Identifying and Evaluating Director Nominees
Pursuant to the Corporate Governance and Nominating Committee Charter as approved by the board, the Corporate Governance and Nominating Committee is responsible for the process relating to director nominations, including identifying, recommending, interviewing and selecting individuals who may be nominated for election to the board.
The process that the Corporate Governance and Nominating Committee follows when it identifies and evaluates individuals to be nominated for election to the board is set forth below.
Identification. For purposes of identifying nominees for the board, the Corporate Governance and Nominating Committee will rely on personal contacts of the members of the board as well as their knowledge of members of the communities served by the Company. The Corporate Governance and Nominating Committee will also consider director candidates recommended by shareholders in accordance with the policy and procedures set forth in the Company’s bylaws and which are summarized generally below in the section titled “—Procedures to be Followed by Shareholders for Director Nominations.” The Corporate Governance and Nominating Committee has not previously used an independent search firm in identifying nominees.
Evaluation. In evaluating potential nominees, the Corporate Governance and Nominating Committee will review the qualifications and independence of individuals being considered as director candidates, including persons proposed by shareholders or others. In addition, for any new director nominee, the Corporate Governance and Nominating Committee will conduct a check of the individual’s background and interview the candidate.
Procedures to be Followed by Shareholders for Director Nominations
Any shareholder of the Company entitled to vote in the election of directors may recommend to the Corporate Governance and Nominating Committee one or more persons as a nominee for election as director at a meeting only if
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such shareholder has given timely notice in proper written form of such shareholder’s intent to make such nomination or nominations. To be timely, a shareholder’s notice given in the context of an annual meeting of shareholders must be delivered to or mailed and received at the principal executive office of the Company not less than 120 calendar days nor more than 150 calendar days prior to the first anniversary of the preceding year’s annual meeting. However, in the event that the date of the annual meeting is advanced more than 30 calendar days prior to such anniversary date or delayed more than 60 calendar days after such anniversary date, then to be timely the notice must be received by the Company no later than the later of 70 calendar days prior to the date of the annual meeting or the close of business on the seventh calendar day following the earlier of the date on which notice of the annual meeting is first mailed by or on behalf of the Company or the day on which public announcement is first made of the date of the annual meeting. Any adjournment or postponement of an annual meeting will not commence a new time period for the purposes of giving notice.
To be in proper written form, a shareholder’s notice to the Secretary of the Company must set forth:
• | as to each person whom the shareholder proposes to nominate for election or re-election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director, if elected; |
• | as to the shareholder giving the notice, the name and address of such shareholder and any shareholder associated person; the class and number of shares of the Company and other economic and voting interests or similar positions, securities or interests held by such shareholder or shareholder associated person; |
• | a description of any material relationships, including financial transactions and compensation, between the shareholder giving the notice and any shareholder associated person, on the one hand, and the proposed nominee or nominees, and such nominee’s affiliates and associates, or others acting in concert with the nominee, on the other hand; |
• | a completed independence questionnaire regarding the proposed nominee or nominees; |
• | a written representation from such proposed nominee or nominees that they do not have, nor will they have, any undisclosed voting commitments or other arrangements with respect to their actions as a director; |
• | a written representation from such proposed nominee or nominees that they comply with all applicable corporate governance policies and eligibility requirements; and |
• | any other information reasonably requested by the Company. |
Shareholder nominations should be submitted to the Corporate Secretary and the Chairman of the Corporate Governance and Nominating Committee of CBTX, Inc., Attn: Corporate Secretary, 9 Greenway Plaza, Suite 110, Houston, Texas 77046.
A nomination not made in compliance with the foregoing procedures will not be eligible to be voted upon by the shareholders at the meeting. The Corporate Governance and Nominating Committee has the power and duty to determine whether a nomination was made in accordance with procedures set forth above and, if any nomination is not in compliance with the procedures set forth above, to declare that such defective nomination will be disregarded.
Committees of the Board
The Company’s board has established an Audit Committee, a Compensation Committee and a Corporate Governance and Nominating Committee and may establish additional committees as it deems appropriate, in accordance with applicable law and regulations and the Company’s certificate of formation and bylaws.
Audit Committee
The members of the Company’s Audit Committee are Messrs. William E. Wilson, Jr. (Chairman), Michael A. Havard, Reagan A. Reaud and Joseph B. Swinbank. Mr. Reagan Reaud joined the Audit Committee in March 2021, replacing Mr. Tommy Lott. The Company’s board evaluated the independence of each of the members of the Audit Committee and determined that each (i) is an “independent director” under NASDAQ Global Select Market rules, (ii) satisfies the additional independence standards under applicable SEC rules for audit committee service, and (iii) has the ability to read and understand fundamental financial statements. In addition, the Company’s board of directors determined that Mr. Wilson is a financial expert and has the financial sophistication required of at least one member of the
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Audit Committee by the rules of the NASDAQ Global Select Market due to his experience and background. The Company’s board of directors has also determined that Mr. Wilson qualifies as an “audit committee financial expert” under the rules and regulations of the SEC. The Audit Committee met four times in 2021.
The purpose of the Audit Committee is to assist the board in fulfilling its oversight responsibilities with respect to the following, among other things:
• | selecting and reviewing the performance of the independent auditor and approving, in advance, all engagements and fee arrangements; |
• | reviewing reports from the independent auditor regarding its internal quality control procedures and any material issues raised by the most recent internal quality-control or peer review or by governmental or professional authorities, and any steps taken to deal with such issues; |
• | reviewing the independence of the Company’s independent auditor and setting policies for hiring employees or former employees of the independent auditor and for independent auditor rotation in accordance with applicable laws, rules and regulations; |
• | resolving any disagreements regarding financial reporting between management and the independent auditor, and reviewing with the independent auditor any audit problems, disagreements or difficulties and management’s response thereto; |
• | overseeing the Company’s internal audit function; |
• | reviewing operating and control issues identified in internal audit reports, management letters, examination reports of regulatory agencies and monitoring management’s compliance with recommendations contained in those reports; and |
• | meeting with management and the independent auditor to review the effectiveness of the system of internal control and internal audit procedures, and to address any deficiencies in such procedures. |
The Audit Committee has adopted a written charter, which sets forth the Audit Committee’s duties and responsibilities. The Audit Committee charter is available on the Company’s website at www.communitybankoftx.com under “Investor Relations—Corporate Governance—Documents and Charters”.
Compensation Committee
The members of the Company’s Compensation Committee are Messrs. Michael A. Havard (Chairman), Tommy W. Lott, Joe E. Penland, Sr., Reagan A. Reaud and Joseph B. Swinbank. Mr. Reagan A. Reaud joined the Compensation Committee in March 2021. The Company’s board of directors has evaluated the independence of each of the members of the Compensation Committee and determined that each of the members of the Compensation Committee meets the definition of an “independent director” under NASDAQ Global Select Market rules. The board of directors has also determined that each of the members of the Compensation Committee qualifies as a “nonemployee director” within the meaning of Rule 16b-3 under the Exchange Act. The Compensation Committee met four times in 2021. The Compensation Committee charter requires the Compensation Committee to meet at least once annually.
The purpose of the Compensation Committee is to assist the board in its oversight of overall compensation structure, policies and programs and assessing whether such structure establishes appropriate incentives and meets corporate objectives, the compensation of executive officers and the administration of compensation and benefit plans.
The Compensation Committee has responsibility for, among other things:
• | reviewing and recommending the annual compensation, annual incentive opportunities and any other matter relating to the compensation of executive officers; |
• | reviewing and making recommendations to the board with respect to all employment agreements, severance or termination agreements, change in control agreements or similar agreements between an executive officer and the Company; |
• | reviewing and recommending the establishment of performance measures and the applicable performance targets for each performance-based cash and equity incentive award to be made under any benefit plan; |
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• | taking all actions required or permitted under the terms of compensation and benefit plans, with separate but concurrent authority, and reviewing at least annually the overall performance, operation and administration of the Company’s compensation and benefit plans; |
• | reviewing and recommending action by the board with respect to various other matters in connection with each of the Company’s compensation and benefit plans; |
• | consulting with the Chief Executive Officer and/or other members of the management team regarding equity-based incentive compensation and incentive-based compensation payable to employees other than executive officers; |
• | consulting with the Chief Executive Officer regarding a succession plan for executive officers, including the Chief Executive Officer, and the review of leadership development process for senior management positions; |
• | reviewing the performance of executive officers for each year; and |
• | reviewing and making recommendations to the board with respect to non-management directors for their service on the board and board committees. |
The Compensation Committee has adopted a written charter, which sets forth the Compensation Committee’s duties and responsibilities. The Compensation Committee charter is available on the Company’s website at www.communitybankoftx.com under “Investor Relations—Corporate Governance—Documents and Charters”.
During 2021, the Compensation Committee engaged Longnecker & Associates, now known as NFP, as an independent compensation consultant to obtain objective, expert advice on the Company’s executive compensation program and practices. Pursuant to the engagement, NFP provided the Compensation Committee with information regarding the competitive market for executive talent and marketplace compensation trends, assisted the Compensation Committee with the identification and approval of an appropriate peer group against which to benchmark the Company’s executive compensation program practices, and provided recommendations for revisions to the Company’s existing compensation for its officers. Additionally, during 2021 the Compensation Committee worked with Pearl Meyer & Associates under a joint engagement with Allegiance in conjunction with the pending merger. The Compensation Committee assessed the independence of NFP and Pearl Meyer & Associates pursuant to the rules of the SEC and concluded that their work for the Compensation Committee did not raise any conflicts of interest during 2021.
Corporate Governance and Nominating Committee
The members of the Company’s Corporate Governance and Nominating Committee are Messrs. John E. Williams, Jr. (Chairman), Michael A. Havard, Tommy W. Lott, Glen W. Morgan, Joe E. Penland, Sr., and Joseph B. Swinbank. The board of directors has evaluated the independence of each of the members of the Corporate Governance and Nominating Committee and determined that each of the members of the Corporate Governance and Nominating Committee meets the definition of an “independent director” under NASDAQ Global Select Market rules. The Corporate Governance and Nominating Committee met two times in 2021. The Corporate Governance and Nominating Committee did not retain the services of any independent search firm during 2021.
The Corporate Governance and Nominating Committee has responsibility for, among other things:
• | reviewing the performance of the board and each of its committees; |
• | identifying, assessing and determining the qualification, attributes and skills of, and recommending, persons to be nominated by the Company’s board for election as directors and to fill any vacancies on the board of directors; |
• | reviewing and recommending to the board each director’s suitability for continued service as a director upon the expiration of his or her term and upon any material change in his or her status; and |
• | reviewing the size and composition of the board as a whole and recommending any appropriate changes to reflect the appropriate balance of required independence, knowledge, experience, skills, expertise and diversity. |
The Company’s Corporate Governance and Nominating Committee has adopted a written charter, which sets forth the Corporate Governance and Nominating Committee’s duties and responsibilities. The Corporate Governance and
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Nominating Committee charter is available on the Company’s website at www.communitybankoftx.com under “Investor Relations—Corporate Governance—Documents and Charters”.
The Company’s Corporate Governance and Nominating Committee will consider shareholder recommendations for nominees, provided that such shareholder complies with the procedures described in the section titled “—Procedures to be Followed by Shareholders for Director Nominations”.
Certain Corporate Governance Matters
Code of Business Conduct and Ethics
The Company has a Code of Business Conduct and Ethics in place that applies to all of its directors, officers and employees. The Code of Business Conduct and Ethics sets forth specific standards of conduct and ethics that the Company expects all of its directors, officers and employees to follow, including the Company’s President, Chairman and Chief Executive Officer and senior financial officers. The Code of Business Conduct and Ethics is available on the Company’s website at www.communitybankoftx.com under “Investor Relations—Corporate Governance—Documents and Charters”. Any amendments to the Code of Business Conduct and Ethics, or any waivers of requirements thereof, will be disclosed on the Company’s website within four business days of such amendment or waiver.
Corporate Governance Guidelines
The Company adopted Corporate Governance Guidelines to assist the board in the exercise of its fiduciary duties and responsibilities and to serve the best interests of the Company and its shareholders. The Corporate Governance Guidelines are available on the Company’s website at www.communitybankoftx.com under “Investor Relations—Corporate Governance—Documents and Charters”.
Executive Officers
The following table sets forth the name, position with the Company and age of each of the Company’s named executive officers. The business address for all of these individuals is 9 Greenway Plaza, Suite 110, Houston, Texas 77046.
Name | Position with the Company | Age | ||
Robert R. Franklin, Jr. | Director, Chairman, President and Chief Executive Officer | 67 | ||
J. Pat Parsons | Director, Vice Chairman | 73 | ||
Robert T. Pigott, Jr. | Chief Financial Officer and Senior Executive Vice President | 67 |
Background of the Company’s Named Executive Officer who is not also a Director
Robert T. Pigott, Jr. Mr. Pigott serves as Senior Executive Vice President and Chief Financial Officer of the Company and the Bank. He also serves as an advisory director on the boards of directors for the Company and the Bank. He served as Chief Financial Officer and a director of VB Texas, Inc. and Vista Bank Texas from 2010 to 2013 and was appointed to his current positions with the Company and the Bank in 2013 following the Company’s merger of equals with VB Texas, Inc. and Vista Bank Texas. In his capacity, he oversees all finance activities, including accounting, financial reporting, investments, and interest rate risk management. Mr. Pigott has over 35 years of financial services experience, having served as Chief Financial Officer for both privately held and publicly-traded institutions in the Houston, Dallas/Fort Worth, Austin and McAllen, Texas markets, including Texas Regional Bancshares, Inc. He also spent six years in public accounting with Arthur Andersen & Co., a national accounting firm. Mr. Pigott graduated from the University of Mississippi with a B.B.A. in Accounting in 1976 and is a licensed Certified Public Accountant.
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Other Executive Officers
The following table sets forth information regarding the Company’s executive officers who, in addition to Messrs. Franklin, Parsons and Pigott, are members of the executive committee of the Bank.
Name | Position with the Company | Age | ||
Travis L. Jaggers | President | 73 | ||
Deborah Dinsmore | Senior Executive Vice President and Chief Information Officer | 62 | ||
Justin M. Long | Senior Executive Vice President, General Counsel and Corporate Secretary | 47 | ||
Cambrea R. Merriwether | Senior Executive Vice President and Chief Human Resources Officer | 47 | ||
James L. Sturgeon | Senior Executive Vice President and Chief Risk Officer | 71 | ||
Joe F. West | Senior Executive Vice President and Chief Credit Officer | 67 |
Travis L. Jaggers. Mr. Jaggers has served as President of the Bank since December 2011 and oversees the Company’s loan and treasury activities. He provides strategic vision and direction to the commercial lending group and designs and implements strategies to ensure asset quality, growth and profitability. Mr. Jaggers reviews, recommends and approves all lending and treasury activities and serves on all key operational and management committees of the Bank. Mr. Jaggers graduated from the University of Houston with a B.B.A. in Accounting and received a Master of Science degree in Finance from the University of Houston.
Deborah Dinsmore. Ms. Dinsmore has served as Senior Executive Vice President and Chief Information Officer of the Bank since 2015. Prior to that, she served as the Chief Operations Officer and Chief Information Officer at Integrity Bank from 2012 through 2015. Ms. Dinsmore is responsible for oversight of aligning technology and operational strategies with corporate strategies, leveraging system capabilities to optimize performance, and managing risks associated with technology and operations. She graduated from Alvin Community College with an A.A.S. degree in Business.
Justin M. Long. Mr. Long has served as Senior Executive Vice President, General Counsel and Corporate Secretary of the Bank and the Company since April 2019. Prior to joining the Bank, Mr. Long served as a partner at Norton Rose Fulbright US LLP from 2016 to 2019 where he represented financial institutions in corporate and regulatory matters, including the Company’s initial public offering. Prior to joining Norton Rose Fulbright, Mr. Long was a partner at Bracewell LLP where he represented financial institutions in corporate and regulatory matters. Mr. Long received a bachelor’s degree in Finance from the University of Texas and graduated from the University of Texas School of Law.
Cambrea R. Merriwether. Mrs. Merriwether has served as Senior Executive Vice President and Chief Human Resources Officer of the Bank since May 2020. She specializes in leading the Human Resources function by developing and executing human resources strategies, policies and programs in support of the overall business plan and strategic direction of the Bank. Prior to joining the Bank, Mrs. Merriwether served as the Corporate Director, Human Resources and Talent Development at Apergy, which she joined in 2016. A certified Senior Human Resources Professional with more than 20 years of comprehensive human resources experience, Mrs. Merriwether spent many years in the oil and gas and banking industries prior to joining the organization. Mrs. Merriwether is a graduate with a bachelor’s degree in International Business and Economics from Purdue University.
James L. Sturgeon. Mr. Sturgeon has served as Senior Executive Vice President and Chief Risk Officer of the Bank since 2013. Prior to that he served as the Vice Chairman from 2011 through 2013 at VB Texas Inc., and Vista Bank. He oversees the Bank’s risk division with enterprise risk management, compliance, audit, loan review, information security, financial crimes risk and strategic planning activities. Additionally, he chairs the Bank’s risk committee and sits on various Bank level risk and governance committees. Mr. Sturgeon has over 40 years of experience in banking and graduated with a B.B.A in Finance from the University of Houston in 1973 and an M.B.A. from Southern Methodist University in 1977.
Joe F. West. Mr. West has served as Senior Executive Vice President and Chief Credit Officer of the Bank since 2013. Mr. West joined the Bank in 2013 via the merger of CBTX and Vista Bank Texas where he was Executive Vice President and Senior Credit Officer since 2006. Prior to Vista Bank Texas, Mr. West served as Senior Credit Officer at Horizon Capital Bank in Houston. In his capacity as Chief Credit Officer he is responsible for loan asset quality, loan
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policy and the Bank’s loan approval process. Mr. West has over 40 years of experience in banking and graduated with a B.B.A. in Accounting from Baylor University in 1978 and is a licensed Certified Public Accountant.
Item 11. Executive Compensation
The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, the Company is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These include, but are not limited to, reduced disclosure obligations regarding executive compensations, including the requirement to include a specific form of Compensation Discussion and Analysis, as well as exemptions from the requirement to hold a non-binding advisory vote on executive compensation and the requirement to obtain shareholder approval of any golden parachute payments not previously approved. The Company has elected to comply with the scaled disclosure requirements applicable to emerging growth companies.
Summary Compensation Table
The table below shows the components of compensation of the Company’s named executive officers during the years indicated. Except as set forth in the notes to the table, all cash compensation for each of the named executive officers was paid by the Bank.
Nonqualified | ||||||||||||||||
Stock | Deferred | |||||||||||||||
Stock | Awards | Compensation | All Other | |||||||||||||
Name | Year | Salary | Bonus(1) | Awards(2) | Dividends (3) | Earnings(4) | Compensation (5) | Total | ||||||||
Robert R. Franklin, Jr. | 2021 | $ 550,000 | $ 800,000 | $ 78,843 | $ 9,786 | $ 6,923 | $ 302,390 | $ 1,747,942 | ||||||||
2020 | 550,000 | 600,000 | 59,948 | 6,056 | 9,338 | 248,750 | 1,474,092 | |||||||||
J. Pat Parsons | 2021 | 300,000 | 300,000 | 29,577 | 3,608 | 5,059 | 152,341 | 790,585 | ||||||||
2020 | 300,000 | 330,000 | 32,982 | 2,144 | 6,179 | 169,679 | 840,984 | |||||||||
Robert T. Pigott, Jr. | 2021 | 327,059 | 150,000 | 14,774 | 3,166 | — | 24,551 | 519,550 | ||||||||
2020 | 327,059 | 150,000 | 14,987 | 1,989 | — | 24,251 | 518,286 |
(1) | The amounts in this column represent the aggregate amount of annual discretionary cash bonuses earned by the named executive officers for 2021 and 2020 performance, respectively. For Mr. Parsons, 75% of the amount reported as 2020 was paid in February 2021 and the remaining 25% will be paid (plus interest accrued at the rate of 7% per year, 4% per year beginning January 1, 2021 compounded monthly) in February 2023 (or, if earlier, upon consummation of the merger with Allegiance) subject to his continued employment through each such date. The amounts shown as 2021 in the table above were paid in full in January 2022. |
(2) | The stock awards amount reflected in the table above as 2021 compensation represents the grant date fair value of restricted stock shares granted February 1, 2022 and the stock awards amount reflected in the table above as 2020 compensation represents the grant date fair value of restricted stock shares granted February 1, 2021. As required by SEC rules, amounts in this column represent the grant date fair value of stock-based compensation expense as required by FASB ASC Topic 718 Stock Based Compensation and were calculated using the valuation assumptions for restricted stock and in the notes to the Company’s financial statements in Part II.—Item 8.—Note 18. Stock-Based Compensation. These amounts are not the actual values that may be realized by the named executive officers. |
(3) Dividends earned on unvested shares of restricted stock awards are paid (without interest) at vesting.
(4) | Nonqualified deferred compensation earnings are above-market earnings credited in 2021 and 2020 to Mr. Franklin’s and Mr. Parsons’ respective holdback discretionary bonus arrangements. Holdback bonus amounts accrued interest at the rate of 4% per year, compounded monthly, during 2021 and 7% in 2020. Mr. Franklin’s holdback bonus arrangement was credited with interest in the aggregate amounts of $10,818 and $20,181 for 2021 and 2020, respectively. Mr. Parsons’ holdback bonus arrangement was credited with interest in the aggregate amounts of $8,843 and $13,216 for 2021 and 2020, respectively. |
(5) | See table below for more information regarding “All Other Compensation”. |
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The table below provides more detail for the “All Other Compensation” in the summary compensation table above:
Salary | Deferred | 401(k) | Life | Company | Club | ||||||||||||||
Name | Year | Continuation (1) | Compensation (2) | Match | Insurance | Car | Dues | Other (3) | Total | ||||||||||
Robert R. Franklin, Jr. | 2021 | $ 260,525 | $ | — | $ 17,400 | $ 6,401 | $ 5,502 | $ 11,812 | $ 750 | $ 302,390 | |||||||||
2020 | 203,001 | — | 17,100 | 6,401 | 4,659 | 16,839 | 750 | 248,750 | |||||||||||
J. Pat Parsons | 2021 | 100,000 | 8,348 | 17,400 | 10,382 | 15,616 | — | 595 | 152,341 | ||||||||||
2020 | 100,000 | 29,781 | 17,100 | 10,382 | 11,929 | — | 487 | 169,679 | |||||||||||
Robert T. Pigott, Jr. | 2021 | — | — | 17,400 | 6,401 | — | — | 750 | 24,551 | ||||||||||
2020 | — | — | 17,100 | 6,401 | — | — | 750 | 24,251 | |||||||||||
| (1) | The amounts shown for Mr. Franklin represent the increase in the actuarial present value of his accrued benefit under his 2017 Salary Continuation Agreement for the years shown above. The amounts shown for Mr. Parsons are the cash compensation received pursuant to his employment agreement which entitles him to receive $100,000 annually for a period of 10 years upon reaching the age of 65. See discussion of these agreements below. |
| (2) | Represents earnings on Mr. Parsons’ deferred compensation under the frozen deferred compensation plan. See further discussion in “Deferred Compensation Arrangements under Annual Bonus Plan” below. |
| (3) | The amounts shown for Mr. Franklin and Mr. Pigott represent Company contributions to their respective health savings accounts. The amounts shown for Mr. Parsons represents Company payments for his home security system. |
Narrative Discussion of Summary Compensation Table
General. The primary elements of the executive compensation are base salary, discretionary cash bonuses, long-term incentive compensation in the form of equity awards, and other benefits including perquisites. The Company originally established its executive compensation philosophy and practices to fit the Company’s status as a privately held corporation and adapted its philosophy and practices following the Company’s initial public offering. The Company believes the current mix and value of these compensation elements provide its named executive officers with total annual compensation that is both reasonable and competitive within its markets, appropriately reflects the Company’s performance and the executive’s particular contributions to that performance and takes into account applicable regulatory guidelines and requirements.
Base Salary. Each named executive officer’s base salary is a fixed component of compensation for each year for performing specific job duties and functions. The Company reviews these base salaries at the end of each year, with any adjustments implemented at the beginning of the next year. In considering whether to make adjustments to the base salary rates of the named executive officers, the board of directors considers many factors, including but not limited to (a) changes to the scope of the executive’s responsibilities, (b) the executive’s job performance, and (c) the competitive market for executive talent, as estimated based on competitive market data developed by the Company’s independent compensation consultant, publicly available information and the experience of members of the board of directors and management.
Discretionary Bonus. Historically, the named executive officers have been awarded discretionary annual cash bonus awards after the end of each year based on an overall assessment of the Company’s performance for the year in light of overall market conditions and the individual performance of the named executive officers. The annual bonuses earned by Messrs. Franklin and Parsons have historically been paid in two installments, with 75% of the approved bonus amount paid in the first quarter of the calendar year following the year in which the bonus was earned and the remaining 25% paid (with interest accrued at the rate of 7% per year until January 1, 2021 when the rate became 4% per year) in February of the third calendar year following the year in which the bonus was earned, subject to the named executive officer’s continuing employment with the Company through such date. Mr. Franklin did not defer any of his bonus for 2020 and the 2020 bonus amount shown for Mr. Franklin in the table above was paid in February 2021. Both Messrs. Franklin and Parsons did not defer any of their bonus for 2021 and the amounts shown for 2021 in the table above were paid in January 2022.
Long-Term Incentive Compensation. The Company believes that equity-based incentives are an effective means for aligning the interests of its executives with the interests of the Company’s shareholders and that the long-term
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compensation of its executive officers should be linked to the value provided to the Company’s shareholders. In addition, the Company uses stock-based compensation as a retention tool. Because the stock awards generally vest over a multi-year period, they provide executives with an ongoing incentive to continue their employment with the Company and to maximize shareholder value. Long-term stock-based incentives granted to executives for the last several years have been structured in the form of restricted stock awards. Restricted stock awards are designed to link executives’ interests with those of the Company’s shareholders because the value of the awards is based on the value of the Company’s common stock. In addition, they provide a long-term retention incentive throughout the vesting period because the restricted stock generally has value regardless of stock price volatility.
The following shares of restricted stock were granted to the named executive officers:
Grant | Number of | |||||
Date | Shares of Restricted | |||||
Name | Grant Date | Fair Value | Stock Granted | |||
Robert R. Franklin, Jr. | 2/1/2022 | $ 29.43 | 2,679 | |||
2/1/2021 | $ 26.32 | 2,252 | ||||
J. Pat Parsons | 2/1/2022 | $ 29.43 | 1,005 | |||
2/1/2021 | $ 26.32 | 1,239 | ||||
Robert T. Pigott, Jr. | 2/1/2022 | $ 29.43 | 502 | |||
2/1/2021 | $ 26.32 | 563 |
Each of these awards vest in three approximately equal annual installments beginning on the date of grant, subject to the named executive officer’s continued status as an employee on each applicable vesting date. These restricted stock awards will become immediately and fully vested upon a change of control (as defined in the 2017 Plan, and which would include the consummation of the merger with Allegiance). The awards granted February 1, 2022 are considered compensation for 2021 and the awards granted February 1, 2021 are considered compensation for 2020.
Employee Retirement Benefit Plan. The Company’s named executive officers are also each eligible to participate in its 401(k) plan, which is designed to provide retirement benefits to all eligible employees. The 401(k) plan provides employees with the opportunity to save for retirement on a tax-deferred basis and permits employees to defer between 1% and 100% of eligible compensation, subject to statutory limits. Under the 401(k) plan, the Company may make discretionary matching contributions or any additional contributions.
Deferred Compensation Arrangements under Annual Bonus Plan. The Bank had in the past established unfunded deferred compensation arrangements with executive officers at the Bank, including Mr. Parsons, and certain other highly compensated employees who contributed to the continued growth, development and future business success of the Bank. Pursuant to these arrangements the Company contributed between 25% and 33% of each eligible participant’s incentive bonus amount into a deferred compensation account. These arrangements were frozen to new contributions in 2014. Despite the restriction on further contributions, the Company had a continuing liability under these arrangements of $1.7 million at December 31, 2021. Mr. Parsons’ deferred compensation account continues to hold the amounts deferred prior to the freeze date, which accrued interest at an annual rate of 4% beginning January 1, 2021 compounded monthly. Mr. Parsons became fully vested in his deferred compensation arrangement on March 1, 2018. The vested balance of Mr. Parsons’ account under his deferred compensation arrangement was $137,143 at December 31, 2021.
2017 Salary Continuation Agreement. In October 2017, the Company entered into a salary continuation agreement (the “SERP”) with Mr. Franklin. Under the SERP, Mr. Franklin will receive an annual payment for ten years commencing at age 70 (the “Normal Retirement Benefit”). The amount of the annual payment (the “Annual SERP Payment”) is determined by using reasonable actuarial assumptions to convert the SERP accrual balance (which is annually approved by the Compensation Committee and may be increased, but not decreased) into the Normal Retirement Benefit. The SERP accrual balance was $899,838 at December 31, 2021, which yields a Normal Retirement Benefit with an Annual SERP Payment of approximately $200,000. If Mr. Franklin’s employment terminates before age 70, instead of the Normal Retirement Benefit he would receive a reduced annual payment that is based on the amount of the SERP accrual balance when employment termination occurs. The reduced installment payments would not commence until the seventh month after his termination of employment, or if earlier, the month after he attains age 70. The SERP also provides for a lump-sum cash benefit (in lieu of any other SERP benefit) payable immediately after a change in control (as defined in the SERP, and which would include the consummation of the merger with Allegiance), regardless of whether Mr. Franklin’s employment also terminates. The lump-sum benefit is the amount of the SERP accrual balance as of the date of the change
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in control. If a change in control occurred while Mr. Franklin is receiving installment payments under the SERP, he would instead receive an immediate lump-sum payment consisting of the aggregate amount of all remaining installment payments.
Employment Agreements with Named Executive Officers
The Company has entered into employment agreements with each of the named executive officers. The following is a summary of the material terms of each such agreement.
Employment Agreement with Robert R. Franklin, Jr.
The Company entered into an amended and restated employment agreement with Mr. Franklin on October 28, 2017, pursuant to which he serves as President and Chief Executive Officer and as Chief Executive Officer of the Bank for an initial term of five years that extends for successive one-year renewal terms unless either party gives 60-days’ advance notice of non-renewal. As consideration for these services, the amended and restated employment agreement provides Mr. Franklin with the following compensation and benefits:
• | A minimum annual base salary of $450,000, subject to annual review by the Compensation Committee. |
• | An annual cash performance bonus opportunity in the minimum amount of 25% of his base salary. |
• | An award of 30,000 shares of restricted stock (subject to adjustment for any stock splits, etc.), which was granted in 2017 under the 2017 Omnibus Incentive Plan. These shares vest in five equal annual installments beginning on the first anniversary of the grant date of the award, subject to Mr. Franklin’s continuous employment through each vesting date. |
• | Participation in the SERP, described above. |
• | Certain severance benefits in the event of a qualifying termination of employment (including in connection with a change in control). See “—Potential Payments upon a Termination of Employment or a Change in Control”. |
• | Certain other employee benefits and perquisites, including a company-provided car and reimbursement of country club dues. |
Pursuant to the amended and restated employment agreement, Mr. Franklin will be subject to a confidentiality covenant, a two-year post-termination non-competition covenant and a two-year post-termination non-solicitation covenant.
Employment Agreement with J. Pat Parsons
The Company entered into an employment agreement with Mr. Parsons on May 21, 2008 (which was amended on December 30, 2008 and March 6, 2013), pursuant to which he serves as the Vice Chairman of the Company’s board of directors and as Vice Chairman of the board of directors of the Bank. The employment agreement provides for an initial term of five years and automatically renews each year. Pursuant to the employment agreement, Mr. Parsons is entitled to an annual base salary of $300,000, subject to annual review by the board of directors, and is eligible to receive a discretionary bonus payment for each year. Mr. Parsons is also eligible to receive employee benefits, fringe benefits, and perquisites in accordance with the employment agreement. In addition, Mr. Parsons’ employment agreement provides for certain severance benefits in the event of a qualifying termination of employment and certain payments in connection with a “change in control” of the Company. See “—Potential Payments upon a Termination of Employment or a Change in Control”. Pursuant to the employment agreement, Mr. Parsons is eligible to receive an additional annual payment of $100,000 for a period of 10 years upon reaching the age of 65, subject to certain restrictions. These annual payments began in 2014 and are scheduled to end in 2023.
Employment Agreement with Robert T. Pigott, Jr.
The Company entered into an employment agreement with Mr. Pigott on March 6, 2013, pursuant to which he serves as the Company’s Chief Financial Officer and the Chief Financial Officer of the Bank. The employment agreement provides for an initial term of five years and automatic renewals thereafter for successive one-year terms, unless either party provides notice of non-renewal at least 60 days prior to the renewal date. Pursuant to the employment agreement,
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Mr. Pigott is entitled to an annual base salary of $225,000, subject to annual review by the board of directors, and is eligible to receive a discretionary bonus payment for each year. Mr. Pigott is also eligible to receive employee benefits, fringe benefits, and perquisites in accordance with the employment agreement. In addition, Mr. Pigott’s employment agreement provides for certain severance benefits in the event of a qualifying termination of employment. See “—Potential Payments upon a Termination of Employment or a Change in Control”.
Potential Payments upon a Termination of Employment or a Change in Control
Below is a description of the severance and other change in control benefits to which the named executive officers would be entitled upon a termination of employment and in connection with a change in control.
Termination of Employment without Cause or Resignation with Good Reason
The employment agreements with each of the named executive officers provide for severance benefits if the Company terminates the executive without “cause” or the executive resigns with “good reason” (as each of those terms is defined in the applicable employment agreement), which circumstances referred to as a “qualifying termination of employment”. Upon a qualifying termination of employment, the executive will be entitled to the following payments and benefits under his employment agreement:
• | an amount equal to the accrued but unpaid base salary and unused vacation pay, which is referred to as the “accrued obligations”; |
• | a lump sum cash payment consisting of $1,500,000 for Mr. Franklin (unless termination occurs during the 27-month period that begins three months prior to a change in control); 100% of one year’s annual base salary for Mr. Parsons (unless termination occurs due to change in control); and $550,000 for Mr. Pigott; |
• | pro-rata portion of the executive’s annual bonus, except for Mr. Parsons, which is referred to as the “unpaid incentive payment”; |
• | medical benefits coverage for Mr. Franklin and Mr. Pigott and their dependents for 18 months and 24 months, respectively, following the date of termination of employment, and medical benefits coverage for Mr. Parsons and his dependents for the lesser of the period of time that the employment agreement would have been in effect, or 12 months, which is referred to as the “health and welfare benefits”; and |
• | Mr. Franklin will fully vest in all outstanding unvested equity awards that would have vested based solely on Mr. Franklin’s continued employment (i.e., all time-based equity awards). |
Change in Control
Mr. Franklin
Pursuant to his amended and restated employment agreement, if Mr. Franklin is terminated by the Company or the Bank other than for “cause” or he resigns for “good reason” (as each of those terms is defined in Mr. Franklin’s amended and restated employment agreement) during the 27-month period that begins three months prior to a “change in control” (as such term is defined in Mr. Franklin’s amended and restated employment agreement, and which would include consummation of the merger with Allegiance) and ends 24 months following such change in control, then, in lieu of the $1,500,000 cash severance payment otherwise payable to him, Mr. Franklin will be entitled to receive a cash severance payment equal to the greater of (a) $1,500,000 or (b) the amount equal to three times the sum of his then-current base salary and target annual bonus for the calendar year in which the termination occurs.
In addition, under the terms of his SERP, upon a change in control (which, as defined in his SERP would include consummation of the merger with Allegiance), Mr. Franklin is entitled to receive a lump-sum cash payment (in lieu of any other SERP benefit) in the amount of the Bank’s liability accrual balance in respect of the SERP. This amount is payable immediately after the change in control, regardless of whether Mr. Franklin’s employment also terminates.
Mr. Parsons
Under his employment agreement, Mr. Parsons is entitled to a lump sum cash payment in an amount equal to 100% of one year’s base salary upon termination without “cause” (as such term is defined in Mr. Parsons’ employment agreement) or if he resigns with “good reason” (as such term is defined in the employment agreement) unless the termination occurs during the 180-day period immediately following a “change in control” of the Company (as that term is defined in the employment agreement, and which would include consummation of the merger with Allegiance), in which
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case Mr. Parsons will be entitled to receive a lump sum cash payment in an amount equal to 150% of one year’s base salary.
Outstanding Equity Awards at Year End
The outstanding equity awards held by each of the named executive officers at December 31, 2021 are shown in the table below. Narrative disclosures regarding the Company’s equity compensation plans follow this table.
Option Awards | Stock Awards | |||||||||||||||||
Market | Equity Incentive | Equity Incentive | ||||||||||||||||
Number of | Value of | Plan Awards: | Plan Awards: | |||||||||||||||
Number of | Shares of | Shares of | Number of | Market Value of | ||||||||||||||
Securities Underlying | Option | Option | Stock That | Stock That | Unearned Units | Unearned Units | ||||||||||||
Unexercised Options | Exercise | Expiration | Have Not | Have Not | That Have | That Have | ||||||||||||
Name | Exercisable | Unexercisable | Price | Date | Vested | Vested (1) | Not Vested | Not Vested | ||||||||||
Robert R. Franklin, Jr. | — | — | — | — | 6,000 | (2) | $ 174,000 | — | — | |||||||||
— | — | — | — | 889 | (3) | 25,781 | — | — | ||||||||||
— | — | — | — | 2,174 | (4) | 63,046 | — | — | ||||||||||
— | — | — | — | 2,252 | (5) | 65,308 | — | — | ||||||||||
J. Pat Parsons | — | — | — | — | 2,000 | (2) | 58,000 | — | — | |||||||||
— | — | — | — | 611 | (3) | 17,719 | — | — | ||||||||||
— | — | — | — | 1,195 | (4) | 34,655 | — | — | ||||||||||
— | — | — | — | 1,239 | (5) | 35,931 | — | — | ||||||||||
Robert T. Pigott, Jr. | — | — | — | — | 2,000 | (2) | 58,000 | — | — | |||||||||
— | — | — | — | 222 | (3) | 6,438 | — | — | ||||||||||
— | — | — | — | 543 | (4) | 15,747 | — | — | ||||||||||
— | — | — | — | 563 | (5) | 16,327 | — | — | ||||||||||
(1) | Market value of shares of restricted stock that have not vested is calculated by multiplying the number of shares of stock that have not vested by the closing market price of the Company’s common stock on December 31, 2021, which was $29.00. |
(2) | Shares of restricted stock awarded under the 2017 Plan on November 7, 2017, which vest in equal increments on an annual basis over a five-year period. |
(3) | Shares of restricted stock awarded under the 2017 Plan on February 1, 2019, which vest in approximately equal increments on an annual basis over a three-year period. |
(4) Shares of restricted stock awarded under the 2017 Plan on February 1, 2020, which vest in approximately equal increments on an annual basis over a three-year period.
(5) Shares of restricted stock awarded under the 2017 Plan on February 1, 2021, which vest in approximately equal increments on an annual basis over a three-year period.
VB Texas, Inc. 2006 Stock Option Plan
In connection with the merger with VB Texas, Inc., the Company assumed the VB Texas, Inc. 2006 Stock Option Plan (the “2006 Plan”), and each outstanding option thereunder at the effective time of the merger to acquire shares of VB Texas, Inc. common stock was converted into an option to purchase the Company’s common stock equal to the number of shares of VB Texas, Inc. common stock into which such options were exercisable immediately before the effective time multiplied by an exchange ratio. All of these options under the 2006 Plan became fully vested and immediately exercisable at the time of the merger with VB Texas, Inc. As of December 31, 2021, there were options outstanding to acquire 35,560 shares of the Company’s common stock under the 2006 Plan. The 2006 Plan expired on October 25, 2016, and no additional options may be granted under its terms.
CBFH, Inc. 2014 Stock Option Plan
In May 2014, the board of directors adopted the Company’s 2014 Stock Option Plan (the “2014 Plan”), which was approved by shareholders in May 2014. The 2014 Plan was adopted to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to selected employees and to promote the success
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of the Company’s business by offering these individuals an opportunity to acquire a proprietary interest in the success of the Company, or to increase this interest, by permitting them to receive options to purchase shares of common stock of the Company. The 2014 Plan provides for the issuance of up to 1,127,200 shares of common stock pursuant to options granted under the plan. At December 31, 2021, there were options outstanding to acquire 156,000 shares of the Company’s common stock under the 2014 Plan. Although the Company has not issued any options under the 2014 Plan since 2017, 963,200 shares were available for future grant at December 31, 2021.
CBTX, Inc. 2017 Omnibus Incentive Plan
In September 2017, the Company’s shareholders approved the 2017 Plan, which was previously approved by the board of directors. The purposes of the 2017 Plan are to provide additional incentives to selected officers, employees, non-employee directors and consultants and to attract and retain competent and dedicated persons whose efforts will impact the Company’s long-term growth and profitability. The 2017 Plan provides for the issuance of stock options, stock appreciation rights, or SARs, restricted stock, restricted stock units, or RSUs, stock bonuses, other stock-based awards and cash awards. The 2017 Plan reserved 600,000 shares of the Company’s common stock for issuance and at December 31, 2021, 276,000 shares of the Company’s common stock were available for further issuance under this reservation. At December 31, 2021, 85,813 shares of restricted stock were outstanding under the 2017 Plan.
Director Compensation
The Company pays its directors annual retainers and fees based on their participation in board meetings held throughout the year. In addition, the Company pays annual retainers and fees based on participation in committee meetings. See additional discussion below.
The following table sets forth compensation paid or earned during 2021 to each of the directors other than Robert R. Franklin, Jr. and J. Pat Parsons, whose compensation is described above in “Summary Compensation Table”. The table also includes compensation earned by each director that is attributable to their service as a director of the Bank.
Fees Earned or | Stock | All Other | ||||||
Name | Paid in Cash(1) | Awards(2) | Compensation(3) | Total | ||||
Michael A. Havard | $ 54,150 | $ 51,493 | $ 695 | $ 106,338 | ||||
Tommy W. Lott | 41,575 | 51,493 | 695 | 93,763 | ||||
Glen W. Morgan | 32,200 | 51,493 | 695 | 84,388 | ||||
Joe E. Penland, Sr. | 39,650 | 51,493 | 695 | 91,838 | ||||
Reagan A. Reaud | 42,500 | 51,493 | 695 | 94,688 | ||||
Joseph B. Swinbank | 49,150 | 51,493 | 695 | 101,338 | ||||
Sheila G. Umphrey | 29,750 | 51,493 | 695 | 81,938 | ||||
John E. Williams, Jr. | 36,950 | 51,493 | 695 | 89,138 | ||||
William E. Wilson, Jr. | 43,250 | 51,493 | 695 | 95,438 |
| (1) | Annual retainers and fees earned for serving on the Board of Directors and committees. |
| (2) | Taxable gain related to restricted stock awards which were granted February 1, 2021 and vested December 31, 2021. |
| (3) | All other compensation represents dividends earned on unvested shares of restricted stocks, which are paid (without interest) at vesting. |
Directors are also entitled to the protection provided by the indemnification provisions in the Company’s amended and restated certificate of formation and amended and restated bylaws, and, to the extent they are directors of the Bank, the articles of association and bylaws of the Bank.
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Non-employee directors are compensated as follows:
| ● | Each non-employee director receives an annual base retainer of $20,000, with 50% payable in March and 50% payable in December, subject in each case to the director attending at least 75% of the board meetings during the applicable period (or portion of such period during which the individual is a non-employee director). In addition, each director will receive a fee of $750 for each board meeting the director attends (whether in-person or by telephone or other electronic means). |
| ● | The chair of the audit committee receives an annual retainer of $10,000 and the other members of the audit committee will receive annual retainers of $7,500, in each case subject to the director attending at least 75% of the audit committee meetings during the applicable period (or portion of such period during which the director is the chair or member of the audit committee, as applicable). In addition, each member of the audit committee will receive a fee of $500 for each audit committee meeting the director attends (whether in-person or by telephone or other electronic means). |
| ● | The chair of the compensation committee receives an annual retainer of $7,500 and the other members of the audit committee will receive annual retainers of $2,500, in each case subject to the director attending at least 75% of the compensation committee meetings during the applicable period (or portion of such period during which the director is the chair or member of the compensation committee, as applicable). In addition, each member of the compensation committee will receive a fee of $450 for each compensation committee meeting the director attends (whether in-person or by telephone or other electronic means). |
| ● | The chair of the corporate governance and nominating committee receives an annual retainer of $5,000 and the other members of the corporate governance and nominating committee receive annual retainers of $2,500, in each case subject to the director attending at least 75% of the corporate governance and nominating committee meetings during the applicable period (or portion of such period during which the director is the chair or member of the corporate governance and nominating committee, as applicable). In addition, each member of the corporate governance and nominating committee receives a fee of $350 for each corporate governance and nominating committee meeting the director attends (whether in-person or by telephone or other electronic means). |
| ● | Each director receives an annual award of restricted stock having a target value of $47,500 (prorated for new directors based on the date of appointment). The directors were awarded 1,783 shares each on February 1, 2021 and 1,591 shares on February 1, 2022. The restricted stock awards vest on December 31 in the year granted, subject to the director’s continuing service with the Company or any of its subsidiaries through the applicable vesting date. If a change of control (as defined in the 2017 Plan, and which would include consummation of the merger with Allegiance) occurs before December 31, 2022, then the director would receive accelerated prorated vesting with respect to the director’s February 1, 2022 restricted stock award based on the number of calendar days that elapsed between January 1, 2022 and the date on which such change in control occurs. |
Compensation Policies and Practices and Risk Management
The Company does not believe any risks arise from its compensation policies and practices for its executive officers and other employees that are reasonably likely to have a material adverse effect on the Company’s operations, results of operations or financial condition.
Compensation Committee Interlocks and Insider Participation
None of the executive officers served as (a) a member of a compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board) of another entity, one of whose executive officers served on the Company’s Compensation Committee, (b) a director of another entity, one of whose executive officers served on the Company’s Compensation Committee or (c) a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board) of another entity, one of whose executive officers served as a director of the Company.
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During the year ended December 31, 2021, the members of the Compensation Committee were Messrs. Michael A. Havard (Chairman), Tommy W. Lott, Joe E. Penland, Sr., Joseph B. Swinbank and Reagan Reaud. None of the members of the Compensation Committee (a) was an officer or employee of the Company or its subsidiary in 2021, (b) was formerly an officer or employee of the Company or its subsidiary or (c) had any relationship that required disclosure under the section titled “Item 13.—Certain Relationships and Related Person Transactions and Director Independence—Certain Relationships and Related Person Transactions”.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information regarding the beneficial ownership of the Company’s common stock as of February 17, 2022, by (1) each director, director nominee and named executive officer of the Company, (2) each person who is known by the Company to own beneficially 5% or more of the Company’s common stock and (3) all directors and executive officers as a group. Unless otherwise indicated, based on information furnished by such shareholders, management of the Company believes that each person has sole voting and dispositive power over the shares indicated as owned by such person, subject to applicable community property laws.
Beneficial ownership is determined in accordance with rules of the SEC and generally includes any shares over which a person exercises sole or shared voting and/or investment power. Shares of common stock subject to options currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage ownership of the person holding the options but are not deemed outstanding for computing the percentage ownership of any other person. Except as otherwise indicated, the Company believes the beneficial owners of common stock listed below, based on information furnished by them, have sole voting and investment power with respect to the number of shares listed opposite their names. Unless otherwise noted, the address for each director and named executive officer listed in the table below is c/o CBTX, Inc., 9 Greenway Plaza, Suite 110, Houston, Texas 77046
Number of Shares | Percentage | ||||
Name of Beneficial Owner | Beneficially Owned | Beneficially Owned (1) | |||
Directors and Named Executive Officers | |||||
Robert R. Franklin, Jr. | 276,169 | (2) | 1.12% | ||
J. Pat Parsons | 127,412 | (3) | * | ||
Michael A. Havard | 48,334 | (4) | * | ||
Tommy W. Lott | 225,534 | (5) | * | ||
Glen W. Morgan | 1,224,334 | (6) | 4.98% | ||
Joe E. Penland, Sr. | 1,422,824 | (7) | 5.78% | ||
Reagan A. Reaud | 4,961 | (8) | * | ||
Joseph B. Swinbank | 263,894 | (9) | 1.07% | ||
Sheila G. Umphrey | 1,224,414 | (10) | 4.98% | ||
John E. Williams, Jr. | 1,232,014 | (11) | 5.01% | ||
William E. Wilson, Jr. | 81,622 | (12) | * | ||
Robert T. Pigott, Jr. | 65,847 | (13) | * | ||
Directors and Executive Officers as a group (18 persons) | 6,427,872 | (14) | 26.06% | ||
Principal Shareholders - 5% Security Holders | |||||
BlackRock, Inc. | 1,333,937 | (15) | 5.42% | ||
FJ Capital Management | 1,303,387 | (16) | 5.31% |
* | Represents beneficial ownership of less than 1%. |
(1) | Percentages are based on 24,608,462 shares of common stock issued and outstanding at February 18, 2022. For purposes of computing the percentage of outstanding shares of common stock held by any individual listed in this table, any shares of common stock that such person has the right to acquire pursuant to the exercise of a stock option that are exercisable or will vest within 60 days of February 18, 2022 are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. |
(2) | Includes (i) 264,902 shares held by Mr. Franklin individually and (ii) 11,267 shares outstanding pursuant to restricted stock awards. Mr. Franklin has pledged 101,600 shares as collateral to secure outstanding debt obligations. |
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(3) | Includes (i) 41,597 shares held by Mr. Parsons individually, (ii) 81,387 shares held jointly by Mr. Parsons and his spouse and (iii) 4,428 shares outstanding pursuant to restricted stock awards. |
(4) | Includes (i) 46,743 shares held by Mr. Havard individually and (ii) 1,591 shares outstanding pursuant to restricted stock awards. |
(5) | Includes (i) 223,943 shares held by Mr. Lott individually and (ii) 1,591 shares outstanding pursuant to restricted stock awards. |
(6) | Includes (i) 581,717 shares held by Mr. Morgan individually, (ii) 641,026 shares held by the Grace Trust of which Mr. Morgan serves as the trustee and (iii) 1,591 shares outstanding pursuant to restricted stock awards. |
(7) | Includes (i) 480,927 shares held by Mr. Penland individually, (ii) 215,670 shares held by the Penland Foundation of which Mr. Penland serves as the trustee, (iii) 724,636 shares held by Tram Road Partners LP of which Mr. Penland is the trustee and (iv) 1,591 shares outstanding pursuant to restricted stock awards. Tram Road Partners LP has pledged 724,636 shares as collateral to secure outstanding debt obligations. |
(8) | Includes (i) 2,870 shares held by Mr. Reaud individually, (ii) 500 shares held by Reaud Holdings LLC and (iii) 1,591 shares outstanding pursuant to restricted stock awards. |
(9) | Includes (i) 160,703 shares held by Mr. Swinbank individually, (ii) 101,600 shares held by the JBS/STS Grandchildren’s Trust of which Mr. Swinbank has voting power and (iii) 1,591 shares outstanding pursuant to restricted stock awards. |
(10) | Includes (i) 611,412 shares held by Ms. Umphrey individually, (ii) 611,411 shares held jointly by the Thomas Walter Umphrey Estate, of which Ms. Umphrey has voting authority for these shares as co-executor of the estate and (iv) 1,591 shares outstanding pursuant to restricted stock awards. |
(11) | Includes (i) 1,230,643 shares held by Mr. Williams individually and (ii) 1,591 shares outstanding pursuant to restricted stock awards. Mr. Williams has pledged 608,000 shares as collateral to secure outstanding debt obligations. |
(12) | Includes (i) 44,031 shares held by Mr. Wilson individually, (ii) 24,000 shares held by Mr. Wilson’s individual retirement account, (iii) 12,000 shares held by the Caldwell McFadden Mineral Trust of which Mr. Wilson serves as the trustee and (iv) 1,591 shares outstanding pursuant to restricted stock awards. |
(13) | Includes (i) 32,646 shares held by Mr. Pigott’s individual retirement account, (ii) 30,053 shares held by Mr. Pigott individually and (iii) 3,148 shares outstanding pursuant to restricted stock awards. |
(14) | Includes (i) 6,427,872 shares held by the directors and executive officers, (ii) 55,240 shares issuable upon the exercise of stock options within 60 days of February 18, 2022, and (iii) 57,666 shares outstanding pursuant to restricted stock awards. Individuals in this group have separately pledged a total of 1,434,236 shares as collateral to secure outstanding. |
(15)Based solely on information reported on a Schedule 13G filed with the SEC on February 7, 2022 by or on behalf of BlackRock, Inc. The address of BlackRock, Inc. is 55 East 52nd Street, New York, NY 10055.
(16)Based solely on information reported on a Schedule 13G filed with the SEC on February 10, 2022 by or on behalf of FJ Capital Management, LLC. The address of FJ Capital Management, LLC is 7901 Jones Branch Drive, Suite 210, McLean, VA 22102.
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Securities Authorized for Issuance Under Equity Compensation Plans
At December 31, 2021, shares authorized for issuance under the Company’s equity compensation plans were as follows:
Number of Shares | ||||||
to be Issued | Weighted-Average | Number of Shares | ||||
Upon Exercise of | Exercise Price of | Available for | ||||
Plan Category | Outstanding Awards | Outstanding Awards | Future Grants | |||
Equity compensation plans approved by shareholders (1) | 156,000 | $18.95 | 1,239,200 | |||
Equity compensation plans not approved by shareholders | — | — | — | |||
Total | 156,000 | $18.95 | 1,239,200 |
(1)The number of shares available for future issuance includes 276,000 shares available under the Company’s 2017 Omnibus Incentive Plan and 963,200 shares available under the Company’s 2014 Stock Option Plan.
Item 13. Certain Relationships and Related Person Transactions and Director Independence
Certain Relationships and Related Person Transactions
Certain of the Company’s officers, directors and principal shareholders, as well as their immediate family members and affiliates, are customers of, or have or have had transactions with, the Bank or the Company in the ordinary course of business. These transactions include deposits, loans, and other financial services related transactions. Related person transactions are made in the ordinary course of business, on substantially the same terms, including interest rates and collateral (where applicable), as those prevailing at the time for comparable transactions with persons not related to the Company, and do not involve more than normal risk of collectability or present other features unfavorable to the Company. Loans and deposits the Bank has with these parties have been made and accepted in compliance with applicable regulations and written policies. The Company expects to continue to have such transactions on similar terms and conditions with such officers, directors, shareholders and their affiliates in the future. See Part II.—Item 8. Financial Statements and Supplementary Data—Note 12: Related Party Transactions” for information regarding related party loans and deposits.
Transactions by the Company with related persons are subject to regulatory requirements and restrictions. These requirements and restrictions include Sections 23A and 23B of the Federal Reserve Act (which govern certain transactions by the Bank with its affiliates) and the Federal Reserve’s Regulation O (which governs certain loans by the Bank to its executive officers, directors, and principal shareholders). See “Part I.—Item 1. Business—Supervision and Regulation—Restrictions on Transactions with Affiliates and Insiders.”
The Company has adopted policies to comply with these regulatory requirements and restrictions, such as a written Related Person Transactions Policy which provides that any related person transaction is generally prohibited unless the Audit Committee determines that such transaction is fair to the Company and, if necessary, the Company has developed an appropriate plan to manage any conflicts of interest.
Director Independence
Under the rules of the NASDAQ Global Select Market, a majority of the members of the Company’s board are required to be independent. The rules of the NASDAQ Global Select Market, as well as those of the SEC, also impose several other requirements with respect to the independence of the Company’s directors.
The Company’s board has evaluated the independence of each director based upon these rules. Applying these rules, the board has affirmatively determined that, with the exception of Messrs. Franklin and Parsons, each of the current directors qualifies as an independent director under applicable rules. In making these determinations, the board considered the current and prior relationships that each director has and has had with the Company and all other facts and circumstances the board deemed relevant in determining their independence, including the beneficial ownership of common stock by each director, and the transactions described under the section titled “—Certain Relationships and Related Person Transactions”.
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Item 14. Principal Accounting Fees and Services
Independent Auditors
Grant Thornton LLP has served as the Company’s independent auditors since 2015.
Fees Paid to Independent Registered Public Accounting Firm
The Audit Committee reviewed the following Grant Thornton LLP fees for professional services for 2021 and 2020 for purposes of considering whether such fees are compatible with maintaining the auditor’s independence and concluded that such fees did not impair Grant Thornton LLP’s independence. The Audit Committee pre-approved all of the services provided by Grant Thornton LLP before the services were performed in accordance with the policies and procedures described in the section titled “—Audit Committee Pre-Approval”.
Independent auditor fees for the periods shown below were as follows:
2021 | 2020 | ||||
Audit fees(1) | $ 611,583 | $ 589,677 | |||
Audit-related fees | — | — | |||
Tax fees | — | — | |||
All other fees | — | — | |||
Total fees | $ 611,583 | $ 589,677 |
| (1) | Audit fees consist of fees for professional services for (i) the audit of the Company’s annual financial statements included in the Annual Report on Form 10-K for the years listed and a review of financial statements included in the Quarterly Reports on Form 10-Q, and (ii) services that are normally provided in connection with statutory and regulatory filings or engagements for those years. |
Audit Committee Pre-Approval
The Audit Committee’s charter establishes a policy and related procedures regarding the Audit Committee’s authority to approve, in advance, all auditing services (which, if applicable, may include providing comfort letters in connection with securities underwritings), and non-audit services that are otherwise permitted by law (including tax services, if any) that are provided to the Company by its independent auditors. The Audit Committee may also delegate to one or more of its members the authority to pre-approve auditing services and non-audit services that are otherwise permitted by law, provided that each such pre-approval decision is presented to the Audit Committee at or before its next scheduled meeting. In addition, the Audit Committee has the authority to review and approve in advance the Company’s independent auditors’ annual engagement letter, including the proposed fees contained therein.
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PART IV.
Item 15. Exhibits and 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 | |
2.1 | |||
3.1 | |||
3.2 | |||
4.1 | |||
4.2 | |||
10.1 | |||
10.2 | |||
10.3† | |||
10.3.1† | |||
10.4† | |||
10.5† | |||
10.6† | |||
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10.7† | |||
10.8† | |||
10.9† | |||
10.10† | |||
10.11† | |||
10.12† | |||
10.13† | |||
10.14† | |||
10.15† | |||
10.16† | |||
10.17† | |||
10.18† | |||
10.19† | |||
10.20 | |||
10.21 | |||
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21.1* | |||
23.1* | |||
31.1* | |||
31.2* | |||
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, 2021, 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
*** Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the SEC upon request; provided, however, that the parties may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any document so furnished
† | Indicates a management contract or compensatory plan. |
Item 16. Form 10-K Summary
None.
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SIGNATURES
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 25, 2022.
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. | Chairman, President and Chief Executive Officer | February 25, 2022 | ||
Robert R. Franklin, Jr. | (Principal Executive Officer) | |||
/s/ Robert T. Pigott, Jr. | Senior Executive Vice President and Chief Financial Officer | February 25, 2022 | ||
Robert T. Pigott, Jr. | (Principal Financial and Accounting Officer) | |||
/s/ Michael A. Havard | Director | February 25, 2022 | ||
Michael A. Havard | ||||
/s/ Tommy W. Lott | Director | February 25, 2022 | ||
Tommy W. Lott | ||||
/s/ Glen W. Morgan | Director | February 25, 2022 | ||
Glen W. Morgan | ||||
/s/ J. Pat Parsons | Vice Chairman | February 25, 2022 | ||
J. Pat Parsons | ||||
/s/ Joe E. Penland, Sr. | Director | February 25, 2022 | ||
Joe E. Penland, Sr. | ||||
/s/ Reagan A. Reaud | Director | February 25, 2022 | ||
Reagan A. Reaud | ||||
/s/ Joseph B. Swinbank | Director | February 25, 2022 | ||
Joseph B. Swinbank | ||||
/s/ Sheila G. Umphrey | Director | February 25, 2022 | ||
Sheila G. Umphrey | ||||
/s/ John E. Williams, Jr. | Director | February 25, 2022 | ||
John E. Williams, Jr. | ||||
/s/ William E. Wilson, Jr. | Director | February 25, 2022 | ||
William E. Wilson, Jr. |
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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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, 2021 and 2020, the related consolidated statements income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
We have served as the Company’s auditor since 2015
February 25, 2022
Board of Directors and Shareholders
CBTX, Inc.
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Item 1. Financial Statements
CBTX, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except par value and share amounts)
December 31, | ||||||
| 2021 |
| 2020 | |||
Assets: |
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Cash and due from banks | $ | | $ | | ||
Interest-bearing deposits at other financial institutions |
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Total cash and cash equivalents |
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Securities |
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Equity investments |
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Loans held for sale |
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Loans, net of allowance for credit losses of $ |
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Premises and equipment, net of accumulated depreciation of $ |
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Goodwill |
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Other intangible assets, net of accumulated amortization of $ |
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Bank-owned life insurance |
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Operating lease right-to-use assets | | | ||||
Deferred tax assets, net |
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Other assets |
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Total assets | $ | | $ | | ||
Liabilities: |
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Noninterest-bearing deposits | $ | | $ | | ||
Interest-bearing deposits |
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Total deposits |
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Federal Home Loan Bank advances | | | ||||
Operating lease liabilities | | | ||||
Other liabilities |
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Total liabilities |
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Commitments and contingencies (Note 16) |
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Shareholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Treasury stock, at cost, |
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Accumulated other comprehensive income, net of tax of $ |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
107
CBTX, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
Years Ended December 31, | |||||||||
| 2021 | 2020 |
| 2019 | |||||
Interest income: |
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Interest and fees on loans | $ | | $ | | $ | | |||
Securities |
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Interest-bearing deposits at other financial institutions |
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Equity investments | | | | ||||||
Total interest income |
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Interest expense: |
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Deposits |
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Federal Home Loan Bank advances |
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Other interest-bearing liabilities |
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Total interest expense |
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Net interest income |
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Provision (recapture) for credit losses: |
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Provision (recapture) for credit losses for loans | ( | | | ||||||
Provision (recapture) for credit losses for unfunded commitments | ( | | — | ||||||
Total provision (recapture) for credit losses | ( | | | ||||||
Net interest income after provision (recapture) for credit losses |
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Noninterest income: |
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Deposit account service charges |
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Card interchange fees |
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Earnings on bank-owned life insurance |
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Net gain on sales of assets |
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Other |
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Total noninterest income |
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Noninterest expense: |
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Salaries and employee benefits |
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Occupancy expense |
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Professional and director fees |
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Data processing and software | | | | ||||||
Regulatory fees | | | | ||||||
Advertising, marketing and business development |
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Telephone and communications | | | | ||||||
Security and protection expense |
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Amortization of intangibles |
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Other expenses |
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Total noninterest expense |
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Net income before income tax expense |
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Income tax expense |
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Net income | $ | | | $ | | ||||
Earnings per common share |
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Basic | $ | | $ | | $ | | |||
Diluted | $ | | $ | | $ | | |||
See accompanying notes to consolidated financial statements.
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CBTX, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Years Ended December 31, | |||||||||
| 2021 | 2020 |
| 2019 | |||||
Net income | $ | | $ | |
| $ | | ||
Change in unrealized gains (losses) on securities available for sale arising during the period | ( | |
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Reclassification adjustments for net realized gains included in net income | — | |
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Change in related deferred income tax | | ( |
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Other comprehensive income (loss), net of tax | ( | |
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Total comprehensive income | $ | | $ | | $ | | |||
See accompanying notes to consolidated financial statements.
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CBTX, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share amounts)
Accumulated | ||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||
Common Stock | Paid-In | Retained | Treasury Stock | Comprehensive | ||||||||||||||||||
| Shares |
| Amount |
| Capital |
| Earnings |
| Shares |
| Amount |
| Income (Loss) |
| Total | |||||||
Balance at December 31, 2018 |
| | $ | | $ | | $ | |
| ( | $ | ( | $ | ( | $ | | ||||||
Net income |
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Dividends on common stock, $ |
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Stock-based compensation expense |
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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 |
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Balance at December 31, 2019 | | | | |
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Net income |
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Cumulative effect of accounting changes from adoption of CECL, net of deferred tax asset | — | — | — | ( | — | — | — | ( | ||||||||||||||
Dividends on common stock, $ |
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Stock-based compensation expense |
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Vesting of restricted stock, net of shares withheld for employee tax liabilities | |
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Exercise of stock options, net of shares withheld for employee tax liabilities | — | — | ( | — | | | — | | ||||||||||||||
Shares repurchased | ( | ( | ( | — | — | — | — | ( | ||||||||||||||
Other comprehensive income, net of tax |
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Balance at December 31, 2020 | | | | |
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Net income |
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Dividends on common stock, $ |
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Stock-based compensation expense |
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Vesting of restricted stock, net of shares withheld for employee tax liabilities | |
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| ( | — | — | — | — | ( | ||||||||||||
Exercise of stock options, net of shares withheld for employee tax liabilities | — | — | ( | — | | | — | | ||||||||||||||
Shares repurchased | ( | ( | ( | — | — | — | — | ( | ||||||||||||||
Other comprehensive loss, net of tax |
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| ( |
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Balance at December 31, 2021 | | $ | | $ | | $ | |
| ( | $ | ( | $ | | $ | | |||||||
See accompanying notes to consolidated financial statements.
110
CBTX, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31, | |||||||||
| 2021 | 2020 | 2019 | ||||||
Cash flows from operating activities: |
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Net income | $ | | $ | | $ | | |||
Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
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Provision (recapture) for credit losses |
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Depreciation expense |
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Amortization of intangibles |
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Amortization of premiums on securities |
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Amortization of lease right-to-use assets | | | | ||||||
Accretion of lease liabilities | | | | ||||||
Earnings on bank-owned life insurance | ( | ( | ( | ||||||
Stock-based compensation expense |
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Deferred income tax benefit (provision) |
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Net gain on sales of assets |
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Net (earnings) loss on securities |
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Change in operating assets and liabilities: |
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Loans held for sale |
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Other assets |
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Operating lease liabilities | ( | ( | ( | ||||||
Other liabilities |
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Total adjustments |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Purchases of securities |
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Proceeds from sales, calls and maturities of securities |
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Principal repayments of securities |
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Net (increase) decrease in loans |
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Purchases of loans | ( | — | — | ||||||
Net sales of loan participations |
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Proceeds from sales of Small Business Administration loans |
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Net return of capital (contributions) to equity investments |
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Redemptions of bank-owned life insurance |
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Net purchases of premises and equipment |
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Proceeds from sales of repossessed real estate and other assets | | — | | ||||||
Proceeds from insurance claims | — | — | | ||||||
Net cash used in investing activities |
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Cash flows from financing activities: |
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Net increase in noninterest-bearing deposits |
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Net increase in interest-bearing deposits |
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Net increase in Federal Home Loan Bank advances | — | — | | ||||||
Net decrease in securities sold under agreements to repurchase |
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Redemption of trust preferred securities | — | — | ( | ||||||
Dividends paid on common stock |
| ( | ( |
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Payments to tax authorities for stock-based compensation | ( | ( | ( | ||||||
Proceeds from exercise of stock options | | | | ||||||
Repurchase of common stock | ( | ( | ( | ||||||
Net cash provided by financing activities |
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Net increase (decrease) in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash, beginning |
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Cash, cash equivalents and restricted cash, ending | $ | | $ | | $ | | |||
See accompanying notes to consolidated financial statements.
111
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
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 interest expense for 2020 and 2019, interest expense related to repurchase agreements, note payable and junior subordinated debt have been combined together as interest expense on other interest-bearing liabilities. These reclassifications were made to conform to the 2021 financial statement presentation in the consolidated statements of income.
Segment Reporting—The Company has
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 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 and cash equivalents 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 $
Historically, the Bank has been required to maintain regulatory reserves with the Federal Reserve Bank of Dallas, or the Federal Reserve Bank. On March 15, 2020, the Board of Governors of the Federal Reserve System announced that it had reduced the required regulatory reserve balance to 0% effective on March 26, 2020 in reaction to the economic dislocation caused by the COVID-19 pandemic. As such, the Bank did not have any reserve requirement balances as of December 31, 2021 and 2020.
At December 31, 2021 and 2020, the Company had $
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
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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 credit at their funded portion. All unfunded amounts for loans in process and credit lines are reported as unfunded commitments and not reflected in the accompanying consolidated balance sheets.
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 2021 and 2020, the Company participated in the Paycheck Protection Program, or PPP, under the CARES Act, which facilitates loans to small businesses. The Company originated loans under PPP financing guidelines 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. The Company had $
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 Company adopted Accounting Standards Codification Topic 326 Financial Instruments—Credit Losses, or CECL, effective January 1, 2020. 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
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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. 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 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
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for expected losses in the portfolio. For loans collectively evaluated, 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 excludes 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.
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. 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.
Prior to the adoption of CECL on January 1, 2020, the Company calculated an ACL 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.
See Note 6: Allowance for Credit Losses for further discussion related to CECL and related disclosures.
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
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. As of December 31, 2021, the Company had no securities classified as held to maturity.
Equity securities are 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.
The Company considers qualitative factors in determining if an ACL is 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 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, 2021 or 2020 were impaired due to credit quality. Accordingly no ACL was recorded in the Company’s consolidated balance sheets at December 31, 2021 or 2020.
Amortized costs, as defined by GAAP, include acquisition costs, applicable accrued interest and accretion or amortization of premiums and discounts. The Company excludes 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.
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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
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
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 at least annually or 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 to
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 individual on receipt of a death notice or other verified evidence.
116
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
Fair Value Measurements—Fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is estimated based upon models that primarily use observable market-based parameters as inputs. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Income Taxes—The Company prepares and reports income taxes on a consolidated basis. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. 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 required at December 31, 2021 and 2020.
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
117
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 salaries and employee benefits expense 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
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 2021,
Accounting Standards Recently Adopted
Accounting standards update, or 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
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 resulting in the acceleration of previously deferred fees and costs. 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 began modifying LIBOR based loans during 2020 and applied the expedients and exceptions. The adoption of this ASU did not have a material effect on the Company, nor does the Company expect it to have a material effect in the future.
118
Cash Flow Reporting—Supplemental disclosures of cash flow information for the periods indicated below were as follows:
Years Ended December 31, | |||||||||
(Dollars in thousands) |
| 2021 | 2020 | 2019 | |||||
Supplemental disclosures of cash flow information: |
|
| |||||||
Cash paid for taxes | $ | | $ | | $ | | |||
Cash paid for interest | | | | ||||||
Supplemental disclosures of non-cash flow information: | |||||||||
Operating lease right-to-use asset increased (decreased) in exchange for lease liabilities | ( | | | ||||||
Change in liability for dividends accrued | ( | | | ||||||
Repossessed real estate and other assets | — | — | | ||||||
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:
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | ||||||||||
(Dollars in thousands) |
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
December 31, 2021 |
|
|
|
|
|
|
|
| ||||
Debt securities available for sale: |
|
|
|
|
|
|
|
| ||||
State and municipal securities | $ | | $ | | $ | ( | $ | | ||||
U.S. Treasury securities | | — | ( | | ||||||||
U.S. agency securities: |
|
|
|
|
| |||||||
Callable debentures | | — | ( | | ||||||||
Collateralized mortgage obligations |
| |
| |
| ( |
| | ||||
Mortgage-backed securities |
| |
| |
| ( |
| | ||||
Equity securities |
| |
| — |
| ( |
| | ||||
Total | $ | | $ | | $ | ( | $ | | ||||
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 | $ | | $ | | $ | ( | $ | | ||||
119
The amortized cost and estimated fair value of securities by contractual maturities as of the dates shown below were as follows:
(Dollars in thousands) |
| 1 Year or Less |
| After 1 Year to 5 Years |
| After 5 Years to 10 Years |
| After 10 Years | Total | ||||||
December 31, 2021 |
|
|
|
|
|
|
|
|
| ||||||
Amortized cost: | |||||||||||||||
Debt securities available for sale: |
|
|
|
|
|
|
|
|
| ||||||
State and municipal securities | $ | | $ | — | $ | | $ | | $ | | |||||
U.S. Treasury securities | — | | | — | | ||||||||||
U.S. agency securities: |
|
|
|
|
|
| |||||||||
Callable debentures | — | — | | — | | ||||||||||
Collateralized mortgage obligations |
| — |
| — |
| |
| |
| | |||||
Mortgage-backed securities |
| — |
| |
| |
| |
| | |||||
Equity securities |
| |
| — |
| — |
| — |
| | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
Fair value: | |||||||||||||||
Debt securities available for sale: |
|
|
|
|
|
|
|
|
| ||||||
State and municipal securities | $ | | $ | — | $ | | $ | | $ | | |||||
U.S. Treasury securities | — | | | — | | ||||||||||
U.S. agency securities: |
|
|
|
|
|
| |||||||||
Callable debentures | — | — | | — | | ||||||||||
Collateralized mortgage obligations |
| — |
| — |
| |
| |
| | |||||
Mortgage-backed securities |
| — |
| |
| |
| |
| | |||||
Equity securities |
| |
| — |
| — |
| — |
| | |||||
Total | $ | | $ | | $ | | $ | | $ | | |||||
(Dollars in thousands) |
| 1 Year or Less |
| After 1 Year to 5 Years |
| After 5 Years to 10 Years |
| After 10 Years | Total | ||||||
December 31, 2020 |
|
|
|
|
|
|
|
|
| ||||||
Amortized cost: | |||||||||||||||
Debt securities available for sale: |
|
|
|
|
|
|
|
|
| ||||||
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 | $ | | $ | | $ | | $ | | $ | | |||||
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 $
Accrued interest receivable for securities was $
120
The Company held
Less than Twelve Months | Twelve Months or More | |||||||||||
Gross | Gross | |||||||||||
Fair | Unrealized | Fair | Unrealized | |||||||||
(Dollars in thousands) |
| Value |
| Losses |
| Value |
| Losses | ||||
December 31, 2021 |
|
|
|
|
|
|
|
| ||||
Debt securities available for sale: |
|
|
|
|
|
|
|
| ||||
State and municipal securities | $ | | $ | ( | $ | | $ | ( | ||||
U.S. Treasury securities | | ( | — | — | ||||||||
U.S. agency securities: |
|
|
|
|
|
|
| |||||
Callable debentures | | ( | — | — | ||||||||
Collateralized mortgage obligations |
| |
| ( |
| |
| ( | ||||
Mortgage-backed securities |
| |
| ( |
| — |
| — | ||||
Equity securities |
| |
| ( |
| — |
| — | ||||
$ | | $ | ( | $ | | $ | ( | |||||
December 31, 2020 |
|
|
|
|
|
|
|
| ||||
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
The Company’s unconsolidated investments that are considered equity securities as they represent ownership interests, such as common or preferred stock, as of the dates indicated below were as follows:
December 31, | ||||||
(Dollars in thousands) |
| 2021 | 2020 | |||
Federal Reserve Bank stock | $ | | $ | | ||
Federal Home Loan Bank stock |
| |
| | ||
The Independent Bankers Financial Corporation stock |
| |
| | ||
Community Reinvestment Act investments |
| |
| | ||
$ | | $ | | |||
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 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 $
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
121
investments from the same issuers that are actively traded, and as a result, these investments are stated at cost. At December 31, 2021 and 2020, the Company had $
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, 2021.
NOTE 4: LOANS
Loans by loan class, or major loan category, as of the dates shown below were as follows:
| ||||||||||
(Dollars in thousands) |
| December 31, 2021 | 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 gross loans |
| |
|
| |
| ||||
Less allowance for credit losses for loans |
| ( |
|
|
| ( |
|
| ||
Less deferred loan fees and unearned discounts |
| ( |
|
|
| ( |
|
| ||
Less loans held for sale |
| ( |
|
|
| ( |
|
| ||
Loans, net | $ | |
|
| $ | |
|
| ||
Accrued interest receivable for loans is $
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, 2021, 2020 and 2019, by loan class, were as follows:
Participations | Participations | |||||
(Dollars in thousands) | Purchased | Sold | ||||
December 31, 2021 |
|
|
|
| ||
Commercial and industrial | $ | — | $ | | ||
Commercial real estate | | | ||||
Construction and development | | | ||||
Other | | — | ||||
$ | | $ | | |||
December 31, 2020 |
|
|
|
| ||
Commercial and industrial | $ | — | $ | | ||
Commercial real estate | | — | ||||
December 31, 2019 | ||||||
Commercial real estate | | | ||||
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, 2021, 2020 and 2019 were $
122
on sales of SBA loans were $
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 indicated below:
90 Days or | 90 Days | ||||||||||||||||||||
30 to 59 Days | 60 to 89 Days | Greater | Total | Total | Past Due and | ||||||||||||||||
(Dollars in thousands) |
| Past Due |
| Past Due |
| Past Due |
| Past Due |
| Current Loans |
| Total Loans |
| Still Accruing | |||||||
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Commercial and industrial | $ | | $ | — | $ | — | $ | | $ | | $ | | $ | — | |||||||
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Commercial real estate |
| |
| — |
| |
| |
| |
| |
| — | |||||||
Construction and development |
| — |
| — |
| |
| |
| |
| |
| — | |||||||
1-4 family residential |
| |
| |
| — |
| |
| |
| |
| — | |||||||
Multi-family residential |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Consumer |
| |
| — |
| — |
| |
| |
| |
| — | |||||||
Agriculture |
| — |
| — |
| — |
| — |
| |
| |
| — | |||||||
Other |
| |
| — |
| — |
| |
| |
| |
| — | |||||||
Total gross loans | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | |||||||
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 gross loans | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | |||||||
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:
December 31, | ||||||
(Dollars in thousands) |
| 2021 |
| 2020 | ||
Commercial and industrial | $ | | $ | | ||
Real estate: |
|
|
| |||
Commercial real estate |
| |
| | ||
Construction and development |
| |
| | ||
1-4 family residential |
| |
| | ||
Consumer | | — | ||||
Total nonaccrual loans | $ | | $ | | ||
Interest income that would have been earned under the original terms of the nonaccrual loans was $
123
Loans restructured due to the borrower’s financial difficulties, or troubled debt restructurings, that remained outstanding as of the end of the periods indicated below were as follows:
Post-modification Recorded Investment | |||||||||||||||||
Extended | |||||||||||||||||
Maturity, | |||||||||||||||||
Pre-modification | Extended | Restructured | |||||||||||||||
Outstanding | Maturity and | Payments | |||||||||||||||
Number | Recorded | Restructured | Extended | Restructured | and Adjusted | ||||||||||||
(Dollars in thousands) |
| of Loans |
| Investment |
| Payments |
| Maturity |
| Payments |
| Interest Rate | |||||
December 31, 2021 | |||||||||||||||||
Commercial and industrial | | $ | | $ | | $ | — | $ | — | $ | — | ||||||
Real estate: | |||||||||||||||||
Commercial real estate |
| | | | — | — | — | ||||||||||
1-4 family residential | | | | — | — | — | |||||||||||
Consumer | | | — | — | | — | |||||||||||
Total |
| | $ | | $ | | $ | — | $ | | $ | — | |||||
December 31, 2020 | |||||||||||||||||
Commercial and industrial |
| | $ | | $ | | $ | — | $ | | $ | | |||||
Real estate: | |||||||||||||||||
Commercial real estate |
| |
| |
| |
| — |
| — |
| — | |||||
Construction and development | | | | — | — | | |||||||||||
1-4 family residential | | | | — | — | — | |||||||||||
Total |
| | $ | | $ | | $ | — | $ | | $ | | |||||
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.
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 a troubled debt restructuring 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.
There were
December 31, 2020 | |||||
Number | |||||
(Dollars in thousands) |
| of Loans |
| Balance | |
Commercial and industrial | | $ | | ||
Real estate: | |||||
Commercial real estate |
| |
| | |
Construction and development | | | |||
1-4 family residential | | | |||
Total |
| | $ | | |
At December 31, 2021 and 2020, the Company had an outstanding commitment to potentially fund $
124
Loans individually evaluated for credit losses as of the dates indicated below were as follows:
Troubled Debt Restructurings | ||||||||||||||||||
(Dollars in thousands) | Accruing | Non-Accrual | Total | Other Non-Accrual | Other Accruing | Total Loans Individually Evaluated | ||||||||||||
December 31, 2021 | ||||||||||||||||||
Commercial and industrial | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Real estate: | ||||||||||||||||||
Commercial real estate | | | | | | | ||||||||||||
Construction and development | | — | | | | | ||||||||||||
1-4 family residential | | | | | — | | ||||||||||||
Consumer | — | | | — | | | ||||||||||||
Other | | — | | — | — | | ||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
December 31, 2020 | ||||||||||||||||||
Commercial and industrial | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Real estate: | ||||||||||||||||||
Commercial real estate | | | | | — | | ||||||||||||
Construction and development | | | | — | — | | ||||||||||||
1-4 family residential | | | | | — | | ||||||||||||
Other | | — | | — | — | | ||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
NOTE 6: ALLOWANCE FOR CREDIT LOSSES
The Company primarily manages credit quality and credit risk associated with its loan portfolio based on the risk grading assigned to each individual loan within the loan class. Each loan class is a grouping of loan receivables within the portfolio based on risk characteristics and the method for monitoring and assessing the associated credit risks.
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. 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.
125
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
At December 31, 2021 and December 31, 2020, the ratio of the ACL for loans to loans excluding loans held for sale was
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. The ACL at December 31, 2021 and 2020, reflects the Company’s assessment based on the information available at that time.
126
Loans by risk grades, loan class and vintage, as of December 31, 2021 were as follows:
(Dollars in thousands) |
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| Prior | Revolving Loans | Converted Revolving Loans |
| Total | |||||||||||
Commercial and industrial: | |||||||||||||||||||||||||||
Pass | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Special mention | — | — | | | — | — | | — | | ||||||||||||||||||
Substandard | — | | | | | | | | | ||||||||||||||||||
Total commercial and industrial | | | | | | | | | | ||||||||||||||||||
Commercial real estate: | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | — | — | | | — | | — | — | | ||||||||||||||||||
Substandard | — | | | | | | — | | | ||||||||||||||||||
Total commercial real estate | | | | | | | | | | ||||||||||||||||||
Construction and development: | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | — | | — | — | — | — | — | — | | ||||||||||||||||||
Substandard | — | | — | | | | — | — | | ||||||||||||||||||
Total construction and development | | | | | | | | | | ||||||||||||||||||
1-4 family residential: | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | — | — | — | — | — | — | — | — | — | ||||||||||||||||||
Substandard | — | | | | | | | — | | ||||||||||||||||||
Total 1-4 family residential | | | | | | | | | | ||||||||||||||||||
Multi-family residential: | |||||||||||||||||||||||||||
Pass | | | | | | | | — | | ||||||||||||||||||
Total multi-family residential | | | | | | | | — | | ||||||||||||||||||
Consumer: | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Substandard | — | | — | — | — | — | | | | ||||||||||||||||||
Total consumer | | | | | | | | | | ||||||||||||||||||
Agriculture: | |||||||||||||||||||||||||||
Pass | | | | | | — | | | | ||||||||||||||||||
Substandard | — | — | — | — | — | | | — | | ||||||||||||||||||
Total agriculture | | | | | | | | | | ||||||||||||||||||
Other: | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Substandard | — | — | — | — | — | — | — | — | |||||||||||||||||||
Total other | | | | | | | | | | ||||||||||||||||||
Total | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | — | | | | — | | | — | | ||||||||||||||||||
Substandard | — | | | | | | | | | ||||||||||||||||||
Total gross loans | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
127
Loans by risk grades, loan class and vintage, as of December 31, 2020 were as follows:
(Dollars in thousands) |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| Prior | Revolving Loans | Converted Revolving Loans |
| Total | |||||||||||
Commercial and industrial: | |||||||||||||||||||||||||||
Pass | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Special mention | — | — | | — | — | — | | — | | ||||||||||||||||||
Substandard | | | | | | | | | | ||||||||||||||||||
Total commercial and industrial | | | | | | | | | | ||||||||||||||||||
Commercial real estate: | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | — | | — | — | — | | — | | | ||||||||||||||||||
Substandard | — | | | | | | | — | | ||||||||||||||||||
Total commercial real estate | | | | | | | | | | ||||||||||||||||||
Construction and development: | |||||||||||||||||||||||||||
Pass | | | | | | | | — | | ||||||||||||||||||
Substandard | — | | | | — | | — | — | | ||||||||||||||||||
Total construction and development | | | | | | | | — | | ||||||||||||||||||
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 | |||||||||||||||||||||||||||
Pass | | | | | | | | | | ||||||||||||||||||
Special mention | | | | — | | | | | | ||||||||||||||||||
Substandard | | | | | | | | | | ||||||||||||||||||
Total gross loans | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
128
Loans by risk grades and loan class as of the dates indicated below were as follows:
(Dollars in thousands) |
| Pass |
| Special Mention |
| Substandard |
| Total Loans | ||||
December 31, 2021 |
|
|
|
|
|
|
|
| ||||
Commercial and industrial | $ | | $ | | $ | | $ | | ||||
Real estate: |
|
|
| |||||||||
Commercial real estate |
| | | |
| | ||||||
Construction and development |
| | | |
| | ||||||
1-4 family residential |
| | — | |
| | ||||||
Multi-family residential |
| | — | — |
| | ||||||
Consumer |
| | — | |
| | ||||||
Agriculture |
| | — | |
| | ||||||
Other |
| | — | — |
| | ||||||
Total gross loans | $ | | $ | | $ | | $ | | ||||
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 gross loans | $ | | $ | | $ | | $ | | ||||
Loans individually evaluated and collectively evaluated as of the dates indicated below were as follows:
December 31, 2021 | December 31, 2020 | |||||||||||||||||
Individually | Collectively | Individually | Collectively | |||||||||||||||
Evaluated | Evaluated | Total | Evaluated | Evaluated | Total | |||||||||||||
(Dollars in thousands) |
| Loans |
| Loans |
| Loans |
| Loans |
| Loans |
| Loans | ||||||
Commercial and industrial | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Real estate: |
|
|
|
|
|
|
|
|
|
| ||||||||
Commercial real estate |
| | |
| |
| |
| |
| | |||||||
Construction and development |
| | |
| |
| |
| |
| | |||||||
1-4 family residential |
| | |
| |
| |
| |
| | |||||||
Multi-family residential |
| — | |
| |
| — |
| |
| | |||||||
Consumer |
| | |
| |
| — |
| |
| | |||||||
Agriculture |
| — | |
| |
| — |
| |
| | |||||||
Other |
| | |
| |
| |
| |
| | |||||||
Total gross loans | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
129
Activity in the ACL for loans, segregated by loan class, for the years indicated below was as follows:
Real Estate | |||||||||||||||||||||||||||
Commercial | Construction | ||||||||||||||||||||||||||
and | Commercial | and | 1-4 Family | Multi-family | |||||||||||||||||||||||
(Dollars in thousands) |
| Industrial |
| Real Estate |
| Development |
| Residential |
| Residential |
| Consumer |
| Agriculture |
| Other |
| Total | |||||||||
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Provision (recapture) |
| ( | ( | ( | ( | ( | ( | ( | ( |
| ( | ||||||||||||||||
Charge-offs |
| ( | — | — | ( | — | ( | — | — |
| ( | ||||||||||||||||
Recoveries |
| | — | — | | — | | | — |
| | ||||||||||||||||
Net recoveries |
| |
| — |
| — |
| ( |
| — |
| |
| |
| — |
| | |||||||||
Ending balance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Period-end amount allocated to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Specific reserve | $ | | $ | | $ | — | $ | — | $ | — | $ | | $ | — | $ | — | $ | | |||||||||
General reserve |
| |
| |
| |
| |
| |
| |
| |
| |
| | |||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
December 31, 2020 | |||||||||||||||||||||||||||
Beginning balance | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Impact of CECL adoption | | ( | | ( | | ( | | | | ||||||||||||||||||
Provision (recapture) |
| |
| |
| |
| |
| |
| |
| ( |
| |
| | |||||||||
Charge-offs |
| ( |
| ( |
| — |
| ( |
| — |
| ( |
| — |
| ( |
| ( | |||||||||
Recoveries |
| |
| |
| — |
| |
| — |
| |
| |
| |
| | |||||||||
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 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
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 ACL for loans by loan class as of the dates indicated was as follows:
December 31, 2021 | December 31, 2020 | |||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | ||||||||
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 | $ | |
| | % | $ | |
| | % | ||
Loans excluding loans held for sale | | | ||||||||||
ACL for loans to loans excluding loans held for sale | ||||||||||||
130
Nonaccrual loans are included in individually evaluated loans and $
The Company had collateral dependent loans totaling $
Charge-offs and recoveries by loan class and vintage for the year ended December 31, 2021 were as follows:
(Dollars in thousands) |
| 2021 |
| 2020 |
| 2019 |
| 2018 | 2017 | Prior | Revolving Loans | Converted Revolving Loans |
| Total | |||||||||||||
Commercial and industrial: | |||||||||||||||||||||||||||
Charge-off | $ | — | $ | — | $ | ( | $ | ( | $ | — | $ | — | $ | ( | $ | — | $ | ( | |||||||||
Recovery | — | — | | | | | | — | | ||||||||||||||||||
Total commercial and industrial | — | — | ( | ( | | | ( | — | | ||||||||||||||||||
1-4 family residential: | |||||||||||||||||||||||||||
Charge-off | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||
Recovery | — | — | — | — | — | | — | — | | ||||||||||||||||||
Total 1-4 family residential | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||
Consumer: | |||||||||||||||||||||||||||
Charge-off | ( | — | ( | — | — | — | — | — | ( | ||||||||||||||||||
Recovery | | — | | — | — | | — | — | | ||||||||||||||||||
Total consumer | ( | — | | — | — | | — | — | | ||||||||||||||||||
Agriculture: | |||||||||||||||||||||||||||
Recovery | — | — | — | — | — | | — | — | | ||||||||||||||||||
Total agriculture | — | — | — | — | — | | — | — | | ||||||||||||||||||
Total: | |||||||||||||||||||||||||||
Charge-off | ( | — | ( | ( | — | ( | ( | — | ( | ||||||||||||||||||
Recovery | | — | | | | | | — | | ||||||||||||||||||
Total | $ | ( | $ | — | $ | ( | $ | ( | $ | | $ | | $ | ( | $ | — | $ | | |||||||||
131
Charge-offs and recoveries by loan class and vintage for the year ended December 31, 2020 were as follows:
(Dollars in thousands) |
| 2020 |
| 2019 |
| 2018 |
| 2017 | 2016 | Prior | Revolving Loans | Converted Revolving Loans |
| Total | |||||||||||||
Commercial and industrial: | |||||||||||||||||||||||||||
Charge-off | $ | — | $ | ( | $ | ( | $ | ( | $ | ( | $ | — | $ | ( | $ | — | $ | ( | |||||||||
Recovery | — | | | | | | | | | ||||||||||||||||||
Total commercial and industrial | — | ( | | | ( | | ( | | | ||||||||||||||||||
Commercial real estate: | |||||||||||||||||||||||||||
Charge-off | — | — | — | — | — | ( | — | — | ( | ||||||||||||||||||
Recovery | — | — | | — | — | | — | — | | ||||||||||||||||||
Total commercial real estate | — | — | | — | — | ( | — | — | ( | ||||||||||||||||||
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 | $ | | $ | ( | $ | | $ | ( | $ | ( | $ | | $ | ( | $ | | $ | ( | |||||||||
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 loans and their ACL was determined using the model and methodology for loans as discussed in Note 1: Basis of Presentation, Nature of Operations and Summary of Significant Accounting and Reporting Policies as well as historical and expected utilization levels.
Activity in the ACL for unfunded commitments for the dates indicated below was as follows:
December 31, | ||||||
(Dollars in thousands) | 2021 | 2020 | ||||
Beginning balance | $ | | $ | | ||
Impact of CECL adoption | — |
| | |||
Provision (recapture) | ( |
| | |||
Ending balance | $ | | $ | | ||
132
NOTE 7: PREMISES AND EQUIPMENT
The components of premises and equipment as of the dates indicated below were as follows:
December 31, | ||||||
(Dollars in thousands) | 2021 | 2020 | ||||
Land | $ | | $ | | ||
Buildings and leasehold improvements |
| |
| | ||
Furniture and equipment |
| |
| | ||
Vehicles |
| |
| | ||
Construction in progress |
| |
| | ||
| | |||||
Less accumulated depreciation | ( | ( | ||||
Premises and equipment, net | $ | | $ | | ||
Depreciation expense was $
NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill was $
Other intangibles as of the dates indicated below were as follows:
| Weighted- |
|
|
| |||||||
Average | |||||||||||
Remaining | Gross | Net | |||||||||
Amortization | Intangible | Accumulated | Intangible | ||||||||
(Dollars in thousands) | Period | Assets | Amortization | Assets | |||||||
December 31, 2021 |
|
|
|
|
|
|
| ||||
Core deposits | $ | | $ | ( | $ | | |||||
Customer relationships |
| |
| ( |
| | |||||
Servicing assets |
| |
| ( |
| | |||||
Total other intangible assets, net | $ | | $ | ( | $ | | |||||
December 31, 2020 |
|
|
|
|
|
| |||||
Core deposits | $ | | $ | ( | $ | | |||||
Customer relationships |
| |
| ( |
| | |||||
Servicing assets |
| |
| ( |
| | |||||
Total other intangible assets, net | $ | | $ | ( | $ | | |||||
Servicing Assets
Changes in servicing assets as of the dates indicated below were as follows:
December 31, | ||||||
(Dollars in thousands) |
| 2021 | 2020 | |||
Balance at beginning of year | $ | | $ | | ||
Increase from loan sales |
| |
| | ||
Decrease from serviced loans paid off or foreclosed | ( | — | ||||
Amortization |
| ( |
| ( | ||
Balance at end of period | $ | | $ | | ||
133
Estimated future amortization for core deposits and customer relationship intangible assets was as follows for the date indicated below:
(Dollars in thousands) | December 31, 2021 | ||
2022 |
| | |
2023 |
| | |
2024 | | ||
2025 | | ||
2026 | | ||
Thereafter |
| | |
Total | $ | | |
NOTE 9: BANK-OWNED LIFE INSURANCE
During the years ended December 31, 2021, 2020 and 2019, the Company received proceeds in the amount of $
Bank-owned life insurance policies and the net change in cash surrender value during the periods indicated below were as follows:
December 31, | |||||||||
(Dollars in thousands) |
| 2021 | 2020 | 2019 | |||||
Balance at beginning of period | $ | | $ | | $ | | |||
Redemptions | ( | ( | ( | ||||||
Net change in cash surrender value | | | | ||||||
Balance at end of period | $ | | $ | | $ | | |||
NOTE 10: DEPOSITS
Deposits as of the dates indicated below were as follows:
December 31, | ||||||
(Dollars in thousands) | 2021 | 2020 | ||||
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 | | | ||||
Total deposits | $ | | $ | | ||
Scheduled maturities of time deposits as of the date indicated below were as follows:
| December 31, | ||
(Dollars in thousands) | 2021 | ||
Three months or less | $ | | |
Over three months through six months |
| | |
Over six months through 12 months |
| | |
Over one year through three years | | ||
Over three years |
| | |
Total | $ | | |
At December 31, 2021 and 2020, the Company had $
134
and $
NOTE 11: LINES OF CREDIT
Line of Credit
The Company has entered into a loan agreement with another financial institution, or Loan Agreement, which has been periodically amended and provides for a $
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 $
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 $
At December 31, 2021 and 2020, there were $
During the year ended December 31, 2020, 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, 2021 and 2020 was $
The scheduled maturities of Federal Home Loan Bank advances as of the date indicated below were as follows:
(Dollars in thousands) | December 31, 2021 | ||
2022 | | ||
2023 | | ||
2024 | | ||
Total | $ | | |
135
The Company maintained federal funds lines of credit with commercial banks that provided for the availability to borrow up to an aggregate of $
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 $
Activity in loans to related parties as of the periods indicated below was as follows:
Years Ended December 31, | ||||||
(Dollars in thousands) |
| 2021 |
| 2020 | ||
Beginning balance | $ | | $ | | ||
New loans |
| | | |||
Repayments | ( | ( | ||||
Ending balance | $ | | $ | | ||
Unfunded Commitments—At December 31, 2021 and 2020, the Company had approximately $
Deposits—The Company held related party deposits of approximately $
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.
136
During the years ended December 31, 2021 and 2020, there were
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 1 and Level 2, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the 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—Equity securities are recorded at fair value and 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.
137
Financial assets and financial liabilities measured at fair value on a recurring basis as of the dates indicated below were as follows:
December 31, | ||||||
(Dollars in thousands) | 2021 | 2020 | ||||
Fair value of financial assets: |
|
|
|
| ||
Level 1 inputs: | ||||||
Equity securities | $ | | $ | | ||
Debt securities available for sale - U.S. Treasury securities | | — | ||||
Level 2 inputs: | ||||||
Debt securities available for sale: | ||||||
State and municipal securities | | | ||||
U.S. agency securities: |
|
|
|
| ||
Callable debentures | | — | ||||
Collateralized mortgage obligations |
| |
| | ||
Mortgage-backed securities |
| |
| | ||
Interest rate swaps |
| |
| | ||
Level 3 inputs: | ||||||
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 | $ | | $ | | ||
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.
The Company’s financial assets measured at fair value on a non-recurring basis are certain loans individually evaluated and as of the dates indicated below were as follows:
December 31, 2021 | December 31, 2020 | |||||||||||||||||
(Dollars in thousands) | Recorded Investment | Specific ACL | Net | Recorded Investment | Specific ACL | Net | ||||||||||||
Level 3 inputs: | ||||||||||||||||||
Loans evaluated individually |
|
| ||||||||||||||||
Commercial and industrial | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Commercial real estate | | | | | | | ||||||||||||
Consumer | | | — | — | — | — | ||||||||||||
Other | — | — | — | | | | ||||||||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
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
138
foreclosed assets for fair value remeasurement subsequent to initial foreclosure during the years ended December 31, 2021 and 2020. There were
Financial Instruments Reported at Amortized Cost
Fair market values and carrying amounts of financial instruments that are reported at cost as of the dates indicated below were as follows:
December 31, 2021 | December 31, 2020 | |||||||||||
|
| Carrying |
| Carrying | ||||||||
(Dollars in thousands) | Fair Value | Amount | Fair Value | Amount | ||||||||
Financial assets: |
|
|
|
|
|
|
| |||||
Level 1 inputs: | ||||||||||||
Cash and due from banks | $ | | $ | | $ | | $ | | ||||
Level 2 inputs: | ||||||||||||
Bank-owned life insurance |
| |
| |
| |
| | ||||
Accrued interest receivable |
| |
| |
| |
| | ||||
Servicing asset |
| |
| |
| |
| | ||||
Level 3 inputs: | ||||||||||||
Loans, including held for sale, net |
| |
| |
| |
| | ||||
Other investments |
| |
| |
| |
| | ||||
Total financial assets | $ | | $ | | $ | | $ | | ||||
Financial liabilities: |
|
|
|
|
|
|
|
| ||||
Level 1 inputs: | ||||||||||||
Noninterest-bearing deposits | $ | | $ | | $ | | $ | | ||||
Level 2 inputs: | ||||||||||||
Interest-bearing deposits |
| |
| |
| |
| | ||||
Federal Home Loan Bank advances | | | | | ||||||||
Accrued interest payable |
| |
| |
| |
| | ||||
Total financial liabilities | $ | | $ | | $ | | $ | | ||||
The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value and as such the fair values shown above are not necessarily indicative of the amounts the Company will realize. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
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, 2021 and 2020, management determined there was
At December 31, 2021 and 2020, the Company had
139
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 has a credit risk participation agreement with another financial institution that is associated with an interest rate swap related to a loan for which the Company is the lead agent bank and the other financial institution 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 indicated below were as follows:
|
|
| Weighted | |||||||||||
Average | ||||||||||||||
Notional |
| Fair | Maturity | |||||||||||
(Dollars in thousands) | Classification | Amounts | Value | Fixed Rate | Floating Rate | (Years) | ||||||||
December 31, 2021 |
|
|
|
|
|
|
| |||||||
Interest rate swaps with customers | Other assets | $ | | |
| LIBOR 1M + | ||||||||
Interest rate swaps with financial institutions | Other assets | | | LIBOR 1M + | ||||||||||
Interest rate swaps with customers | Other assets |
| | |
| U.S. Prime | ||||||||
Interest rate swaps with financial institutions | Other liabilities |
| | ( |
| U.S. Prime | ||||||||
Interest rate swaps with financial institutions | Other liabilities | | ( |
| LIBOR 1M + | |||||||||
Interest rate swaps with customers | Other liabilities | | ( | LIBOR 1M + | ||||||||||
Credit risk participation agreement with financial institution | Other assets | | | LIBOR 1M + | ||||||||||
Total derivatives | $ | | $ | | ||||||||||
December 31, 2020 |
|
|
|
|
|
|
|
|
| |||||
Interest rate swaps with customers | Other assets | $ | | $ | |
| LIBOR 1M + | |||||||
Interest rate swaps with customers | Other assets |
| |
| |
| U.S. Prime | |||||||
Interest rate swaps with financial institutions | Other liabilities |
| |
| ( |
| U.S. Prime | |||||||
Interest rate swaps with financial institutions | Other liabilities |
| |
| ( |
| LIBOR 1M + | |||||||
Credit risk participation agreement with financial institution | Other assets | | | LIBOR 1M + | ||||||||||
Total derivatives | $ | | $ | | ||||||||||
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 and operating lease liabilities in the consolidated balance sheets represent the Company’s liability to make lease payments under these operating leases, on a discounted basis. The Company excludes short-term leases, defined as lease terms of 12 months or less from its operating lease right-of-use assets and operating lease liabilities.
During the year ended December 31, 2021, the operating lease asset decreased $
140
Lease costs for the periods indicated below were as follows:
Years Ended December 31, | ||||||
(Dollars in thousands) | 2021 | 2020 | ||||
Operating lease cost | $ | | $ | | ||
Short-term lease cost | | | ||||
Sublease income | ( | ( | ||||
Total lease cost | $ | | $ | | ||
Other information related to operating leases for the periods indicated below was as follows:
Years Ended December 31, | ||||||
(Dollars in thousands) | 2021 | 2020 | ||||
Amortization of lease right-to-use asset | $ | | $ | | ||
Accretion of lease liabilities | | | ||||
Cash paid for amounts included in the measurement of lease liabilities | | | ||||
Weighted-average remaining lease term in years | ||||||
Weighted-average discount rate | ||||||
A maturity analysis of operating lease liabilities as of the date indicated below was as follows:
(Dollars in thousands) | December 31, 2021 | |||
1 year or less | $ | | ||
Over 1 year through 2 years |
| | ||
Over 2 years through 3 years | | |||
Over 3 years through 4 years | | |||
Over 4 years through 5 years | | |||
Thereafter |
| | ||
Total undiscounted lease liability | | |||
Less: | ||||
Discount on cash flows | ( | |||
Total operating lease liability | $ | | ||
NOTE 16: COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Financial Instruments with Off-Balance-Sheet Risk
The Company enters into commitments to extend credit and standby letters of credit to meet customer financing needs and, in accordance with GAAP, these commitments are not reflected as liabilities in the consolidated balance sheets. Due to the nature of these commitments, the amounts disclosed in the tables below do not necessarily represent future cash requirements.
Commitments to extend credit and standby letters of credit as of the dates indicated below were as follows:
December 31, | ||||||
(Dollars in thousands) | 2021 | 2020 | ||||
Commitments to extend credit, variable interest rate | $ | | $ | | ||
Commitments to extend credit, fixed interest rate |
| |
| | ||
Total commitments | $ | | $ | | ||
Standby letters of credit | $ | | $ | | ||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract, generally have fixed expiration dates or other termination clauses and may expire without being fully drawn upon.
141
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.
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
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 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, 2021 and 2020, the amount payable, including interest, for this deferred plan was $
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 $
In October 2017, the Company entered into a salary continuation arrangement with the Company’s President and CEO that calls for payments of $
142
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, or the 2006 Plan. At the merger date, all outstanding options under this plan became fully vested and exercisable. The plan expired in 2016 and no additional options may be granted under its terms. As of December 31, 2021, there were options outstanding to acquire
In 2014, the Company adopted the 2014 Stock Option Plan, or the 2014 Plan, which was approved by the Company’s shareholders and limits the number of shares that may be optioned to
In 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
Stock option activity for the periods indicated below was as follows:
Years Ended December 31, | ||||||||||
2021 | 2020 | |||||||||
Number of | Weighted | Number of | Weighted | |||||||
Shares | Average | Shares | Average | |||||||
Underlying | Exercise | Underlying | Exercise | |||||||
Options | Price | Options | Price | |||||||
Outstanding at beginning of period |
| | $ | |
| | $ | | ||
Granted |
| — | — |
| — | — | ||||
Exercised |
| ( | |
| ( | | ||||
Forfeited/expired |
| — | — |
| — | — | ||||
Outstanding at end of period |
| | $ | |
| | $ | | ||
A summary of stock options as of the date shown indicated was as follows:
December 31, 2021 | |||||||||
Stock Options | Exercisable | Unvested | Outstanding | ||||||
Number of shares underlying options |
| | | | |||||
Weighted-average exercise price per share |
| $ | | $ | | $ | | ||
Aggregate intrinsic value (in thousands) |
| $ | | $ | | $ | | ||
Weighted-average remaining contractual term (years) |
| ||||||||
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 to
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
143
goals must be achieved within
Restricted stock activity for the periods indicated below was as follows:
Non-performance Based | Performance-based | |||||||||
Weighted | Weighted | |||||||||
Average | Average | |||||||||
Number of | Grant Date | Number of | Grant Date | |||||||
Shares | Fair Value | Shares | Fair Value | |||||||
Outstanding at December 31, 2019 |
| | $ | | | $ | | |||
Granted |
| | |
| — | — | ||||
Vested |
| ( | |
| — | — | ||||
Forfeited |
| ( | |
| ( | | ||||
Outstanding at December 31, 2020 | | | | | ||||||
Granted |
| | |
| — | — | ||||
Vested |
| ( | |
| — | — | ||||
Forfeited |
| ( | |
| — | — | ||||
Outstanding at December 31, 2021 |
| | $ | |
| | $ | | ||
A summary of restricted stock as of the periods indicated below was as follows:
December 31, 2021 | ||||||
Restricted Stock | Non-performance Based | Performance-based | ||||
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) |
| |||||
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 indicated 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, 2021 | |||||||||
Stock options |
| | — |
| | ||||
Non-performance based restricted stock | | ( | | ||||||
Year Ended December 31, 2020 | |||||||||
Stock options | | — | | ||||||
Non-performance based restricted stock |
| | ( |
| |
For the years ended December 31, 2021, 2020 and 2019, stock compensation expense was $
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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
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 (
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 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 lowered 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
145
not to use the transition provision and has reported the full effect of CECL upon adoption and for each reporting period thereafter 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, 2021 and 2020, 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, with regard to Bank Secrecy Act, or BSA, and anti-money laundering, or AML, compliance matters. On September 7, 2021, the OCC terminated the Formal Agreement between the Bank and the OCC relating to the Bank’s BSA/AML compliance program.
To resolve the BSA/AML compliance matters, on December 16, 2021, the Bank, entered into an OCC Consent Order. Under the OCC Consent Order, the Bank paid a civil money penalty of $
On December 15, 2021, the Bank entered into a FinCEN Consent Order. Under the terms of the FinCEN Consent Order, the Bank paid a civil money penalty of $
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
146
At December 31, 2021 and 2020, 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 for the periods indicated below were as follows:
Minimum | Required to be | |||||||||||
Capital Required | Considered Well | |||||||||||
Actual | Basel III | Capitalized | ||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||
December 31, 2021 |
|
|
|
|
|
|
|
|
|
| ||
Common Equity Tier 1 to Risk-Weighted Assets: |
|
|
|
|
|
|
|
|
|
| ||
Consolidated | $ | $ | N/A |
| N/A | |||||||
Bank Only | $ | $ | $ |
| ||||||||
Tier 1 Capital to Risk-Weighted Assets: |
|
|
|
| ||||||||
Consolidated | $ | $ | N/A |
| N/A | |||||||
Bank Only | $ | $ | $ |
| ||||||||
Total Capital to Risk-Weighted Assets: |
|
|
| |||||||||
Consolidated | $ | $ | N/A |
| N/A | |||||||
Bank Only | $ | $ | $ |
| ||||||||
Tier 1 Leverage Capital to Average Assets: |
|
|
| |||||||||
Consolidated | $ | $ | N/A |
| N/A | |||||||
Bank Only | $ | $ | $ |
| ||||||||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
| ||
Common Equity Tier 1 to Risk-Weighted Assets: |
|
|
|
|
|
|
|
|
|
| ||
Consolidated | $ | $ | N/A |
| N/A | |||||||
Bank Only | $ | $ | $ |
| ||||||||
Tier 1 Capital to Risk-Weighted Assets: |
|
|
|
| ||||||||
Consolidated | $ | $ | N/A |
| N/A | |||||||
Bank Only | $ | $ | $ |
| ||||||||
Total Capital to Risk-Weighted Assets: |
|
|
|
| ||||||||
Consolidated | $ | $ | N/A |
| N/A | |||||||
Bank Only | $ | $ | $ |
| ||||||||
Tier 1 Leverage Capital to Average Assets: |
|
|
|
| ||||||||
Consolidated | $ | $ | N/A |
| N/A | |||||||
Bank Only | $ | $ | $ |
| ||||||||
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NOTE 20: INCOME TAXES
The components of the provision for income tax expense for the periods indicated below were as follows:
For the Years Ended December 31, | |||||||||
(Dollars in thousands) |
| 2021 |
| 2020 | 2019 | ||||
Current federal income tax | $ | | $ | | $ | | |||
Current state income tax |
| | | | |||||
Deferred income tax | | ( | ( | ||||||
Total income tax expense | $ | | $ | | $ | | |||
Income tax expense for the periods indicated below differ from the applicable statutory rate of
For the Years Ended December 31, | ||||||||||
(Dollars in thousands) |
| 2021 |
| 2020 | 2019 | |||||
Tax expense calculated at statutory rate | $ | | $ | | $ | | ||||
Increase (decrease) resulting from: |
| |||||||||
State income tax | | | | |||||||
Tax exempt interest income | ( | ( | ( | |||||||
Bank-owned life insurance | ( | ( | ( | |||||||
Regulatory fines | | — | — | |||||||
Other | | | | |||||||
Total income tax expense | $ | | $ | | $ | | ||||
Effective tax rate | ||||||||||
The differences between the federal statutory rate of
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 indicated below were as follows:
| December 31, | ||||||
(Dollars in thousands) | 2021 | 2020 | |||||
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 | ( | ( | |||||
Core deposit intangibles | ( | ( | |||||
Unrealized gain on securities available for sale | ( | ( | |||||
Other | ( | ( | |||||
Total deferred tax liabilities | ( | ( | |||||
Net deferred tax asset | $ | | $ | | |||
148
As of December 31, 2021, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are from the year 2017 forward for the State of Texas and from the year 2018 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, 2021, 2020 and 2019. For the years ended December 31, 2021 and 2020, management has determined there were no material uncertain tax positions.
NOTE 21: EARNINGS PER SHARE
The computation of basic and diluted earnings per share for the periods indicated below was as follows:
Years Ended December 31, | |||||||||
(Dollars in thousands, except per share data) | 2021 | 2020 | 2019 | ||||||
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: | |||||||||
Basic | $ | | $ | | $ | | |||
Diluted | $ | | $ | | $ | | |||
For the years ended December 31, 2021, 2020 and 2019, the Company excluded from diluted weighted-average shares, the impact of
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 | December 31, | |||||
(Dollars in thousands) |
| 2021 |
| 2020 | ||
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 | $ | | $ | | ||
149
Statements of Income | Years Ended December 31, | ||||||||
(Dollars in thousands) |
| 2021 |
| 2020 | 2019 | ||||
Interest income |
|
|
|
| |||||
Other | $ | — | $ | — | $ | | |||
Interest expense |
|
|
|
|
|
| |||
Note payable |
| |
| |
| | |||
Junior subordinated debt |
| — |
| — |
| | |||
Total interest expense |
| |
| |
| | |||
Net interest expense |
| ( |
| ( |
| ( | |||
Noninterest income |
|
|
|
|
|
| |||
Dividend income from subsidiary |
| |
| |
| | |||
Total noninterest income |
| |
| |
| | |||
Noninterest expense |
|
|
|
|
|
| |||
Salaries and employee benefits |
| |
| |
| | |||
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 subsidiary |
| |
| |
| | |||
Income tax benefit |
| ( |
| ( |
| ( | |||
Income before equity in undistributed income of subsidiary | | | | ||||||
Equity in undistributed income of subsidiary | | | | ||||||
Net income | $ | | $ | | $ | | |||
Statements of Cash Flows | Years Ended December 31, | ||||||||
(Dollars in thousands) |
| 2021 | 2020 |
| 2019 | ||||
Cash flows from operating activities: |
|
| |||||||
Net income | $ | | $ | | $ | | |||
Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
|
|
|
|
|
| |||
Equity in undistributed net income loss of subsidiary |
| ( |
| ( |
| ( | |||
Stock-based compensation expense |
| |
| |
| | |||
Deferred tax benefit | | | | ||||||
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: |
|
|
|
|
|
| |||
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 | $ | | $ | | $ | | |||
150