Allegiance Bancshares, Inc. - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________

FORM 10-Q

_______________________________________________


S			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022


£			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 001-37585

_______________________________________________

Allegiance Bancshares, Inc.

(Exact name of registrant as specified in its charter)

_______________________________________________


Texas			26-3564100
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

8847 West Sam Houston Parkway, N., Suite 200

Houston, Texas 77040

(Address of principal executive offices, including zip code)

(281) 894-3200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value, $1.00 per share

ABTX

NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes S No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S

As of April 26, 2022, the registrant had 20,378,054 shares common stock, $1.00 par value per share, outstanding.

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ALLEGIANCE BANCSHARES, INC.

INDEX TO FORM 10-Q

March 31, 2022


PART I—FINANCIAL INFORMATION

Item 1.	Interim Consolidated Financial Statements	3
	Consolidated Balance Sheets (unaudited)	3
	Consolidated Statements of Income (unaudited)	4
	Consolidated Statements of Comprehensive Income (unaudited)	5
	Consolidated Statements of Changes in Shareholders' Equity (unaudited)	6
	Consolidated Statements of Cash Flows (unaudited)	7
	Condensed Notes to Interim Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53
Item 4.	Controls and Procedures	54

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	56
Signatures		57

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PART I—FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	March 31, 2022		December 31, 2021
	(Dollars in thousands, except par value)
ASSETS
Cash and due from banks	$	26,629	$	23,961
Interest-bearing deposits at other financial institutions	672,755		733,548
Total cash and cash equivalents	699,384		757,509
Available for sale securities, at fair value	1,790,707		1,773,765
Loans held for investment	4,283,514		4,220,486
Less: allowance for credit losses on loans	(49,215)		(47,940)
Loans, net	4,234,299		4,172,546
Accrued interest receivable	31,505		33,392
Premises and equipment, net	62,168		63,708

Federal Home Loan Bank stock	9,376		9,358
Bank owned life insurance	28,374		28,240
Goodwill	223,642		223,642
Core deposit intangibles, net	13,907		14,658
Other assets	56,001		28,136
TOTAL ASSETS	$	7,149,363	$	7,104,954
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing	$	2,353,604	$	2,243,085
Interest-bearing
Demand	1,070,855		869,984
Money market and savings	1,552,853		1,643,745
Certificates and other time	1,185,015		1,290,825
Total interest-bearing deposits	3,808,723		3,804,554
Total deposits	6,162,327		6,047,639
Accrued interest payable	3,086		1,753
Borrowed funds	89,959		89,956
Subordinated debt	108,978		108,847
Other liabilities	33,073		40,291
Total liabilities	6,397,423		6,288,486
COMMITMENTS AND CONTINGENCIES (See Note 13)
SHAREHOLDERS’ EQUITY:
Preferred stock, $1 par value; 1,000,000 shares authorized; no shares issued or outstanding	—		—
Common stock, $1 par value; 80,000,000 shares authorized; 20,378,116 shares issued and outstanding at March 31, 2022 and 20,337,220 shares issued and outstanding at December 31, 2021	20,378		20,337
Capital surplus	512,284		510,797
Retained earnings	282,896		267,092
Accumulated other comprehensive (loss) income	(63,618)		18,242
Total shareholders’ equity	751,940		816,468
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	7,149,363	$	7,104,954

See condensed notes to interim consolidated financial statements.

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ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended March 31,
	2022		2021
	(Dollars in thousands, except per share data)
INTEREST INCOME:
Loans, including fees	$	52,370	$	57,991
Securities:
Taxable	5,068		2,402
Tax-exempt	2,525		2,394
Deposits in other financial institutions	340		41
Total interest income	60,303		62,828
INTEREST EXPENSE:
Demand, money market and savings deposits	1,347		1,484
Certificates and other time deposits	2,156		3,665
Borrowed funds	186		539
Subordinated debt	1,442		1,442
Total interest expense	5,131		7,130
NET INTEREST INCOME	55,172		55,698
Provision for credit losses	1,814		639
Net interest income after provision for credit losses	53,358		55,059
NONINTEREST INCOME:
Nonsufficient funds fees	116		83
Service charges on deposit accounts	527		388
Gain on sale of securities	—		49
Loss on sale of other real estate and other repossessed assets	—		(176)
Bank owned life insurance income	133		139
Debit card and ATM card income	819		630
Other	2,423		623
Total noninterest income	4,018		1,736
NONINTEREST EXPENSE:
Salaries and employee benefits	22,728		22,452
Net occupancy and equipment	2,205		2,390
Depreciation	1,033		1,034
Data processing and software amortization	2,498		2,200
Professional fees	138		789
Regulatory assessments and FDIC insurance	1,261		807
Core deposit intangibles amortization	751		824
Communications	341		321
Advertising	462		298
Other real estate expense	59		113
Acquisition and merger-related expenses	451		—
Other	2,590		3,691
Total noninterest expense	34,517		34,919
INCOME BEFORE INCOME TAXES	22,859		21,876
Provision for income taxes	4,202		3,866
NET INCOME	$	18,657	$	18,010
EARNINGS PER SHARE:
Basic	$	0.92	$	0.89
Diluted	$	0.91	$	0.89
DIVIDENDS PER SHARE	$	0.14	$	0.12

See condensed notes to interim consolidated financial statements.

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ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended March 31,
	2022		2021
	(Dollars in thousands)
Net income	$	18,657	$	18,010
Other comprehensive loss:
Unrealized loss on securities:
Change in unrealized holding (loss) gain on available for sale securities during the period	(103,621)		(14,710)
Reclassification of gain realized through the sale of securities	—		(49)
Unrealized gain on cash flow hedge:
Change in fair value of cash flow hedge	—		1,824

Total other comprehensive loss	(103,621)		(12,935)
Deferred tax benefit related to other comprehensive loss	21,761		2,717
Other comprehensive loss, net of tax	(81,860)		(10,218)
Comprehensive (loss) income	$	(63,203)	$	7,792

See condensed notes to interim consolidated financial statements.

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ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)


	Common Stock			Capital Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
	Shares	Amount
	(Dollars in thousands, except per share data)
BALANCE AT DECEMBER 31, 2020	20,208,323	$	20,208	$	508,794	$	195,236	$	34,431	$	758,669
Net income						18,010				18,010
Other comprehensive loss								(10,218)		(10,218)
Cash dividends declared, $0.12 per share						(2,412)				(2,412)
Common stock issued in connection with the exercise of stock options and restricted stock awards	135,854	136		1,191						1,327
Repurchase of common stock	(161,206)	(161)		(5,498)						(5,659)
Stock based compensation expense				820						820
BALANCE AT MARCH 31, 2021	20,182,971	$	20,183	$	505,307	$	210,834	$	24,213	$	760,537

BALANCE AT DECEMBER 31, 2021	20,337,220	$	20,337	$	510,797	$	267,092	$	18,242	$	816,468
Net income						18,657				18,657
Other comprehensive loss								(81,860)		(81,860)
Cash dividends declared, $0.14 per share						(2,853)				(2,853)
Common stock issued in connection with the exercise of stock options and restricted stock awards	40,896	41		528						569
Stock based compensation expense				959						959
BALANCE AT MARCH 31, 2022	20,378,116	$	20,378	$	512,284	$	282,896	$	(63,618)	$	751,940

See condensed notes to interim consolidated financial statements.

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ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31,
	2022		2021
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	18,657	$	18,010
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and core deposit intangibles amortization	1,784		1,858
Provision for credit losses	1,814		639
Deferred income tax expense (benefit)	47		(1,899)
Net amortization of premium on investments	2,797		1,471
Excess tax benefit from stock based compensation	(149)		(251)
Bank owned life insurance income	(133)		(139)
Net accretion of discount on loans	(77)		(97)
Net amortization of discount on subordinated debt	29		28
Net accretion of discount on certificates of deposit	(16)		(58)
Loss on sale of other real estate and other repossessed assets	—		176
Loss on write-downs of premises, equipment and other real estate	—		1,317
Net gain on sale of securities	—		(49)
Federal Home Loan Bank stock dividends	(18)		(19)
Stock based compensation expense	959		820
Net change in operating leases	767		712
Increase in accrued interest receivable and other assets	(26,190)		(8,012)
Increase in accrued interest payable and other liabilities	15,785		6,739
Net cash provided by operating activities	16,056		21,246
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal paydowns of available for sale securities	640,437		1,012,785
Proceeds from sales and calls of available for sale securities	—		4,898
Purchase of available for sale securities	(763,586)		(1,048,261)
Net change in total loans	(63,268)		(167,253)
Purchase of bank premises and equipment	(184)		(916)
Proceeds from sale of bank premises, equipment and other real estate	—		8,044

Net cash used in investing activities	(186,601)		(190,703)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits	110,519		209,554
Net increase in interest-bearing deposits	4,185		176,211

Net paydown in borrowings under credit agreement	—		(8,000)
Dividends paid to common shareholders	(2,853)		(2,412)
Proceeds from the issuance of common stock and stock option exercises	569		1,327
Repurchase of common stock	—		(5,659)
Net cash provided by financing activities	112,420		371,021
NET CHANGE IN CASH AND CASH EQUIVALENTS	(58,125)		201,564
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	757,509		422,766
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	699,384	$	624,330
SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid	$	3,798	$	5,969
Cash paid for operating lease liabilities	892		870
SUPPLEMENTAL NONCASH DISCLOSURE:
Lease right-of-use asset obtained in exchange for lessee operating lease liabilities	$	76	$	502

Bank-financed sales of other real estate	—		8,125

See condensed notes to interim consolidated financial statements.

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ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

Nature of Operations-Allegiance Bancshares, Inc. (“Allegiance”) and its wholly-owned subsidiary, Allegiance Bank, (the “Bank”, and together with Allegiance, collectively referred to as the “Company”) provide commercial and retail loans and commercial banking services. The Company derives substantially all of its revenues and income from the operation of the Bank. The Company is focused on delivering a wide variety of relationship-driven commercial banking products and community-oriented services tailored to meet the needs of small to medium-sized businesses, professionals and individual customers. The Company operated 27 full-service banking locations in the Houston region, which it defines as the Houston-The Woodlands-Sugar Land and Beaumont-Port Arthur metropolitan statistical areas, with 26 bank offices in the Houston metropolitan area and one bank office location in Beaumont, just outside of the Houston metropolitan area as of March 31, 2022. The Bank provides its customers with a variety of banking services including checking accounts, savings accounts and certificates of deposit, and its primary lending products are commercial, personal, automobile, mortgage and home improvement loans. The Bank also offers safe deposit boxes, automated teller machines, drive-through services and 24-hour depository facilities.

Basis of Presentation-The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis, and all such adjustments are of a normal recurring nature. Transactions between the Company and the Bank have been eliminated. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

Pending Merger of Equals

On November 8, 2021, Allegiance and CBTX, Inc., jointly announced that they entered into a definitive merger agreement pursuant to which the companies will combine in an all-stock merger of equals. CBTX reported total assets of $4.49 billion as of December 31, 2021. Under the terms of the definitive merger agreement, Allegiance shareholders will receive 1.4184 shares of CBTX, Inc. common stock for each share of Allegiance common stock they own. Following the completion of the merger, we estimate that former Allegiance shareholders will own approximately 54% and former CBTX, Inc. shareholders will own approximately 46% of the combined company. The companies have submitted the required regulatory filings and, subject to satisfaction or in some cases waiver of the closing conditions, including approval of the merger agreement by both companies’ shareholders, the parties anticipate closing in the second quarter of the year. Each company has scheduled a special meeting for May 24, 2022 at which its respective shareholders will consider and vote on the merger agreement and other related matters.

Significant Accounting and Reporting Policies

The Company’s significant accounting and reporting policies can be found in Note 1 of the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

New Accounting Standards

Newly Issued But Not Yet Effective Accounting Standards

ASU 2022-02, "Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." ASU 2022-02 eliminates the TDR accounting model for creditors that have already adopted Topic 326, which is commonly referred to as the current expected credit loss ("CECL") model. The FASB’s decision to eliminate the TDR accounting model is in response to

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feedback that the allowance under CECL already incorporates credit losses from loans modified as TDRs and, consequently, the related accounting and disclosures – which preparers often find onerous to apply – no longer provide the same level of benefit to users. In lieu of the TDR accounting model, creditors now will apply the general loan modification guidance in Subtopic 310-20 to all loan modifications, including modifications made for borrowers experiencing financial difficulty. Under the general loan modification guidance, a modification is treated as a new loan only if the following two conditions are met: (1) the terms of the new loan are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks; and (2) modifications to the terms of the original loan are more than minor. If either condition is not met, the modification is accounted for as the continuation of the old loan with any effect of the modification treated as a prospective adjustment to the loan’s effective interest rate. ASU 2022-02 will become effective for the Company on December 15, 2022 and is not expected to have a significant impact on the Company’s financial statements.

2. GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS

Changes in the carrying amount of the Company’s goodwill and core deposit intangible assets were as follows:


	Goodwill		Core Deposit Intangibles
	(Dollars in thousands)
Balance as of December 31, 2020	$	223,642	$	17,954
Amortization	—		(3,296)
Balance as of December 31, 2021	223,642		14,658
Amortization	—		(751)
Balance as of March 31, 2022	$	223,642	$	13,907

Goodwill is recorded on the acquisition date of an entity. During the measurement period, the Company may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date.

Management performs an evaluation annually, and more frequently if a triggering event occurs, of whether any impairment of the goodwill and other intangible assets has occurred. If any such impairment is determined, a write-down is recorded. As of March 31, 2022, there were no impairments recorded on goodwill and other intangible assets.

The estimated aggregate future amortization expense for core deposit intangible assets remaining as of March 31, 2022 is as follows (dollars in thousands):


Remaining 2022	$	2,252
2023	2,323
2024	2,188
2025	2,061
2026	1,941
Thereafter	3,142
Total	$	13,907

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3. SECURITIES

The amortized cost and fair value of investment securities were as follows:


	March 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Available for Sale
U.S. government and agency securities	$	424,171	$	300	$	(11,376)	$	413,095
Municipal securities	470,404		7,449		(18,150)		459,703
Agency mortgage-backed pass-through securities	322,883		102		(22,119)		300,866
Agency collateralized mortgage obligations	518,067		81		(34,030)		484,118
Corporate bonds and other	135,701		1,157		(3,933)		132,925
Total	$	1,871,226	$	9,089	$	(89,608)	$	1,790,707


	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Available for Sale
U.S. government and agency securities	$	401,811	$	414	$	(1,674)	$	400,551
Municipal securities	468,164		30,483		(1,547)		497,100
Agency mortgage-backed pass-through securities	307,097		2,075		(6,576)		302,596
Agency collateralized mortgage obligations	443,277		2,026		(4,247)		441,056
Corporate bonds and other	130,314		2,922		(774)		132,462
Total	$	1,750,663	$	37,920	$	(14,818)	$	1,773,765

As of March 31, 2022, no allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality. This is based upon the Company’s analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to its available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.

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The amortized cost and fair value of investment securities at March 31, 2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations at any time with or without call or prepayment penalties.


	Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	5,817	$	5,867
Due after one year through five years	261,665		251,280
Due after five years through ten years	158,863		157,109
Due after ten years	603,931		591,467
Subtotal	1,030,276		1,005,723
Agency mortgage-backed pass-through securities and collateralized mortgage obligations	840,950		784,984
Total	$	1,871,226	$	1,790,707

Securities with unrealized losses segregated by length of time such securities have been in a continuous loss position are as follows:


	March 31, 2022
	Less than 12 Months				More than 12 Months				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
	(Dollars in thousands)
Available for Sale
U.S. government and agency securities	$	360,995	$	(11,376)	$	—	$	—	$	360,995	$	(11,376)
Municipal securities	223,001		(15,908)		14,746		(2,242)		237,747		(18,150)
Agency mortgage-backed pass-through securities	248,653		(17,462)		38,031		(4,657)		286,684		(22,119)
Agency collateralized mortgage obligations	462,888		(33,458)		12,725		(572)		475,613		(34,030)
Corporate bonds and other	71,447		(3,933)		—		—		71,447		(3,933)
Total	$	1,366,984	$	(82,137)	$	65,502	$	(7,471)	$	1,432,486	$	(89,608)


	December 31, 2021
	Less than 12 Months				More than 12 Months				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
	(Dollars in thousands)
Available for Sale
U.S. government and agency securities	$	340,161	$	(1,674)	$	—	$	—	$	340,161	$	(1,674)
Municipal securities	70,019		(1,185)		10,435		(362)		80,454		(1,547)
Agency mortgage-backed pass-through securities	219,610		(5,675)		21,627		(901)		241,237		(6,576)
Agency collateralized mortgage obligations	328,300		(3,994)		13,820		(253)		342,120		(4,247)
Corporate bonds and other	38,210		(774)		—		—		38,210		(774)
Total	$	996,300	$	(13,302)	$	45,882	$	(1,516)	$	1,042,182	$	(14,818)

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There were no sales of securities for the three months ended March 31, 2022. The Company sold $4.9 million of securities recording gross gains of $49 thousand for the three months ended March 31, 2021. At March 31, 2022 and December 31, 2021, the Company did not own securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of consolidated shareholders’ equity at such respective dates.

The carrying value of pledged securities was $460.7 million at March 31, 2022 and $258.8 million at December 31, 2021, respectively. The majority of the securities were pledged to collateralize public fund deposits.

4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The loan portfolio balances, net of unearned income and fees, consist of various types of loans primarily made to borrowers located within Texas and are segregated by class of loan as follows:


	March 31, 2022		December 31, 2021
	(Dollars in thousands)
Commercial and industrial	$	714,450	$	693,559
Paycheck Protection Program (PPP)	78,624		145,942
Real estate:
Commercial real estate (including multi-family residential)	2,197,502		2,104,621
Commercial real estate construction and land development	453,473		439,125
1-4 family residential (including home equity)	669,306		685,071
Residential construction	136,760		117,901
Consumer and other	33,399		34,267
Total loans	4,283,514		4,220,486
Allowance for credit losses on loans	(49,215)		(47,940)
Loans, net	$	4,234,299	$	4,172,546

Nonaccrual and Past Due Loans

An aging analysis of the recorded investment in past due loans, segregated by class of loans, is included below. The Company defines recorded investment as the outstanding loan balances including net deferred loan fees, and excluding accrued interest receivable of $24.1 million and $26.0 million as of March 31, 2022 and December 31, 2021, respectively, due to immateriality.


	March 31, 2022
	Loans Past Due and Still Accruing						Nonaccrual Loans		Current Loans		Total Loans
	30-89 Days		90 or More Days		Total Past Due Loans
	(Dollars in thousands)
Commercial and industrial	$	3,149	$	—	$	3,149	$	7,809	$	703,492	$	714,450
Paycheck Protection Program (PPP)	—		—		—		—		78,624		78,624
Real estate:
Commercial real estate (including multi-family residential)	8,391		—		8,391		15,259		2,173,852		2,197,502
Commercial real estate construction and land development	2,611		—		2,611		—		450,862		453,473
1-4 family residential (including home equity)	1,539		—		1,539		3,065		664,702		669,306
Residential construction	2,431		—		2,431		—		134,329		136,760
Consumer and other	28		—		28		142		33,229		33,399
Total loans	$	18,149	$	—	$	18,149	$	26,275	$	4,239,090	$	4,283,514

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	December 31, 2021
	Loans Past Due and Still Accruing						Nonaccrual Loans		Current Loans		Total Loans
	30-89 Days		90 or More Days		Total Past Due Loans
	(Dollars in thousands)
Commercial and industrial	$	1,786	$	—	$	1,786	$	8,358	$	683,415	$	693,559
Paycheck Protection Program (PPP)	—		—		—		—		145,942		145,942
Real estate:
Commercial real estate (including multi-family residential)	7,689		—		7,689		12,639		2,084,293		2,104,621
Commercial real estate construction and land development	619		—		619		63		438,443		439,125
1-4 family residential (including home equity)	2,422		—		2,422		2,875		679,774		685,071
Residential construction	1,243		—		1,243		—		116,658		117,901
Consumer and other	23		—		23		192		34,052		34,267
Total loans	$	13,782	$	—	$	13,782	$	24,127	$	4,182,577	$	4,220,486

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt. The Company utilizes a risk rating matrix to assign a risk rating to each of its loans. Loans are rated on a scale of 1 to 9. Risk ratings are updated on an ongoing basis and are subject to change by continuous loan monitoring processes including lending management monitoring, executive management and board committee oversight, and independent credit review. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks certain risk ratings to be used as credit quality indicators including trends related to (i) the weighted-average risk grade of loans, (ii) the level of classified loans, (iii) the delinquency status of loans (iv) nonperforming loans and (vi) the general economic conditions in the Houston region. Individual bankers, under the oversight of credit administration, review updated financial information for all pass grade commercial loans to reassess the risk grade on at least an annual basis. When a loan has a risk grade of Pass/Watch (4), it is still considered a pass grade loan; however, it is considered to be on management’s “watch list,” where a significant risk-modifying action is anticipated in the near term. When a loan reaches a set of internally designated criteria, including Substandard-nonperforming (7) or higher, a special assets officer generally will be involved in the monitoring of the loan on an on-going basis.

The following is a general description of the risk ratings used:

Watch—Loans classified as watch loans may still be of high quality, but have an element of risk added to the credit such as declining payment history, deteriorating financial position of the borrower or a decrease in collateral value.

Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Substandard—Loans classified as substandard have well-defined weaknesses on a continuing basis and are inadequately protected by the current net worth and paying capacity of the borrower, declining collateral values, or a continuing downturn in their industry which is reducing their profits to below zero and having a significantly negative impact on their cash flow. These loans so classified are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Loss—Loans classified as loss are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

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The following table presents risk ratings by category of loan as of March 31, 2022 and December 31, 2021:


	As of March 31, 2022																		As of December 31, 2021
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted to Term Loans		Total		Total
	2022		2021		2020		2019		2018		Prior
	(Dollars in thousands)
Commercial and industrial
Pass	$	43,735	$	171,146	$	67,546	$	37,224	$	20,599	$	13,664	$	296,900	$	67	$	650,881	$	625,843
Watch	978		10,836		3,197		5,461		2,964		1,872		7,212		—		32,520		33,186
Special Mention	23		1,251		312		475		240		319		880		—		3,500		5,724
Substandard	2,963		12,529		3,710		967		1,276		2,374		3,642		—		27,461		28,705
Doubtful	—		88		—		—		—		—		—		—		88		101
Total commercial and industrial loans	$	47,699	$	195,850	$	74,765	$	44,127	$	25,079	$	18,229	$	308,634	$	67	$	714,450	$	693,559

Paycheck Protection Program (PPP)
Pass	$	—	$	68,546	$	10,078	$	—	$	—	$	—	$	—	$	—	$	78,624	$	145,942
Watch	—		—		—		—		—		—		—		—		—		—
Special Mention	—		—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—		—
Total PPP loans	$	—	$	68,546	$	10,078	$	—	$	—	$	—	$	—	$	—	$	78,624	$	145,942

Commercial real estate (including multi-family residential)
Pass	$	243,672	$	731,797	$	401,058	$	191,714	$	123,931	$	172,675	$	43,899	$	—	$	1,908,746	$	1,813,000
Watch	8,561		33,583		23,859		20,571		9,756		40,846		1,354		—		138,530		132,542
Special Mention	1,964		11,311		3,659		6,405		2,191		8,513		747		—		34,790		44,850
Substandard	19,057		24,419		19,953		16,060		18,071		15,379		2,497		—		115,436		114,229
Doubtful	—		—		—		—		—		—		—		—		—		—
Total commercial real estate (including multi-family residential) loans	$	273,254	$	801,110	$	448,529	$	234,750	$	153,949	$	237,413	$	48,497	$	—	$	2,197,502	$	2,104,621

Commercial real estate construction and land development
Pass	$	59,849	$	260,532	$	67,609	$	17,628	$	6,221	$	6,349	$	12,004	$	—	$	430,192	$	412,169
Watch	1,228		1,793		3,550		2,607		1,839		649		1,688		—		13,354		17,717
Special Mention	—		4,792		158		1,516		357		816		—		—		7,639		7,331
Substandard	—		1,512		96		215		465		—		—		—		2,288		1,908
Doubtful	—		—		—		—		—		—		—		—		—		—
Total commercial real estate construction and land development	$	61,077	$	268,629	$	71,413	$	21,966	$	8,882	$	7,814	$	13,692	$	—	$	453,473	$	439,125

1-4 family residential (including home equity)
Pass	$	50,699	$	168,960	$	129,031	$	75,939	$	40,462	$	55,108	$	95,267	$	1,581	$	617,047	$	632,428
Watch	1,378		6,411		4,741		1,336		4,892		3,842		5,898		352		28,850		30,365
Special Mention	1,017		534		648		1,101		1,471		668		998		—		6,437		5,471
Substandard	919		1,262		2,417		3,824		1,780		4,899		1,871		—		16,972		16,807
Doubtful	—		—		—		—		—		—		—		—		—		—
Total 1-4 family residential (including home equity)	$	54,013	$	177,167	$	136,837	$	82,200	$	48,605	$	64,517	$	104,034	$	1,933	$	669,306	$	685,071

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	As of March 31, 2022																		As of December 31, 2021
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans		Revolving Loans Converted to Term Loans
	2022		2021		2020		2019		2018		Prior						Total		Total
	(Dollars in thousands)
Residential construction
Pass	$	22,064	$	90,796	$	14,169	$	1,524	$	3,186	$	565	$	—	$	—	$	132,304	$	113,943
Watch	2,181		667		—		902		—		—		—		—		3,750		2,981
Special Mention	—		—		—		—		—		—		—		—		—		—
Substandard	15		691		—		—		—		—		—		—		706		977
Doubtful	—		—		—		—		—		—		—		—		—		—
Total residential construction	$	24,260	$	92,154	$	14,169	$	2,426	$	3,186	$	565	$	—	$	—	$	136,760	$	117,901

Consumer and other
Pass	5,824		19,452		2,493		1,093		748		307		2,983		—		32,900		33,638
Watch	—		112		36		141		—		—		33		—		322		381
Special Mention	—		—		—		—		15		—		—		—		15		19
Substandard	—		1		—		142		10		—		9		—		162		229
Doubtful	—		—		—		—		—		—		—		—		—		—
Total consumer and other	$	5,824	$	19,565	$	2,529	$	1,376	$	773	$	307	$	3,025	$	—	$	33,399	$	34,267

Total loans
Pass	425,843		1,511,229		691,984		325,122		195,147		248,668		451,053		1,648		3,850,694		3,776,963
Watch	14,326		53,402		35,383		31,018		19,451		47,209		16,185		352		217,326		217,172
Special Mention	3,004		17,888		4,777		9,497		4,274		10,316		2,625		—		52,381		63,395
Substandard	22,954		40,414		26,176		21,208		21,602		22,652		8,019		—		163,025		162,855
Doubtful	—		88		—		—		—		—		—		—		88		101
Total loans	$	466,127	$	1,623,021	$	758,320	$	386,845	$	240,474	$	328,845	$	477,882	$	2,000	$	4,283,514	$	4,220,486

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The following table presents the activity in the allowance for credit losses on loans by portfolio type for the three months ended March 31, 2022 and 2021:


	Commercial and industrial		Paycheck Protection Program (PPP)		Commercial real estate (including multi-family residential)		Commercial real estate construction and land development		1-4 family residential (including home equity)		Residential construction		Consumer and other		Total
	(Dollars in thousands)
Allowance for credit losses on loans:
Three Months Ended
Balance December 31, 2021	$	16,629	$	—	$	23,143	$	6,263	$	847	$	975	$	83	$	47,940
Provision for credit losses on loans	(383)		—		1,989		(53)		(95)		118		16		1,592
Charge-offs	(341)		—		(255)		(63)		—		—		(48)		(707)
Recoveries	390		—		—		—		—		—		—		390
Net charge-offs	49		—		(255)		(63)		—		—		(48)		(317)
Balance March 31, 2022	$	16,295	$	—	$	24,877	$	6,147	$	752	$	1,093	$	51	$	49,215







Three Months Ended
Balance December 31, 2020	$	17,738	$	—	$	23,934	$	6,939	$	3,279	$	870	$	413	$	53,173
Provision for credit losses on loans	1,304		—		(155)		683		(1,723)		(45)		(134)		(70)
Charge-offs	(404)		—		—		—		—		—		—		(404)
Recoveries	59		—		—		—		—		—		—		59
Net charge-offs	(345)		—		—		—		—		—		—		(345)
Balance March 31, 2021	$	18,697	$	—	$	23,779	$	7,622	$	1,556	$	825	$	279	$	52,758

Collateral dependent loans are secured by real estate assets, accounts receivable, inventory and equipment. For a collateral dependent loan, the Company’s evaluation process includes a valuation by appraisal or other collateral analysis adjusted for selling costs, when appropriate. This valuation is compared to the remaining outstanding principal balance of the loan. If a loss is determined to be probable, the loss is included in the allowance for credit losses on loans as a specific allocation. The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses as of March 31, 2022 and December 31, 2021:


	As of March 31, 2022
	Real Estate		Business Assets		Other		Total
	(Dollars in thousands)
Commercial and industrial	$	—	$	4,952	$	—	$	4,952
Paycheck Protection Program (PPP)	—		—		—		—
Real estate:
Commercial real estate (including multi-family residential)	5,080		—		—		5,080
Commercial real estate construction and land development	—		—		—		—
1-4 family residential (including home equity)	4,498		—		—		4,498
Residential construction	—		—		—		—
Consumer and other	—		—		—		—
Total	$	9,578	$	4,952	$	—	$	14,530

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	As of December 31, 2021
	Real Estate		Business Assets		Other		Total
	(Dollars in thousands)
Commercial and industrial	$	—	$	6,168	$	—	$	6,168
Paycheck Protection Program (PPP)	—		—		—		—
Real estate:
Commercial real estate (including multi-family residential)	5,494		—		—		5,494
Commercial real estate construction and land development	63		—		—		63
1-4 family residential (including home equity)	4,685		—		—		4,685
Residential construction	—		—		—		—
Consumer and other	—		—		158		158
Total	$	10,242	$	6,168	$	158	$	16,568

The following table presents additional information regarding nonaccrual loans. No interest income was recognized on nonaccrual loans as of March 31, 2022 and December 31, 2021.


	As of March 31, 2022
	Nonaccrual Loans with No Related Allowance		Nonaccrual Loans with Related Allowance		Total Nonaccrual Loans
	(Dollars in thousands)
Commercial and industrial	$	3,787	$	4,022	$	7,809
Paycheck Protection Program (PPP)	—		—		—
Real estate:
Commercial real estate (including multi-family residential)	12,540		2,719		15,259
Commercial real estate construction and land development	—		—		—
1-4 family residential (including home equity)	2,046		1,019		3,065
Residential construction	—		—		—
Consumer and other	142		—		142
Total loans	$	18,515	$	7,760	$	26,275


	As of December 31, 2021
	Nonaccrual Loans with No Related Allowance		Nonaccrual Loans with Related Allowance		Total Nonaccrual Loans
	(Dollars in thousands)
Commercial and industrial	$	1,824	$	6,534	$	8,358
Paycheck Protection Program (PPP)	—		—		—
Real estate:
Commercial real estate (including multi-family residential)	9,018		3,621		12,639
Commercial real estate construction and land development	63		—		63
1-4 family residential (including home equity)	2,324		551		2,875
Residential construction	—		—		—
Consumer and other	158		34		192
Total loans	$	13,387	$	10,740	$	24,127

Troubled Debt Restructurings

As of March 31, 2022 and December 31, 2021, the Company had a recorded investment in troubled debt restructurings of $18.8 million and $19.2 million, respectively. The Company allocated $984 thousand and $1.9 million of specific reserves for troubled debt restructurings at March 31, 2022 and December 31, 2021, respectively.

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The following table presents information regarding loans modified in a troubled debt restructuring during the three months ended March 31, 2022 and 2021:


	Three Months Ended March 31,
	2022					2021
	Number of Contracts	Pre-Modification of Outstanding Recorded Investment		Post Modification of Outstanding Recorded Investment		Number of Contracts	Pre-Modification of Outstanding Recorded Investment		Post Modification of Outstanding Recorded Investment
	(Dollars in thousands)
Troubled Debt Restructurings
Commercial and industrial	—	$	—	$	—	—	$	—	$	—
Paycheck Protection Program (PPP)	—	—		—		—	—		—
Real estate:
Commercial real estate (including multi-family residential)	4	1,207		1,207		1	545		545
Commercial real estate construction and land development	—	—		—		—	—		—
1-4 family residential (including home equity)	—	—		—		—	—		—
Residential construction	—	—		—		—	—		—
Consumer and other	—	—		—		—	—		—
Total	4	$	1,207	$	1,207	1	$	545	$	545

Troubled debt restructurings resulted in no charge-offs during the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, there were no loans modified under a troubled debt restructuring during the previous twelve-month period that subsequently defaulted during the three months ended March 31, 2022. As of March 31, 2021, there was one loan for $174 thousand modified under a troubled debt restructuring during the previous twelve-month period that subsequently defaulted during the three months ended March 31, 2021. Default is determined at 90 or more days past due. The modifications primarily related to extending the amortization periods of the loans. The Company did not grant principal reductions on any restructured loans. There were no commitments to lend additional amounts to troubled debt restructured loans for the three months ended March 31, 2022 and 2021. During the three months ended March 31, 2022, the Company added $1.2 million in new troubled debt restructurings, of which $1.2 million was still outstanding on March 31, 2022. During the three months ended March 31, 2021, the Company added $545 thousand in new troubled debt restructurings, of which $545 thousand was still outstanding on March 31, 2021.

The Company granted principal and interest deferrals on outstanding loan balances to customers affected by the COVID-19 pandemic. Additionally, upon request and after meeting certain conditions, borrowers could be granted additional payment deferrals subsequent to the first deferral. In addition to the short-term modification program implemented by the Company, Section 4013 of the CARES Act and bank regulatory interagency guidance gave entities temporary relief from the accounting and disclosure requirements for troubled debt restructurings (“TDR”) indicating that a lender could conclude that the modifications are not a TDR if the borrower was less than 30 days past due as of December 31, 2019. As of March 31, 2022, 7 loans with outstanding loan balances of $3.4 million remained on deferral. If the impact of COVID-19 persists, borrower operations do not improve or if other negative events occur, such modified loans could transition to potential problem loans or into problem loans.

5. LEASES

Lease payments over the expected term are discounted using the Company’s incremental borrowing rate for borrowings of similar terms. Generally, the Company cannot be reasonably certain about whether or not it will renew a lease until such time as the lease is within the last two years of the existing lease term. When the Company is reasonably certain that a renewal option will be exercised, it measures/remeasures the right-of-use asset and related lease liability using the lease payments specified for the renewal period or, if such amounts are unspecified, the Company generally assumes an increase (evaluated on a case-by-case basis in light of prevailing market conditions) in the lease payment over the final period of the existing lease term.

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There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the three months ended March 31, 2022 and 2021.

At March 31, 2022, the Company had 17 leases consisting of branch locations and office space. On the March 31, 2022 balance sheet, the right-of-use asset is classified within premises and equipment and the lease liability is included in other liabilities. The Company also owns certain office facilities which it leases to outside parties under operating lessor leases; however, such leases are not significant. All leases were classified as operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.

Certain leases include options to renew, with renewal terms that can extend the lease term from one to five years. Lease assets and liabilities include related options that are reasonably certain of being exercised. The depreciable life of leased assets are limited by the expected lease term.

Supplemental lease information at the dates indicated is as follows:


	March 31, 2022			December 31, 2021
	(Dollars in thousands)
Balance Sheet:
Operating lease right of use asset classified as premises and equipment	$	9,505		$	10,196
Operating lease liability classified as other liabilities	$	9,656		$	10,370
Weighted average lease term, in years	4.88			4.97
Weighted average discount rate	2.61		%	2.62		%

Lease costs for the dates indicated is as follows:


	Three Months Ended March 31,
	2022		2021
	(Dollars in thousands)
Income Statement:
Operating lease cost	$	892	$	873
Short-term lease cost	—		15
Sublease income	—		(18)
Total operating lease costs	$	892	$	870

A maturity analysis of the Company’s lease liabilities is as follows:


	March 31, 2022		December 31, 2021
	(Dollars in thousands)
Lease payments due:
Within one year	$	2,137	$	2,951
After one but within two years	2,362		2,350
After two but within three years	1,904		1,892
After three but within four years	1,378		1,366
After four but within five years	907		894
After five years	1,586		1,594
Total lease payments	10,274		11,047
Less: discount on cash flows	618		677
Total lease liability	$	9,656	$	10,370

6. FAIR VALUE

The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair value represents the exchange price that would be received from selling an asset or paid to transfer a liability, otherwise known as an “exit price,” in the principal or most advantageous market available to the entity in an orderly transaction between market participants on the measurement date.

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Fair Value Hierarchy

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

•Level 1—Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

•Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•Level 3—Significant unobservable inputs that reflect management’s judgment and assumptions that market participants would use in pricing an asset or liability that are supported by little or no market activity.

The carrying amounts and estimated fair values of financial instruments that are reported on the balance sheet are as follows:


	As of March 31, 2022
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	699,384	$	699,384	$	—	$	—	$	699,384
Available for sale securities	1,790,707		—		1,790,707		—		1,790,707
Loans held for investment, net of allowance	4,234,299		—		—		4,205,514		4,205,514
Accrued interest receivable	31,505		44		7,409		24,052		31,505
Financial liabilities
Deposits	$	6,162,327	$	—	$	6,150,816	$	—	$	6,150,816
Accrued interest payable	3,086		—		3,086		—		3,086
Borrowed funds	89,959		—		89,969		—		89,969
Subordinated debt	108,978		—		113,458		—		113,458


	As of December 31, 2021
			Estimated Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	757,509	$	757,509	$	—	$	—	$	757,509
Available for sale securities	1,773,765		—		1,773,765		—		1,773,765
Loans held for investment, net of allowance	4,172,546		—		—		4,143,552		4,143,552
Accrued interest receivable	33,392		6		7,435		25,953		33,394
Financial liabilities
Deposits	$	6,047,639	$	—	$	6,046,050	$	—	$	6,046,050
Accrued interest payable	1,753		—		1,753		—		1,753
Borrowed funds	89,956		—		73,699		—		73,699
Subordinated debt	108,847		—		113,355		—		113,355

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The following tables present fair values for assets and liabilities measured at fair value on a recurring basis. There were no liabilities measured at fair value on a recurring basis as of March 31, 2022.


	March 31, 2022
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Financial assets
Available for sale securities:
U.S. government and agency securities	$	—	$	413,095	$	—	$	413,095
Municipal securities	—		459,703		—		459,703
Agency mortgage-backed pass-through securities	—		300,866		—		300,866
Agency collateralized mortgage obligations	—		484,118		—		484,118
Corporate bonds and other	—		132,925		—		132,925
Total available for sale securities	$	—	$	1,790,707	$	—	$	1,790,707


	December 31, 2021
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Financial assets
Available for sale securities:
U.S. government and agency securities	$	—	$	400,551	$	—	$	400,551
Municipal securities	—		497,100		—		497,100
Agency mortgage-backed pass-through securities	—		302,596		—		302,596
Agency collateralized mortgage obligations	—		441,056		—		441,056
Corporate bonds and other	—		132,462		—		132,462
Total available for sale securities	$	—	$	1,773,765	$	—	$	1,773,765

There were no transfers between levels during the three months ended March 31, 2022 or 2021.

Assets measured at fair value on a nonrecurring basis are summarized in the table below. There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2022 and December 31, 2021.


	As of March 31, 2022
	Level 1		Level 2		Level 3
	(Dollars in thousands)
Loans:
Commercial and industrial	$	—	$	—	$	7,073
Commercial real estate (including multi- family residential)	—		—		54,569
Commercial real estate construction and land development	—		—		192
1-4 family residential (including home equity)	—		—		2,322
Residential construction	—		—		538
Branch assets held for sale	—		—		3,598
	$	—	$	—	$	68,292

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	As of December 31, 2021
	Level 1		Level 2		Level 3
	(Dollars in thousands)
Loans:
Commercial and industrial	$	—	$	—	$	6,960
Commercial real estate (including multi- family residential)	—		—		34,627
Commercial real estate construction and land development	—		—		72
1-4 family residential (including home equity)	—		—		2,806
Residential construction	—		—		500
Branch assets held for sale	2,925		—		—
	$	2,925	$	—	$	44,965

Individually Evaluated Loans with Specific Allocation of Allowance for Credit Losses on Loans

A loan is considered to be a collateral dependent loan when, based on current information and events, the Company expects repayment of the financial assets to be provided substantially through the operation or sale of the collateral and the Company has determined that the borrower is experiencing financial difficulty as of the measurement date. The allowance for credit losses on loans is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan’s collateral. For real estate loans, fair value of the loan’s collateral is generally determined by third-party appraisals or internal evaluations, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third-party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 10% of the appraised value. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.

Other Real Estate Owned and Branch Assets Held for Sale

Other real estate owned is comprised of real estate acquired in partial or full satisfaction of loans. Branch assets held for sale are assets that are expected to be sold as a result of the closure of a banking location or land that was acquired for future expansion but for which banking use is no longer contemplated. Other real estate owned and branch assets held for sale are recorded at its estimated fair value less estimated selling and closing costs at the date of transfer. Any excess of the related loan balance over the fair value less expected selling costs is charged to the allowance. Subsequent declines in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The fair value of other real estate owned and branch assets held for sale are determined using third-party appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. For this asset class, the actual valuation methods (income, sales comparable or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 10% of the appraised value.

At March 31, 2022 and December 31, 2021, the balance of other real estate owned was zero.

7. DEPOSITS

Time deposits that met or exceeded the Federal Deposit Insurance Corporation insurance limit of $250 thousand at March 31, 2022 and December 31, 2021 were $625.2 million and $707.5 million, respectively.

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Scheduled maturities of time deposits for the next five years are as follows (dollars in thousands):


Within one year	$	951,588
After one but within two years	121,161
After two but within three years	48,699
After three but within four years	27,255
After four but within five years	36,312
Total	$	1,185,015

The Company had $303.7 million and $306.4 million of brokered deposits as of March 31, 2022 and December 31, 2021, respectively. There were no concentrations of deposits with any one depositor at March 31, 2022 and December 31, 2021.

8. DERIVATIVE INSTRUMENTS

The Company entered into a financial derivative in 2020. Financial derivatives are reported at fair value in other assets or other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship.

Derivatives designated as cash flow hedges

For derivative instruments that are designated and qualify as a cash flow hedge, the aggregate fair value of the derivative instrument is recorded in other assets or other liabilities with any gain or loss related to changes in fair value recorded in accumulated other comprehensive income, net of tax. The gain or loss is reclassified into earnings in the same period during which the hedged asset or liability affects earnings and is presented in the same income statement line item as the earnings effect of the hedged asset or liability. The Company uses forward cash flow hedges in an effort to manage future interest rate exposure on liabilities. The hedging strategy converts the variable interest rate on liabilities to a fixed interest rate and is used in an effort to protect the Company from floating interest rate variability.

During the second quarter of 2021, the Company terminated the interest rate swap designated as a cash flow hedge prior to its maturity date resulting in a net gain of approximately $225 thousand recognized into other noninterest expenses as the forecasted transaction will not occur. The Company did not have any derivatives designated as cash flow hedges outstanding at March 31, 2022.

The effects of the Company’s cash flow hedge relationship on the statement of comprehensive income during the three months ended March 31, 2022 and 2021 were as follows, before tax:


	Amount of Gain Recognized in Other Comprehensive Loss
	Three Months Ended March 31,
	2022		2021
	(Dollars in thousands)
Liability derivatives
Interest rate swaps	$	—	$	1,824

The cash flow hedge was determined to be effective during the periods outstanding and as a result qualified for hedge accounting treatment. The hedge would no longer be considered effective if a portion of the hedge becomes ineffective, the item hedged is no longer in existence or the Company discontinues hedge accounting.

9. BORROWINGS AND BORROWING CAPACITY

The Company has an available line of credit with the Federal Home Loan Bank (“FHLB”) of Dallas, which allows the Company to borrow on a collateralized basis. FHLB advances are used to manage liquidity as needed. The advances are secured by a blanket lien on certain loans. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits. At March 31, 2022, the Company had a total borrowing capacity of $2.54 billion, of which $1.12 billion was available and $1.42 billion was outstanding. FHLB advances of $90.0 million were outstanding at March 31, 2022, at a weighted

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average interest rate of 0.74%. Letters of credit were $1.33 billion at March 31, 2022, of which $1.15 billion will expire during the remaining months of 2022, $101.2 million will expire in 2023, $57.9 million will expire in 2024 and $16.0 million will expire in 2025.

On December 28, 2018, the Company amended its revolving credit agreement to increase the maximum commitment to advance funds to $45.0 million which reduces annually by $7.5 million beginning in December 2020 and on each December 22nd each year thereafter. The Company is required to repay any outstanding balance in excess of the then-current maximum commitment amount. The revised agreement will mature in December 2025 and is secured by 100% of the capital stock of the Bank. At March 31, 2022, the balance on the revolving credit agreement was zero. The credit agreement contains certain restrictive covenants. At March 31, 2022, the Company believes it was in compliance with all such debt covenants. The interest rate on the debt is the Prime Rate minus 25 basis points, or 3.25% at March 31, 2022, and is paid quarterly.

10. SUBORDINATED DEBT

Junior Subordinated Debentures

On January 1, 2015, the Company acquired F&M Bancshares, Inc. and assumed Farmers & Merchants Capital Trust II and Farmers & Merchants Capital Trust III. Each of these trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s junior subordinated debentures. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company’s present and future senior indebtedness. The Company has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by such trust, provided such trust has funds available for such obligations. The junior subordinated debentures are included in Tier 1 capital under current regulatory guidelines and interpretations.

Under the provisions of each issue of the debentures, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.

The Company assumed the junior subordinated debentures with an aggregate original principal amount of $11.3 million and a current carrying value at March 31, 2022 of $9.8 million. At acquisition, the Company recorded a discount of $2.5 million on the debentures. The difference between the carrying value and contractual balance will be recognized as a yield adjustment over the remaining term for the debentures. At March 31, 2022, the Company had $11.3 million outstanding in junior subordinated debentures issued to the Company’s unconsolidated subsidiary trusts. The junior subordinated debentures are included in tier 1 capital under current regulatory guidelines and interpretations.

A summary of pertinent information related to the Company’s issues of junior subordinated debentures outstanding at March 31, 2022 is set forth in the table below:

Description

Issuance

Date

Trust

Preferred

Securities

Outstanding

Interest Rate(1)

Junior

Subordinated

Debt Owed

to Trusts

Maturity

Date(2)

(Dollars in thousands)

Farmers & Merchants Capital Trust II

November 13, 2003

7,500

3 month LIBOR + 3.00%

7,732

November 8, 2033

Farmers & Merchants Capital Trust III

June 30, 2005

3,500

3 month LIBOR + 1.80%

3,609

July 7, 2035

11,341


(1)			The 3-month LIBOR in effect as of March 31, 2022 was 0.83971%.
(2)			All debentures are currently callable.

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Subordinated Notes

In December 2017, the Bank completed the issuance, through a private placement, of $40.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Bank Notes") due December 15, 2027. The Bank Notes were issued at a price equal to 100% of the principal amount, resulting in net proceeds to the Bank of $39.4 million.

The Bank Notes bear a fixed interest rate of 5.25% per annum until (but excluding) December 15, 2022, payable semi-annually in arrears. From December 15, 2022, the Bank Notes will bear a floating rate of interest equal to 3-Month LIBOR + 3.03% until the Bank Notes mature on December 15, 2027, or such earlier redemption date, payable quarterly in arrears. The Bank Notes will be redeemable by the Bank, in whole or in part, on or after December 15, 2022 or, in whole but not in part, upon the occurrence of certain specified tax events, capital events or investment company events. Any redemption will be at a redemption price equal to 100% of the principal amount of Bank Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Bank Notes are not subject to redemption at the option of the holders.

In September 2019, the Company completed the issuance of $60.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Company Notes") due October 1, 2029. The Company Notes were issued at a price equal to 100% of the principal amount, resulting in net proceeds to the Company of $58.6 million. The Company used the net proceeds from the offering to support its growth and for general corporate purposes.

The Company Notes bear a fixed interest rate of 4.70% per annum until (but excluding) October 1, 2024, payable semi-annually in arrears on April 1 and October 1, commencing on April 1, 2020. Thereafter, from October 1, 2024 through the maturity date, October 1, 2029, or earlier redemption date, the Company Notes will bear interest at a floating rate equal to the then-current three-month LIBOR, plus 313 basis points (3.13%) for each quarterly interest period (subject to certain provisions set forth under “Description of the Notes—Interest Rates and Interest Payment Dates” included in the Prospectus Supplement), payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year. Any redemption will be at a redemption price equal to 100% of the principal amount of Company Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Company Notes are not subject to redemption at the option of the holders.

11. INCOME TAXES

The amount of the Company’s federal and state income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible items. For the three months ended March 31, 2022, income tax expense was $4.2 million, compared with $3.9 million for the three months ended March 31, 2021. The effective income tax rate for the three months ended March 31, 2022 was 18.4%, compared to 17.7% for the three months ended March 31, 2021.

Interest and penalties related to tax positions are recognized in the period in which they begin accruing or when the entity claims the position that does not meet the minimum statutory thresholds. The Company does not have any uncertain tax positions and does not have any interest or penalties recorded in the income statement for the three months ended March 31, 2022. The Company is no longer subject to examination by the U.S. Federal Tax Jurisdiction for the years prior to 2018.

12. STOCK BASED COMPENSATION

At March 31, 2022, the Company had two stock-based employee compensation plans with awards outstanding. In connection with the acquisition of Post Oak Bancshares, Inc. on October 1, 2018, the Company assumed the Post Oak Bancshares, Inc. Stock Option Plan, under which no additional awards will be issued. During 2019, the Company’s Board of Directors and shareholders approved the 2019 Amended and Restated Stock Awards and Incentive Plan (the “Plan”) covering certain awards of stock-based compensation to key employees and directors of the Company. Under the Plan, the Company is authorized to issue a maximum aggregate of 3,200,000 shares of stock, up to 1,800,000 of which may be issued through incentive stock options. The Company accounts for stock based employee compensation plans using the fair value-based method of accounting. The Company recognized total stock based compensation expense of $959 thousand for the three months ended March 31, 2022, and $820 thousand for the three months ended March 31, 2021.

Stock Options

Options to purchase a total of 1,309,231 shares of Company stock have been granted as of March 31, 2022. Options are exercisable for up to 10 years from the date of the grant and, dependent on the terms of the applicable award agreement generally vest four years after the date of grant. The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model.

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A summary of the activity in the stock option plans during the three months ended March 31, 2022 is set forth below:


	Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(Shares in thousands)			(In years)	(Dollars in thousands)
Options outstanding, January 1, 2022	283	$	22.74	2.90	$	5,508
Options granted	—	—
Options exercised	(33)	20.21
Options forfeited	(6)	31.73
Options outstanding, March 31, 2022	244	$	22.86	2.71	$	5,330
Options vested and exercisable, March 31, 2022	244	$	22.86	2.71	$	5,330

As of March 31, 2022, there was no unrecognized compensation cost related to nonvested stock options granted under the Plan.

Restricted Stock Awards

During the three months ended March 31, 2022, the Company issued 1,743 shares of restricted stock. The shares of restricted stock generally vest over a period of four years and are considered outstanding at the date of issuance. The Company accounts for shares of restricted stock by recording the fair value of the grant on the award date as compensation expense over the vesting period.

A summary of the activity of the nonvested shares of restricted stock during the three months ended March 31, 2022 is as follows:


	Number of Shares	Weighted Average Grant Date Fair Value
	(Shares in thousands)
Nonvested share awards outstanding, January 1, 2022	168	$	34.23
Share awards granted	2	42.21
Share awards vested	(17)	38.46
Unvested share awards forfeited or cancelled	(1)	34.63
Nonvested share awards outstanding, March 31, 2022	152	$	33.86

As of March 31, 2022, there was $3.6 million of total unrecognized compensation cost related to the restricted stock awards which is expected to be recognized over a weighted-average period of 2.28 years.

Performance Share Units (“PSUs”)

PSUs are earned subject to certain performance goals being met after the two-year performance period and will be settled in shares of Allegiance Common Stock following a one-year service period. There were no PSUs awarded during the three months ended March 31, 2022. The Company awarded 56,255 PSUs during the three months ended March 31, 2021. The grant date fair value of the PSUs is based on the probable outcome of the applicable performance conditions and is calculated at target based on a combination of the closing market price of our common stock on the grant date and a Monte Carlo simulated fair value in accordance with ASC 718. At March 31, 2022, there was $1.6 million of unrecognized compensation expense related to the PSUs, which is expected to be recognized over a weighted-average period of 1.76 years.

13. OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles generally accepted in the United States, are not included in the Company’s consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve to varying degrees elements of credit risk and interest rate risk in excess

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of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.

The contractual amounts of financial instruments with off-balance sheet risk are as follows:


	March 31, 2022				December 31, 2021
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
	(Dollars in thousands)
Commitments to extend credit	$	534,330	$	632,875	$	484,441	$	607,106
Standby letters of credit	7,992		13,718		8,536		12,624
Total	$	542,322	$	646,593	$	492,977	$	619,730

Commitments to extend credit include lines of credit as well as commitments to make new loans. Commitments to make loans are generally made for an approval period of 120 days or fewer. As of March 31, 2022, the funded fixed rate loan commitments had interest rates ranging from 1.00% to 13.49% with a weighted average maturity and rate of 3.70 years and 4.72% , respectively. As of December 31, 2021, the funded fixed rate loan commitments had interest rates ranging from 1.00% to 13.49% with a weighted average maturity and rate of 3.71 years and 4.68% , respectively.

Allowance for Credit Losses on Unfunded Commitments. In addition to the allowance for credit losses on loans, the Company has established an allowance for credit losses on unfunded commitments, classified in other liabilities and adjusted as a provision for credit loss expense. The allowance represents estimates of expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is informed by historical analysis looking at utilization rates. The expected credit loss rates applied to the commitments expected to fund is informed by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. The allowance for credit losses on unfunded commitments as of March 31, 2022 and December 31, 2021 was $5.5 million and $5.3 million, respectively. This reserve is maintained at a level management believes to be sufficient to absorb losses arising from unfunded loan commitments.

The following table details activity in the allowance for credit losses on unfunded commitments (dollars in thousands):


Balance at December 31, 2021	$	5,298
Provision for credit losses on unfunded commitments	222
Balance at March 31, 2022	$	5,520

Balance at December 31, 2020	$	4,697
Provision for credit losses on unfunded commitments	709
Balance at March 31, 2021	$	5,406

Litigation

From time to time, the Company is subject to claims and litigation arising in the ordinary course of business. In the opinion of management, the Company is not party to any legal proceedings the resolution of which it believes would have a material adverse effect on the Company’s business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels. However, one or more unfavorable outcomes in any claim or litigation against the Company could have a material adverse effect for the period in which such claim or litigation is resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect the Company’s reputation, even if resolved in its favor. The Company intends to defend itself vigorously against any future claims or litigation.

14. REGULATORY CAPITAL MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines, and 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

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also subject to qualitative judgments by regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can cause regulators to initiate actions that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. The final rules implementing Basel Committee on Banking Supervision's capital guideline for U.S. Banks (Basel III Rules) were fully phased in when the capital conservation buffer reached 2.5%. Management believes as of March 31, 2022 and December 31, 2021, the Company and the Bank met all capital adequacy requirements to which they were then subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If less than well capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

The following is a summary of the Company’s and the Bank’s actual and required capital ratios as of March 31, 2022 and December 31, 2021:


	Actual				Minimum Required for Capital Adequacy Purposes				Minimum Required Plus Capital Conservation Buffer				To Be Categorized As Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
ALLEGIANCE BANCSHARES, INC.
(Consolidated)
As of March 31, 2022
Total Capital (to risk weighted assets)	$	741,722	15.76	%	$	376,611	8.00	%	$	494,302	10.50	%	N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets)	578,009		12.28	%	211,844		4.50	%	329,535		7.00	%	N/A		N/A
Tier 1 Capital (to risk weighted assets)	587,790		12.49	%	282,458		6.00	%	400,149		8.50	%	N/A		N/A
Tier 1 Capital (to average tangible assets)	587,790		8.37	%	280,972		4.00	%	280,972		4.00	%	N/A		N/A
As of December 31, 2021
Total Capital (to risk weighted assets)	$	722,010	16.08	%	$	359,214	8.00	%	$	471,468	10.50	%	N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets)	559,926		12.47	%	202,058		4.50	%	314,312		7.00	%	N/A		N/A
Tier 1 Capital (to risk weighted assets)	569,678		12.69	%	269,410		6.00	%	381,665		8.50	%	N/A		N/A
Tier 1 Capital (to average tangible assets)	569,678		8.53	%	267,286		4.00	%	267,286		4.00	%	N/A		N/A
ALLEGIANCE BANK
As of March 31, 2022
Total Capital (to risk weighted assets)	$	681,690	14.50	%	$	376,164	8.00	%	$	493,715	10.50	%	$	470,205	10.00	%
Common Equity Tier 1 Capital (to risk weighted assets)	587,047		12.48	%	211,592		4.50	%	329,144		7.00	%	305,633		6.50	%
Tier 1 Capital (to risk weighted assets)	587,047		12.48	%	282,123		6.00	%	399,674		8.50	%	376,164		8.00	%
Tier 1 Capital (to average tangible assets)	587,047		8.37	%	280,607		4.00	%	280,607		4.00	%	350,758		5.00	%
As of December 31, 2021
Total Capital (to risk weighted assets)	$	659,596	14.71	%	$	358,793	8.00	%	$	470,916	10.50	%	$	448,491	10.00	%
Common Equity Tier 1 Capital (to risk weighted assets)	566,483		12.63	%	201,821		4.50	%	313,944		7.00	%	291,519		6.50	%
Tier 1 Capital (to risk weighted assets)	566,483		12.63	%	269,095		6.00	%	381,217		8.50	%	358,793		8.00	%
Tier 1 Capital (to average tangible assets)	566,483		8.49	%	266,944		4.00	%	266,944		4.00	%	333,680		5.00	%

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15. EARNINGS PER COMMON SHARE

Diluted earnings per common share is computed using the weighted-average number of common shares determined for the basic earnings per common share computation plus the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock using the treasury stock method. Outstanding stock options and PSUs issued by the Company represent the only dilutive effect reflected in diluted weighted average shares. Restricted shares are considered outstanding at the date of grant, accounted for as participating securities and included in basic and diluted weighted average common shares outstanding. Performance share units that vest based on the Company’s performance and service conditions that have not been achieved as of the end of the period are not included in basic and diluted weighted average common shares outstanding.


	Three Months Ended March 31,
	2022				2021
	Amount		Per Share Amount		Amount		Per Share Amount
	(Amounts in thousands, except per share data)
Net income attributable to shareholders	$	18,657			$	18,010
Basic:
Weighted average shares outstanding	20,363		$	0.92	20,140		$	0.89
Diluted:
Add incremental shares for:
Dilutive effect of stock option exercises and performance share units	163				202
Total	20,526		$	0.91	20,342		$	0.89

There were no antidilutive shares as of March 31, 2022 and 2021, respectively.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except where the context otherwise requires or where otherwise indicated, in this Quarterly Report on Form 10-Q the terms “we,” “us,” “our,” “Company” and “our business” refer to Allegiance Bancshares, Inc. and our wholly-owned banking subsidiary, Allegiance Bank, a Texas banking association, and the terms “Allegiance Bank” or the “Bank” refer to Allegiance Bank. In this Quarterly Report on Form 10-Q, we refer to the Houston-The Woodlands-Sugar Land metropolitan statistical area, or MSA, and the Beaumont-Port Arthur MSA as the “Houston region.”

Cautionary Notice Regarding Forward-Looking Statements

Statements and financial discussion and analysis contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We also may make forward-looking statements in our other documents filed with or furnished to the SEC. In addition, our senior management may make forward-looking statements orally to investors, analysts, representatives of the media and others. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “continues,” “anticipates,” “intends,” “projects,” “estimates,” “potential,” “plans” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and not historical facts, although not all forward-looking statements include the foregoing words. Forward-looking statements are based on assumptions and involve a number of risks and uncertainties, many of which are beyond our control, particularly with regard to developments related to the coronavirus (COVID-19) pandemic. Many possible events or factors could affect our future financial results and performance and could cause such results or performance to differ materially from those expressed in our forward-looking statements.

While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause our actual results to differ from those in our forward-looking statements:

•risks related to the pending merger with CBTX, Inc. (“CBTX”), including that its consummation is contingent upon the satisfaction of a number of conditions, including shareholder and regulatory approvals, that may be outside of our or CBTX’s control and that we and CBTX may be unable to satisfy or obtain or which may delay the consummation of the merger or result in the imposition of conditions that could reduce the anticipated benefits from the merger or cause the parties to abandon the merger;

•risks related to the concentration of our business in the Houston region, including risks associated with volatility or decreases in oil and gas prices or prolonged periods of lower oil and gas prices;

•general market conditions and economic trends nationally, regionally and particularly in the Houston region;

•the impact of the COVID-19 pandemic on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitation, the CARES Act), and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

•our ability to retain executive officers and key employees and their customer and community relationships;

•our ability to recruit and retain successful bankers that meet our expectations in terms of customer and community relationships and profitability;

•risks related to our strategic focus on lending to small to medium-sized businesses;

•our ability to implement our growth strategy, including through the identification of acquisition candidates that will be accretive to our financial condition and results of operations, as well as permitting decision-making authority at the branch level;

•risks related to any businesses we acquire in the future, including exposure to potential asset and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms, procedures and personnel, the need for additional capital to finance such transactions and possible failures in realizing the anticipated benefits from such acquisitions;

•risks associated with our owner-occupied commercial real estate loan and other commercial real estate loan portfolios, including the risks inherent in the valuation of the collateral securing such loans;

•risks associated with our commercial and industrial loan portfolio, including the risk for deterioration in value of the general business assets that generally secure such loans;

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•the accuracy and sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses and other estimates;

•risk of deteriorating asset quality and higher loan charge-offs, as well as the time and effort necessary to resolve nonperforming assets;

•potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;

•risks related to loans originated and serviced under the Small Business Administration’s guidelines;

•changes in market interest rates that affect the pricing of our loans and deposits and our net interest income;

•potential fluctuations in the market value and liquidity of the securities we hold for sale;

•risk of impairment of investment securities, goodwill, other intangible assets or deferred tax assets;

•the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services, which may adversely affect our pricing and terms;

•risks associated with negative public perception of the Company;

•our ability to maintain an effective system of disclosure controls and procedures and internal controls over financial reporting;

•risks associated with fraudulent and negligent acts by our customers, employees or vendors;

•our ability to keep pace with technological change or difficulties when implementing new technologies;

•risks associated with system failures or failures to protect against cybersecurity threats, such as breaches of our network security;

•our ability to comply with privacy laws and properly safeguard personal, confidential or proprietary information;

•risks associated with data processing system failures and errors;

•potential risk of environmental liability related to owning or foreclosing on real property;

•the institution and outcome of litigation and other legal proceeding against us or to which we become subject;

•our ability to maintain adequate liquidity and to raise necessary capital to fund our acquisition strategy and operations or to meet increased minimum regulatory capital levels;

•our ability to comply with various governmental and regulatory requirements applicable to financial institutions;

•the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators;

•governmental monetary and fiscal policies, including the policies of the Federal Reserve;

•our ability to comply with supervisory actions by federal and state banking agencies;

•changes in the scope and cost of FDIC insurance and other coverage;

•systemic risks associated with the soundness of other financial institutions;

•the effects of war or other conflicts, acts of terrorism (including cyberattacks) or other catastrophic events, including hurricanes, pandemics, storms, droughts, tornadoes and flooding, that may affect general economic conditions; and

•other risks and uncertainties listed from time to time in our reports and documents filed with the SEC.

Further, these forward-looking statements speak only as of the date on which they were made and we disclaim any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events, unless required to do so under the federal securities laws. Other factors not identified above, including those described under the headings “Risk Factors”, "Quantitative and Qualitative Disclosures about Market Risk" and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, and in our Annual Report on Form 10-K for the year ended December 31, 2021 may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be made by us. Because of these uncertainties, you should not place undue reliance on any forward-looking statement.

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Overview

We generate most of our income from interest income on loans, service charges on customer accounts and interest income from investments in securities. We incur interest expense on deposits and other borrowed funds and noninterest expenses such as salaries and employee benefits and occupancy expenses. Net interest income is the difference between interest income on earning assets such as loans and securities and interest expense on liabilities such as deposits and borrowings that are used to fund those assets. Net interest income is our largest source of revenue. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the interest expenses of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change.” Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas and specifically in the Houston region, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target market and throughout the state of Texas.

Our net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and borrowed funds, referred to as a “rate change.” Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets.

Our objective is to grow and strengthen our community banking franchise by deploying our super-community banking strategy and pursuing select strategic acquisitions. We are strategically focused on the Houston region because of our deep roots and experience operating through a variety of economic cycles in this large and vibrant market. We are positioned to be a leading provider of customized commercial banking services by emphasizing the strength and capabilities of local bank office management and by providing superior customer service.

Super-community banking strategy. Our super-community banking strategy emphasizes local delivery of the excellent customer service associated with community banking combined with the products, efficiencies and scale associated with larger banks. By empowering our personnel to make certain business decisions at a local level in order to respond quickly to customers’ needs, we are able to establish and foster strong relationships with customers through superior service. We operate full-service bank offices and employ bankers with strong underwriting credentials who are authorized to make loan and underwriting decisions up to prescribed limits at the bank office level. We support bank office operations with a centralized credit approval process for larger credit relationships, loan operations, information technology, core data processing, accounting, finance, treasury and treasury management support, deposit operations and executive and board oversight. We emphasize lending to and banking with small to medium-sized businesses, with which we believe we can establish stronger relationships through excellent service and provide lending that can be priced on terms that are more attractive to the Company than would be achieved by lending to larger businesses. We believe this approach produces a clear competitive advantage by delivering an extraordinary customer experience and fostering a culture dedicated to achieving superior external and internal service levels.

We plan to continue to emphasize our super-community banking strategy to organically grow our presence in the Houston region through:

•increasing the productivity of existing bankers, as measured by loans, deposits and fee income per banker, while enhancing profitability by leveraging our existing operating platform;

•focusing on local and individualized decision-making, allowing us to provide customers with rapid decisions on loan requests, which we believe allows us to effectively compete with larger financial institutions;

•identifying and hiring additional seasoned bankers who will thrive within our super-community banking model, and opening additional branches where we are able to attract seasoned bankers; and

•developing new products designed to serve a diversified economy, while preserving our strong culture of risk management.

Select strategic acquisitions. We intend to continue to expand our presence through organic growth and a disciplined acquisition strategy. We focus on like-minded community banks with similar lending strategies to our own when evaluating

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acquisition opportunities. We believe that our management’s experience in assessing, executing and integrating target institutions will allow us to capitalize on acquisition opportunities.

Pending Merger of Equals with CBTX, Inc.

On November 8, 2021, Allegiance and CBTX jointly announced that they entered into a definitive merger agreement pursuant to which the companies will combine in an all-stock merger of equals. CBTX reported total assets of $4.49 billion as of December 31, 2021. Under the terms of the definitive merger agreement, Allegiance shareholders will receive 1.4184 shares of CBTX common stock for each share of Allegiance common stock they own. Following the completion of the merger, we estimate that former Allegiance shareholders will own approximately 54% and former CBTX shareholders will own approximately 46% of the combined company. The companies have submitted the required regulatory filings and, subject to satisfaction or in some cases waiver of the closing conditions, including approval of the merger agreement by both companies’ shareholders, the parties anticipate closing in the second quarter of the year. Each company has scheduled a special meeting for May 24, 2022 at which its respective shareholders will consider and vote on the merger agreement and other related matters.

COVID-19 Update

The COVID-19 pandemic continues to place significant health, economic and other major pressure throughout the Houston region we serve, the state of Texas, the United States and the entire world.

•While all of our bank offices generally remain open to customers, we have taken steps to address safety issues by offering in-person visits by appointment, added social distancing markers and plexiglass and are encouraging the use of our drive-thrus, following the guidelines of the Centers for Disease Control and Prevention (“CDC”).

•We continue to encourage the use of available eBanking tools and financial education resources.

•We have provided extensions and deferrals to our loan customers in accordance with the CARES Act.

•We have participated in assisting with applications for resources through the CARES Act’s PPP, administered by the SBA, which provides government guaranteed and forgivable loans. As of March 31, 2022, we funded over 10,000 loans totaling in excess of $1.08 billion. We believe these loans and our participation in the program will provide support for our customers and small businesses in the communities we serve.

•Our team is at full-strength with some employees utilizing the work-from-home program implemented pursuant to the pre-existing pandemic plan.

•We are working to ensure the health and safety of our in-office teams providing CDC-recommended supplies and implementing additional routine cleaning measures to all offices and departments.

•We continue to closely monitor this pandemic and its effects and expect to continue to adjust our operations in response to the pandemic as the situation evolves.

Critical Accounting Policies

Our accounting policies are integral to understanding our results of operations. Our accounting policies are described in detail in Note 1 to our Annual Report on Form 10-K for the year ended December 31, 2021.

We believe that of our accounting policies, the following may involve a higher degree of judgment and complexity:

Securities

Debt securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value. Unrealized gains and losses are excluded from earnings and reported, net of tax, as a separate component of shareholders’ equity until realized. Securities within the available for sale portfolio may be used as part of the Company’s asset/liability strategy and may be sold in response to changes in interest rate risk, prepayment risk or other similar economic factors.

Interest earned on these assets is included in interest income. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

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Nonperforming and Past Due Loans

The Company has several procedures in place to assist it in maintaining the overall quality of its loan portfolio. The Company has established underwriting guidelines to be followed by its officers, and monitors its delinquency levels for any negative or adverse trends. There can be no assurance, however, that the Company’s loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions or other factors.

Past due status is based on the contractual terms of the loan. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The Company generally classifies a loan as nonperforming, automatically places the loan on nonaccrual status, ceases accruing interest and reverses all unpaid accrued interest against interest income, when, in management’s opinion, the borrower may be unable to meet payment obligations, when the payment of principal or interest on a loan is delinquent for 90 days, as well as when required by regulatory provisions, unless the loan is in the process of collection and the underlying collateral fully supports the carrying value of the loan. Any payments received on nonaccrual loans are applied first to outstanding loan amounts. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Any excess is treated as recovery of lost interest. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. If the decision is made to continue accruing interest on the loan, periodic reviews are made to confirm the accruing status of the loan. Nonaccrual loans and loans past due 90 days include both smaller balance homogeneous loans that are collectively and individually evaluated. When available information confirms that specific loans, or portions thereof, are uncollectible, these amounts are charged-off against the allowance. All loan types are considered delinquent after 30 days past due and are typically charged-off or charged-down no later than 120 days past due, with consideration of, but not limited to, the following criteria in determining the need and timing of the charge-off or charge-down: (1) the Bank is in the process of repossession or foreclosure and there appears to be a likely deficiency; (2) the collateral securing the loan has been sold and there is an actual deficiency; (3) the Bank is proceeding with lengthy legal action to collect its balance; (4) the borrower is unable to be located; or (5) the borrower has filed bankruptcy. Charge-offs occur when the Company confirms a loss on a loan.

Allowance for Credit Losses

The allowance for credit losses is a valuation account that is established through a provision for credit losses charged to expense, which represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical loss experience, and other qualitative considerations. The allowance for credit losses includes the allowance for credit losses on loans, which is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans, the allowance for credit losses on unfunded commitments reported in other liabilities and the allowance for credit losses on securities available for sale.

Allowance for Credit Losses on Loans

The level of the allowance is based upon management's evaluation of historical default and loss experience, current and projected economic conditions, asset quality trends, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay a loan (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, industry and peer bank loan quality indications and other pertinent factors, including regulatory recommendations. The allowance for credit losses on loans maintained by management is believed adequate to absorb all expected future losses in the loan portfolio at the balance sheet date. The Company disaggregates the loan portfolio into pools for purposes of determining the allowance for credit losses. These pools are based on the level at which the Company develops, documents and applies a systematic methodology to determine the allowance for credit losses.

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Loans with similar risk characteristics are collectively evaluated resulting in loss estimates as determined by applying reserve factors, such as historical lifetime loan loss experience, concentration risk of specific loan types, the volume, growth and composition of the Company’s loan portfolio, current economic conditions and reasonable and supportable forecasted economic conditions that may affect the borrower’s ability to pay and the value of collateral, the evaluation of the Company’s loan portfolio through its internal loan review process, general economic conditions and other qualitative risk factors both internal and external to the Company and other relevant factors, designed to estimate current expected credit losses, to amortized cost balances over the remaining contractual life of the collectively evaluated portfolio. Loans with similar risk characteristics are aggregated into homogeneous pools for assessment. Historical lifetime loan loss experience is determined by utilizing an open-pool (“cumulative loss rate”) methodology. Adjustments to the historical lifetime loan loss experience are made for differences in current loan pool risk characteristics such as portfolio concentrations, delinquency, nonaccrual, and watch list levels, as well as changes in current and forecasted economic conditions such as unemployment rates, property and collateral values, and other indices relating to economic activity. Losses are predicted over a period of time determined to be reasonable and supportable, and at the end of the reasonable and supportable period losses are reverted to long term historical averages. The reasonable and supportable period and reversion period are re-evaluated each year by the Company and are dependent on the current economic environment among other factors. A reasonable and supportable period of twelve months was utilized for all loan pools, followed by an immediate reversion to long term averages. Based on a review of these factors for each loan type, the Company applies an estimated percentage to the outstanding balance of each loan type.

Loans that no longer share risk characteristics with the collectively evaluated loan pools are evaluated on an individual basis and are excluded from the collectively evaluated pools. In order to assess which loans are to be individually evaluated, the Company follows a loan review program to evaluate the credit risk in the total loan portfolio and assigns risk grades to each loan. Individual credit loss estimates are typically performed for nonaccrual loans, modified loans classified as troubled debt restructurings and all other loans identified by management. All loans deemed as being individually evaluated are reviewed on a quarterly basis in order to determine whether a specific reserve is required. The Company considers certain loans to be collateral dependent if the borrower is experiencing financial difficulty and management expects repayment for the loan to be substantially through the operation or sale of the collateral. For collateral dependent loans, loss estimates are based on the fair value of collateral, less estimated cost to sell (if applicable). Collateral values supporting individually evaluated loans are assessed quarterly and appraisals are typically obtained at least annually. The Company allocates a specific loan loss reserve on an individual loan basis primarily based on the value of the collateral securing the individually evaluated loan. Through this loan review process, the Company assesses the overall quality of the loan portfolio and the adequacy of the allowance for credit losses on loans while considering risk elements attributable to particular loan types in assessing the quality of individual loans. In addition, for each category of loans, the Company considers secondary sources of income and the financial strength and credit history of the borrower and any guarantors.

A change in the allowance for credit losses on loans can be attributable to several factors, most notably specific reserves for individually evaluated loans, historical lifetime loan loss information, and changes in economic factors and growth in the loan portfolio. Specific reserves that are calculated on an individual basis and the qualitative assessment of all other loans reflect current changes in the credit quality of the loan portfolio. Historical lifetime credit losses, on the other hand, are based on an open-pool (“cumulative loss rate”) methodology, which is then applied to estimate lifetime credit losses in the loan portfolio. The allowance for credit losses on loans is further determined by the size of the loan portfolio subject to the allowance methodology and factors that include Company-specific risk indicators and general economic conditions, both of which are constantly changing. The Company evaluates the economic and portfolio-specific factors on a quarterly basis to determine a qualitative component of the general valuation allowance. These factors include current economic metrics, reasonable and supportable forecasted economic metrics, delinquency trends, credit concentrations, nature and volume of the portfolio and other adjustments for items not covered by specific reserves and historical lifetime loss experience. Based on the Company’s actual historical lifetime loan loss experience relative to economic and loan portfolio-specific factors at the time the losses occurred, management is able to identify the probable level of lifetime losses as of the date of measurement. The Company’s analysis of qualitative, or economic, factors on pools of loans with common risk characteristics, in combination with the quantitative historical lifetime loss information and specific reserves, provides the Company with an estimate of lifetime losses.

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The calculation of current expected credit losses is inherently subjective, as it requires management to exercise judgment in determining appropriate factors used to determine the allowance. The estimated loan losses for all loan pools are adjusted for changes in qualitative factors not inherently considered in the quantitative analyses to bring the allowance to the level management believes is appropriate based on factors that have not otherwise been fully accounted for, including adjustments for foresight risk, input imprecision and model imprecision. The qualitative categories and the measurements used to quantify the risks within each of these categories are subjectively selected by management, but measured by objective measurements period over period. The data for each measurement may be obtained from internal or external sources. The current period measurements are evaluated and assigned a factor commensurate with the current level of risk relative to past measurements over time. The resulting qualitative adjustments are applied to the relevant collectively evaluated loan portfolios. These adjustments are based upon quarterly trend assessments in portfolio concentrations, changes in lending policies and procedures, policy exceptions, independent loan review results, internal risk ratings and peer group credit quality trends. The qualitative allowance allocation, as determined by the processes noted above, is increased or decreased for each loan pool based on the assessment of these various qualitative factors. The determination of the appropriate qualitative adjustment is based on management's analysis of current and expected economic conditions and their impact to the portfolio, as well as internal credit risk movements and a qualitative assessment of the lending environment, including underwriting standards. Management recognizes the sensitivity of various assumptions made in the quantitative modeling of expected losses and may adjust reserves depending upon the level of uncertainty that currently exists in one or more assumptions.

While policies and procedures used to estimate the allowance for credit losses on loans, as well as the resultant provision for credit losses charged to income, are considered adequate by management and are reviewed periodically by regulators and internal audit, they are approximate and could materially change based on changes within the loan portfolio and effects from economic factors. There are factors beyond the Company’s control, such as changes in projected economic conditions, including political instability or global events affecting the U.S. economy, real estate markets or particular industry conditions which could cause changes to expectations for current conditions and economic forecasts that could result in an unanticipated increase in the allowance and may materially impact asset quality and the adequacy of the allowance for credit losses and thus the resulting provision for credit losses.

In assessing the adequacy of the allowance for credit losses on loans, the Company considers the results of its ongoing independent loan review process. The Company undertakes this process both to ascertain those loans in the portfolio with elevated credit risk and to assist in its overall evaluation of the risk characteristics of the entire loan portfolio. Its loan review process includes the judgment of management, independent internal loan reviewers and reviews that may have been conducted by third-party reviewers including regulatory examiners. The Company incorporates relevant loan review results in the allowance.

In accordance with CECL, losses are estimated over the remaining contractual terms of loans, adjusted for prepayments. The contractual term excludes expected extensions, renewals and modifications unless management has a reasonable expectation at the reporting date that a troubled debt restructuring will be executed or such renewals, extensions or modifications are included in the original loan agreement and are not unconditionally cancellable by the Company.

Credit losses are estimated on the amortized cost basis of loans, which includes the principal balance outstanding, purchase discounts and premiums and deferred loan fees and costs. Loan losses are not estimated for accrued interest receivable as interest that is deemed uncollectible is written off through interest income in a timely manner. Accrued interest is presented separately on the balance sheets and as allowed under ASC Topic 326 is excluded from the tabular loan disclosures in Note 4 – Loans and Allowance for Credit Losses.

Allowance for Credit Losses on Unfunded Commitments

The Company estimates expected credit losses over the contractual term in which the Company is exposed to credit risk through a contractual obligation to extend credit, unless the obligation is unconditionally cancellable by the Company. The allowance for credit losses on unfunded commitments is adjusted as a provision for credit loss expense. The estimates are determined based on the likelihood of funding during the contractual term and an estimate of credit losses subsequent to funding. Estimated credit losses on subsequently funded balances are based on the same assumptions as used to estimate credit losses on existing funded loans.

Allowance for Credit Losses on Securities Available for Sale

For securities classified as available for sale that are in an unrealized loss position at the balance sheet date, the Company first assesses whether or not it intends to sell the security, or more likely than not will be required to sell the security, before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is written down to fair value through net income. If neither criteria is met, the Company evaluates whether any portion of the decline in fair value is the result of credit deterioration. Such evaluations consider the extent to which the amortized cost of the security exceeds its fair value, changes in credit ratings and any other known adverse conditions related to the specific security. If the evaluation indicates that a credit loss exists, an allowance for

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credit losses is recorded through provisions for credit losses for the amount by which the amortized cost basis of the security exceeds the present value of cash flows expected to be collected, limited by the amount by which the amortized cost exceeds fair value. Losses are charged against the allowance when management believes the uncollectibility of an available for sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment not recognized in the allowance for credit losses is recognized in other comprehensive income. For certain types of debt securities, such as U.S. Treasuries and other securities with government guarantees, entities may expect zero credit losses. The zero-loss expectation applies to all of the Company’s securities and no allowance for credit losses was recorded on its available for sale securities portfolio at transition.

Accrued interest receivable on available for sale securities totaled $7.4 million at March 31, 2022 and is excluded from the estimate of credit losses.

Goodwill

Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is assessed annually on October 1 for impairment or more frequently if events and circumstances exist that indicate that the carrying amount of the asset may not be recoverable and a goodwill impairment test should be performed. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse action or assessment by a regulator; and unanticipated competition. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on the Company’s consolidated financial statements.

Goodwill is the only intangible asset with an indefinite life on the Company’s balance sheet.

Participation in PPP Loan Program

We elected to participate in the first and second rounds of the Small Business Administration Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) program funding over $1.08 billion in loans. We have received fees and incurred incremental direct origination costs related to our participation in the PPP loan program, both of which have been deferred and are being amortized over the shorter of the repayment period or the contractual life of these loans. During the three months ended March 31, 2022, we recognized total net fee revenue into interest income of $2.5 million related to PPP fees compared to $6.9 million for the same period in 2021. The remainder of the PPP loan deferred fees totaled approximately $2.3 million at March 31, 2022. These remaining deferred fees will be amortized over the shorter of the repayment period or the contractual life of the loans.

Recently Issued Accounting Pronouncements

We have evaluated new accounting pronouncements that have recently been issued. Refer to Note 1 of the Company’s consolidated financial statements for a discussion of recent accounting pronouncements that have been adopted by the Company or that will require enhanced disclosures in the Company’s financial statements in future periods.

Results of Operations

Net income was $18.7 million, or $0.91 per diluted share, for the first quarter 2022 compared to $18.0 million, or $0.89 per diluted share, for the first quarter 2021 as results were primarily driven by lower funding costs and income from Small Business Investment Company investments, partially offset by the decreased impact of PPP loans and an increased provision for credit losses. Annualized returns on average assets, average equity and average tangible equity were 1.04%, 9.40% and 13.35%, respectively, compared to 1.18%, 9.59% and 14.03%, respectively, for the three months ended March 31, 2022 and 2021, respectively. Return on average tangible equity is a non-GAAP financial measure. See the GAAP to non-GAAP reconciliation table provided for a more detailed analysis. The efficiency ratio decreased to 58.32% for the first quarter 2022 from 60.85% for the first quarter 2021. The efficiency ratio is calculated by dividing total noninterest expense by the sum of net interest income plus noninterest income, excluding net gains and losses on the sale of loans, securities and assets. Additionally, taxes and provision for loan losses are not part of the efficiency ratio calculation.

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Net Interest Income

Three months ended March 31, 2022 compared with three months ended March 31, 2021. Net interest income before the provision for credit losses for the three months ended March 31, 2022 was $55.2 million compared with $55.7 million for the three months ended March 31, 2021, a slight decrease of $526 thousand, or 0.9%. This decrease in net interest income was primarily due to the decreased impact of PPP loans and changes in interest rates partially offset by lower costs on interest-bearing liabilities and increased securities income (or alternatively larger earning asset balances).

Interest income was $60.3 million for the three months ended March 31, 2022, a decrease of $2.5 million, or 4.0%, compared to the three months ended March 31, 2021, primarily due to decreased PPP fee income and a decrease in yield on interest-earning assets driven by changes in interest rates and the mix of average interest-earning asset balances. Average securities outstanding increased $1.05 billion and deposits in other financial institutions increased $710.4 million while average loans outstanding decreased $339.5 million primarily due to paydowns of PPP loans partially offset by the origination of core loans for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The net increase in total average interest-earning asset balances was partially offset by the decrease in average yield on securities to 1.68% from 2.46% due to the impact of lower interest rates and the decrease in average yield on loans to 5.02% for the three months ended March 31, 2022 from 5.15% for the same period in 2021. This decrease in average yield on loans was primarily due to $2.5 million of PPP fee income recognition during the three months ended March 31, 2022 compared to $6.9 million recognized for the three months ended March 31, 2021.

Interest expense was $5.1 million for the three months ended March 31, 2022, a decrease of $2.0 million, or 28.0%, compared to the three months ended March 31, 2021. This decrease was primarily due to lower funding costs on interest-bearing deposits partially offset by an increase in average interest-bearing liabilities. The cost of average interest-bearing liabilities decreased to 51 basis points for the three months ended March 31, 2022 compared to 80 basis points for the same period in 2021. Average interest-bearing liabilities increased $506.2 million, or 14.1%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due in part to funds from government stimulus programs such as the PPP and consumer economic impact payments received along with organic deposit growth.

Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the three months ended March 31, 2022 was 3.30%, a decrease of 89 basis points compared to 4.19% for the three months ended March 31, 2021. The decrease in the net interest margin on a tax equivalent basis was primarily due to the increase in lower-yielding assets driven by the increase in securities and cash, partially offset by decreased funding costs. The average yield on interest-earning assets and the average rate paid on interest-bearing liabilities are primarily impacted by changes in the volume and relative mix of the underlying assets and liabilities as well as changes in market interest rates. The average yield on interest-earning assets of 3.56% and the average rate paid on interest-bearing liabilities of 0.51% for the first quarter 2022 decreased by 111 basis points and decreased by 29 basis points, respectively, over the same period in 2021. Tax equivalent adjustments to net interest margin are the result of increasing income from tax-free securities and loans by an amount equal to the taxes that would have been paid if the income were fully taxable based on a 21% federal tax rate for the three months ended March 31, 2022 and 2021, thus making tax-exempt yields comparable to taxable asset yields.

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The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets and the annualized resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in both dollars and rates. Any nonaccruing loans have been included in the table as loans carrying a zero yield.


	Three Months Ended March 31,
	2022						2021
	Average Balance		Interest Earned/ Interest Paid		Average Yield/ Rate		Average Balance		Interest Earned/ Interest Paid		Average Yield/ Rate
	(Dollars in thousands)
Assets
Interest-earning Assets:
Loans	$	4,231,507	$	52,370	5.02	%	$	4,571,045	$	57,991	5.15	%
Securities	1,835,618		7,593		1.68	%	789,188		4,796		2.46	%
Deposits in other financial institutions	806,583		340		0.17	%	96,212		41		0.17	%
Total interest-earning assets	6,873,708		$	60,303	3.56	%	5,456,445		$	62,828	4.67	%
Allowance for credit losses on loans	(48,343)						(53,370)
Noninterest-earning assets	432,133						760,762
Total assets	$	7,257,498					$	6,163,837

Liabilities and Shareholders' Equity
Interest-bearing Liabilities:
Interest-bearing demand deposits	$	1,071,010	$	549	0.21	%	$	458,063	$	371	0.33	%
Money market and savings deposits	1,584,373		798		0.20	%	1,539,127		1,113		0.29	%
Certificates and other time deposits	1,245,180		2,156		0.70	%	1,332,663		3,665		1.12	%
Borrowed funds	89,880		186		0.84	%	154,927		539		1.41	%
Subordinated debt	108,913		1,442		5.37	%	108,387		1,442		5.40	%
Total interest-bearing liabilities	4,099,356		$	5,131	0.51	%	3,593,167		$	7,130	0.80	%

Noninterest-Bearing Liabilities:
Noninterest-bearing demand deposits	2,312,114						1,767,740
Other liabilities	41,324						41,330
Total liabilities	6,452,794						5,402,237
Shareholders' equity	804,704						761,600
Total liabilities and shareholders' equity	$	7,257,498					$	6,163,837

Net interest rate spread					3.05	%					3.87	%

Net interest income and margin(1)			$	55,172	3.26	%			$	55,698	4.14	%

Net interest income and margin (tax equivalent)(2)			$	55,922	3.30	%			$	56,317	4.19	%

(1)The net interest margin is equal to annualized net interest income divided by average interest-earning assets.

(2)In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 21% for the three months ended March 31, 2022 and 2021 and other applicable effective tax rates.

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The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earnings assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.


	For the Three Months Ended March 31,
	2022 vs. 2021
	Increase (Decrease) Due to Change in
	Volume		Rate		Total
	(Dollars in thousands)
Interest-earning Assets:
Loans	$	(4,308)	$	(1,313)	$	(5,621)
Securities	6,359		(3,562)		2,797
Deposits in other financial institutions	303		(4)		299
Total increase (decrease) in interest income	2,354		(4,879)		(2,525)

Interest-bearing Liabilities:
Interest-bearing demand deposits	496		(318)		178
Money market and savings deposits	33		(348)		(315)
Certificates and other time deposits	(241)		(1,268)		(1,509)
Borrowed funds	(226)		(127)		(353)
Subordinated debt	7		(7)		—
Total increase (decrease) in interest expense	69		(2,068)		(1,999)
Increase (decrease) in net interest income	$	2,285	$	(2,811)	(526)

Provision for Credit Losses

Our allowance for credit losses is established through charges to income in the form of the provision in order to bring our allowance for credit losses for various types of financial instruments including loans, unfunded commitments and securities to a level deemed appropriate by management. We recorded a $1.8 million and $639 thousand provision for credit losses for the three months ended March 31, 2022 and 2021, respectively. The provision for credit losses for the three months ended March 31, 2022 compared to the same period in 2021 reflects the increase in core loan originations during the first quarter 2022. Core loans exclude PPP loans.

Noninterest Income

Our primary sources of noninterest income are debit card and ATM card income, service charges on deposit accounts, income earned on bank owned life insurance and nonsufficient funds fees. Noninterest income does not include loan origination fees which are recognized over the life of the related loan as an adjustment to yield using the interest method.

Three months ended March 31, 2022 compared with three months ended March 31, 2021. Noninterest income totaled $4.0 million for the three months ended March 31, 2022 compared with $1.7 million for the same period in 2021, an increase of $2.3 million, or 131.5%, primarily due to $1.3 million in income from Small Business Investment Company investments along with increased service charges on deposit accounts, increased debit card and ATM card income and decreased losses on the sales of other real estate.

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The following table presents, for the periods indicated, the major categories of noninterest income:


	For the Three Months Ended March 31,				Increase (Decrease)
	2022		2021
	(Dollars in thousands)
Nonsufficient funds fees	$	116	$	83	$	33
Service charges on deposit accounts	527		388		139
Gain on sale of securities	—		49		(49)
Loss on sale of other real estate and repossessed assets	—		(176)		176
Bank owned life insurance income	133		139		(6)
Debit card and ATM card income	819		630		189
Rebate from correspondent bank	—		132		(132)
Other(1)	2,423		491		1,932
Total noninterest income	$	4,018	$	1,736	$	2,282

(1)Other includes wire transfer and letter of credit fees, among other items.

Noninterest Expense

Three months ended March 31, 2022 compared with three months ended March 31, 2021. Noninterest expense was $34.5 million for the three months ended March 31, 2022 compared to $34.9 million for the three months ended March 31, 2021, a decrease of $402 thousand, or 1.2%, primarily due to decreased professional fees partially offset by increased regulatory assessments and acquisition and merger-related expenses. Additionally, the first quarter 2021 included a write-down of assets related to the closure of a bank office.

The following table presents, for the periods indicated, the major categories of noninterest expense:


	For the Three Months Ended March 31,				Increase (Decrease)
	2022		2021
	(Dollars in thousands)
Salaries and employee benefits(1)	$	22,728	$	22,452	$	276
Net occupancy and equipment	2,205		2,390		(185)
Depreciation	1,033		1,034		(1)
Data processing and software amortization	2,498		2,200		298
Professional fees	138		789		(651)
Regulatory assessments and FDIC insurance	1,261		807		454
Core deposit intangibles amortization	751		824		(73)
Communications	341		321		20
Advertising	462		298		164
Other real estate expense	59		113		(54)
Acquisition and merger-related expenses	451		—		451
Printing and supplies	61		73		(12)
Other	2,529		3,618		(1,089)
Total noninterest expense	$	34,517	$	34,919	$	(402)

(1)Total salaries and employee benefits includes $959 thousand and $820 thousand for the three months ended March 31, 2022 and 2021, respectively, of stock based compensation expense.

Salaries and employee benefits. Salaries and benefits increased $276 thousand, or 1.2%, for the three months ended March 31, 2022, compared to the same period in 2021 primarily due to increased deferred origination costs related to core loan originations partially offset by decreased performance-based bonus and profit sharing accruals during the first quarter 2022.

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Acquisition and merger-related expenses. Acquisition and merger-related expenses of $451 thousand incurred during the first quarter 2022 were primarily legal and advisory fees associated with the pending merger with CBTX.

Other. Other noninterest expenses decreased $1.1 million for the three months ended March 31, 2022 compared to the same period in 2021 primarily due to a $1.3 million write-down of assets related to the closure of a bank office during the first quarter 2021.

Efficiency Ratio

The efficiency ratio is a supplemental financial measure utilized in management’s internal evaluation of our performance. We calculate our efficiency ratio by dividing total noninterest expense by the sum of net interest income and noninterest income, excluding net gains and losses on the sale of loans, securities and assets. Additionally, taxes and provision for loan losses are not part of this calculation. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources. Our efficiency ratio decreased to 58.32% for the three months ended March 31, 2022, compared to 60.85% for the three months ended March 31, 2021, respectively.

We monitor the efficiency ratio in comparison with changes in our total assets and loans, and we believe that maintaining or reducing the efficiency ratio during periods of growth demonstrates the scalability of our operating platform. We expect to continue to benefit from our scalable platform in future periods as we continue to monitor overhead expenses necessary to support our growth.

Income Taxes

The amount of federal and state income tax expense is influenced by the amount of pre-tax income, tax-exempt income and other nondeductible expenses. Income tax expense increased $336 thousand to $4.2 million for the three months ended March 31, 2022 compared with $3.9 million for the same period in 2021 primarily due to the increase in pre-tax net income. Our effective tax rate was 18.4% for the three months ended March 31, 2022 compared to 17.7% for the three months ended March 31, 2021.

Financial Condition

Loan Portfolio

At March 31, 2022, total loans were $4.28 billion, an increase of $63.0 million, or 1.5%, compared with December 31, 2021, primarily due to organic growth within our loan portfolio partially offset by paydowns of PPP loans during the three months ended March 31, 2022.

Total loans as a percentage of deposits were 69.5% and 69.8% as of March 31, 2022 and December 31, 2021, respectively. Total loans as a percentage of assets were 59.9% and 59.4% as of March 31, 2022 and December 31, 2021, respectively.

The following table summarizes our loan portfolio by type of loan as of the dates indicated:


	March 31, 2022				December 31, 2021
	Amount		Percent		Amount		Percent
	(Dollars in thousands)
Commercial and industrial	$	714,450	16.7	%	$	693,559	16.4	%
Paycheck Protection Program (PPP)	78,624		1.8	%	145,942		3.5	%
Real estate:
Commercial real estate (including multi-family residential)	2,197,502		51.3	%	2,104,621		49.9	%
Commercial real estate construction and land development	453,473		10.6	%	439,125		10.4	%
1-4 family residential (including home equity)	669,306		15.6	%	685,071		16.2	%
Residential construction	136,760		3.2	%	117,901		2.8	%
Consumer and other	33,399		0.8	%	34,267		0.8	%
Total loans	4,283,514		100.0	%	4,220,486		100.0	%
Allowance for credit losses on loans	(49,215)				(47,940)
Loans, net	$	4,234,299			$	4,172,546

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Lending activities originate from the efforts of our lenders, with an emphasis on lending to small to medium-sized businesses and companies, professionals and individuals located in the Houston region.

The principal categories of our loan portfolio are discussed below:

Commercial and Industrial. We make commercial and industrial loans in our market area that are underwritten primarily on the basis of the borrower’s ability to service the debt from income. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and therefore typically yield a higher return. The increased risk in commercial loans derives from the expectation that commercial and industrial loans generally are serviced principally from the operations of the business, which may not be successful and from the type of collateral securing these loans. As a result, commercial and industrial loans require more extensive underwriting and servicing than other types of loans. Our commercial and industrial loan portfolio increased by $20.9 million, or 3.0%, to $714.5 million as of March 31, 2022 from $693.6 million as of December 31, 2021.

Paycheck Protection Program (PPP). The CARES Act authorized the Small Business Administration (SBA) to guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP). As a preferred SBA lender, we were automatically authorized to originate PPP loans. An eligible business could apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly “payroll costs;” or (2) $10.0 million. PPP loans have: (a) an interest rate of 1.0%, (b) a two-year or five-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA provides a 100% guarantee of the PPP loan made to an eligible borrower. The principal balance of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced in full, so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. The balance of PPP loans decreased $67.3 million to $78.6 million as of March 31, 2022 from $145.9 million as of December 31, 2021 due to loan forgiveness.

Commercial Real Estate (Including Multi-Family Residential). We make loans collateralized by owner-occupied, nonowner-occupied and multi-family real estate to finance the purchase or ownership of real estate. As of March 31, 2022 and December 31, 2021, 55.1% and 54.6%, respectively, of our commercial real estate loans were owner-occupied. Our commercial real estate loan portfolio increased $92.9 million, or 4.4%, to $2.20 billion as of March 31, 2022 from $2.10 billion as of December 31, 2021, primarily as a result of organic loan growth. Included in our commercial real estate portfolio are multi-family residential loans. Our multi-family loans increased to $88.9 million as of March 31, 2022 from $77.1 million as of December 31, 2021. We had 141 multi-family loans with an average loan size of $631 thousand as of March 31, 2022.

Commercial Real Estate Construction and Land Development. We make commercial real estate construction and land development loans to fund commercial construction, land acquisition and real estate development construction. Construction loans involve additional risks as they often involve the disbursement of funds with the repayment dependent on the ultimate success of the project’s completion. Sources of repayment for these loans may be pre-committed permanent financing or sale of the developed property. The loans in this portfolio are monitored closely by management. Due to uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often includes the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. As of March 31, 2022 and December 31, 2021, 20.1% and 22.3%, respectively, of our commercial real estate construction and land development loans were owner-occupied. Commercial real estate construction and land development loans increased $14.3 million, or 3.3%, to $453.5 million as of March 31, 2022 compared to $439.1 million as of December 31, 2021.

1-4 Family Residential (Including Home Equity). Our residential real estate loans include the origination of 1-4 family residential mortgage loans (including home equity and home improvement loans and home equity lines of credit) collateralized by owner-occupied residential properties located in our market area. Our residential real estate portfolio (including home equity) decreased $15.8 million, or 2.3%, to $669.3 million as of March 31, 2022 from $685.1 million as of December 31, 2021. The home equity, home improvement and home equity lines of credit portion of our residential real estate portfolio decreased $1.7 million, or 1.4%, to $117.3 million as of March 31, 2022 from $119.0 million as of December 31, 2021.

Residential Construction. We make residential construction loans to home builders and individuals to fund the construction of single-family residences with the understanding that such loans will be repaid from the proceeds of the sale of the homes by builders or with the proceeds of a mortgage loan. These loans are secured by the real property being built and are made based on our assessment of the value of the property on an as-completed basis. Our residential construction loans portfolio increased $18.9 million, or 16.0%, to $136.8 million as of March 31, 2022 from $117.9 million as of December 31, 2021.

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Consumer and Other. Our consumer and other loan portfolio is made up of loans made to individuals for personal purposes and deferred fees and costs on all loan types. Our consumer and other loan portfolio decreased slightly due to the impact of the deferred fees and costs recorded on originated loans during the first quarter of 2022.

Asset Quality

Nonperforming Assets

We have procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our officers and monitor our delinquency levels for any negative or adverse trends.

We had $26.3 million and $24.1 million in nonperforming loans as of March 31, 2022 and December 31, 2021, respectively.

The following table presents information regarding nonperforming assets as of the dates indicated.


	As of March 31, 2022			As of December 31, 2021
	(Dollars in thousands)
Nonaccrual loans:
Commercial and industrial	$	7,809		$	8,358
Paycheck Protection Program (PPP)	—			—
Real estate:
Commercial real estate (including multi-family residential)	15,259			12,639
Commercial real estate construction and land development	—			63
1-4 family residential (including home equity)	3,065			2,875
Residential construction	—			—
Consumer and other	142			192
Total nonaccrual loans	26,275			24,127
Accruing loans 90 or more days past due	—			—
Total nonperforming loans	26,275			24,127
Other real estate	—			—
Total nonperforming assets	$	26,275		$	24,127
Restructured loans(1)	$	8,793		$	9,068
Nonperforming assets to total assets	0.37		%	0.34		%
Nonperforming loans to total loans	0.61		%	0.57		%

(1)Restructured loans represent the balance at the end of the respective period for those loans modified in a troubled debt restructuring that are not already presented as a nonperforming loan.

Potential problem loans are included in the loans that are accruing, restructured and impaired that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. Management monitors these loans closely and reviews their performance on a regular basis. Potential problem loans contain potential weaknesses that could improve, persist or further deteriorate. At March 31, 2022 and December 31, 2021, we had $61.9 million and $47.1 million, respectively, in loans of this type which are not included in any of the nonaccrual or 90 days past due loan categories. At March 31, 2022, potential problem loans consisted of 35 credit relationships. Of the total outstanding balance at March 31, 2022, 44.5% to six customers in the hotel industry, 14.8% to four customers in the daycare industry, 13.8% to three customers in the fitness industry, 7.6% to seven customers in the energy industry, 5.5% to one customer in the car wash industry, 4.5% to three customers in the construction services industry, 3.1% to one customer in the event center industry, 2.4% to one customer in the CRE investments industry, 2.4% to one customer in the consumer services industry, 0.8% to four customers in the commercial services industry, 0.3% to one customer in the wholesale industry, 0.2% to two customers in the consumer real estate industry and 0.1% to one customer in the medical industry. Weakness in these organizations’ operating performance, financial condition and borrowing base deficits for certain energy-related credits, among other factors, have caused us to heighten the attention given to these credits.

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The Company granted initial principal and interest deferrals on outstanding loan balances to borrowers in connection with the COVID-19 relief provided by the CARES Act and subsequent deferrals upon request and after meeting certain conditions. These deferrals were generally no more than 90 days in duration. As of March 31, 2022, 7 loans with outstanding loan balances of $3.4 million remained on deferral. If the impact of COVID-19 persists, borrower operations do not improve or if other negative events occur, such modified loans could transition to potential problem loans or into problem loans.

We have also actively participated in assisting with applications for resources through the PPP. PPP loans have a two-year or five-year term and earn interest at 1%. We believe that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of March 31, 2022, we had funded over $1.08 billion in PPP loans. The balance of the PPP loans decreased to $78.6 million at March 31, 2022 as a result of loan forgiveness. It is our understanding that loans funded through the PPP are fully guaranteed by the U.S. government. Should those circumstances change, we could be required to establish additional allowance for credit loss through additional provision expense charged to earnings.

Allowance for Credit Losses

The allowance for credit losses is a valuation allowance that is established through charges to earnings in the form of a provision for credit losses calculated in accordance with ASC 326 that is deducted from the amortized cost basis of certain assets to present the net amount expected to be collected. The amount of each allowance account represents management's best estimate of CECL on these financial instruments considering available information, from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. For additional information regarding critical accounting policies, refer to Note 1 – Nature of Operations and Summary of Significant Accounting and Reporting Policies and Note 4 – Loans and Allowance for Credit Losses in the accompanying notes to consolidated financial statements.

Allowance for Credit Losses on Loans

The allowance for credit losses on loans represents management’s estimates of current expected credit losses in the Company’s loan portfolio. Pools of loans with similar risk characteristics are collectively evaluated, while loans that no longer share risk characteristics with loan pools are evaluated individually.

At March 31, 2022, our allowance for credit losses on loans amounted to $49.2 million, or 1.15% of total loans (1.17% excluding PPP loans), compared with $47.9 million, or 1.14% (1.18% excluding PPP loans), of total loans as of December 31, 2021. The increase in the allowance for credit losses on loans during the first quarter of 2022 reflects an increase in core loans.

Collective loss estimates are determined by applying reserve factors, designed to estimate current expected credit losses, to amortized cost balances over the remaining contractual life of the collectively evaluated portfolio. Loans with similar risk characteristics are aggregated into homogeneous pools. The allowance for credit losses on loans also includes qualitative adjustments to bring the allowance to the level management believes is appropriate based on factors that have not otherwise been fully accounted for, including adjustments for foresight risk, input imprecisions and model imprecision. Credit losses for loans that no longer share risk characteristics with the loan pools are estimated on an individual basis. Individual credit loss estimates are typically performed for nonaccrual loans and modified loans classified as TDRs and are based on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.

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The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:


	As of and for the Three Months Ended March 31,
	2022			2021
	(Dollars in thousands)
Average loans outstanding	$	4,231,507		$	4,571,045
Gross loans outstanding at end of period	4,283,514			4,659,169
Allowance for credit losses on loans at beginning of period	47,940			53,173
Provision for credit losses on loans	1,592			(70)
Charge-offs:
Commercial and industrial loans	(341)			(404)
Real estate:
Commercial real estate (including multi-family residential)	(255)			—
Commercial real estate construction and land development	(63)			—
1-4 family residential (including home equity)	—			—
Residential construction	—			—
Consumer and other	(48)			—
Total charge-offs for all loan types	(707)			(404)
Recoveries:
Commercial and industrial loans	390			59
Real estate:
Commercial real estate (including multi-family residential)	—			—
Commercial real estate construction and land development	—			—
1-4 family residential (including home equity)	—			—
Residential construction	—			—
Consumer and other	—			—
Total recoveries for all loan types	390			59
Net charge-offs	(317)			(345)
Allowance for credit losses on loans at end of period	$	49,215		$	52,758
Allowance for credit losses on loans to total loans	1.15		%	1.13		%
Net charge-offs to average loans(1)	0.03		%	0.03		%
Allowance for credit losses on loans to nonperforming loans	187.31		%	150.52		%

(1)Interim periods annualized.

Available for Sale Securities

We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk and to meet pledging and regulatory capital requirements. As of March 31, 2022, the carrying amount of investment securities totaled $1.79 billion, an increase of $16.9 million, or 1.0%, compared with $1.77 billion as of December 31, 2021. Securities represented 25.0% of total assets as of March 31, 2022 and December 31, 2021.

All of the securities in our securities portfolio are classified as available for sale. Securities classified as available for sale are measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as accumulated comprehensive income or loss until realized. Interest earned on securities is included in interest income.

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The following table summarizes the amortized cost and fair value of the securities in our securities portfolio as of the dates shown:


	March 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Available for Sale
U.S. government and agency securities	$	424,171	$	300	$	(11,376)	$	413,095
Municipal securities	470,404		7,449		(18,150)		459,703
Agency mortgage-backed pass-through securities	322,883		102		(22,119)		300,866
Agency collateralized mortgage obligations	518,067		81		(34,030)		484,118
Corporate bonds and other	135,701		1,157		(3,933)		132,925
Total	$	1,871,226	$	9,089	$	(89,608)	$	1,790,707


	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)
Available for Sale
U.S. government and agency securities	$	401,811	$	414	$	(1,674)	$	400,551
Municipal securities	468,164		30,483		(1,547)		497,100
Agency mortgage-backed pass-through securities	307,097		2,075		(6,576)		302,596
Agency collateralized mortgage obligations	443,277		2,026		(4,247)		441,056
Corporate bonds and other	130,314		2,922		(774)		132,462
Total	$	1,750,663	$	37,920	$	(14,818)	$	1,773,765

Investment securities classified as available for sale or held to maturity are evaluated for expected credit losses under ASC Topic 326, “Financial Instruments – Credit Losses.” As of March 31, 2022, we did not expect to sell any securities classified as available for sale with unrealized losses, and management believes that we more likely than not will not be required to sell any securities before their anticipated recovery at which time we will receive full value for the securities. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased.

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The following table summarizes the contractual maturity of securities and their weighted average yields as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures. Available for sale securities are shown at amortized cost. For purposes of the table below, municipal securities are calculated on a tax equivalent basis.


	March 31, 2022
	Within One Year				After One Year but Within Five Years				After Five Years but Within Ten Years				After Ten Years				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Total		Yield
	(Dollars in thousands)
Available for Sale
U.S. government and agency securities	$	4,140	3.25	%	$	249,344	0.80	%	$	21,281	1.53	%	$	149,406	1.23	%	$	424,171	1.01	%
Municipal securities	1,678		2.86	%	8,320		3.58	%	79,630		2.79	%	380,776		3.08	%	470,404		3.04	%
Agency mortgage-backed pass-through securities	—		0.00	%	4,900		2.97	%	4,525		3.19	%	313,458		1.79	%	322,883		1.83	%
Agency collateralized mortgage obligations	—		0.00	%	17,349		2.81	%	7,852		2.64	%	492,866		1.40	%	518,067		1.47	%
Corporate bonds and other	—		0.00	%	4,000		6.31	%	57,952		4.52	%	73,749		2.33	%	135,701		3.38	%
Total	$	5,818	3.13	%	$	283,913	1.12	%	$	171,240	3.22	%	$	1,410,255	1.97	%	$	1,871,226	1.96	%


	December 31, 2021
	Within One Year				After One Year but Within Five Years				After Five Years but Within Ten Years				After Ten Years				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Total		Yield
	(Dollars in thousands)
Available for Sale
U.S. government and agency securities	$	4,127	3.25	%	$	249,188	0.80	%	$	22,752	1.29	%	$	125,744	0.98	%	$	401,811	0.91	%
Municipal securities	2,383		3.16	%	5,548		3.63	%	73,369		2.93	%	386,864		3.06	%	468,164		3.05	%
Agency mortgage-backed pass-through securities	—		0.00	%	4,954		2.96	%	4,805		3.21	%	297,338		1.35	%	307,097		1.41	%
Agency collateralized mortgage obligations	—		0.00	%	11,212		2.80	%	14,020		2.72	%	418,045		1.34	%	443,277		1.42	%
Corporate bonds and other	—		0.00	%	3,000		5.75	%	50,388		4.72	%	76,926		2.33	%	130,314		3.34	%
Total	$	6,510	3.22	%	$	273,902	1.04	%	$	165,334	3.24	%	$	1,304,917	1.88	%	$	1,750,663	1.88	%

The contractual maturity of mortgage-backed securities and collateralized mortgage obligations is not a reliable indicator of their expected life because borrowers may have the right to prepay their obligations. Mortgage-backed securities and collateralized mortgage obligations are typically issued with stated principal amounts and are backed by pools of mortgage loans with varying maturities. The term of the underlying mortgages and loans may vary significantly due to the ability of a borrower to prepay and, in particular, monthly pay downs on mortgage-backed securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and, consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security.

As of March 31, 2022 and December 31, 2021, we did not own securities of any one issuer (other than the U.S. government and its agencies or sponsored entities) for which the aggregate adjusted cost exceeded 10% of our consolidated shareholders’ equity.

The average yield of our securities portfolio was 1.68% during the three months ended March 31, 2022 compared with 2.46% for the three months ended March 31, 2021. The decrease in average yield during 2022 compared to the same period in 2021 was primarily due to the lower interest rate environment over the prior year partially offset by the growth in the portfolio.

Goodwill and Core Deposit Intangible Assets

Our goodwill was $223.6 million as of March 31, 2022 and December 31, 2021. Goodwill resulting from business combinations represents the excess of the consideration paid over the fair value of the net assets acquired and liabilities assumed.

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Goodwill is assessed annually for impairment or when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

Our core deposit intangible assets, net as of March 31, 2022 and December 31, 2021, was $13.9 million and $14.7 million, respectively. Core deposit intangible assets are amortized over their estimated useful life of seven to ten years.

Premises and Equipment, net

Premises and equipment, net was $62.2 million and $63.7 million at March 31, 2022 and December 31, 2021, respectively.

Deposits

Our lending and investing activities are primarily funded by deposits. We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and certificates and other time accounts. We rely primarily on convenient locations, personalized service and our customer relationships to attract and retain these deposits. We seek customers that will engage in both a lending and deposit relationship with us.

Total deposits at March 31, 2022 were $6.16 billion, an increase of $114.7 million, or 1.9%, compared with $6.05 billion at December 31, 2021. Noninterest-bearing deposits at March 31, 2022 were $2.35 billion, an increase of $110.5 million, or 4.9%, compared with $2.24 billion at December 31, 2021. Interest-bearing deposits at March 31, 2022 were $3.81 billion, an increase of $4.2 million, or 0.1%, compared with $3.80 billion at December 31, 2021.

Borrowings

We have an available line of credit with the Federal Home Loan Bank ("FHLB") of Dallas, which allows us to borrow on a collateralized basis. FHLB advances are used to manage liquidity as needed. The advances are secured by a blanket lien on certain loans. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits. At March 31, 2022, we had a total borrowing capacity of $2.54 billion, of which $1.12 billion was available and $1.42 billion was outstanding. FHLB advances of $90.0 million were outstanding at March 31, 2022, at a weighted average interest rate of 0.74%. Letters of credit were $1.33 billion at March 31, 2022, of which $1.15 billion will expire during the remaining months of 2022, $101.2 million will expire in 2023, $57.9 million will expire in 2024 and $16.0 million will expire in 2025.

Credit Agreement

At March 31, 2022, the balance of the revolving credit agreement was zero. The interest rate on the debt is the Prime Rate minus 25 basis points, or 3.25%, at March 31, 2022, and is paid quarterly. On December 28, 2018, we amended our revolving credit agreement to increase the maximum commitment to advance funds to $45.0 million which reduces annually by $7.5 million beginning in December 2020 and on December 22nd of each year thereafter. We are required to repay any outstanding balance in excess of the then-current maximum commitment amount. The revised agreement will mature in December 2025 and is secured by 100% of the capital stock of the Bank.

Our credit agreement contains certain restrictive covenants, including limitations on our ability to incur additional indebtedness or engage in certain fundamental corporate transactions, such as mergers, reorganizations and recapitalizations. Additionally, the Bank is required to maintain a “well-capitalized” rating, a minimum return on assets of 0.65%, measured quarterly, a ratio of loan loss reserve to nonperforming loans equal to or greater than 75%, measured quarterly, and a ratio of nonperforming assets to aggregate equity plus loan loss reserves minus intangible assets of less than 35%, measured quarterly. As of March 31, 2022, we believe we were in compliance with all such debt covenants.

Off-Balance Sheet Items

In the normal course of business, we enter into various transactions, which, in accordance with accounting principles generally accepted in the United States, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.

Commitments to Extend Credit. We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under

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these commitments by subjecting them to credit approval and monitoring procedures. The amount and type of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses.

Standby Letters of Credit. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. If the customer does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment and we would have the rights to the underlying collateral. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

As of March 31, 2022 and December 31, 2021, we had outstanding $1.17 billion and $1.09 billion, respectively, in commitments to extend credit and $21.7 million and $21.2 million, respectively, in commitments associated with outstanding letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.

Liquidity and Capital Resources

Liquidity

Liquidity is the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital, strategic cash flow needs and to maintain reserve requirements to operate on an ongoing basis and manage unexpected events, all at a reasonable cost. During the three months ended March 31, 2022 and the year ended December 31, 2021, our liquidity needs have been primarily met by deposits, borrowed funds, security and loan maturities and amortizing investment and loan portfolios. The Bank has access to purchased funds from correspondent banks, and advances from the FHLB are available under a security and pledge agreement to take advantage of investment opportunities.

Our largest source of funds is deposits, and our largest use of funds is loans. Our average deposits increased $1.12 billion, or 21.9%, and our average loans decreased $339.5 million, or 7.4%, for the three months ended March 31, 2022 compared with the three months ended March 31, 2021. We predominantly invest excess deposits in Federal Reserve Bank of Dallas balances, securities, interest-bearing deposits at other banks or other short-term liquid investments until the funds are needed to fund loan growth. Our securities portfolio had a weighted average life of 6.4 years and modified duration of 4.4 years at March 31, 2022, and a weighted average life of 6.5 years and modified duration of 4.6 years at December 31, 2021.

As of March 31, 2022 and December 31, 2021, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.

Capital Resources

Capital management consists of providing equity to support our current and future operations. We are subject to capital adequacy requirements imposed by the Federal Reserve, and the Bank is subject to capital adequacy requirements imposed by the FDIC. Both the Federal Reserve and the FDIC have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

Under current guidelines, the minimum ratio of total capital to risk-weighted assets (which are primarily the credit risk equivalents of balance sheet assets and certain off-balance sheet items such as standby letters of credit) is 8.0%. At least half of total capital must be composed of tier 1 capital, which includes common shareholders’ equity (including retained earnings), less goodwill, other disallowed intangible assets, and disallowed deferred tax assets, among other items. The Federal Reserve also has adopted a minimum leverage ratio, requiring tier 1 capital of at least 4.0% of average quarterly total consolidated assets, net of goodwill and certain other intangible assets, for all but the most highly rated bank holding companies. The federal banking agencies have also established risk-based and leverage capital guidelines that FDIC-insured depository institutions are required to meet. These regulations are generally similar to those established by the Federal Reserve for bank holding companies.

Under the Federal Deposit Insurance Act, the federal bank regulatory agencies must take “prompt corrective action” against undercapitalized U.S. depository institutions. U.S. depository institutions are assigned one of five capital categories: “well-

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capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized,” and are subjected to different regulation corresponding to the capital category within which the institution falls. A depository institution is deemed to be “well-capitalized” if the banking institution has a total risk-based capital ratio of 10.0% or greater, a tier 1 risk-based capital ratio of 8.0% or greater, a common equity tier 1 capital ratio of 6.5% and a leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific level for any capital measure. Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category.

Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including: termination of deposit insurance by the FDIC, restrictions on certain business activities and appointment of the FDIC as conservator or receiver.

As of March 31, 2022 and December 31, 2021, the Bank was well-capitalized. Total shareholder’s equity was $751.9 million at March 31, 2022, compared with $816.5 million at December 31, 2021, a decrease of $64.5 million. This decrease was primarily due the decrease in accumulated other comprehensive income of $81.9 million along with the $0.14 per common share dividend paid partially offset by net income of $18.7 million for the three months ended March 31, 2022.

The following table provides a comparison of our leverage and risk-weighted capital ratios as of the dates indicated to the minimum and well-capitalized regulatory standards, as well as with the capital conservation buffer:


	Actual Ratio		Minimum Required For Capital Adequacy Purposes		Minimum Required Plus Capital Conservation Buffer		To Be Categorized As Well-Capitalized Under Prompt Corrective Action Provisions
Allegiance Bancshares, Inc. (Consolidated)
As of March 31, 2022
Total capital (to risk weighted assets)	15.76	%	8.00	%	10.50	%	N/A
Common equity Tier 1 capital (to risk weighted assets)	12.28	%	4.50	%	7.00	%	N/A
Tier 1 capital (to risk weighted assets)	12.49	%	6.00	%	8.50	%	N/A
Tier 1 capital (to average assets)	8.37	%	4.00	%	4.00	%	N/A
As of December 31, 2021
Total capital (to risk weighted assets)	16.08	%	8.00	%	10.50	%	N/A
Common equity Tier 1 capital (to risk weighted assets)	12.47	%	4.50	%	7.00	%	N/A
Tier 1 capital (to risk weighted assets)	12.69	%	6.00	%	8.50	%	N/A
Tier 1 capital (to average tangible assets)	8.53	%	4.00	%	4.00	%	N/A
Allegiance Bank
As of March 31, 2022
Total capital (to risk weighted assets)	14.50	%	8.00	%	10.50	%	10.00	%
Common equity Tier 1 capital (to risk weighted assets)	12.48	%	4.50	%	7.00	%	6.50	%
Tier 1 capital (to risk weighted assets)	12.48	%	6.00	%	8.50	%	8.00	%
Tier 1 capital (to average tangible assets)	8.37	%	4.00	%	4.00	%	5.00	%
As of December 31, 2021
Total capital (to risk weighted assets)	14.71	%	8.00	%	10.50	%	10.00	%
Common equity Tier 1 capital (to risk weighted assets)	12.63	%	4.50	%	7.00	%	6.50	%
Tier 1 capital (to risk weighted assets)	12.63	%	6.00	%	8.50	%	8.00	%
Tier 1 capital (to average tangible assets)	8.49	%	4.00	%	4.00	%	5.00	%

GAAP Reconciliation and Management’s Explanation of Non-GAAP Financial Measures

We identify certain financial measures discussed in this Quarterly Report on Form 10-Q as being “non-GAAP financial measures.” In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts,

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that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheet or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Quarterly Report on Form 10-Q should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Quarterly Report on Form 10-Q may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this Quarterly Report on Form 10-Q when comparing such non-GAAP financial measures.

Our management, financial analysts and investment bankers use the non-GAAP financial measure “Return on Average Tangible Shareholders’ Equity” in their analysis of our performance. Return on average tangible shareholders’ equity is computed by dividing net earnings by average total shareholders’ equity reduced by average goodwill and core deposit intangibles, net of accumulated amortization. For return on average tangible shareholders’ equity, the most directly comparable financial measure calculated in accordance with GAAP is return on average shareholders’ equity. This measure is important to investors because it measures the performance of the business consistently, exclusive of changes in intangible assets.

We believe this non-GAAP financial measure provides useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use. The following reconciliation tables provide a more detailed analysis of this non-GAAP financial measure:


	Three Months Ended March 31,
	2022			2021
	(Dollars in thousands)
Net income	$	18,657		$	18,010

Average shareholders' equity	$	804,704		$	761,600
Less: Average goodwill and core deposit intangibles, net	237,925			241,166
Average tangible shareholders’ equity	$	566,779		$	520,434

Return on average tangible shareholders' equity(1)	13.35		%	14.03		%

(1)Annualized.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset/Liability Management and Interest Rate Risk

Our asset liability and interest rate risk policy provides management with the guidelines for effective balance sheet management. We have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.

As a financial institution, a component of the market risk that we face is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

During the second quarter 2021, we terminated an interest rate swap entered into for the purpose of reducing interest rate risk. See Note 8 – Derivative Instruments. Based upon the nature of our operations, we are not subject to foreign exchange rate or commodity price risk. We do not own any trading assets. We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of a community banking business.

Our exposure to interest rate risk is managed by our Asset Liability Committee (“ALCO”), which is composed of certain members of our Board of Directors and Bank management. The ALCO formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The ALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the ALCO reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity.

We use an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and the balance sheet, respectively. All instruments on the balance sheet are modeled at the instrument level, incorporating all relevant attributes such as next reset date, reset frequency and call dates, as well as prepayment assumptions for loans and securities and decay rates for nonmaturity deposits. Assumptions based on past experience are incorporated into the model for nonmaturity deposit account decay rates. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

We utilize static balance sheet rate shocks to estimate the potential impact on net interest income of changes in interest rates under various rate scenarios. This analysis estimates a percentage of change in the metric from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a static balance sheet.

The following table summarizes the simulated change in net interest income over a 12-month horizon and the economic value of equity as of the dates indicated:


Change in Interest Rates (Basis Points)	Percent Change in Net Interest Income		Percent Change in Economic Value of Equity
	As of March 31, 2022	As of December 31, 2021	As of March 31, 2022	As of December 31, 2021
300	(2.1)%	(0.1)%	(7.3)%	(1.0)%
200	(1.6)%	(0.7)%	(3.9)%	1.1%
100	(0.8)%	(0.7)%	(1.3)%	1.6%
Base	0.0%	0.0%	0.0%	0.0%
-100	(1.8)%	(3.5)%	(0.6)%	(3.3)%

These results are primarily due to the size of our cash position, the size and duration of our loan and securities portfolio, the duration of our borrowings and the expected behavior of demand, money market and savings deposits during such rate fluctuations.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, 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 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the end of the period covered by this report. See Exhibits 31.1 and 31.2 for the Certification statements issued by the Company’s Chief Executive Officer and Chief Financial Officer, respectively.

Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are subject to claims and litigation arising in the ordinary course of business. In the opinion of management, we are not party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which such claim or litigation is resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor. We intend to defend ourselves vigorously against any future claims or litigation.

ITEM 1A. RISK FACTORS

In evaluating an investment in any of the Company’s securities, investors should consider carefully, among other things, information under the heading “Cautionary Notice Regarding Forward-Looking Statements” in this Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and such other risk factors as the Company may disclose or has disclosed in other reports and statements filed with the Securities and Exchange Commission. As of March 31, 2022, there were no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Information regarding shares of common stock we repurchased during the three months ended March 31, 2022 is as follows:


Period	Total Number of Shares Purchased(1)	Average Price Paid Per Share
January 1, 2022 to January 31, 2022	24	$	42.21
February 1, 2022 to February 28, 2022	23	$	43.15
March 1, 2022 to March 31, 2022	1,050	$	42.07
Total	1,097	$	42.10

(1)The Company acquired 1,097 shares from employees for tax withholding purposes related to vesting of restricted stock grants.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS


Exhibit Number						Description

2.1						Agreement and Plan of Merger, dated November 5, 2021, by and between Allegiance Bancshares, Inc. and CBTX, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K filed on November 12, 2021)

3.1						Amended and Restated Certificate of Formation of Allegiance Bancshares, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on August 1, 2019)

3.2						Amended and Restated Bylaws of Allegiance Bancshares, Inc. (incorporated herein by reference to the Company’s Registration Statement on Form S-1 (Registration No. 333-206536) (the “Registration Statement”))

10.1						Form of Allegiance Executive Employment Agreement (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 18, 2022)

31.1*						Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended

31.2*						Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended

32.1**						Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**						Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*						Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

101.SCH*						Inline XBRL Taxonomy Extension Schema Document

101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*						Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document

104						Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Filed with this Quarterly Report on Form 10-Q.

** Furnished with this Quarterly Report on Form 10-Q.

Table of Contents

SIGNATURES

Pursuant to the requirements 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.


			Allegiance Bancshares, Inc. (Registrant)

Date: April 29, 2022			/s/ Steven F. Retzloff
			Steven F. Retzloff
			Chief Executive Officer

Date: April 29, 2022			/s/ Paul P. Egge
			Paul P. Egge
			Chief Financial Officer