Annual Statements Open main menu

Stellar Bancorp, Inc. - Quarter Report: 2022 June (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM  10-Q

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

For the quarterly period ended June 30, 2022

or

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

For the transition period from ____   to   ____.

Commission File Number: 001-38280

CBTX, Inc.

(Exact name of registrant as specified in its charter)

Texas

 

20-8339782

(State or other jurisdiction of

 

(I.R.S. employer

incorporation or organization)

 

identification no.)

9 Greenway Plaza, Suite 110

Houston, Texas 77046

(Address of principal executive offices)

(713210-7600

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

CBTX

The Nasdaq Global Select Market

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

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

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

Large accelerated filer

 

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 

As of July 25, 2022, there were 24,520,932 shares of the registrant’s common stock, par value $0.01 per share outstanding, including 95,671 shares of unvested restricted stock deemed to have beneficial ownership.

Table of Contents

CBTX, INC.

Page

PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements – (Unaudited)

1

Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021

1

Condensed Consolidated Statements of Income for the Three Months Ended June 30, 2022 and 2021

2

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021

3

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021

4

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021

6

Notes to Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

37

Cautionary Note Regarding Forward-Looking Statements

37

Overview

39

Impact and Uncertain Economic Outlook

40

Results of Operations

41

Financial Condition

47

Liquidity and Capital Resources

55

Interest Rate Sensitivity and Market Risk

57

Non-GAAP Financial Measures

59

Critical Accounting Policies

60

Recently Issued Accounting Pronouncements

60

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

61

Item 4.

Controls and Procedures

61

PART II — OTHER INFORMATION

Item 1.

Legal Proceedings

61

Item 1A.

Risk Factors

61

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

Item 3.

Defaults Upon Senior Securities

62

Item 4.

Mine Safety Disclosures

62

Item 5.

Other Information

62

Item 6.

Exhibits

63

SIGNATURES

64

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except par value and share amounts)

    

June 30, 2022

    

December 31, 2021

Assets:

 

  

 

  

Cash and due from banks

$

41,951

$

27,689

Interest-bearing deposits at other financial institutions

 

442,015

 

922,457

Total cash and cash equivalents

 

483,966

 

950,146

Securities

 

550,083

 

425,046

Equity investments

 

18,073

 

17,727

Loans held for sale

 

 

164

Loans, net of allowance for credit losses of $32,087 and $31,345 at June 30, 2022 and December 31, 2021, respectively

 

3,000,827

 

2,836,179

Premises and equipment, net of accumulated depreciation of $39,656 and $39,196 at June 30, 2022 and December 31, 2021, respectively

 

56,010

 

58,417

Goodwill

 

80,950

 

80,950

Other intangible assets, net of accumulated amortization of $17,698 and $17,345 at June 30, 2022 and December 31, 2021, respectively

 

3,353

 

3,658

Bank-owned life insurance

 

73,898

 

73,156

Operating lease right-to-use assets

11,324

11,191

Deferred tax assets, net

 

22,699

 

9,973

Other assets

 

21,120

 

19,394

Total assets

$

4,322,303

$

4,486,001

Liabilities:

 

  

 

  

Noninterest-bearing deposits

$

1,810,275

$

1,784,981

Interest-bearing deposits

 

1,946,359

 

2,046,303

Total deposits

 

3,756,634

 

3,831,284

Federal Home Loan Bank advances

50,000

Operating lease liabilities

14,169

14,142

Other liabilities

 

24,821

 

28,450

Total liabilities

 

3,795,624

 

3,923,876

Commitments and contingencies (Note 16)

 

  

 

  

Shareholders’ equity:

 

  

 

  

Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued

 

 

Common stock, $0.01 par value, 90,000,000 shares authorized, 25,252,256 and 25,323,558 shares issued at June 30, 2022 and December 31, 2021, respectively; 24,425,261 and 24,487,730 shares outstanding at June 30, 2022 and December 31, 2021, respectively

 

253

 

253

Additional paid-in capital

 

334,104

 

335,846

Retained earnings

 

253,180

 

237,165

Treasury stock, at cost, 826,995 and 835,828 shares held at June 30, 2022 and December 31, 2021, respectively

 

(14,046)

 

(14,196)

Accumulated other comprehensive income (loss), net of tax of $(12,444) and $813 at June 30, 2022 and December 31, 2021, respectively

 

(46,812)

 

3,057

Total shareholders’ equity

 

526,679

 

562,125

Total liabilities and shareholders’ equity

$

4,322,303

$

4,486,001

See accompanying notes to condensed consolidated financial statements.

1

Table of Contents

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

    

2022

    

2021

2022

2021

Interest income:

 

  

 

  

Interest and fees on loans

$

31,768

$

30,793

$

62,989

$

63,958

Securities

 

2,937

 

1,332

 

5,229

2,505

Interest-bearing deposits at other financial institutions

 

1,238

 

223

 

1,586

400

Equity investments

158

158

312

304

Total interest income

 

36,101

 

32,506

 

70,116

67,167

Interest expense:

 

  

 

  

 

Deposits

 

1,178

 

1,267

 

2,342

2,617

Federal Home Loan Bank advances

 

51

 

221

 

272

442

Total interest expense

 

1,229

 

1,488

 

2,614

3,059

Net interest income

 

34,872

 

31,018

 

67,502

64,108

Provision (recapture) for credit losses:

 

 

 

Provision (recapture) for credit losses for loans

479

(4,190)

499

(3,904)

Provision (recapture) for credit losses for unfunded commitments

(353)

(893)

62

(767)

Total provision (recapture) for credit losses

126

(5,083)

561

(4,671)

Net interest income after provision (recapture) for credit losses

 

34,746

 

36,101

 

66,941

68,779

Noninterest income:

 

  

 

  

 

Deposit account service charges

 

1,386

 

1,167

 

2,756

2,360

Card interchange fees

 

1,135

 

1,095

 

2,172

2,071

Earnings on bank-owned life insurance

 

371

 

390

 

742

780

Net gain on sales of assets

 

58

 

366

 

588

558

Other

 

596

 

473

 

2,617

833

Total noninterest income

 

3,546

 

3,491

 

8,875

6,602

Noninterest expense:

 

  

 

  

 

Salaries and employee benefits

 

14,698

 

14,734

 

29,952

28,922

Occupancy expense

 

2,396

 

2,597

 

4,767

5,118

Professional and director fees

 

1,142

 

2,441

 

2,021

4,144

Data processing and software

1,458

1,661

3,221

3,237

Regulatory fees

803

501

1,417

1,057

Advertising, marketing and business development

 

366

 

510

 

615

795

Telephone and communications

349

550

803

1,013

Security and protection expense

 

170

 

537

 

494

927

Amortization of intangibles

 

172

 

186

 

353

377

Other expenses

 

2,204

 

1,480

 

4,767

2,892

Total noninterest expense

 

23,758

 

25,197

 

48,410

48,482

Net income before income tax expense

 

14,534

 

14,395

 

27,406

26,899

Income tax expense

 

2,827

 

2,692

 

5,104

5,177

Net income

$

11,707

$

11,703

$

22,302

$

21,722

Earnings per common share

 

  

 

  

Basic

$

0.48

$

0.48

$

0.91

$

0.89

Diluted

$

0.48

$

0.48

$

0.91

$

0.88

See accompanying notes to condensed consolidated financial statements.

2

Table of Contents

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

    

2022

    

2021

    

2022

2021

Net income

$

11,707

    

$

11,703

$

22,302

$

21,722

Change in unrealized gains (losses) on securities available for sale arising during the period

 

(24,800)

 

2,292

(63,125)

(2,047)

Change in related deferred income tax

 

5,208

 

(480)

13,256

431

Other comprehensive income (loss), net of tax

 

(19,592)

 

1,812

(49,869)

(1,616)

Total comprehensive income (loss)

$

(7,885)

$

13,515

$

(27,567)

$

20,106

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(Dollars in thousands, except share amounts)

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Treasury Stock

Comprehensive

    

Shares

    

Amount

    

Capital

    

Earnings

    

Shares

    

Amount

    

Income (Loss)

    

Total

Six Months Ended June 30, 2021:

Balance at December 31, 2020

25,458,816

$

255

$

339,334

$

214,456

 

(845,988)

$

(14,369)

$

6,775

$

546,451

Net income

 

 

 

 

21,722

 

 

 

 

21,722

Dividends on common stock, $0.26 per share

 

 

 

 

(6,393)

 

 

 

 

(6,393)

Stock-based compensation expense

 

 

 

1,115

 

 

 

 

 

1,115

Vesting of restricted stock, net of shares withheld for employee tax liabilities

18,658

 

 

(84)

(84)

Shares repurchased

(181,089)

(2)

(4,966)

(4,968)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

(1,616)

 

(1,616)

Balance at June 30, 2021

25,296,385

$

253

$

335,399

$

229,785

 

(845,988)

$

(14,369)

$

5,159

$

556,227

Six Months Ended June 30, 2022:

Balance at December 31, 2021

25,323,558

$

253

$

335,846

$

237,165

 

(835,828)

$

(14,196)

$

3,057

$

562,125

Net income

 

 

 

 

22,302

 

 

 

 

22,302

Dividends on common stock, $0.26 per share

 

 

 

 

(6,287)

 

 

 

 

(6,287)

Stock-based compensation expense

 

 

 

1,022

 

 

 

 

 

1,022

Vesting of restricted stock, net of shares withheld for employee tax liabilities

22,113

 

 

(131)

(131)

Exercise of stock options, net of shares withheld for employee tax liabilities

(50)

8,833

150

100

Shares repurchased

(93,415)

(2,583)

(2,583)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

(49,869)

 

(49,869)

Balance at June 30, 2022

25,252,256

$

253

$

334,104

$

253,180

 

(826,995)

$

(14,046)

$

(46,812)

$

526,679

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Quarterly Changes in Shareholders’ Equity (Unaudited)

(Dollars in thousands, except share amounts)

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Treasury Stock

Comprehensive

    

Shares

    

Amount

    

Capital

    

Earnings

    

Shares

    

Amount

    

Income

    

Total

Three Months Ended June 30, 2021:

Balance at March 31, 2021

25,288,454

$

253

$

334,839

$

221,279

 

(845,988)

$

(14,369)

$

3,347

$

545,349

Net income

 

 

 

 

11,703

 

 

 

 

11,703

Dividends on common stock, $0.13 per share

 

 

 

 

(3,197)

 

 

 

 

(3,197)

Stock-based compensation expense

 

 

 

574

 

 

 

 

 

574

Vesting of restricted stock, net of shares withheld for employee tax liabilities

7,931

(14)

(14)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

1,812

 

1,812

Balance at June 30, 2021

 

25,296,385

$

253

$

335,399

$

229,785

 

(845,988)

$

(14,369)

$

5,159

$

556,227

Three Months Ended June 30, 2022:

Balance at March 31, 2022

25,338,008

$

253

$

336,214

$

244,672

 

(835,828)

$

(14,196)

$

(27,220)

$

539,723

Net income

 

 

 

 

11,707

 

 

 

 

11,707

Dividends on common stock, $0.13 per share

 

 

 

 

(3,199)

 

 

 

 

(3,199)

Stock-based compensation expense

 

 

 

539

 

 

 

 

 

539

Vesting of restricted stock, net of shares withheld for employee tax liabilities

7,663

 

 

(16)

(16)

Exercise of stock options, net of shares withheld for employee tax liabilities

(50)

8,833

150

100

Shares repurchased

(93,415)

(2,583)

(2,583)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

(19,592)

 

(19,592)

Balance at June 30, 2022

 

25,252,256

$

253

$

334,104

$

253,180

 

(826,995)

$

(14,046)

$

(46,812)

$

526,679

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

CBTX, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

Six Months Ended June 30,

    

2022

2021

Cash flows from operating activities:

 

  

Net income

$

22,302

$

21,722

Adjustments to reconcile consolidated net income to net cash provided by operating activities:

 

  

Provision (recapture) for credit losses

 

561

(4,671)

Depreciation expense

 

1,678

1,731

Amortization of intangibles

 

353

377

Amortization of premiums on securities

 

412

805

Amortization of lease right-to-use assets

676

771

Accretion of lease liabilities

173

199

Earnings on bank-owned life insurance

(742)

(780)

Stock-based compensation expense

 

1,022

1,115

Deferred income tax provision

 

691

1,376

Net gain on sales of assets

 

(588)

(558)

Net loss on securities

 

86

9

Change in operating assets and liabilities:

 

Loans held for sale

 

647

2,390

Other assets

 

(1,728)

7,614

Other liabilities

 

(4,692)

(7,622)

Total adjustments

 

(1,451)

 

2,756

Net cash provided by operating activities

 

20,851

 

24,478

Cash flows from investing activities:

 

  

Purchases of securities

 

(512,561)

(412,971)

Proceeds from sales, calls and maturities of securities

 

301,395

303,155

Principal repayments of securities

 

22,506

35,003

Net (increase) decrease in loans

 

(132,663)

193,049

Net (purchases) sales of loan participations

 

(35,286)

22

Proceeds from sales of Small Business Administration loans

 

2,802

2,000

Net return of capital from equity investments

 

871

1,859

Net purchases of premises and equipment

 

(431)

(591)

Proceeds from sales of repossessed real estate and other assets

112

Net cash (used in) provided by investing activities

 

(353,367)

121,638

Cash flows from financing activities:

 

  

Net increase in noninterest-bearing deposits

 

25,294

80,359

Net increase in interest-bearing deposits

 

(99,944)

34,633

Repayment of Federal Home Loan advances

(50,000)

Dividends paid on common stock

 

(6,400)

(5,654)

Payments to tax authorities for stock-based compensation

(131)

(84)

Proceeds from exercise of stock options

100

Repurchase of common stock

(2,583)

(4,968)

Net cash (used in) provided by financing activities

 

(133,664)

104,286

Net increase (decrease) in cash, cash equivalents and restricted cash

 

(466,180)

250,402

Cash, cash equivalents and restricted cash, beginning

 

950,146

538,007

Cash, cash equivalents and restricted cash, ending

$

483,966

$

788,409

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

CBTX, INC. AND SUBSIDIARY

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of OperationsCBTX, Inc., or the Company or CBTX, operates 34 branches, 18 in the Houston market area, 15 in the Beaumont/East Texas market area and one in Dallas, through its wholly-owned subsidiary, CommunityBank of Texas, N.A., or the Bank. The Bank provides relationship-driven commercial banking products and services primarily to small and medium-sized businesses and professionals with operations within the Bank’s markets.

Basis of PresentationThe accompanying unaudited condensed consolidated financial statements include the accounts of the Company and the Bank. All material intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP, but do not include all the information and footnotes required for complete consolidated financial statements. In management’s opinion, these interim unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of the Company’s consolidated financial position at June 30, 2022 and December 31, 2021 and consolidated results of operations and consolidated shareholders’ equity for the three and six months ended June 30, 2022 and 2021 and consolidated cash flows for the six months ended June 30, 2022 and 2021.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and the results for the interim periods shown in this report are not necessarily indicative of results to be expected for the full year due in part to global economic and financial market conditions, interest rates, access to sources of liquidity, market competition and interruptions of business processes. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2021 included within the Company’s Annual Report on Form 10-K.

Share Repurchase Program—The Company repurchased 93,415 shares under the Company’s share repurchase program during the six months ended June 30, 2022 at an average price of $27.66. During the six months ended June 30, 2021, the Company repurchased 181,089 shares at an average price of $27.44. Shares repurchased were retired and returned to the status of authorized but unissued shares.

Accounting Standards Not Yet Adopted—Accounting Standards Update, or ASU, 2022-02, eliminates the accounting guidance for troubled debt restructurings, or TDRs, by creditors, while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. Under the new guidance, the creditor must determine whether a modification results in a new loan or a continuation of an existing loan. ASU 2022-02 also requires the disclosure of the current-period gross loan charge-offs as a component of vintage disclosure. This update is effective for the Company for fiscal years beginning after December 31, 2022, including interim periods within those fiscal years. Early adoption is permitted and the amendments about TDRs and related disclosure enhancements may be adopted separately from the amendments related to vintage disclosures. The Company is in the process of evaluating the impact of this ASU.

Cash Flow Reporting—As of December 31, 2021, the Company had $1.8 million in cash held as collateral on deposit with other financial institution counterparties related to interest rate swap transactions that are considered restricted cash. As of June 30, 2022, the Company had no cash held as collateral related to interest rate swap transactions.

7

Table of Contents

Supplemental disclosures of cash flow information were as follows for the periods indicated below:

Six Months Ended June 30,

(Dollars in thousands)

    

2022

2021

Supplemental disclosures of cash flow information:

 

  

Cash paid for taxes

$

2,450

$

2,059

Cash paid for interest

2,591

3,198

Supplemental disclosures of non-cash flow information:

Operating lease right-to-use asset increased in exchange for lease liabilities

809

Change in liability for dividends accrued

113

(739)

NOTE 2: SECURITIES

The amortized cost, related gross unrealized gains and losses and fair values of investments in securities as of the dates indicated below were as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

(Dollars in thousands)

    

Cost

    

Gains

    

Losses

    

Fair Value

June 30, 2022

 

  

 

  

 

  

 

  

Debt securities available for sale:

 

  

 

  

 

  

 

  

State and municipal securities

$

175,956

$

36

$

(29,001)

$

146,991

U.S. Treasury securities

110,820

(2,617)

108,203

U.S. agency securities:

 

 

  

Callable debentures

3,000

(264)

2,736

Collateralized mortgage obligations

 

100,569

123

(8,339)

 

92,353

Mortgage-backed securities

 

217,907

54

(19,248)

 

198,713

Equity securities

 

1,197

(110)

 

1,087

Total

$

609,449

$

213

$

(59,579)

$

550,083

December 31, 2021

Debt securities available for sale:

 

  

 

  

 

  

 

  

State and municipal securities

$

168,541

$

4,451

$

(392)

$

172,600

U.S. Treasury securities

11,888

(91)

11,797

U.S. agency securities:

 

 

 

 

  

Callable debentures

3,000

(27)

2,973

Collateralized mortgage obligations

 

63,129

 

115

 

(862)

 

62,382

Mortgage-backed securities

 

173,446

 

1,805

 

(1,130)

 

174,121

Equity securities

 

1,189

 

 

(16)

 

1,173

Total

$

421,193

$

6,371

$

(2,518)

$

425,046

8

Table of Contents

The amortized cost and estimated fair value of securities, by contractual maturities, as of the dates indicated below were as follows:

(Dollars in thousands)

    

1 Year or Less

    

After 1 Year to 5 Years

    

After 5 Years to 10 Years

    

After 10 Years

Total

June 30, 2022

 

  

 

  

 

  

 

  

  

Amortized cost:

Debt securities available for sale:

 

  

 

  

 

  

 

  

  

State and municipal securities

$

$

506

$

15,854

$

159,596

$

175,956

U.S. Treasury securities

39,773

65,276

5,771

110,820

U.S. agency securities:

 

Callable debentures

3,000

3,000

Collateralized mortgage obligations

 

3,136

97,433

100,569

Mortgage-backed securities

 

721

24,644

192,542

217,907

Equity securities

 

1,197

1,197

Total

$

40,970

$

66,503

$

52,405

$

449,571

$

609,449

Fair value:

Debt securities available for sale:

 

  

 

  

 

  

 

  

  

State and municipal securities

$

$

503

$

15,268

$

131,220

$

146,991

U.S. Treasury securities

39,233

63,710

5,260

108,203

U.S. agency securities:

 

Callable debentures

2,736

2,736

Collateralized mortgage obligations

 

3,103

89,250

92,353

Mortgage-backed securities

 

726

24,255

173,732

198,713

Equity securities

 

1,087

1,087

Total

$

40,320

$

64,939

$

50,622

$

394,202

$

550,083

(Dollars in thousands)

    

1 Year or Less

    

After 1 Year to 5 Years

    

After 5 Years to 10 Years

    

After 10 Years

Total

December 31, 2021

 

  

 

  

 

  

 

  

  

Amortized cost:

Debt securities available for sale:

 

  

 

  

 

  

 

  

  

State and municipal securities

$

881

$

$

12,339

$

155,321

$

168,541

U.S. Treasury securities

6,138

5,750

11,888

U.S. agency securities:

 

 

 

 

 

Callable debentures

3,000

3,000

Collateralized mortgage obligations

 

 

 

4,528

 

58,601

 

63,129

Mortgage-backed securities

 

 

953

 

4,056

 

168,437

 

173,446

Equity securities

 

1,189

 

 

 

 

1,189

Total

$

2,070

$

7,091

$

29,673

$

382,359

$

421,193

Fair value:

Debt securities available for sale:

 

  

 

  

 

  

 

  

  

State and municipal securities

$

883

$

$

12,905

$

158,812

$

172,600

U.S. Treasury securities

6,072

5,725

11,797

U.S. agency securities:

 

 

 

 

 

Callable debentures

2,973

2,973

Collateralized mortgage obligations

 

 

 

4,591

 

57,791

 

62,382

Mortgage-backed securities

 

 

994

 

4,166

 

168,961

 

174,121

Equity securities

 

1,173

 

 

 

 

1,173

Total

$

2,056

$

7,066

$

30,360

$

385,564

$

425,046

Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

9

Table of Contents

No securities were sold in the six months ended June 30, 2022 and 2021. At June 30, 2022 and December 31, 2021, securities with a carrying amount of $26.2 million and $25.6 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Management did not believe that any of the securities the Company held at June 30, 2022 or December 31, 2021 were impaired due to credit quality. Accordingly, no allowance for credit losses, or ACL, was recorded in the Company’s condensed consolidated balance sheets at June 30, 2022 or during 2021. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our 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. 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.

Accrued interest receivable for securities was $2.4 million and $2.0 million at June 30, 2022 and December 31, 2021, respectively, and is included in other assets in the condensed consolidated balance sheets.

The Company held 417 and 115 securities at June 30, 2022 and December 31, 2021, respectively, that were in a gross unrealized loss position.

Securities with unrealized losses as of the dates indicated below, aggregated by category and the length of time, were as follows:

Less than Twelve Months

Twelve Months or More

Gross

Gross

Fair

Unrealized

Fair

Unrealized

(Dollars in thousands)

    

Value

    

Losses

    

Value

    

Losses

June 30, 2022

 

  

 

  

 

  

 

  

Debt securities available for sale:

 

  

 

  

 

  

 

  

State and municipal securities

$

135,904

$

(27,542)

$

3,877

$

(1,459)

U.S. Treasury securities

108,203

(2,617)

U.S. agency securities:

 

 

  

 

  

 

  

Callable debentures

2,736

(264)

Collateralized mortgage obligations

 

71,697

 

(6,637)

 

10,398

 

(1,702)

Mortgage-backed securities

 

162,307

 

(15,768)

 

18,267

 

(3,480)

Equity securities

 

1,087

 

(110)

 

 

$

481,934

$

(52,938)

$

32,542

$

(6,641)

December 31, 2021

 

  

 

  

 

  

 

  

Debt securities available for sale:

 

  

 

  

 

  

 

  

State and municipal securities

$

36,962

$

(387)

$

257

$

(5)

U.S. Treasury securities

11,797

(91)

U.S. agency securities:

 

 

  

 

  

 

  

Callable debentures

2,973

(27)

Collateralized mortgage obligations

 

40,776

 

(860)

 

241

 

(2)

Mortgage-backed securities

 

87,220

 

(1,130)

 

 

Equity securities

 

1,173

 

(16)

 

 

$

180,901

$

(2,511)

$

498

$

(7)

10

Table of Contents

NOTE 3: EQUITY INVESTMENTS

The Company’s unconsolidated investments that are considered equity securities as they represent ownership interests, such as common or preferred stock as of the dates indicated below were as follows:  

(Dollars in thousands)

    

June 30, 2022

December 31, 2021

Federal Reserve Bank stock

$

9,271

$

9,271

Federal Home Loan Bank stock

 

3,981

 

3,967

The Independent Bankers Financial Corporation stock

 

141

 

141

Community Reinvestment Act investments

 

4,680

 

4,348

$

18,073

$

17,727

Banks that are members of the Federal Home Loan Bank are required to maintain a stock investment in the Federal Home Loan Bank calculated as a percentage of aggregate outstanding mortgages, outstanding Federal Home Loan Bank advances and other financial instruments. As a member of the Federal Reserve, the Bank is required to annually subscribe to Federal Reserve Bank stock in specific ratios to the Bank’s equity. Although Federal Home Loan Bank and Federal Reserve Bank stock are considered equity securities, they do not have readily determinable fair values because ownership is restricted, and they lack a readily-available market. These investments can be sold back only at their par value of $100 per share and can only be sold to the Federal Home Loan Banks or the Federal Reserve Banks or to another member institution. In addition, the equity ownership rights are more limited than would be the case for a public company because of the oversight role exercised by regulators in the process of budgeting and approving dividends. As a result, these investments are carried at cost and evaluated for impairment.

The Company also holds an investment in the stock of The Independent Bankers Financial Corporation, which has limited marketability. As a result, this investment is carried at cost and evaluated for impairment.

The Company has investments in investment funds and limited partnerships that are qualified Community Reinvestment Act, or CRA, investments and investments under the Small Business Investment Company program of the Small Business Administration, or SBA. There are limited to no observable price changes in orderly transactions for identical investments or similar investments from the same issuers that are actively traded and, as a result, these investments are stated at cost. At June 30, 2022 and December 31, 2021, the Company had $4.9 million and $6.3 million, respectively, in outstanding unfunded commitments to these funds, which are subject to call.

During the six months ended June 30, 2022, two of these investment funds sold underlying investments for more than their book value and the Company recorded a total gain of $1.2 million, which is included in net gains on sales of assets in the condensed consolidated income statement.

The Company’s equity investments are evaluated for impairment based on an assessment of qualitative indicators, which include, but are not limited to: (i) a significant deterioration in the earnings, performance, credit rating, asset quality or business prospects of the investee; (ii) a significant adverse change in the regulatory, economic or technological environment of the investee; (iii) a significant adverse change in the general market conditions of either the geographical area or the industry in which the investee operates; and (iv) a bona fide offer to purchase, an offer by the investee to sell, or completed auction process for the same or similar investment for an amount less than the carrying amount of the investment. There were no such qualitative indicators as of June 30, 2022.

11

Table of Contents

NOTE 4: LOANS

Loans by loan class, or major loan category, as of the dates indicated below were as follows:

    

(Dollars in thousands)

    

June 30, 2022

December 31, 2021

Commercial and industrial

$

581,443

 

19.1%

$

634,384

 

22.0%

Real estate:

 

 

 

 

Commercial real estate

 

1,181,620

 

38.8%

 

1,091,969

 

38.0%

Construction and development

 

560,903

 

18.4%

 

460,719

 

16.0%

1-4 family residential

 

264,428

 

8.7%

 

277,273

 

9.6%

Multi-family residential

 

300,582

 

9.9%

 

286,396

 

10.0%

Consumer

 

26,810

 

0.9%

 

28,090

 

1.0%

Agriculture

 

8,036

 

0.3%

 

7,941

 

0.3%

Other

 

118,153

 

3.9%

 

89,655

 

3.1%

Total gross loans

 

3,041,975

 

100.0%

 

2,876,427

 

100.0%

Less allowance for credit losses for loans

 

(32,087)

 

  

 

(31,345)

 

  

Less deferred loan fees and unearned discounts

 

(9,061)

 

  

 

(8,739)

 

  

Less loans held for sale

 

 

  

 

(164)

 

  

Loans, net

$

3,000,827

 

  

$

2,836,179

 

  

Accrued interest receivable for loans was $9.0 million and $9.6 million at June 30, 2022 and December 31, 2021, respectively, and was included in other assets in the condensed consolidated balance sheets.

From time to time, the Company will acquire and dispose of interests in loans under participation agreements with other financial institutions. Loan participations purchased and sold during the six months ending June 30, 2022 and 2021, by loan class, were as follows:

Participations

Participations

(Dollars in thousands)

Purchased

Sold

June 30, 2022

 

  

 

  

Commercial and industrial

$

15,844

$

1,943

Commercial real estate

17,955

1,247

Other

4,677

$

38,476

$

3,190

June 30, 2021

Construction and development

$

$

22

The Company participates in the SBA loan program. When advantageous, the Company will sell the guaranteed portions of these loans with servicing retained. SBA loans that were sold with servicing retained during the six months ended June 30, 2022 and 2021, totaled $2.8 million and $2.0 million, respectively. Net gains recognized on sales of SBA loans were $328,000 and $223,000 for the six months ended June 30, 2022 and 2021, respectively.

12

Table of Contents

NOTE 5: LOAN PERFORMANCE

The following is an aging analysis of the Company’s past due loans, segregated by loan class, as of the dates indicated below:

90 Days or

 90 Days

30 to 59 Days

60 to 89 Days

Greater

Total 

Total 

Past Due and

(Dollars in thousands)

    

Past Due

    

Past Due

    

Past Due

    

Past Due

    

Current Loans

    

Total Loans

    

Still Accruing

June 30, 2022

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial and industrial

$

524

$

$

3,478

$

4,002

$

577,441

$

581,443

$

Real estate:

 

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

 

4,513

 

5,275

 

9,788

 

1,171,832

 

1,181,620

 

Construction and development

 

 

 

 

 

560,903

 

560,903

 

1-4 family residential

 

13

 

98

 

1,523

 

1,634

 

262,794

 

264,428

 

Multi-family residential

 

 

 

 

 

300,582

 

300,582

 

Consumer

 

 

 

 

 

26,810

 

26,810

 

Agriculture

 

 

 

 

 

8,036

 

8,036

 

Other

 

 

 

 

 

118,153

 

118,153

 

Total gross loans

$

537

$

4,611

$

10,276

$

15,424

$

3,026,551

$

3,041,975

$

December 31, 2021

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial and industrial

$

14

$

$

$

14

$

634,370

$

634,384

$

Real estate:

 

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

650

 

 

55

 

705

 

1,091,264

 

1,091,969

 

Construction and development

 

 

 

142

 

142

 

460,577

 

460,719

 

1-4 family residential

 

150

 

34

 

 

184

 

277,089

 

277,273

 

Multi-family residential

 

 

 

 

 

286,396

 

286,396

 

Consumer

 

50

 

 

 

50

 

28,040

 

28,090

 

Agriculture

 

 

 

 

 

7,941

 

7,941

 

Other

 

41

 

 

 

41

 

89,614

 

89,655

 

Total gross loans

$

905

$

34

$

197

$

1,136

$

2,875,291

$

2,876,427

$

The Company places loans on nonaccrual status because of delinquency or because collection of principal or interest is doubtful. Nonaccrual loans, segregated by loan class, as of the dates indicated below were as follows:

(Dollars in thousands)

    

June 30, 2022

    

December 31, 2021

Commercial and industrial

$

8,312

$

9,090

Real estate:

 

 

Commercial real estate

 

16,481

 

11,512

Construction and development

 

143

 

142

1-4 family residential

 

3,302

 

1,784

Consumer

35

40

Total nonaccrual loans

$

28,273

$

22,568

Interest income that would have been earned under the original terms of the nonaccrual loans was $704,000 and $366,000 for the six months ended June 30, 2022 and 2021, respectively.

13

Table of Contents

Loans restructured due to the borrower’s financial difficulties, or troubled debt restructurings, during the six months ended June 30, 2022 and 2021, that remained outstanding as of the end of those periods were as follows:

Post-modification Recorded Investment

Extended

Maturity,

Pre-modification

Extended

Restructured

Outstanding

Maturity and

Payments

Number

Recorded

Restructured

Extended

Restructured

and Adjusted

(Dollars in thousands)

    

of Loans

    

Investment

    

Payments

    

Maturity

    

Payments

    

Interest Rate

June 30, 2022

Commercial and industrial

8

$

3,915

$

1,093

$

$

$

2,822

Real estate:

Commercial real estate

 

2

2,273

2,040

245

Construction and development

3

431

431

Total

 

13

$

6,619

$

1,093

$

$

2,471

$

3,067

June 30, 2021

Commercial and industrial

 

3

$

3,256

$

3,256

$

$

$

Real estate:

Commercial real estate

 

1

1,206

1,206

1-4 family residential

1

1,548

1,548

Total

 

5

$

6,010

$

6,010

$

$

$

Loan modifications related to a loan refinancing or restructuring other than a troubled debt restructuring are accounted for as a new loan if the terms provided to the borrower are at least as favorable to the Company as terms for comparable loans to other borrowers with similar collection risks that is not a loan refinancing or restructuring. If the loan refinancing or restructuring does not meet this condition or if only minor modifications are made to the original loan contract, it is not considered a new loan and is considered a renewal or modification of the original contract. Restructured or modified loans are not considered past due if they are performing under the terms of the modified or restructured payment schedule.

A troubled debt restructuring is considered in default when a payment in accordance with the terms of the restructuring is more than 30 days past due. All loans restructured in a troubled debt restructuring are individually evaluated based on the underlying collateral for the determination of an ACL.

There were no troubled debt restructurings with payment defaults during the twelve months ended June 30, 2022 and troubled debt restructuring during the twelve months ended June 30, 2021 with payment defaults were as follows:

June 30, 2021

Number

(Dollars in thousands)

    

of Loans

    

Balance

Commercial and industrial

3

$

5,892

Real estate:

Commercial real estate

 

1

 

4,722

Total

 

4

$

10,614

At June 30, 2022 and December 31, 2021, the Company had an outstanding commitment to fund $2.4 million and $2.5 million, respectively, for loans that were previously restructured.

14

Table of Contents

Loans individually evaluated for credit losses were as follows for the dates indicated below:

Troubled Debt Restructurings

Total Loans

(Dollars in thousands)

Accruing

Non-Accrual

Total

Other Non-Accrual

Other Accruing

Individually Evaluated

June 30, 2022

Commercial and industrial

$

5,148

$

8,255

$

13,403

$

57

$

1,078

$

14,538

Real estate:

Commercial real estate

7,754

11,106

18,860

5,375

24,235

Construction and development

7,825

143

7,968

7,968

1-4 family residential

41

3,222

3,263

80

3,343

Consumer

35

35

74

109

Other

5,349

5,349

5,349

Total

$

26,117

$

22,761

$

48,878

$

5,512

$

1,152

$

55,542

December 31, 2021

Commercial and industrial

$

5,661

$

6,851

$

12,512

$

2,239

$

1,828

$

16,579

Real estate:

Commercial real estate

5,755

11,401

17,156

111

3,790

21,057

Construction and development

12,282

12,282

142

292

12,716

1-4 family residential

1,571

1,727

3,298

57

3,355

Consumer

40

40

85

125

Other

5,440

5,440

5,440

Total

$

30,709

$

20,019

$

50,728

$

2,549

$

5,995

$

59,272

NOTE 6: ALLOWANCE FOR CREDIT LOSSES

The Company primarily manages credit quality and credit risk associated with its loan portfolio based on the risk grading assigned to each individual loan within the loan class. Each loan class is a grouping of loan receivables within the portfolio based on risk characteristics and the method for monitoring and assessing the associated credit risks.

Risk Grading

The methodology used by the Company in the determination of its ACL, which is performed at least on a quarterly basis, is designed to be responsive to changes in the credit quality of the loan portfolio as well as forecasted economic conditions. The credit quality of the loan portfolio is assessed through different processes. At origination, a risk grade is assigned to each loan based on underwriting procedures and criteria. The risk grades used are described below. The Company monitors the credit quality of the loan portfolio on an on-going basis by performing loan reviews, both internally and through a third-party vendor, on loans meeting certain risk and exposure criteria. Through these reviews, loans that require risk grade changes are approved by executive management. In addition, executive management reviews classified and criticized loans to assess changes in credit quality of the underlying loan, and when determined appropriate, based on individual evaluation, approve specific reserves.

Pass—Credits in this category contain an acceptable amount of risk.

Special Mention—Credits in this category contain more than the normal amount of risk and are referred to as special mention in accordance with regulatory guidelines. These credits possess clearly identifiable temporary weaknesses or trends that, if not corrected or revised, may result in a condition that exposes the Company to a higher level of risk of loss.

Substandard—Credits in this category are substandard in accordance with regulatory guidelines and of unsatisfactory credit quality with well-defined weaknesses or weaknesses that jeopardize the liquidation of the debt. Credits in this category are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Often, the assets in this category will have a valuation allowance representative of management’s

15

Table of Contents

estimated loss that is probable to be incurred. Loans deemed substandard and on nonaccrual status are individually evaluated for expected credit losses.

Doubtful—Credits in this category are considered doubtful in accordance with regulatory guidelines, are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Generally, these credits will have a valuation allowance based upon management’s best estimate of the losses probable to occur in the liquidation of the debt.

Loss—Credits in this category are considered loss in accordance with regulatory guidelines and are considered uncollectible and of such little value as to question their continued existence as assets on the Company’s financial statements. Such credits are charged off or charged down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. This category does not intend to imply that the debt or some portion of it will never be paid, nor does it in any way imply that the debt will be forgiven.

The Company had no loans graded loss or doubtful at June 30, 2022 or December 31, 2021.

At June 30, 2022 and December 31, 2021, the ratio of the ACL for loans to loans excluding loans held for sale was 1.06% and 1.09%, respectively. The ACL increased from $31.3 million at December 31, 2021 to $32.1 million at June 30, 2022, primarily due to growth in the loan portfolio. Although national and local economies and economic forecasts improved during 2021 and 2022, geopolitical instabilities, inflation, rising interest rates, supply disruptions and other uncertainties continue and these factors are considered in the forecasts and qualitative factors used to determine the Company’s ACL.

The total of the Company’s qualitative and quantitative factors ranged from 0.64% to 1.99% and 0.62% to 2.08% at June 30, 2022 and December 31, 2021, respectively. All factors are reassessed at the end of each quarter.

The review of the appropriateness of the ACL, which includes evaluation of historical loss trends, qualitative adjustments and forecasted economic conditions applied to general reserves, is performed by executive management and presented to the Board of Directors for its review on a quarterly basis. The ACL at June 30, 2022, reflects the Company’s assessment based on the information available at that time.

16

Table of Contents

Loans by risk grades, loan class and vintage, at June 30, 2022 were as follows:

(Dollars in thousands)

    

2022

    

2021

    

2020

    

2019

    

2018

    

Prior

Revolving Loans

Converted Revolving Loans

    

Total

Commercial and industrial:

Pass

$

69,304

$

153,044

$

39,999

$

44,432

$

17,159

$

9,174

$

227,008

$

5,346

$

565,466

Substandard

45

2,819

6,457

339

1,388

4,929

15,977

Total commercial and industrial

69,349

153,044

39,999

47,251

23,616

9,513

228,396

10,275

581,443

Commercial real estate:

Pass

292,206

219,332

183,074

175,475

93,993

107,229

52,985

17,746

1,142,040

Substandard

49

2,898

8,256

14,292

3,505

10,580

39,580

Total commercial real estate

292,206

219,381

185,972

183,731

108,285

110,734

52,985

28,326

1,181,620

Construction and development:

Pass

112,617

216,604

93,293

36,256

6,154

15,237

72,219

87

552,467

Special mention

468

468

Substandard

292

7,676

7,968

Total construction and development

112,617

216,604

94,053

36,256

6,154

22,913

72,219

87

560,903

1-4 family residential:

Pass

36,188

107,718

20,224

13,067

23,437

52,599

5,992

275

259,500

Substandard

1,548

494

894

490

1,502

4,928

Total 1-4 family residential

36,188

107,718

21,772

13,561

24,331

53,089

5,992

1,777

264,428

Multi-family residential:

Pass

36,077

18,573

18,072

5,808

49,952

171,527

573

300,582

Total multi-family residential

36,077

18,573

18,072

5,808

49,952

171,527

573

300,582

Consumer:

Pass

4,885

3,878

2,844

836

482

121

12,579

975

26,600

Substandard

35

75

100

210

Total consumer

4,885

3,878

2,879

836

482

121

12,654

1,075

26,810

Agriculture:

Pass

2,684

1,032

366

29

37

28

3,662

138

7,976

Substandard

16

44

60

Total agriculture

2,684

1,032

366

29

37

44

3,706

138

8,036

Other:

Pass

18,830

34,386

1,382

613

1,361

1,184

57,458

2,894

118,108

Substandard

45

45

Total other

18,875

34,386

1,382

613

1,361

1,184

57,458

2,894

118,153

Total

Pass

572,791

754,567

359,254

276,516

192,575

357,099

432,476

27,461

2,972,739

Special mention

468

468

Substandard

90

49

4,773

11,569

21,643

12,026

1,507

17,111

68,768

Total gross loans

$

572,881

$

754,616

$

364,495

$

288,085

$

214,218

$

369,125

$

433,983

$

44,572

$

3,041,975

17

Table of Contents

Loans by risk grades, loan class and vintage, at December 31, 2021 were as follows:

(Dollars in thousands)

    

2021

    

2020

    

2019

    

2018

    

2017

    

Prior

Revolving Loans

Converted Revolving Loans

    

Total

Commercial and industrial:

Pass

$

230,432

$

53,744

$

60,514

$

21,059

$

8,117

$

5,533

$

228,247

$

5,773

$

613,419

Special mention

290

15

3,177

3,482

Substandard

1,014

1,852

7,075

4

391

1,647

5,500

17,483

Total commercial and industrial

230,432

54,758

62,656

28,149

8,121

5,924

233,071

11,273

634,384

Commercial real estate:

Pass

243,666

197,625

232,074

141,591

69,995

84,398

55,253

13,799

1,038,401

Special mention

859

7,934

62

8,855

Substandard

2,953

12,967

14,556

334

3,046

10,857

44,713

Total commercial real estate

243,666

200,578

245,900

164,081

70,329

87,506

55,253

24,656

1,091,969

Construction and development:

Pass

197,900

99,420

54,017

7,127

16,133

142

72,698

96

447,533

Special mention

470

470

Substandard

292

1,500

10,207

717

12,716

Total construction and development

197,900

100,182

54,017

8,627

26,340

859

72,698

96

460,719

1-4 family residential:

Pass

115,451

23,298

20,210

31,416

21,607

53,253

6,516

466

272,217

Substandard

1,548

514

902

126

464

1,502

5,056

Total 1-4 family residential

115,451

24,846

20,724

32,318

21,733

53,717

8,018

466

277,273

Multi-family residential:

Pass

16,744

18,236

6,473

58,750

9,784

167,033

9,376

286,396

Total multi-family residential

16,744

18,236

6,473

58,750

9,784

167,033

9,376

286,396

Consumer:

Pass

6,427

3,637

1,199

714

277

11

14,921

679

27,865

Substandard

40

85

100

225

Total consumer

6,427

3,677

1,199

714

277

11

15,006

779

28,090

Agriculture:

Pass

2,954

423

42

57

35

4,198

190

7,899

Substandard

18

24

42

Total agriculture

2,954

423

42

57

35

18

4,222

190

7,941

Other:

Pass

27,656

3,744

630

1,509

10

2,157

53,906

43

89,655

Total other

27,656

3,744

630

1,509

10

2,157

53,906

43

89,655

Total

Pass

841,230

400,127

375,159

262,223

125,958

312,527

445,115

21,046

2,783,385

Special mention

470

1,149

7,949

62

3,177

12,807

Substandard

5,847

15,333

24,033

10,671

4,636

3,258

16,457

80,235

Total gross loans

$

841,230

$

406,444

$

391,641

$

294,205

$

136,629

$

317,225

$

451,550

$

37,503

$

2,876,427

18

Table of Contents

Loans by risk grades and loan class as of the dates indicated below were as follows:  

(Dollars in thousands)

    

Pass

    

Special Mention

    

Substandard

    

Total Loans

June 30, 2022

 

  

 

  

 

  

 

  

Commercial and industrial

$

565,466

$

$

15,977

$

581,443

Real estate:

 

 

  

Commercial real estate

 

1,142,040

39,580

 

1,181,620

Construction and development

 

552,467

468

7,968

 

560,903

1-4 family residential

 

259,500

4,928

 

264,428

Multi-family residential

 

300,582

 

300,582

Consumer

 

26,600

210

 

26,810

Agriculture

 

7,976

60

 

8,036

Other

 

118,108

45

 

118,153

Total gross loans

$

2,972,739

$

468

$

68,768

$

3,041,975

December 31, 2021

 

  

 

  

 

  

 

  

Commercial and industrial

$

613,419

$

3,482

$

17,483

$

634,384

Real estate:

 

 

  

Commercial real estate

 

1,038,401

8,855

44,713

 

1,091,969

Construction and development

 

447,533

470

12,716

 

460,719

1-4 family residential

 

272,217

5,056

 

277,273

Multi-family residential

 

286,396

 

286,396

Consumer

 

27,865

225

 

28,090

Agriculture

 

7,899

42

 

7,941

Other

 

89,655

 

89,655

Total gross loans

$

2,783,385

$

12,807

$

80,235

$

2,876,427

Loans individually evaluated and collectively evaluated as of the dates indicated below were as follows:

June 30, 2022

December 31, 2021

Individually

Collectively

Individually

Collectively

Evaluated

Evaluated

Total

Evaluated

Evaluated

Total

(Dollars in thousands)

    

Loans

    

Loans

    

Loans

    

Loans

    

Loans

    

Loans

Commercial and industrial

$

14,538

$

566,905

$

581,443

$

16,579

$

617,805

$

634,384

Real estate:

 

  

 

  

 

 

  

 

  

Commercial real estate

 

24,235

1,157,385

 

1,181,620

 

21,057

 

1,070,912

 

1,091,969

Construction and development

 

7,968

552,935

 

560,903

 

12,716

 

448,003

 

460,719

1-4 family residential

 

3,343

261,085

 

264,428

 

3,355

 

273,918

 

277,273

Multi-family residential

 

300,582

 

300,582

 

 

286,396

 

286,396

Consumer

 

109

26,701

 

26,810

 

125

 

27,965

 

28,090

Agriculture

 

8,036

 

8,036

 

 

7,941

 

7,941

Other

 

5,349

112,804

 

118,153

 

5,440

 

84,215

 

89,655

Total gross loans

$

55,542

$

2,986,433

$

3,041,975

$

59,272

$

2,817,155

$

2,876,427

The Company had collateral dependent loans totaling $1.5 million pending foreclosure at both June 30, 2022 and December 31, 2021.

19

Table of Contents

Activity in the ACL for loans, segregated by loan class for the six months ended June 30, 2022 and 2021, was as follows:

Real Estate

Commercial

Construction

and

Commercial

and

1-4 Family

Multi-family

(Dollars in thousands)

    

Industrial

    

Real Estate

    

Development

    

Residential

    

Residential

    

Consumer

    

Agriculture

    

Other

    

Total

June 30, 2022

 

  

 

  

 

  

 

  

 

  

 

 

  

 

  

 

  

Beginning balance

$

11,214

$

11,015

$

3,310

$

2,105

$

1,781

$

406

$

88

$

1,426

$

31,345

Provision (recapture)

 

(1,778)

693

933

(31)

144

43

(10)

505

 

499

Charge-offs

 

(1)

(8)

(63)

 

(72)

Recoveries

 

295

5

5

10

 

315

Net recoveries

 

294

 

 

 

(3)

 

 

(58)

 

10

 

 

243

Ending balance

$

9,730

$

11,708

$

4,243

$

2,071

$

1,925

$

391

$

88

$

1,931

$

32,087

Period-end amount allocated to:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Specific reserve

$

2,776

$

55

$

$

$

$

109

$

$

$

2,940

General reserve

 

6,954

 

11,653

 

4,243

 

2,071

 

1,925

 

282

 

88

 

1,931

 

29,147

Total

$

9,730

$

11,708

$

4,243

$

2,071

$

1,925

$

391

$

88

$

1,931

$

32,087

June 30, 2021

Beginning balance

$

13,035

$

13,798

$

6,089

$

2,578

$

2,513

$

440

$

137

$

2,047

$

40,637

Provision (recapture)

 

(1,083)

 

(538)

 

(1,636)

 

(406)

 

(131)

 

(46)

 

(64)

 

 

(3,904)

Charge-offs

 

(495)

 

 

 

 

 

(3)

 

 

 

(498)

Recoveries

 

803

 

 

 

 

 

103

 

42

 

 

948

Net (charge-offs) recoveries

 

308

 

 

 

 

 

100

 

42

 

 

450

Ending balance

$

12,260

$

13,260

$

4,453

$

2,172

$

2,382

$

494

$

115

$

2,047

$

37,183

Period-end amount allocated to:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Specific reserve

$

4,803

$

252

$

$

$

$

90

$

$

536

$

5,681

General reserve

 

7,457

 

13,008

 

4,453

 

2,172

 

2,382

 

404

 

115

 

1,511

 

31,502

Total

$

12,260

$

13,260

$

4,453

$

2,172

$

2,382

$

494

$

115

$

2,047

$

37,183

The ACL for loans by loan class as of the dates indicated was as follows:

June 30, 2022

December 31, 2021

(Dollars in thousands)

Amount

Percent

Amount

Percent

Commercial and industrial

$

9,730

 

30.3

%  

$

11,214

 

35.7

%

Real estate:

 

 

 

  

 

Commercial real estate

 

11,708

 

36.5

%  

 

11,015

 

35.1

%

Construction and development

 

4,243

 

13.2

%  

 

3,310

 

10.6

%

1-4 family residential

 

2,071

 

6.5

%  

 

2,105

 

6.7

%

Multi-family residential

 

1,925

 

6.0

%  

 

1,781

 

5.7

%

Consumer

 

391

 

1.2

%  

 

406

 

1.3

%

Agriculture

 

88

 

0.3

%  

 

88

 

0.3

%

Other

 

1,931

 

6.0

%  

 

1,426

 

4.6

%

Total allowance for credit losses for loans

$

32,087

 

100.0

%  

$

31,345

 

100.0

%

Loans excluding loans held for sale

3,032,914

2,867,524

ACL for loans to loans excluding loans held for sale

1.06%

1.09%

Allocation of a portion of the ACL to one class of loans above does not preclude its availability to absorb losses in other classes.

Nonaccrual loans are included in individually evaluated loans and $23.0 million and $16.0 million of nonaccrual loans had no related ACL at June 30, 2022 and December 31, 2021, respectively.

20

Table of Contents

Charge-offs and recoveries by loan class and vintage for the six months ended June 30, 2022 were as follows:

(Dollars in thousands)

    

2022

    

2021

    

2020

    

2019

2018

Prior

Revolving Loans

Converted Revolving Loans

    

Total

Commercial and industrial:

Charge-off

$

$

$

$

$

$

(1)

$

$

$

(1)

Recovery

197

40

58

295

Total commercial and industrial

197

39

58

294

1-4 family residential:

Charge-off

(2)

(6)

(8)

Recovery

5

5

Total 1-4 family residential

(2)

(1)

(3)

Consumer:

Charge-off

(12)

(1)

(50)

(63)

Recovery

1

3

1

5

Total consumer

1

(12)

3

(1)

(49)

(58)

Agriculture:

Recovery

10

10

Total agriculture

10

10

Total:

Charge-off

(12)

(2)

(7)

(1)

(50)

(72)

Recovery

1

3

197

55

58

1

315

Total

$

1

$

$

(12)

$

3

$

195

$

48

$

57

$

(49)

$

243

Charge-offs and recoveries by loan class and vintage for the six months ended June 30, 2021 were as follows:

(Dollars in thousands)

    

2021

    

2020

    

2019

    

2018

2017

Prior

Revolving Loans

Converted Revolving Loans

    

Total

Commercial and industrial:

Charge-off

$

$

$

(191)

$

(260)

$

$

$

$

(44)

$

(495)

Recovery

3

29

40

703

28

803

Total commercial and industrial

(188)

(231)

40

703

(16)

308

Consumer:

Charge-off

(3)

(3)

Recovery

2

2

99

103

Total consumer

2

(3)

2

99

100

Agriculture:

Recovery

42

42

Total agriculture

42

42

Total:

Charge-off

(194)

(260)

(44)

(498)

Recovery

2

3

31

40

844

28

948

Total

$

2

$

$

(191)

$

(229)

$

40

$

844

$

$

(16)

$

450

The Company has unfunded commitments, comprised of letters of credit and commitments to extend credit that are not unconditionally cancellable by the Company. See Note 16: Commitments and Contingencies and Financial Instruments with Off-Balance-Sheet Risk. Unfunded commitments have similar characteristics as loans and their ACL was determined using the model and methodology for loans noted above as well as historical and expected utilization levels.

21

Table of Contents

Activity in the ACL for unfunded commitments for the six months ended June 30, 2022 and 2021, was as follows:

Six Months Ended June 30,

(Dollars in thousands)

2022

2021

Beginning balance

$

3,266

$

4,177

Provision (recapture)

62

 

(767)

Ending balance

$

3,328

$

3,410

NOTE 7: PREMISES AND EQUIPMENT

The components of premises and equipment as of the dates indicated below were as follows:

(Dollars in thousands)

June 30, 2022

December 31, 2021

Land

$

15,484

$

15,484

Buildings and leasehold improvements

 

62,227

 

64,298

Furniture and equipment

 

17,344

 

17,087

Vehicles

 

248

 

248

Construction in progress

 

363

 

496

95,666

97,613

Less accumulated depreciation

(39,656)

(39,196)

Premises and equipment, net

$

56,010

$

58,417

Depreciation expense was $1.7 million for both the six months ended June 30, 2022 and 2021 and $838,000 and $868,000 for the three months ended June 30, 2022 and 2021, respectively. Depreciation expense is included in net occupancy expense in the Company’s condensed consolidated statements of income.

During the six months ended June 30, 2022, the Company recorded a loss of $1.2 million, which is included in net gains on sales of assets in the condensed consolidated income statement, for disposals of buildings and improvements and furniture and equipment for a land lease that was terminated early at the request of the lessor.

NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill was $81.0 million at June 30, 2022 and December 31, 2021 and there were no changes in goodwill during the six months ended June 30, 2022 or the year ended December 31, 2021. Based on the results of the Company’s assessment, management does not believe any impairment of goodwill or other intangible assets existed at June 30, 2022 or December 31, 2021.

Other intangibles as of the dates indicated below were as follows:

    

Weighted-

    

    

    

Average

Remaining

Gross

Net

Amortization

Intangible

Accumulated

Intangible

(Dollars in thousands)

Period

Assets

Amortization

Assets

June 30, 2022

 

 

  

 

  

 

  

Core deposits

2.0 years

$

13,750

$

(13,620)

$

130

Customer relationships

6.5 years

 

6,629

 

(3,756)

 

2,873

Servicing assets

7.4 years

 

672

 

(322)

 

350

Total other intangible assets, net

$

21,051

$

(17,698)

$

3,353

December 31, 2021

 

  

 

  

 

  

Core deposits

2.4 years

$

13,750

$

(13,538)

$

212

Customer relationships

7.0 years

 

6,629

 

(3,535)

 

3,094

Servicing assets

11.5 years

 

624

 

(272)

 

352

Total other intangible assets, net

$

21,003

$

(17,345)

$

3,658

22

Table of Contents

Servicing Assets

Changes in servicing assets as of the dates indicated below were as follows:

Six Months Ended June 30,

(Dollars in thousands)

    

2022

2021

Balance at beginning of year

$

352

$

190

Increase from loan sales

 

62

 

53

Decrease from serviced loans paid off or foreclosed

(14)

(1)

Amortization

 

(50)

 

(28)

Balance at end of period

$

350

$

214

NOTE 9: BANK-OWNED LIFE INSURANCE

Bank-owned life insurance policies and the net change in cash surrender value during the periods indicated below were as follows:

Six Months Ended June 30,

(Dollars in thousands)

    

2022

2021

Balance at beginning of period

$

73,156

$

72,338

Net change in cash surrender value

742

780

Balance at end of period

$

73,898

$

73,118

NOTE 10: DEPOSITS

Deposits as of the dates indicated below were as follows:

(Dollars in thousands)

June 30, 2022

December 31, 2021

Interest-bearing demand accounts

$

445,149

$

468,361

Money market accounts

 

1,109,265

 

1,209,659

Savings accounts

 

130,713

 

127,031

Certificates and other time deposits, $100,000 or greater

 

169,616

 

134,775

Certificates and other time deposits, less than $100,000

 

91,616

 

106,477

Total interest-bearing deposits

1,946,359

2,046,303

Noninterest-bearing deposits

1,810,275

1,784,981

Total deposits

$

3,756,634

$

3,831,284

At June 30, 2022 and December 31, 2021, the Company had $36.7 million and $37.3 million in deposits from public entities and brokered deposits of $39.8 million and $52.9 million, respectively. At June 30, 2022 and December 31, 2021, overdrafts of $368,000 and $402,000, respectively, were reclassified to loans. Accrued interest payable for deposits was $224,000 and $128,000 at June 30, 2022 and December 31, 2021, respectively, which was included in other liabilities in the condensed consolidated balance sheets. The Company had no major concentrations of deposits at June 30, 2022 or December 31, 2021 from any single or related groups of depositors. At June 30, 2022 and December 31, 2021, the Company had $109.4 million and $70.5 million, respectively, of certificates of deposits or other time deposits that were uninsured. Securities pledged and the letter of credit issued under the Company’s Federal Home Loan blanket lien arrangement which secure public deposits were not considered in determining the amount of uninsured time deposits.

NOTE 11: LINES OF CREDIT

Line of Credit

The Company has entered into a loan agreement with another financial institution, or Loan Agreement, which has been periodically amended and provides for a $30.0 million revolving line of credit. At June 30, 2022, there were no outstanding borrowings on this line of credit and the Company did not draw on this line of credit during 2022 or 2021. The Company can make draws on the line of credit for a period of 12 months, which began on December 13, 2021, after

23

Table of Contents

which the Company will not be permitted to make further draws and the outstanding balance will amortize over a period of 60 months. Interest accrues on outstanding borrowings at a rate equal to the maximum “Latest” U.S. prime rate of interest per annum and payable quarterly in the first 12 months and thereafter, quarterly principal and interest payments are required over a term of 60 months. The entire outstanding balance and unpaid interest is payable in full on December 13, 2027.

The Company may prepay the principal amount of the line of credit without premium or penalty. The obligations of the Company under the Loan Agreement are secured by a valid and perfected first priority lien on all of the issued and outstanding shares of capital stock of the Bank.

Covenants made under the Loan Agreement include, among other things, the Company maintaining tangible net worth of not less than $300.0 million, the Company maintaining a free cash flow coverage ratio of not less than 1.25 to 1.00, the Bank Texas Ratio (as defined in the Loan Agreement) not to exceed 15%, the Bank’s Total Capital Ratio (as defined under the Loan Agreement) of not less than 12% and restrictions on the ability of the Company and its subsidiaries to incur certain additional debt. The Company was in compliance with these covenants at June 30, 2022.

Additional Lines of Credit

The Federal Home Loan Bank allows the Company to borrow on a blanket floating lien status collateralized by certain loans and the blanket lien amount was $1.1 billion at June 30, 2022 and $999.3 million at December 31, 2021. Federal Home Loan Bank advances outstanding totaled $50.0 million at December 31, 2021. These borrowings were paid in full during the six months ended June 30, 2022. At both June 30, 2022 and December 31, 2021, there were $26.0 million letters of credit outstanding that were issued under this agreement and used as collateral to secure certain public deposits. After considering the outstanding advances and letters of credit, the net capacity available under the Federal Home Loan Bank facility was $1.1 billion at June 30, 2022 and $923.3 million at December 31, 2021.

The Company has historically borrowed under this agreement on a short-term basis but did not during the six months ended June 30, 2022 and 2021. The weighted-average interest rate for Federal Home Loan Bank advances for the six months ended June 30, 2022 and 2021 was 1.99% and 1.78%, respectively.

At June 30, 2022 and December 31, 2021, the Company maintained federal funds lines of credit with commercial banks that provided for the availability to borrow up to an aggregate of $45.0 million and $65.0 million, respectively. There were no funds under these lines of credit outstanding at June 30, 2022 or December 31, 2021.

NOTE 12: RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company, through the Bank, has and expects to continue to conduct routine banking business with related parties, including its executive officers and directors. Related parties also include shareholders and their affiliates who directly or indirectly have 5% or more beneficial ownership in the Company.

Loans—In the opinion of management, loans to related parties were on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectability or present any other unfavorable features to the Company. The Company had approximately $158.1 million and $138.1 million in loans to related parties at June 30, 2022 and December 31, 2021, respectively. At June 30, 2022 and December 31, 2021, there were no loans made to related parties deemed nonaccrual, past due, restructured in a troubled debt restructuring or classified as potential problem loans.

Unfunded Commitments—At June 30, 2022 and December 31, 2021, the Company had approximately $65.7 million and $55.6 million in unfunded loan commitments to related parties, respectively.

Deposits—The Company held related party deposits of approximately $246.6 million and $249.9 million at June 30, 2022 and December 31, 2021, respectively.

24

Table of Contents

NOTE 13: FAIR VALUE DISCLOSURES

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. In estimating fair value, the Company uses valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied.

Inputs to valuation techniques refer to the assumptions used in pricing the asset or liability. Valuation inputs are categorized in a three-level hierarchy, that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs—Other observable inputs that may include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable for the asset or liability such as interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates or inputs that are observable or can be corroborated by observable market data.

Level 3 Inputs—Unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.

During the six months ended June 30, 2022 and the year ended December 31, 2021, there were no transfers of assets or liabilities within the levels of the fair value hierarchy.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use observable market-based parameters as inputs. Valuation adjustments may be made to ensure that assets and liabilities are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.

The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value could result in different estimates of fair value. Fair value estimates are based on judgments regarding current economic conditions, risk characteristics of the various instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.

Financial Instruments Measured at Fair Value on a Recurring Basis

The Company’s assets and liabilities measured at fair value on a recurring basis include the following:

Debt Securities Available for Sale—Debt securities classified as available for sale are recorded at fair value. For those debt securities classified as Level 1 and Level 2, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayments speeds, credit information and the security’s terms and conditions, among other things. The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies for reasonableness.

Equity Securities—Equity securities are recorded at fair value and the fair value measurements are based on observable data obtained from a third-party pricing service. The Company reviews the prices supplied by the service against publicly available information. The equity securities are mutual funds publicly traded on the National Association of Securities Dealers Automated Quotations and the fair value is determined by using unadjusted quoted market prices which are considered Level 1 inputs.

25

Table of Contents

Interest Rate Swaps—The Company obtains fair value measurements for its interest rate swaps from an independent pricing service which uses the income approach. The income approach calls for the utilization of valuation techniques to convert future cash flows as due to be exchanged per the terms of the financial instrument, into a single present value amount. Measurement is based on the value indicated by the market expectations about those future amounts as of the measurement date. The proprietary curves of the independent pricing service utilize pricing models derived from industry standard analytic tools, considering both Level 1 and Level 2 inputs. Interest rate swaps are classified as Level 2.

Financial assets and financial liabilities measured at fair value on a recurring basis as of the dates indicated below were as follows:

(Dollars in thousands)

June 30, 2022

December 31, 2021

Fair value of financial assets:

 

  

 

  

Level 1 inputs:

Equity securities

$

1,087

$

1,173

Debt securities available for sale - U.S. Treasury securities

108,203

11,797

Level 2 inputs:

Debt securities available for sale:

State and municipal securities

146,991

172,600

U.S. agency securities:

 

  

 

  

Callable debentures

2,736

2,973

Collateralized mortgage obligations

 

92,353

 

62,382

Mortgage-backed securities

 

198,713

 

174,121

Interest rate swaps

 

6,113

 

3,543

Level 3 inputs:

Credit risk participation agreement

15

15

Total fair value of financial assets

$

556,211

$

428,604

Fair value of financial liabilities:

 

  

 

  

Level 2 inputs:

Interest rate swaps

$

6,113

$

3,543

Total fair value of financial liabilities

$

6,113

$

3,543

Financial Instruments Measured at Fair Value on a Non-recurring Basis

A portion of financial instruments are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances. Financial assets measured at fair value on a non-recurring basis during the dates shown below include certain loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral or a discounted cash flow method if not. Prior to foreclosure, estimated fair values for collateral is estimated based on Level 3 inputs based on customized discounting criteria.

The Company’s financial assets measured at fair value on a non-recurring basis are certain individually evaluated loans and as of the dates indicated below were as follows:

June 30, 2022

December 31, 2021

(Dollars in thousands)

Recorded Investment

Specific ACL

Net

Recorded Investment

Specific ACL

Net

Level 3 inputs:

Loans evaluated individually

 

  

Commercial and industrial

$

8,112

$

2,776

$

5,336

$

9,624

$

3,986

$

5,638

Commercial real estate

770

55

715

2,629

609

2,020

Consumer

109

109

125

125

Total

$

8,991

$

2,940

$

6,051

$

12,378

$

4,720

$

7,658

26

Table of Contents

Non-Financial Assets and Non-Financial Liabilities Measured at Fair Value on a Non-recurring Basis

The Company’s non-financial assets measured at fair value on a non-recurring basis for the periods reported are foreclosed assets (upon initial recognition or subsequent impairment). The Company’s other non-financial assets whose fair value may be measured on a non-recurring basis when there is evidence of impairment and may be subject to impairment adjustments include goodwill and intangible assets, among other assets.

The fair value of foreclosed assets may be estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria less estimated selling costs. There were no write-downs of foreclosed assets for fair value remeasurement subsequent to initial foreclosure during the six months ended June 30, 2022 or during 2021. There were no outstanding foreclosed assets at June 30, 2022 or December 31, 2021.

Financial Instruments Reported at Amortized Cost

Fair market values and carrying amounts of financial instruments that are reported at cost as of the dates indicated below were as follows:

June 30, 2022

December 31, 2021

    

    

Carrying

    

Carrying

(Dollars in thousands)

Fair Value

Amount

Fair Value

Amount

Financial assets:

 

  

 

  

  

 

  

Level 1 inputs:

Cash and due from banks

$

483,966

$

483,966

$

950,146

$

950,146

Level 2 inputs:

Bank-owned life insurance

 

73,898

 

73,898

 

73,156

 

73,156

Accrued interest receivable

 

11,468

 

11,468

 

11,616

 

11,616

Servicing asset

 

350

 

350

 

352

 

352

Level 3 inputs:

Loans, including held for sale, net

 

2,903,489

 

3,000,827

 

2,864,663

 

2,836,343

Other investments

 

18,073

 

18,073

 

17,727

 

17,727

Total financial assets

$

3,491,244

$

3,588,582

$

3,917,660

$

3,889,340

Financial liabilities:

 

  

 

  

 

  

 

  

Level 1 inputs:

Noninterest-bearing deposits

$

1,810,275

$

1,810,275

$

1,784,981

$

1,784,981

Level 2 inputs:

Interest-bearing deposits

 

1,741,024

 

1,946,359

 

2,040,794

 

2,046,303

Federal Home Loan Bank advances

50,591

50,000

Accrued interest payable

 

224

 

224

 

201

 

201

Total financial liabilities

$

3,551,523

$

3,756,858

$

3,876,567

$

3,881,485

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value and as such the fair values shown above are not necessarily indicative of the amounts the Company will realize. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

NOTE 14: DERIVATIVE FINANCIAL INSTRUMENTS

The Company has outstanding interest rate swap contracts with certain customers and equal and offsetting interest rate swaps with other financial institutions entered into at the same time. These interest rate swap contracts are not designated as hedging instruments for mitigating interest rate risk. The objective of the transactions is to allow customers to effectively convert a variable rate loan to a fixed rate.

In connection with each swap transaction, the Company agreed to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agreed to pay a third-party financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. Because the Company acts

27

Table of Contents

as an intermediary for its customer, changes in the fair value of the underlying derivative contracts are designed to offset each other and do not significantly impact the Company’s operating results except in certain situations where there is a significant deterioration in the customer’s credit worthiness or that of the counterparties. At June 30, 2022 and December 31, 2021, management determined there was no such deterioration.

At June 30, 2022 and December 31, 2021, the Company had 13 and 19 interest rate swap agreements outstanding with borrowers and financial institutions, respectively. These derivative instruments are not designated as accounting hedges and changes in the net fair value are recognized in other noninterest income. Fair value amounts are included in other assets and other liabilities.

At June 30, 2022 and December 31, 2021, the Company had two and one credit risk participation agreements with another financial institution, respectively, that are associated with interest rate swaps related to loans for which the Company is the lead agent bank and the other financial institution provides credit protection to the Company should the borrower fail to perform under the terms of the interest rate swap agreements. The fair value of the agreements is determined based on the market value of the underlying interest rate swaps adjusted for credit spreads and recovery rates.

Derivative instruments outstanding as of the dates indicated below were as follows:

    

    

    

Weighted

Average

Notional

    

Fair

Maturity

(Dollars in thousands)

Classification

Amounts

Value

Fixed Rate

Floating Rate

(Years)

June 30, 2022

 

  

 

 

  

  

  

Interest rate swaps with financial institutions

Other assets

$

88,449

$

5,827

3.25% - 5.58%

LIBOR 1M + 2.50% - 3.00%

4.83

Interest rate swaps with customers

Other assets

6,725

67

 

5.35%

SOFR CME 1M+ 2.50%

9.90

Interest rate swaps with financial institutions

Other assets

 

5,085

219

 

4.99%

U.S. Prime

5.46

Interest rate swaps with customers

Other liabilities

 

5,085

(219)

 

4.99%

U.S. Prime

5.46

Interest rate swaps with financial institutions

Other liabilities

6,725

(67)

 

5.35%

SOFR CME 1M+ 2.50%

9.90

Interest rate swaps with customers

Other liabilities

88,449

(5,827)

3.25% - 5.58%

LIBOR 1M + 2.50% - 3.00%

4.83

Credit risk participation agreement with financial institution

Other assets

13,298

4

3.50%

LIBOR 1M + 2.50%

7.75

Credit risk participation agreement with financial institution

Other assets

2,522

11

5.35%

SOFR CME 1M+ 2.50%

9.90

Total derivatives

$

127,889

$

15

December 31, 2021

 

  

 

  

 

  

  

 

  

Interest rate swaps with customers

Other assets

$

56,440

$

2,474

 

4.00% - 5.60%

LIBOR 1M + 2.50% - 3.00%

5.10

Interest rate swaps with financial institutions

Other assets

66,650

875

3.25% - 3.50%

LIBOR 1M + 2.50%

5.59

Interest rate swaps with customers

Other assets

 

5,141

194

 

4.99%

U.S. Prime

5.96

Interest rate swaps with financial institutions

Other liabilities

 

5,141

(194)

 

4.99%

U.S. Prime

5.96

Interest rate swaps with financial institutions

Other liabilities

56,440

(2,474)

 

4.00% - 5.60%

LIBOR 1M + 2.50% - 3.00%

5.10

Interest rate swaps with customers

Other liabilities

66,650

(875)

3.25% - 3.50%

LIBOR 1M + 2.50%

5.59

Credit risk participation agreement with financial institution

Other assets

13,563

15

3.50%

LIBOR 1M + 2.50%

8.24

Total derivatives

$

270,025

$

15

28

Table of Contents

NOTE 15: OPERATING LEASES

The Company leases certain office space, stand-alone buildings and land, which are recognized as operating lease right-of-use assets in the consolidated balance sheets and operating lease liabilities in the consolidated balance sheets represent the Company’s liability to make lease payments under these operating leases, on a discounted basis. The Company excludes short-term leases, defined as lease terms of 12 months or less from its operating lease right-of-use assets and operating lease liabilities.

Lease costs for the periods indicated below were as follows:

Six Months Ended June 30,

(Dollars in thousands)

2022

2021

Operating lease cost

$

824

$

970

Short-term lease cost

10

9

Sublease income

(266)

(314)

Total lease cost

$

568

$

665

Other information related to operating leases for the periods indicated below was as follows:

Six Months Ended June 30,

(Dollars in thousands)

2022

2021

Amortization of lease right-to-use assets

$

676

$

771

Accretion of lease liabilities

173

199

Cash paid for amounts included in the measurement of lease liabilities

953

1,055

Weighted-average remaining lease term in years

10.2

10.7

Weighted-average discount rate

2.62%

2.64%

A maturity analysis of operating lease liabilities as of the date indicated below was as follows:

(Dollars in thousands)

June 30, 2022

1 year or less

$

1,780

Over 1 year through 2 years

 

1,919

Over 2 years through 3 years

1,955

Over 3 years through 4 years

1,948

Over 4 years through 5 years

1,840

Thereafter

 

7,295

Total undiscounted lease liability

16,737

Less:

Discount on cash flows

(2,568)

Total operating lease liability

$

14,169

During the six months ended June 30, 2022, the Company terminated a land lease at the request of the lessor. The Company received a payment of $1.5 million from the lessor for the early termination of the lease, which is reflected in other noninterest income in the condensed consolidated income statements.

During the six months ended June 30, 2022, the operating lease right-of-use asset and liabilities were both increased $809,000 due to a lease modification to extend the term of a lease.

29

Table of Contents

NOTE 16: COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

Financial Instruments with Off-Balance-Sheet Risk

The Company enters into commitments to extend credit and standby letters of credit to meet customer financing needs and, in accordance with GAAP, these commitments are not reflected as liabilities in the consolidated balance sheets. Due to the nature of these commitments, the amounts disclosed in the tables below do not necessarily represent future cash requirements.

Commitments to extend credit and standby letters of credit as of the dates indicated below were as follows:

(Dollars in thousands)

June 30, 2022

December 31, 2021

Commitments to extend credit, variable interest rate

$

761,869

$

714,084

Commitments to extend credit, fixed interest rate

 

140,943

 

60,876

Total commitments

$

902,812

$

774,960

Standby letters of credit

$

9,836

$

18,109

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract, generally have fixed expiration dates or other termination clauses and may expire without being fully drawn upon.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to the Company’s customers.

Litigation

The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing the Company, it is the opinion of management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the financial position or results of operations of the Company.

NOTE 17: EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION ARRANGEMENTS

Employee Benefit Plans

The Company maintains a 401(k) employee benefit plan and substantially all employees that complete three months of service may participate. The Company matches a portion of each employee’s contribution and may, at its discretion, make additional contributions. During the six months ended June 30, 2022 and 2021, the Company contributed $1.3 million and $1.2 million to the plan, respectively.

Executive Deferred Compensation Arrangements

The Company established an executive incentive compensation arrangement with several officers of the Bank, in which these officers are eligible for performance-based incentive bonus compensation. As part of this compensation arrangement, the Company contributes one-fourth of the incentive bonus amount into a deferred compensation account. The deferred amounts accrue at a market rate of interest and are payable to the employees upon separation from the Bank provided vesting arrangements have been met. At June 30, 2022 and December 31, 2021, the amount payable, including interest, for this deferred plan was approximately $1.4 million and $1.7 million, respectively, which is included in other liabilities in the condensed consolidated balance sheets.

30

Table of Contents

Salary Continuation Agreements

The Company entered into a salary continuation arrangement in 2008 with the Company’s then President and Chief Executive Officer, or CEO, that calls for payments of $100,000 per year for a period of 10 years commencing at age 65. Payments under the plan began during 2014. The Company’s liability was $106,000 and $153,000 at June 30, 2022 and December 31, 2021, respectively, which is included in other liabilities in the condensed consolidated balance sheets and equals the present value of the benefits expected to be provided.

In October 2017, the Company entered into a salary continuation arrangement with the Company’s President and CEO that calls for payments of $200,000 per year payable for a period of 10 years commencing at age 70. Payments under the plan will begin in 2024. The Company’s liability was $1.0 million and $900,000 at June 30, 2022 and December 31, 2021, respectively, which is included in other liabilities in the condensed consolidated balance sheets. The liability will continue to accrue over the remaining period until payments commence such that the accrued amount at the eligibility date will equal the present value of all the future benefits expected to be paid.

NOTE 18: STOCK-BASED COMPENSATION

The Company acquired a stock option plan which originated under VB Texas, Inc. as a part of a merger of the two companies, or the 2006 Plan. At the merger date, all outstanding options under this plan became fully vested and exercisable. The plan expired in 2016 and no additional options may be granted under its terms. As of June 30, 2022, there were options outstanding to acquire 16,567 shares of the Company’s common stock under the 2006 Plan, all of which will expire in 2022 if not exercised.

In 2014, the Company adopted the 2014 Stock Option Plan, or the 2014 Plan, which was approved by the Company’s shareholders and limits the number of shares that may be optioned to 1,127,200. The 2014 Plan provides that no options may be granted after May 20, 2024. Options granted under the 2014 Plan expire 10 years from the date of grant and become exercisable in installments over a period of one to five years, beginning on the first anniversary of the date of grant. As of June 30, 2022, 963,200 shares were available for future grant. No options have been issued under the 2014 Plan since 2017.

In 2017, the Company adopted the 2017 Omnibus Incentive Plan, or the 2017 Plan. The 2017 Plan authorizes the Company to grant options, performance-based and non-performance based restricted stock awards as well as various other types of stock-based awards and other awards that are not stock-based to eligible employees, consultants and non-employee directors up to an aggregate of 600,000 shares of common stock. As of June 30, 2022, 243,895 shares were available for future grant under the 2017 Plan.

Stock option activity for the periods indicated below was as follows:

Six Months Ended June 30,

2022

2021

Number of

Weighted

Number of

Weighted

Shares

Average

Shares

Average

Underlying

Exercise

Underlying

Exercise

Options

Price

Options

Price

Outstanding at beginning of period

 

191,560

$

17.53

 

201,720

$

17.22

Granted

 

 

Exercised

 

(8,833)

11.32

 

Forfeited/expired

 

(10,160)

11.32

 

Outstanding at end of period

 

172,567

$

18.22

 

201,720

$

17.22

31

Table of Contents

A summary of stock options as of the date indicated below was as follows:

June 30, 2022

Stock Options

Exercisable

Unvested

Outstanding

Number of shares underlying options

 

166,568

5,999

172,567

Weighted-average exercise price per share

 

$

18.12

$

21.00

$

18.22

Aggregate intrinsic value (in thousands)

 

$

1,411

$

34

$

1,445

Weighted-average remaining contractual term (years)

 

3.5

5.1

3.6

The fair value of the Company’s restricted stock awards is estimated based on the market value of the Company’s common stock at the date of grant. Restricted stock shares are considered fully issued at the time of the grant and the grantee becomes the record owner of the restricted stock and has voting, dividend and other shareholder rights. The shares of restricted stock are non-transferable and subject to forfeiture until the restricted stock vests and any dividends with respect to the restricted stock are subject to the same restrictions, including the risk of forfeiture.

Non-performance based restricted stock grants vest over the service period in equal increments over a period of two to five years, beginning on the first anniversary of the date of grant.

The number of shares earned under the Company’s performance-based restricted stock award agreements is based on the achievement of certain branch production goals. Compensation expense for performance-based restricted stock is recognized for the probable award level over the period estimated to achieve the performance conditions and other goals, on a straight-line basis. If the probable award level and/or the period estimated to be achieved change, compensation expense will be adjusted via a cumulative catch-up adjustment to reflect these changes. The performance conditions and goals must be achieved within five years or the awards expire. The number of performance-based shares granted presented in the table.

Restricted stock activity for the periods indicated below was as follows:

Non-performance Based

Performance-based

Weighted

Weighted

Average

Average

Number of

Grant Date

Number of

Grant Date

Shares

Fair Value

Shares

Fair Value

Outstanding at December 31, 2020

129,667

$

28.22

2,250

$

34.40

Granted

 

33,285

26.32

 

Vested

 

(21,749)

30.71

 

Forfeited

 

(493)

28.80

 

Outstanding at June 30, 2021

140,710

27.39

2,250

34.40

Outstanding at December 31, 2021

83,563

27.85

2,250

34.40

Granted

 

38,457

29.42

 

Vested

 

(26,622)

29.80

 

Forfeited

 

(1,843)

33.30

 

Outstanding at June 30, 2022

 

93,555

27.84

 

2,250

34.40

A summary of restricted stock as of the date indicated below was as follows:

June 30, 2022

Restricted Stock

Non-performance Based

Performance-based

Number of shares underlying restricted stock

 

93,555

2,250

Weighted-average grant date fair value per share

 

$

27.84

$

34.40

Aggregate fair value (in thousands)

 

$

2,488

$

60

Weighted-average remaining vesting period (years)

 

1.4

1.3

The Company’s stock compensation plans allow employees to elect to have shares withheld to satisfy their tax liabilities related to options exercised or restricted stock vested or to pay the exercise price of the options. The shares of

32

Table of Contents

stock subject to options exercised, restricted stock vested, shares withheld and shares issued for the periods indicated below were as follows:

Exercised/Vested

Shares Withheld

Shares Issued

Six Months Ended June 30, 2022

Non-performance based restricted stock

26,622

(4,509)

22,113

Six Months Ended June 30, 2021

Non-performance based restricted stock

 

21,749

(3,091)

 

18,658

For the six months ended June 30, 2022 and 2021, stock compensation expense was $1.0 million and $1.1 million, respectively, and for the three months ended June 30, 2022 and 2021, stock compensation expense was $539,000 and $574,000, respectively. As of June 30, 2022, there was approximately $1.5 million of total unrecognized compensation expense related to the unvested stock options, non-performance based restricted stock and performance-based restricted stock, which is expected to be recognized in the Company’s consolidated statements of income over a weighted-average period of 1.4 years.

NOTE 19: REGULATORY MATTERS

Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

The Company and the Bank’s Common Equity Tier 1 capital includes common stock and related capital surplus, net of treasury stock, and retained earnings. In connection with the adoption of the Basel III Capital Rules, the Company and the Bank elected to opt-out of the requirement to include most components of accumulated other comprehensive income in Common Equity Tier 1 capital. Common Equity Tier 1 capital for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities.

The Basel III Capital Rules require the Company and the Bank to maintain: (i) a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital ratio, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0%); (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average quarterly assets.

The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company and the Bank. The capital conservation buffer is designed to absorb losses during periods of economic stress and, as detailed above, effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum (4.5% plus the capital conservation buffer and, if applicable, the countercyclical capital buffer) will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

In November 2019, the federal bank regulatory agencies published a final rule, the Community Bank Leverage Ratio Framework, or the Framework, to simplify capital calculations for community banks. The Framework provides for a simple measure of capital adequacy for certain community banking organizations. The Framework is optional and is designed to reduce burden by removing requirements for calculating and reporting risk-based capital ratios. Depository institutions and depository institution holding companies that have less than $10.0 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio of greater than 9.0%, are considered qualifying community banking organizations and are eligible to opt into the Framework. A qualifying community banking organization that elects to use the Framework and that maintains a Tier 1 capital-to-adjusted total assets ratio, or leverage capital ratio, of greater

33

Table of Contents

than 9.0% is considered to have satisfied the generally applicable risk-based and leverage capital requirements under the Basel III Capital Rules and, if applicable, is considered to have met the “well capitalized” ratio requirements for purposes of its primary federal regulator’s prompt corrective action rules. The final rule became effective January 1, 2020, and organizations that opt into the Framework and meet the criteria established by the rule can use the Framework for regulatory reports for the year ended December 31, 2020. In April 2020, the federal bank regulatory agencies announced two interim final rules to provide relief associated with Section 4012 of the Coronavirus Aid Relief and Economic Security Act, or CARES Act. For institutions that elect the Framework, the interim rules temporarily lowered the leverage ratio requirement to 8.0% for the second quarter of 2020 through the end of calendar year 2020 and to 8.5% for the 2021 calendar year and greater than 9.0% thereafter. The Company determined not to opt into the Framework and will continue to compute regulatory capital ratios based on the Basel III Capital Rules discussed above.

In September 2020, the federal bank regulatory agencies finalized an interim final rule that allows banking organizations to mitigate the effects of CECL on their regulatory capital computations. The rule permitted banking organizations that were required to adopt CECL for purposes of GAAP (as in effect January 1, 2021) for a fiscal year beginning during the calendar year 2020, the option to delay for up to two years an estimate of CECL’s effect on regulatory capital, followed by a three-year transition period (i.e., a transition period of five years in total). The Company determined not to use the transition provision and has reported the full effect of CECL upon adoption and for each reporting period thereafter in its regulatory capital calculation and ratios.

The Company is subject to the regulatory capital requirements administered by the Board of Governors of the Federal Reserve System and, for the Bank, those administered by the Office of Comptroller of Currency, or OCC. Regulatory authorities can initiate certain mandatory actions if the Company or the Bank fail to meet the minimum capital requirements, which could have a direct material effect on the Company’s financial statements. Management believes, as of June 30, 2022 and December 31, 2021, that the Company and the Bank met all capital adequacy requirements to which they were subject.

On June 18, 2021, the Bank and the OCC entered into a formal agreement, or the Formal Agreement, with regard to Bank Secrecy Act, or BSA, and anti-money laundering, or AML, compliance matters. On September 7, 2021, the OCC terminated the Formal Agreement, dated June 18, 2021 between the Bank and the OCC relating to the Bank’s BSA/AML compliance program.

To resolve the BSA/AML compliance matters, on December 16, 2021, the Bank, entered into an OCC Consent Order. Under the OCC Consent Order, the Bank paid a civil money penalty of $1.0 million.

 

On December 15, 2021, the Bank entered into a FinCEN Consent Order. Under the terms of the FinCEN Consent Order, the Bank paid a civil money penalty of $8.0 million; provided, however, that FinCEN agreed to credit the Bank the $1.0 million civil money penalty imposed by the OCC described above. As a result, the Bank paid an aggregate sum of $8.0 million under the OCC Consent Order and the FinCEN Consent Order. The OCC Consent Order and the FinCEN Consent Order each settled the civil money proceedings against the Bank initiated by the OCC and FinCEN.

34

Table of Contents

At June 30, 2022 and December 31, 2021, the Company and the Bank were “well capitalized” based on the ratios presented below. Actual and required capital ratios for the Company and the Bank were as follows for the dates presented:

Minimum

Required to be

Capital Required

Considered Well

Actual

Basel III

Capitalized

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

June 30, 2022

 

  

 

  

  

 

  

  

 

  

Common Equity Tier 1 to Risk-Weighted Assets:

 

  

 

  

  

 

  

  

 

  

Consolidated

$ 489,832

14.49%

$ 236,705

7.00%

N/A

 

N/A

Bank Only

$ 465,539

13.77%

$ 236,663

7.00%

$ 219,759

 

6.50%

Tier 1 Capital to Risk-Weighted Assets:

  

  

 

  

Consolidated

$ 489,832

14.49%

$ 287,428

8.50%

N/A

 

N/A

Bank Only

$ 465,539

13.77%

$ 287,377

8.50%

$ 270,472

 

8.00%

Total Capital to Risk-Weighted Assets:

  

 

  

Consolidated

$ 525,247

15.53%

$ 355,058

10.50%

N/A

 

N/A

Bank Only

$ 500,954

14.82%

$ 354,995

10.50%

$ 338,090

 

10.00%

Tier 1 Leverage Capital to Average Assets:

  

 

  

Consolidated

$ 489,832

11.48%

$ 170,675

4.00%

N/A

 

N/A

Bank Only

$ 465,539

10.91%

$ 170,628

4.00%

$ 213,285

 

5.00%

December 31, 2021

 

  

 

  

  

 

  

  

 

  

Common Equity Tier 1 to Risk-Weighted Assets:

 

  

 

  

  

 

  

  

 

  

Consolidated

$ 475,154

15.31%

$ 217,300

7.00%

N/A

 

N/A

Bank Only

$ 447,819

14.43%

$ 217,270

7.00%

$ 201,757

 

6.50%

Tier 1 Capital to Risk-Weighted Assets:

  

  

 

  

Consolidated

$ 475,154

15.31%

$ 263,864

8.50%

N/A

 

N/A

Bank Only

$ 447,819

14.43%

$ 263,836

8.50%

$ 248,316

 

8.00%

Total Capital to Risk-Weighted Assets:

  

 

  

Consolidated

$ 509,766

16.42%

$ 325,950

10.50%

N/A

 

N/A

Bank Only

$ 482,431

15.54%

$ 325,915

10.50%

$ 310,395

 

10.00%

Tier 1 Leverage Capital to Average Assets:

  

 

  

Consolidated

$ 475,154

11.22%

$ 169,470

4.00%

N/A

 

N/A

Bank Only

$ 447,819

10.58%

$ 169,381

4.00%

$ 211,726

 

5.00%

Dividend Restrictions

In the ordinary course of business, the Company may be dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years.

35

Table of Contents

NOTE 20: INCOME TAXES

The provision for income tax expense and effective tax rates for the periods indicated below were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

2022

2021

    

2022

2021

Income tax expense

$ 2,827

$ 2,692

$ 5,104

$ 5,177

Effective tax rate

19.45%

18.70%

18.62%

19.25%

The differences between the federal statutory rate of 21% and the effective tax rates presented in the table above were largely attributable to permanent differences primarily related to tax exempt interest income, bank-owned life insurance related earnings and merger-related costs.

NOTE 21: EARNINGS PER SHARE

The computation of basic and diluted earnings per share for the periods indicated below was as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands, except per share data)

2022

2021

2022

2021

Net income for common shareholders

$

11,707

$

11,703

$

22,302

$

21,722

Weighted-average shares (thousands)

Basic weighted-average shares outstanding

 

24,493

24,447

 

24,495

24,477

Dilutive effect of outstanding stock options and unvested restricted stock awards

100

124

118

114

Diluted weighted-average shares outstanding

 

24,593

24,571

 

24,613

24,591

Earnings per share:

Basic

$

0.48

$

0.48

$

0.91

$

0.89

Diluted

$

0.48

$

0.48

$

0.91

$

0.88

For the six months ended June 30, 2022 and 2021, the Company excluded the impact of 394 and 1,800 shares of unvested restricted stock, respectively, from diluted weighted-average shares as they were anti-dilutive. The Company also excluded the impact of 2,250 shares of performance based restricted stock awards for the three and six months ended June 30, 2022 and 2021 as they are contingently issuable and the performance conditions for these awards have not been met.

36

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements reflect the Company’s current views with respect to, among other things, future events and the Company’s financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. Accordingly, the Company cautions that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause the Company’s actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the risks described in “Part I— Item 1A.—Risk Factors” in the Company’s Annual Report on Form 10-K, this Quarterly Report on Form 10-Q and the following:

natural disasters and adverse weather on the Company’s market area, acts of terrorism, pandemics, an outbreak of hostilities, such as the conflict in Ukraine, or other international or domestic calamities and other matters beyond the Company’s control;
the Company’s ability to manage the economic risks related to the ongoing impact of the COVID-19 pandemic (including risks related to its customers’ credit quality, deferrals and modifications to loans);
the geographic concentration of the Company’s markets in Houston and Beaumont, Texas;
the Company’s ability to manage changes and the continued health or availability of management personnel;
the amount of nonperforming and classified assets that the Company holds and the time and effort necessary to resolve nonperforming assets;
deterioration of asset quality;
interest rate risk associated with the Company’s business;
national business and economic conditions in general, in the financial services industry and within the Company’s primary markets;
sustained instability of the oil and gas industry in general and within Texas;
the composition of the Company’s loan portfolio, including the identity of the Company’s borrowers and the concentration of loans in specialized industries;
changes in the value of collateral securing the Company’s loans;
the Company’s ability to maintain important deposit customer relationships and its reputation;
the Company’s ability to maintain effective internal control over financial reporting;
volatility and direction of market interest rates;
liquidity risks associated with the Company’s business;
systems failures, interruptions or breaches involving the Company’s information technology and telecommunications systems or third- or fourth-party servicers;
the failure of certain third- or fourth-party vendors to perform;
the institution and outcome of litigation and other legal proceedings against the Company or to which it may become subject;
the operational risks associated with the Company’s business;
the costs, effects and results of regulatory examinations, investigations, or reviews or the ability to obtain required regulatory approvals;

37

Table of Contents

changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting, tax, trade, monetary and fiscal matters;
further government intervention in the U.S. financial system that may impact how the Company achieves its performance goals;
the possible substantial costs related to the pending merger and integration;
the risk that the cost savings and any revenue synergies from the pending merger may not be fully realized or may take longer than anticipated to be realized;
the possibility that the pending merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;
the ability to retain personnel of the Company or Allegiance Bancshares, Inc., or Allegiance, after the pending merger is completed;
the ability by each of Allegiance and the Company to obtain required governmental approvals of the pending merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction);
the occurrence of any event, change or other circumstances that could give rise to the right of us and/or Allegiance to terminate the merger agreement with respect to the pending merger;
disruption to the parties’ businesses as a result of the announcement and pendency of the pending merger;
the risks related to the Company’s assumption of certain of Allegiance’s outstanding debt obligations and the combined company’s level of indebtedness following the completion of the merger;
the dilution caused by the Company’s issuance of additional shares of its common stock in the merger;
the failure of the closing conditions in the merger agreement to be satisfied, or any unexpected delay in closing the pending merger;
reputational risk and the reaction of each company’s customers, suppliers, employees or other business partners to the pending merger;
and other risks, uncertainties, and factors that are discussed from time to time in the Company’s reports and documents filed with the SEC.  

Pending Merger

On November 8, 2021, Allegiance and the Company jointly announced that they entered into a definitive merger agreement pursuant to which the companies will combine in an all-stock merger of equals. Under the terms of the definitive merger agreement, Allegiance shareholders will receive 1.4184 shares of the Company’s common stock for each share of Allegiance common stock they own. Based on the number of outstanding shares of Allegiance and the Company as of November 5, 2021, Allegiance shareholders will own approximately 54% and the Company’s shareholders will own approximately 46% of the combined company. Both companies have received requisite shareholder approval of the merger agreement. The companies have also received regulatory approvals from the Federal Deposit Insurance Corporation and the Texas Department of Banking. The merger remains subject to the receipt of regulatory approval from the Board of Governors of the Federal Reserve System. Subject to satisfaction of the closing conditions, the parties anticipate closing in the third quarter of 2022.

There are or will be important factors that could cause the actual results of the merger to differ materially from those indicated in these forward-looking statements, including, but not limited to, the risks described in “Part I.—Item 1A. —Risk Factors” in the Company’s Annual Report on Form 10-K.

the risk that the cost savings and any revenue synergies from the merger may not be fully realized or may take longer than anticipated to be realized;
disruption to the parties’ businesses as a result of the announcement and pendency of the merger;
the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement;
the risk that the integration of each party’s operations will be materially delayed or will be more costly or difficult than expected or that the parties are otherwise unable to successfully integrate each party’s businesses into the other’s businesses;

38

Table of Contents

the amount of the costs, fees, expenses and charges related to the merger; the ability by each of Allegiance and the Company to obtain required governmental approvals of the merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction);
reputational risk and the reaction of each company’s customers, suppliers, employees or other business partners to the merger; the failure of the closing conditions in the merger agreement to be satisfied, or any unexpected delay in closing the merger;
the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;
the dilution caused by the Company’s issuance of additional shares of its common stock in the merger; general competitive, economic, political and market conditions;
and other factors that may affect future results of the Company and Allegiance, including changes in asset quality and credit risk;
the inability to sustain revenue and earnings growth;
changes in interest rates and capital markets;
inflation; customer borrowing, repayment, investment and deposit practices;
the impact, extent and timing of technological changes;
capital management activities; and other actions of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and OCC and legislative and regulatory actions and reforms;
and other risks, uncertainties, and factors that are discussed from time to time in the Company’s reports and documents filed with the SEC.  

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. If one or more events related to these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, actual results may differ materially from what is anticipated. Undue reliance should not be placed on any such forward-looking statements. Any forward-looking statement speaks only as of the date made, and the Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible to predict which will arise. In addition, the Company cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Overview

The Company operates through one segment. The Company’s primary source of funds is deposits and its primary use of funds is loans. Most of the Company’s revenue is generated from interest on loans and investments. The Company incurs interest expense on deposits and other borrowed funds as well as noninterest expense, such as salaries and employee benefits and occupancy expenses.

The Company’s operating results depend primarily on net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in market interest rates and the interest rates earned on interest-earning assets or paid on interest-bearing liabilities, as well as in the volume and types of interest-earning assets and interest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets.

Periodic changes in the volume and types of loans in the Company’s loan portfolio are affected by, among other factors, economic and competitive conditions in Texas, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within the Company’s target markets and throughout the state of Texas. The Company maintains diversity in its loan portfolio as a means of managing risk associated with fluctuations in economic conditions. The Company’s focus on lending to small to medium-sized businesses and professionals in its market areas has resulted in a diverse loan portfolio comprised primarily of core relationships. The

39

Table of Contents

Company carefully monitors exposure to certain asset classes to minimize the impact of a downturn in the value of such assets.

The Company seeks to remain competitive with respect to interest rates on loans and deposits, as well as prices on fee-based services, which are typically significant competitive factors within the banking and financial services industry. Many of the Company’s competitors are much larger financial institutions that have greater financial resources and compete aggressively for market share. Through the Company’s relationship-driven, community banking strategy, a significant portion of its growth has been through referral business from its existing customers and professionals in the Company’s markets including attorneys, accountants and other professional service providers.  

 

Uncertain Economic Outlook

Although national and local economies and economic forecasts improved during 2021 and 2022, geopolitical instabilities, inflation, rising interest rates, supply disruptions and other uncertainties continue and these factors are considered in the forecasts and qualitative factors used to determine the Company’s ACL. If the national and/or local economies and economic forecasts and loan performance indicators worsen in the future, increases in the ACL through additional provisions for credit losses may occur which would negatively impact net income. The future impact of these items is uncertain but could materially affect the Company’s future financial and operational results. See “Part I—Item 1A.—Risk Factors” in the Company’s Annual Report on Form 10-K.

The table below shows the trend of the risk grades of the Company’s loan portfolio, past due loans, loans individually evaluated and nonperforming loans, or loan performance indicators as of the dates indicated.

June 30, 

March 31, 

December 31,

September 30,

June 30,

(Dollars in thousands)

2022

2021

2021

2021

2021

Risk grades:

Pass

$

2,972,739

$

2,804,237

$

2,783,385

$

2,526,395

$

2,645,811

Special mention

 

468

 

4,281

 

12,807

 

 

4,661

 

 

14,276

Substandard

 

68,768

 

80,460

 

80,235

 

 

86,501

 

 

80,535

Total gross loans

$

3,041,975

$

2,888,978

$

2,876,427

 

$

2,617,557

 

$

2,740,622

Past due loans:

30 to 59 days past due

$

537

$

13,603

$

905

 

$

2,755

 

$

39

60 to 89 days past due

 

4,611

 

2,032

 

34

 

 

143

 

 

90 days or greater past due

10,276

140

197

104

217

Total past due loans

$

15,424

$

15,775

$

1,136

 

$

3,002

 

$

256

Loans individually evaluated:

Accruing troubled debt restructurings

$

26,117

$

28,428

$

30,709

 

$

31,656

 

$

31,789

Non-accrual troubled debt restructurings

 

22,761

 

21,720

 

20,019

 

 

17,834

 

 

18,196

Total troubled debt restructurings

48,878

50,148

50,728

49,490

49,985

Other non-accrual

5,512

363

2,549

2,751

2,777

Other accruing

1,152

3,494

5,995

5,260

836

Total loans individually evaluated

$

55,542

$

54,005

$

59,272

 

$

57,501

 

$

53,598

Nonperforming assets:

Nonaccrual loans

$

28,273

$

22,083

$

22,568

$

20,585

$

20,973

Accruing loans 90 or more days past due

Total nonperforming loans

28,273

22,083

22,568

20,585

20,973

Foreclosed assets

Total nonperforming assets

$

28,273

$

22,083

$

22,568

$

20,585

$

20,973

40

Table of Contents

Results of Operations

The increase in net income during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was primarily due to an increase in net interest income and noninterest income, partially offset by an increase in the provision (recapture) for credit losses. The increase in net income during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, was primarily due to an increase in net interest income and a decrease in noninterest expense, partially offset by an increase in the provision (recapture) for credit losses. See further analysis of the material fluctuations in the related discussions that follow.

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

    

2022

    

2021

Increase (Decrease)

2022

2021

Increase (Decrease)

Interest income

$

36,101

$

32,506

$

3,595

11.1%

$

70,116

$

67,167

$

2,949

4.4%

Interest expense

1,229

1,488

(259)

(17.4%)

2,614

3,059

(445)

(14.5%)

Net interest income

34,872

31,018

3,854

12.4%

67,502

64,108

3,394

5.3%

Provision (recapture) for credit losses

126

(5,083)

5,209

(102.5%)

561

(4,671)

5,232

(112.0%)

Noninterest income

3,546

3,491

55

1.6%

8,875

6,602

2,273

34.4%

Noninterest expense

23,758

25,197

(1,439)

(5.7%)

48,410

48,482

(72)

(0.1%)

Income before income taxes

14,534

14,395

139

1.0%

27,406

26,899

507

1.9%

Income tax expense

2,827

2,692

135

5.0%

5,104

5,177

(73)

(1.4%)

Net income

$

11,707

$

11,703

$

4

0.0%

$

22,302

$

21,722

$

580

2.7%

Earnings per share - basic

$

0.48

$

0.48

$

0.91

$

0.89

Earnings per share - diluted

0.48

0.48

0.91

0.88

Dividends per share

0.13

0.13

0.26

0.26

Net Interest Income for the Six Months Ended June 30, 2022, Compared to the Six Months Ended June 30, 2021

Net interest income increased $3.4 million during the six months ended June 30, 2022, compared to the six months ended June 30, 2021, primarily due higher average rates on interest-bearing deposits at other financial institutions and securities, higher average securities and loans and lower rates on interest-bearing deposits, partially offset by lower rates on loans.

The yield on interest-earning assets was 3.44% for the six months ended June 30, 2022, compared to 3.62% for the six months ended June 30, 2021. The cost of interest-bearing liabilities was 0.26% for the six months ended June 30, 2022 and 0.33% for the six months ended June 30, 2021. Yields on interest-earning assets decreased and the costs of interest-bearing liabilities remained at about the same level, which caused compression of the Company’s net interest margin on a tax equivalent basis to 3.35% for the six months ended June 30, 2022, compared to 3.49% for the six months ended June 30, 2021.

41

Table of Contents

The following table presents for the periods indicated, average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest income or interest expense and the average yield or rate for the periods indicated.

Six Months Ended June 30,

2022

2021

Average

Interest

Average

Average

Interest

Average

Outstanding

Earned/

Yield/

Outstanding

Earned/

Yield/

(Dollars in thousands)

Balance

Interest Paid

Rate(1)

Balance

Interest Paid

Rate(1)

Assets

Interest-earning assets:

 

 

  

 

  

  

 

  

 

  

Total loans(1)

$

2,892,079

$

62,989

 

4.39%

$

2,868,463

$

63,958

 

4.50%

Securities

 

530,259

 

5,229

 

1.99%

 

281,196

2,505

 

1.80%

Interest-bearing deposits at other financial institutions

 

680,477

 

1,586

 

0.47%

 

573,433

400

 

0.14%

Equity investments

 

13,383

 

312

 

4.70%

 

15,346

304

 

3.99%

Total interest-earning assets

 

4,116,198

$

70,116

 

3.44%

 

3,738,438

$

67,167

 

3.62%

Allowance for credit losses for loans

 

(31,340)

 

  

 

  

 

(40,941)

 

  

 

  

Noninterest-earning assets

 

311,482

 

  

 

  

 

318,520

 

  

 

  

Total assets

$

4,396,340

 

  

 

  

$

4,016,017

 

  

 

  

Liabilities and Shareholders’ Equity

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits

$

1,979,578

$

2,342

 

0.24%

$

1,821,098

$

2,617

 

0.29%

Federal Home Loan Bank advances

 

27,624

 

272

 

1.99%

 

50,000

 

442

 

1.78%

Total interest-bearing liabilities

 

2,007,202

$

2,614

 

0.26%

 

1,871,098

$

3,059

 

0.33%

Noninterest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Noninterest-bearing deposits

 

1,794,239

 

  

 

  

 

1,545,242

 

  

 

  

Other liabilities

 

46,406

 

  

 

  

 

48,503

 

  

 

  

Total noninterest-bearing liabilities

 

1,840,645

 

  

 

  

 

1,593,745

 

  

 

  

Shareholders’ equity

 

548,493

 

  

 

  

 

551,174

 

  

 

  

Total liabilities and shareholders’ equity

$

4,396,340

 

  

 

  

$

4,016,017

 

  

 

  

Net interest income

 

  

$

67,502

 

  

 

  

$

64,108

 

  

Net interest spread(3)

 

  

 

  

 

3.18%

 

  

 

  

 

3.29%

Net interest margin(4)

 

  

 

  

 

3.31%

 

  

 

  

 

3.46%

Net interest margin - tax equivalent(5)

 

  

 

  

 

3.35%

 

  

 

  

 

3.49%

(1)Annualized.
(2)Includes average outstanding balances related to loans held for sale.
(3)Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(4)Net interest margin is equal to net interest income divided by average interest-earning assets.
(5)Tax equivalent adjustments of $941,000 and $621,000 for the six months ended June 30, 2022 and 2021, respectively, were computed using a federal income tax rate of 21%.

42

Table of Contents

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

Six Months Ended June 30, 2022,

Compared to Six Months Ended June 30, 2021

    

Increase (Decrease) due to

(Dollars in thousands)

Rate

Volume

Total 

Interest-earning assets:

Total loans

$

(1,496)

$

527

$

(969)

Securities

 

501

 

2,223

 

2,724

Interest-bearing deposits at other financial institutions

 

1,112

 

74

 

1,186

Equity investments

 

47

 

(39)

 

8

Total increase in interest income

164

2,785

2,949

Interest-bearing liabilities:

 

  

 

  

 

  

Interest-bearing deposits

(503)

228

(275)

Federal Home Loan Bank advances

 

28

 

(198)

 

(170)

Total increase (decrease) in interest expense

(475)

30

(445)

Increase in net interest income

$

639

$

2,755

$

3,394

Net Interest Income for the Three Months Ended June 30, 2022, Compared to the Three Months Ended June 30, 2021

Net interest income increased $3.9 million during the three months ended June 30, 2022, compared to the three months ended June 30, 2021, primarily due to higher rates on interest-earning assets, higher average loans and securities, lower rates on deposits and lower average Federal Home Loan Bank advances.

The yield on interest-earning assets was 3.56% for the three months ended June 30, 2022, compared to 3.41% for the three months ended June 30, 2021. The cost of interest-bearing liabilities was 0.25% for the three months ended June 30, 2022 and 0.32% for the three months ended June 30, 2021. The Company’s net interest margin on a tax equivalent basis was 3.49% for the three months ended June 30, 2022, compared to 3.29% for the three months ended June 30, 2021.

43

Table of Contents

The following table presents for the periods indicated, average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest income or interest expense and the average yield or rate for the periods indicated.

Three Months Ended June 30,

2022

2021

Average

Interest

Average

Average

Interest

Average

Outstanding

Earned/

Yield/

Outstanding

Earned/

Yield/

(Dollars in thousands)

Balance

Interest Paid

Rate(1)

Balance

Interest Paid

Rate(1)

Assets

Interest-earning assets:

 

  

 

  

 

  

  

 

  

 

  

Total loans(2)

$

2,897,335

$

31,768

 

4.40%

$

2,835,995

$

30,793

 

4.36%

Securities

 

562,518

 

2,937

 

2.09%

 

302,808

 

1,332

 

1.76%

Interest-bearing deposits at other financial institutions

 

593,255

 

1,238

 

0.84%

 

670,508

 

223

 

0.13%

Equity investments

 

13,386

 

158

 

4.73%

 

15,338

 

158

 

4.13%

Total interest-earning assets

 

4,066,494

$

36,101

 

3.56%

 

3,824,649

$

32,506

 

3.41%

Allowance for credit losses for loans

 

(31,081)

 

  

 

  

 

(40,806)

 

  

 

  

Noninterest-earning assets

 

315,133

 

  

 

  

 

317,115

 

  

 

  

Total assets

$

4,350,546

 

  

 

  

$

4,100,958

 

  

 

  

Liabilities and Shareholders’ Equity

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits

$

1,939,990

$

1,178

 

0.24%

$

1,839,812

$

1,267

 

0.28%

Federal Home Loan Bank advances

 

5,495

 

51

 

3.72%

 

50,000

 

221

 

1.77%

Total interest-bearing liabilities

 

1,945,485

$

1,229

 

0.25%

 

1,889,812

$

1,488

 

0.32%

Noninterest-bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

Noninterest-bearing deposits

 

1,825,400

 

  

 

  

 

1,611,565

 

  

 

  

Other liabilities

 

42,861

 

  

 

  

 

46,774

 

  

 

  

Total noninterest-bearing liabilities

 

1,868,261

 

  

 

  

 

1,658,339

 

  

 

  

Shareholders’ equity

 

536,800

 

  

 

  

 

552,807

 

  

 

  

Total liabilities and shareholders’ equity

$

4,350,546

 

  

 

  

$

4,100,958

 

  

 

  

Net interest income

 

  

$

34,872

 

  

 

  

$

31,018

 

  

Net interest spread(3)

 

  

 

  

 

3.31%

 

  

 

  

 

3.09%

Net interest margin(4)

 

  

 

  

 

3.44%

 

  

 

  

 

3.25%

Net interest margin - tax equivalent(5)

 

  

 

  

 

3.49%

 

  

 

  

 

3.29%

(1)Annualized.
(2)Includes average outstanding balances related to loans held for sale.
(3)Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(4)Net interest margin is equal to net interest income divided by average interest-earning assets.
(5)Tax equivalent adjustments of $478,000 and $321,000 for the three months ended June 30, 2022 and 2021, respectively, were computed using a federal income tax rate of 21%.

44

Table of Contents

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

Three Months Ended June 30, 2022,

Compared to Three Months Ended June 30, 2021

    

Increase (Decrease) due to

(Dollars in thousands)

Rate

Volume

Total 

Interest-earning assets:

Total loans

$

308

$

667

$

975

Securities

 

465

 

1,140

 

1,605

Interest-bearing deposits at other financial institutions

 

1,040

 

(25)

 

1,015

Equity investments

 

20

 

(20)

 

Total increase in interest income

1,833

1,762

3,595

Interest-bearing liabilities:

 

  

 

  

 

  

Interest-bearing deposits

(159)

70

(89)

Federal Home Loan Bank advances

 

26

(196)

 

(170)

Total decrease in interest expense

(133)

(126)

(259)

Increase in net interest income

$

1,966

$

1,888

$

3,854

Provision for Credit Losses

The provision for credit losses was $126,000 and $561,000 for the three and six months ended June 30, 2022, respectively, compared to a recapture of $5.1 million and $4.7 million for the three and six months ended June 30, 2021, respectively.

The provision for credit losses for the three months and six months ended June 30, 2022 was comprised of a $479,000 and $499,000 provision for credit losses for loans, respectively, due to increases in the loan portfolio and a $353,000 recapture and a $62,000 provision for credit losses, respectively, due to fluctuations in available unfunded commitments.

The recapture of credit losses for the three and six months ended June 30, 2021 were the result of certain qualitative factor adjustments made on the ACL. Due to improvements in the national economy, economic forecasts and improved loan quality during those periods, the Company adjusted its economic forecasts and certain loan quality factors.

Noninterest Income

The following table presents components of noninterest income for the three and six months ended June 30, 2022 and 2021 and the period-over-period changes in the categories of noninterest income:

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

2022

2021

Increase (Decrease)

2022

2021

Increase (Decrease)

Deposit account service charges

$

1,386

$

1,167

$

219

 

18.8%

$

2,756

$

2,360

$

396

 

16.8%

Card interchange fees

 

1,135

 

1,095

 

40

 

3.7%

 

2,172

 

2,071

 

101

 

4.9%

Earnings on bank-owned life insurance

 

371

 

390

 

(19)

 

(4.9%)

 

742

 

780

 

(38)

 

(4.9%)

Net gain on sales of assets

 

58

 

366

 

(308)

 

(84.2%)

 

588

 

558

 

30

 

5.4%

Other

 

596

 

473

 

123

 

26.0%

 

2,617

 

833

 

1,784

 

214.2%

Total noninterest income

$

3,546

$

3,491

$

55

 

1.6%

$

8,875

$

6,602

$

2,273

 

34.4%

The increase in noninterest income of $2.3 million during the six months ended June 30, 2022,  compared to the six months ended June 30, 2021, was primarily due to payments totaling $1.5 million recognized for early termination of a land lease included in other noninterest income and a gain of $1.2 million for sales of assets underlying a portion of the Company’s equity investments, partially offset by a loss of $1.2 million included in net gain on sale of assets for disposals

45

Table of Contents

of buildings and improvements and furniture and equipment for the land lease that was terminated early. See “Part I—Item 1.—Financial Statements—Note 3”.

Noninterest income was $3.5 million for both the second quarter of 2022 and 2021. Deposit account service charge income was $219,000 higher and net gains on sales of assets were $308,000 lower in the second quarter of 2022, compared to the second quarter of 2021.

Noninterest Expense

Generally, noninterest expense is composed of employee expenses and costs associated with operating facilities, obtaining and retaining customer relationships and providing bank services. See further analysis of these changes in the related discussions that follow.

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

2022

2021

Increase (Decrease)

2022

2021

Increase (Decrease)

Salaries and employee benefits

$

14,698

$

14,734

$

(36)

 

(0.2%)

$

29,952

$

28,922

$

1,030

 

3.6%

Occupancy expense

2,396

2,597

(201)

 

(7.7%)

4,767

5,118

(351)

 

(6.9%)

Professional and director fees

1,142

2,441

(1,299)

 

(53.2%)

2,021

4,144

(2,123)

 

(51.2%)

Data processing and software

1,458

1,661

(203)

 

(12.2%)

3,221

3,237

(16)

 

(0.5%)

Regulatory fees

803

501

302

 

60.3%

1,417

1,057

360

 

34.1%

Advertising, marketing and business development

366

510

(144)

 

(28.2%)

615

795

(180)

 

(22.6%)

Telephone and communications

349

550

(201)

 

(36.5%)

803

1,013

(210)

 

(20.7%)

Security and protection expense

170

537

(367)

 

(68.3%)

494

927

(433)

 

(46.7%)

Amortization of intangibles

172

186

(14)

 

(7.5%)

353

377

(24)

 

(6.4%)

Other expenses

2,204

1,480

724

 

48.9%

4,767

2,892

1,875

 

64.8%

Total noninterest expense

$

23,758

$

25,197

$

(1,439)

 

(5.7%)

$

48,410

$

48,482

$

(72)

 

(0.1%)

Noninterest expense decreased $1.4 million and $72,000 for the three and six months ended June 30, 2022, respectively, compared to the three and six months ended June 30, 2021.

The decrease in noninterest expense for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was primarily due to a $2.1 million decrease in professional and director fees, primarily related to BSA/AML compliance matters and legal fees, partially offset by higher salaries and employee benefits, primarily due to higher health insurance expense and $1.8 million of costs related to the pending merger with Allegiance.

The decrease in noninterest expense for the second quarter of 2022, compared to the second quarter of 2021, was primarily due to a $1.3 million decrease in professional and director fees, primarily related to BSA/AML compliance matters and decrease in legal fees, partially offset by $1.0 million of costs related to the pending merger with Allegiance.

Income Tax Expense

The amount of income tax expense is impacted by the amounts of pre-tax income, tax-exempt income and other nondeductible expenses. Income tax expense and effective tax rates for the periods indicated below were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

2022

2021

    

2022

2021

Income tax expense

$ 2,827

$ 2,692

$ 5,104

$ 5,177

Effective tax rate

19.45%

18.70%

18.62%

19.25%

The differences between the federal statutory rate of 21% and the effective tax rates presented in the table above were primarily related to tax exempt interest income, bank-owned life insurance and merger-related costs.

46

Table of Contents

Financial Condition

Total assets were $4.3 billion as of June 30, 2022, compared to $4.5 billion as of December 31, 2021. The decrease of $163.7 million, or 3.6%, was primarily due to a $466.2 million decrease in cash and cash equivalents, partially offset by a $125.0 million increase in securities and a $165.4 million increase in loans excluding loans held for sale. Total liabilities were $3.8 billion and $3.9 billion at June 30, 2022 and December 31, 2021, respectively. See further analysis in the related discussions that follow.

(Dollars in thousands)

    

June 30, 2022

    

December 31, 2021

Increase (Decrease)

Assets:

Loans excluding loans held for sale

$

3,032,914

 

$

2,867,524

$

165,390

 

5.8%

Allowance for credit losses

 

(32,087)

 

(31,345)

 

742

 

2.4%

Loans, net

3,000,827

2,836,179

164,648

 

5.8%

Cash and cash equivalents

483,966

950,146

(466,180)

 

(49.1%)

Securities

550,083

425,046

125,037

 

29.4%

Premises and equipment

56,010

58,417

(2,407)

(4.1%)

Goodwill

80,950

80,950

Other intangible assets

3,353

3,658

(305)

(8.3%)

Loans held for sale

164

(164)

(100.0%)

Operating lease right-to-use asset

11,324

11,191

133

 

1.2%

Other assets

135,790

120,250

15,540

 

12.9%

Total assets

$

4,322,303

$

4,486,001

$

(163,698)

 

(3.6%)

Liabilities:

 

Noninterest-bearing deposits

$

1,810,275

 

$

1,784,981

$

25,294

 

1.4%

Interest-bearing deposits

1,946,359

2,046,303

(99,944)

 

(4.9%)

Total deposits

3,756,634

3,831,284

(74,650)

 

(1.9%)

Federal Home Loan Bank advances

50,000

(50,000)

 

(100.0%)

Operating lease liabilities

14,169

14,142

27

 

0.2%

Other liabilities

24,821

28,450

(3,629)

 

(12.8%)

Total liabilities

3,795,624

3,923,876

(128,252)

 

(3.3%)

Shareholders' equity

526,679

562,125

(35,446)

 

(6.3%)

Total liabilities and shareholders' equity

$

4,322,303

$

4,486,001

$

(163,698)

 

(3.6%)

47

Table of Contents

Loan Portfolio

The components of the loan portfolio as of the dates indicated was as follows:

(Dollars in thousands)

June 30, 2022

December 31, 2021

Increase (Decrease)

Commercial and industrial:

Oil and gas

$

114,039

$

135,081

$

(21,042)

(15.6%)

Industrial construction

70,523

67,618

2,905

4.3%

Equipment rental

64,641

60,206

4,435

7.4%

Professional/medical

56,990

57,365

(375)

(0.7%)

Manufacturing

32,364

31,120

1,244

4.0%

PPP loans

9,157

54,262

(45,105)

(83.1%)

Other

233,729

228,732

4,997

2.2%

Total commercial and industrial

581,443

634,384

(52,941)

(8.3%)

Commercial real estate:

Non-owner occupied

628,190

581,229

46,961

8.1%

Owner occupied

486,146

443,853

42,293

9.5%

Oil and gas

67,284

66,887

397

0.6%

Total commercial real estate

1,181,620

1,091,969

89,651

8.2%

Construction and development:

Land and development

206,175

177,506

28,669

16.2%

Commercial

153,914

107,663

46,251

43.0%

Multi-family community development

134,083

119,363

14,720

12.3%

1-4 family - commercial

42,023

39,345

2,678

6.8%

1-4 family - primary

23,254

14,285

8,969

62.8%

Oil and gas

1,454

2,557

(1,103)

(43.1%)

Total construction and development

560,903

460,719

100,184

21.7%

Multi-family residential:

Multi-family community development

249,722

238,913

10,809

4.5%

Other

50,860

47,483

3,377

7.1%

Total multi-family residential

300,582

286,396

14,186

5.0%

Total commercial loans

2,624,548

2,473,468

151,080

6.1%

1-4 family residential

264,428

277,273

(12,845)

(4.6%)

Consumer

26,810

28,090

(1,280)

(4.6%)

Other loans

117,851

89,309

28,542

32.0%

Agriculture

8,036

7,941

95

1.2%

Other oil and gas loans

302

346

(44)

(12.7%)

Total gross loans

3,041,975

2,876,427

165,548

5.8%

Less deferred fees and unearned discount

(9,061)

(8,739)

(322)

3.7%

Less loans held for sale

(164)

164

(100.0%)

Loans excluding loans held for sale

3,032,914

2,867,524

165,390

5.8%

Less allowance for credit losses for loans

(32,087)

(31,345)

(742)

2.4%

Loans, net

$

3,000,827

$

2,836,179

$

164,648

5.8%

As of June 30, 2022, loans excluding loans held for sale were $3.0 billion, an increase of $165.4 million, or 5.8%, compared to December 31, 2021, primarily due to originations and line of credit drawdowns outpacing paydowns.

As of June 30, 2022, the Company had 49 loans outstanding funded under the Paycheck Protection Program, or PPP, under the CARES Act totaling $9.2 million. As of December 31, 2021, the Company had 330 PPP loans totaling $54.3 million. During the six months ended June 30, 2022, payments for PPP loans totaled $45.1 million.

As of June 30, 2022 and December 31, 2021, the Company’s loan portfolio included $183.1 million and $204.9 million, respectively, of loans directly or indirectly related to the oil and gas industry. Oil and gas loans are loans with revenue related to well-head, oil in the ground or extracting oil or gas, including any activity, product or service related to the oil and gas industry, such as exploration and production, drilling, equipment, services, midstream companies, service

48

Table of Contents

companies and commercial real estate companies with significant reliance on oil and gas companies.

As of June 30, 2022 and December 31, 2021, the Company’s loan portfolio included $383.8 million and $358.3 million, respectively, of community development loans, which fund Texas based projects to promote affordable housing.

The contractual maturity ranges of loans in the loan portfolio and the amount of such loans with fixed and variable interest rates in each maturity range as of the date indicated were as follows:

    

    

1 Year 

    

5 Years

After

    

(Dollars in thousands)

1 Year or Less

Through 5 Years

Through 15 Years

15 years

Total

June 30, 2022

Commercial and industrial:

Fixed rate

$

71,468

$

160,388

$

2,825

$

$

234,681

Variable rate

185,455

121,938

38,883

486

346,762

256,923

282,326

41,708

486

581,443

Real estate:

 

 

  

Commercial real estate:

 

Fixed rate

70,598

505,985

66,640

643,223

Variable rate

22,550

303,267

192,484

20,096

538,397

93,148

809,252

259,124

20,096

1,181,620

Construction and development:

 

Fixed rate

35,011

100,386

16,454

12,163

164,014

Variable rate

114,965

257,867

6,723

17,334

396,889

149,976

358,253

23,177

29,497

560,903

1-4 family residential:

 

Fixed rate

3,438

39,276

20,271

103,615

166,600

Variable rate

779

2,674

13,244

81,131

97,828

4,217

41,950

33,515

184,746

264,428

Multi-family residential:

 

Fixed rate

1,646

12,286

215,890

31,000

260,822

Variable rate

3,323

36,158

279

39,760

4,969

48,444

216,169

31,000

300,582

Consumer:

 

 

Fixed rate

6,297

8,665

14,962

Variable rate

10,311

984

553

11,848

16,608

9,649

553

26,810

Agriculture:

 

 

Fixed rate

4,929

1,115

6,044

Variable rate

1,964

28

1,992

6,893

1,143

8,036

Other:

Fixed rate

1,655

778

350

2,783

Variable rate

24,074

87,069

4,227

115,370

25,729

87,847

4,577

118,153

Total:

Fixed rate loans

195,042

828,879

322,430

146,778

1,493,129

Variable rate loans

 

363,421

809,985

256,393

119,047

1,548,846

Total gross loans

$

558,463

$

1,638,864

$

578,823

$

265,825

$

3,041,975

49

Table of Contents

Nonperforming Assets

Nonperforming assets include nonaccrual loans, loans that are accruing over 90 days past due and foreclosed assets. Generally, loans are placed on nonaccrual status when they become more than 90 days past due and/or the collection of principal or interest is in doubt. The components of nonperforming assets as of the dates indicated were as follows:

    

(Dollars in thousands)

June 30, 2022

December 31, 2021

Nonaccrual loans

$

28,273

$

22,568

Accruing loans 90 or more days past due

Total nonperforming loans

28,273

22,568

Foreclosed assets

Total nonperforming assets

$

28,273

$

22,568

Total assets

$

4,322,303

$

4,486,001

Loans excluding loans held for sale

3,032,914

2,867,524

Allowance for credit losses for loans

32,087

31,345

Allowance for credit losses for loans to nonaccrual loans

113.49%

138.89%

Nonperforming loans to loans excluding loans held for sale

0.93%

0.79%

Nonperforming assets to total assets

0.65%

0.50%

Nonperforming assets were $28.3 million, or 0.65% of total assets, as of June 30, 2022 and $22.6 million, or 0.50% of total assets, as of December 31, 2021. Nonperforming assets increased $5.7 million during the six months ended June 30, 2022, primarily due to two loans that were downgraded to nonaccrual.

Troubled Debt Restructurings

Loans restructured due to the borrower’s financial difficulties, or troubled debt restructurings, during the six months ended June 30, 2022 and 2021, which remained outstanding as of the end of those periods were as follows:

Post-modification Recorded Investment

Extended

Maturity,

Pre-modification

Extended

Restructured

Outstanding

Maturity and

Payments

Number

Recorded

Restructured

Extended

Restructured

and Adjusted

(Dollars in thousands)

    

of Loans

    

Investment

    

Payments

    

Maturity

    

Payments

    

Interest Rate

June 30, 2022

Commercial and industrial

8

$

3,915

$

1,093

$

$

$

2,822

Real estate:

Commercial real estate

 

2

2,273

2,040

245

Construction and development

3

431

431

Total

 

13

$

6,619

$

1,093

$

$

2,471

$

3,067

June 30, 2021

Commercial and industrial

 

3

$

3,256

$

3,256

$

$

$

Real estate:

Commercial real estate

 

1

1,206

1,206

1-4 family residential

1

1,548

1,548

Total

 

5

$

6,010

$

6,010

$

$

$

50

Table of Contents

Risk Gradings

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the ACL, management assigns and tracks risk gradings as described below that are used as credit quality indicators.

The internal ratings of loans as of the periods indicated were as follows:

    

Special

    

    

(Dollars in thousands)

Pass

Mention

Substandard

Total

June 30, 2022

Commercial and industrial

$

565,466

$

 

$

15,977

 

$

581,443

Real estate:

 

  

 

  

 

 

  

 

 

  

Commercial real estate

 

1,142,040

 

 

 

39,580

 

 

1,181,620

Construction and development

 

552,467

 

468

 

 

7,968

 

 

560,903

1-4 family residential

 

259,500

 

 

 

4,928

 

 

264,428

Multi-family residential

 

300,582

 

 

 

 

 

300,582

Consumer

 

26,600

 

 

 

210

 

 

26,810

Agriculture

 

7,976

 

 

 

60

 

 

8,036

Other

 

118,108

 

 

 

45

 

 

118,153

Total gross loans

$

2,972,739

$

468

 

$

68,768

 

$

3,041,975

    

Special

    

    

(Dollars in thousands)

Pass

Mention

Substandard

Total

December 31, 2021

Commercial and industrial

$

613,419

$

3,482

 

$

17,483

 

$

634,384

Real estate:

 

  

 

  

 

 

  

 

 

  

Commercial real estate

 

1,038,401

 

8,855

 

 

44,713

 

 

1,091,969

Construction and development

 

447,533

 

470

 

 

12,716

 

 

460,719

1-4 family residential

 

272,217

 

 

 

5,056

 

 

277,273

Multi-family residential

 

286,396

 

 

 

 

 

286,396

Consumer

 

27,865

 

 

 

225

 

 

28,090

Agriculture

 

7,899

 

 

 

42

 

 

7,941

Other

 

89,655

 

 

 

 

 

89,655

Total gross loans

$

2,783,385

$

12,807

 

$

80,235

 

$

2,876,427

During the six months of 2022, loans with an internal rating of pass increased $189.4 million primarily due to new originations, loans with an internal rating of special mention decreased $12.3 million primarily due to a loan payoff and several loans upgraded to pass and loans with an internal rating of substandard decreased $11.5 million primarily due to payoffs and a loan upgraded to pass during the same period.

Allowance for Credit Losses

The Company maintains an ACL that represents management’s best estimate of the expected credit losses and risks inherent in the loan portfolio. The amount of the ACL should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the ACL, the Company estimates losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the ACL is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current and forecasted economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. Please refer to “Part I—Item 1.—Financial Statements—Note 6.”

51

Table of Contents

The ACL by loan category as of the dates indicated was as follows:

June 30, 2022

December 31, 2021

(Dollars in thousands)

Amount

Percent

Amount

Percent

Commercial and industrial

$

9,730

 

30.3

%  

$

11,214

 

35.7

%

Real estate:

 

 

 

  

 

Commercial real estate

 

11,708

 

36.5

%  

 

11,015

 

35.1

%

Construction and development

 

4,243

 

13.2

%  

 

3,310

 

10.6

%

1-4 family residential

 

2,071

 

6.5

%  

 

2,105

 

6.7

%

Multi-family residential

 

1,925

 

6.0

%  

 

1,781

 

5.7

%

Consumer

 

391

 

1.2

%  

 

406

 

1.3

%

Agriculture

 

88

 

0.3

%  

 

88

 

0.3

%

Other

 

1,931

 

6.0

%  

 

1,426

 

4.6

%

Total allowance for credit losses for loans

$

32,087

 

100.0

%  

$

31,345

 

100.0

%

Loans excluding loans held for sale

3,032,914

2,867,524

ACL for loans to loans excluding loans held for sale

1.06%

1.09%

The ACL for loans was $32.1 million, or 1.06% of loans excluding loans held for sale, at June 30, 2022, compared to $31.3 million, or 1.09% of loans excluding loans held for sale, at December 31, 2021. The increase in the ACL from December 31, 2021 to June 30, 2022 was primarily due to the increase in the loan portfolio.

Although national and local economies and economic forecasts improved during 2021 and 2022, geopolitical instabilities, inflation, rising interest rates, supply disruptions and other uncertainties continue and these factors are considered in the forecasts and qualitative factors used to determine the Company’s ACL.

Activity in the ACL for loans for the periods indicated was as follows:

Six Months Ended June 30,

(Dollars in thousands)

2022

2021

Beginning balance

$

31,345

$

40,637

Provision (recapture):

 

 

Commercial and industrial

(1,778)

(1,083)

Real estate:

Commercial real estate

693

(538)

Construction and development

933

(1,636)

1-4 family residential

(31)

(406)

Multi-family residential

144

(131)

Consumer

43

(46)

Agriculture

(10)

(64)

Other

505

Total provision (recapture)

499

(3,904)

Net (charge-offs) recoveries:

 

  

 

  

Commercial and industrial

 

294

 

308

Real estate:

 

  

 

  

1-4 family residential

 

(3)

 

Consumer

 

(58)

 

100

Agriculture

10

42

Total net (charge-offs) recoveries

 

243

 

450

Ending balance

$

32,087

$

37,183

Total average loans

2,892,079

2,868,463

Net charge-offs (recoveries) to total average loans

(0.02%)

(0.03%)

52

Table of Contents

Annualized net charge-off (recoveries) to average loans by loan category for the periods indicated below were as follows:

Six Months Ended June 30,

(Dollars in thousands)

2022

2021

Commercial and industrial

(0.20%)

(0.09%)

Consumer

0.85%

 

(0.62%)

Agriculture

(0.56%)

(1.00%)

The ACL for unfunded commitments was $3.3 million at both June 30, 2022 and December 31, 2021.

Securities

The amortized cost, related gross unrealized gains and losses and fair values of investments in securities as of the dates indicated below were as follows:

Gross

Gross

Amortized

Unrealized

Unrealized

(Dollars in thousands)

    

Cost

    

Gains

    

Losses

    

Fair Value

June 30, 2022

 

  

 

  

 

  

 

  

Debt securities available for sale:

 

  

 

  

 

  

 

  

State and municipal securities

$

175,956

$

36

$

(29,001)

$

146,991

U.S. Treasury securities

110,820

(2,617)

108,203

U.S. agency securities:

 

 

  

Callable debentures

3,000

(264)

2,736

Collateralized mortgage obligations

 

100,569

123

(8,339)

 

92,353

Mortgage-backed securities

 

217,907

54

(19,248)

 

198,713

Equity securities

 

1,197

(110)

 

1,087

Total

$

609,449

$

213

$

(59,579)

$

550,083

December 31, 2021

Debt securities available for sale:

 

  

 

  

 

  

 

  

State and municipal securities

$

168,541

$

4,451

$

(392)

$

172,600

U.S. Treasury securities

11,888

(91)

11,797

U.S. agency securities:

 

 

 

 

  

Callable debentures

3,000

(27)

2,973

Collateralized mortgage obligations

 

63,129

 

115

 

(862)

 

62,382

Mortgage-backed securities

 

173,446

 

1,805

 

(1,130)

 

174,121

Equity securities

 

1,189

 

 

(16)

 

1,173

Total

$

421,193

$

6,371

$

(2,518)

$

425,046

As of June 30, 2022, the fair value of the Company’s securities totaled $550.1 million, compared to $425.0 million as of December 31, 2021, an increase of $125.1 million. Amortized cost increased $188.3 million during 2022, primarily as a result of purchases totaling $512.6 million outpacing maturities, calls and paydowns totaling $323.9 million. Net unrealized losses on the securities portfolio were $59.3 million at June 30, 2022, compared to a net unrealized gains of $3.9 million at December 31, 2021. This decrease of $63.2 million was due to a reduction in fair value as a result of interest rate increases and anticipated increases.

The Company’s mortgage-backed securities at June 30, 2022 and December 31, 2021 were agency securities. The Company does not hold any Federal National Mortgage Loan Association, or Fannie Mae, or Federal Home Mortgage Corporation, or Freddie Mac, preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A or second lien elements in the securities portfolio.

The weighted-average life of the securities portfolio was 7.4 years with an estimated modified duration of 6.1 years as of June 30, 2022. See “Part I—Item 1.—Financial Statements—Note 2” for securities by contractual maturity.  

53

Table of Contents

Weighted-average yields by security type and maturity based on estimated annual income divided by the average amortized cost of the Company’s available for sale securities portfolio as of the date indicated was as follows:

(Dollars in thousands)

1 Year or Less

After 1 Year to 5 Years

After 5 Years to 10 Years

After 10 Years

Total

June 30, 2022

Debt securities:

State and municipal securities

2.20%

2.58%

2.18%

2.22%

U.S. Treasury securities

1.28%

1.43%

1.25%

1.37%

U.S. agency securities:

  

  

  

  

  

Callable debentures

1.37%

1.37%

Collateralized mortgage obligations

2.35%

2.22%

2.22%

Mortgage-backed securities

3.50%

2.81%

2.00%

2.10%

Equity securities:

1.25%

1.25%

Total securities

1.28%

1.46%

2.46%

2.11%

2.02%

At June 30, 2022 and December 31, 2021, securities with a carrying amount of approximately $26.2 million and $25.6 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Deposits

Total deposits as of June 30, 2022 were $3.8 billion, a decrease of $74.7 million, or 1.9%, compared to December 31, 2021. Noninterest-bearing deposits as of June 30, 2022 were $1.8 billion, an increase of $25.3 million, or 1.4%, compared to December 31, 2021. Total interest-bearing account balances as of June 30, 2022 were $1.9 billion, a decrease of $99.9 million, or 4.9%, from December 31, 2021, primarily due to decreases in interest-bearing demand deposits and money market accounts, partially offset by increases in certificates and other time deposits and savings accounts.

The components of deposits as of the dates indicated below were as follows:

    

(Dollars in thousands)

    

June 30, 2022

December 31, 2021

Increase (Decrease)

Interest-bearing demand accounts

$

445,149

$

468,361

$

(23,212)

(5.0%)

Money market accounts

 

1,109,265

 

1,209,659

(100,394)

(8.3%)

Savings accounts

 

130,713

 

127,031

3,682

2.9%

Certificates and other time deposits, $100,000 or greater

 

169,616

 

134,775

34,841

25.9%

Certificates and other time deposits, less than $100,000

 

91,616

 

106,477

(14,861)

(14.0%)

Total interest-bearing deposits

 

1,946,359

 

2,046,303

(99,944)

(4.9%)

Noninterest-bearing deposits

 

1,810,275

 

1,784,981

25,294

1.4%

Total deposits

$

3,756,634

$

3,831,284

$

(74,650)

(1.9%)

54

Table of Contents

The scheduled maturities of uninsured certificates of deposit or other time deposits as of the date indicated were as follows:

    

(Dollars in thousands)

June 30, 2022

Three months or less

$

52,767

Over three months through six months

 

13,896

Over six months through 12 months

 

18,354

Over 12 months

 

24,346

Total

$

109,363

Securities pledged which secure certain public deposits were not considered in determining the amount of uninsured deposits.

Cash and Equivalents

Cash and equivalents decreased $466.2 million during the six months ended June 30, 2022, primarily due to increases in loans, purchases of securities, net deposit outflows and repayment of Federal Home Loan Bank advances.  

Other Assets

Other assets increased $15.5 million from December 31, 2021 to June 30, 2022, primarily due to a $12.7 million increase in net deferred tax assets resulting from an increase in the deferred tax asset related to unrealized losses on the Company’s available for sale securities and a $2.6 million increase in the fair value of the Company’s interest rate swap contracts.

Liquidity and Capital Resources

The Company monitors its liquidity and may seek to obtain additional financing to further support its business if necessary. The Company’s primary source of funds has been customer deposits and the primary use of funds has been funding of loans.

As of June 30, 2022, the Company had $484.0 million in cash and cash equivalents and $550.1 million of securities, which are considered to be liquid assets, compared to $950.1 million in cash and cash equivalents and $425.0 million of securities as of December 31, 2021. This decrease in liquid assets of $341.1 million during the first six months of 2022 was primarily due to a $74.7 million decrease in deposits, an increase of $164.6 million in loans excluding loans held for sale and repayment of $50.0 million of Federal Home Loan Bank advances.  

Historically, the cost of the Company’s deposits has been lower than other sources of funds available. Average rates paid for the three and six months ended June 30, 2022 were computed on an annualized basis. Average balances and average rates paid on deposits for the periods indicated were as follows:

Six Months Ended June 30, 2022

Year Ended December 31, 2021

(Dollars in thousands)

Average Balance

Average Rate

Average Balance

Average Rate

Interest-bearing demand accounts

$

445,338

 

0.05

%  

$

391,388

 

0.05

%

Money market accounts

 

1,161,747

 

0.27

%  

 

1,094,042

 

0.27

%

Savings accounts

 

129,032

 

0.03

%  

 

115,972

 

0.03

%

Certificates and other time deposits, $100,000 or greater

 

145,851

 

0.32

%  

 

142,605

 

0.37

%

Certificates and other time deposits, less than $100,000

 

97,610

 

0.84

%  

 

126,141

 

1.07

%

Total interest-bearing deposits

 

1,979,578

 

0.24

%  

 

1,870,148

 

0.27

%

Noninterest-bearing deposits

1,794,239

1,603,006

Total deposits

$

3,773,817

 

0.13

%  

$

3,473,154

 

0.14

%

55

Table of Contents

The ratio of average noninterest-bearing deposits to average total deposits was 47.5% for the three and six months ended June 30, 2022 and 46.2% for the year ended December 31, 2021.

In addition to the liquid assets discussed above, the Company had $1.1 billion and $1.0 billion of available funds under various borrowing arrangements at June 30, 2022 and December 31, 2021, respectively. See “Part I—Item 1.—Financial Statements—Note 11” for additional details of these arrangements. At June 30, 2022, the capacity, amounts outstanding and availability under these arrangements were as follows:

(Dollars in thousands)

Capacity

Outstanding(1)

Availability

Federal Home Loan Bank Facility

$

1,086,257

$

(26,000)

$

1,060,257

Loan Agreement

30,000

30,000

Federal Funds

45,000

45,000

Total

$

1,161,257

$

(26,000)

$

1,135,257

(1)Outstanding amount for the Federal Home Loan Bank Facility includes $26.0 million of letters of credit pledged to secure public funds’ deposit balances.

The composition of funding sources and uses as a percentage of average total assets for the periods indicated was as follows:

    

June 30, 2022

December 31, 2021

Sources of funds:

 

  

 

  

Deposits:

 

  

 

  

Interest-bearing

 

45.0

%  

45.2

%

Noninterest-bearing

 

40.8

%  

38.8

%

Federal Home Loan Bank advances

 

0.6

%  

1.2

%

Other liabilities

 

1.1

%  

1.3

%

Shareholders’ equity

 

12.5

%  

13.5

%

Total sources

 

100.0

%  

100.0

%

Uses of funds:

 

  

 

  

Loans

 

65.8

%  

67.4

%

Securities

 

12.1

%  

7.8

%

Interest-bearing deposits at other financial institutions

 

15.4

%  

17.7

%

Equity securities

 

0.3

%  

0.4

%

Other noninterest-earning assets

 

6.4

%  

6.7

%

Total uses

 

100.0

%  

100.0

%

Average loans to average deposits

 

76.6

%  

80.2

%

A portion of the Company’s liquidity capacity will be used for contractual obligations entered into in the normal course of business, such as obligations for operating leases, certificates of deposits and borrowings. Future cash payments associated with the Company’s contractual obligations as of the dates indicated were as follows:

    

    

    

    

1 Year 

Over 1 Year 

Greater

(Dollars in thousands)

or Less

to 3 Years

than 3 Years

Total

June 30, 2022

Non-cancellable future operating leases

$

1,780

$

3,874

$

11,083

$

16,737

Certificates of deposit

205,293

44,814

11,125

261,232

Total

$

207,073

$

48,688

$

22,208

$

277,969

December 31, 2021

Federal Home Loan Bank advances

$

10,000

$

40,000

$

$

50,000

Non-cancellable future operating leases

 

1,812

3,823

11,164

16,799

Certificates of deposit

 

162,153

68,956

10,143

241,252

Total

$

173,965

$

112,779

$

21,307

$

308,051

56

Table of Contents

As of June 30, 2022, the Company had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.

The Company also enters into commitments to extend credit and standby letters of credit to meet customer financing needs and, in accordance with GAAP, these commitments are not reflected as liabilities in the consolidated balance sheets. Due to the nature of these commitments, the amounts disclosed in the table below do not necessarily represent future cash requirements.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract, generally have fixed expiration dates or other termination clauses and may expire without being fully drawn upon.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third-party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to the Company’s customers.

Commitments to extend credit and standby letters of credit expiring by period as of the dates indicated were as follows:

1 Year 

Over 1 Year 

Greater

(Dollars in thousands)

or Less

to 3 Years

than 3 Years

Total

June 30, 2022

Commitments to extend credit

$

463,732

$

384,371

$

54,709

$

902,812

Standby letters of credit

 

8,983

 

853

 

 

9,836

Total

$

472,715

$

385,224

$

54,709

$

912,648

December 31, 2021

Commitments to extend credit

$

400,006

$

293,606

$

81,348

$

774,960

Standby letters of credit

 

16,532

 

1,415

 

162

 

18,109

Total

$

416,538

$

295,021

$

81,510

$

793,069

As a general matter, Federal Deposit Insurance Corporation, or FDIC, insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. The Company and the Bank are both subject to regulatory capital requirements. At June 30, 2022 and December 31, 2021, the Company and the Bank were in compliance with all applicable regulatory capital requirements at the bank holding company and bank levels, and the Bank was classified as “well capitalized” for purposes of the FDIC’s prompt corrective action regulations. The OCC or the FDIC may require the Bank to maintain capital ratios above the required minimums and the Federal Reserve may require the Company to maintain capital ratios above the required minimums. See “Part I—Item 1.—Financial Statements—Note 19.”

Interest Rate Sensitivity and Market Risk

Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates and prices. As a financial institution, the Company’s primary component of market risk is interest rate risk due to future interest rate changes. Fluctuations in interest rates impact both income and expense recorded on most of the Company’s assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short-term to maturity period.

The Company manages exposure to interest rates by structuring its balance sheet in the ordinary course of business. The Company does not enter into instruments such as leveraged derivatives, financial options, financial future contracts or forward delivery contracts to reduce interest rate risk. The Company enters into interest rate swaps as an accommodation to customers. The Company is not subject to foreign exchange or commodity price risk and does not own any trading assets.

The Company has asset, liability and funds management policies that provide the guidelines for effective funds management and has established a measurement system for monitoring the net interest rate sensitivity position. The Company’s exposure to interest rate risk is managed by the Funds Management Committee of the Bank. The committee formulates strategies based on appropriate levels of interest rate risk with consideration of the impact on earnings and

57

Table of Contents

capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the relationships between interest-earning assets and interest-bearing liabilities, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity.

The Company uses interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model, as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of non-maturity deposit accounts are based on standard regulatory decay assumptions and are incorporated into the model. The assumptions used are inherently uncertain and the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results may differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.

On a quarterly basis, two simulation models are run, including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. The results from these models are impacted by the behavior of interest-rate sensitive assets and liabilities as well as the mixture of those assets and liabilities. Under the static and dynamic growth models, rates are shocked instantaneously and ramped rate changes over a 12-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. The Company’s internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one-year period should not decline by more than 10.0% for a 100-basis point shift, 20.0% for a 200-basis point shift and 30.0% for a 300-basis point shift.

58

Table of Contents

Simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated below were as follows:

June 30, 2022

December 31, 2021

Change in Interest

Percent Change in

Percent Change 

Percent Change in

Percent Change 

Rates (Basis Points)

Net Interest Income

Fair Value of Equity

Net Interest Income

Fair Value of Equity

+ 300

 

13.2

%  

(1.6)

%

 

25.4

%  

6.7

%

+ 200

 

9.2

%  

1.7

%

 

16.9

%  

13.0

%

+ 100

 

5.0

%  

2.6

%

 

7.9

%  

8.8

%

Base

 

%  

%

 

%  

%

−100

 

(10.9)

%  

(12.7)

%

 

(2.5)

%  

(37.2)

%

The Company's model simulation as of June 30, 2022 indicates that its projected balance sheet was less asset sensitive in comparison to its balance sheet as of December 31, 2021. The shift to a less asset sensitive position was primarily due to the deployment of interest-bearing cash deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) to originate loan growth during the second quarter 2022 and deposit balance run off that resulted in an increase to the economic value of equity. This combined with the recent interest rate increases from the Fed resulted in less sensitivity to future rate increases and more sensitive to downward rate movements.

LIBOR Transition

LIBOR was used as an index rate for a majority of the Company’s interest-rate swaps and approximately 5.1% of the Company’s loans at June 30, 2022. In March 2021, the UK Financial Conduct authority formally confirmed that a number of U.S. dollar LIBOR rates will be available until the end of June 2023 to support the rundown of legacy contracts. The Company’s transition away from LIBOR may span several reporting periods through June 2023.

The Company’s loans that remain indexed to LIBOR are primarily participations and syndications where the Company is not the lead agent bank and the transition away from LIBOR is dependent on the lead agent bank. The Company is in active discussions with the lead agent banks regarding these loans indexed to LIBOR. These lead agent banks have LIBOR transition programs in place to assist in the transition from LIBOR. The Company’s interest-rate swaps are paired swaps and the interest-rate swaps are established by dealers that have many such agreements and have established or will establish fallback language to transition away from LIBOR.

If not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks to the Company. One of the major identified risks is inadequate fallback language in various existing instruments’ contracts that may result in issues establishing the alternative index and adjusting the margin as applicable. The Company continues to monitor this activity and evaluate the related risks to its business.

Non-GAAP Financial Measures

The Company’s accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, the Company also evaluates its performance based on certain additional non-GAAP financial measures. The Company classifies a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are not included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP in the statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating, other statistical measures or ratios calculated using exclusively financial measures calculated in accordance with GAAP. Non-GAAP financial measures should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the way the Company calculates non-GAAP financial measures may differ from that of other companies reporting measures with similar names.

The Company calculates tangible equity as total shareholders’ equity, less goodwill and other intangible assets, net of accumulated amortization, and tangible book value per share as tangible equity divided by shares of common stock outstanding at the end of the relevant period. The most directly comparable GAAP financial measure for tangible book value per share is book value per share. The Company calculates tangible assets as total assets less goodwill and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible

59

Table of Contents

equity to tangible assets is total shareholders’ equity to total assets. The Company believes that tangible book value per share and tangible equity to tangible assets are measures that are important to many investors in the marketplace who are interested in book value per share and total shareholders’ equity to total assets, exclusive of change in intangible assets.

The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible equity, total assets to tangible assets and presents book value per share, tangible book value per share, total shareholders’ equity to total assets and tangible equity to tangible assets:

(Dollars in thousands, except per share data)

    

June 30, 2022

December 31, 2021

Tangible Equity

 

  

  

Total shareholders’ equity

$

526,679

$

562,125

Adjustments:

 

  

 

  

Goodwill

 

(80,950)

 

(80,950)

Other intangibles

 

(3,353)

 

(3,658)

Tangible equity

$

442,376

$

477,517

Tangible Assets

 

  

 

  

Total assets

$

4,322,303

$

4,486,001

Adjustments:

 

  

 

  

Goodwill

 

(80,950)

 

(80,950)

Other intangibles

 

(3,353)

 

(3,658)

Tangible assets

$

4,238,000

$

4,401,393

Common shares outstanding

 

24,425

 

24,488

Book value per share

$

21.56

$

22.96

Tangible book value per share

$

18.11

$

19.50

Total shareholders’ equity to total assets

 

12.19%

 

12.53%

Tangible equity to tangible assets

 

10.44%

 

10.85%

Critical Accounting Policies

The Company’s accounting policies are described in “Part II—Item 8.—Financial Statements and Supplementary Data—Note 1” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The Company’s accounting policies that it considers critical because they involve a higher degree of judgment and complexity are described in “Part II—Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Emerging Growth Company

The Company qualifies as an “emerging growth company” under the Jump Start Our Business Start-ups, or JOBS Act. As an emerging growth company, the Company has taken advantage of reduced reporting and other requirements that are otherwise generally applicable to public companies. Emerging growth company are:

exempt from the requirement to obtain an attestation and report from the Company’s auditors on management’s assessment of internal control over financial reporting under the Sarbanes-Oxley Act of 2002;
permitted to have an extended transition period for adopting any new or revised accounting standards that may be issued by the Financial Accounting Standards Board or by the Securities and Exchange Commission;
permitted to provide less extensive disclosure about the Company’s executive compensation arrangements; and
not required to give shareholders nonbinding advisory votes on executive compensation or golden parachute arrangements.

The Company will lose its emerging growth status December 31, 2022, which is the end of the fiscal year in which the fifth anniversary of its initial public offering occurs.

Recently Issued Accounting Pronouncements

See “Part I—Item 1.—Financial Statements—Note 1.”

60

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See “Part I—Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Sensitivity and Market Risk” for a discussion of how the Company manages market risk.

Item 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 any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

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 June 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not currently subject to any material legal proceedings. The Company is from time to time subject to claims and litigation arising in the ordinary course of business.

At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on the Company’s results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against the Company could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially and adversely affect the Company’s reputation, even if resolved in the Company’s favor.

Item 1A. Risk Factors

There have been no material changes in the risk factors as disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In 2021, the Company’s Board of Directors authorized a share repurchase program, or the 2021 Repurchase Program, under which the Company may repurchase up to $40.0 million of the Company’s common stock starting September 16, 2021 through September 30, 2022.

Repurchases under the 2021 Repurchase Program may be made from time to time at the Company’s discretion in open market transactions, through block trades, in privately negotiated transactions, and pursuant to any trading plan that

61

Table of Contents

may be adopted by the Company’s management in accordance with Rule 10b5-1 of the Exchange Act or otherwise. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The repurchase program does not obligate the Company to acquire a specific dollar amount or number of shares and may be modified, suspended or discontinued at any time.

The following table provides information with respect to purchases of shares of the Company’s common stock during the three months ended June 30, 2022 that the Company made or were made on behalf of the Company or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act.

Shares Purchased

Number of Shares That

Total Number of

Average Price

as Part of Publicly

May Yet be Purchased

Period

Shares Purchased

Paid per Share

Announced Plan(2)

Under the Plan(3)

April 1, 2022 - April 30, 2022

89

(1)

$ 28.00

1,402,525

May 1, 2022 -May 31, 2022

528

(1)

$ 26.83

1,407,460

June 1, 2022 - June 30, 2022

93,415

(2)

$ 27.66

93,415

1,407,057

Total

94,032

$ 27.65

93,415

(1)Represents shares employees have elected to have withheld to satisfy their tax liabilities related to options exercised or restricted stock vested or to pay the exercise price of the options as allowed under the Company’s stock compensation plans. When this settlement method is elected by the employee, the Company repurchases the shares withheld upon vesting of the award stock.
(2)Purchased under the 2021 Repurchase Program described above.
(3)Computed based on the closing share price of the Company’s common stock as of the end of each period shown.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

62

Table of Contents

Item 6. Exhibits

Exhibit

Number

Description of Exhibit

3.1

First Amended and Restated Certificate of Formation of CBTX, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form S-1 filed with the Commission on October 13, 2017, File No. 333-220930)

3.2

Second Amended and Restated Bylaws of CBTX, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Form S-1 filed with the Commission on October 13, 2017, File No. 333-220930)

4.1

Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Form S-1 filed with the Commission on October 13, 2017, File No. 333-220930)

31.1*

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934

31.2*

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934

32.1**

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350

32.2**

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

101*

The following materials from CBTX’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.

104*

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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

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

Indicates a management contract or compensatory plan.

63

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.

CBTX, INC.

(Registrant)

Date: July 28, 2022

/s/ Robert R. Franklin, Jr.

Robert R. Franklin, Jr.

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

Date: July 28, 2022

/s/ Robert T. Pigott, Jr.

Senior Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

64