ALLEGIANCE BANCSHARES, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)
The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and the accompanying notes included elsewhere in this Annual 40
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Report on Form 10-K. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that the Company believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under " - Cautionary Notice Regarding Forward-Looking Statements," in the forepart of this report, under Item 1A. "Risk Factors" and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. The Company assumes no obligation to update any of these forward-looking statements.
Overview
The following discussion and analysis presents the more significant factors that affected our financial condition as ofDecember 31, 2021 and 2020 and results of operations for each of the years then ended. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with theSEC onMarch 10, 2021 (the " 2020 Form 10-K ") for a discussion and analysis of the more significant factors that affected periods prior to 2020. We generate most of our income from interest income on loans, service charges on customer accounts and interest income from investments in securities. We incur interest expense on deposits and other borrowed funds and noninterest expenses such as salaries and employee benefits and occupancy expenses. Net interest income is the difference between interest income on earning assets such as loans and securities and interest expense on liabilities such as deposits and borrowings that are used to fund those assets. Net interest income is our largest source of revenue. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the interest expenses of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders' equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources. Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a "volume change." Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions inTexas and specifically in theHouston region, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target market and throughout the state ofTexas . Our net interest income is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and borrowed funds, referred to as a "rate change." Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. OnOctober 7, 2015 , we completed an initial public offering of 2,990,000 shares of Allegiance's common stock at$21.00 per share, generating net proceeds of$57.1 million . Allegiance's common stock began trading on the NASDAQ Global Market onOctober 8, 2015 under the ticker symbol "ABTX."
Recent developments related to COVID-19
The COVID-19 pandemic continues to exert significant health, economic and other pressures throughout the territory.
•While all of our bank offices generally remain open to customers, we have taken steps to address safety issues by offering in-person visits by appointment, added social distancing markers and plexiglass and are encouraging most of our traffic to leverage our drive-thrus, following the guidelines of theCenters for Disease Control and Prevention ("CDC").
•We continue to encourage the use of available electronic banking tools and financial education resources.
• We provided extensions and deferrals to our loan clients in accordance with the CARES Act.
•We actively participate in assisting with applications for resources through the CARES Act's PPP, administered by the SBA, which provides government guaranteed and forgivable loans. As ofDecember 31, 2021 , we funded over 10,000 loans totaling in excess of$1.08 billion . We believe these loans and our participation in the program will provide support for our customers and small businesses in the communities we serve.
• Our team is at full strength with some employees using the work from home program put in place in line with the pre-existing pandemic plan.
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• We strive to ensure the health and safety of our internal teams with split shift rotations, providing
We continue to closely monitor this pandemic and its effects and plan to continue to adjust our operations in response to the pandemic as the situation evolves.
Critical Accounting Policies Certain of our accounting estimates are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances that could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Management believes that determining the allowance for credit losses is its most critical accounting estimate. Our accounting policies are discussed in detail in Note 1 - Nature of Operations and Summary of Significant Accounting and Reporting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Provision for credit losses
The allowance for credit losses is a valuation account which represents
management's best estimate of lifetime expected losses based on reasonable and
supportable forecasts, historical loss experience, and other qualitative
considerations. The allowance for credit losses includes the allowance for
credit losses on loans, which is deducted from the loans' amortized cost basis
to present the net amount expected to be collected on loans, and the allowance
for credit losses on unfunded commitments reported in other liabilities. The
amount of the allowance for credit losses is affected by the following: (1)
charge-offs of loans that decrease the allowance, (2) subsequent recoveries on
loans previously charged off that increase the allowance and (3) provisions for
(or reversal of) credit losses charged to income that increase or decrease the
allowance. Management considers the policies related to the allowance for credit
losses as the most critical to the financial statement presentation. The total
allowance for credit losses includes activity related to allowances calculated
in accordance with Accounting Standards Codification ("ASC") 326 - Measurement
of Credit Losses on Financial Instruments.
Recently issued accounting pronouncements
We have evaluated new accounting pronouncements that have recently been issued and have determined that there are no new accounting pronouncements that should be described in this section that will impact the Company's operations, financial condition or liquidity in future periods. Refer to "Part II - Item 8. Financial Statements and Supplementary Data - Note 1 - Nature of Operations and Summary of Significant Accounting and Reporting Policies" of this Report regarding recent accounting pronouncements that have been or will be adopted by the Company or that will require enhanced disclosures in the Company's financial statements in future periods. InJune 2016 , the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASC 326") along with subsequent amendments thereto, which introduce the current expected credit losses ("CECL") methodology. ASC 326 makes significant changes to the accounting for credit losses on financial instruments presented on an amortized cost basis and related disclosures. The measurement of expected credit losses under the CECL methodology utilizes a lifetime "expected credit loss" measurement objective for the recognition of credit losses for loans and held-to-maturity debt securities measured at amortized cost. ASC 326 also applies to off-balance sheet credit exposures. This methodology replaces the multiple existing impairment methods in current guidance, which generally require that a loss be incurred before it is recognized. Within the life cycle of a loan or other financial asset, this new guidance will generally result in the earlier recognition of the provision for credit losses and the related allowance for credit losses than current practice. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. In addition, ASU 2016-13 amends the accounting for credit losses on purchased financial assets with credit deterioration. CECL became effective for the Company onJanuary 1, 2020 using the modified retrospective approach; however, the Company took the option under the CARES Act to temporarily defer the adoption of ASC 326. The decision to delay adoption of ASC 326 was due to the uncertainty of the impact of COVID-19 and the volatility of crude oil prices, which can be impactful to theHouston region. During the deferral, the Company calculated and recorded its provision for credit losses under the incurred loss model that existed prior to ASC 326. The Company adopted the new standard as ofJanuary 1, 2020 during the fourth quarter of 2020. ASC 326 is discussed more fully under "Part II - 42
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Section 8. Financial Statements and Supplementary Data – Note 1 – Nature of Operations and Summary of Significant Accounting and Reporting Policies” of this report.
Participation in the PPP loan program
We elected to participate in the first and second rounds of the Small Business Administration Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) program funding over$1.08 billion in loans. We have received fees and incurred incremental direct origination costs related to our participation in the PPP loan program, both of which have been deferred and are being amortized over the shorter of the repayment period or the contractual life of these loans. For the year endedDecember 31, 2021 , we recognized$26.6 million of total net fee revenue related to PPP fees compared to$11.0 million for the year endedDecember 31, 2020 . The remainder of the PPP loan deferred fees totaled approximately$4.9 million atDecember 31, 2021 . These remaining deferred fees will be amortized over the shorter of the repayment period or the contractual life of the loans.
Operating results
Net income was$81.6 million , or$4.01 per diluted common share, for the year endedDecember 31, 2021 compared with$45.5 million , or$2.22 per diluted common share, for the year endedDecember 31, 2020 , an increase of$36.0 million , or 79.1%. The increase in net income was primarily the result of a$29.7 million reversal of provision for credit losses, a$25.9 million increase in net interest income, which included the impact of our participation in the PPP loan program, partially offset by higher noninterest expenses due primarily to increased performance-based accruals and acquisition and merger-related expenses. Returns on average equity were 10.38% and 6.22%, returns on average assets were 1.24% and 0.81% and efficiency ratios were 58.86% and 60.55% for the years endedDecember 31, 2021 and 2020, respectively. The efficiency ratio is calculated by dividing total noninterest expense by the sum of net interest income plus noninterest income, excluding net gains and losses on the sale of loans, securities and assets. Additionally, taxes and provision for credit losses are not part of the efficiency ratio calculation.
Net interest income
Net interest income is the difference between interest income on earning assets, such as loans and securities, and interest expense on liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is our largest source of revenue, representing 96.4% of total revenue during 2021. Tax equivalent net interest margin is the ratio of taxable-equivalent net interest income to average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin. TheFederal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is affected by changes in the effective federal funds rate, which is the cost of immediately available overnight funds, and the prime interest rate. The effective federal funds rate decreased 75 basis points (25 basis points in each of July, September and October) to end 2019 at 1.75%. During 2020, the effective federal funds rate decreased 150 basis points in March to end the period at 0.25%. There were no changes to the effective federal funds rate during 2021. Similarly, the prime rate decreased 75 basis points (25 basis points in each of August, September and October) during 2019 to end the year at 4.75%. During 2020, the prime rate decreased 150 basis points in March to end the year at 3.25%. There were no changes to the prime rate during 2021. Net interest income before the provision for credit losses for the year endedDecember 31, 2021 was$228.6 million compared with$202.7 million for the year endedDecember 31, 2020 , an increase of$25.9 million , or 12.8%. The increase in net interest income from the previous year was primarily due to the impact of PPP loan revenue, lower costs related to interest-bearing liabilities and an increase in average interest-earning assets, partially offset by a lower yield on interest-earning assets. Interest income was$253.2 million for the year endedDecember 31, 2021 , an increase of$11.4 million , or 4.7%, compared with$241.8 million for the year endedDecember 31, 2020 primarily due to the increase in average interest-earning asset balances and PPP fee income recognition partially offset by a decrease in yield on interest-earning assets driven by changes in interest rates and the mix of average interest-earning asset balances. Average interest-earning assets increased$922.4 million , or 18.4%, for the year endedDecember 31, 2021 compared with the year endedDecember 31, 2020 primarily due to the increase in average securities of$462.1 million , or 78.5%, and average deposits in other financial institutions of$421.2 million compared to the year endedDecember 31, 2020 . Average loans outstanding increased$39.1 million , or 0.9%, for the year endedDecember 31, 2021 compared to the year ended 2020 primarily due to the origination of PPP and core loans. The increase in average interest-earning asset balances were partially offset by the decrease in average yield on securities to 2.08% from 2.64%, along with the decrease in yield on deposits in other 43
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financial institutions to 0.15% from 0.72% for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 due to the impact of lower interest rates. These decreases were partially offset by the increase in average yield on loans to 5.22% for the year endedDecember 31, 2021 from 5.15% for the same period in 2020. This increase in average yield on loans was primarily due to$26.6 million of PPP fee income recognition during the year endedDecember 31, 2021 compared to$11.0 million recognized for the same period in 2020. As ofDecember 31, 2021 , the balance of net deferred PPP fees was$4.9 million . Interest expense was$24.6 million for the year endedDecember 31, 2021 , a decrease of$14.5 million , or 37.0%, compared with$39.1 million for the year endedDecember 31, 2020 . This decrease was primarily due to lower funding costs on interest-bearing deposits partially offset by an increase in average interest-bearing liabilities. The cost of average interest-bearing liabilities decreased to 66 basis points for the year endedDecember 31, 2021 compared to 119 basis points for the same period in 2020. Average interest-bearing liabilities increased$472.4 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily the result of increased deposits due in part to funds from government stimulus programs such as the PPP and consumer economic impact payments received and organic deposit growth. Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the year endedDecember 31, 2021 was 3.90%, a decrease of 18 basis points compared to 4.08% for the year endedDecember 31, 2020 . The decrease in the net interest margin on a tax equivalent basis was primarily due to the increase in lower-yielding assets driven by the increase in securities and cash, partially offset by decreased funding costs. The average yield on interest-earning assets and the average rate paid on interest-bearing liabilities are primarily impacted by changes in the volume and relative mix of the underlying assets and liabilities as well as changes in market interest rates. The average yield on interest-earning assets of 4.27% and the average rate paid on interest-bearing liabilities of 0.66% for the year endedDecember 31, 2021 decreased by 56 basis points and 53 basis points, respectively, over the same period in 2020. Tax equivalent adjustments to net interest margin are the result of increased or decreased income from tax-free securities by an amount equal to the taxes that would have been paid if the income were fully taxable based on a 21% federal tax rate for the years endedDecember 31, 2021 and 2020, thus making tax-exempt yields relatively more comparable to taxable asset yields. 44
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The following table presents, for the periods indicated, the total dollar amount
of average balances, interest income from average interest-earning assets and
the annualized resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed in both dollars and rates. Any
nonaccruing loans have been included in the table as loans carrying a zero
yield.
For the Years Ended December 31,
2021 2020 2019
Interest Interest Interest
Average Earned/ Average Average Earned/ Average Average Earned/ Average
Balance Interest Paid Yield/ Rate Balance Interest Paid Yield/ Rate Balance Interest Paid Yield/ Rate
(Dollars in thousands)
Assets
Interest-Earning Assets:
Loans $ 4,422,467 $ 230,713 5.22% $ 4,383,375 $ 225,959 5.15% $ 3,831,894 $ 221,363 5.78%
Securities 1,050,376 21,798 2.08% 588,318 15,538 2.64% 355,233 9,909 2.79%
Deposits in other financial
institutions 458,190 673 0.15% 36,945 265 0.72% 74,655 1,635 2.19%
Total interest-earning assets 5,931,033
4.27% 5,008,638$ 241,762 4.83% 4,261,782$ 232,907 5.47% Allowance for credit losses on loans (51,513) (46,680) (28,129) Noninterest-earning assets 680,191 675,701 594,981 Total assets$ 6,559,711 $ 5,637,659 $ 4,828,634 Liabilities and Shareholders' Equity Interest-Bearing Liabilities: Interest-bearing demand deposits$ 574,079 $ 1,409 0.25%$ 385,482 $ 2,045 0.53%$ 345,693 $ 4,010 1.16% Money market and savings deposits 1,571,532 3,956 0.25% 1,316,188 7,326 0.56% 1,037,126 14,297 1.38% Certificates and other time deposits 1,349,216 11,628 0.86% 1,268,080 21,675 1.71% 1,276,684 26,656 2.09% Borrowed funds 144,354 1,878 1.30% 197,525 2,183 1.11% 127,138 4,675 3.68% Subordinated debt 108,588 5,749 5.29% 108,064 5,850 5.41% 64,451 3,732 5.79% Total interest-bearing liabilities 3,747,769$ 24,620 0.66% 3,275,339$ 39,079 1.19% 2,851,092$ 53,370 1.87% Noninterest-Bearing Liabilities: Noninterest-bearing demand deposits 1,983,934 1,593,354 1,194,496 Other liabilities 41,972 37,278 74,777 Total liabilities 5,773,675 4,905,971 4,120,365 Shareholders' equity 786,036 731,688 708,269 Total liabilities and shareholders' equity$ 6,559,711 $ 5,637,659 $ 4,828,634 Net interest rate spread 3.61% 3.64% 3.60% Net interest income and margin(1)$ 228,564 3.85%$ 202,683 4.05%$ 179,537 4.21% Net interest income and margin (tax equivalent)(2)$ 231,315 3.90%$ 204,416 4.08%$ 180,036 4.22%
(1)Net interest margin equals net interest income divided by average interest-earning assets.
(2)In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 21% for the years endedDecember 31, 2021 , 2020 and 2019 and other applicable effective tax rates. 45
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The following table presents information regarding the dollar amount of changes
in interest income and interest expense for the periods indicated for each major
component of interest-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.
For the
Completed exercises
2021 vs. 2020 2020 vs. 2019
Increase Increase
(Decrease) (Decrease)
Due to Change in Due to Change in
Volume Rate Total Volume Rate Total
(Dollars in thousands)
Interest-Earning assets:
Loans $ 2,640 $ 2,114 $ 4,754 $ 32,552 $ (27,956) $ 4,596
Securities 12,203 (5,943) 6,260 6,502 (873) 5,629
Deposits in other financial
institutions 3,022 (2,614) 408 (826) (544) (1,370)
Total increase (decrease) in
interest income 17,865 (6,443) 11,422 38,228 (29,373) 8,855
Interest-Bearing liabilities:
Interest-bearing demand
deposits 1,001 (1,637) (636) 462 (2,427) (1,965)
Money market and savings
deposits 1,421 (4,791) (3,370) 3,847 (10,818) (6,971)
Certificates and other time
deposits 1,387 (11,434) (10,047) (180) (4,801) (4,981)
Borrowed funds (588) 283 (305) 2,588 (5,080) (2,492)
Subordinated debt 28 (129) (101) 2,525 (407) 2,118
Total increase (decrease) in
interest expense 3,249 (17,708) (14,459) 9,242 (23,533) (14,291)
Increase (decrease) in net
interest income $ 14,616 $ 11,265 $ 25,881
Provision for credit losses
Our allowance for credit losses is established through charges to income in the form of the provision in order to bring our allowance for credit losses for various types of financial instruments including loans, securities and unfunded commitments to a level deemed appropriate by management. We recorded a$2.3 million negative provision for credit losses for the year endedDecember 31, 2021 compared to a$27.4 million provision for credit losses for the year endedDecember 31, 2020 . The reversal of provision for credit losses for the year endedDecember 31, 2021 reflected improvements in economic factors and lower net charge-offs compared to the elevated provision expense in 2020, which was driven by the life of loan losses expected within our loan portfolio from the increase in unemployment and other expected economic effects of the COVID-19 pandemic.
Non-interest income
Our primary sources of noninterest income are debit card and ATM card income, service charges on deposit accounts, income earned on bank owned life insurance and nonsufficient funds fees. Noninterest income does not include loan origination fees which are recognized over the life of the related loan as an adjustment to yield using the interest method. Noninterest income totaled$8.6 million for the year endedDecember 31, 2021 compared to$8.2 million for the year endedDecember 31, 2020 , an increase of$406 thousand , or 5.0%. Noninterest income increased in 2021 primarily due to increased debit card and ATM card income partially offset by a decrease in rebates from correspondent bank as a result of the decline in the earnings credit rate and a decrease in gain on sale of securities compared to the year endedDecember 31, 2020 . 46
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The following table presents, for the periods indicated, the major categories of
noninterest income:
For the Years Ended For the Years Ended
December 31, Increase December 31, Increase
2021 2020 (Decrease) 2020 2019 (Decrease)
(Dollars in thousands)
Nonsufficient funds fees $ 464 $ 404 $ 60 $ 404 $ 658 $ (254)
Service charges on deposit accounts 1,671 1,530 141 1,530 1,472 58
Gain on sale of securities 49 287 (238) 287 1,459 (1,172)
(Loss) gain on sale of other real
estate and other repossessed assets (265) (258) (7) (258) 26 (284)
Bank owned life insurance income 554 582 (28) 582 624 (42)
Debit card and ATM card income 2,996 2,205 791 2,205 1,984 221
Rebate from correspondent bank 200 876 (676) 876 3,580 (2,704)
Other(1) 2,893 2,530 363 2,530 3,620 (1,090)
Total noninterest income $ 8,562 $ 8,156 $ 406 $ 8,156 $ 13,423 $ (5,267)
(1)Other includes, among others, bank transfer and letter of credit fees.
Non-interest expenses
Noninterest expense was$139.6 million for the year endedDecember 31, 2021 compared to$127.5 million for the year endedDecember 31, 2020 , an increase of$12.1 million , or 9.5%. This increase was primarily due to increases salaries and benefits, as a result of increased performance-based and profit sharing accruals, acquisition and merger-related expenses associated with the pending merger with CBTX, the write-down of assets related to the closure of a bank office and other expenses partially offset by lower other real estate expenses as$4.1 million of other real estate write-downs were recorded during the year endedDecember 31, 2020 . The following table presents, for the periods indicated, the major categories of noninterest expense: For the Years Ended For the Years Ended December 31, Increase December 31, Increase 2021 2020 (Decrease) 2020 2019 (Decrease) (Dollars in thousands) Salaries and employee benefits(1)$ 90,177 $ 80,152 $ 10,025 $ 80,152 $ 77,593 $ 2,559 Net occupancy and equipment 9,144 7,969 1,175 7,969 8,179 (210) Depreciation 4,254 3,716 538 3,716 3,192 524 Data processing and software amortization 8,862 7,992 870 7,992 7,464 528 Professional fees 3,025 3,128 (103) 3,128 2,333 795 Regulatory assessments andFDIC insurance 3,407 2,926 481 2,926 1,705 1,221 Core deposit intangibles amortization 3,296 3,922 (626) 3,922 4,711 (789) Communications 1,406 1,387 19 1,387 1,839 (452) Advertising 1,692 1,565 127 1,565 2,367 (802) Other real estate expense 548 5,162 (4,614) 5,162 614 4,548 Acquisition and merger-related expenses 2,011 - 2,011 - 1,326 (1,326) Printing and supplies 272 377 (105) 377 511 (134) Other 11,460 9,198 2,262 9,198 8,801 397 Total noninterest expense$ 139,554 $ 127,494 $ 12,060 $ 127,494 $ 120,635 $ 6,859
(1)Total salaries and employee benefits include
47 -------------------------------------------------------------------------------- Table of Contents Salaries and Employee Benefits. Salaries and benefits were$90.2 million for the year endedDecember 31, 2021 , an increase of$10.0 million , or 12.5%, compared to the year endedDecember 31, 2020 due to increased performance-based bonus and profit sharing accruals related to increased net income.
Acquisition and Merger Costs. Acquisition and merger costs of
Other real estate expenses. Other real estate expenses decreased$4.6 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 due to write-downs on several foreclosed properties and related expenses associated with these properties during the year 2020. Other. Other noninterest expenses increased$2.3 million , or 24.6%, for the year endedDecember 31, 2021 compared to the same period in 2020 primarily due to a$1.3 million write-down of assets related to the closure of a bank office during the first quarter 2021. Efficiency Ratio The efficiency ratio is a supplemental financial measure utilized in management's internal evaluation of our performance. We calculate our efficiency ratio by dividing total noninterest expense by the sum of net interest income and noninterest income, excluding net gains and losses on the sale of loans, securities and assets. Additionally, taxes and provision for credit losses are not part of this calculation. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease would indicate a more efficient allocation of resources. Our efficiency ratio decreased to 58.86% for the year endedDecember 31, 2021 compared to 60.55% for the year endedDecember 31, 2020 and 62.99% for the year endedDecember 31, 2019 . We monitor the efficiency ratio in comparison with changes in our total assets and loans, and we believe that maintaining or reducing the efficiency ratio during periods of growth, as we did from 2019 to 2020 and again in 2021, demonstrates the scalability of our operating platform. We expect to continue to benefit from our scalable platform in future periods as we continue to monitor fixed and variable expenses necessary to support our growth.
Income taxes
The amount of federal and state income tax expense is influenced by the amount of pre-tax income, the amount of tax-exempt income and the amount of other nondeductible expenses. Income tax expense increased$7.9 million , or 75.7%, to$18.3 million for the year endedDecember 31, 2021 compared with$10.4 million for the same period in 2020 primarily due to an increase in pre-tax net income. The effective tax rates were 18.4%, 18.6% and 20.2% for the years endedDecember 31, 2021 , 2020 and 2019, respectively.
Quarterly financial information
The following table presents certain unaudited consolidated quarterly financial information regarding the results of operations for the quarters endedDecember 31 ,September 30 ,June 30 andMarch 31 in the years endedDecember 31, 2021 and 2020. This information should be read in conjunction with our consolidated financial statements as of and for the fiscal years endedDecember 31, 2021 and 2020 appearing elsewhere in this Annual Report on Form 10-K. 48
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Net Income
Attributable to Earnings Per Share(1)
Interest Net Interest Common
Income Income Shareholders Basic Diluted
(Dollars in thousands, except per share data)
2021
First quarter $ 62,828 $ 55,698 $ 18,010 $ 0.89 $ 0.89
Second quarter 62,832 56,596 22,925 1.13 1.12
Third quarter 63,893 58,166 19,060 0.94 0.93
Fourth quarter 63,631 58,104 21,558 1.06 1.06
2020
First quarter(2) $ 57,452 $ 45,025 $ 3,516 $ 0.17 $ 0.17
Second quarter(2) 60,452 50,847 9,907 0.49 0.48
Third quarter(2) 60,811 51,909 16,170 0.79 0.79
Fourth quarter 63,047 54,902 15,941 0.78 0.77
(1) Earnings per share is calculated independently for each of the quarters presented and therefore may not total earnings per share for the year.
(2) Does not reflect adoption of ASC 326.
Financial condition
loan portfolio
AT
Total loans as a percentage of deposits were 69.8% and 90.0% as ofDecember 31, 2021 andDecember 31, 2020 , respectively. Total loans as a percentage of assets were 59.4% and 74.2% as ofDecember 31, 2021 andDecember 31, 2020 , respectively. The following table summarizes our loan portfolio by type of loan as of the dates indicated: As of December 31, 2021 2020 2019 2018 2017 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent (Dollars in thousands) Commercial and industrial$ 693,559 16.4 %$ 667,079 14.9 %$ 689,360 17.6 %$ 702,037 18.9 %$ 457,129 20.1 % Mortgage warehouse - 0.0 % - 0.0 % 8,304 0.2 % 48,274 1.3 % 69,456 3.1 % Paycheck Protection Program (PPP) 145,942 3.5 % 569,901 12.7 % - 0.0 % - 0.0 % - 0.0 % Real estate: Commercial real estate (including multi-family residential) 2,104,621 49.9 % 1,999,877 44.5 % 1,873,782 47.9 %
1,650,912 44.6 % 1,080,247 47.5 % Commercial real estate construction and land development 439,125 10.4 % 367,213 8.2 % 410,471 10.5 % 430,128 11.6 % 243,389 10.7 % 1-4 family residential (including home equity) 685,071 16.2 % 737,605 16.4 % 698,957 17.8 % 649,311 17.5 % 301,219 13.3 % Residential construction 117,901 2.8 % 127,522 2.8 % 192,515 4.9 % 186,411 5.0 % 109,116 4.8 % Consumer and other 34,267 0.8 % 22,567 0.5 % 41,921 1.1 % 41,233 1.1 % 10,320 0.5 % Total loans 4,220,486 100.0 % 4,491,764 100.0 % 3,915,310 100.0 % 3,708,306 100.0 % 2,270,876 100.0 % Allowance for credit losses on loans (47,940) (53,173) (29,438) (26,331) (23,649) Loans, net$ 4,172,546 $ 4,438,591 $ 3,885,872 $ 3,681,975 $ 2,247,227 49
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Our lending activities originate from the efforts of our bankers with an emphasis on lending to individuals, professionals, small to medium-sized businesses and commercial companies generally located in theHouston region. Our strategy for credit risk management generally includes well-defined, centralized credit policies, uniform underwriting criteria and ongoing risk monitoring and review processes for all credit exposures. The strategy generally emphasizes regular credit examinations and management reviews of loans. We have certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. We maintain an independent loan review department that reviews and validates the credit risk program on a periodic basis. In addition, an independent third-party loan review is performed on a semi-annual basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by bankers and credit personnel and contained in our policies and procedures.
The main categories of our loan portfolio are described below:
Commercial and Industrial. We make commercial loans in our market area that are underwritten on the basis of the borrower's ability to service the debt from income. In general, commercial loans involve more credit risk than residential mortgage loans and commercial mortgage loans and therefore typically yield a higher return. The increased risk in commercial loans derives from the expectation that commercial and industrial loans generally are serviced principally from the operations of the business, which may not be successful and from the type of collateral securing these loans. As a result, commercial and industrial loans require more extensive underwriting and servicing than other types of loans. Our commercial and industrial loan portfolio increased$26.5 million , or 4.0%, to$693.6 million as ofDecember 31, 2021 compared to$667.1 million as ofDecember 31, 2020 .Mortgage Warehouse . We made loans to unaffiliated mortgage loan originators collateralized by mortgage promissory notes which were segregated in our mortgage warehouse portfolio. These promissory notes originated by our mortgage warehouse customers carried terms and conditions as would be expected in the competitive permanent mortgage market and served as collateral under a traditional mortgage warehouse arrangement whereby such promissory notes were warehoused under a revolving credit facility to allow for the end investor (or purchaser) of the note to receive a complete loan package and remit funds to the bank. For mortgage promissory notes secured by residential property, the warehouse time was normally 10 to 20 days. For mortgage promissory notes secured by commercial property, the warehouse time was normally 40 to 50 days. The funded balance of the mortgage warehouse portfolio can have significant fluctuation based upon market demand for the product, level of home sales and refinancing activity, market interest rates and velocity of end investor processing times. Volumes of the portfolio tend to peak at the end of each month. We made the strategic decision in 2019 to exit this line of business. There were no mortgage warehouse loans of this type as ofDecember 31, 2021 . Paycheck Protection Program (PPP). The CARES Act authorized theSmall Business Administration (SBA) to guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP). As a preferred SBA lender, we were automatically authorized to originate PPP loans. An eligible business could apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly "payroll costs;" or (2)$10.0 million . PPP loans have: (a) an interest rate of 1.0%, (b) a two-year or five-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA provides a 100% guarantee of the PPP loan made to an eligible borrower. The principal balance of the borrower's PPP loan, including any accrued interest, is eligible to be reduced in full, so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. During the year endedDecember 31, 2021 ,Allegiance Bank funded PPP loans totaling over$374.6 million . The balance of PPP loans decreased$424.0 million to$145.9 million as ofDecember 31, 2021 from$569.9 million as ofDecember 31, 2020 due to loan forgiveness.Commercial Real Estate (Including Multi-Family Residential). We make loans collateralized by owner-occupied, nonowner-occupied and multi-family real estate to finance the purchase or ownership of real estate. As ofDecember 31, 2021 andDecember 31, 2020 , 54.6%, of our commercial real estate loans were owner-occupied. Our commercial real estate loan portfolio increased$104.7 million , or 5.2%, to$2.10 billion as ofDecember 31, 2021 from$2.00 billion as ofDecember 31, 2020 primarily as a result of organic loan growth. Included in our commercial real estate portfolio are multi-family residential loans. Our multi-family loans increased$1.2 million , or 1.6%, to$77.1 million as ofDecember 31, 2021 from$75.9 million as ofDecember 31, 2020 . We had 136 multi-family loans with an average loan size of$567 thousand as ofDecember 31, 2021 .Commercial Real Estate Construction andLand Development . We make commercial real estate construction and land development loans to fund commercial construction, land acquisition and real estate development construction. Construction loans involve additional risks as they often involve the disbursement of funds with the repayment dependent on the ultimate success of the project's completion. Sources of repayment for these loans may be pre-committed permanent financing or sale of the developed property. The loans in this portfolio are monitored closely by management. Due to uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to 50
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accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often includes the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. As ofDecember 31, 2021 andDecember 31, 2020 , 22.3% and 26.8%, respectively, of our commercial real estate construction and land development loans were owner-occupied. Our commercial real estate construction and land development land loans increased$71.9 million , or 19.6%, to$439.1 million as ofDecember 31, 2021 compared to$367.2 million as ofDecember 31, 2020 . 1-4 Family Residential (Including Home Equity). Our residential real estate loans include the origination of 1-4 family residential mortgage loans (including home equity and home improvement loans and home equity lines of credit) collateralized by owner-occupied residential properties located in our market area. Our residential real estate portfolio (including home equity) decreased$52.5 million , or 7.1%, to$685.1 million as ofDecember 31, 2021 from$737.6 million as ofDecember 31, 2020 . The home equity, home improvement and home equity lines of credit portion of our residential real estate portfolio increased$1.5 million , or 1.3%, to$119.0 million as ofDecember 31, 2021 from$117.5 million as ofDecember 31, 2020 .Residential Construction . We make residential construction loans to home builders and individuals to fund the construction of single-family residences with the understanding that such loans will be repaid from the proceeds of the sale of the homes by builders or with the proceeds of a mortgage loan. These loans are secured by the real property being built and are made based on our assessment of the value of the property on an as-completed basis. Our residential construction loans portfolio decreased$9.6 million , or 7.5%, to$117.9 million as ofDecember 31, 2021 from$127.5 million as ofDecember 31, 2020 . Consumer and Other. Our consumer and other loan portfolio is made up of loans made to individuals for personal purposes. Generally, consumer loans entail greater risk than residential real estate loans because they may be unsecured or if secured the value of the collateral, such as an automobile or boat, may be more difficult to assess and more likely to decrease in value than real estate. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans. Our consumer and other loan portfolio increased$11.7 million , or 51.8%, to$34.3 million as ofDecember 31, 2021 from$22.6 million as ofDecember 31, 2020 . The contractual maturity ranges of total loans in our loan portfolio and the amount of such loans with predetermined interest rates in each maturity range and the amount of loans with predetermined (fixed) interest rates and floating interest rates in each maturity range, in each case as of the date indicated, are summarized in the following tables: As of December 31, 2021 Due After Due After Due in One Year Five Years One Year Through Through Due After or Less Five Years Fifteen Years Fifteen Years Total (Dollars in thousands) Commercial and industrial$ 296,120 $ 305,836 $ 91,603 $ -$ 693,559 Paycheck Protection Program (PPP) 5,645 140,297 - - 145,942 Real estate: Commercial real estate (including multi-family residential) 282,372 1,217,220 435,746 169,283 2,104,621 Commercial real estate construction and land development 111,320 277,389 23,904 26,512 439,125 1-4 family residential (including home equity) 87,515 324,611 121,289 151,656 685,071 Residential construction 74,994 16,515 26,392 - 117,901 Consumer and other 25,350 8,696 221 - 34,267 Total loans$ 883,316 $ 2,290,564 $ 699,155 $ 347,451 $ 4,220,486 Loans with predetermined (fixed) interest rates$ 558,167 $ 2,033,247
Floating rate loans 325 149
257,317 420,888 268,490 1,271,844 Total loans$ 883,316 $ 2,290,564 $ 699,155 $ 347,451 $ 4,220,486 51
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As of December 31, 2020
Due After Due After
Due in One Year Five Years
One Year Through Through Due After
or Less Five Years Fifteen Years Fifteen Years Total
(Dollars in thousands)
Commercial and industrial $ 313,600 $ 274,675 $ 78,804 $ - $ 667,079
Paycheck Protection Program (PPP) - 569,901 - - 569,901
Real estate:
Commercial real estate (including
multi-family residential) 312,807 1,272,018 285,264 129,788 1,999,877
Commercial real estate construction
and land development 85,194 237,947 30,686 13,386 367,213
1-4 family residential (including home
equity) 104,699 365,001 128,225 139,680 737,605
Residential construction 92,402 15,383 19,737 - 127,522
Consumer and other 26,143 (4,715) (1) 1,139 - 22,567
Total loans $ 934,845 $ 2,730,210 $ 543,855 $ 282,854 $ 4,491,764
Loans with predetermined (fixed)
interest rates $ 580,970 $ 2,488,221
Floating rate loans 353,875
241,989 292,200 205,072 1,093,136 Total loans$ 934,845 $ 2,730,210 $ 543,855 $ 282,854 $ 4,491,764
(1)Includes deferred costs net of
Credit concentrations
The vast majority of our lending activity occurs in theHouston region. Our loans are primarily secured by real estate, including commercial and residential construction, owner-occupied and nonowner-occupied and multi-family commercial real estate, raw land and other real estate based loans located in theHouston region. As ofDecember 31, 2021 , 2020 and 2019, commercial real estate and commercial construction loans represented 60.3%, 52.7% and 58.3%, respectively, of our total loans. Asset Quality We have procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our officers and monitor our delinquency levels for any negative or adverse trends. We had$24.1 million ,$28.9 million and$28.4 million in nonperforming loans as ofDecember 31, 2021 , 2020 and 2019, respectively. If interest on nonaccrual loans had been accrued under the original loan terms,$948 thousand ,$902 thousand and$1.2 million would have been recorded as income for the years endedDecember 31, 2021 , 2020 and 2019, respectively. 52
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The following table presents information regarding nonperforming assets as of
the dates indicated:
As of December 31,
2021 2020 2019 2018 2017
(Dollars in thousands)
Nonaccrual loans:
Commercial and industrial $ 8,358 $ 10,747 $
8,388
Paycheck Protection Program (PPP) - - - - - Real estate: Commercial real estate (including multi-family residential) 12,639 10,081 6,741 17,776 6,110 Commercial real estate construction and land development 63 3,011 9,050 974 - 1-4 family residential (including home equity) 2,875 4,525 3,294 3,201 781 Residential construction - - 746 - - Consumer and other 192 529 152 141 - Total nonaccrual loans 24,127 28,893 28,371 32,953 13,328 Accruing loans 90 or more days past due - - - - - Total nonperforming loans(1) 24,127 28,893 28,371 32,953 13,328 Other real estate - 9,196 8,337 630 365 Other repossessed assets - - - - 205
Total non-performing assets(2)
36,708
Restructured loans(3)
$ 9,068 $ 12,448 $
19,239
Non-performing assets to total assets
0.34 % 0.63 % 0.74 % 0.72 % 0.49 % Nonperforming loans to total loans 0.57 % 0.64 % 0.72 % 0.89 % 0.59 %
(1) Non-performing loans include outstanding loans and loans past due for 90 days or more and still bearing interest.
(2) Non-performing assets include outstanding loans, loans past due 90 days or more and still bearing interest, repossessed assets and other real estate.
(3)Restructured loans represent the balance at the end of the respective period for those performing loans modified in a troubled debt restructuring that are not already presented as a nonperforming loan. Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor's potential operating or financial difficulties. Management monitors these loans closely and reviews their performance on a regular basis. Potential problem loans contain potential weaknesses that could improve, persist or further deteriorate. AtDecember 31, 2021 and 2020, we had$47.1 million and$32.6 million , respectively, in loans of this type which are not included in any of the nonaccrual or 90 days past due loan categories. AtDecember 31, 2021 , potential problem loans consisted of 30 credit relationships. Of the total outstanding balance atDecember 31, 2021 , 59.4% related to six customers in the hotel industry, 9.6% related to one customer in the commercial real estate investment industry, 8.3% related to six customers in the energy-related industry, 7.7% related to three customers in the customer service industry, 4.4% related to one customer in the event center industry, 4.3% related to two customers in the construction services industry, 3.2% related to four customers with homestead loans, 1.5% related to four customers in the commercial services industry, 1.2% related to two customers in the medical industry and 0.4% related to one customer in the wholesaler industry. Weakness in these organizations' operating performance, financial condition and borrowing base deficits, among other factors, have caused us to heighten the attention given to these credits. Potential problem loans impact the allocation of our allowance for credit losses on loans as a result of our risk grade based allocation methodology. See Note 6 - Loans and Allowance for Credit Losses in the accompanying consolidated financial statements for details regarding our allowance allocation methodology. 53
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Nonperforming assets decreased$14.0 million to$24.1 million atDecember 31, 2021 , from$38.1 million atDecember 31, 2020 . Nonaccrual loans consisted of 64 separate credits atDecember 31, 2021 compared to 69 separate credits atDecember 31, 2020 . Nonperforming assets were 0.57% of total loans atDecember 31, 2021 compared to 0.85% atDecember 31, 2020 . The provisions in the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings ("TDR") to loan modifications, such as extensions or deferrals, related to COVID-19. We elected to adopt these provisions of the CARES Act and are following the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by regulatory agencies. During the years endedDecember 31, 2021 and 2020, the Company granted principal and interest deferrals on outstanding loan balances to customers affected by the COVID-19 pandemic. Additionally, upon request and after meeting certain conditions, borrowers could be granted additional payment deferrals subsequent to the first deferral. These deferrals were generally no more than 90 days in duration and were not considered troubled debt restructurings. As ofDecember 31, 2021 , 13 loans with outstanding loan balances of$18.2 million remained on deferral. If the impact of COVID-19 persists, borrower operations do not improve or if other negative events occur, such modified loans could transition to potential problem loans or into problem loans. The following table presents information regarding principal and interest deferrals as ofDecember 31, 2021 associated with loan modifications related to COVID-19: Inside of Deferral Period Outside of Deferral Period
Total loans that have had a deferral
Percentage of Percentage of Percentage of
Outstanding Loan Deferred Loan Total Deferred Loan Total Deferred Loan Total
Balance Balance Deferrals Balance Deferrals Balance Deferrals
(Dollars in thousands)
Commercial and industrial $693,559
5.7 %$ 69,754 9.8 %$ 70,794 9.7 % Paycheck Protection Program (PPP) 145,942 - 0.0 % - 0.0 % - 0.0 % Real estate: Commercial real estate (including multi-family residential) 2,104,621 16,851 92.5 % 539,043 76.1 % 555,894 76.5 % Commercial real estate construction and land development 439,125 95 0.5 % 30,317 4.3 % 30,412 4.2 % 1-4 family residential (including home equity) 685,071 231 1.3 % 67,944 9.6 % 68,175 9.4 % Residential construction 117,901 - 0.0 % 737 0.1 % 737 0.1 % Consumer and other 34,267 - 0.0 % 462 0.1 % 462 0.1 % Total loans$ 4,220,486 $ 18,217 100.0 %$ 708,257 100.0 %$ 726,474 100.0 %
Provision for credit losses
The allowance for credit losses is a valuation allowance that is established
through charges to earnings in the form of a provision for (or reversal of)
credit losses calculated in accordance with ASC 326, that is deducted from the
amortized cost basis of certain assets to present the net amount expected to be
collected. The amount of each allowance account represents management's best
estimate of CECL on these financial instruments considering available
information, from internal and external sources, relevant to assessing exposure
to credit loss over the contractual term of the instrument. Relevant available
information includes historical credit loss experience, current conditions and
reasonable and supportable forecasts. While historical credit loss experience
provides the basis for the estimation of expected credit losses, adjustments to
historical loss information may be made for differences in current
portfolio-specific risk characteristics, environmental conditions or other
relevant factors. While management utilizes its best judgment and information
available, the ultimate adequacy of our allowance accounts is dependent upon a
variety of factors beyond our control, including the performance of our
portfolios, the economy, changes in interest rates and the view of the
regulatory authorities toward classification of assets. For additional
information regarding critical accounting policies, refer to Note 1 - Nature of
Operations and Summary of Significant Accounting and Reporting Policies and Note
6 - Loans and Allowance for Credit Losses in the accompanying notes to
consolidated financial statements.
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Allowance for credit losses on loans
The allowance for credit losses on loans represents management's estimates of current expected credit losses in the Company's loan portfolio. Pools of loans with similar risk characteristics are collectively evaluated, while loans that no longer share risk characteristics with loan pools are evaluated individually. The Company retroactively adopted ASC Topic 326 effectiveJanuary 1, 2020 during the fourth quarter of 2020. Upon adoption of CECL, the Company recognized an increase in allowance for credit losses on loans of$3.1 million with a corresponding decrease in retained earnings (after-tax). Additionally, the Company recognized an increase in the allowance for credit losses on loans of$2.1 million related to loans acquired from Post Oak, due to the reclassification of PCD discounts as result of adopting CECL. AtDecember 31, 2021 , our allowance for credit losses on loans amounted to$47.9 million , or 1.14% of total loans (1.18% excluding PPP loans), compared with$53.2 million , or 1.18% of total loans (1.36% excluding PPP loans), as ofDecember 31, 2020 . This decrease in the allowance for credit losses on loans during 2021 reflected improvements in economic factors compared to increased expected losses during 2020 resulting from a deterioration in forecasted economic conditions and the current and uncertain future impacts associated with the COVID-19 pandemic and volatility in crude oil prices along with the increased level of net charge-offs, the deterioration of credit quality and other changes within the loan portfolio during 2020. Collective loss estimates are determined by applying reserve factors, designed to estimate current expected credit losses, to amortized cost balances over the remaining contractual life of the collectively evaluated portfolio. Loans with similar risk characteristics are aggregated into homogeneous pools. The allowance for credit losses on loans also includes qualitative adjustments to bring the allowance to the level management believes is appropriate based on factors that have not otherwise been fully accounted for, including adjustments for foresight risk, input imprecision and model imprecision. Credit losses for loans that no longer share risk characteristics with the loan pools are estimated on an individual basis. Individual credit loss estimates are typically performed for nonaccrual loans and modified loans classified as TDRs and are based on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows. 55
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The following table presents, as of the dates and for the periods indicated, an analysis of the allowance for credit losses on loans and other related data:
As of
and for the years ended
2021 2020 2019 2018 2017
(Dollars in thousands)
Average loans outstanding $ 4,422,467 $
4,383,375
Gross outstanding loans at the end of the period
4,220,486 4,491,764 3,915,310 3,708,306 2,270,876 Allowance for credit losses on loans at beginning of period 53,173 29,438 26,331 23,649 17,911 Impact of ASC 326 adoption - 5,225 - - - Provision for loan losses (2,923) 26,543 5,939 4,248 13,188 Charge-offs: Commercial and industrial loans (1,579) (2,938) (2,688) (2,424) (7,673) Mortgage warehouse - - - - - Real estate: Commercial real estate (including multi-family residential) (857) (2,562) (80) (42) (124) Commercial real estate construction and land development - (2,573) (44) - - 1-4 family residential (including home equity) (21) (351) (295) (25) - Residential construction - - - - - Consumer and other (24) (159) (34) (24) (196) Total charge-offs for all loan types (2,481) (8,583) (3,141) (2,515) (7,993)
Recoveries:
Commercial and industrial loans 164 473 274 847 516 Mortgage warehouse - - - - - Real estate: Commercial real estate (including multi-family residential) - 72 3 102 3 Commercial real estate construction and land development - - - - 10 1-4 family residential (including home equity) - - - - 10 Residential construction - - - - - Consumer and other 7 5 32 - 4 Total recoveries for all loan types 171 550 309 949 543 Net charge-offs (2,310) (8,033) (2,832) (1,566) (7,450) Allowance for credit losses on loans at end of period $ 47,940 $
53 173
Allowance for credit losses on loans/total loans
1.14 % 1.18 % 0.75 % 0.71 % 1.04 %
Net charge-offs to average loans 0.05 % 0.18 % 0.07 % 0.06 % 0.36 %
Allowance for credit losses on loans
to nonperforming loans 198.70 % 184.03 % 103.76 % 79.90 % 177.44 %
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The following table shows the allocation of the allowance for credit losses on
loans among our loan categories and the percentage of the respective loan
category to total loans held for investment as of the dates indicated. The
allocation is made for analytical purposes and is not necessarily indicative of
the categories in which future losses may occur. The total allowance is
available to absorb losses from any loan category.
As of December 31,
2021 2020 2019 2018 2017
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
Balance of allowance for
credit losses on loans
applicable to:
Commercial and industrial
loans $ 16,629 16.4 % $ 17,738 14.9 % $ 8,818 17.6 % $ 8,351 18.9 % $ 7,694 20.1 %
Mortgage Warehouse - 0.0 % - 0.0 % - 0.2 % - 1.3 % - 3.1 %
Paycheck Protection
Program (PPP) - 3.5 % - 12.7 % - 0.0 % - 0.0 % - 0.0 %
Real estate:
Commercial real estate
(including multi-family
residential) 23,143 49.9 % 23,934 44.5 % 11,170 47.9 % 11,901 44.6 % 10,253 47.5 %
Commercial real estate
construction and land
development 6,263 10.4 % 6,939 8.2 % 4,421 10.5 % 2,724 11.6 % 2,525 10.7 %
1-4 family residential
(including home equity) 847 16.2 % 3,279 16.4 % 3,852 17.8 % 2,242 17.5 % 2,140 13.3 %
Residential construction 975 2.8 % 870 2.8 % 1,057 4.9 % 1,040 5.0 % 942 4.8 %
Consumer and other 83 0.8 % 413 0.5 % 120 1.1 % 73 1.1 % 95 0.5 %
Total allowance for
credit losses on loans $ 47,940 100.0 % $ 53,173 100.0 % $ 29,438 100.0 % $ 26,331 100.0 % $ 23,649 100.0 %
The Company believes that the allowance for credit losses on loans at
December 31, 2021 is adequate based upon management's best estimate of current
expected credit losses within the existing portfolio of loans. Nevertheless, the
Company could sustain losses in future periods which could be substantial in
relation to the size of the allowance at December 31, 2021 should any of the
factors considered by management in making this estimate change.
Allowance for credit losses on unfunded commitments
Upon adoption of ASC Topic 326 during the fourth quarter of 2020 retroactive toJanuary 1, 2020 , the Company established an allowance for credit losses on unfunded commitments of$3.9 million with a corresponding decrease in retained earnings (after-tax). The allowance for credit losses on unfunded commitments estimates current expected credit losses over the contractual period in which there is exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The allowance for credit losses on unfunded commitments is a liability account reported as a component of other liabilities in our consolidated balance sheets and is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on the commitments expected to fund. The estimate of commitments expected to fund is affected by historical analysis looking at utilization rates. The expected credit loss rates applied to the commitments expected to fund are affected by the general valuation allowance utilized for outstanding balances with the same underlying assumptions and drivers. AtDecember 31, 2021 , our allowance for credit losses on unfunded commitments amounted to$5.3 million compared to$4.7 million atDecember 31, 2020 . See Note 6 - Loans and Allowance for Credit Losses in our audited consolidated financial statement included elsewhere in this Annual Report on Form 10-K for additional information regarding how we estimate and evaluate the credit risk in our loan portfolio. Available forSale Securities We use our securities portfolio to provide a source of liquidity, to provide an appropriate return on funds invested, to manage interest rate risk, to meet pledging requirements and to meet regulatory capital requirements. As ofDecember 31, 2021 , the carrying amount of investment securities totaled$1.77 billion , an increase of$1.00 billion , or 129.5%, compared with$772.9 million as of 57
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All of the securities in our securities portfolio are classified as available for sale. Securities classified as available for sale are measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, as accumulated comprehensive income or loss until realized. Interest earned on securities is included in interest income.
The following table summarizes the amortized cost and fair value of securities in our securities portfolio as of the dates indicated:
December 31, 2021
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
Available for Sale
U.S. government and agency securities $ 401,811 $ 414 $ (1,674) $ 400,551
Municipal securities 468,164 30,483 (1,547) 497,100
Agency mortgage-backed pass-through
securities 307,097 2,075 (6,576) 302,596
Agency collateralized mortgage obligations 443,277 2,026 (4,247) 441,056
Corporate bonds and other 130,314 2,922 (774) 132,462
Total $ 1,750,663 $ 37,920 $ (14,818) $ 1,773,765
December 31, 2020
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(Dollars in thousands)
Available for Sale
U.S. government and agency securities $ 25,545 $ 654 $ - $ 26,199
Municipal securities 392,586 35,079 (60) 427,605
Agency mortgage-backed pass-through
securities 167,606 3,829 (146) 171,289
Agency collateralized mortgage obligations 80,182 4,263 (75) 84,370
Corporate bonds and other 62,124 1,352 (49) 63,427
Total $ 728,043 $ 45,177 $ (330) $ 772,890
Investment securities classified as available for sale or held to maturity are
evaluated for expected credit losses under ASC Topic 326, "Financial Instruments
- Credit Losses." See Note 5 - Securities to our audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K for additional
information.
As of December 31, 2021 , we did not expect to sell any securities classified as
available for sale with unrealized losses, and management believes that we more
likely than not will not be required to sell any securities before their
anticipated recovery at which time we will receive full value for the
securities. The unrealized losses are largely due to increases in market
interest rates over the yields available at the time the underlying securities
were purchased.
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The following table summarizes the contractual maturity of securities and their
weighted average yields as of the dates indicated. The contractual maturity of a
mortgage-backed security is the date at which the last underlying mortgage
matures. Available for sale securities are shown at amortized cost. For purposes
of the table below, municipal securities are calculated on a tax equivalent
basis.
December 31, 2021
After One Year but Within Five After Five Years but Within Ten
Within One Year Years Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
(Dollars in thousands)
Available for Sale
U.S. government and agency
securities $ 4,127 3.25 % $ 249,188 0.80 % $ 22,752 1.29 % $ 125,744 0.98 % $ 401,811 0.91 %
Municipal securities 2,383 3.16 % 5,548 3.63 % 73,369 2.93 % 386,864 3.06 % 468,164 3.05 %
Agency mortgage-backed
pass-through securities - 0.00 % 4,954 2.96 % 4,805 3.21 % 297,338 1.35 % 307,097 1.41 %
Agency collateralized
mortgage obligations - 0.00 % 11,212 2.80 % 14,020 2.72 % 418,045 1.34 % 443,277 1.42 %
Corporate bonds and other - 0.00 % 3,000 5.75 % 50,388 4.72 % 76,926 2.33 % 130,314 3.34 %
Total $ 6,510 3.22 % $ 273,902 1.04 % $ 165,334 3.24 % $ 1,304,917 1.88 % $ 1,750,663 1.88 %
December 31, 2020
After
One year but within five years After five years but within ten years
Within One Year Years Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
(Dollars in thousands)
Available for Sale
U.S. government and agency
securities $ - 0.00 % $ 5,526 3.30 % $ 18,536 1.62 % $ 1,483 2.74 % $ 25,545 2.05 %
Municipal securities 110 4.40 % 4,323 3.34 % 51,703 3.12 % 336,450 3.27 % 392,586 3.26 %
Agency mortgage-backed
pass-through securities - 0.00 % 5,378 2.99 % 6,681 3.31 % 155,547 1.65 % 167,606 1.76 %
Agency collateralized
mortgage obligations - 0.00 % - 0.00 % 25,354 2.79 % 54,828 1.66 % 80,182 2.01 %
Corporate bonds and other - 0.00 % 3,000 5.75 % 35,000 5.72 % 24,124 3.10 % 62,124 4.70 %
Total $ 110 4.40 % $ 18,227 3.62 % $ 137,274 3.53 % $ 572,432 2.67 % $ 728,043 2.86 %
The contractual maturity of mortgage-backed securities and collateralized
mortgage obligations is not a reliable indicator of their expected life because
borrowers generally have the right to prepay their obligations. Mortgage-backed
securities and collateralized mortgage obligations are typically issued with
stated principal amounts and are backed by pools of mortgage loans with varying
maturities. The term of the underlying mortgages and loans may vary
significantly due to the ability of a borrower to prepay and, in particular,
monthly pay downs on mortgage-backed securities tend to cause the average life
of the securities to be much different than the stated contractual maturity.
During a period of increasing interest rates, fixed rate mortgage-backed
securities do not tend to experience heavy prepayments of principal and,
consequently, the average life of this security will be lengthened. If interest
rates begin to fall, prepayments may increase, thereby shortening the estimated
life of this security.
As of December 31, 2021 and 2020, we did not own securities of any one issuer
(other than the U.S. government and its agencies or sponsored entities) for
which the aggregate adjusted cost exceeded 10% of our consolidated shareholders'
equity.
The average yield of our securities portfolio was 2.08% during the year ended
December 31, 2021 compared with 2.64% for the year ended December 31, 2020 . The
decrease in average yield during 2021 compared to 2020 was primarily due to the
lower interest rate environment over the prior year partially offset by the
growth in our securities portfolio during the year.
Our goodwill was
resulting from business combinations represents the excess of the consideration paid over the fair value of the net assets acquired.
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depreciation on
Our core deposit intangibles, net, as ofDecember 31, 2021 was$14.7 million compared to$18.0 million as ofDecember 31, 2020 . Core deposit intangibles are amortized over the estimated useful life of seven to ten years.
Deposits
Our lending and investing activities are primarily funded by deposits. We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and certificates and other time accounts. We rely primarily on convenient locations, personalized service and our customer relationships to attract and retain these deposits. We seek customers that will both engage in a lending and deposit relationship with us. Total deposits atDecember 31, 2021 were$6.05 billion , an increase of$1.06 billion , or 21.2%, compared with$4.99 billion atDecember 31, 2020 . The deposit growth we experienced was largely the result of growth in our loan customer base, partially a result of our participation in the PPP Program, many of whom also established a deposit relationship with us. Noninterest-bearing deposits atDecember 31, 2021 were$2.24 billion , an increase of$538.5 million , or 31.6%, compared with$1.70 billion atDecember 31, 2020 . Interest-bearing deposits atDecember 31, 2021 were$3.80 billion , an increase of$520.6 million , or 15.9%, compared with$3.28 billion atDecember 31, 2020 .
The following table shows the daily average balances and the weighted average rates paid on deposits for the periods indicated:
For the Years Ended December 31,
2021 2020 2019
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
(Dollars in thousands)
Interest-bearing demand$ 574,079 0.25 %$ 385,482 0.53 %$ 345,693 1.16 % Money market and savings 1,571,532 0.25 % 1,316,188 0.56 % 1,037,126 1.38 % Certificates and other time 1,349,216 0.86 % 1,268,080 1.71 % 1,276,684 2.09 % Total interest-bearing deposits 3,494,827 0.49 % 2,969,750 1.05 % 2,659,503 1.69 % Noninterest-bearing deposits 1,983,934 - 1,593,354 - 1,194,496 - Total deposits$ 5,478,761 0.31 %$ 4,563,104 0.68 %$ 3,853,999 1.17 % Our ratio of average noninterest-bearing deposits to average total deposits was 36.2%, 34.9% and 31.0% for the years endedDecember 31, 2021 , 2020 and 2019, respectively.
The following table shows the amount of our certificates of deposit that are
As of December 31,
2021 2020
(Dollars in
thousands)
Three months or less$ 252,147 $ 230,168 Over three months through six months 274,740 219,492 Over six months through 12 months 322,612 297,618 Over 12 months through three years 210,941 314,548 Over three years 28,732 26,856 Total$ 1,089,172 $ 1,088,682 60
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Loans
We have an available line of credit with the FHLB ofDallas , which allows us to borrow on a collateralized basis. FHLB advances are used to manage liquidity as needed. The advances are secured by a blanket lien on certain loans and certain securities. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits. AtDecember 31, 2021 , the Company had total borrowing capacity of$2.60 billion , of which$1.16 billion was available under this agreement and$1.45 billion was outstanding. FHLB advances of$90.0 million were outstanding atDecember 31, 2021 , at a weighted average rate of 0.74%. Letters of credit were$1.36 billion atDecember 31, 2021 , of which$1.22 billion will expire in 2022,$64.1 million will expire in 2023,$55.9 million will expire in 2024 and$11.0 million will expire in 2025. Credit Agreement As ofDecember 31, 2021 , the balance of the revolving credit agreement with another financial institution was zero compared to$15.6 million as ofDecember 31, 2020 . The interest rate on the outstanding debt under the credit agreement is the Prime Rate minus 25 basis points, or 3.00% atDecember 31, 2021 , and is paid quarterly. OnDecember 28, 2018 , we amended the credit agreement to increase the maximum commitment to advance funds to$45.0 million which will reduce annually by$7.5 million beginning inDecember 2020 and on eachDecember 22nd for the following years thereafter. We are required to repay any outstanding balance in excess of the then-current maximum commitment amount. The revised agreement will mature inDecember 2025 and is secured by 100% of the capital stock of the Bank. Our credit agreement contains certain restrictive covenants, including limitations on our ability to incur additional indebtedness or engage in certain fundamental corporate transactions, such as mergers, reorganizations and recapitalizations. Additionally, the Bank is required to maintain a "well-capitalized" rating, a minimum return on assets of 0.65%, measured quarterly, a ratio of loan loss reserve to non-performing loans equal to or greater than 75%, measured quarterly, and a ratio of non-performing assets to aggregate equity plus loan loss reserves minus intangible assets of less than 35%, measured quarterly. As ofDecember 31, 2021 , we believe we were in compliance with all such debt covenants and had not been made aware of any noncompliance by the lender.
Subordinated debt
Junior subordinated debentures
In connection with the F&M Bancshares acquisition, we assumed junior subordinated debentures with an aggregate original principal amount of$11.3 million and a current fair value of$9.8 million atDecember 31, 2021 . At acquisition, we recorded a discount of$2.5 million on the debentures. The difference between the carrying value and contractual balance will be recognized as a yield adjustment over the remaining term for the debentures. See Note 13 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Subordinated Notes InDecember 2017 , the Bank completed the issuance, through a private placement, of$40.0 million aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Notes") dueDecember 15, 2027 . The Notes were issued at a price equal to 100% of the principal amount, resulting in net proceeds to the Bank of$39.4 million . The Bank used the net proceeds from the offering to support its growth and for general corporate purposes. The Notes are intended to qualify as Tier 2 capital for bank regulatory purposes. The Notes bear a fixed interest rate of 5.25% per annum until (but excluding)December 15, 2022 , payable semi-annually in arrears. FromDecember 15, 2022 , the Notes will bear a floating rate of interest equal to 3-Month LIBOR + 3.03% until the Notes mature onDecember 15, 2027 , or such earlier redemption date, payable quarterly in arrears. The Notes will be redeemable by the Bank, in whole or in part, on or afterDecember 15, 2022 or, in whole but not in part, upon the occurrence of certain specified tax events, capital events or investment company events. Any redemption will be at a redemption price equal to 100% of the principal amount of Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Notes are not subject to redemption at the option of the holders.
In
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principal amount, resulting in net proceeds to the Company of$58.6 million . The Company intends to use the net proceeds from the offering to support its growth and for general corporate purposes. The Company Notes bear a fixed interest rate of 4.70% per annum until (but excluding)October 1, 2024 , payable semi-annually in arrears onApril 1 andOctober 1 , commencing onApril 1, 2020 . Thereafter, fromOctober 1, 2024 through the maturity date,October 1, 2029 , or earlier redemption date, the Company Notes will bear interest at a floating rate equal to the then-current three-month LIBOR, plus 313 basis points (3.13%) for each quarterly interest period (subject to certain provisions set forth under "Description of the Notes-Interest Rates and Interest Payment Dates" included in the Prospectus Supplement for the Company Notes), payable quarterly in arrears onJanuary 1 ,April 1 ,July 1 andOctober 1 of each year. Any redemption will be at a redemption price equal to 100% of the principal amount of Company Notes being redeemed, plus accrued and unpaid interest, and will be subject to, and require, prior regulatory approval. The Company Notes are not subject to redemption at the option of the holders.
Cash and capital resources
Liquidity
Liquidity is the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs and to maintain reserve requirements to operate on an ongoing basis and manage unexpected events, all at a reasonable cost. During the years endedDecember 31, 2021 , 2020 and 2019, our liquidity needs have been met by deposits, borrowed funds, security and loan maturities and amortizing investment and loan portfolios. The Bank has access to purchased funds from correspondent banks, and advances from the FHLB are available under a security and pledge agreement to take advantage of investment opportunities. Average assets totaled$6.56 billion ,$5.64 billion and$4.83 billion for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The following table illustrates, during the periods presented, the mix of our funding sources and the average assets in which those funds are invested as a percentage of our average total assets for the period indicated.
For the years ended
2021 2020 2019 Sources of Funds: Deposits: Noninterest-bearing 30.2 % 28.3 % 24.7 % Interest-bearing 53.3 % 52.7 % 55.2 % Borrowed funds 2.2 % 3.5 % 2.6 % Subordinated debt 1.7 % 1.9 % 1.3 % Other liabilities 0.6 % 0.6 % 1.5 % Shareholders' equity 12.0 % 13.0 % 14.7 % Total 100.0 % 100.0 % 100.0 % Uses of Funds: Loans 67.4 % 77.7 % 79.4 % Securities 16.0 % 10.4 % 7.4 % Deposits in other financial institutions 7.0 % 0.7 % 1.5 % Noninterest-earning assets 9.6 % 11.2 % 11.7 % Total 100.0 % 100.0 % 100.0 % Average noninterest-bearing deposits to average deposits 36.2 % 34.9 % 31.0 % Average loans to average deposits 80.7 % 96.1 % 99.4 % Our largest source of funds is deposits and our largest use of funds is loans. Our average deposits increased$915.7 million , or 20.1%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Our average loans increased$39.1 million , or 0.9%, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . We predominantly invest 62
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excess deposits inFederal Reserve Bank of Dallas balances, securities, interest-bearing deposits at other banks or other short-term liquid investments until the funds are needed to fund loan growth. Our securities portfolio had a weighted average life of 6.5 years and modified duration of 4.6 years atDecember 31, 2021 , and a weighted average life of 7.9 years and modified duration of 6.2 years atDecember 31, 2020 . As ofDecember 31, 2021 andDecember 31, 2020 , we had outstanding commitments to extend credit of$1.09 billion and$831.8 million , respectively, and commitments associated with outstanding letters of credit of$21.2 million and$17.3 million , respectively. Since commitments associated with commitments to extend credit and outstanding letters of credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. AtDecember 31, 2021 and 2020, the Company had FHLB Letters of Credit in the amount of$1.36 billion and$410.2 million , respectively, pledged as collateral for public and other deposits of state and local government agencies. For more information on FHLB borrowings, refer to Note 12 - Borrowings and Borrowing Capacity.
From
As ofDecember 31, 2021 , we had cash and cash equivalents of$757.5 million compared with$422.8 million atDecember 31, 2020 , an increase of$334.5 million , or 79.2%. This increase in cash and cash equivalents was primarily due to the increase of$1.06 billion in deposits partially offset by the increase in total securities of$1.00 billion . In the ordinary course of business we have entered into contractual obligations and have made other commitments to make future payments. Refer to the accompanying notes to consolidated financial statements elsewhere in this report for the expected timing of such payments as ofDecember 31, 2021 . These include payments related to (i) operating leases (Note 9 - Leases), (ii) time deposits with stated maturity dates (Note 10 - Deposits), (iii) long-term borrowings (Note 12 - Borrowings and Borrowing Capacity) and (iv) commitments to extend credit and standby letters of credit (Note 17 - Off-Balance Sheet Arrangements, Commitments and Contingencies).
Our commitments related to outstanding standby letters of credit and expiring credit extension commitments by period are summarized below as of
As of December 31, 2021
More than One Three years or
Year but Less More but Less
One Year or Than Than Five Years or
Less Three Years Five Years More Total
(Dollars in thousands)
Commitments to extend credit $ 492,733 $ 187,840 $
119,296
Stand-by letters of credit
19,459 1,677 24 - 21,160 Total$ 512,192 $ 189,517 $ 119,320 $ 291,678 $ 1,112,707 Commitments to Extend Credit. We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. The amount and type of collateral obtained, if considered necessary by us, upon extension of credit, is based on management's credit evaluation of the customer. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses. Standby Letters of Credit. Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to a third party. If the customer does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment and we would have the rights to the underlying collateral. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. Our policies generally require that standby letter of credit arrangements are backed by promissory notes that contain security and debt covenants similar to those contained in loan agreements. 63
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Capital resources
Capital management consists of providing equity to support our current and future operations. We are subject to capital adequacy requirements imposed by theFederal Reserve and the Bank is subject to capital adequacy requirements imposed by theFDIC . Both theFederal Reserve and theFDIC have adopted risk-based capital requirements for assessing bank holding companies and bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. Under current guidelines, the minimum ratio of total capital to risk-weighted assets (which are primarily the credit risk equivalents of balance sheet assets and certain off-balance sheet items such as standby letters of credit) is 8.0%. At least half of total capital must be composed of tier 1 capital, which includes common shareholders' equity (including retained earnings), less goodwill, other disallowed intangibles and disallowed deferred tax assets, among other items. TheFederal Reserve also has adopted a minimum leverage ratio, requiring tier 1 capital of at least 4.0% of average quarterly total consolidated assets, net of goodwill and certain other intangible assets, for all but the most highly rated bank holding companies. The federal banking agencies have also established risk-based and leverage capital guidelines thatFDIC -insured depository institutions are required to meet. These regulations are generally similar to those established by theFederal Reserve for bank holding companies. Under the Federal Deposit Insurance Act, the federal bank regulatory agencies must take "prompt corrective action" against undercapitalizedU.S. depository institutions.U.S. depository institutions are assigned one of five capital categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized," and are subjected to different regulation corresponding to the capital category within which the institution falls. A depository institution is deemed to be "well capitalized" if the banking institution has a total risk-based capital ratio of 10.0% or greater, a tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% and a leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific level for any capital measure. Under certain circumstances, a well-capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including: termination of deposit insurance by theFDIC , restrictions on certain business activities and appointment of theFDIC as conservator or receiver. As ofDecember 31, 2021 and 2020, the Bank was well-capitalized. Basel III Capital Rules impacted regulatory capital ratios of banking organizations in the following manner: created a new requirement to maintain a ratio of "common equity Tier 1 capital" to total risk-weighted assets of not less than 4.5%; increased the minimum leverage capital ratio to 4.0% for all banking organizations; increased the minimum tier 1 risk-based capital ratio from 4.0% to 6.0%; and maintained the minimum total risk-based capital ratio at 8.0%. In addition, the Basel III Capital Rules subject a banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a "capital conservation buffer" of common equity Tier 1 capital. The implementation of the capital conservation buffer began onJanuary 1, 2016 at the 0.625% level and was phased in over a three-year period (increasing by 0.625% on each subsequentJanuary 1 , until it reached 2.5% onJanuary 1, 2019 ). The effect of the capital conservation buffer is to increase the minimum common equity Tier 1 capital ratio to 7.0%, the minimum tier 1 risk-based capital ratio to 8.5% and the minimum total risk-based capital ratio to 10.5%. 64
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The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted capital ratios as at
To Be Categorized As
Well
Minimum Required Capitalized Under
for Capital Minimum Required Plus Prompt Corrective
Actual Ratio Adequacy Purposes Capital Conservation Buffer Action Provisions
ALLEGIANCE BANCSHARES, INC.
(Consolidated)
Total capital (to risk weighted assets) 16.08% 8.00% 10.50% N/A
Common equity Tier 1 capital (to risk
weighted assets) 12.47% 4.50% 7.00% N/A
Tier 1 capital (to risk weighted assets) 12.69% 6.00% 8.50% N/A
Tier 1 capital (to average tangible
assets) 8.53% 4.00% 4.00% N/A
ALLEGIANCE BANK:
Total capital (to risk weighted assets) 14.71% 8.00% 10.50% 10.00%
Common equity Tier 1 capital (to risk
weighted assets) 12.63% 4.50% 7.00% 6.50%
Tier 1 capital (to risk weighted assets) 12.63% 6.00% 8.50% 8.00%
Tier 1 capital (to average tangible
assets) 8.49% 4.00% 4.00% 5.00%
Total shareholder's equity was $816.5 million at December 31, 2021 , compared
with $758.7 million at December 31, 2020 , an increase of $57.8 million , or 7.6%,
primarily due to net income during 2021 partially offset by dividends paid on
common stock during the year. We paid quarterly dividends of $0.12 per common
share during each of the first, second, third and fourth quarters of 2021.
Asset/liability management and interest rate risk
Our asset liability and interest rate risk policy provides management with the guidelines for effective balance sheet management. We have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines. As a financial institution, a component of the market risk that we face is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
In 2021, we terminated an interest rate swap that we originally entered into in 2020 with the aim of reducing interest rate risk. See Note 11 – Derivatives. Due to the nature of our business, we are not subject to currency risk or commodity price risk. We do not own any business assets. We manage our interest rate exposure by structuring our balance sheet in the normal course of community banking.
Our exposure to interest rate risk is managed by our Asset Liability Committee
("ALCO"), which is composed of certain members of our Board of Directors and
Bank management. The ALCO formulates strategies based on appropriate levels of
interest rate risk. In determining the appropriate level of interest rate risk,
the ALCO considers the impact on earnings and capital of the current outlook on
interest rates, potential changes in interest rates, regional economies,
liquidity, business strategies and other factors. The ALCO meets regularly to
review, among other things, the sensitivity of assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, purchase and sale activities, commitments to
originate loans and the maturities of investments and borrowings. Additionally,
the ALCO reviews liquidity, cash flow flexibility, maturities of deposits and
consumer and commercial deposit activity.
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We use an interest rate risk simulation model and shock analysis to test the
interest rate sensitivity of net interest income and the balance sheet,
respectively. All instruments on the balance sheet are modeled at the instrument
level, incorporating all relevant attributes such as next reset date, reset
frequency and call dates, as well as prepayment assumptions for loans and
securities and decay rates for nonmaturity deposits. Assumptions based on past
experience are incorporated into the model for nonmaturity deposit account decay
rates. The assumptions used are inherently uncertain and, as a result, the model
cannot precisely measure future net interest income or precisely predict the
impact of fluctuations in market interest rates on net interest income. Actual
results will differ from the model's simulated results due to timing, magnitude
and frequency of interest rate changes as well as changes in market conditions
and the application and timing of various management strategies.
We utilize static balance sheet rate shocks to estimate the potential impact on
net interest income of changes in interest rates under various rate scenarios.
This analysis estimates a percentage of change in the metric from the stable
rate base scenario versus alternative scenarios of rising and falling market
interest rates by instantaneously shocking a static balance sheet.
The following table summarizes the simulated change in net interest income and
the economic value of equity over a 12-month horizon as of the dates indicated:
Percent Change in Net Interest Income Percent Change in Economic Value of Equity
Change in Interest As of December 31,
Rates (Basis Points) As of December 31, 2021 2020 As of December 31, 2021 As of December 31, 2020
+300 (0.1)% (3.9)% (1.0)% 10.8%
+200 (0.7)% (3.1)% 1.1% 8.8%
+100 (0.7)% (1.9)% 1.6% 5.2%
Base 0.0% 0.0% 0.0% 0.0%
-100 (3.5)% (3.7)% (3.3)% (12.9)%
These results are primarily due to the size of our cash position, the size and
duration of our loan and securities portfolio, the duration of our borrowings
and the expected behavior of demand, money market and savings deposits during
such rate fluctuations. During 2021, our assets increased, the overall duration
of our assets decreased, non-maturity deposit balances increased and FHLB
borrowings represented a smaller proportion of our funding mix at year end as
deposit growth exceeded loan growth in 2021.
GAAP Reconciliation and Management’s Explanation of Non-GAAP Financial Measures
We identify certain financial measures discussed in this Annual Report on Form 10-K as being "non-GAAP financial measures." In accordance with theSEC's rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles as in effect from time to time inthe United States in our statements of income, balance sheet or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both. The non-GAAP financial measures that we discuss in this Annual Report on Form 10-K should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Annual Report on Form 10-K may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this Annual Report on Form 10-K when comparing such non-GAAP financial measures.
Our management uses these non-GAAP financial measures in its analysis of our performance:
•"Tangible Shareholders' Equity" is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. Tangible shareholders' equity is defined as total shareholders' equity reduced by goodwill and core deposit intangibles, net of accumulated amortization. This measure is important to investors interested in changes from period to period in shareholders' equity, exclusive of changes in intangible assets. For tangible shareholders' equity, the most directly comparable financial measure calculated in accordance with GAAP is total shareholders' equity.Goodwill and other intangible assets have the effect of increasing total shareholders' equity while not increasing our tangible equity. 66
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•"Tangible Book Value Per Share" is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. Tangible book value per share is defined as total shareholders' equity reduced by goodwill and core deposit intangibles, net of accumulated amortization, divided by total shares outstanding. This measure is important to investors interested in changes from period to period in book value per share, exclusive of changes in intangible assets. For tangible book value per share, the most directly comparable financial measure calculated in accordance with GAAP is our book value per share. •"Return on Average Tangible Shareholders' Equity" is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. Return on average tangible shareholders' equity is computed by dividing net earnings by average total shareholders' equity reduced by average goodwill and core deposit intangibles, net of accumulated amortization. For return on average tangible shareholders' equity, the most directly comparable financial measure calculated in accordance with GAAP is return on average shareholders' equity. This measure is important to investors because it measures the performance of the business consistently, exclusive of changes in intangible assets. •"Tangible Equity to Tangible Assets" is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. Tangible equity to tangible assets is defined as total shareholders' equity reduced by goodwill and core deposit intangibles, net of accumulated amortization, divided by tangible assets, which are total assets reduced by goodwill and core deposit intangibles, net of accumulated amortization. This measure is important to investors interested in changes from period to period in equity and total assets, each exclusive of changes in intangible assets. For tangible equity to tangible assets, the most directly comparable financial measure calculated in accordance with GAAP is total shareholders' equity to total assets.Goodwill and other intangible assets have the effect of increasing both total shareholders' equity and assets while not increasing our tangible common equity or tangible assets. 67
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We believe these non-GAAP financial measures provide useful information to
management and investors that is supplementary to our financial condition,
results of operations and cash flows computed in accordance with GAAP; however,
we acknowledge that our non-GAAP financial measures have a number of
limitations. As such, you should not view these disclosures as a substitute for
results determined in accordance with GAAP, and they are not necessarily
comparable to non-GAAP financial measures that other companies use. The
following reconciliation tables provide a more detailed analysis of these
non-GAAP financial measures:
As of and for the Years Ended December 31,
2021 2020 2019
(Dollars and share amounts in thousands, except per share data)
Total shareholders' equity $ 816,468 $ 758,669 $ 709,865
Less:
Goodwill and core deposit intangibles, net 238,300 241,596 245,518
Tangible shareholders' equity $ 578,168 $
$517,073 464,347
Shares outstanding at end of period 20,337,220 20,208,323 20,523,816 Tangible book value per share $ 28.43 $ 25.59 $ 22.62 Net income attributable to shareholders $ 81,553 $ 45,534 $ 52,959 Average shareholders' equity $ 786,036 $ 731,688 $ 708,269 Less: Average goodwill and other intangible assets, net 239,916 243,513 247,854 Average tangible shareholders' equity $ 546,120 $
$488,175 $460,415
Return on average tangible equity 14.93%
9.33 % 11.50 % Total assets$ 7,104,954 $ 6,050,128 $ 4,992,654 Less: Goodwill and core deposit intangibles, net 238,300 241,596 245,518 Tangible assets$ 6,866,654 $ 5,808,532 $ 4,747,136 Tangible equity to tangible assets 8.42 % 8.90 % 9.78 %
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