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Section 1: 10-Q (10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
_____________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM              TO             
COMMISSION FILE NUMBER: 001-37585
_____________________________
Allegiance Bancshares, Inc.
(Exact name of registrant as specified in its charter)
_____________________________
Texas
26-3564100
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
8847 West Sam Houston Parkway, N., Suite 200
Houston, Texas 77040
(Address of principal executive offices, including zip code)
(281) 894-3200
(Registrant’s telephone number, including area code)
_____________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒   No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No   ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
☐ 
Accelerated filer
 
 
 
 
Non-accelerated filer
☐  (Do not check if a smaller reporting company)
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒
As of May 4, 2018, there were 13,325,736 outstanding shares of the registrant’s Common Stock, par value $1.00 per share.



ALLEGIANCE BANCSHARES, INC.
INDEX TO FORM 10-Q
MARCH 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents


PART I—FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31,
2018
 
December 31,
2017
 
(Dollars in thousands, except share data)
ASSETS
 
 
 
Cash and due from banks
$
143,176

 
$
133,124

Interest-bearing deposits at other financial institutions
46,912

 
48,979

Total cash and cash equivalents
190,088

 
182,103

 
 
 
 
Available for sale securities, at fair value
307,411

 
309,615

 
 
 
 
Loans held for investment
2,290,494

 
2,270,876

Less: allowance for loan losses
(24,628
)
 
(23,649
)
Loans, net
2,265,866

 
2,247,227

 
 
 
 
Accrued interest receivable
10,521

 
12,194

Premises and equipment, net
18,605

 
18,477

Other real estate owned
365

 
365

Federal Home Loan Bank stock
14,128

 
12,862

Bank owned life insurance
22,563

 
22,422

Goodwill
39,389

 
39,389

Core deposit intangibles, net
3,079

 
3,274

Other assets
14,469

 
12,303

TOTAL ASSETS
$
2,886,484

 
$
2,860,231

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES:
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
694,880

 
$
683,110

Interest-bearing
 
 
 
Demand
143,178

 
215,499

Money market and savings
583,967

 
554,051

Certificates and other time
862,777

 
761,314

Total interest-bearing deposits
1,589,922

 
1,530,864

Total deposits
2,284,802

 
2,213,974

Accrued interest payable
1,212

 
610

Borrowed funds
232,569

 
282,569

Subordinated debt
48,719

 
48,659

Other liabilities
7,194

 
7,554

Total liabilities
2,574,496

 
2,553,366

COMMITMENTS AND CONTINGENCIES (See Note 11)


 


SHAREHOLDERS’ EQUITY:
 
 
 
Preferred stock, $1 par value; 1,000,000 shares authorized; no shares issued or outstanding

 

Common stock, $1 par value; 40,000,000 shares authorized; 13,302,462 shares issued and outstanding at March 31, 2018 and 13,226,826 shares issued and outstanding at December 31, 2017
13,302

 
13,227

Capital surplus
219,760

 
218,408

Retained earnings
82,533

 
74,894

Accumulated other comprehensive (loss) income
(3,607
)
 
336

Total shareholders’ equity
311,988

 
306,865

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
2,886,484

 
$
2,860,231

See condensed notes to interim consolidated financial statements.

3

Table of Contents


ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
 
(Dollars in thousands, except per share data)
INTEREST INCOME:
 
 
 
Loans, including fees
$
30,117

 
$
25,260

Securities:
 
 
 
Taxable
599

 
498

Tax-exempt
1,459

 
1,624

Deposits in other financial institutions
216

 
130

Total interest income
32,391

 
27,512

INTEREST EXPENSE:
 
 
 
Demand, money market and savings deposits
976

 
654

Certificates and other time deposits
2,785

 
1,957

Borrowed funds
1,036

 
653

Subordinated debt
705

 
120

Total interest expense
5,502

 
3,384

NET INTEREST INCOME
26,889

 
24,128

Provision for loan losses
653

 
1,343

Net interest income after provision for loan losses
26,236

 
22,785

NONINTEREST INCOME:
 
 
 
Nonsufficient funds fees
176

 
199

Service charges on deposit accounts
223

 
195

Bank owned life insurance income
141

 
148

Rebate from correspondent bank
444

 
233

Other
662

 
566

Total noninterest income
1,646

 
1,341

NONINTEREST EXPENSE:
 
 
 
Salaries and employee benefits
12,794

 
10,562

Net occupancy and equipment
1,272

 
1,427

Depreciation
407

 
400

Data processing and software amortization
1,053

 
695

Professional fees
469

 
895

Regulatory assessments and FDIC insurance
534

 
589

Core deposit intangibles amortization
195

 
195

Communications
248

 
247

Advertising
330

 
263

Other
1,415

 
1,276

Total noninterest expense
18,717

 
16,549

INCOME BEFORE INCOME TAXES
9,165

 
7,577

Provision for income taxes
1,454

 
1,530

NET INCOME
$
7,711

 
$
6,047

 
 
 
 
EARNINGS PER SHARE:
 
 
 
Basic
$
0.58

 
$
0.46

Diluted
$
0.57

 
$
0.45

See condensed notes to interim consolidated financial statements.

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Table of Contents


ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
 
(Dollars in thousands)
Net income
$
7,711

 
$
6,047

Other comprehensive (loss) income, before tax:
 
 
 
Unrealized (loss) gain on securities:
 
 
 
Change in unrealized holding (loss) gain on available for sale securities during the period
(5,082
)
 
1,197

Total other comprehensive (loss) income
(5,082
)
 
1,197

Deferred tax benefit (expense) related to other comprehensive (loss) income
1,139

 
(419
)
Other comprehensive (loss) income, net of tax
(3,943
)
 
778

Comprehensive income
$
3,768

 
$
6,825

See condensed notes to interim consolidated financial statements.

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Table of Contents


ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
 
Common Stock
 
Capital
 
Retained
 
Accumulated
Other
Comprehensive
 
Treasury
 
Total
Shareholders’
 
 
Shares
 
Amount
 
Surplus
 
Earnings
 
Income (Loss)
 
Stock
 
Equity
 
 
(In thousands, except share data)
BALANCE AT JANUARY 1, 2017
 
12,958,341

 
$
12,958

 
$
212,649

 
$
57,262

 
$
(3,052
)
 
$

 
$
279,817

Net income
 
 
 
 
 
 
 
6,047

 
 
 
 
 
6,047

Other comprehensive income
 
 
 
 
 
 
 
 
 
778

 
 
 
778

Common stock issued in connection with the exercise of stock options and restricted stock awards
 
122,101

 
122

 
2,025

 
 
 
 
 
 
 
2,147

Repurchase of treasury stock
 
 
 
 
 
 
 
 
 
 
 

 

Stock based compensation expense
 
 
 
 
 
341

 
 
 
 
 
 
 
341

BALANCE AT MARCH 31, 2017
 
13,080,442

 
$
13,080

 
$
215,015

 
$
63,309

 
$
(2,274
)
 
$

 
$
289,130

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT JANUARY 1, 2018
 
13,226,826

 
$
13,227

 
$
218,408

 
$
74,894

 
$
336

 
$

 
$
306,865

Net income
 
 
 
 
 
 
 
7,711

 
 
 
 
 
7,711

Other comprehensive loss
 
 
 
 
 
 
 
 
 
(3,943
)
 
 
 
(3,943
)
Reclassification of amounts within AOCI to retained earnings due to tax reform (See Notes 1)
 
 
 
 
 
 
 
(72
)
 
 
 
 
 
(72
)
Common stock issued in connection with the exercise of stock options and restricted stock awards
 
75,636

 
75

 
914

 
 
 
 
 
 
 
989

Stock based compensation expense
 
 
 
 
 
438

 
 
 
 
 
 
 
438

BALANCE AT MARCH 31, 2018
 
13,302,462

 
$
13,302

 
$
219,760

 
$
82,533

 
$
(3,607
)
 
$

 
$
311,988

See condensed notes to interim consolidated financial statements.

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Table of Contents


ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
 
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
7,711

 
$
6,047

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and core deposit intangibles amortization
602

 
595

Provision for loan losses
653

 
1,343

Excess tax benefit related to the exercise of stock options
(224
)
 
(631
)
Net amortization of premium on investments
832

 
826

Bank owned life insurance
(141
)
 
(148
)
Net accretion of discount on loans
(632
)
 
(236
)
Net amortization of discount on subordinated debentures
27

 
26

Net amortization of discount on certificates of deposit
(3
)
 
(253
)
Federal Home Loan Bank stock dividends
(67
)
 
(46
)
Stock based compensation expense
438

 
341

Decrease in accrued interest receivable and other assets
1,116

 
698

Increase in accrued interest payable and other liabilities
499

 
545

Net cash provided by operating activities
10,811

 
9,107

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from maturities and principal paydowns of available for sale securities
501,653

 
902,938

Purchase of available for sale securities
(505,363
)
 
(903,331
)
Net change in total loans
(18,660
)
 
(93,996
)
Purchase of bank premises and equipment
(1,076
)
 
(557
)
Net purchases of Federal Home Loan Bank stock
(1,199
)
 
(6,642
)
Net cash used in investing activities
(24,645
)
 
(101,588
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in noninterest-bearing deposits
11,770

 
21,474

Net increase in interest-bearing deposits
59,061

 
120,908

Paydowns on borrowed funds
(50,000
)
 
(10,000
)
Proceeds from the issuance of common stock, stock option exercises, restricted stock awards and the ESPP
988

 
2,147

Net cash provided by financing activities
21,819

 
134,529

NET CHANGE IN CASH AND CASH EQUIVALENTS
7,985

 
42,048

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
182,103

 
142,098

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
190,088

 
$
184,146

SUPPLEMENTAL INFORMATION:
 
 
 
Income taxes paid
$
1,900

 
$

Interest paid
4,900

 
3,421

See condensed notes to interim consolidated financial statements.

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Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(Unaudited)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations-Allegiance Bancshares, Inc. (“Allegiance”) and its wholly-owned subsidiary, Allegiance Bank, (the “Bank”, and together with Allegiance, collectively referred to as the “Company”) provide commercial and retail loans and commercial banking services. The Company derives substantially all of its revenues and income from the operation of the Bank. The Company is focused on delivering a wide variety of relationship-driven commercial banking products and community-oriented services tailored to meet the needs of small to medium-sized businesses, professionals and individuals through its 16 offices and one loan production office in Houston, Texas and the surrounding region. The Bank provides its customers with a variety of banking services including checking accounts, savings accounts and certificates of deposit, and its primary lending products are commercial, personal, automobile, mortgage and home improvement loans. The Bank also offers safe deposit boxes, automated teller machines, drive-through services and 24-hour depository facilities.
Basis of Presentation-The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis, and all such adjustments are of a normal recurring nature. Transactions with Allegiance have been eliminated. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
Significant Accounting and Reporting Policies
The Company’s significant accounting and reporting policies can be found in Note 1 of the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
New Accounting Standards
Adoption of New Accounting Standards    
ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and most industry-specific guidance throughout the Industry Topics of the Codification. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods. The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed, charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment

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ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(Unaudited)

involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. The new standard was effective for the Company on January 1, 2018 and did not have a significant impact on its consolidated financial statements and related disclosures.
ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition of Financial Assets and Financial Liabilities." ASU 2016-01 makes targeted amendments to fair value measurement and disclosure guidance. ASU 2016-01 requires equity investments (other than equity method investments) to be measured at fair value with changes in fair value recognized in net income. This change is only applied if a readily determinable fair value can be obtained. The update also requires the use of exit prices to measure fair value for disclosure purposes as well as other enhanced disclosure requirements. ASU 2016-01 was effective for the Company on January 1, 2018 and did not have a significant impact on its financial statements and related disclosures. See Note 5 – Fair Value Disclosures for further information.
ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice. Among other things, the update clarifies the appropriate classification for proceeds from settlement of bank owned life insurance (BOLI) policies. Based on preliminary assessments, the Company expects to change the classification of proceeds from settlement of BOLI policies, if any, from operating activities to investing activities. ASU 2016-15 was effective for the Company on January 1, 2018 and did not have a significant impact on its financial statements and related disclosures.

ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 amends ASC 220, Income Statement - Reporting Comprehensive Income, to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), resulting in significant modifications to existing law. Authoritative guidance and interpretation by regulatory bodies is ongoing, and as such, the accounting for the effects of the Tax Act is not final and the full impact of the new regulation is still being evaluated. ASU 2018-02 is effective on January 1, 2019, with early adoption permitted. The Company early adopted and recognized a decrease to retained earnings of $72 thousand due to a reclassification on January 1, 2018.
Newly Issued But Not Yet Effective Accounting Standards

ASU 2016-02 “Leases (Topic 842)." ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, “Revenue from Contracts with Customers.” ASU 2016-02 will be effective for the Company on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early application of this ASU is permitted for all entities. Adoption of ASU 2016-02 is not expected to have a material impact on the Company’s financial statements.  The Company leases certain properties and equipment under operating leases that will result in the recognition of lease assets and lease liabilities on the Company’s balance sheet under the ASU.

ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for the Company on January 1, 2020 and must be applied using the modified retrospective approach with limited exceptions. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. While the Company is currently unable to reasonably estimate the impact of adopting ASU 2016-13, the Company expects that the impact of adoption will be significantly influenced by the composition, characteristics and quality of its loan and securities portfolios as well as the

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ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(Unaudited)

prevailing economic conditions and forecasts as of the adoption date. The Company has formed a cross functional team and with the assistance of a third-party provider is assessing the Company's data and system needs to evaluate the impact that adoption of this standard will have on the financial condition and results of operations of the Company.

ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for the Company on January 1, 2020, with earlier adoption permitted and is not expected to have a significant impact on the Company's financial statements.
ASU 2017-08,“Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. ASU 2017-08 will be effective for the Company on January 1, 2019, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2017-08 on its financial statements.
2. GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS
Changes in the carrying amount of the Company’s goodwill and core deposit intangible assets were as follows:
 
Goodwill
 
Core Deposit
Intangibles
 
(Dollars in thousands)
Balance as of January 1, 2017
$
39,389

 
$
4,055

Amortization

 
(781
)
Balance as of December 31, 2017
39,389

 
3,274

Amortization

 
(195
)
Balance as of March 31, 2018
$
39,389

 
$
3,079

Goodwill is recorded on the acquisition date of an entity. Management performs an evaluation annually, and more frequently if a triggering event occurs, of whether any impairment of the goodwill and other intangible assets has occurred. If any such impairment is determined, a write-down is recorded. As of March 31, 2018, there were no impairments recorded on goodwill and other intangible assets.
The estimated aggregate future amortization expense for core deposit intangible assets remaining as of March 31, 2018 is as follows (dollars in thousands):
Remaining 2018
$
586

2019
781

2020
744

2021
484

2022
484

Thereafter

Total
$
3,079


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ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(Unaudited)

3. SECURITIES
The amortized cost and fair value of investment securities were as follows:
 
March 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(Dollars in thousands)
Available for Sale
 
 
 
 
 
 
 
U.S. Government and agency securities
$
8,299

 
$
142

 
$
(59
)
 
$
8,382

Municipal securities
221,403

 
1,166

 
(4,281
)
 
218,288

Agency mortgage-backed pass-through securities
36,197

 
74

 
(954
)
 
35,317

Corporate bonds and other
46,077

 

 
(653
)
 
45,424

Total
$
311,976

 
$
1,382

 
$
(5,947
)
 
$
307,411

 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(Dollars in thousands)
Available for Sale
 
 
 
 
 
 
 
U.S. Government and agency securities
$
8,507

 
$
232

 
$
(24
)
 
$
8,715

Municipal securities
222,330

 
2,470

 
(1,842
)
 
222,958

Agency mortgage-backed pass-through securities
32,014

 
159

 
(361
)
 
31,812

Corporate bonds and other
46,247

 
62

 
(179
)
 
46,130

Total
$
309,098

 
$
2,923

 
$
(2,406
)
 
$
309,615

As of March 31, 2018, the Company’s management does not expect to sell any securities classified as available for sale with material unrealized losses, and the Company believes it is more likely than not it will not be required to sell any of these securities before their anticipated recovery, at which time the Company will receive full value for the securities. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2018, management believes the unrealized losses in the previous table are temporary and no other than temporary impairment loss has been realized in the Company’s consolidated statements of income.
The amortized cost and fair value of investment securities at March 31, 2018, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations at any time with or without call or prepayment penalties.
 
Amortized
Cost
 
Fair
Value
 
(Dollars in thousands)
Due in one year or less
$
11,873

 
$
11,873

Due after one year through five years
71,990

 
71,051

Due after five years through ten years
92,765

 
91,478

Due after ten years
99,151

 
97,692

Subtotal
275,779

 
272,094

Agency mortgage-backed pass through securities
36,197

 
35,317

Total
$
311,976

 
$
307,411


11

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(Unaudited)

Securities with unrealized losses segregated by length of time such securities have been in a continuous loss position are as follows:
 
March 31, 2018
 
Less than 12 Months
 
More than 12 Months
 
Total
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
(Dollars in thousands)
Available for Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency securities
$
3,342

 
$
(34
)
 
$
531

 
$
(25
)
 
$
3,873

 
$
(59
)
Municipal securities
100,904

 
(2,015
)
 
55,389

 
(2,266
)
 
156,293

 
(4,281
)
Agency mortgage-backed pass-through securities
20,426

 
(507
)
 
8,461

 
(447
)
 
28,887

 
(954
)
Corporate bonds and other
44,424

 
(653
)
 

 

 
44,424

 
(653
)
Total
$
169,096

 
$
(3,209
)
 
$
64,381

 
$
(2,738
)
 
$
233,477

 
$
(5,947
)
 
December 31, 2017
 
Less than 12 Months
 
More than 12 Months
 
Total
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
(Dollars in thousands)
Available for Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency securities
$
3,110

 
$
(9
)
 
$
595

 
$
(15
)
 
$
3,705

 
$
(24
)
Municipal securities
42,249

 
(517
)
 
56,483

 
(1,325
)
 
98,732

 
(1,842
)
Agency mortgage-backed pass-through securities
13,238

 
(105
)
 
8,921

 
(256
)
 
22,159

 
(361
)
Corporate bonds and other
30,203

 
(179
)
 

 

 
30,203

 
(179
)
Total
$
88,800

 
$
(810
)
 
$
65,999

 
$
(1,596
)
 
$
154,799

 
$
(2,406
)
No securities were sold during the three months ended March 31, 2018 and 2017. At March 31, 2018 and December 31, 2017, the Company did not own securities of any one issuer, other than the U.S government and its agencies, in an amount greater than 10% of consolidated shareholders’ equity at such respective dates.
The carrying value of pledged securities was $5.0 million at March 31, 2018 and $5.0 million at December 31, 2017, respectively. The securities are pledged to further collateralize letters of credit issued by the Bank but confirmed by another financial institution.

12

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(Unaudited)

4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The loan portfolio balances, net of unearned income and fees, consist of various types of loans primarily made to borrowers located within Texas and are classified by major type as follows:
 
March 31,
2018
 
December 31,
2017
 
(Dollars in thousands)
Commercial and industrial
$
447,168

 
$
457,129

Mortgage warehouse
41,572

 
69,456

Real estate:
 
 
 
Commercial real estate (including multi-family residential)
1,108,537

 
1,080,247

Commercial real estate construction and land development
257,566

 
243,389

1-4 family residential (including home equity)
317,842

 
301,219

Residential construction
108,882

 
109,116

Consumer and other
8,927

 
10,320

Total loans
2,290,494

 
2,270,876

Allowance for loan losses
(24,628
)
 
(23,649
)
Loans, net
$
2,265,866

 
$
2,247,227

Nonaccrual and Past Due Loans
An aging analysis of the recorded investment in past due loans, segregated by class of loans, is as follows:
 
March 31, 2018
 
Loans Past Due and Still Accruing
 
 
 
 
 
 
 
30-89
Days
 
90 or More
Days
 
Total Past
Due Loans
 
Nonaccrual
Loans
 
Current
Loans
 
Total
Loans
 
(Dollars in thousands)
Commercial and industrial
$
1,545

 
$

 
$
1,545

 
$
6,153

 
$
439,470

 
$
447,168

Mortgage warehouse

 

 

 

 
41,572

 
41,572

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate (including multi-family residential)
699

 

 
699

 
6,466

 
1,101,372

 
1,108,537

Commercial real estate construction and land development
75

 

 
75

 

 
257,491

 
257,566

1-4 family residential (including home equity)
1,164

 

 
1,164

 
754

 
315,924

 
317,842

Residential construction
1,787

 

 
1,787

 

 
107,095

 
108,882

Consumer and other
25

 

 
25

 

 
8,902

 
8,927

Total loans
$
5,295

 
$

 
$
5,295

 
$
13,373

 
$
2,271,826

 
$
2,290,494


13

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(Unaudited)

 
December 31, 2017
 
Loans Past Due and Still Accruing
 
 
 
 
 
 
 
30-89
Days
 
90 or More
Days
 
Total Past
Due Loans
 
Nonaccrual
Loans
 
Current
Loans
 
Total
Loans
 
(Dollars in thousands)
Commercial and industrial
$
1,069

 
$

 
$
1,069

 
$
6,437

 
$
449,623

 
$
457,129

Mortgage warehouse

 

 

 

 
69,456

 
69,456

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate (including multi-family residential)
4,932

 

 
4,932

 
6,110

 
1,069,205

 
1,080,247

Commercial real estate construction and land development
5,274

 

 
5,274

 

 
238,115

 
243,389

1-4 family residential (including home equity)
924

 

 
924

 
781

 
299,514

 
301,219

Residential construction
674

 

 
674

 

 
108,442

 
109,116

Consumer and other
74

 

 
74

 

 
10,246

 
10,320

Total loans
$
12,947

 
$

 
$
12,947

 
$
13,328

 
$
2,244,601

 
$
2,270,876


14

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(Unaudited)

Impaired Loans
Impaired loans by class of loans are set forth in the following tables.
 
March 31, 2018
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
(Dollars in thousands)
With no related allowance recorded:
 
 
 
 
 
Commercial and industrial
$
4,036

 
$
4,519

 
$

Mortgage warehouse

 

 

Real estate:
 
 
 
 
 
Commercial real estate (including multi-family residential)
10,940

 
10,941

 

Commercial real estate construction and land development
209

 
209

 

1-4 family residential (including home equity)
910

 
910

 

Residential construction

 

 

Consumer and other

 

 

Total
16,095

 
16,579

 

 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
Commercial and industrial
7,047

 
7,443

 
2,723

Mortgage warehouse

 

 

Real estate:
 
 
 
 
 
Commercial real estate (including multi-family residential)
7,919

 
8,104

 
569

Commercial real estate construction and land development

 

 

1-4 family residential (including home equity)

 

 

Residential construction

 

 

Consumer and other

 

 

Total
14,966

 
15,547

 
3,292

 
 
 
 
 
 
Total:
 
 
 
 
 
Commercial and industrial
11,083

 
11,962

 
2,723

Mortgage warehouse

 

 

Real estate:
 
 
 
 
 
Commercial real estate (including multi-family residential)
18,859

 
19,045

 
569

Commercial real estate construction and land development
209

 
209

 

1-4 family residential (including home equity)
910

 
910

 

Residential construction

 

 

Consumer and other

 

 

 
$
31,061

 
$
32,126

 
$
3,292

    

15

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(Unaudited)

 
December 31, 2017
 
Recorded Investment
 
Unpaid Principal
Balance
 
Related Allowance
 
(Dollars in thousands)
With no related allowance recorded:
 
 
 
 
 
Commercial and industrial
$
5,792

 
$
6,666

 
$

Mortgage warehouse

 

 

Real estate:
 
 
 
 
 
Commercial real estate (including multi-family residential)
12,155

 
12,155

 

Commercial real estate construction and land development
209

 
209

 

1-4 family residential (including home equity)
948

 
948

 

Residential construction

 

 

Consumer and other

 

 

Total
19,104

 
19,978

 

 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
Commercial and industrial
5,600

 
5,652

 
1,640

Mortgage warehouse

 

 

Real estate:
 
 
 
 
 
Commercial real estate (including multi-family residential)
8,009

 
8,194

 
716

Commercial real estate construction and land development

 

 

1-4 family residential (including home equity)

 

 

Residential construction

 

 

Consumer and other

 

 

Total
13,609

 
13,846

 
2,356

 
 
 
 
 
 
Total:
 
 
 
 
 
Commercial and industrial
11,392

 
12,318

 
1,640

Mortgage warehouse

 

 

Real estate:
 
 
 
 
 
Commercial real estate (including multi-family residential)
20,164

 
20,349

 
716

Commercial real estate construction and land development
209

 
209

 

1-4 family residential (including home equity)
948

 
948

 

Residential construction

 

 

Consumer and other

 

 

 
$
32,713

 
$
33,824

 
$
2,356


16

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(Unaudited)

The following table presents average impaired loans and interest recognized on impaired loans for the three months ended March 31, 2018 and 2017:
 
Three Months Ended March 31,
 
2018
 
2017
 
Average Recorded Investment
 
Interest Income
Recognized
 
Average Recorded Investment
 
Interest Income
Recognized
 
(Dollars in thousands)
Commercial and industrial
$
11,461

 
$
94

 
$
15,742

 
$
139

Mortgage warehouse

 

 

 

Real estate:
 
 
 
 
 
 
 
Commercial real estate (including multi-family residential)
18,967

 
141

 
16,854

 
77

Commercial real estate construction and land development
209

 
3

 
72

 

1-4 family residential (including home equity)
927

 
4

 
575

 
1

Residential construction

 

 

 

Consumer and other

 

 
14

 

          Total
$
31,564

 
$
242

 
$
33,257

 
$
217

Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including factors such as: current financial information, historical payment experience, credit documentation, public information and current economic trends. The Company analyzes loans individually by classifying the loans by credit risk. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks risk ratings to be used as credit quality indicators.
The following is a general description of the risk ratings used:
Pass—Loans classified as pass are loans with low to average risk and not otherwise classified as watch, special mention, substandard or doubtful. In addition, the guaranteed portion of SBA loans are considered pass risk rated loans.
Watch—Loans classified as watch loans may still be of high quality, but have an element of risk added to the credit such as declining payment history, deteriorating financial position of the borrower or a decrease in collateral value.
Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Substandard—Loans classified as substandard have well-defined weaknesses on a continuing basis and are inadequately protected by the current net worth and paying capacity of the borrower, impaired or declining collateral values, or a continuing downturn in their industry which is reducing their profits to below zero and having a significantly negative impact on their cash flow. These classified loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values highly questionable and improbable.

17

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(Unaudited)

Based on the most recent analysis performed, the risk category of loans by class of loan at March 31, 2018 is as follows:
 
Pass
 
Watch
 
Special Mention
 
Substandard
 
Doubtful
 
Total
 
(Dollars in thousands)
Commercial and industrial
$
419,105

 
$
10,115

 
$
1,610

 
$
16,338

 
$

 
$
447,168

Mortgage warehouse
41,572

 

 

 

 

 
41,572

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate (including multi-family residential)
1,045,532

 
24,830

 
3,067

 
35,108

 

 
1,108,537

Commercial real estate construction and land development
245,815

 
4,345

 

 
7,406

 

 
257,566

1-4 family residential (including home equity)
311,603

 
3,024

 
1,278

 
1,937

 

 
317,842

Residential construction
104,987

 
3,895

 

 

 

 
108,882

Consumer and other
8,851

 
75

 

 
1

 

 
8,927

Total loans
$
2,177,465

 
$
46,284

 
$
5,955

 
$
60,790

 
$

 
$
2,290,494

The following table presents the risk category of loans by class of loan at December 31, 2017:
 
Pass
 
Watch
 
Special Mention
 
Substandard
 
Doubtful
 
Total
 
(Dollars in thousands)
Commercial and industrial
$
427,336

 
$
10,274

 
$
2,195

 
$
17,324

 
$

 
$
457,129

Mortgage warehouse
69,456

 

 

 

 

 
69,456

Real estate:
 
 
 
 
 
 
 
 
 
 


Commercial real estate (including multi-family residential)
1,016,831

 
23,039

 
4,685

 
35,692

 

 
1,080,247

Commercial real estate construction and land development
231,536

 
4,397

 

 
7,456

 

 
243,389

1-4 family residential (including home equity)
295,744

 
2,696

 
785

 
1,994

 

 
301,219

Residential construction
103,611

 
5,505

 

 

 

 
109,116

Consumer and other
10,207

 
111

 

 
2

 

 
10,320

Total loans
$
2,154,721

 
$
46,022

 
$
7,665

 
$
62,468

 
$

 
$
2,270,876


18

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(Unaudited)

Allowance for Loan Losses
The following table presents the activity in the allowance for loan losses by portfolio type for the three months ended March 31, 2018 and 2017:
 
Commercial
and
industrial 
 
Mortgage
warehouse
 
Commercial
real estate
(including
multi-family
residential)
 
Commercial
real estate
construction
and land
development
 
1-4 family
residential
(including
home equity)
 
Residential
construction
 
Consumer
and other
 
Total
 
(Dollars in thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2017
$
7,694

 
$

 
$
10,253

 
$
2,525

 
$
2,140

 
$
942

 
$
95

 
$
23,649

Provision for loan losses
1,440

 

 
(963
)
 
20

 
160

 
4

 
(8
)
 
653

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(367
)
 

 
(40
)
 

 

 

 

 
(407
)
Recoveries
631

 

 
102

 

 

 

 

 
733

Net recoveries
264

 

 
62

 

 

 

 

 
326

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance March 31, 2018
$
9,398

 
$

 
$
9,352

 
$
2,545

 
$
2,300

 
$
946

 
$
87

 
$
24,628

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2016
$
5,059

 
$

 
$
8,950

 
$
1,217

 
$
1,876

 
$
748

 
$
61

 
$
17,911

Provision for loan losses
806

 

 
208

 
391

 
(40
)
 
(11
)
 
(11
)
 
1,343

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(627
)
 

 

 

 

 

 

 
(627
)
Recoveries
46

 

 

 

 
10

 

 
4

 
60

Net charge-offs
(581
)
 

 

 

 
10

 

 
4

 
(567
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance March 31, 2017
$
5,284

 
$

 
$
9,158

 
$
1,608

 
$
1,846

 
$
737

 
$
54

 
$
18,687














19

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(Unaudited)

The following table presents the balance of the allowance for loan losses by portfolio type based on the impairment method as of March 31, 2018 and December 31, 2017:
 
Commercial
and
industrial 
 
Mortgage
warehouse
 
Commercial
real estate
(including
multi-family
residential)
 
Commercial
real estate
construction
and land
development
 
1-4 family
residential
(including
home equity)
 
Residential
construction
 
Consumer
and other
 
Total
 
(Dollars in thousands)
Allowance for loan losses related to:
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,723

 
$

 
$
569

 
$

 
$

 
$

 
$

 
$
3,292

Collectively evaluated for impairment
6,675

 

 
8,783

 
2,545

 
2,300

 
946

 
87

 
21,336

Total allowance for loan losses
$
9,398

 
$

 
$
9,352

 
$
2,545

 
$
2,300

 
$
946

 
$
87

 
$
24,628

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,640

 
$

 
$
716

 
$

 
$

 
$

 
$

 
$
2,356

Collectively evaluated for impairment
6,054

 

 
9,537

 
2,525

 
2,140

 
942

 
95

 
21,293

Total allowance for loan losses
$
7,694

 
$

 
$
10,253

 
$
2,525

 
$
2,140

 
$
942

 
$
95

 
$
23,649

The following table presents the recorded investment in loans held for investment by portfolio type based on the impairment method as of March 31, 2018 and December 31, 2017:
 
Commercial
and
industrial 
 
Mortgage
warehouse
 
Commercial
real estate
(including
multi-family
residential)
 
Commercial
real estate
construction
and land
development
 
1-4 family
residential
(including
home equity)
 
Residential
construction
 
Consumer
and other
 
Total
 
(Dollars in thousands)
Recorded investment in loans:
March 31, 2018