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Section 1: 10-Q (ABTX 1ST QUARTER 2020 10-Q)

abtx-10q_20200331.htm

 

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, 2020

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)

 

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

 

 

 

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value, $1.00 per share

 

ABTX

 

NASDAQ Global Market

 

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

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

 

 

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

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

As of April 29, 2020, the registrant had 20,402,965 shares common stock, $1.00 par value per share, outstanding.

 

 


 

 

ALLEGIANCE BANCSHARES, INC.

INDEX TO FORM 10-Q

March 31, 2020

PART I—FINANCIAL INFORMATION

 

 

 

 

Item 1.

Interim Consolidated Financial Statements

3

 

Consolidated Balance Sheets (unaudited)

3

 

Consolidated Statements of Income (unaudited)

4

 

Consolidated Statements of Comprehensive Income (unaudited)

5

 

Consolidated Statements of Changes in Shareholders' Equity (unaudited)

6

 

Consolidated Statements of Cash Flows (unaudited)

7

 

Condensed Notes to Interim Consolidated Financial Statements (unaudited)

8

Item 2.

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

34

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

56

Item 4.

Controls and Procedures

57

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

58

Item 1A.

Risk Factors

58

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

60

Item 3.

Defaults upon Senior Securities

60

Item 4.

Mine Safety Disclosures

60

Item 5.

Other Information

60

Item 6.

Exhibits

61

Signatures

62

 

 

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in thousands, except share data)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

156,700

 

 

$

213,347

 

Interest-bearing deposits at other financial institutions

 

 

18,189

 

 

 

132,901

 

Total cash and cash equivalents

 

 

174,889

 

 

 

346,248

 

Available for sale securities, at fair value

 

 

508,250

 

 

 

372,545

 

Loans held for investment

 

 

3,955,546

 

 

 

3,915,310

 

Less: allowance for loan losses

 

 

(37,511

)

 

 

(29,438

)

Loans, net

 

 

3,918,035

 

 

 

3,885,872

 

Accrued interest receivable

 

 

17,203

 

 

 

15,468

 

Premises and equipment, net

 

 

66,798

 

 

 

66,790

 

Other real estate owned

 

 

12,617

 

 

 

8,337

 

Federal Home Loan Bank stock

 

 

12,798

 

 

 

6,242

 

Bank owned life insurance

 

 

27,255

 

 

 

27,104

 

Goodwill

 

 

223,642

 

 

 

223,642

 

Core deposit intangibles, net

 

 

20,886

 

 

 

21,876

 

Other assets

 

 

20,056

 

 

 

18,530

 

TOTAL ASSETS

 

$

5,002,429

 

 

$

4,992,654

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

1,217,532

 

 

$

1,252,232

 

Interest-bearing

 

 

 

 

 

 

 

 

Demand

 

 

341,524

 

 

 

367,278

 

Money market and savings

 

 

1,110,631

 

 

 

1,258,008

 

Certificates and other time

 

 

1,283,887

 

 

 

1,190,583

 

Total interest-bearing deposits

 

 

2,736,042

 

 

 

2,815,869

 

Total deposits

 

 

3,953,574

 

 

 

4,068,101

 

Accrued interest payable

 

 

3,821

 

 

 

4,326

 

Borrowed funds

 

 

190,506

 

 

 

75,503

 

Subordinated debt

 

 

107,930

 

 

 

107,799

 

Other liabilities

 

 

40,005

 

 

 

27,060

 

Total liabilities

 

 

4,295,836

 

 

 

4,282,789

 

COMMITMENTS AND CONTINGENCIES (See Note 13)

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Preferred stock, $1 par value; 1,000,000 shares authorized; no

   shares issued or outstanding

 

 

 

 

 

 

Common stock, $1 par value; 80,000,000 shares authorized; 20,355,120 shares

   issued and outstanding at March 31, 2020 and 20,523,816 shares issued

   and outstanding at December 31, 2019

 

 

20,355

 

 

 

20,524

 

Capital surplus

 

 

513,894

 

 

 

521,066

 

Retained earnings

 

 

164,858

 

 

 

163,375

 

Accumulated other comprehensive income

 

 

7,486

 

 

 

4,900

 

Total shareholders’ equity

 

 

706,593

 

 

 

709,865

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

5,002,429

 

 

$

4,992,654

 

 

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,

 

 

2020

 

 

2019

 

 

(Dollars in thousands, except per share data)

 

INTEREST INCOME:

 

 

 

 

 

 

 

Loans, including fees

$

54,624

 

 

$

54,189

 

Securities:

 

 

 

 

 

 

 

Taxable

 

2,087

 

 

 

982

 

Tax-exempt

 

546

 

 

 

1,290

 

Deposits in other financial institutions

 

195

 

 

 

688

 

Total interest income

 

57,452

 

 

 

57,149

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

Demand, money market and savings deposits

 

4,364

 

 

 

3,728

 

Certificates and other time deposits

 

6,084

 

 

 

6,256

 

Borrowed funds

 

506

 

 

 

1,827

 

Subordinated debt

 

1,473

 

 

 

735

 

Total interest expense

 

12,427

 

 

 

12,546

 

NET INTEREST INCOME

 

45,025

 

 

 

44,603

 

Provision for loan losses

 

10,990

 

 

 

1,002

 

Net interest income after provision for loan losses

 

34,035

 

 

 

43,601

 

NONINTEREST INCOME:

 

 

 

 

 

 

 

Nonsufficient funds fees

 

169

 

 

 

162

 

Service charges on deposit accounts

 

457

 

 

 

325

 

Gain on sale of securities

 

194

 

 

 

 

(Loss) gain on sale of other real estate and

   other repossessed assets

 

(69

)

 

 

1

 

Bank owned life insurance income

 

151

 

 

 

159

 

Rebate from correspondent bank

 

493

 

 

 

896

 

Other

 

1,330

 

 

 

1,746

 

Total noninterest income

 

2,725

 

 

 

3,289

 

NONINTEREST EXPENSE:

 

 

 

 

 

 

 

Salaries and employee benefits

 

19,781

 

 

 

19,684

 

Net occupancy and equipment

 

1,907

 

 

 

2,098

 

Depreciation

 

866

 

 

 

753

 

Data processing and software amortization

 

1,826

 

 

 

1,577

 

Professional fees

 

573

 

 

 

599

 

Regulatory assessments and FDIC insurance

 

632

 

 

 

728

 

Core deposit intangibles amortization

 

990

 

 

 

1,178

 

Communications

 

417

 

 

 

430

 

Advertising

 

521

 

 

 

704

 

Acquisition and merger-related expenses

 

 

 

 

1,173

 

Other

 

4,888

 

 

 

2,191

 

Total noninterest expense

 

32,401

 

 

 

31,115

 

INCOME BEFORE INCOME TAXES

 

4,359

 

 

 

15,775

 

Provision for income taxes

 

843

 

 

 

3,097

 

NET INCOME

$

3,516

 

 

$

12,678

 

EARNINGS PER SHARE:

 

 

 

 

 

 

 

Basic

$

0.17

 

 

$

0.58

 

Diluted

$

0.17

 

 

$

0.58

 

DIVIDENDS PER SHARE

$

0.10

 

 

$

 

 

See condensed notes to interim consolidated financial statements.

 

4


Table of Contents

 

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in thousands)

 

Net income

 

$

3,516

 

 

$

12,678

 

Other comprehensive income, before tax:

 

 

 

 

 

 

 

 

Unrealized gain on securities:

 

 

 

 

 

 

 

 

Change in unrealized holding gain on

   available for sale securities during the period

 

 

3,466

 

 

 

7,462

 

Reclassification of gain realized through the sale

   of securities

 

 

(194

)

 

 

 

Total other comprehensive income

 

 

3,272

 

 

 

7,462

 

Deferred tax expense related to other comprehensive

   income

 

 

(686

)

 

 

(1,559

)

Other comprehensive income, net of tax

 

 

2,586

 

 

 

5,903

 

Comprehensive income

 

$

6,102

 

 

$

18,581

 

 

See condensed notes to interim consolidated financial statements.

 

5


Table of Contents

 

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

 

Capital

 

 

Retained

 

 

Other Comprehensive

 

 

Total Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Surplus

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

 

 

(Dollars in thousands, except share data)

 

BALANCE AT DECEMBER 31, 2018

 

 

21,937,740

 

 

$

21,938

 

 

$

571,803

 

 

$

112,131

 

 

$

(2,888

)

 

$

702,984

 

   Cumulative effect of change in

      accounting principle related to

      ASU 2017-08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,715

)

 

 

 

 

 

 

(1,715

)

Total shareholders' equity at beginning of

    period, as adjusted (See Note 1)

 

 

21,937,740

 

 

 

21,938

 

 

 

571,803

 

 

 

110,416

 

 

 

(2,888

)

 

 

701,269

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,678

 

 

 

 

 

 

 

12,678

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,903

 

 

 

5,903

 

Common stock issued in

   connection with the exercise

   of stock options and restricted

   stock awards

 

 

32,647

 

 

 

32

 

 

 

632

 

 

 

 

 

 

 

 

 

 

 

664

 

Repurchase of common stock

 

 

(486,415

)

 

 

(486

)

 

 

(16,858

)

 

 

 

 

 

 

 

 

 

 

(17,344

)

Stock based compensation expense

 

 

 

 

 

 

 

 

 

 

607

 

 

 

 

 

 

 

 

 

 

 

607

 

BALANCE AT MARCH 31, 2019

 

 

21,483,972

 

 

$

21,484

 

 

$

556,184

 

 

$

123,094

 

 

$

3,015

 

 

$

703,777

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT DECEMBER 31, 2019

 

 

20,523,816

 

 

$

20,524

 

 

$

521,066

 

 

$

163,375

 

 

$

4,900

 

 

$

709,865

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,516

 

 

 

 

 

 

 

3,516

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,586

 

 

 

2,586

 

Cash dividends declared, $0.10 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,033

)

 

 

 

 

 

 

(2,033

)

Common stock issued in

   connection with the exercise

   of stock options and restricted

   stock awards

 

 

75,638

 

 

 

75

 

 

 

1,082

 

 

 

 

 

 

 

 

 

 

 

1,157

 

Repurchase of common stock

 

 

(244,334

)

 

 

(244

)

 

 

(9,058

)

 

 

 

 

 

 

 

 

 

 

(9,302

)

Stock based compensation expense

 

 

 

 

 

 

 

 

 

 

804

 

 

 

 

 

 

 

 

 

 

 

804

 

BALANCE AT MARCH 31, 2020

 

 

20,355,120

 

 

$

20,355

 

 

$

513,894

 

 

$

164,858

 

 

$

7,486

 

 

$

706,593

 

 

See condensed notes to interim consolidated financial statements.

 

6


Table of Contents

 

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

3,516

 

 

$

12,678

 

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

 

 

 

 

 

 

 

 

Depreciation and core deposit intangibles amortization

 

 

1,856

 

 

 

1,931

 

Provision for loan losses

 

 

10,990

 

 

 

1,002

 

Deferred income tax (benefit) expense

 

 

(2,250

)

 

 

40

 

Net amortization of premium on investments

 

 

506

 

 

 

934

 

Excess tax benefit from stock based compensation

 

 

(25

)

 

 

(420

)

Bank owned life insurance income

 

 

(151

)

 

 

(159

)

Net accretion of discount on loans

 

 

(1,149

)

 

 

(2,678

)

Net amortization of discount on subordinated debt

 

 

28

 

 

 

28

 

Net accretion of discount on certificates of deposit

 

 

(110

)

 

 

(287

)

Loss (gain) on sale or write-downs of other real estate and other repossessed assets

 

 

2,283

 

 

 

(1

)

Net gain on sale of securities

 

 

(194

)

 

 

 

Federal Home Loan Bank stock dividends

 

 

(71

)

 

 

(58

)

Stock based compensation expense

 

 

804

 

 

 

607

 

Net change in operating leases

 

 

636

 

 

 

11

 

(Increase) decrease in accrued interest receivable and other assets

 

 

(4,141

)

 

 

2,177

 

(Decrease) Increase in accrued interest payable and other liabilities

 

 

(2,118

)

 

 

3,820

 

Net cash provided by operating activities

 

 

10,410

 

 

 

19,625

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from maturities and principal paydowns of available for sale securities

 

 

164,575

 

 

 

554,829

 

Proceeds from sales of available for sale securities

 

 

29,735

 

 

 

 

Purchase of available for sale securities

 

 

(309,922

)

 

 

(558,438

)

Net change in total loans

 

 

(49,052

)

 

 

(51,357

)

Purchase of bank premises and equipment

 

 

(1,510

)

 

 

(415

)

Proceeds from sale of bank premises, equipment and other real estate

 

 

485

 

 

 

 

Net purchases of Federal Home Loan Bank stock

 

 

(6,485

)

 

 

(3,366

)

Net cash paid for the LoweryBank branch acquisition

 

 

 

 

 

(32,867

)

Net cash used in investing activities

 

 

(172,174

)

 

 

(91,614

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Net decrease in noninterest-bearing deposits

 

 

(34,700

)

 

 

(41,260

)

Net (decrease) increase in interest-bearing deposits

 

 

(79,717

)

 

 

143,323

 

Net change in other borrowed funds

 

 

100,000

 

 

 

(23,498

)

Net increase in borrowings under credit agreement

 

 

15,000

 

 

 

 

Dividends paid to common shareholders

 

 

(2,033

)

 

 

 

Proceeds from the issuance of common stock, stock option exercises

   and the ESPP

 

 

1,157

 

 

 

664

 

Repurchase of common stock

 

 

(9,302

)

 

 

(17,344

)

Net cash (used in) provided by financing activities

 

 

(9,595

)

 

 

61,885

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

(171,359

)

 

 

(10,104

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

346,248

 

 

 

268,947

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

174,889

 

 

$

258,843

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

   Income taxes paid

 

$

 

 

$

 

   Interest paid

 

 

12,932

 

 

 

10,847

 

   Cash paid for operating lease liabilities

 

 

817

 

 

 

931

 

SUPPLEMENTAL NONCASH DISCLOSURE:

 

 

 

 

 

 

 

 

   Lease right-of-use asset obtained in exchange for lessee operating lease liabilities

 

$

 

 

$

15,266

 

   Loans transferred to other real estate

 

 

4,280

 

 

 

522

 

   Other real estate transferred to loans

 

 

1,615

 

 

 

 

   Security trades not yet settled

 

 

16,939

 

 

 

 

See condensed notes to interim consolidated financial statements.

 

7


Table of Contents

 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(Unaudited)

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

Nature of Operations-Allegiance Bancshares, Inc. (“Allegiance”) and its wholly-owned subsidiary, Allegiance Bank, (the “Bank”, and together with Allegiance, collectively referred to as the “Company”) provide commercial and retail loans and commercial banking services. The Company derives substantially all of its revenues and income from the operation of the Bank. The Company is focused on delivering a wide variety of relationship-driven commercial banking products and community-oriented services tailored to meet the needs of small to medium-sized businesses, professionals and individual customers.  The Company operated 27 full-service bank offices in the Houston region, which it defines as the Houston-The Woodlands-Sugar Land and Beaumont-Port Arthur metropolitan statistical areas, with 26 bank offices and one loan production office in the Houston metropolitan area and one bank office location in Beaumont, just outside of the Houston metropolitan area as of March 31, 2020. The Bank provides its customers with a variety of banking services including checking accounts, savings accounts and certificates of deposit, and its primary lending products are commercial, personal, automobile, mortgage and home improvement loans. The Bank also offers safe deposit boxes, automated teller machines, drive-through services and 24-hour depository facilities.

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis, and all such adjustments are of a normal recurring nature. Transactions between the Company and the Bank have been eliminated. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Risks and Uncertainties

The coronavirus (COVID-19) pandemic has negatively impacted the global economy, disrupted global supply chains and increased unemployment levels. The resulting temporary closure of many businesses and the implementation of social distancing and sheltering-in-place policies has and may continue to impact many of the Company’s customers. While the full effects of the pandemic remain unknown, the Company is committed to supporting its customers, employees and communities during this difficult time. The Company has given hardship relief assistance to customers, including the consideration of various loan payment deferral and fee waiver options, and encourages customers to reach out for assistance to support their individual circumstances.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States. Certain provisions within the CARES Act encourage financial institutions to practice prudent efforts to work with borrowers impacted by COVID-19. Under these provisions, modifications deemed to be COVID-19-related would not be considered a troubled debt restructuring (“TDR”) if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. The banking regulators issued similar guidance, which also clarified that a COVID-19-related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification is considered to be short-term. Under these terms, as of March 31, 2020, the Company had processed payment deferrals for 395 loans with an aggregate loan balance of $203.8 million. Through April 26, 2020, the number of deferrals increased to 1,563 with an aggregate loan balance of $838.1 million, with substantially all considered performing at the time of deferral. These deferrals were generally no more than 90 days in duration.

Additionally, the Bank is a lender for the Small Business Administration's (“SBA”) Paycheck Protection Program ("PPP"), a program under the CARES Act, and other SBA, Federal Reserve or United States Treasury programs that have been created in response to the pandemic and may be a lender for programs created in the future. These programs are new and their effects on the Company’s business are uncertain. Through April 26, 2020, the Company had approved more than 3,500 PPP loans in excess of $640 million under the allocation approved by Congress.

 

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The Company identified several loan portfolio categories that it considered to be most “at-risk” from the COVID-19 pandemic, such as, oil and gas, hotel, and restaurants and bars with outstanding loan balances of $80.7 million, $133.0 million and $101.3 million at March 31, 2020, respectively.  The Company’s exposure to the oil and gas industry is minimal as it does not participate in exploration and production or reserve-based lending; however, this industry is vital to the Houston region and the indirect effects could be significant. The Company considers these “at-risk” portfolios to be the most vulnerable to financial difficulties and risks from business disruptions caused by the pandemic spread mitigation efforts. Due to the uncertainty in the economy and unemployment from COVID-19 and the sharp reduction in crude oil prices, the impact could extend to the Company’s securities portfolio, income taxes, other real estate owned and goodwill and intangibles among other items, although the impact is dependent on future events which are highly uncertain and cannot be predicted at this time.

 

In a period of economic contraction, additional loan losses and lost interest income may occur, either in the industries previously noted or others to which the Company has exposure.  The Company continues to accrue interest on loans modified under the new accounting standards.  To the extent those borrowers are unable to resume normal contractual payments, the Company could experience additional losses of principal and interest.

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, 2019.

New Accounting Standards

Adoption of New Accounting Standards

 

ASC 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. In response to COVID-19, new guidance was issued that complies with GAAP whereby, subject to certain restrictions, loan modifications may not be subject to classification as TDRs.  Through April 26, 2020, the Company granted deferrals on 1,563 loans with an aggregate loan balance of $838.1 million. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have an impact on the Company’s financial statements.  

 

ASU 2018-13, “Fair Value Measurement (Topic 820). – Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in ASU 2018-13 remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures and add disclosure requirements identified as relevant. ASU 2018-13 became effective for the Company on January 1, 2020 and did not have a significant impact on the Company’s financial statements.

 

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 became 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 2016-02, “Leases (Topic 842)."  ASU 2016-02 requires 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 became effective for the Company on January 1, 2019.  The Company adopted the standard through the required modified retrospective approach by applying the allowed transition method whereby comparative periods were not restated and a cumulative effect adjustment to the opening balance of retained earnings was recognized as of January 1, 2019.  Topic 842 requires the recognition of a lease liability measured as the present value of unpaid lease payments for operating leases where the Company is the lessee, and a corresponding right-of-use (ROU) asset for the right to use the leased properties. The Company elected not to reassess whether contracts are or contain leases, lease classification or initial direct costs for existing leases, a set of practical expedients for transition provided by ASU 2016-12. Further, the Company elected the practical expedient to use hindsight in determining the lease term and

 

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assessing impairment. The election of the hindsight practical expedient resulted in longer lease terms for a limited number of strategic locations based on relevant factors as of the adoption date. The Company implemented a lease management system to assist in centralizing, maintaining and accounting for all leases to ensure the Company meets the ASU’s reporting and disclosure requirements. Prior comparable periods are presented in accordance with previous guidance under Accounting Standards Codification (ASC) 840, “Leases.” See Note 6 – Leases for further information regarding the Company’s leases on certain properties and equipment under operating leases.  

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 became effective for the Company on January 1, 2019.  Upon adoption, the Company recognized a cumulative effect reduction in retained earnings totaling $1.7 million.

Newly Issued But Not Yet Effective Accounting Standards

ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Among other things, ASU 2016-13 (“CECL”) 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, CECL amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. CECL became effective for the Company on January 1, 2020 using the modified retrospective approach; however, the CARES Act, signed by the President of the United States on March 27, 2020 includes an option for entities to delay the implementation of ASU 2016-13 until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. The Company expects to adopt CECL as of January 1, 2020 after the deferral period ends. Due to the uncertainty of the impact of COVID-19 and the sharp decline in crude oil prices, which can be impactful to the Houston market, the Company has delayed its implementation of CECL and has calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASU 2016-13. The Company will continue to perform and enhance CECL model operations parallel with the incurred loss model throughout 2020, or until adoption.

ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” to simplify various aspects of the current guidance to promote consistent application of the standard among reporting entities by moving certain exceptions to the general principles. The amendment is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. ASU 2019-12 will be become effective for the Company on January 1, 2021 and is not expected to have a significant impact on the Company’s financial statements.

2. ACQUISITIONS

Acquisitions are accounted for using the acquisition method of accounting. Accordingly, the assets and liabilities of an acquired entity are recorded at their fair value at the acquisition date. The excess of the purchase price over the estimated fair value of the net assets is recorded as goodwill. The results of operations for an acquisition have been included in the Company’s consolidated financial results beginning on the respective acquisition date.

The measurement period for the Company to determine the fair values of acquired identifiable assets and assumed liabilities will end at the earlier of (1) twelve months from the date of the acquisition or (2) as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. The following acquisitions were completed on the dates indicated below:

 

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2018 Acquisition

Acquisition of Post Oak Bancshares, Inc.—On October 1, 2018, the Company completed the acquisition of Post Oak Bancshares, Inc. (“Post Oak”) and its wholly-owned subsidiary Post Oak Bank, N.A. headquartered in Houston, Texas. Post Oak operated thirteen bank offices, twelve located throughout the greater Houston metropolitan area and one in Beaumont, just outside of the Houston metropolitan area. The Company acquired Post Oak to further expand its Houston, Texas area market. Goodwill resulted from a combination of expected operational synergies and an enhanced branching network. Goodwill is not expected to be deductible for tax purposes.

Pursuant to the merger agreement, the Company issued 8,402,010 shares of Company common stock for all outstanding shares of Post Oak common stock and paid $21 thousand in cash for any fractional shares held by Post Oak shareholders. Additionally, all outstanding Post Oak options were assumed by Allegiance and converted using the 0.7017 exchange ratio to 299,352 options at a weighted average exercise price of $12.83 per option. Based on the $41.70 per share closing price of Allegiance common stock on September 28, 2018, the total transaction value was approximately $359.0 million.  The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill of $183.7 million which is calculated as the excess of both the consideration exchanged and liabilities assumed as compared to the fair value of identifiable assets acquired, none of which is expected to be deductible for tax purposes. The intangible assets recognized in the transaction are amortized utilizing an accelerated method over their ten year estimated useful lives.

As of September 30, 2019, the Company finalized its valuation of all assets and liabilities acquired.  A summary of the purchase price allocation is as follows (in thousands):

 

Fair value of consideration paid:

 

 

 

 

Common shares issued (8,402,010 shares)

 

$

350,364

 

Stock options issued (299,352)

 

 

8,639

 

Cash in lieu of fractional shares

 

 

21

 

Total consideration paid

 

$

359,024

 

 

 

 

 

 

Fair value of assets acquired:

 

 

 

 

Cash and cash equivalents

 

$

230,416

 

Investment securities

 

 

42,779

 

Loans

 

 

1,164,281

 

Premises and equipment

 

 

21,988

 

Core deposit intangibles

 

 

25,128

 

Other assets

 

 

18,076

 

Total assets acquired

 

$

1,502,668

 

 

 

 

 

 

Fair value of liabilities assumed:

 

 

 

 

Deposits

 

$

1,291,310

 

Other borrowed funds

 

 

30,000

 

Other liabilities

 

 

6,070

 

Total liabilities assumed

 

 

1,327,380

 

Fair value of net assets acquired

 

$

175,288

 

Goodwill resulting from acquisition

 

$

183,736

 

 

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The fair value of net assets acquired includes fair value adjustments to certain acquired loans that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. The following presents details of all loans acquired as of October 1, 2018:

 

 

 

Contractual

Balance

 

 

Fair Value

 

 

Discount

 

 

 

(Dollars in thousands)

 

Commercial and industrial

 

$

221,098

 

 

$

217,204

 

 

$

(3,894

)

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

   (including multi-family

   residential)

 

 

450,947

 

 

 

443,512

 

 

 

(7,435

)

Commercial real estate

   construction and land

   development

 

 

167,386

 

 

 

165,387

 

 

 

(1,999

)

1-4 family residential (including

   home equity)

 

 

288,304

 

 

 

285,099

 

 

 

(3,205

)

Residential construction

 

 

23,812

 

 

 

23,812

 

 

 

 

Consumer and other

 

 

29,684

 

 

 

29,267

 

 

 

(417

)

Total loans

 

$

1,181,231

 

 

$

1,164,281

 

 

$

(16,950

)

 

In connection with the Post Oak acquisition, the Company acquired loans both with and without evidence of credit quality deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan losses. Acquired loans were segregated between those considered to be purchased credit impaired (“PCI”) loans and those without credit impairment at acquisition.

The Company incurred approximately $1.7 million and $1.3 million of pre-tax acquisition and merger-related expenses reflected on the Company’s income statement during the years ended December 31, 2018 and 2019, respectively, related to the Post Oak acquisition.

2019 Acquisition

Acquisition of LoweryBank Branch—On February 1, 2019, the Bank completed the acquisition of LoweryBank, the Sugar Land location of Huntington State Bank. The Bank paid $32.9 million in cash to acquire certain assets which included approximately $45.0 million in loans and assumed approximately $16.0 million in customer deposits. The Bank consolidated its existing Sugar Land bank office into this new bank office location, which was less than one mile away. The acquisition of LoweryBank was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations.  The Company recognized goodwill of $578 thousand which is calculated as the excess of both the consideration exchanged and liabilities assumed as compared to the fair value of identifiable assets acquired, which is expected to be deductible for tax purposes. Income and expense generated from acquired assets and liabilities assumed would not have a material impact; therefore, proforma numbers are not presented.

3. GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS

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

 

 

 

 

 

 

 

Core Deposit

 

 

 

Goodwill

 

 

Intangibles

 

 

 

(Dollars in thousands)

 

Balance as of December 31, 2018

 

$

223,125

 

 

$

26,587

 

Acquisition of LoweryBank branch

 

 

578

 

 

 

 

Measurement period adjustment

 

 

(61

)

 

 

 

Amortization

 

 

 

 

 

(4,711

)

Balance as of December 31, 2019

 

 

223,642

 

 

 

21,876

 

Amortization

 

 

 

 

 

(990

)

Balance as of March 31, 2020

 

$

223,642

 

 

$

20,886

 

 

 

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Goodwill is recorded on the acquisition date of an entity. During the measurement period, the Company may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date. There was a $61 thousand measurement period adjustment recorded during the first quarter 2019 related to the Post Oak Bank acquisition.

 

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. While the Company’s stock was trading above book value for most of the first quarter of 2020, it did decline at the end of the quarter. Although management did not deem this to be a sustained decline in the Company’s stock price at March 31, 2020, it performed an impairment analysis concluding it is more likely than not the fair value exceeded the carrying amount.  In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

The estimated aggregate future amortization expense for core deposit intangible assets remaining as of March 31, 2020 is as follows (dollars in thousands):

 

Remaining 2020

 

$

2,941

 

2021

 

 

3,296

 

2022

 

 

3,003

 

2023

 

 

2,323

 

2024

 

 

2,188

 

Thereafter

 

 

7,135

 

Total

 

$

20,886

 

 

4. SECURITIES

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

 

 

 

March 31, 2020

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

(Dollars in thousands)

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agency securities

 

$

27,914

 

 

$

506

 

 

$

(118

)

 

$

28,302

 

Municipal securities

 

 

252,906

 

 

 

3,634

 

 

 

 

 

 

256,540

 

Agency mortgage-backed pass-through securities

 

 

93,965

 

 

 

3,961

 

 

 

 

 

 

97,926

 

Agency collateralized mortgage obligations

 

 

102,361

 

 

 

3,036

 

 

 

(1,411

)

 

 

103,986

 

Corporate bonds and other

 

 

21,618

 

 

 

78