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 SEPTEMBER 30, 2015

 

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 or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting 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

 

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

 

As of November 11, 2015, there were 12,812,985 outstanding shares of the registrant’s Common Stock, par value $1.00 per share.

 

 

 

 

ALLEGIANCE BANCSHARES, INC.

 

INDEX TO FORM 10-Q

 

SEPTEMBER 30, 2015

 

PART I—FINANCIAL INFORMATION  
     
Item 1. Interim Consolidated Financial Statements  
  Consolidated Balance Sheets (unaudited) 3
  Consolidated Statements of Income (unaudited) 4
  Consolidated Statements of Comprehensive Income (unaudited) 5
  Consolidated Statements of Changes in Stockholders’ 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 32
Item 3. Quantitative and Qualitative Disclosures about Market Risk 55
Item 4. Controls and Procedures 56
   
PART II—OTHER INFORMATION  
     
Item 1. Legal Proceedings 56
Item 1A. Risk Factors 56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 56
Item 3. Defaults upon Senior Securities 56
Item 4. Mine Safety Disclosures 56
Item 5. Other Information 57
Item 6. Exhibits 57
Signatures 58

 

 

 2 

PART I—FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

 

   September 30,
2015
  December 31,
2014
   (Unaudited)   
   (Dollars in thousands, except share data)
ASSETS      
Cash and due from banks  $75,196   $57,314 
Interest bearing deposits at other financial institutions   69,394    110,226 
Total cash and cash equivalents   144,590    167,540 
           
Available for sale securities, at fair value   154,546    84,962 
           
Loans held for sale   27,004    - 
Loans held for investment   1,589,412    1,002,054 
Less: allowance for loan losses   (11,204)   (8,246)
Loans, net   1,605,212    993,808 
           
Accrued interest receivable   5,213    3,285 
Goodwill   39,389    11,144 
Core deposit intangibles, net   5,437    1,747 
Premises and equipment, net   18,838    10,969 
Federal Home Loan Bank stock   7,688    468 
Branch assets held for sale   1,446    - 
Bank owned life insurance   21,040    - 
Other assets   8,951    6,085 
TOTAL ASSETS  $2,012,350   $1,280,008 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
LIABILITIES:          
Deposits:          
Noninterest-bearing  $560,773   $373,795 
Interest-bearing          
Demand   93,808    87,806 
Money market and savings   454,797    279,595 
Certificates and other time   547,170    392,488 
Total interest-bearing deposits   1,095,775    759,889 
Total deposits   1,656,548    1,133,684 
           
Accrued interest payable   150    43 
Short-term borrowings   115,000    - 
Subordinated debentures   9,062    - 
Other borrowed funds   28,069    10,069 
Other liabilities   7,478    4,434 
Total liabilities   1,816,307    1,148,230 
           
COMMITMENTS AND CONTINGENCIES (See Note 12)          
STOCKHOLDERS’ EQUITY:          
Preferred stock, $1 par value; 1,000,000 shares authorized; there were no shares issued and outstanding of Series A or Series B, each has a $1,000 liquidation value   -    - 
Common stock, $1 par value; 40,000,000 shares authorized; 9,824,696 shares issued and 9,823,025 shares outstanding at September 30, 2015 and 7,477,309 shares issued and outstanding at December 31, 2014   9,825    7,477 
Capital surplus   154,737    104,568 
Retained earnings   30,199    19,184 
Accumulated other comprehensive income   1,319    549 
Less: Treasury stock, at cost, 1,671 shares   (37)   - 
Total stockholders’ equity   196,043    131,778 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $2,012,350   $1,280,008 

 

See condensed notes to interim consolidated financial statements.

 

 3 

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
   2015  2014  2015  2014
   (Dollars in thousands, except per share data)
INTEREST INCOME:                    
Loans, including fees  $21,627   $13,011   $63,012   $36,709 
Securities:                    
Taxable   252    332    694    1,053 
Tax-exempt   723    140    1,441    348 
Deposits in other financial institutions   43    70    167    243 
Total interest income   22,645    13,553    65,314    38,353 
                     
INTEREST EXPENSE:                    
Demand, money market and savings deposits   508    307    1,446    923 
Certificates and other time deposits   1,324    1,026    3,778    3,034 
Short-term borrowings   47    -    49    - 
Subordinated debt   114    -    439    - 
Other borrowed funds   245    76    691    151 
Total interest expense   2,238    1,409    6,403    4,108 
                     
NET INTEREST INCOME   20,407    12,144    58,911    34,245 
Provision for loan losses   1,530    750    3,633    1,650 
Net interest income after provision for loan losses   18,877    11,394    55,278    32,595 
NONINTEREST INCOME:                    
Nonsufficient funds fees   179    118    512    335 
Service charges on deposit accounts   163    125    514    378 
Gains (losses) on sales of other real estate   1    -    (5)   188 
Gains on sales of loans   235    -    235    - 
Other   623    362    1,758    1,025 
Total noninterest income   1,201    605    3,014    1,926 
NONINTEREST EXPENSE:                    
Salaries and employee benefits   8,996    4,994    26,419    14,497 
Net occupancy and equipment   1,289    888    3,647    2,469 
Data processing and software amortization   841    397    2,294    1,230 
Professional fees   343    973    1,220    1,502 
Regulatory assessments and FDIC insurance   296    214    990    636 
Core deposit intangibles amortization   207    74    622    222 
Depreciation   414    286    1,190    789 
Communications   300    154    992    460 
Advertising   188    116    510    394 
Other   1,027    656    3,025    1,822 
Total noninterest expense   13,901    8,752    40,909    24,021 
INCOME BEFORE INCOME TAXES   6,177    3,247    17,383    10,500 
Provision for income taxes   1,957    1,226    5,809    3,795 
NET INCOME   4,220    2,021    11,574    6,705 
Preferred stock dividends   173    -    559    - 
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS  $4,047   $2,021   $11,015   $6,705 
                     
EARNINGS PER COMMON SHARE:                    
Basic  $0.41   $0.29   $1.12   $0.96 
Diluted  $0.40   $0.28   $1.10   $0.94 

 

 

See condensed notes to interim consolidated financial statements.

 

 4 

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2015  2014  2015  2014
   (Dollars in thousands)
Net income  $4,220   $2,021   $11,574   $6,705 
Other comprehensive income, before tax:                    
Unrealized gain on securities:                    
Change in unrealized holding gain on available for sale securities during the period   2,162    154    1,197    1,667 
Total other comprehensive income    2,162    154    1,197    1,667 
Deferred tax expense related to other comprehensive income   (756)   (117)   (427)   (567)
Other comprehensive income, net of tax   1,406    37    770    1,100 
Comprehensive income  $5,626   $2,058   $12,344   $7,805 

 

 

 

 

 

See condensed notes to interim consolidated financial statements.

 

 5 

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

   Preferred Stock  Common Stock  Capital  Retained  Accumulated
Other
Comprehensive
  Treasury  Total
Stockholders’
   Shares  Amount  Shares  Amount  Surplus  Earnings  Income (Loss)  Stock  Equity
   (In thousands, except share data)
BALANCE AT JANUARY 1, 2014   -   $-    6,964,551   $6,965   $93,459   $10,179   $(669)  $(198)  $109,736 
Net income                            6,705              6,705 
Other comprehensive income                                 1,100         1,100 
Common stock issued in connection with the exercise of stock options and restricted stock awards and the Employee Stock Purchase Plan ("ESPP")             16,335    16    117              198    331 
Stock based compensation expense                       517                   517 
BALANCE AT SEPTEMBER 30, 2014   -    -    6,980,886    6,981    94,093    16,884    431    -    118,389 
                                              
BALANCE AT JANUARY 1, 2015   -    -    7,477,309    7,477    104,568    19,184    549    -    131,778 
Net income                            11,574              11,574 
Other comprehensive income                                 770         770 
Common stock issued in connection with the exercise of stock options and restricted stock awards             3,983    4    7                   11 
Repurchase of treasury stock                                      (51)   (51)
Issuance of common stock in private placement offering             4,884    5    103              14    122 
Common stock issued in connection with the acquisition of F&M Bancshares, Inc.             2,338,520    2,339    49,108                   51,447 
Preferred stock issued in connection with the acquisition of F&M Bancshares, Inc.   11,550    11,550                                  11,550 
Redemption of preferred stock   (11,550)   (11,550)                                 (11,550)
Preferred stock dividends                            (559)             (559)
Stock based compensation expense                       951                   951 
BALANCE AT SEPTEMBER 30, 2015   -   $-    9,824,696   $9,825   $154,737   $30,199   $1,319   $(37)  $196,043 

 

 

See condensed notes to interim consolidated financial statements.

 

 6 

 

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Nine Months Ended September 30,
   2015  2014
   (Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income  $11,574   $6,705 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and core deposit intangibles amortization   1,812    1,011 
Provision for loan losses   3,633    1,650 
Net amortization of premium on investments   815    169 
Net (accretion) amortization of (discount) premium on loans   (2,968)   70 
Net amortization of premium on subordinated debentures   191    - 
Net loss (gain) on sale or write down of premises, equipment and other real estate   5    (135)
Net gain on sales of loans   (235)   - 
Stock based compensation expense   951    517 
(Increase) decrease in accrued interest receivable and other assets   (8,503)   2,072 
Increase (decrease) in accrued interest payable and other liabilities   832    (499)
Net cash provided by operating activities   8,107    11,560 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from maturities and principal paydowns of available for sale securities   1,213,992    1,214,346 
Proceeds from sales of available for sale securities   14,748    - 
Purchase of available for sale securities   (1,283,220)   (1,214,755)
Net increase in total loans   (207,197)   (128,864)
Purchase of bank premises and equipment   (1,891)   (1,889)
Proceeds from sale of bank premises, equipment and other real estate   -    520 
Purchase of bank owned life insurance   (10,000)   - 
Net cash and cash equivalents acquired in the purchase of F&M Bancshares, Inc.   106,486    - 
Net cash used in investing activities   (167,082)   (130,642)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net increase in noninterest-bearing deposits   1,449    40,194 
Net increase in interest-bearing deposits   31,603    20,218 
Paydowns of long-term borrowings   (18,000)   - 
Proceeds from long-term borrowings   18,000    5,000 
Proceeds from short-term borrowings   115,000    - 
Preferred stock dividends   (559)   - 
Redemption of preferred stock   (11,550)   - 
Proceeds from the issuance of common stock, stock option exercises, restricted stock awards and the ESPP   133    331 
Repurchase of treasury stock   (51)   - 
Net cash provided by financing activities   136,025    65,743 
           
NET CHANGE IN CASH AND CASH EQUIVALENTS   (22,950)   (53,339)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   167,540    213,076 
CASH AND CASH EQUIVALENTS, END OF PERIOD  $144,590   $159,737 
           
NONCASH ACTIVITIES:          
Acquired koans transferred to loans held for sale  $33,409   $- 
Acquired premises and equipment and accrued interest receivable transferred to branch assets held for sale   1,662    - 
           
SUPPLEMENTAL INFORMATION:          
Income taxes paid  $5,600   $3,400 
Interest paid   5,675    3,623 

 

See Note 2 regarding non-cash transactions included in the F&M Bancshares, Inc. acquisition

 

 

See condensed notes to interim consolidated financial statements.

 

 7 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(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, a Texas state 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.

Basis of Presentation-The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States Generally Accepted Accounting Principles (GAAP) for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission. Accordingly, the condensed 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 the subsidiary 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 prospectus filed with the Securities and Exchange Commission on October 8, 2015 pursuant to Rule 424(b)(4) for the fiscal year ended December 31, 2014. Operating results for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. Furthermore, the acquisition of F&M Bancshares, Inc. during the first quarter of 2015 may impact the comparability of year to date 2015 versus year to date 2014 comparable information.

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 the Company’s prospectus filed with the Securities and Exchange Commission on October 8, 2015 pursuant to Rule 424(b)(4). The following accounting and reporting policies were adopted during the first quarter of 2015 as part of the F&M Bancshares, Inc. transaction:

 

Bank Owned Life Insurance-During the first quarter of 2015, the Company purchased bank owned life insurance policies on certain key executives and in conjunction with the acquisition of F&M Bancshares, Inc., the Company acquired life insurance policies. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value, which is the most reasonable estimate of fair value, adjusted for other charges or other amounts due that are probable at settlement.

 

Loans held for Sale-Loans held for sale are carried at lower of aggregate cost or fair value. During the first quarter of 2015, the Company purchased F&M Bancshares, Inc. At September 30, 2015, loans held for sale consists of loans at two former F&M Bancshares, Inc. branches in Central Texas that are for sale.

New Accounting Standards

Adoption of New Accounting Standards

 

On January 1, 2015, the Company adopted Accounting Standards Update (ASU) 2014-04 “Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40) — Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” ASU 2014-04 intends to reduce diversity by clarifying an in substance repossession or foreclosure occurs when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The adoption of this ASU did not have a material impact on the Company’s financial statements.

 

 8 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

Newly Issued But Not Yet Effective Accounting Standards

 

ASU 2015-16, “Business Combinations (Topic 805) – Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer must record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Additionally, the entity is required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for the Company beginning January 1, 2016, though early adoption is permitted. ASU 2015-16 is not expected to have a significant impact on the Company’s financial statements.

 

ASU 2014-09 “Revenue from Contract 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.  ASU 2014-09 is currently effective for the Company beginning on January 1, 2018 with retrospective application to each prior reporting period presented. The Company is still evaluating the potential impact on the Company’s financial statements.

 

 

2. ACQUISITIONS

 

Acquisition of F&M Bancshares - On January 1, 2015, the Company completed the acquisition of F&M Bancshares, Inc. (“F&M”) and its wholly-owned subsidiary Enterprise Bank (“Enterprise”) headquartered in Houston, Texas. Enterprise operated nine banking locations, seven in Houston, Texas and two in Central Texas, one in Rosebud, Texas and one in Mart, Texas. The two Central Texas locations and their related assets have been classified within loans held for sale and branch assets held for sale as of September 30, 2015. During the first quarter of 2015, the Company consolidated two of the seven acquired Houston area locations due to the close proximity of these locations to its existing banking locations. The Company acquired F&M to further expand its Houston, Texas area market.

Pursuant to the merger agreement, the Company issued 2,338,520 shares of Company common stock for all outstanding shares of F&M capital stock and paid $642 thousand in cash for any fractional and out of state shares held by F&M shareholders. The Company recognized initial goodwill of $28.2 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. F&M’s results of operations were included in the Company’s results beginning January 1, 2015. For the nine months ended September 30, 2015, net interest income associated with F&M was $13.1 million. The Company does not track separately the noninterest income and noninterest expense of the F&M branches.

 

The period during which the initial fair value adjustments may be revised is generally referred to as the measurement period. During the measurement period, the Company also shall recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period ends 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. However, the measurement period shall not exceed one year from the acquisition date.

 

 9 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

As of September 30, 2015, the Company finalized its valuation of all assets and liabilities acquired, resulting in no changes to purchase accounting adjustments. A summary of the final purchase price allocation is as follows (dollars in thousands):

 

Fair value of consideration paid:   
Common shares issued (2,338,520 shares)  $51,447 
Preferred shares issued (11,550 shares)   11,550 
Cash consideration   642 
Total consideration paid  $63,639 
      
Fair value of assets acquired:     
Cash and cash equivalents  $107,128 
Investment Securities   14,722 
Loans, net   404,637 
Premises and equipment   7,699 
Core deposit intangibles   4,313 
Other assets   15,896 
Total assets acquired  $554,395 
      
Fair value of liabilities assumed:     
Deposits  $489,556 
Subordinated debt   8,871 
Other borrowed funds   18,000 
Other liabilities   2,574 
Total liabilities assumed   519,001 
Fair value of net assets acquired  $35,394 
Goodwill resulting from acquisition  $28,245 

 

Subsequent to the acquisition, the Company paid off the $18.0 million of borrowed funds from F&M shareholders by drawing on its borrowing with another financial institution. Additionally, the securities acquired from F&M were sold subsequent to the acquisition with no income statement impact.

Additionally, on July 15, 2015, the Company redeemed all of the outstanding shares of Series A and Series B preferred stock for an aggregate redemption price of $11.7 million (which is the sum of the liquidation amount plus accrued and unpaid dividends up to, but excluding the redemption date). The Company issued the shares of Series A and Series B preferred stock in connection with the F&M acquisition, which had preferred stock pursuant to the U.S. Treasury’s Troubled Asset Relief Program.

 

 10 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

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 January 1, 2015:

 

   Contractual Balance  Fair Value  Discount
          
Commercial and industrial  $96,891   $95,256   $(1,635)
Real estate:               
Commercial real estate (including multi-family residential)   225,191    222,082    (3,109)
Commercial real estate construction and land development   40,787    40,094    (693)
1-4 family residential (including home equity)   35,897    35,488    (409)
Residential construction   6,467    6,395    (72)
Consumer and other   5,421    5,322    (99)
Total loans  $410,654   $404,637   $(6,017)

 

The following table presents pro forma information as if the acquisition had occurred at the beginning of 2014. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates.

 

   For the Three Months Ending September 30,  For the Nine Months Ending September 30,
   2015  2014  2015  2014
Net interest income  $20,030   $18,039   $58,879   $52,929 
Net income attributable to common stockholders   3,606    3,204    8,710    11,388 
Basic earnings per common share   0.37    0.34    0.89    1.22 
Diluted earnings per common share   0.36    0.34    0.87    1.20 

 

To determine pro forma information, the Company adjusted its three and nine months ended September 30, 2015 and three and nine months ended September 30, 2014 historical results to exclude the historical results for F&M for the three and nine months ended September 30, 2015 and 2014.

 

The pro forma information includes adjustments for acquisition accounting to interest on loans, certificates of deposit and subordinated debt, amortization of intangibles arising from the transaction and the related income tax effects.

 

The Company incurred approximately $941 thousand of pre-tax merger related expenses during the nine months ended September 30, 2015. The merger expenses are reflected on the Company’s income statement for the applicable period and are reported primarily in the categories of salaries and benefits and professional fees but are excluded from the calculation of pro forma income above.

 

The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates.

 

As of September 30, 2015, the Company held the two Central Texas locations and their related assets for sale. The assets held for sale of these locations include loans, the related accrued interest receivable on those loans and premises and equipment. The loans are presented as loans held for sale on the balance sheet. The branch assets held for sale reported on the balance sheet include accrued interest receivable and premises and equipment for these two respective locations. See Note 15 – Subsequent Events regarding the definitive purchase and assumption agreement entered into on November 3, 2015 for the sale of the two Central Texas banking locations.

 

 11 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

3. GOODWILL AND CORE DEPOSIT INTANGIBLES

 

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

 

   Goodwill  Core Deposit
Intangibles
   (Dollars in thousands)
       
Balance as of January 1, 2014  $10,999   $2,045 
Measurement period adjustment   145    - 
Amortization   -    (298)
Balance as of December 31, 2014   11,144    1,747 
Acquisition of F&M Bancshares, Inc.   28,245    4,312 
Amortization   -    (622)
Balance as of September 30, 2015  $39,389   $5,437 

 

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.

 

 

4. SECURITIES

 

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

 

   September 30, 2015
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
   (Dollars in thousands)
Available for Sale                    
U.S. Government and agency securities  $8,658   $466   $-   $9,124 
Municipal securities   110,810    1,455    (203)   112,062 
Agency mortgage-backed pass-through securities   30,779    530    (182)   31,127 
Agency collateralized mortgage obligations   2,270    23    (60)   2,233 
Total  $152,517   $2,474   $(445)  $154,546 

 

   December 31, 2014
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
   (Dollars in thousands)
Available for Sale                    
U.S. Government and agency securities  $14,080   $442   $(45)  $14,477 
Municipal securities   35,272    283    (74)   35,481 
Agency mortgage-backed pass-through securities   32,191    472    (188)   32,475 
Agency collateralized mortgage obligations   2,587    21    (79)   2,529 
Total  $84,130   $1,218   $(386)  $84,962 

  

 12 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

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

 

   September 30, 2015
   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  $-   $-   $-   $-   $-   $- 
Municipal securities   24,953    (202)   115    (1)   25,068    (203)
Agency mortgage-backed pass-through securities   5,980    (38)   6,530    (144)   12,510    (182)
Agency collateralized mortgage obligations   724    (8)   733    (52)   1,457    (60)
Total  $31,657   $(248)  $7,378   $(197)  $39,035   $(445)

 

   December 31, 2014
   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  $2,842   $(3)  $1,748   $(42)  $4,590   $(45)
Municipal securities   14,102    (74)   -    -    14,102    (74)
Agency mortgage-backed pass-through securities   498    (1)   14,058    (187)   14,556    (188)
Agency collateralized mortgage obligations   -    -    1,607    (79)   1,607    (79)
Total  $17,442   $(78)  $17,413   $(308)  $34,855   $(386)

 

As of September 30, 2015, management does not expect to sell any debt securities classified as available for sale with material unrealized losses; and the Company believes that it more likely than not will not be required to sell any of these debt 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 September 30, 2015, 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.

 

 13 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

The amortized cost and fair value of investment securities at September 30, 2015, 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  $8,026   $8,048 
Due after one year through five years   15,706    15,884 
Due after five years through ten years   27,278    27,837 
Due after ten years   68,458    69,417 
Subtotal   119,468    121,186 
Agency mortgage-backed pass through securities and agency collateralized mortgage obligations   33,049    33,360 
Total  $152,517   $154,546 

 

During the first quarter of 2015, the Company sold all securities acquired in the F&M transaction resulting in gross proceeds of approximately $15.0 million. No gains or losses were recognized. No securities were sold during the nine months ended September 30, 2014.

 

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

 

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

 

   September 30, 2015  December 31, 2014
   (Dollars in thousands)
       
Loans held for sale (1)  $27,004   $- 
           
Commercial and industrial   367,341    242,034 
Mortgage warehouse (2)   65,928    28,329 
Real estate:          
Commercial real estate (including  multi-family residential)   710,857    429,986 
Commercial real estate construction and land development   151,369    85,484 
1-4 family residential (including home equity)   185,473    135,127 
Residential construction   95,212    72,402 
Consumer and other   13,232    8,692 
Total loans held for investment   1,589,412    1,002,054 
Total loans   1,616,416    1,002,054 
Allowance for loan losses   (11,204)   (8,246)
 Loans, net  $1,605,212   $993,808 

  

(1)

Consists of loans at two former F&M locations acquired on January 1, 2015. On November 3, 2015, the Company entered into an agreement to sell these former F&M branches and their related assets located in Central Texas. As of September 30, 2015, loans held for sale consists of $12.2 million of commercial and industrial loans, $11.6 million of commercial real estate (including multi-family residential) loans, $2.4 million of 1-4 family residential (including home equity) loans and $741 thousand of consumer and other loans. Loans held for sale are carried at lower of aggregate cost or fair value.

   
 (2)

Mortgage warehouse was previously reported within the Commercial and Industrial loan portfolio. These loans are to unaffiliated mortgage loan originators collateralized by mortgage promissory notes which are segregated in the Company’s mortgage warehouse portfolio.  These promissory notes are further secured by real estate in a manner consistent with traditional mortgage warehouse lending whereby the promissory notes are 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 is normally 10 to 20 days.  For mortgage promissory notes secured by commercial property, the warehouse time is 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.

 

 14 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

Nonaccrual and Past Due Loans

 

An aging analysis of the recorded investment in past due loans, segregated by class of loans, is as follows:

 

   September 30, 2015
   Loans Past Due and Still Accruing         
   30-89
Days (3)
  90 or More
Days
  Total Past
Due Loans
  Nonaccrual
Loans (4)
  Current
Loans
  Total
Loans
   (Dollars in thousands)
                   
Loans held for sale  $157   $-   $157   $498   $26,349   $27,004 
                               
Commercial and industrial   349    -    349    3,476    363,516    367,341 
Mortgage warehouse   -    -    -    -    65,928    65,928 
Real estate:                              
Commercial real estate (including multi-family residential)   393    -    393    1,783    708,681    710,857 
Commercial real estate construction and land development   129    -    129    -    151,240    151,369 
1-4 family residential (including home equity)   188    -    188    341    184,944    185,473 
Residential construction   4    -    4    -    95,208    95,212 
Consumer and other   112    -    112    87    13,033    13,232 
Total loans held for investment   1,175    -    1,175    5,687    1,582,550    1,589,412 
Total loans  $1,332   $-   $1,332   $6,185   $1,608,899   $1,616,416 

 

   December 31, 2014
   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  $274   $-   $274   $1,527   $240,233   $242,034 
Mortgage warehouse   -    -    -    -    28,329    28,329 
Real estate:                              
Commercial real estate (including multi-family residential)   -    -    -    1,653    428,333    429,986 
Commercial real estate construction and land development   -    -    -    -    85,484    85,484 
1-4 family residential (including home equity)   -    -         -    135,127    135,127 
Residential construction   413    -    413    -    71,989    72,402 
Consumer and other   46    -    46    4    8,642    8,692 
Total loans  $733   $-   $733   $3,184   $998,137   $1,002,054 

 

(3)Includes $240 thousand of loans acquired from F&M.
(4)Includes $1.2 million of loans acquired from F&M.

 

 

 15 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

Impaired Loans

 

Impaired loans by class of loans are set forth in the following tables. The average recorded investment presented in the table below is reported on a year-to-date basis.

 

   September 30, 2015
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
   (Dollars in thousands)
With no related allowance recorded:                         
Commercial and industrial  $1,950   $2,272   $-   $2,315   $102 
Mortgage warehouse   -    -    -    -    - 
Commercial real estate (including multi-family residential)   972    972    -    1,029    66 
Commercial real estate construction and land development   -    -    -    -    - 
1-4 family residential (including home equity)   379    379    -    382    12 
Residential construction   -    -    -    -    - 
Consumer and other   101    101    -    110    6 
Total   3,402    3,724    -    3,836    186 
                          
With an allowance recorded:                         
Commercial and industrial   1,907    1,907    604    1,970    53 
Mortgage warehouse   -    -    -    -    - 
Commercial real estate (including multi-family residential)   864    864    90    838    20 
Commercial real estate construction and land development   -    -    -    -    - 
1-4 family residential (including home equity)   -    -    -    -    - 
Residential construction   -    -    -    -    - 
Consumer and other   20    20    6    22    1 
Total   2,791    2,791    700    2,830    74 
                          
Total:                         
Commercial and industrial   3,857    4,179    604    4,285    155 
Mortgage warehouse   -    -    -    -    - 
Commercial real estate (including multi-family residential)   1,836    1,836    90    1,867    86 
Commercial real estate construction and land development   -    -    -    -    - 
1-4 family residential (including home equity)   379    379    -    382    12 
Residential construction   -    -    -    -    - 
Consumer and other   121    121    6    132    7 
   $6,193   $6,515   $700   $6,666   $260 

  

The average recorded investment of impaired loans for the three months ended September 30, 2015 was $6.9 million. Interest income recognized for the three months ended September 30, 2015 on impaired loans was $74 thousand. The average recorded investment of impaired loans for the three and nine months ended September 30, 2014 was $5.6 million and $5.8 million, respectively. Interest income recognized for the three and nine months ended September 30, 2014 on impaired loans was $105 thousand and $285 thousand, respectively.

 16 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

   December 31, 2014
   Recorded
Investment
  Unpaid
Principal
Balance
  Related
Allowance
  Average
Recorded
Investment
  Interest
Income
Recognized
   (Dollars in thousands)
With no related allowance recorded:                         
Commercial and industrial  $999   $1,054   $-   $1,292   $83 
Mortgage warehouse   -    -    -    -    - 
Commercial real estate (including multi-family residential)   2,894    2,894    -    1,641    182 
Commercial real estate construction and land development   -    -    -    -    - 
1-4 family residential (including home equity)   -    -    -    2    - 
Residential construction   -    -    -    -    - 
Consumer and other   -    -    -    1,084    - 
Total   3,893    3,948    -    4,019    265 
                          
With an allowance recorded:                         
Commercial and industrial   1,802    1,802    501    2,247    128 
Mortgage warehouse   -    -    -    -    - 
Commercial real estate (including multi-family residential)   180    180    10    715    12 
Commercial real estate construction and land development   -    -    -    -    - 
1-4 family residential (including home equity)   -    -    -    40    - 
Residential construction   -    -    -    -    - 
Consumer and other   4    4    1    2,102    - 
 Total   1,986    1,986    512    5,104    140 
                          
Total:                         
Commercial and industrial   2,801    2,856    501    3,539    211 
Mortgage warehouse   -    -    -    -    - 
Commercial real estate (including multi-family residential)   3,074    3,074    10    2,356    194 
Commercial real estate construction and land development   -    -    -    -    - 
1-4 family residential (including home equity)   -    -    -    42    - 
Residential construction   -    -    -    -    - 
Consumer and other   4    4    1    3,186    - 
   $5,879   $5,934   $512   $9,123   $405 

 

 

 17 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

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:

Watch—Loans classified as watch 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 loans so classified are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

Based on the most recent analysis performed, the risk category of loans by class of loan at September 30, 2015 is as follows:

 

   Pass  Watch  Special Mention  Substandard  Doubtful  Total
   (Dollars in thousands)
                   
Loans held for sale  $25,806   $25   $26   $1,147   $-   $27,004 
                               
Commercial and industrial   355,053    5,173    1,810    5,305    -    367,341 
Mortgage warehouse   65,928    -    -    -    -    65,928 
Commercial real estate (including multi-family residential)   690,617    7,960    819    11,461    -    710,857 
Commercial real estate construction  and land development   149,167    2,202    -    -    -    151,369 
1-4 family residential (including home equity)   181,053    1,824    237    2,359    -    185,473 
Residential construction   95,212    -    -    -    -    95,212 
Consumer and other   13,052    74    -    106    -    13,232 
Total loans held for investment   1,550,082    17,233    2,866    19,231    -    1,589,412 
Total loans  $1,575,888   $17,258   $2,892   $20,378   $-   $1,616,416 

  

 18 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

The following table presents the risk category of loans by class of loan at December 31, 2014:

 

   Pass  Watch  Special Mention  Substandard  Doubtful  Total
   (Dollars in thousands)
Commercial and industrial  $235,006   $1,817   $291   $4,920   $-   $242,034 
Mortgage warehouse   28,329    -    -    -    -    28,329 
Commercial real estate (including multi-family residential)   408,117    9,365    -    12,504    -    429,986 
Commercial real estate construction  and land development   82,643    2,841    -    -    -    85,484 
1-4 family residential (including home equity)   132,979    1,677    83    388    -    135,127 
Residential construction   71,025    -    1,200    177    -    72,402 
Consumer and other   8,636    35    -    21    -    8,692 
Total loans held for investment  $966,735   $15,735   $1,574   $18,010   $-   $1,002,054 

 

Allowance for Loan Losses

 

The following table presents the activity in the allowance for loan losses by portfolio type for the three and nine months ended September 30, 2015 and 2014:

 

   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 June 30, 2015  $2,905   $-   $4,533   $842   $1,255   $710   $67   $10,312 
Provision for loan losses   820    -    434    173    68    25    10    1,530 
                                         
Charge-offs   (641)   -    -    -    -    -    (8)   (649)
Recoveries   7    -    -    -    -    2    2    11 
Net charge-offs   (634)   -    -    -    -    2    (6)   (638)
                                         
Balance September 30, 2015  $3,091   $-   $4,967   $1,015   $1,323   $737   $71   $11,204 
                                         
Nine Months Ended                                        
Balance January 1, 2015  $2,334   $-   $3,799   $578   $1,008   $475   $52   $8,246 
Provision for loan losses   1,434    -    1,168    437    315    238    41    3,633 
                                         
Charge-offs   (723)   -    -    -    -    -    (26)   (749)
Recoveries   46    -    -    -    -    24    4    74 
Net charge-offs   (677)   -    -    -    -    24    (22)   (675)
                                         
Balance September 30, 2015  $3,091   $-   $4,967   $1,015   $1,323   $737   $71   $11,204 

 

 19 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

   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 June 30, 2014  $2,083   $-   $3,396   $615   $875   $441   $52   $7,462 
Provision for loan losses   722    -   97    (116)   83    (43)   7    750 
                                         
Charge-offs   (481)   -    -    -    -    -    -    (481)
Recoveries   9    -    -    -    -    -    -    9 
Net charge-offs   (472)   -    -    -    -    -    -    (472)
                                         
Balance September 30, 2014  $2,333   $-   $3,493   $499   $958   $398   $59   $7,740 
                                         
Nine Months Ended                                        
Balance January 1, 2014  $2,729   $-   $2,175   $357   $558   $598   $238   $6,655 
Provision for loan losses   130    -    1,318    142    400    (200)   (140)   1,650 
                                         
Charge-offs   (555)   -    -    -    -    -    (40)   (595)
Recoveries   29    -    -    -    -    -    1    30 
Net charge-offs   (526)        -    -    -    -    (39)   (565)
                                         
Balance September 30, 2014  $2,333   $-   $3,493   $499   $958   $398   $59   $7,740 

 

The following table presents the balance in the allowance for loan losses by portfolio type based on the impairment method as of September 30, 2015 and December 31, 2014:

 

   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:                                        
September 30, 2015                                        
Individually evaluated for impairment  $604   $-   $90   $-   $-   $-   $6   $700 
Collectively evaluated for impairment   2,487    -    4,877    1,015    1,323    737    65    10,504 
Total allowance for loan losses  $3,091   $-   $4,967   $1,015   $1,323   $737   $71   $11,204 
                                         
December 31, 2014                                        
Individually evaluated for impairment  $501   $-   $10   $-   $-   $-   $1   $512 
Collectively evaluated for impairment   1,833    -    3,789    578    1,008    475    51    7,734 
Total allowance for loan losses  $2,334   $-   $3,799   $578   $1,008   $475   $52   $8,246 

 

 20 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

The following table presents the recorded investment in loans held for investment by portfolio type based on the impairment method as of September 30, 2015 and December 31, 2014:

 

   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:                                        
September 30, 2015                                        
Individually evaluated for impairment  $3,857   $-   $1,836   $-   $379   $-   $121   $6,193 
Collectively evaluated for impairment   363,484    65,928    709,021    151,369    185,094    95,212    13,111    1,583,219 
Total loans evaluated for impairment  $367,341   $65,928   $710,857   $151,369   $185,473   $95,212   $13,232   $1,589,412 
                                         
                                         
December 31, 2014                                        
Individually evaluated for impairment  $2,801   $-   $3,074   $-   $-   $-   $4   $5,879 
Collectively evaluated for impairment   239,233    28,329    426,912    85,484    135,127    72,402    8,688    996,175 
Total loans evaluated for impairment  $242,034   $28,329   $429,986   $85,484   $135,127   $72,402   $8,692   $1,002,054 

 

Troubled Debt Restructurings

 

As of September 30, 2015 and December 31, 2014, the Company had a recorded investment in troubled debt restructurings of $3.7 million and $1.7 million, respectively. The Company added $2.8 million in troubled debt restructurings during the nine months ended September 30, 2015. The Company allocated $591 thousand and $205 thousand of specific reserves for troubled debt restructurings at September 30, 2015 and December 31, 2014, respectively, and did not commit to lend additional amounts on these loans. As of September 30, 2015, there have been no defaults on any loans that were modified as troubled debt restructurings during the preceding 12 months. Default is determined at 90 or more days past due.

 

6. FAIR VALUE

 

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

 

Fair Value Hierarchy

 

The Company groups financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1—Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. 
Level 3—Significant unobservable inputs that reflect management’s judgment and assumptions that market participants would use in pricing an asset or liability that are supported by little or no market activity. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.

 

 21 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

The following method to determine fair value of loans held for sale was adopted during the first quarter of 2015 as part of the F&M transaction:

 

Loans Held For Sale-Loans held for sale are carried at the lower of aggregate cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale was determined using assets, adjusted for specific attributes of that loan or other observable market data. The Company classifies the fair value of loans held for sale as Level 3.

 

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

 

   As of September 30, 2015
   Carrying  Estimated Fair Value
   Amount  Level 1  Level 2  Level 3  Total
Financial assets  (Dollars in thousands)
Cash and cash equivalents  $144,590   $144,590   $-   $-   $144,590 
Available for sale securities   154,546    -    154,546    -    154,546 
Loans held for sale   27,004    -    -    27,004    27,004 
Loans held for investment, net of allowance   1,578,208    -    -    1,584,059    1,584,059 
Accrued interest receivable   5,213    -    968    4,245    5,213 
                          
Financial liabilities                         
Total deposits  $1,656,548   $-   $-   $1,658,643   $1,658,643 
Accrued interest payable   150    -    65    85    150 
Short-term borrowings   115,000    -    115,000    -    115,000 
Subordinated debentures   9,062    -    9,062    -    9,062 
Other borrowed funds   28,069    -    28,069    -    28,069 

 

   As of December 31, 2014
   Carrying  Estimated Fair Value
   Amount  Level 1  Level 2  Level 3  Total
Financial assets  (Dollars in thousands)
Cash and cash equivalents  $167,540   $167,540   $-   $-   $167,540 
Available for sale securities   84,962    -    84,962    -    84,962 
Loans held for investment, net of allowance   993,808    -    -    998,575    998,575 
Accrued interest receivable   3,285    -    473    2,812    3,285 
                          
Financial liabilities                         
Total deposits  $1,133,684   $-   $-   $1,133,684   $1,133,684 
Accrued interest payable   43    -    -    43    43 
Other borrowed funds   10,069    -    10,069    -    10,069 

 

The fair value estimates presented above are based on pertinent information available to management as of the dates indicated. The methods used to determine fair value are described in our audited financial statements which are presented in the Company’s prospectus filed with the Securities and Exchange Commission on October 8, 2015 pursuant to Rule 424(b)(4).

 

 22 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

The following tables present fair values for assets measured at fair value on a recurring basis:

 

   As of September 30, 2015
   Level 1  Level 2  Level 3  Total
   (Dollars in thousands)
Available for sale securities:                    
U.S. Government and agency securities  $-   $9,124   $-   $9,124 
Municipal securities   -    112,062    -    112,062 
Agency mortgage-backed pass-through securities   -    31,127    -    31,127 
Agency collateralized mortgage obligations   -    2,233    -    2,233 
   $-   $154,546   $-   $154,546 

 

   As of December 31, 2014
   Level 1  Level 2  Level 3  Total
   (Dollars in thousands)
Available for sale securities:                    
U.S. Government and agency securities  $-   $14,477   $-   $14,477 
Municipal securities   -    35,481    -    35,481 
Agency mortgage-backed pass-through securities   -    32,475    -    32,475 
Agency collateralized mortgage obligations   -    2,529    -    2,529 
   $-   $84,962   $-   $84,962 

 

There were no liabilities measured at fair value on a recurring basis as of September 30, 2015 or December 31, 2014. There were no transfers between levels during the nine months ended September 30, 2015 or 2014.

 

 23 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances such as evidence of impairment.

 

   As of September 30, 2015
   Level 1  Level 2  Level 3
   (Dollars in thousands)
          
Impaired loans:               
Commercial and industrial  $-   $-   $1,303 
Commercial real estate (including multi-family residential)   -    -    774 
Consumer and other   -    -    14 
   $-   $-   $2,091 

 

   As of December 31, 2014
   Level 1  Level 2  Level 3
   (Dollars in thousands)
          
Impaired loans               
Commercial and industrial  $-   $-   $1,301 
Commercial real estate (including multi-family residential)   -    -    170 
Consumer and other   -    -    3 
   $-   $-   $1,474 

 

Level 3 Valuations

 

During the nine months ended September 30, 2015 and the year ended December 31, 2014, certain impaired loans were reevaluated and reported at fair value through a specific allocation of the allowance for loan losses. At September 30, 2015, the total reported fair value of impaired loans of $2.1 million based on collateral valuations utilizing Level 3 valuation inputs had a carrying value of $2.8 million that was reduced by specific allowance allocations totaling $700 thousand. At December 31, 2014, the total reported fair value of impaired loans of $1.5 million based on collateral valuations utilizing Level 3 valuation inputs had a carrying value of $2.0 million that was reduced by specific allowance allocations totaling $512 thousand.

 24 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

7. DEPOSITS

 

Time deposits that meet or exceed the Federal Deposit Insurance Corporation (the “FDIC”) Insurance limit of $250 thousand at September 30, 2015 and December 31, 2014 were $140.8 million and $97.0 million, respectively.

 

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

 

Within one year  $382,666 
After one but within two years   93,074 
After two but within three years   38,960 
After three but within four years   16,384 
After four but within five years   16,086 
Total  $547,170 

 

 

8. BORROWINGS

 

The Company has an available line of credit with the FHLB of Dallas, which allows the Company to borrow on a collateralized basis. FHLB advances are short-term, overnight borrowings and are used to manage liquidity as needed. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits. At September 30, 2015, the Company had total funds of $512.1 million available under this agreement, of which $119.0 million was outstanding. Short-term overnight FHLB advances of $115.0 million were outstanding at September 30, 2015, at a weighted average rate of 0.18%. Letters of credit were $4.0 million at September 30, 2015, of which $1.5 million will expire in January 2016 and $2.5 million will expire in August 2016.

 

In 2015, the Company borrowed an additional $18.0 million on a borrowing agreement with another financial institution in addition to the $10.1 million indebtedness incurred in 2014. The borrowing matures in December 2021. The Company used the funds borrowed in 2015 to repay debt that F&M owed and used the borrowed funds in 2014 to pay off a previous borrowing with another financial institution entered into during 2013 in conjunction with the purchase of Independence Bank. The note agreement requires the Company to meet certain restrictive covenants. At September 30, 2015, the Company believes it is in compliance with its debt covenants and had not been made aware of any noncompliance by the lender. The interest rate on the debt is the Prime Rate minus 25 basis points, or 3.00%, at September 30, 2015, and is paid quarterly. Scheduled principal maturities are as follows (dollars in thousands):

 

2015  $2,354 
2016   4,285 
2017   4,285 
2018   4,285 
2019 and thereafter   12,860 
Total  $28,069 

 

 25 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

9. SUBORDINATED DEBENTURES

 

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

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

On January 1, 2015, the Company recorded the debentures at fair value. The differences between the carrying value and contractual balance will be recognized as a yield adjustment over the remaining term for the debentures. At September 30, 2015, the Company had $11.3 million outstanding in junior subordinated debentures issued to the Company’s unconsolidated subsidiary trusts. A summary of pertinent information related to the Company’s issues of junior subordinated debentures outstanding at September 30, 2015 is set forth in the table below:

 

Description  Issuance Date 

Trust

Preferred

Securities

Outstanding

  Interest Rate (1) 

Junior

Subordinated

Debt Owed to

Trusts

  Maturity Date (2)
(Dollars in thousands)
                
Farmers & Merchants Capital Trust II   November 13, 2003   $7,500    3 month LIBOR + 3.00%   $7,732    November 8, 2033 
Farmers & Merchants Capital Trust III   June 30, 2005    3,500    3 month LIBOR + 1.80%    3,609    July 7, 2035 
                  $11,341      

_____________

(1)The 3-month LIBOR in effect as of September 30, 2015 was 0.3214%.
(2)All debentures are currently callable.

 

 

10. 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 items. For the three and nine months ended, September 30, 2015, income tax expense was $2.0 million and $5.8 million, respectively, compared with $1.2 million and $3.8 million for the three and nine months ended September 30, 2014, respectively. The increase in income tax expense year over year was primarily attributable to higher pre-tax earnings. The effective income tax rate for the three and nine months ended September 30, 2015 was 31.7% and 33.4%, respectively, compared to 37.8% and 36.1% for the three and nine months ended September 30, 2014, respectively. The effective tax rate decreased for the three months ended September 30, 2015 compared to the same period in 2014 due to an increase in tax-free income from the purchase of additional municipal securities and bank owned life insurance during 2015.

Interest and penalties related to tax positions are recognized in the period in which they begin accruing or when the entity claims the position that does not meet the minimum statutory thresholds. The Company has not recorded any interest and penalties in the income statement for the nine months ended September 30, 2015 and 2014.

 

 26 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

11. STOCK BASED COMPENSATION

 

During 2008, the Company’s Board of Directors and shareholders approved the 2008 Stock Awards and Incentive Plan (the “Plan”) covering certain key employees to purchase shares of the Company’s stock. The Plan was amended in 2015 as the shareholders authorized a maximum aggregate number of shares of stock to be issued of 1,460,000, any or all of which may be issued through incentive stock options. The Company accounts for stock-based employee compensation plans using the fair value-based method of accounting.  The Company recognized total stock-based compensation expense of $310 thousand and $190 thousand for the three months ended September 30, 2015 and 2014, respectively, and $951 thousand and $517 thousand for the nine months ended September 30, 2015 and 2014, respectively.

 

Stock Option Plan

 

Options to purchase a total of 1,112,231 shares of Company stock have been granted as of September 30, 2015. Under the stock option plan; options are exercisable up to 10 years from the date of the grant, unless otherwise provided by the Board of Directors and are fully vested 4 years after the date of grant.

The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model.

A summary of the activity in the stock option plan during the nine months ended September 30, 2015 is set forth below:  

 

   Number of
Options
  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual Term
  Aggregate
Intrinsic
Value
   (In thousands)     (In years)  (In thousands)
Options outstanding, December 31, 2014   694   $15.60    6.57   $4,437 
Options granted   277    22.00           
Options exercised   -    22.00           
Options forfeited   (24)   22.00           
Options outstanding, September 30, 2015   947   $17.32    6.79   $4,432 
Options vested and exercisable, September 30, 2015   461   $13.38    4.59   $3,972 

 

The fair value of options granted was determined using the following weighted-average assumptions as of the grant date.

 

   2015
Risk-free interest rate   1.98%
Expected term   10 
Expected stock price volatility   17.7%
Dividend yield   - 

 

Share Award Plan

 

During 2015, the Company issued 3,983 shares of restricted stock with a grant date fair value of $22.00 per share. The restricted stock shares will vest over a period of 4 years but are considered outstanding at the date of issuance. The Company accounts for restricted stock grants by recording the fair value of the grant as compensation expense over the vesting period.

 27 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

A summary of the activity of the nonvested shares of restricted stock as of September 30, 2015 is as follows:

 

   Number of
Shares
  Weighted
Average Grant
Date Fair
Value
   (Shares in thousands)
Nonvested share awards outstanding, December 31, 2014   27   $18.23 
Share awards granted   4    22.00 
Share awards vested   (12)   17.20 
Unvested share awards forfeited   -    - 
Nonvested share awards outstanding, September 30, 2015   19   $19.73 

 

 

12. OFF-BALANCE SHEET ARRANGEMENTS, COMMITMENTS AND CONTINGENCIES

 

In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles generally accepted in the United States are not included in the Company’s consolidated balance sheets. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve to varying degrees elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.

 

The contractual amounts of financial instruments with off-balance sheet risk at September 30, 2015 are as follows:

 

   September 30,  December 31,
   2015  2014
   Fixed
Rate
  Variable
Rate
  Fixed
Rate
  Variable
Rate
   (Dollars in thousands)
Commitments to extend credit  $357,148   $217,781   $178,803   $214,195 
Standby letters of credit   5,155    111    4,006    - 
Total  $362,303   $217,892   $182,809   $214,195 

  

Commitments to make loans are generally made for periods of 120 days or less. As of September 30, 2015, the fixed rate loan commitments have interest rates ranging from 1.60% to 9.50% with a weighted average maturity and rate of 1.92 years and 4.57%, respectively.

 

Litigation

 

The Company and the Bank are defendants, from time to time, in legal actions arising from transactions conducted in the ordinary course of business. The Company and the Bank believe, after consultations with legal counsel, that the ultimate liability, if any, arising from such actions will not have a material adverse effect on the financial statements.

 28 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

13. REGULATORY CAPITAL MATTERS

 

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Capital adequacy guidelines prompt corrective action regulations and involve quantitative measures of assets, liabilities and certain off balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. Any institution that fails to meet its minimum capital requirements is subject to actions by regulators that could have a direct material effect on the Company’s financial statements.

 

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

 

On July 2, 2013, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) approved a final rule that establishes an integrated regulatory capital framework. The rule implements the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. In general, under the new rules, minimum requirements have increased for both the quantity and quality of capital held by banking organizations. Consistent with the Basel framework, the new rules include a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. The rule also raises the minimum ratio of Tier 1 capital to risk weighted assets from 4.0% to 6.0% and includes a minimum leverage ratio of 4.0% for all banking organizations. The new rules also change the methodology for calculating risk-weighted assets to enhance risk sensitivity and became effective on January 1, 2015. As of September 30, 2015, the Company and the Bank met all capital adequacy requirements to which they were subject.

 

The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid by the Bank in any calendar year is limited to the current year’s net profits combined with the retained net profits of the preceding two years, subject to the capital requirements described above.

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ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

The following is a summary of the Company’s and the Bank’s actual and required capital ratios at September 30, 2015 and December 31, 2014:

 

   Minimum Required 
For Capital
Adequacy Purposes
  To Be Categorized As
Well Capitalized Under
Prompt Corrective
Action Provisions
  Actual Ratio
ALLEGIANCE BANCSHARES, INC.         
(Consolidated)         
As of September 30, 2015               
Common equity Tier 1 capital (to risk weighted assets)   4.50%   N/A    8.61%
Leverage ratio (to average assets)   4.00%   N/A    8.37%
Tier 1 risk-based capital ratio (to risk weighted assets)   6.00%   N/A    9.12%
Total risk-based capital ratio (to risk weighted assets)   8.00%   N/A    9.75%
                
As of December 31, 2014               
Common equity Tier 1 capital (to risk weighted assets)   N/A    N/A    N/A 
Leverage ratio (to average assets)   4.00%   N/A    9.55%
Tier 1 risk-based capital ratio (to risk weighted assets)   4.00%   N/A    11.96%
Total risk-based capital ratio (to risk weighted assets)   8.00%   N/A    12.80%
                

 

ALLEGIANCE BANK:
As of September 30, 2015
  Minimum Required 
For Capital
Adequacy Purposes
  To Be Categorized As
Well Capitalized Under
Prompt Corrective
Action Provisions
  Actual Ratio
Common equity Tier 1 capital (to risk weighted assets)   4.50%   6.50%   10.69%
Leverage ratio (to average assets)   4.00%   5.00%   9.80%
Tier 1 risk-based capital ratio (to risk weighted assets)   6.00%   8.00%   10.69%
Total risk-based capital ratio (to risk weighted assets)   8.00%   10.00%   11.32%
                
As of December 31, 2014               
Common equity Tier 1 capital (to risk weighted assets)   N/A    N/A    N/A 
Leverage ratio (to average assets)   4.00%   5.00%   9.38%
Tier 1 risk-based capital ratio (to risk weighted assets)   4.00%   6.00%   11.76%
Total risk-based capital ratio (to risk weighted assets)   8.00%   10.00%   12.59%

 

 

 30 

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015

(Unaudited)

 

14. EARNINGS PER COMMON SHARE

 

Diluted earnings per common share is computed using the weighted-average number of common shares determined for the basic earnings per common share computation plus the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock using the treasury stock method. Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares. Restricted shares are considered outstanding at the date of grant and are included in basic and diluted weighted average common shares outstanding.

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2015  2014  2015  2014
   (Amounts in thousands, except per share data)
   Amount  Per Share
Amount
  Amount  Per Share
Amount
  Amount  Per Share
Amount
  Amount  Per Share
Amount
                         
Net income attributable to common stockholders  $4,047        $2,021        $11,015        $6,705      
Basic:                                        
Weighted average common shares outstanding   9,823   $0.41    6,979   $0.29    9,823   $1.12    6,972   $0.96 
                                         
Diluted:                                        
Add incremental shares for:                                        
Dilutive effect of stock option exercises   180         175         178         161      
Total   10,003   $0.40    7,154   $0.28    10,001   $1.10    7,133   $0.94 

 

Stock options for 318 thousand shares and 241 thousand shares of common stock were not considered in computing diluted earnings per common share for September 30, 2015 and 2014, respectively, because they were antidilutive. The Company’s initial public offering was completed in the fourth quarter as described below and could have a material impact on earnings per share going forward.

 

15. SUBSEQUENT EVENTS

 

On October 7, 2015, the Company completed an initial public offering of 2,990,000 shares of Company stock at $21.00 per share generating net proceeds of approximately $57.2 million after expenses. The Company’s common stock began trading on the NASDAQ Global Market on October 8, under the ticker symbol “ABTX.”

 

On October 16, 2015, the Company paid down $27.5 million on the borrowing agreement with another financial institution with a portion of the proceeds from the Initial Public Offering.

 

On November 3, 2015, the Bank entered into a definitive purchase and assumption agreement providing for the sale of two of its banking locations to Incommons Bank, N.A., a national banking association headquartered in Mexia, Texas. Under the terms of the purchase and assumption agreement, Incommons Bank, N.A. will acquire certain assets and assume certain liabilities associated with the Mart banking location at 714 Texas Avenue in Mart, Texas and the Rosebud banking location at 339 Main Street in Rosebud, Texas. Loans and branch assets of $27.0 million and $1.4 million, respectively, associated with these branches have been classified as held for sale at September 30, 2015. Deposits associated with these branches were $27.1 million as of September 30, 2015. The transaction is subject to regulatory approval and certain other customary conditions and is expected to close during the first quarter of 2016.

 

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

 

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

 

Cautionary Notice Regarding Forward-Looking Statements

 

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

 

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

risks related to the concentration of our business in Houston, Texas, including risks associated with volatility or decreases in oil and gas prices or prolonged periods of lower oil and gas prices;
general market conditions and economic trends nationally, regionally and particularly in Houston, Texas; 
our ability to retain executive officers and key employees and their customer and community relationships;
our ability to recruit and retain successful bankers that meet our expectations in terms of customer and community relationships and profitability;
risks related to our strategic focus on lending to small to medium-sized businesses;
our ability to implement our growth strategy, including through the identification of acquisition candidates that will be accretive to our financial condition and results of operation;
risks related to any businesses we acquire in the future, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms, procedures and personnel, the need for additional capital to finance such transactions, and possible failures in realizing the anticipated benefits from acquisitions;
potential impairment on the goodwill we have recorded or may record in connection with business acquisitions;
risks associated with our owner-occupied commercial real estate loan and other commercial real estate loan portfolios, including the risks inherent in the valuation of the collateral securing such loans;
risks associated with our commercial and industrial loan portfolio, including the risk for deterioration in value of the general business assets that generally secure such loans;
the accuracy and sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses and other estimates;
risk of deteriorating asset quality and higher loan charge-offs;
time and effort necessary to resolve nonperforming assets; 

potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;
changes in market interest rates that affect the pricing of our loans and deposits and our net interest income;
potential fluctuations in the market value and liquidity of the securities we hold for sale;
risk of impairment of investment securities, goodwill, other intangible assets or deferred tax assets;
the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services, which may adversely affect our pricing and terms;

 

 

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our ability to maintain an effective system of disclosure controls and procedures and internal controls over financial reporting;
risks associated with fraudulent and negligent acts by our customers, employees or vendors;
our ability to keep pace with technological change or difficulties when implementing new technologies;
risks associated with system failures or failures to protect against cybersecurity threats, such as breaches of our network security;
risks associated with data processing system failures and errors;
the institution and outcome of litigation and other legal proceeding against us or to which we become subject;
our ability to maintain adequate liquidity and to raise necessary capital to fund our acquisition strategy and operations or to meet increased minimum regulatory capital levels;
our ability to comply with various governmental and regulatory requirements applicable to financial institutions;
the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, such as the Dodd-Frank Act;
governmental monetary and fiscal policies, including the policies of the Federal Reserve;
our ability to comply with supervisory actions by federal and state banking agencies;
changes in the scope and cost of FDIC insurance and other coverage;
systemic risks associated with the soundness of other financial institutions; and
other risks and uncertainties listed from time to time in our reports and documents filed with the Securities and Exchange Commission. 

 

Further, these forward-looking statements speak only as of the date on which they were made and we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after the date on which these statements are made or to reflect the occurrence of unanticipated events, unless required to do so under the federal securities laws. Other factors not identified above, including those described under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may also cause actual results to differ materially from those described in our forward looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be made by us.

 

Overview

 

The Company is a Texas corporation and a registered bank holding company, headquartered in Houston, Texas. Through our wholly-owned subsidiary, Allegiance Bank, we provide a diversified range of commercial banking services primarily to Houston metropolitan area-based small to medium-sized businesses and individual customers. Since we began operations in 2007, we have expanded our footprint to 16 banking locations in the Houston metropolitan area.

 

We generate most of our revenues 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 stockholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

 

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

 

 33 

 

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

 

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

 

Super-community banking strategy. We focus on establishing personal relationships with customers through superior service, which we provide through responsive decision-making and empowering personnel to respond quickly to customers’ needs. We focus on lending to and banking with small to medium-sized businesses, for which we believe loans can be priced on terms that are more attractive to us than we would achieve by lending to larger businesses. We operate full-service decentralized branches and employ lenders with strong underwriting credentials who we authorize to make loan and underwriting decisions at the branch level up to prescribed limits. We support our branch operations with a centralized credit approval process for larger credit relationships, loan operations, information technology, core data processing, accounting, finance, treasury and treasury management support, deposit operations and executive/board oversight. Our strategy emphasizes community involvement by our directors, officers and employees, which further allows us to be responsive in developing products and services. This approach produces clear competitive advantages by delivering an extraordinary customer experience and fostering a culture dedicated to achieving both superior external and internal service levels.

 

Select strategic acquisitions. We intend to complement our strong organic growth by continuing to pursue a disciplined acquisition strategy within the Houston metropolitan area. Our focus is on like-minded community banks with similar lending strategies. We believe that our management’s experience in assessing, executing and integrating target institutions will allow us to capitalize on acquisition opportunities. On January 1, 2015, we completed the acquisition of F&M Bancshares, Inc. (“F&M”) and its subsidiary bank, Enterprise Bank (“Enterprise”). The results for the nine months ended September 30, 2015 reflect the combined entity. The impact of this acquisition is not reflected in our financial condition and results of operations as of December 31, 2014 or for the three and nine months ended September 30, 2014.

 

Recent Developments

 

On October 7, 2015, we completed an initial public offering of 2,990,000 shares of Company stock at $21.00 per share generating net proceeds of approximately $57.2 million. Our common stock began trading on the NASDAQ Global Market on October 8, under the ticker symbol “ABTX.”

 

On October 16, 2015, we paid down $27.5 million on the borrowing agreement with another financial institution with a portion of the proceeds from the Initial Public Offering.

 

On November 3, 2015, the Bank entered into a definitive purchase and assumption agreement providing for the sale of two of its banking locations to Incommons Bank, N.A., a national banking association headquartered in Mexia, Texas. Under the terms of the purchase and assumption agreement, Incommons Bank, N.A. will acquire certain assets and assume certain liabilities associated with the Mart banking location at 714 Texas Avenue in Mart, Texas and the Rosebud banking location at 339 Main Street in Rosebud, Texas. Loans and branch assets of $27.0 million and $1.4 million, respectively, associated with these branches have been classified as held for sale at September 30, 2015. Deposits associated with these branches were $27.1 million as of September 30, 2015. The transaction is subject to regulatory approval and certain other customary conditions and is expected to close during the first quarter of 2016.

 

Critical Accounting Policies

Our accounting policies are integral to understanding our results of operations. Our accounting policies are described in detail in Note 1 to our annual and interim consolidated financial statements included in the our prospectus filed with the Securities and Exchange Commission on October 8, 2015, pursuant to Rule 424(b)(4). We believe that of our accounting policies, the following may involve a higher degree of judgment and complexity:

 

34
 

Securities

 

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

 

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

 

Management evaluates debt securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement, and (2) OTTI related to other factors, which is recognized in other comprehensive income, net of applicable taxes. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the security.

 

Nonperforming and Past Due Loans

 

Loans are placed on nonaccrual status when payment in full of principal or interest is not expected or upon which principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection. If the decision is made to continue accruing interest on the loan, periodic reviews are made to confirm the accruing status of the loan. Nonaccrual loans and loans past due 90 days include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

When available information confirms that specific loans, or portions thereof, are uncollectible, these amounts are charged off against the allowance. All loan types are considered delinquent after 30 days past due and are typically charged off no later than 120 days past due, with consideration of the following guidelines in determining the need and ultimate timing of the charge-off: 1) the Bank is in the process of repossession and there appears to be a likely deficiency, 2) the collateral securing the loan has been sold and there is an actual deficiency, 3) the Bank is proceeding with lengthy legal action to collect its balance, 4) the borrower has left the service area and is unable to be located, or 5) the borrower has filed bankruptcy and the Bank is either in an unsecured or weak collateral position. Confirming events requiring charge-offs occur when a shortfall is identified between the recorded investment in the loan and the underlying value of the collateral on a collateral dependent loan.

 

Allowance for Loan Losses

 

The allowance for loan losses is a valuation allowance that is established through charges to earnings in the form of a provision for loan losses. The amount of the allowance for loan losses is affected by the following: (1) charge-off of loans that decrease the allowance, (2) subsequent recoveries on loans previously charged off that increase the allowance and (3) provisions for loan losses charged to earnings that increase the allowance.

 

Throughout the year, management estimates the probable incurred losses in the loan portfolio to determine if the allowance for loan losses is adequate to absorb such losses. The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired. We follow a loan review program to evaluate the credit risk in the loan portfolio. Loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific reserve is required. The general component covers non-impaired loans and is based on industry and our specific historical loan loss experience, volume, growth and composition of the loan portfolio, the evaluation of our loan portfolio through our internal loan review process, general current economic conditions both internal and external to us that may affect the borrower’s ability to pay, value of collateral and other qualitative relevant risk factors. Based on a review of these estimates, we adjust the allowance for loan losses to a level determined by management to be adequate. Estimates of loan losses are inherently subjective as they involve an exercise of judgment.

 

35
 

Our allowance for loan losses, both in dollars and as a percentage of total loans, may not be comparable to other similar sized institutions due to the impact of acquisition accounting. As part of acquisition accounting, acquired loans are initially recognized at fair value with no corresponding allowance for loan losses. Initial fair value of the loans includes consideration of expected credit losses.

 

Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and therefore classified as impaired. Subsequent to identification as a troubled debt restructuring, such loans are then evaluated for impairment on an individual basis whereby we determine the amount of reserve in accordance with the accounting policy for the impaired loans as part of our allowance for loan losses calculation. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

 

Accounting for Acquired Loans

 

At acquisition, we evaluate loans to determine if they are purchase credit impaired loans. Purchased credit impaired loans are those acquired loans with evidence of credit deterioration for which it was probable at acquisition that we would be unable to collect all contractual payments. We make this determination by considering past due and/or nonaccrual status, prior designation of a troubled debt restructuring, or other factors that may suggest we will not be able to collect all contractual payments. Purchased credit impaired loans are initially recorded at fair value with the difference between fair value and estimated future cash flows accreted over the expected cash flow period as income only to the extent we can reasonably estimate the timing and amount of future cash flows. In this case, these loans would be classified as accruing. In the event we are unable to reasonably estimate timing and amount of future cash flows, the loan is classified as non-accrual. An acquired loan previously classified by the seller as a troubled debt restructuring is no longer classified as such at the date of acquisition. Past due status is reported based on contractual payment status.

 

Our purchase credit impaired loans have generally been de minimis and comprised 0.1% of our loan portfolio at September 30, 2015. Historically, purchased credit impaired loans have been placed on nonaccrual status and reported as such until we are able to reasonably estimate the timing and amount of future expected cash flows. Income associated with purchased credit impaired loans for 2015 and prior periods has been immaterial.

 

All loans not otherwise classified as purchase credit impaired are recorded at fair value with the discount to contractual value accreted over the life of the loan. When determining the allowance for loan losses on acquired loans, we bifurcate the allowance between legacy loans and acquired loans. Loans remain designated as acquired until either (i) loan is renewed or (ii) loan is substantially modified whereby modification results in a new loan. When determining the allowance on acquired loans, the Company estimates principal losses as compared to the Company’s recorded investment, with the recorded investment being net of any unaccreted discounts from the acquisition. At September 30, 2015, we had $331.3 million in acquired loans that have not been renewed or substantially modified which is net of an unaccreted discount of $2.9 million or 0.87%.

 

Goodwill

 

Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is assessed annually for impairment or when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Goodwill acquired in a purchase business combination that is determined to have an indefinite useful life, is not amortized, but tested for impairment as described above. We perform our annual impairment test on October 1st. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

 

Recently Issued Accounting Pronouncements

 

ASU 2015-16, “Business Combinations (Topic 805) – Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer must record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Additionally, the entity is required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for the Company beginning January 1, 2016, though early adoption is permitted. ASU 2015-16 is not expected to have a significant impact on the Company’s financial statements.

 

ASU 2014-09 “Revenue from Contract 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. ASU 2014-09 is effective for us beginning after January 1, 2018, subject to delay that has been proposed by the Financial Accounting Standards Board, with retrospective application to each prior reporting period presented. We are still evaluating the potential impact on our financial statements.

 

ASU 2014-04 “Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40)—Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” ASU 2014-04 intends to reduce diversity by clarifying that an in substance repossession or foreclosure occurs when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU 2014-04 became effective for us on January 1, 2015 and did not have a material impact on our financial statements.

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Results of Operations

 

Net income attributable to common stockholders was $4.0 million ($0.40 per diluted common share) for the quarter ended September 30, 2015 compared with $2.0 million ($0.28 per diluted common share) for the quarter ended September 30, 2014, an increase in net income attributable to common stockholders of $2.0 million or 100.2%. Annualized returns on average common equity were 8.27% and 6.82%, annualized returns on average assets were 0.85% and 0.64% and efficiency ratios were 65.04% and 68.65% for the quarters ended September 30, 2015 and 2014, 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 assets and securities. Additionally, taxes and provision for loan losses are not part of this calculation.

For the nine months ended September 30, 2015, net income attributable to common stockholders was $11.0 million ($1.10 per diluted common share) compared with $6.7 million ($0.94 per diluted common share) for the same period in 2014, an increase in net income attributable to common stockholders of $4.3 million or 64.3%. Annualized returns on average common equity were 7.75% and 7.79%, annualized returns on average assets were 0.82% and 0.76% and efficiency ratios were 66.31% and 66.41% for the nine months ended September 30, 2015 and 2014, respectively.

 

Net Interest Income

 

Three months ended September 30, 2015 compared with three months ended September 30, 2014. Net interest income before the provision for loan losses for the three months ended September 30, 2015 was $20.4 million compared with $12.1 million for the three months ended September 30, 2014, an increase of $8.3 million, or 68.0%. The increase in net interest income was primarily due to the increase in average interest-earning assets of $676.2 million or 60.8% for the three months ended September 30, 2015 compared with the three months ended September 30, 2014. The increase in our average interest-earning assets during the three months of 2015 as compared to the same period in 2014 was primarily the result of the acquisition of F&M which was completed on January 1, 2015.

 

Interest income was $22.6 million for the three months ended September 30, 2015, an increase of $9.1 million compared with the three months ended September 30, 2014 primarily due to an increase of $8.6 million of interest income and fees on loans during the three months ended September 30, 2015 compared to the same period in 2014 as a result of the increase in average loans outstanding of $632.2 million for the same period. Additionally, during the three months ended September 30, 2015 and 2014, we benefitted from acquisition accounting loan discount accretion of $618 thousand and $14 thousand, respectively.

 

Interest expense was $2.2 million for the three months ended September 30, 2015, an increase of $829 thousand compared to the three months ended September 30, 2014. This increase was primarily due to an increase in average interest-bearing liabilities of $474.9 million for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. This increase in interest-bearing liabilities was impacted by the addition of $18.0 million, on our borrowing agreement with another financial institution, on January 1, 2015, to repay debt acquired from F&M. Additionally, we assumed $11.3 million of junior subordinated debentures as part of the acquisition of F&M on January 1, 2015.

 

Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the three months ended September 30, 2015 was 4.61%, an increase of 26 basis points compared to 4.35% for the three months ended September 30, 2014. Tax equivalent adjustments to net interest margin are the result of increasing 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 35% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields. The impact of net acquisition accounting adjustments of $750 thousand and $127 thousand on the tax equivalent net interest margin was an increase of 17 basis points and 4 basis points for the three months ended September 30, 2015 and 2014, respectively.

 

37
 

 

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

 

   Three Months Ended
   September 30, 2015  September 30, 2014
   Average Balance  Interest Earned/ Interest Paid  Average Yield/ Rate  Average Balance  Interest Earned/ Interest Paid  Average Yield/ Rate
   (Dollars in thousands)
Assets                              
Interest-Earning Assets:                              
Loans (3)  $1,572,441   $21,627    5.46%  $940,284   $13,011    5.49%
Securities   162,308    975    2.38%   97,079    472    1.93%
Deposits in other financial institutions   53,759    43    0.31%   74,935    70    0.37%
Total interest-earning assets   1,788,508   $22,645    5.02%   1,112,298   $13,553    4.83%
Allowance for loan losses   (10,618)             (7,617)          
Noninterest-earning assets   201,952              110,369           
Total assets  $1,979,842             $1,215,050           
                               
Liabilities and Stockholders' Equity                              
Interest-Bearing Liabilities:                              
Interest-bearing demand deposits  $97,488   $40    0.16%  $69,967   $29    0.16%
Money market and savings deposits   432,654    468    0.43%   264,720    278    0.42%
Certificates and other time deposits   547,884    1,324    0.96%   402,088    1,026    1.01%
Short-term borrowings   106,533    47    0.17%   -    -    0.00%
Subordinated debt   9,060    114    5.01%   -    -    0.00%
Other borrowed funds   28,069    245    3.46%   10,000    76    3.00%
Total interest-bearing liabilities   1,221,688   $2,238    0.73%   746,775   $1,409    0.75%
                               
Noninterest-Bearing liabilities:                              
Noninterest-bearing demand deposits   555,060              346,616           
Other liabilities   7,292              4,104           
Total liabilities   1,784,040              1,097,495           
Stockholders' equity   195,802              117,555           
Total liabilities and stockholders' equity  $1,979,842             $1,215,050           
                               
Net interest rate spread             4.29%             4.08%
                               
Net interest income and margin (1)       $20,407    4.53%       $12,144    4.33%
                               
Net interest income and margin (tax equivalent) (2)       $20,770    4.61%       $12,207    4.35%

__________________

(1)The net interest margin is equal to annualized net interest income divided by average interest-earning assets.
(2)In order to make pretax income and resultant yields on tax-exempt investments and loans comparable to those on taxable investments and loans, a tax-equivalent adjustment has been computed using a federal income tax rate of 35% for the three months ended September 30, 2015 and 2014 and other applicable effective tax rates.
(3)Includes loans held for sale at September 30, 2015.

 

38
 

Nine months ended September 30, 2015 compared with nine months ended September 30, 2014. Net interest income before the provision for loan losses for the nine months ended September 30, 2015 was $58.9 million compared with $34.2 million for the nine months ended September 30, 2014, an increase of $24.7 million, or 72.0%. The increase in net interest income was primarily due to the increase in average interest-earning assets of $619.2 million or 57.8% for the nine months ended September 30, 2015 compared with the nine months ended September 30, 2014. The increase in our average interest-earning assets during the first nine months of 2015 as compared to the same period in 2014 was primarily the result of the acquisition of F&M completed on January 1, 2015, as well as organic growth in our loan portfolio.

 

Interest income was $65.3 million for the nine months ended September 30, 2015, an increase of $27.0 million compared with the nine months ended September 30, 2014 primarily due to an increase of $26.3 million of interest income and fees on loans during the nine months ended September 30, 2015 compared to the same period in 2014 as a result of the increase in average loans outstanding of $593.9 million for the same period. Additionally, during the nine months ended September 30, 2015 and 2014, we benefitted from acquisition accounting loan discount accretion of $3.0 million and $70 thousand, respectively.

 

Interest expense was $6.4 million for the nine months ended September 30, 2015, an increase of $2.3 million compared to the nine months ended September 30, 2014. This increase was primarily due to an increase in average interest-bearing liabilities of $410.4 million for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. The increase was also impacted by the addition of $18.0 million, on our borrowing agreement with another financial institution, on January 1, 2015, to repay debt acquired from F&M. Additionally, we assumed $11.3 million of junior subordinated debentures as part of the acquisition of F&M on January 1, 2015.

 

Tax equivalent net interest margin, defined as net interest income adjusted for tax-free income divided by average interest-earning assets, for the nine months ended September 30, 2015 was 4.71%, an increase of 41 basis points compared to 4.30% for the nine months ended September 30, 2014. Tax equivalent adjustments to net interest margin are the result of increasing 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 35% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields. The impact of net acquisition accounting adjustments of $3.4 million and $504 thousand on the tax equivalent net interest margin was an increase of 26 basis points and 7 basis points for the nine months ended September 30, 2015 and 2014, respectively.

 

39
 

 

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.

 

   Year-to-Date
   September 30, 2015  September 30, 2014
   Average Balance  Interest Earned/ Interest Paid  Average Yield/ Rate  Average Balance  Interest Earned/ Interest Paid  Average Yield/ Rate
   (Dollars in thousands)
Assets                              
Interest-Earning Assets:                              
Loans (3)  $1,489,690   $63,012    5.66%  $895,774   $36,709    5.48%
Securities   127,863    2,135    2.23%   92,034    1,401    2.04%
Deposits in other financial institutions   72,182    167    0.31%   82,765    243    0.39%
Total interest-earning assets   1,689,735   $65,314    5.17%   1,070,573   $38,353    4.79%
Allowance for loan losses   (9,466)             (7,037)          
Noninterest-earning assets   210,039              109,543           
Total assets  $1,890,308             $1,173,079           
                               
Liabilities and Stockholders' Equity                              
Interest-Bearing Liabilities: