abtx-10q_20180930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

OR

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

FOR THE TRANSITION PERIOD FROM              TO

COMMISSION FILE NUMBER: 001-37585

 

Allegiance Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

 

Texas

26-3564100

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

8847 West Sam Houston Parkway, N., Suite 200

Houston, Texas 77040

(Address of principal executive offices, including zip code)

(281) 894-3200

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

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

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

As of October 30, 2018, there were 21,827,053 outstanding shares of the registrant’s Common Stock, par value $1.00 per share.

 

 


ALLEGIANCE BANCSHARES, INC.

INDEX TO FORM 10-Q

SEPTEMBER 30, 2018

 

PART I—FINANCIAL INFORMATION

 

 

 

 

Item 1.

Interim Consolidated Financial Statements

3

 

Consolidated Balance Sheets (unaudited)

3

 

Consolidated Statements of Income (unaudited)

4

 

Consolidated Statements of Comprehensive Income (unaudited)

5

 

Consolidated Statements of Changes in Shareholders' Equity (unaudited)

6

 

Consolidated Statements of Cash Flows (unaudited)

7

 

Condensed Notes to Interim Consolidated Financial Statements (unaudited)

8

Item 2.

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

33

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

55

Item 4.

Controls and Procedures

56

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3.

Defaults upon Senior Securities

57

Item 4.

Mine Safety Disclosures

57

Item 5.

Other Information

57

Item 6.

Exhibits

58

Signatures

59

 

 

 

2


Table of Contents

 

PART I—FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands, except share data)

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

145,192

 

 

$

133,124

 

Interest-bearing deposits at other financial institutions

 

 

46,276

 

 

 

48,979

 

Total cash and cash equivalents

 

 

191,468

 

 

 

182,103

 

Available for sale securities, at fair value

 

 

300,115

 

 

 

309,615

 

Loans held for investment

 

 

2,440,926

 

 

 

2,270,876

 

Less: allowance for loan losses

 

 

(23,586

)

 

 

(23,649

)

Loans, net

 

 

2,417,340

 

 

 

2,247,227

 

Accrued interest receivable

 

 

11,609

 

 

 

12,194

 

Premises and equipment, net

 

 

18,970

 

 

 

18,477

 

Other real estate owned

 

 

1,801

 

 

 

365

 

Federal Home Loan Bank stock

 

 

11,851

 

 

 

12,862

 

Bank owned life insurance

 

 

22,838

 

 

 

22,422

 

Goodwill

 

 

39,389

 

 

 

39,389

 

Core deposit intangibles, net

 

 

2,688

 

 

 

3,274

 

Other assets

 

 

17,470

 

 

 

12,303

 

TOTAL ASSETS

 

$

3,035,539

 

 

$

2,860,231

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

789,705

 

 

$

683,110

 

Interest-bearing

 

 

 

 

 

 

 

 

Demand

 

 

197,032

 

 

 

215,499

 

Money market and savings

 

 

542,679

 

 

 

554,051

 

Certificates and other time

 

 

904,375

 

 

 

761,314

 

Total interest-bearing deposits

 

 

1,644,086

 

 

 

1,530,864

 

Total deposits

 

 

2,433,791

 

 

 

2,213,974

 

Accrued interest payable

 

 

2,106

 

 

 

610

 

Borrowed funds

 

 

211,569

 

 

 

282,569

 

Subordinated debt

 

 

48,839

 

 

 

48,659

 

Other liabilities

 

 

11,103

 

 

 

7,554

 

Total liabilities

 

 

2,707,408

 

 

 

2,553,366

 

COMMITMENTS AND CONTINGENCIES (See Note 11)

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

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

   shares issued or outstanding

 

 

 

 

 

 

Common stock, $1 par value; 40,000,000 shares authorized; 13,396,703 shares

   issued and outstanding at September 30, 2018 and 13,226,826 shares issued

   and outstanding at December 31, 2017

 

 

13,397

 

 

 

13,227

 

Capital surplus

 

 

221,762

 

 

 

218,408

 

Retained earnings

 

 

98,968

 

 

 

74,894

 

Accumulated other comprehensive (loss) income

 

 

(5,996

)

 

 

336

 

Total shareholders’ equity

 

 

328,131

 

 

 

306,865

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

3,035,539

 

 

$

2,860,231

 

 

See condensed notes to interim consolidated financial statements.

 

3


Table of Contents

 

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands, except per share data)

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

32,988

 

 

$

28,588

 

 

$

94,951

 

 

$

80,584

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

636

 

 

 

547

 

 

 

1,881

 

 

 

1,548

 

Tax-exempt

 

 

1,447

 

 

 

1,574

 

 

 

4,357

 

 

 

4,789

 

Deposits in other financial institutions

 

 

265

 

 

 

192

 

 

 

731

 

 

 

479

 

Total interest income

 

 

35,336

 

 

 

30,901

 

 

 

101,920

 

 

 

87,400

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand, money market and savings deposits

 

 

1,248

 

 

 

811

 

 

 

3,111

 

 

 

2,167

 

Certificates and other time deposits

 

 

4,051

 

 

 

2,299

 

 

 

10,120

 

 

 

6,539

 

Borrowed funds

 

 

1,272

 

 

 

654

 

 

 

3,780

 

 

 

2,068

 

Subordinated debt

 

 

729

 

 

 

140

 

 

 

2,168

 

 

 

394

 

Total interest expense

 

 

7,300

 

 

 

3,904

 

 

 

19,179

 

 

 

11,168

 

NET INTEREST INCOME

 

 

28,036

 

 

 

26,997

 

 

 

82,741

 

 

 

76,232

 

Provision for loan losses

 

 

 

 

 

6,908

 

 

 

1,284

 

 

 

11,258

 

Net interest income after provision for loan losses

 

 

28,036

 

 

 

20,089

 

 

 

81,457

 

 

 

64,974

 

NONINTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonsufficient funds fees

 

 

175

 

 

 

144

 

 

 

565

 

 

 

527

 

Service charges on deposit accounts

 

 

177

 

 

 

204

 

 

 

506

 

 

 

604

 

Loss on sale of securities

 

 

 

 

 

(12

)

 

 

 

 

 

(12

)

Gain on sale of other real estate

 

 

 

 

 

 

 

 

1

 

 

 

 

Bank owned life insurance income

 

 

137

 

 

 

146

 

 

 

416

 

 

 

440

 

Rebate from correspondent bank

 

 

613

 

 

 

370

 

 

 

1,621

 

 

 

939

 

Other

 

 

826

 

 

 

608

 

 

 

2,270

 

 

 

1,780

 

Total noninterest income

 

 

1,928

 

 

 

1,460

 

 

 

5,379

 

 

 

4,278

 

NONINTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

12,965

 

 

 

11,580

 

 

 

38,537

 

 

 

32,557

 

Net occupancy and equipment

 

 

1,281

 

 

 

1,325

 

 

 

3,886

 

 

 

4,054

 

Depreciation

 

 

490

 

 

 

427

 

 

 

1,330

 

 

 

1,225

 

Data processing and software amortization

 

 

1,226

 

 

 

783

 

 

 

3,635

 

 

 

2,197

 

Professional fees

 

 

303

 

 

 

822

 

 

 

1,339

 

 

 

2,704

 

Regulatory assessments and FDIC insurance

 

 

505

 

 

 

582

 

 

 

1,533

 

 

 

1,740

 

Core deposit intangibles amortization

 

 

195

 

 

 

195

 

 

 

586

 

 

 

586

 

Communications

 

 

262

 

 

 

251

 

 

 

769

 

 

 

731

 

Advertising

 

 

351

 

 

 

302

 

 

 

1,021

 

 

 

853

 

Acquisition and merger-related expenses

 

 

196

 

 

 

 

 

 

821

 

 

 

 

Other

 

 

1,390

 

 

 

1,409

 

 

 

4,284

 

 

 

4,039

 

Total noninterest expense

 

 

19,164

 

 

 

17,676

 

 

 

57,741

 

 

 

50,686

 

INCOME BEFORE INCOME TAXES

 

 

10,800

 

 

 

3,873

 

 

 

29,095

 

 

 

18,566

 

Provision for income taxes

 

 

1,921

 

 

 

887

 

 

 

4,949

 

 

 

4,138

 

NET INCOME

 

$

8,879

 

 

$

2,986

 

 

$

24,146

 

 

$

14,428

 

EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.66

 

 

$

0.23

 

 

$

1.81

 

 

$

1.10

 

Diluted

 

$

0.65

 

 

$

0.22

 

 

$

1.77

 

 

$

1.07

 

 

See condensed notes to interim consolidated financial statements.

 

4


Table of Contents

 

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands)

 

Net income

 

$

8,879

 

 

$

2,986

 

 

$

24,146

 

 

$

14,428

 

Other comprehensive (loss) income, before tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized holding (loss) gain on

   available for sale securities during the period

 

 

(2,265

)

 

 

735

 

 

 

(8,106

)

 

 

6,115

 

Reclassification of amount realized through the sale

   of securities

 

 

 

 

 

12

 

 

 

 

 

 

12

 

Total other comprehensive (loss) income

 

 

(2,265

)

 

 

747

 

 

 

(8,106

)

 

 

6,127

 

Deferred tax benefit (expense) related to other

   comprehensive income

 

 

476

 

 

 

(268

)

 

 

1,774

 

 

 

(2,152

)

Other comprehensive (loss) income, net of tax

 

 

(1,789

)

 

 

479

 

 

 

(6,332

)

 

 

3,975

 

Comprehensive income

 

$

7,090

 

 

$

3,465

 

 

$

17,814

 

 

$

18,403

 

 

See condensed notes to interim consolidated financial statements.

 

5


Table of Contents

 

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Capital

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Surplus

 

 

Earnings

 

 

Income (Loss)

 

 

Stock

 

 

Equity

 

 

 

(in thousands, except share data)

 

BALANCE AT JANUARY 1, 2017

 

 

12,958,341

 

 

$

12,958

 

 

$

212,649

 

 

$

57,262

 

 

$

(3,052

)

 

$

 

 

$

279,817

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,428

 

 

 

 

 

 

 

 

 

 

 

14,428

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,975

 

 

 

 

 

 

 

3,975

 

Common stock issued in

   connection with the exercise

   of stock options and restricted

   stock awards

 

 

212,388

 

 

 

213

 

 

 

3,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,213

 

Stock based compensation expense

 

 

 

 

 

 

 

 

 

 

1,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,294

 

BALANCE AT SEPTEMBER 30, 2017

 

 

13,170,729

 

 

$

13,171

 

 

$

216,943

 

 

$

71,690

 

 

$

923

 

 

$

 

 

$

302,727

 

BALANCE AT JANUARY 1, 2018

 

 

13,226,826

 

 

$

13,227

 

 

$

218,408

 

 

$

74,894

 

 

$

336

 

 

$

 

 

 

306,865

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24,146

 

 

 

 

 

 

 

 

 

 

 

24,146

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,332

)

 

 

 

 

 

 

(6,332

)

Reclassification of amounts

   within AOCI to retained

   earnings due to tax reform

   (See Note 1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(72

)

 

 

 

 

 

 

 

 

 

 

(72

)

Common stock issued in

   connection with the exercise

   of stock options and restricted

   stock awards

 

 

169,877

 

 

 

170

 

 

 

2,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,309

 

Stock based compensation expense

 

 

 

 

 

 

 

 

 

 

1,215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,215

 

BALANCE AT SEPTEMBER 30, 2018

 

 

13,396,703

 

 

$

13,397

 

 

$

221,762

 

 

$

98,968

 

 

$

(5,996

)

 

$

 

 

$

328,131

 

 

See condensed notes to interim consolidated financial statements.

 

6


Table of Contents

 

ALLEGIANCE BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

24,146

 

 

$

14,428

 

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

 

 

 

 

 

 

 

 

Depreciation and core deposit intangibles amortization

 

 

1,916

 

 

 

1,811

 

Provision for loan losses

 

 

1,284

 

 

 

11,258

 

Loss on the sale of securities

 

 

 

 

 

12

 

Net amortization of premium on investments

 

 

2,413

 

 

 

2,550

 

Excess tax benefit related to the exercise of stock options

 

 

(420

)

 

 

(989

)

Bank owned life insurance

 

 

(416

)

 

 

(440

)

Net amortization of discount on loans

 

 

(207

)

 

 

(536

)

Net amortization of discount on subordinated debentures

 

 

82

 

 

 

81

 

Net amortization of discount on certificates of deposit

 

 

(3

)

 

 

(3

)

Net gain on the sale or write down of premises, equipment and other real estate

 

 

(1

)

 

 

 

Federal Home Loan Bank stock dividends

 

 

(268

)

 

 

(201

)

Stock based compensation expense

 

 

1,215

 

 

 

1,294

 

Increase in accrued interest receivable and other assets

 

 

(2,846

)

 

 

(4,103

)

Increase in accrued interest payable and other liabilities

 

 

5,563

 

 

 

2,052

 

Net cash provided by operating activities

 

 

32,458

 

 

 

27,214

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from maturities and principal paydowns of available for sale securities

 

 

2,014,951

 

 

 

2,007,007

 

Proceeds from sales of available for sale securities

 

 

 

 

 

9,000

 

Purchase of available for sale securities

 

 

(2,015,970

)

 

 

(2,019,843

)

Net change in total loans

 

 

(172,625

)

 

 

(314,816

)

Purchase of bank premises and equipment

 

 

(1,857

)

 

 

(1,517

)

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

 

 

 

 

 

1,050

 

Net redemptions of Federal Home Loan Bank stock

 

 

1,279

 

 

 

586

 

Net cash used in investing activities

 

 

(174,222

)

 

 

(318,533

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Net increase in noninterest-bearing deposits

 

 

106,595

 

 

 

119,200

 

Net increase in interest-bearing deposits

 

 

113,225

 

 

 

297,235

 

Proceeds from borrowed funds

 

 

 

 

 

25,000

 

Paydowns on borrowed funds

 

 

(71,000

)

 

 

(103,000

)

Proceeds from the issuance of common stock, stock option exercises, restricted

    stock awards and the ESPP

 

 

2,309

 

 

 

3,213

 

Net cash provided by financing activities

 

 

151,129

 

 

 

341,648

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

9,365

 

 

 

50,329

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

182,103

 

 

 

142,098

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

191,468

 

 

$

192,427

 

SUPPLEMENTAL INFORMATION:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

4,700

 

 

$

6,000

 

Interest paid

 

 

17,682

 

 

 

10,929

 

 

See condensed notes to interim consolidated financial statements.

 

 

7


Table of Contents

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(Unaudited)

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

Nature of Operations-Allegiance Bancshares, Inc. (“Allegiance”) and its wholly-owned subsidiary, Allegiance Bank, (the “Bank”, and together with Allegiance, collectively referred to as the “Company”) provide commercial and retail loans and commercial banking services. The Company derives substantially all of its revenues and income from the operation of the Bank. The Company is focused on delivering a wide variety of relationship-driven commercial banking products and community-oriented services tailored to meet the needs of small to medium-sized businesses, professionals and individuals.  The Company operated 16 offices and one loan production office in Houston, Texas and the surrounding region as of September 30, 2018. The Bank provides its customers with a variety of banking services including checking accounts, savings accounts and certificates of deposit, and its primary lending products are commercial, personal, automobile, mortgage and home improvement loans. The Bank also offers safe deposit boxes, automated teller machines, drive-through services and 24-hour depository facilities.

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis, and all such adjustments are of a normal recurring nature. Transactions with Allegiance have been eliminated. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

Significant Accounting and Reporting Policies

The Company’s significant accounting and reporting policies can be found in Note 1 of the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

New Accounting Standards

Adoption of New Accounting Standards

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and most industry-specific guidance throughout the Industry Topics of the Codification. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods. The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment securities and other financial instruments that are not within the scope of ASU 2014-09. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed, charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.  The new standard was effective for the Company on January 1, 2018 and did not have a significant impact on its consolidated financial statements and related disclosures.

 

8


Table of Contents

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition of Financial Assets and Financial Liabilities." ASU 2016-01 makes targeted amendments to fair value measurement and disclosure guidance. ASU 2016-01 requires equity investments (other than equity method investments) to be measured at fair value with changes in fair value recognized in net income. This change is only applied if a readily determinable fair value can be obtained. The update also requires the use of exit prices to measure fair value for disclosure purposes as well as other enhanced disclosure requirements. ASU 2016-01 was effective for the Company on January 1, 2018 and did not have a significant impact on its financial statements and related disclosures. See Note 5 – Fair Value Disclosures for further information.

ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments."  ASU 2016-15 provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice. Among other things, the update clarifies the appropriate classification for proceeds from settlement of bank owned life insurance (BOLI) policies. The guidance is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted with retrospective application. ASU 2016-15 was effective for the Company on January 1, 2018 and did not have a significant impact on its financial statements and related disclosures.

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

Newly Issued But Not Yet Effective Accounting Standards

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

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

 

9


Table of Contents

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for the Company on January 1, 2020, with earlier adoption permitted and is not expected to have a significant impact on the Company's financial statements.

ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities.” ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium to require such premiums to be amortized to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. ASU 2017-08 will be effective for the Company on January 1, 2019, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2017-08 on its financial statements.

2. GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS

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

 

 

 

 

 

 

 

Core Deposit

 

 

 

Goodwill

 

 

Intangibles

 

 

 

(Dollars in thousands)

 

Balance as of January 1, 2017

 

$

39,389

 

 

$

4,055

 

Amortization

 

 

 

 

 

(781

)

Balance as of December 31, 2017

 

$

39,389

 

 

$

3,274

 

Amortization

 

 

 

 

 

(586

)

Balance as of September 30, 2018

 

$

39,389

 

 

$

2,688

 

 

Goodwill is recorded on the acquisition date of an entity. Management performs an evaluation annually, and more frequently if a triggering event occurs, of whether any impairment of the goodwill and other intangible assets has occurred. If any such impairment is determined, a write-down is recorded. As of September 30, 2018, there were no impairments recorded on goodwill and other intangible assets.

The estimated aggregate future amortization expense for core deposit intangible assets remaining as of September 30, 2018 is as follows (dollars in thousands):

 

Remaining 2018

 

$

195

 

2019

 

 

781

 

2020

 

 

744

 

2021

 

 

484

 

2022

 

 

484

 

Thereafter

 

 

 

Total

 

$

2,688

 

 

 

10


Table of Contents

 

ALLEGIANCE BANCSHARES, INC.

CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

3. SECURITIES

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

 

 

 

September 30, 2018

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

(Dollars in thousands)

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agency securities

 

$

6,118

 

 

$

58

 

 

$

(73

)

 

$

6,103

 

Municipal securities

 

 

219,231

 

 

 

546

 

 

 

(5,901

)

 

 

213,876

 

Agency mortgage-backed pass-through securities

 

 

44,034

 

 

 

36

 

 

 

(1,576

)

 

 

42,494

 

Corporate bonds and other

 

 

38,321

 

 

 

 

 

 

(679

)