Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
_____________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM              TO             
COMMISSION FILE NUMBER: 001-37585
_____________________________
Allegiance Bancshares, Inc.
(Exact name of registrant as specified in its charter)
_____________________________
Texas
26-3564100
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
8847 West Sam Houston Parkway, N., Suite 200
Houston, Texas 77040
(Address of principal executive offices, including zip code)
(281) 894-3200
(Registrant’s telephone number, including area code)
_____________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒   No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No   ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
☐ 
Accelerated filer
 
 
 
 
Non-accelerated filer
☐  (Do not check if a smaller reporting company)
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒
As of July 31, 2017, there were 13,161,490 outstanding shares of the registrant’s Common Stock, par value $1.00 per share.



ALLEGIANCE BANCSHARES, INC.
INDEX TO FORM 10-Q
JUNE 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents


PART I—FINANCIAL INFORMATION
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS 
ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
 
June 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 
 
(Dollars in thousands, except share data)
ASSETS
 
 
 
Cash and due from banks
$
141,952

 
$
94,073

Interest-bearing deposits at other financial institutions
45,539

 
48,025

Total cash and cash equivalents
187,491

 
142,098

 
 
 
 
Available for sale securities, at fair value
321,268

 
316,455

 
 
 
 
Loans held for investment
2,114,652

 
1,891,635

Less: allowance for loan losses
(21,010
)
 
(17,911
)
Loans, net
2,093,642

 
1,873,724

 
 
 
 
Accrued interest receivable
9,284

 
9,007

Premises and equipment, net
18,240

 
18,340

Other real estate owned
365

 
1,503

Federal Home Loan Bank stock
16,675

 
13,175

Bank owned life insurance
22,131

 
21,837

Goodwill
39,389

 
39,389

Core deposit intangibles, net
3,664

 
4,055

Other assets
12,567

 
11,365

TOTAL ASSETS
$
2,724,716

 
$
2,450,948

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES:
 
 
 
Deposits:
 
 
 
Noninterest-bearing
$
662,527

 
$
593,751

Interest-bearing
 
 
 
Demand
163,443

 
114,772

Money market and savings
509,533

 
483,266

Certificates and other time
763,739

 
678,394

Total interest-bearing deposits
1,436,715

 
1,276,432

Total deposits
2,099,242

 
1,870,183

Accrued interest payable
466

 
285

Borrowed funds
310,569

 
285,569

Subordinated debentures
9,249

 
9,196

Other liabilities
6,731

 
5,898

Total liabilities
2,426,257

 
2,171,131

COMMITMENTS AND CONTINGENCIES (See Note 12)


 


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; 13,153,053 shares issued and outstanding at June 30, 2017 and 12,958,341 shares issued and outstanding at December 31, 2016
13,153

 
12,958

Capital surplus
216,158

 
212,649

Retained earnings
68,704

 
57,262

Accumulated other comprehensive income (loss)
444

 
(3,052
)
Total shareholders’ equity
298,459

 
279,817

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
2,724,716

 
$
2,450,948

See condensed notes to interim consolidated financial statements.

3

Table of Contents


ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands, except per share data)
INTEREST INCOME:
 
 
 
 
 
 
 
Loans, including fees
$
26,736

 
$
22,839

 
$
51,996

 
$
45,067

Securities:
 
 
 
 
 
 
 
Taxable
503

 
452

 
1,001

 
723

Tax-exempt
1,591

 
1,086

 
3,215

 
1,896

Deposits in other financial institutions
157

 
150

 
287

 
292

Total interest income
28,987

 
24,527

 
56,499

 
47,978

INTEREST EXPENSE:
 
 
 
 
 
 
 
Demand, money market and savings deposits
702

 
569

 
1,356

 
1,113

Certificates and other time deposits
2,283

 
1,665

 
4,240

 
3,225

Borrowed funds
761

 
224

 
1,414

 
370

Subordinated debentures
134

 
120

 
254

 
237

Total interest expense
3,880

 
2,578

 
7,264

 
4,945

NET INTEREST INCOME
25,107

 
21,949

 
49,235

 
43,033

Provision for loan losses
3,007

 
1,645

 
4,350

 
2,355

Net interest income after provision for loan losses
22,100

 
20,304

 
44,885

 
40,678

NONINTEREST INCOME:
 
 
 
 
 
 
 
Nonsufficient funds fees
184

 
145

 
383

 
308

Service charges on deposit accounts
205

 
173

 
400

 
318

Gain on sale of branch assets

 

 

 
2,050

Bank owned life insurance income
146

 
153

 
294

 
319

Other
942

 
741

 
1,741

 
1,521

Total noninterest income
1,477

 
1,212

 
2,818

 
4,516

NONINTEREST EXPENSE:
 
 
 
 
 
 
 
Salaries and employee benefits
10,415

 
9,177

 
20,977

 
18,450

Net occupancy and equipment
1,302

 
1,214

 
2,729

 
2,446

Depreciation
398

 
415

 
798

 
832

Data processing and software amortization
719

 
622

 
1,414

 
1,275

Professional fees
987

 
401

 
1,882

 
935

Regulatory assessments and FDIC insurance
569

 
355

 
1,158

 
700

Core deposit intangibles amortization
196

 
195

 
391

 
394

Communications
233

 
274

 
480

 
554

Advertising
288

 
197

 
551

 
398

Other
1,354

 
1,073

 
2,630

 
2,192

Total noninterest expense
16,461

 
13,923

 
33,010

 
28,176

INCOME BEFORE INCOME TAXES
7,116

 
7,593

 
14,693

 
17,018

Provision for income taxes
1,721

 
2,339

 
3,251

 
5,409

NET INCOME
$
5,395

 
$
5,254

 
$
11,442

 
$
11,609

 
 
 
 
 
 
 
 
EARNINGS PER SHARE:
 
 
 
 
 
 
 
Basic
$
0.41

 
$
0.41

 
$
0.88

 
$
0.90

Diluted
$
0.40

 
$
0.40

 
$
0.85

 
$
0.89

See condensed notes to interim consolidated financial statements.

4

Table of Contents


ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Net income
$
5,395

 
$
5,254

 
$
11,442

 
$
11,609

Other comprehensive income, before tax:
 
 
 
 
 
 
 
Unrealized gain on securities:
 
 
 
 
 
 
 
Change in unrealized holding gain on available for sale securities during the period
4,183

 
6,232

 
5,380

 
7,435

Total other comprehensive income
4,183

 
6,232

 
5,380

 
7,435

Deferred tax benefit related to other comprehensive income
(1,465
)
 
(2,181
)
 
(1,884
)
 
(2,602
)
Other comprehensive income, net of tax
2,718

 
4,051

 
3,496

 
4,833

Comprehensive income
$
8,113

 
$
9,305

 
$
14,938

 
$
16,442

See condensed notes to interim consolidated financial statements.

5

Table of Contents


ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
 
Common Stock
 
Capital
 
Retained
 
Accumulated
Other
Comprehensive
 
Treasury
 
Total
Shareholders’
 
 
Shares
 
Amount
 
Surplus
 
Earnings
 
Income (Loss)
 
Stock
 
Equity
 
 
(In thousands, except share data)
BALANCE AT JANUARY 1, 2016
 
12,814,696

 
$
12,815

 
$
209,285

 
$
34,411

 
$
2,017

 
$
(38
)
 
$
258,490

Net income
 
 
 
 
 
 
 
11,609

 
 
 
 
 
11,609

Other comprehensive income
 
 
 
 
 
 
 
 
 
4,833

 
 
 
4,833

Common stock issued in connection with the exercise of stock options and restricted stock awards
 
54,714

 
54

 
520

 
 
 
 
 
 
 
574

Repurchase of treasury stock
 
 
 
 
 
 
 
 
 
 
 
38

 
38

Stock based compensation expense
 
 
 
 
 
707

 
 
 
 
 
 
 
707

BALANCE AT JUNE 30, 2016
 
12,869,410

 
$
12,869

 
$
210,512

 
$
46,020

 
$
6,850

 
$

 
$
276,251

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE AT JANUARY 1, 2017
 
12,958,341

 
$
12,958

 
$
212,649

 
$
57,262

 
$
(3,052
)
 
$

 
$
279,817

Net income
 
 
 
 
 
 
 
11,442

 
 
 
 
 
11,442

Other comprehensive income
 
 
 
 
 
 
 
 
 
3,496

 
 
 
3,496

Common stock issued in connection with the exercise of stock options and restricted stock awards
 
194,712

 
195

 
2,712

 
 
 
 
 
 
 
2,907

Stock based compensation expense
 
 
 
 
 
797

 
 
 
 
 
 
 
797

BALANCE AT JUNE 30, 2017
 
13,153,053

 
$
13,153

 
$
216,158

 
$
68,704

 
$
444

 
$

 
$
298,459

See condensed notes to interim consolidated financial statements.

6

Table of Contents


ALLEGIANCE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
 
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
11,442

 
$
11,609

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and core deposit intangibles amortization
1,189

 
1,226

Provision for loan losses
4,350

 
2,355

Excess tax benefit related to the exercise of stock options
(959
)
 

Net amortization of premium on investments
1,678

 
1,329

Bank owned life insurance
(294
)
 
(319
)
Net accretion of discount on loans
(408
)
 
(904
)
Net amortization of discount on subordinated debentures
53

 
53

Net amortization of discount on certificates of deposit
(3
)
 
(175
)
Net gain on sale of branch assets

 
(2,050
)
Federal Home Loan Bank stock dividends
(118
)
 
(32
)
Stock based compensation expense
797

 
707

Increase in accrued interest receivable and other assets
(3,004
)
 
(3,549
)
Increase in accrued interest payable and other liabilities
1,973

 
1,246

Net cash provided by operating activities
16,696

 
11,496

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from maturities and principal paydowns of available for sale securities
2,004,385

 
1,962,150

Proceeds from sales of available for sale securities
9,000

 

Purchase of available for sale securities
(2,014,496
)
 
(2,094,410
)
Net change in total loans
(222,722
)
 
(91,751
)
Purchase of bank premises and equipment
(1,057
)
 
(196
)
Net purchases of Federal Home Loan Bank stock
(3,382
)
 
(10,985
)
Net cash paid for the sale of branch assets

 
(5,250
)
Net cash used in investing activities
(228,272
)
 
(240,442
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in noninterest-bearing deposits
68,776

 
16,897

Net increase in interest-bearing deposits
160,286

 
93,869

Proceeds from borrowed funds
25,000

 
200,000

Paydowns on borrowed funds

 
(20,000
)
Proceeds from the issuance of common stock, stock option exercises, restricted stock awards and the ESPP
2,907

 
574

Issuance of treasury stock

 
38

Net cash provided by financing activities
256,969

 
291,378

NET CHANGE IN CASH AND CASH EQUIVALENTS
45,393

 
62,432

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
142,098

 
148,431

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
187,491

 
$
210,863

SUPPLEMENTAL INFORMATION:
 
 
 
Income taxes paid
$
3,100

 
$
6,100

Interest paid
7,080

 
2,298

See condensed notes to interim consolidated financial statements.

7

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(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 mid-sized businesses, professionals and individuals through its 16 offices and one loan production office in Houston, Texas and the surrounding region. The Bank provides its customers with a variety of banking services including checking accounts, savings accounts and certificates of deposit, and its primary lending products are commercial, personal, automobile, mortgage and home improvement loans. The Bank also offers safe deposit boxes, automated teller machines, drive-through services and 24-hour depository facilities.
Basis of Presentation-The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis, and all such adjustments are of a normal recurring nature. Transactions with Allegiance have been eliminated. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
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, 2016.
New Accounting Standards
Newly Issued But Not Yet Effective 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. ASU 2014-09 is effective for the Company beginning on January 1, 2018, with retrospective application to each prior reporting period presented. The Company expects to adopt ASU 2014-09 in the first quarter 2018 using the modified retrospective approach, which includes presenting the cumulative effect of initial application along with supplementary disclosures. The Company is evaluating the full effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures; however, adoption of the ASU is not expected to have a significant impact.  The Company’s primary sources of revenues 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.  

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

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ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(Unaudited)

Contracts with Customers.” ASU 2016-02 will be effective for the Company on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early application of this ASU is permitted for all entities. Adoption of ASU 2016-02 is not expected to have a material impact on the Company’s financial statements.  The Company leases certain properties and equipment under operating leases that will result in the recognition of lease assets and lease liabilities on the Company’s balance sheet under the ASU.

ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for the Company on January 1, 2020 and must be applied using the modified retrospective approach with limited exceptions. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the impact that the adoption of this standard will have on the financial condition and results of operations of the Company. The Company has formed a team that is assessing its data and system needs and is evaluating the impact of adoption. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but has not yet determined the magnitude of any such one-time adjustment or the overall impact on the Company’s financial statements.
ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” ASU 2017-04 intends to simplify goodwill impairment testing by eliminating the second step of the analysis under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. The update instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. ASU 2017-04 must be applied prospectively and is effective for the Company on January 1, 2020. Early adoption is permitted. The Company does not expect the new guidance to have a material impact on its financial condition or results of operation.
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. ACQUISITIONS
Acquisition of F&M Bancshares - On January 1, 2015, the Company completed the acquisition of F&M Bancshares, Inc. (“F&M Bancshares”) and its wholly-owned subsidiary Enterprise Bank (“Enterprise”) headquartered in Houston, Texas. Enterprise operated nine bank offices, seven in Houston, Texas and two in Central Texas. During the first quarter of 2016, the Bank completed the sale of the two Central Texas branch locations of Enterprise. The Bank sold $18.2 million and $26.6 million of loans and deposits, respectively, and recorded a gain of approximately $2.1 million on the sale of these branches.

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ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(Unaudited)

3. GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS
Changes in the carrying amount of the Company’s goodwill and core deposit intangible assets were as follows:
 
Goodwill
 
Core Deposit
Intangibles
 
(Dollars in thousands)
Balance as of January 1, 2016
$
39,389

 
$
5,230

Sale of branch assets

 
(390
)
Amortization

 
(785
)
Balance as of December 31, 2016
39,389

 
4,055

Amortization

 
(391
)
Balance as of June 30, 2017
$
39,389

 
$
3,664

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 June 30, 2017, there were no impairments recorded on goodwill and other intangible assets. During the first quarter 2016, the Bank completed the sale of the two Central Texas branch locations of Enterprise in 2015 and wrote-down the core deposit intangible assets related to those locations.
The estimated aggregate future amortization expense for core deposit intangible assets remaining as of June 30, 2017 is as follows (dollars in thousands):
Remaining 2017
$
391

2018
781

2019
781

2020
744

2021
484

Thereafter
483

Total
$
3,664

4. SECURITIES
The amortized cost and fair value of investment securities were as follows:
 
June 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(Dollars in thousands)
Available for Sale
 
 
 
 
 
 
 
U.S. Government and agency securities
$
8,722

 
$
307

 
$
(24
)
 
$
9,005

Municipal securities
239,282

 
2,694

 
(2,359
)
 
239,617

Agency mortgage-backed pass-through securities
27,991

 
218

 
(302
)
 
27,907

Corporate bonds and other
44,589

 
184

 
(34
)
 
44,739

Total
$
320,584

 
$
3,403

 
$
(2,719
)
 
$
321,268


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ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(Unaudited)

 
December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(Dollars in thousands)
Available for Sale
 
 
 
 
 
 
 
U.S. Government and agency securities
$
5,883

 
$
266

 
$

 
$
6,149

Municipal securities
242,501

 
956

 
(5,655
)
 
237,802

Agency mortgage-backed pass-through securities
27,496

 
265

 
(437
)
 
27,324

Corporate bonds and other
45,271

 
77

 
(168
)
 
45,180

Total
$
321,151

 
$
1,564

 
$
(6,260
)
 
$
316,455

As of June 30, 2017, the Company’s management does not expect to sell any securities classified as available for sale with material unrealized losses, and the Company believes it is more likely than not it will not be required to sell any of these securities before their anticipated recovery, at which time the Company will receive full value for the securities. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of June 30, 2017, management believes the unrealized losses in the previous table are temporary and no other than temporary impairment loss has been realized in the Company’s consolidated statements of income.
The amortized cost and fair value of investment securities at June 30, 2017, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations at any time with or without call or prepayment penalties.
 
Amortized
Cost
 
Fair
Value
 
(Dollars in thousands)
Due in one year or less
$
11,110

 
$
11,136

Due after one year through five years
62,750

 
63,060

Due after five years through ten years
96,802

 
97,349

Due after ten years
121,931

 
121,816

Subtotal
292,593

 
293,361

Agency mortgage-backed pass through securities
27,991

 
27,907

Total
$
320,584

 
$
321,268

Securities with unrealized losses segregated by length of time such securities have been in a continuous loss position are as follows:
 
June 30, 2017
 
Less than 12 Months
 
More than 12 Months
 
Total
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
Estimated
Fair Value
 
Unrealized
Losses
 
(Dollars in thousands)
Available for Sale
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and agency securities
$
1,271

 
$
(24
)
 
$

 
$

 
$
1,271

 
$
(24
)
Municipal securities
119,872

 
(2,359
)
 

 

 
119,872

 
(2,359
)
Agency mortgage-backed pass-through securities
12,779

 
(228
)
 
2,613

 
(74
)
 
15,392

 
(302
)
Corporate bonds and other
12,093

 
(34
)
 

 

 
12,093

 
(34
)
Total
$
146,015

 
$
(2,645
)
 
$
2,613

 
$
(74
)
 
$
148,628

 
$
(2,719
)

11

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(Unaudited)

 
December 31, 2016
 
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
178,876

 
(5,655
)
 

 

 
178,876

 
(5,655
)
Agency mortgage-backed pass-through securities
12,520

 
(347
)
 
2,803

 
(90
)
 
15,323

 
(437
)
Corporate bonds and other
24,629

 
(168
)
 

 

 
24,629

 
(168
)
Total
$
216,025

 
$
(6,170
)
 
$
2,803

 
$
(90
)
 
$
218,828

 
$
(6,260
)
During the three and six months ended June 30, 2017, the Company sold $9.0 million of corporate bonds with a minimal gain recognized. No securities were sold during the three and six months ended June 30, 2016. At June 30, 2017 and December 31, 2016, the Company did not own securities of any one issuer, other than the U.S government and its agencies, in an amount greater than 10% of consolidated shareholders’ equity at such respective dates.
The carrying value of pledged securities was $5.0 million at June 30, 2017 and $4.9 million at December 31, 2016. The securities are pledged to further collateralize letters of credit issued by the Bank but confirmed by another financial institution.
5. LOANS AND ALLOWANCE FOR LOAN LOSSES
The loan portfolio balances, net of unearned income and fees, consist of various types of loans primarily made to borrowers located within Texas and are classified by major type as follows:
 
June 30,
2017
 
December 31,
2016
 
(Dollars in thousands)
Commercial and industrial
$
444,701

 
$
416,752

Mortgage warehouse
73,499

 
67,038

Real estate:
 
 
 
Commercial real estate (including multi-family residential)
1,008,027

 
891,989

Commercial real estate construction and land development
206,024

 
159,247

1-4 family residential (including home equity)
267,939

 
246,987

Residential construction
102,832

 
98,657

Consumer and other
11,630

 
10,965

Total loans
2,114,652

 
1,891,635

Allowance for loan losses
(21,010
)
 
(17,911
)
Loans, net
$
2,093,642

 
$
1,873,724


12

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(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:
 
June 30, 2017
 
Loans Past Due and Still Accruing
 
 
 
 
 
 
 
30-89
Days
 
90 or More
Days
 
Total Past
Due Loans
 
Nonaccrual
Loans
 
Current
Loans
 
Total
Loans
 
(Dollars in thousands)
Commercial and industrial
$
1,720

 
$

 
$
1,720

 
$
9,051

 
$
433,930

 
$
444,701

Mortgage warehouse

 

 

 

 
73,499

 
73,499

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate (including multi-family residential)
3,563

 

 
3,563

 
9,556

 
994,908

 
1,008,027

Commercial real estate construction and land development
275

 

 
275

 

 
205,749

 
206,024

1-4 family residential (including home equity)
1,403

 

 
1,403

 
568

 
265,968

 
267,939

Residential construction
1,401

 

 
1,401

 

 
101,431

 
102,832

Consumer and other
12

 

 
12

 
155

 
11,463

 
11,630

Total loans
$
8,374

 
$

 
$
8,374

 
$
19,330

 
$
2,086,948

 
$
2,114,652

 
December 31, 2016
 
Loans Past Due and Still Accruing
 
 
 
 
 
 
 
30-89
Days
 
90 or More
Days
 
Total Past
Due Loans
 
Nonaccrual
Loans
 
Current
Loans
 
Total
Loans
 
(Dollars in thousands)
Commercial and industrial
$
1,028

 
$
911

 
$
1,939

 
$
3,896

 
$
410,917

 
$
416,752

Mortgage warehouse

 

 

 

 
67,038

 
67,038

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate (including multi-family residential)
1,661

 

 
1,661

 
11,663

 
878,665

 
891,989

Commercial real estate construction and land development
263

 

 
263

 

 
158,984

 
159,247

1-4 family residential (including home equity)
280

 

 
280

 
217

 
246,490

 
246,987

Residential construction

 

 

 

 
98,657

 
98,657

Consumer and other
125

 

 
125

 
12

 
10,828

 
10,965

Total loans
$
3,357

 
$
911

 
$
4,268

 
$
15,788

 
$
1,871,579

 
$
1,891,635


13

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(Unaudited)

Impaired Loans
Impaired loans by class of loans are set forth in the following tables.
 
June 30, 2017
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
(Dollars in thousands)
With no related allowance recorded:
 
 
 
 
 
Commercial and industrial
$
5,268

 
$
6,194

 
$

Mortgage warehouse

 

 

Real estate:
 
 
 
 
 
Commercial real estate (including multi-family residential)
8,835

 
8,835

 

Commercial real estate construction and land development
210

 
210

 

1-4 family residential (including home equity)
568

 
568

 

Residential construction

 

 

Consumer and other
5

 
5

 

Total
14,886

 
15,812

 

 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
Commercial and industrial
10,588

 
11,663

 
2,657

Mortgage warehouse

 

 

Real estate:
 
 
 
 
 
Commercial real estate (including multi-family residential)
7,341

 
7,562

 
580

Commercial real estate construction and land development

 

 

1-4 family residential (including home equity)

 

 

Residential construction

 

 

Consumer and other
150

 
150

 
150

Total
18,079

 
19,375

 
3,387

 
 
 
 
 
 
Total:
 
 
 
 
 
Commercial and industrial
15,856

 
17,857

 
2,657

Mortgage warehouse

 

 

Real estate:
 
 
 
 
 
Commercial real estate (including multi-family residential)
16,176

 
16,397

 
580

Commercial real estate construction and land development
210

 
210

 

1-4 family residential (including home equity)
568

 
568

 

Residential construction

 

 

Consumer and other
155

 
155

 
150

 
$
32,965

 
$
35,187

 
$
3,387

    

14

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(Unaudited)

 
December 31, 2016
 
Recorded Investment
 
Unpaid Principal
Balance
 
Related Allowance
 
(Dollars in thousands)
With no related allowance recorded:
 
 
 
 
 
Commercial and industrial
$
5,300

 
$
5,414

 
$

Mortgage warehouse

 

 

Real estate:
 
 
 
 
 
Commercial real estate (including multi-family residential)
11,748

 
11,833

 

Commercial real estate construction and land development

 

 

1-4 family residential (including home equity)
217

 
217

 

Residential construction

 

 

Consumer and other
5

 
5

 

Total
17,270

 
17,469

 

 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
Commercial and industrial
3,108

 
3,328

 
1,543

Mortgage warehouse

 

 

Real estate:
 
 
 
 
 
Commercial real estate (including multi-family residential)
573

 
573

 
105

Commercial real estate construction and land development

 

 

1-4 family residential (including home equity)

 

 

Residential construction

 

 

Consumer and other
6

 
6

 
6

Total
3,687

 
3,907

 
1,654

 
 
 
 
 
 
Total:
 
 
 
 
 
Commercial and industrial
8,408

 
8,742

 
1,543

Mortgage warehouse

 

 

Real estate:
 
 
 
 
 
Commercial real estate (including multi-family residential)
12,321

 
12,406

 
105

Commercial real estate construction and land development

 

 

1-4 family residential (including home equity)
217

 
217

 

Residential construction

 

 

Consumer and other
11

 
11

 
6

 
$
20,957

 
$
21,376

 
$
1,654


15

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(Unaudited)

The following table presents average impaired loans and interest recognized on impaired loans for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended June 30,
 
2017
 
2016
 
Average Recorded Investment
 
Interest Income
Recognized
 
Average Recorded Investment
 
Interest Income
Recognized
 
(Dollars in thousands)
Commercial and industrial
$
16,758

 
$
95

 
$
5,748

 
$
109

Mortgage warehouse

 

 

 

Real estate:
 
 
 
 
 
 
 
Commercial real estate (including multi-family residential)
16,239

 
103

 
11,221

 
164

Commercial real estate construction and land development
210

 
4

 

 

1-4 family residential (including home equity)
571

 

 
229

 
(2
)
Residential construction

 

 

 

Consumer and other
159

 
1

 
35

 
(1
)
          Total
$
33,937

 
$
203

 
$
17,233

 
$
270

 
Six Months Ended June 30,
 
2017
 
2016
 
Average Recorded Investment
 
Interest Income
Recognized
 
Average Recorded Investment
 
Interest Income
Recognized
 
(Dollars in thousands)
Commercial and industrial
$
17,004

 
$
234

 
$
5,959

 
$
164

Mortgage warehouse

 

 

 

Real estate:
 
 
 
 
 
 
 
Commercial real estate (including multi-family residential)
16,338

 
180

 
11,599

 
222

Commercial real estate construction and land development
315

 
4

 

 

1-4 family residential (including home equity)
572

 
1

 
233

 
8

Residential construction

 

 

 

Consumer and other
160

 
1

 
38

 
1

          Total
$
34,389

 
$
420

 
$
17,829

 
$
395

Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including factors such as: current financial information, historical payment experience, credit documentation, public information and current economic trends. The Company analyzes loans individually by classifying the loans by credit risk. As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the allowance for credit losses, management assigns and tracks risk ratings to be used as credit quality indicators.
The following is a general description of the risk ratings used:
Pass—Loans classified as pass are loans with low to average risk and not otherwise classified as watch, special mention, substandard or doubtful. In addition, the guaranteed portion of SBA loans are considered pass risk rated loans.

16

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(Unaudited)

Watch—Loans classified as watch loans may still be of high quality, but have an element of risk added to the credit such as declining payment history, deteriorating financial position of the borrower or a decrease in collateral value.
Special Mention—Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Substandard—Loans classified as substandard have well-defined weaknesses on a continuing basis and are inadequately protected by the current net worth and paying capacity of the borrower, impaired or declining collateral values, or a continuing downturn in their industry which is reducing their profits to below zero and having a significantly negative impact on their cash flow. These classified loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful—Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values highly questionable and improbable.
Based on the most recent analysis performed, the risk category of loans by class of loan at June 30, 2017 is as follows:
 
Pass
 
Watch
 
Special Mention
 
Substandard
 
Doubtful
 
Total
 
(Dollars in thousands)
Commercial and industrial
$
406,655

 
$
11,003

 
$
6,284

 
$
20,759

 
$

 
$
444,701

Mortgage warehouse
73,499

 

 

 

 

 
73,499

Real estate:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate (including multi-family residential)
943,534

 
21,716

 
6,168

 
36,609

 

 
1,008,027

Commercial real estate construction and land development
195,180

 
5,643

 
144

 
5,057

 

 
206,024

1-4 family residential (including home equity)
262,972

 
848

 
1,474

 
2,645

 

 
267,939

Residential construction
100,756

 
1,559

 
517

 

 

 
102,832

Consumer and other
11,256

 
168

 
3

 
203

 

 
11,630

Total loans
$
1,993,852

 
$
40,937

 
$
14,590

 
$
65,273

 
$

 
$
2,114,652

The following table presents the risk category of loans by class of loan at December 31, 2016:
 
Pass
 
Watch
 
Special Mention
 
Substandard
 
Doubtful
 
Total
 
(Dollars in thousands)
Commercial and industrial
$
384,979

 
$
11,784

 
$
3,344

 
$
16,645

 
$

 
$
416,752

Mortgage warehouse
67,038

 

 

 

 

 
67,038

Real estate:
 
 
 
 
 
 
 
 
 
 


Commercial real estate (including multi-family residential)
834,781

 
16,009

 
6,804

 
34,395

 

 
891,989

Commercial real estate construction and land development
149,010

 
8,124

 

 
2,113

 

 
159,247

1-4 family residential (including home equity)
242,208

 
512

 
2,069

 
2,198

 

 
246,987

Residential construction
97,808

 

 
415

 
434

 

 
98,657

Consumer and other
10,520

 
364

 
4

 
77

 

 
10,965

Total loans
$
1,786,344

 
$
36,793

 
$
12,636

 
$
55,862

 
$

 
$
1,891,635


17

Table of Contents

ALLEGIANCE BANCSHARES, INC.
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2017
(Unaudited)

Allowance for Loan Losses
The following table presents the activity in the allowance for loan losses by portfolio type for the three and six months ended June 30, 2017 and 2016:
 
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 March 31, 2017
$
5,284

 
$

 
$
9,158

 
$
1,608

 
$
1,846

 
$
737

 
$
54

 
$
18,687

Provision for loan losses
1,692

 

 
170

 
276

 
142

 
98

 
629

 
3,007

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(1,108
)
 

 

 

 

 

 

 
(1,108
)
Recoveries
414

 

 

 
10

 

 

 

 
424

Net charge-offs
(694
)
 

 

 
10

 

 

 

 
(684
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance June 30, 2017
$
6,282

 
$

 
$
9,328

 
$
1,894

 
$
1,988

 
$
835

 
$
683

 
$
21,010

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance January 1, 2017
$
5,059

 
$

 
$
8,950

 
$
1,217

 
$
1,876

 
$
748

 
$
61

 
$
17,911

Provision for loan losses
2,498

 

 
378

 
667

 
102

 
87

 
618

 
4,350

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Charge-offs
(1,735
)
 

 

 

 

 

 

 
(1,735
)
Recoveries
460

 

 

 
10

 
10

 

 
4

 
484

Net charge-offs
(1,275
)
 

 

 
10

 
10

 

 
4

 
(1,251
)