Stellar Bancorp, Inc. (STEL) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Stellar Bancorp, Inc.'s 10-K for fiscal year 2021. Filing date: 2022-02-25. Report date: 2021-12-31. Accession: 0001558370-22-002170.

This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.

Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high.

Company profile: STEL · All MD&A years: index · Next year: FY 2022

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements. These forward-looking statements reflect the Company’s current views with respect to, among other things, future events and the Company’s financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. Accordingly, the Company cautions that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause the Company’s actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the risks described in “Part I.—Item 1A. —Risk Factors” and the following:

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	●	natural disasters and adverse weather on the Company’s market area, acts of terrorism, pandemics, an outbreak of hostilities or other international or domestic calamities and other matters beyond the Company’s control;

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	●	the Company’s ability to manage the economic risks related to the continued impact of the COVID-19 pandemic (including risks related to its customers’ credit quality, deferrals and modifications to loans);

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	●	the geographic concentration of the Company’s markets in Houston and Beaumont, Texas;

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	●	the Company’s ability to manage changes and the continued health or availability of management personnel;

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	●	the amount of nonperforming and classified assets that the Company holds and the time and effort necessary to resolve nonperforming assets;

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	●	deterioration of asset quality;

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	●	interest rate risk associated with the Company’s business;

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	●	national business and economic conditions in general, in the financial services industry and within the Company’s primary markets;

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	●	sustained instability of the oil and gas industry in general and within Texas;

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	●	the composition of the Company’s loan portfolio, including the identity of the Company’s borrowers and the concentration of loans in specialized industries;

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	●	changes in the value of collateral securing the Company’s loans;

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	●	the Company’s ability to maintain important deposit customer relationships and its reputation;

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	●	the Company’s ability to maintain effective internal control over financial reporting;

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	●	the Company’s ability to pursue available remedies in the event of a loan default for Paycheck Protection Program, or PPP, loans and the risk of holding such loans at unfavorable interest rates and on terms that are less favorable than those with customers to whom the Company would have otherwise lent;

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	●	volatility and direction of market interest rates;

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	●	liquidity risks associated with the Company’s business;

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	●	systems failures, interruptions or breaches involving the Company’s information technology and telecommunications systems or third- or fourth-party servicers;

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	●	the failure of certain third- or fourth-party vendors to perform;

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	●	the institution and outcome of litigation and other legal proceedings against the Company or to which it may become subject;

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	●	the operational risks associated with the Company’s business;

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	●	the costs, effects and results of regulatory examinations, investigations, or reviews or the ability to obtain required regulatory approvals;

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	●	changes in the laws, rules, regulations, interpretations or policies relating to financial institution, accounting, tax, trade, monetary and fiscal matters;

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	●	governmental or regulatory responses to the COVID-19 pandemic that may impact the Company’s loan portfolio and forbearance practice;

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	●	further government intervention in the U.S. financial system that may impact how the Company achieves its performance goals;

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	●	the possible substantial costs related to the merger and integration;

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	●	the risk that the cost savings and any revenue synergies from the merger may not be fully realized or may take longer than anticipated to be realized;

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	●	the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

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	●	the ability to retain the Company’s or Allegiance personnel successfully after the merger is completed;

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	●	the ability by each of Allegiance and the Company to obtain required governmental approvals of the merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction);

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	●	the occurrence of any event, change or other circumstances that could give rise to the right of us and/or Allegiance to terminate the merger agreement with respect to the merger;

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	●	disruption to the parties’ businesses as a result of the announcement and pendency of the merger;

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	●	the risks related to the Company’s assumption of certain of Allegiance’s outstanding debt obligations and the combined company’s level of indebtedness following the completion of the merger;

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	●	the dilution caused by the Company’s issuance of additional shares of its common stock in the merger;

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	●	the failure of the closing conditions in the merger agreement to be satisfied, or any unexpected delay in closing the merger;

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	●	the failure to obtain the necessary approvals by the shareholders of Allegiance or the Company;

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	●	reputational risk and the reaction of each company’s customers, suppliers, employees or other business partners to the merger;

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	●	and other risks, uncertainties, and factors that are discussed from time to time in the Company’s reports and documents filed with the SEC.

Pending Merger

On November 8, 2021, Allegiance (NASDAQ:ABTX) and the Company jointly announced that they entered into a definitive merger agreement pursuant to which the companies will combine in an all-stock merger of equals. Under the terms of the definitive merger agreement, Allegiance shareholders will receive 1.4184 shares of the Company’s common stock for each share of Allegiance common stock they own. Based on the number of outstanding shares of Allegiance and the Company as of November 5, 2021, Allegiance shareholders will own approximately 54% and the Company’s shareholders will own approximately 46% of the combined company. The companies have submitted the required regulatory filings and the parties anticipate closing in the second quarter of 2022.

There are or will be important factors that could cause the actual results of the merger to differ materially from those indicated in these forward-looking statements, including, but not limited to, the risks described in “Part I.—Item 1A. —Risk Factors”.

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	●	the risk that the cost savings and any revenue synergies from the merger may not be fully realized or may take longer than anticipated to be realized;

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	●	disruption to the parties’ businesses as a result of the announcement and pendency of the merger;

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	●	the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement;

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	●	the risk that the integration of each party’s operations will be materially delayed or will be more costly or difficult than expected or that the parties are otherwise unable to successfully integrate each party’s businesses into the other’s businesses;

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	●	the failure to obtain the necessary approvals by the shareholders of Allegiance or the Company;

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	●	the amount of the costs, fees, expenses and charges related to the merger; the ability by each of Allegiance and the Company to obtain required governmental approvals of the merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction);

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	●	reputational risk and the reaction of each company’s customers, suppliers, employees or other business partners to the merger; the failure of the closing conditions in the merger agreement to be satisfied, or any unexpected delay in closing the merger;

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	●	the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

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	●	the dilution caused by the Company’s issuance of additional shares of its common stock in the merger; general competitive, economic, political and market conditions;

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	●	and other factors that may affect future results of the Company and Allegiance, including changes in asset quality and credit risk;

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	●	the inability to sustain revenue and earnings growth;

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	●	changes in interest rates and capital markets;

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	●	inflation; customer borrowing, repayment, investment and deposit practices;

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	●	the impact, extent and timing of technological changes;

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	●	capital management activities; and other actions of the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and OCC and legislative and regulatory actions and reforms;

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	●	and other risks, uncertainties, and factors that are discussed from time to time in the Company’s reports and documents filed with the SEC.

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with Part IV.—Item 15.—Exhibits and Financial Statement Schedules” and the consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis includes forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that the Company believes are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth in “Part I.—Item 1A.—Risk Factors” and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. The Company assumes no obligation to update any of these forward-looking statements.

Allegiance and the Company disclaim any obligation and do not intend to update or revise any forward-looking statements contained in this Annual Report on Form 10-K, which speak only as of the date hereof, whether as a result of new information, future events or otherwise, except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.

Information about the Merger and Where to Find It

This Annual Report on Form 10-K does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval.

In connection with the proposed merger, the Company has filed a registration statement on Form S-4 with the SEC to register the shares of the Company’s common stock that will be issued to Allegiance shareholders in connection with the merger. The registration statement will include a joint proxy statement/prospectus and other relevant materials in connection with the proposed merger, which will be sent to the shareholders of the Company and Allegiance seeking their approval of the proposed merger.

WE URGE INVESTORS AND SECURITY HOLDERS TO READ THE REGISTRATION STATEMENT ON FORM S-4, THE JOINT PROXY STATEMENT/PROSPECTUS INCLUDED WITHIN THE REGISTRATION STATEMENT ON FORM S-4 AND ANY OTHER RELEVANT DOCUMENTS FILED OR TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IN CONNECTION WITH THE PROPOSED MERGER BECAUSE

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THEY CONTAIN IMPORTANT INFORMATION ABOUT ALLEGIANCE, THE COMPANY AND THE PROPOSED MERGER.

Investors and security holders may obtain free copies of these documents, once they are filed, and other documents filed with the SEC by Allegiance or the Company through the website maintained by the SEC at https://www.sec.gov. Documents filed with the SEC by the Company will be available free of charge by accessing the Company’s website at www.communitybankoftx.com under the heading “Investor Relations” or, alternatively, by directing a request by mail or telephone to CBTX, Inc., 9 Greenway Plaza, Suite 110, Houston, Texas 77046, Attn: Investor Relations, (713) 210-7600, and documents filed with the SEC by Allegiance will be available free of charge by accessing Allegiance’s website at www.allegiancebank.com under the heading “Investor Relations” or, alternatively, by directing a request by mail or telephone to Allegiance Bancshares, Inc., 8847 West Sam Houston Parkway, N., Suite 200, Houston, Texas 77040, (281) 894-3200.

Participants in the Solicitation

The Company, Allegiance and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the shareholders of the Company and Allegiance in connection with the proposed merger. Certain information regarding the interests of these participants and a description of their direct or indirect interests, by security holdings or otherwise, will be included in the joint proxy statement/prospectus regarding the proposed merger when it becomes available. Additional information about the directors and executive officers of the Company and their ownership of the Company’s common stock is set forth in the Company’s proxy statement for its annual meeting of shareholders, filed with the SEC on April 14, 2021. Additional information about the directors and executive officers of Allegiance and their ownership of Allegiance’s common stock is set forth in Allegiance’s proxy statement for its annual meeting of shareholders, filed with the SEC on March 10, 2021. These documents can be obtained free of charge from the sources described above.

Overview

The Company operates through one segment. The Company’s primary source of funds is deposits and its primary use of funds is loans. Most of the Company’s revenue is generated from interest on loans and investments. The Company incurs interest expense on deposits and other borrowed funds as well as noninterest expense, such as salaries and employee benefits and occupancy expenses.

The Company’s operating results depend primarily on net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in market interest rates and the interest rates earned on interest-earning assets or paid on interest-bearing liabilities, as well as in the volume and types of interest-earning assets and interest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. 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.

Periodic changes in the volume and types of loans in the Company’s loan portfolio are affected by, among other factors, economic and competitive conditions in Texas, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within the Company’s target markets and throughout the state of Texas. The Company maintains diversity in its loan portfolio as a means of managing risk associated with fluctuations in economic conditions. The Company’s focus on lending to small to medium-sized businesses and professionals in its market areas has resulted in a diverse loan portfolio comprised primarily of core relationships. The Company carefully monitors exposure to certain asset classes to minimize the impact of a downturn in the value of such assets.

The Company seeks to remain competitive with respect to interest rates on loans and deposits, as well as prices on fee-based services, which are typically significant competitive factors within the banking and financial services industry. Many of the Company’s competitors are much larger financial institutions that have greater financial resources and compete aggressively for market share. Through the Company’s relationship-driven, community banking strategy, a significant portion of its growth has been through referral business from its existing customers and professionals in the Company’s markets including attorneys, accountants and other professional service providers.

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On September 7, 2021, the Company was informed by the OCC that it terminated the Formal Agreement, between the Bank and the OCC regarding BSA/AML compliance matters. On December 16, 2021, the Bank entered into an OCC Consent Order regarding BSA/AML compliance matters. Under the OCC Consent Order, the Bank paid a civil money penalty of $1.0 million.

On December 15, 2021, the Bank entered into the FinCEN Consent Order. Under the terms of the FinCEN Consent Order, the Bank paid a civil money penalty of $8.0 million; provided, however, that FinCEN agreed to credit the Bank the $1.0 million civil money penalty imposed by the OCC described above. As a result, the Bank paid an aggregate sum of $8.0 million under the OCC Consent Order and the FinCEN Consent Order. The OCC Consent Order and the FinCEN Consent Order each settle the civil money proceedings against the Bank initiated by the OCC and FinCEN. See “Item 1A.—Risk Factors.”

Information Regarding COVID-19 Impact and Uncertain Economic Outlook

The COVID-19 pandemic and actions taken in response to it, combined with the sustained instability in the oil and gas industry, negatively impacted the global economy and financial markets. The Company’s markets, including its primary markets in Houston and Beaumont are particularly subject to the financial impact of the sustained instability in the oil and gas industry. Although oil prices increased in January 2022, the industry remains in a downturn. As a result of these factors and the impact on the loan portfolio, the Company increased the ACL and provision for credit losses during 2020, which negatively impacted the Company’s net income and due to improvements in the national and local economies and related forecasts and the reduction of the loan portfolio, the Company reduced the ACL in during 2021. The future impact of the COVID-19 pandemic is uncertain but could materially affect the Company’s future financial and operational results. See “Part I.—Item 1A.—Risk Factors.”

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The risk grades of the Company’s loan portfolio, past due loans, loans individually evaluated and nonperforming loans, or loan performance indicators, as of the dates indicated below were as follows:


	December 31,		September 30,		June 30,	March 31,		December 31,
(Dollars in thousands)	2021		2021		2021	2021		2020
Risk grades:
Pass	$	2,783,385		$	2,526,395	$	2,645,811		$	2,810,248	$	2,835,768
Special mention		12,807			4,661		14,276			10,508		14,088
Substandard		80,235			86,501		80,535			83,032		86,814
Total gross loans	$	2,876,427		$	2,617,557	$	2,740,622		$	2,903,788	$	2,936,670
Past due loans:
30 to 59 days past due	$	905		$	2,755	$	39		$	1,377	$	1,463
60 to 89 days past due		34			143		—			495		2,074
90 days or greater past due		197			104		217			4,019		2,375
Total past due loans	$	1,136		$	3,002	$	256		$	5,891	$	5,912
Loans individually evaluated:
Accruing troubled debt restructurings	$	30,709		$	31,656	$	31,789		$	27,709	$	32,880
Non-accrual troubled debt restructurings		20,019			17,834		18,196			18,913		19,173
Total troubled debt restructurings		50,728			49,490		49,985			46,622		52,053
Other non-accrual		2,549			2,751		2,777			4,595		4,844
Other accruing		5,995			5,260		836			836		746
Total loans individually evaluated	$	59,272		$	57,501	$	53,598		$	52,053	$	57,643
Nonperforming assets:
Nonaccrual loans	$	22,568		$	20,585	$	20,973		$	23,508	$	24,017
Accruing loans 90 or more days past due		—			—		—			—		—
Total nonperforming loans		22,568			20,585		20,973			23,508		24,017
Foreclosed assets		—			—		—			106		—
Total nonperforming assets	$	22,568		$	20,585	$	20,973		$	23,614	$	24,017

The table above shows the trend of loan performance indicators over the past five reporting periods. Loan performance indicators reflected worsening loan performance during 2020, primarily as a result of the impact of the COVID-19 pandemic and sustained instability in the oil and gas industry on the Company’s borrowers. Substantially all of the loan performance indicators have shown improvement during 2021. Although national and local economies and economic forecasts improved during 2021, the COVID-19 pandemic continues to have an ongoing impact through supply disruptions and other uncertainties and the oil and gas industry is still experiencing instability. If the national and/or local economies and economic forecasts and loan performance indicators worsen in the future, increases in the ACL through additional provisions for credit losses may occur which would negatively impact net income.

In support of customers impacted by the COVID-19 pandemic, the Company offered relief through payment deferrals during 2020 and 2021. A majority of borrowers with deferral arrangements have returned to normal contractual payment schedules and the Company continues to provide deferred payment arrangements to a small number of businesses. The Company had 7 loans subject to such deferral arrangements with outstanding principal balances of $18.5 million at December 31, 2021 and 21 loans on deferral arrangements with total outstanding principal balances totaling $38.4 million at December 31, 2020.

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During the years ended December 31, 2021 and 2020, the Company participated in PPP lending under the CARES Act, which facilitates loans to small businesses See “Part II.—Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Loan Portfolio” and “Part I. —Item 1A.—Risk Factors.”

Results of Operations

Year Ended December 31, 2021 vs Year Ended December 31, 2020

The increase in net income during the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to fluctuations in the provision (recapture) for credit losses, increased noninterest expense, decreased net interest income, increased noninterest income and increased income tax expense. See further analysis of the material fluctuations in the related discussions that follow.


	Years Ended December 31,
(Dollars in thousands)		2021	2020		Increase (Decrease)
Interest income	$	132,093	$	138,693		$	(6,600)	(4.8)%
Interest expense		5,926		10,087			(4,161)	(41.3)%
Net interest income		126,167		128,606			(2,439)	(1.9)%
Provision (recapture) for credit losses		(10,773)		18,892			(29,665)	(157.0)%
Noninterest income		16,264		14,781			1,483	10.0%
Noninterest expense		107,686		92,100			15,586	16.9%
Income before income taxes		45,518		32,395			13,123	40.5%
Income tax expense		9,920		6,034			3,886	64.4%
Net income	$	35,598	$	26,361		$	9,237	35.0%
Earnings per share - basic	$	1.46	$	1.06
Earnings per share - diluted		1.45		1.06
Dividends per share		0.52		0.40

Net Interest Income

Net interest income decreased $2.4 million during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to lower average loans, lower rates on interest-earning assets and higher average interest-bearing deposits, which was partially offset by higher average securities and interest-bearing deposits at other financial institutions and lower rates on interest-bearing deposits.

The yield on interest-earning assets was 3.43% for the year ended December 31, 2021, compared to 3.98% for the year ended December 31, 2020. The cost of interest-bearing liabilities was 0.31% for the year ended December 31, 2021 and 0.57% for the year ended December 31, 2020. The Company’s net interest margin on a tax equivalent basis was 3.31% for the year ended December 31, 2021, compared to 3.73% for the year ended December 31, 2020. Yields on interest-earning assets decreased and the costs of interest-bearing liabilities did not decrease to the same extent, which caused compression of the Company’s net interest margin on a tax equivalent basis during 2021. Although competitive pressures have caused the costs of interest-bearing deposits to not drop in tandem with decreases in market rates for interest-earning assets, they remain a low-cost source of funds, as compared to other sources of funds.

The yield on loans for the years ended December 31, 2021 and 2020 was impacted by the Company’s participation in PPP financing. The Company recognized a net yield of 5.80% and 2.79% on PPP loans during the years ended December 31, 2021 and 2020, respectively. Without PPP loans, the Company’s average yield on loans would have been 4.39% and 4.75% for those same periods.

Interest earned on PPP loans for the years ended December 31, 2021 and 2020 included the recognition of $8.4 million and $4.0 million, respectively, of origination fee income, net of associated costs, related to PPP loans. At December 31, 2021 and 2020, the Company had $1.5 million and $4.2 million of deferred loan fees and costs related to PPP loans outstanding.

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The following table presents for the periods indicated, average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest income or interest expense and the average yield or rate for the periods indicated below.


	Years Ended December 31,
	2021		2020
	Average		Interest		Average	Average	Interest		Average
	Outstanding		Earned/		Yield/	Outstanding	Earned/		Yield/
(Dollars in thousands)	Balance		Interest Paid		Rate	Balance	Interest Paid		Rate
Assets
Interest-earning assets:
Total loans(1)	$	2,784,663		$	124,605	4.47%	$	2,862,911		$	131,678	4.60%
Securities		323,952			5,736	1.77%		236,625			4,768	2.02%
Interest-bearing deposits at other financial institutions		731,996			1,123	0.15%		366,628			1,568	0.43%
Equity investments		14,350			629	4.38%		14,874			679	4.57%
Total interest-earning assets		3,854,961		$	132,093	3.43%		3,481,038		$	138,693	3.98%
Allowance for credit losses for loans		(37,892)						(35,448)
Noninterest-earning assets		316,575						312,672
Total assets	$	4,133,644					$	3,758,262
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,870,148		$	5,024	0.27%	$	1,703,543		$	9,168	0.54%
Federal Home Loan Bank advances		50,000			885	1.77%		55,205			903	1.64%
Other interest-bearing liabilities		8			17	—		1,631			16	0.98%
Total interest-bearing liabilities		1,920,156		$	5,926	0.31%		1,760,379		$	10,087	0.57%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		1,603,006						1,404,027
Other liabilities		51,885						50,464
Total noninterest-bearing liabilities		1,654,891						1,454,491
Shareholders’ equity		558,597						543,392
Total liabilities and shareholders’ equity	$	4,133,644					$	3,758,262
Net interest income				$	126,167					$	128,606
Net interest spread(2)						3.12%						3.41%
Net interest margin(3)						3.27%						3.69%
Net interest margin - tax equivalent(4)						3.31%						3.73%

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(1)	Includes average outstanding balances related to loans held for sale.

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(2)	Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

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(3)	Net interest margin is equal to net interest income divided by average interest-earning assets.

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(4)	Tax equivalent adjustments of $1.4 million and $1.1 million for the years ended December 31, 2021 and 2020, respectively, were computed using a federal income tax rate of 21%.

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The following table presents information regarding changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.


	Year Ended December 31, 2021,
	Compared to Year Ended December 31, 2020
	Increase (Decrease) due to
(Dollars in thousands)	Rate		Volume			Days		Total
Interest-earning assets:
Total loans	$	(3,113)		$	(3,599)		$	(361)	$	(7,073)
Securities		(783)			1,764			(13)		968
Interest-bearing deposits at other financial institutions		(2,012)			1,571			(4)		(445)
Equity investments		(24)			(24)			(2)		(50)
Total decrease in interest income		(5,932)			(288)			(380)		(6,600)
Interest-bearing liabilities:
Interest-bearing deposits		(5,019)			900			(25)		(4,144)
Federal Home Loan Bank advances		69			(85)			(2)		(18)
Other interest-bearing liabilities		2			(1)			—		1
Total increase (decrease) in interest expense		(4,948)			814			(27)		(4,161)
Decrease in net interest income	$	(984)		$	(1,102)		$	(353)	$	(2,439)

Provision (Recapture) for Credit Losses

The provision (recapture) for credit losses is an income adjustment used to maintain the ACL at a level deemed appropriate by management to absorb inherent losses on existing loans. The recapture of credit losses of $10.8 million in 2021 primarily resulted from the adjustment of certain qualitative factors used to determine the ACL due to the continued improvements in the national and local economies and forecast assumptions. The provision for credit losses of $18.9 million in 2020 primarily resulted from the impact of the COVID-19 pandemic, sustained instability of the oil and gas industry, an increase in adversely graded loans and an increase in charge-offs of $3.1 million from 2019 to 2020.

The ACL for loans was $31.3 million, or 1.09%, of loans excluding loans held for sale at December 31, 2021 and $40.6 million, or 1.39%, at December 31, 2020. The decrease in the ACL for loans during 2021, as compared to 2020, was primarily the result of the adjustment of certain qualitative factors utilized in the Company’s ACL estimate due to the continued improvements in the national and local economies and forecast assumptions.

Noninterest Income

The following table presents components of noninterest income for the years ended December 31, 2021 and 2020 and the period-over-period changes in the categories of noninterest income:


	Years Ended December 31,
(Dollars in thousands)	2021		2020		Increase (Decrease)
Deposit account service charges	$	5,082		$	5,026	$	56	1.1%
Card interchange fees		4,200			3,831		369	9.6%
Earnings on bank-owned life insurance		3,488			2,422		1,066	44.0%
Net gain on sales of assets		1,828			755		1,073	142.1%
Other		1,666			2,747		(1,081)	(39.4)%
Total noninterest income	$	16,264		$	14,781	$	1,483	10.0%

The increase of $1.5 million for 2021, compared to 2020, was primarily due to gains of $1.9 million related to bank-owned life insurance policies recorded during 2021, compared to gains of $769,000 related to bank-owned life insurance policies recorded during 2020. Net gains on sales of assets increased $1.1 million from $755,000 for 2020 to $1.8 million for 2021.

Table

Noninterest Expense

Generally, noninterest expense is composed of employee expenses and costs associated with operating facilities, obtaining and retaining customer relationships and providing bank services. See further analysis of these changes in the related discussions that follow.


		Years Ended December 31,
(Dollars in thousands)	2021		2020		Increase (Decrease)
Salaries and employee benefits	$	60,531		$	55,415	$	5,116	9.2%
Occupancy expense		10,384			10,106		278	2.8%
Professional and director fees		6,467			8,348		(1,881)	(22.5)%
Data processing and software		6,582			5,369		1,213	22.6%
Regulatory fees		9,901			1,798		8,103	450.7%
Advertising, marketing and business development		1,551			1,500		51	3.4%
Telephone and communications		2,000			1,752		248	14.2%
Security and protection expense		1,791			1,447		344	23.8%
Amortization of intangibles		738			846		(108)	(12.8)%
Other expenses		7,741			5,519		2,222	40.3%
Total noninterest expense	$	107,686		$	92,100	$	15,586	16.9%

The increase in noninterest expense of $15.6 million for 2021, compared to 2020, was primarily due to the payment of $8.0 million in civil money penalties to resolve BSA/AML compliance matters included in regulatory fees, $1.7 million of costs related to the pending merger with Allegiance in 2021 included in other expenses and a $5.1 million increase in salaries and employee benefits. The increase in salaries and employee benefits during 2021, compared to 2020, resulted from increased claims under the Company’s self-funded health plan, increased bonus expense, increased stock-based compensation expense and increased salary expense. Professional and director fees decreased $1.9 million primarily due to lower consulting fees incurred in 2021 associated with BSA/AML compliance matters.

Income Tax Expense

The amount of income tax expense is impacted by the amounts of pre-tax income, tax-exempt income and other nondeductible expenses. Income tax expense and effective tax rates for the periods shown below were as follows:


	Years Ended December 31,
(Dollars in thousands)	2021	2020
Income tax expense	$ 9,920		$ 6,034
Effective tax rate	21.79%		18.63%

The differences between the federal statutory rate of 21% and the effective tax rates were largely attributable to permanent differences primarily related to tax exempt interest income and bank-owned life insurance earnings. The tax rate for the year ended December 31, 2021 was also impacted by the resolution of the BSA/AML compliance matters as the civil money penalty payments are not tax deductible.

Table

Year Ended December 31, 2020 vs Year Ended December 31, 2019

Net income was $26.4 million for the year ended December 31, 2020 and $50.5 million for the year ended December 31, 2019. The decrease of $24.1 million was primarily due to an increase of $16.5 million in the provision for credit losses during 2020 and a $7.4 million decrease in net interest income. See further analysis of these changes in the related discussions that follow.


	Years Ended December 31,
(Dollars in thousands, except per share data and percentages)		2020	2019		Increase (Decrease)
Interest income	$	138,693	$	153,395		$	(14,702)	(9.6)%
Interest expense		10,087		17,407			(7,320)	(42.1)%
Net interest income		128,606		135,988			(7,382)	(5.4)%
Provision for credit losses		18,892		2,385			16,507	692.1%
Noninterest income		14,781		18,628			(3,847)	(20.7)%
Noninterest expense		92,100		90,143			1,957	2.2%
Income before income taxes		32,395		62,088			(29,693)	(47.8)%
Income tax expense		6,034		11,571			(5,537)	(47.9)%
Net income	$	26,361	$	50,517		$	(24,156)	(47.8)%
Earnings per share - basic	$	1.06	$	2.03
Earnings per share - diluted		1.06		2.02
Dividends per share		0.40		0.40

Net Interest Income

Net interest income was $128.6 million for the year ended December 31, 2020, compared to $136.0 million for the year ended December 31, 2019. Net interest income decreased $7.4 million during the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to higher average interest-bearing deposits, lower rates on loans, securities and other interest-earning assets, partially offset by the impact of lower rates on deposits and increased average loans and other interest-earning assets.

The yield on interest-earning assets was 3.98% for the year ended December 31, 2020, compared to 4.95% for the year ended December 31, 2019. The cost of interest-bearing liabilities was 0.57% for the year ended December 31, 2020 and 1.07% for the year ended December 31, 2019. The Company’s net interest margin on a tax equivalent basis was 3.73% for the year ended December 31, 2020, compared to 4.42% for the year ended December 31, 2019. Yields on interest-earning assets decreased and the costs of interest-bearing liabilities did not decrease to the same extent, which caused compression of the Company’s net interest margin on a tax equivalent basis during 2020.

The yield on loans for the year ended December 31, 2020 was impacted by the Company’s participation in PPP financing as PPP loans are at unfavorable interest rates relative to other loans the Company originates. The Company recognized a net yield of 2.79% on PPP loans during the year ended December 31, 2020. Without PPP loans, the Company’s average yield on loans would have been 4.75% instead of 4.60%.

Interest earned on PPP loans for the year ended December 31, 2020 included the recognition of $4.0 million of origination fee income, net of associated costs, related to PPP loans. At December 31, 2020, the Company had $4.2 million of deferred loan fees and costs related to PPP loans outstanding.

Table


	Years Ended December 31,
	2020		2019
	Average		Interest		Average	Average	Interest		Average
	Outstanding		Earned/		Yield/	Outstanding	Earned/		Yield/
(Dollars in thousands)	Balance		Interest Paid		Rate	Balance	Interest Paid		Rate
Assets
Interest-earning assets:
Total loans(1)	$	2,862,911		$	131,678	4.60%	$	2,608,505		$	141,388	5.42%
Securities		236,625			4,768	2.02%		233,543			5,954	2.55%
Other interest-earning assets		366,628			1,568	0.43%		243,349			5,333	2.19%
Equity investments		14,874			679	4.57%		14,852			720	4.85%
Total interest-earning assets		3,481,038		$	138,693	3.98%		3,100,249		$	153,395	4.95%
Allowance for credit losses for loans		(35,448)						(24,971)
Noninterest-earning assets		312,672						299,387
Total assets	$	3,758,262					$	3,374,665
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,703,543		$	9,168	0.54%	$	1,566,038		$	15,999	1.02%
Federal Home Loan Bank advances		55,205			903	1.64%		61,589			1,386	2.25%
Other interest-bearing liabilities		1,631			16	0.98%		1,046			22	2.10%
Total interest-bearing liabilities		1,760,379		$	10,087	0.57%		1,628,673		$	17,407	1.07%
Noninterest-bearing liabilities:
Noninterest-bearing deposits		1,404,027						1,193,527
Other liabilities		50,464						37,458
Total noninterest-bearing liabilities		1,454,491						1,230,985
Shareholders’ equity		543,392						515,007
Total liabilities and shareholders’ equity	$	3,758,262					$	3,374,665
Net interest income				$	128,606					$	135,988
Net interest spread(2)						3.41%						3.88%
Net interest margin(3)						3.69%						4.39%
Net interest margin - tax equivalent(4)						3.73%						4.42%

Column 1	Column 2
(1)	Includes average outstanding balances related to loans held for sale.

Column 1	Column 2
(2)	Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

Column 1	Column 2
(3)	Net interest margin is equal to net interest income divided by average interest-earning assets.

Column 1	Column 2
(4)	Tax equivalent adjustments of $1.1 million and $1.0 million for the years ended December 31, 2020 and 2019, respectively, were computed using a federal income tax rate of 21%.

Table


	Year Ended December 31, 2020,
	Compared to Year Ended December 31, 2019
	Increase (Decrease) due to
(Dollars in thousands)	Rate		Volume			Days		Total
Interest-earning assets:
Total loans	$	(23,886)		$	13,789		$	387	$	(9,710)
Securities		(1,281)			79			16		(1,186)
Other interest-earning assets		(6,480)			2,700			15		(3,765)
Equity investments		(44)			1			2		(41)
Total increase (decrease) in interest income		(31,691)			16,569			420		(14,702)
Interest-bearing liabilities:
Interest-bearing deposits		(8,278)			1,403			44		(6,831)
Federal Home Loan Bank advances		(343)			(144)			4		(483)
Other interest-bearing liabilities		(8)			2			—		(6)
Total increase (decrease) in interest expense		(8,629)			1,261			48		(7,320)
Increase (decrease) in net interest income	$	(23,062)		$	15,308		$	372	$	(7,382)

Provision for Credit Losses

The provision for credit losses is an income adjustment used to maintain the ACL at a level deemed appropriate by management to absorb inherent losses on existing loans. The provision for credit losses was $18.9 million for the year ended December 31, 2020, an increase of $16.5 million compared to the year ended December 31, 2019, primarily due to the impact of the COVID-19 pandemic, the sustained instability of the oil and gas industry, an increase in adversely graded loans and an increase in charge-offs.

Noninterest Income

The following table presents components of noninterest income for the years ended December 31, 2020 and 2019 and the period-over-period changes in the categories of noninterest income:


	Years Ended December 31,
(Dollars in thousands)	2020		2019		Increase (Decrease)
Deposit account service charges	$	5,026		$	6,554	$	(1,528)	(23.3)%
Card interchange fees		3,831			3,720		111	3.0%
Earnings on bank-owned life insurance		2,422			5,011		(2,589)	(51.7)%
Net gain on sales of assets		755			652		103	15.8%
Other		2,747			2,691		56	2.1%
Total noninterest income	$	14,781		$	18,628	$	(3,847)	(20.7)%

Noninterest income was $14.8 million for the year ended December 31, 2020 and $18.6 million for the year ended December 31, 2019. The decrease in noninterest income during the year ended December 31, 2020, compared to the year ended December 31, 2019, was primarily due to earnings on bank-owned life insurance. During the year ended December 31, 2020, the Company received nontaxable death proceeds of $2.0 million under the bank-owned life insurance policies and recorded a gain of $769,000 over the carrying value recorded. During the year ended December 31, 2019, the Company received nontaxable death benefit proceeds of $4.7 million under bank-owned life insurance policies and a gain of $3.3

Table

million over the carrying value recorded. In addition, deposit account service charges decreased due to a reduction in the amount of insufficient funds and overdraft fees charged on deposit accounts and lower transactional volumes.

Noninterest Expense


		Years Ended December 31,
(Dollars in thousands)	2020		2019		Increase (Decrease)
Salaries and employee benefits	$	55,415		$	56,222	$	(807)	(1.4)%
Occupancy expense		10,106			9,506		600	6.3%
Professional and director fees		8,348			7,048		1,300	18.4%
Data processing and software		5,369			4,435		934	21.1%
Regulatory fees		1,798			1,138		660	58.0%
Advertising, marketing and business development		1,500			1,831		(331)	(18.1)%
Telephone and communications		1,752			1,774		(22)	(1.2)%
Security and protection expense		1,447			1,464		(17)	(1.2)%
Amortization of intangibles		846			894		(48)	(5.4)%
Other expenses		5,519			5,831		(312)	(5.4)%
Total noninterest expense	$	92,100		$	90,143	$	1,957	2.2%

Noninterest expense was $92.1 million for the year ended December 31, 2020 and $90.1 million for the year ended December 31, 2019. The increase in noninterest expense of $2.0 million between the year ended December 31, 2020 and 2019 was primarily due to a $1.3 million increase in professional and director fees, a $934,000 increase in data processing and software costs, a $660,000 increase in regulatory fees, partially offset by an $807,000 decrease in salaries and employee benefits. The increase in professional and director fees during the year ended December 31, 2020 was primarily due to $3.9 million in consulting related fees associated with BSA/AML compliance matters, compared to $18,000 during the year ended December 31, 2019, partially offset by lower legal fees of $721,000 during the year ended December 31, 2020, compared to $3.7 million during the year ended December 31, 2019.

Income Tax Expense

Income tax expense was $6.0 million and $11.6 million for the years ended December 31, 2020 and 2019, respectively. The amount of income tax expense for each year was impacted by the amounts of pre-tax income, tax-exempt income and other nondeductible expenses. Income tax expense and effective tax rates for the periods shown below were as follows:


	Years Ended December 31,
(Dollars in thousands)	2020	2020
Income tax expense	$ 6,034	$ 11,571
Effective tax rate	18.63%	18.64%

Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7	Column 8

The differences between the federal statutory rate of 21% and the effective tax rates presented in the table above were primarily related to tax-exempt interest income and bank-owned life insurance earnings. The decrease in the effective rate for the year ended December 31, 2020 was primarily due to tax-exempt gains related to the bank-owned life insurance.

Table

Financial Condition

Total assets were $4.5 billion as of December 31, 2021, compared to $3.9 billion as of December 31, 2020. The increase of $536.8 million, or 13.6%, was primarily due to a $412.1 million increase in cash and cash equivalents and a $187.8 million increase in securities, partially offset by a $47.3 million decrease in net loans. Total liabilities were $3.9 billion as of December 31, 2021, compared to $3.4 billion as of December 31, 2020, an increase of $521.1 million primarily due to an increase in deposits of $529.5 million. See further analysis in the related discussions that follow.


	December 31,
(Dollars in thousands)	2021		2020		Increase (Decrease)
Assets:
Loans excluding loans held for sale	$	2,867,524		$	2,924,117	$	(56,593)	(1.9)%
Allowance for credit losses		(31,345)			(40,637)		(9,292)	(22.9)%
Loans, net		2,836,179			2,883,480		(47,301)	(1.6)%
Cash and cash equivalents		950,146			538,007		412,139	76.6%
Securities		425,046			237,281		187,765	79.1%
Premises and equipment, net		58,417			61,152		(2,735)	(4.5)%
Goodwill		80,950			80,950		—	—
Other intangibles		3,658			4,171		(513)	(12.3)%
Loans held for sale		164			2,673		(2,509)	(93.9)%
Operating lease right-to-use asset		11,191			13,285		(2,094)	(15.8)%
Other assets		120,250			128,218		(7,968)	(6.2)%
Total assets	$	4,486,001		$	3,949,217	$	536,784	13.6%
Liabilities:
Deposits	$	3,831,284		$	3,301,794	$	529,490	16.0%
Federal Home Loan Bank advances		50,000			50,000		—	—
Operating lease liabilities		14,142			16,447		(2,305)	(14.0)%
Other liabilities		28,450			34,525		(6,075)	(17.6)%
Total liabilities		3,923,876			3,402,766		521,110	15.3%
Shareholders' equity		562,125			546,451		15,674	2.9%
Total liabilities and shareholders' equity	$	4,486,001		$	3,949,217	$	536,784	13.6%

Loan Portfolio

The loan portfolio by loan class as of the dates indicated below was as follows:


	December 31,
(Dollars in thousands)	2021		2020		Increase (Decrease)
Commercial and industrial	$	634,384		$	742,957	$	(108,573)	(14.6)%
Real estate:
Commercial real estate		1,091,969			1,041,998		49,971	4.8%
Construction and development		460,719			522,705		(61,986)	(11.9)%
1-4 family residential		277,273			239,872		37,401	15.6%
Multi-family residential		286,396			258,346		28,050	10.9%
Consumer		28,090			33,884		(5,794)	(17.1)%
Agriculture		7,941			8,670		(729)	(8.4)%
Other		89,655			88,238		1,417	1.6%
Gross loans		2,876,427			2,936,670		(60,243)	(2.1)%
Less deferred fees and unearned discount		(8,739)			(9,880)		(1,141)	(11.5)%
Less loans held for sale		(164)			(2,673)		(2,509)	93.9%
Loans excluding loans held for sale		2,867,524			2,924,117		(56,593)	(1.9)%
Less allowance for credit losses for loans		(31,345)			(40,637)		(9,292)	(22.9)%
Loans, net	$	2,836,179		$	2,883,480	$	(47,301)	(1.6)%

Table

Loans excluding loans held for sale were $2.9 billion at December 31, 2021 and $2.9 billion at December 31, 2020. The decrease of $56.6 million from December 31, 2020 to December 31, 2021 was primarily due to loan paydowns outpacing loan originations, which were partially offset by the purchase of loans from a third party totaling $81.4 million.

The decrease in loans was also impacted by the decrease in the Company’s PPP loans which were $52.8 million, net of deferred fees and unearned discounts, at December 31, 2021 and $271.2 million at December 31, 2020. The PPP program has been closed to further borrowings and the Company has not originated any new loans under this program since the second quarter of 2021. At December 31, 2021, the Company has 330 PPP loans outstanding and 260 of these were originated in 2021 and are not due for any payment until July 2022 at the earliest.

The contractual maturity of loans in the loan portfolio and loans with fixed and variable interest rates in each maturity range as of date indicated below were as follows:



			1 Year		5 Years	After
(Dollars in thousands)	1 Year or Less		Through 5 Years		Through 15 Years	15 years		Total
December 31, 2021
Commercial and industrial:
Fixed rate	$	68,658		$	207,140	$	4,328		$	—	$	280,126
Variable rate		178,917			124,374		50,471			496		354,258
		247,575			331,514		54,799			496		634,384
Real estate:
Commercial real estate:
Fixed rate		58,134			485,587		25,410			1,388		570,519
Variable rate		72,184			269,762		156,397			23,107		521,450
		130,318			755,349		181,807			24,495		1,091,969
Construction and development:
Fixed rate		56,581			79,877		12,454			12,163		161,075
Variable rate		61,378			221,903		6,530			9,833		299,644
		117,959			301,780		18,984			21,996		460,719
1-4 family residential:
Fixed rate		5,847			35,660		21,782			91,633		154,922
Variable rate		1,136			4,094		13,318			103,803		122,351
		6,983			39,754		35,100			195,436		277,273
Multi-family residential:
Fixed rate		1,313			8,437		235,528			—		245,278
Variable rate		3,385			36,465		1,268			—		41,118
		4,698			44,902		236,796			—		286,396
Consumer:
Fixed rate		6,946			8,501		—			—		15,447
Variable rate		11,382			1,261		—			—		12,643
		18,328			9,762		—			—		28,090
Agriculture:
Fixed rate		4,961			825		—			—		5,786
Variable rate		2,118			37		—			—		2,155
		7,079			862		—			—		7,941
Other:
Fixed rate		1,041			1,744		393			—		3,178
Variable rate		21,616			64,470		391			—		86,477
		22,657			66,214		784			—		89,655
Total:
Fixed rate loans		203,481			827,771		299,895			105,184		1,436,331
Variable rate loans		352,116			722,366		228,375			137,239		1,440,096
Total gross loans	$	555,597		$	1,550,137	$	528,270		$	242,423	$	2,876,427

Table

Nonperforming Assets

Nonperforming assets include nonaccrual loans, loans that are accruing over 90 days past due and foreclosed assets. Generally, loans are placed on nonaccrual status when they become more than 90 days past due and/or the collection of principal or interest is in doubt. The components of nonperforming assets as of the dates indicated below were as follows:


	December 31,
(Dollars in thousands)	2021		2020
Nonaccrual loans	$	22,568		$	24,017
Accruing loans 90 or more days past due		—			—
Total nonperforming loans		22,568			24,017
Foreclosed assets		—			—
Total nonperforming assets	$	22,568		$	24,017
Total assets	$	4,486,001		$	3,949,217
Loans excluding loans held for sale		2,867,524			2,924,117
Allowance for credit losses for loans		31,345			40,637
Allowance for credit losses for loans to nonaccrual loans		138.89%			169.20%
Nonperforming loans to loans excluding loans held for sale		0.79%			0.82%
Nonperforming assets to total assets		0.50%			0.61%

Nonperforming assets to total assets improved to 0.50% of total assets at December 31, 2021 from 0.61% of total assets at December 31, 2020 due to the $536.8 million increase in total assets discussed above and the $1.5 million decrease in NPA between those periods.

Troubled Debt Restructurings

The Company has certain loans that have been restructured due to the borrower’s financial difficulties. The troubled debt restructurings granted during the years ending December 31, 2021 and 2020 which remain outstanding at period end were as follows:


					Post-modification Recorded Investment
												Extended
												Maturity,
		Pre-modification							Extended		Restructured
		Outstanding							Maturity and		Payments
	Number	Recorded		Restructured		Extended	Restructured		and Adjusted
(Dollars in thousands)	of Loans	Investment		Payments		Maturity	Payments		Interest Rate
December 31, 2021
Commercial and industrial	3	$	3,256		$	3,256	$	—		$	—	$	—
Real estate:
Commercial real estate	1		1,206			1,206		—			—		—
1-4 family residential	1		1,548			1,548		—			—		—
Consumer	1		42			—		—			42		—
Total	6	$	6,052		$	6,010	$	—		$	42	$	—
December 31, 2020
Commercial and industrial	17	$	10,343		$	7,475	$	—		$	2,637	$	231
Real estate:
Commercial real estate	9		18,867			18,867		—			—		—
Construction and development	5		12,905			12,648		—			—		257
1-4 family residential	5		1,629			1,651		—			—		—
Total	36	$	43,744		$	40,641	$	—		$	2,637	$	488

Table

Risk Gradings

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio and methodology for calculating the ACL, management assigns and tracks loan grades that are used as credit quality indicators. The internal ratings of loans as of the dates indicated below were as follows:


				Special
(Dollars in thousands)	Pass		Mention		Substandard	Total
December 31, 2021
Commercial and industrial	$	613,419		$	3,482	$	17,483	$	634,384
Real estate:
Commercial real estate		1,038,401			8,855		44,713		1,091,969
Construction and development		447,533			470		12,716		460,719
1-4 family residential		272,217			—		5,056		277,273
Multi-family residential		286,396			—		—		286,396
Consumer		27,865			—		225		28,090
Agriculture		7,899			—		42		7,941
Other		89,655			—		—		89,655
Total gross loans	$	2,783,385		$	12,807	$	80,235	$	2,876,427


				Special
(Dollars in thousands)	Pass		Mention		Substandard	Total
December 31, 2020
Commercial and industrial	$	720,465		$	3,404	$	19,088	$	742,957
Real estate:
Commercial real estate		1,000,503			7,519		33,976		1,041,998
Construction and development		502,933			—		19,772		522,705
1-4 family residential		230,654			3,165		6,053		239,872
Multi-family residential		258,346			—		—		258,346
Consumer		33,884			—		—		33,884
Agriculture		8,597			—		73		8,670
Other		80,386			—		7,852		88,238
Total gross loans	$	2,835,768		$	14,088	$	86,814	$	2,936,670

During the year ended December 31, 2021, loans with an internal rating of pass decreased $52.4 million primarily due to loan payoffs and payments collected. Loans with an internal rating of special mention decreased $1.3 million and loans with an internal rating of substandard decreased $6.6 million during the same period, primarily due to loan payoffs and payments collected.

Allowance for Credit Losses

The Company maintains an ACL that represents management’s best estimate of the expected credit losses and risks inherent in the loan portfolio. The amount of the ACL should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the ACL, the Company estimates losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the ACL is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current and forecasted economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. Please refer to “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 6” and “Part II.—Item 7.—Management’s Discussion and Analysis—Critical Accounting Policies—Allowance for Credit Losses.”

Table

The ACL by loan category as of the dates indicated below was as follows:



	December 31, 2021		December 31, 2020
(Dollars in thousands)	Amount		Percent		Amount	Percent
Commercial and industrial	$	11,214		35.7	%	$	13,035	32.1	%
Real estate:
Commercial real estate		11,015		35.1	%		13,798	34.0	%
Construction and development		3,310		10.6	%		6,089	15.0	%
1-4 family residential		2,105		6.7	%		2,578	6.3	%
Multi-family residential		1,781		5.7	%		2,513	6.2	%
Consumer		406		1.3	%		440	1.1	%
Agriculture		88		0.3	%		137	0.3	%
Other		1,426		4.6	%		2,047	5.0	%
Total allowance for credit losses for loans	$	31,345		100.0	%	$	40,637	100.0	%
Loans excluding loans held for sale	2,867,524					2,924,117
ACL for loans to loans excluding loans held for sale	1.09%					1.39%

Activity in the ACL for loans for the dates indicated below was as follows:



			Years Ended December 31,
(Dollars in thousands)		2021		2020
Beginning balance		$	40,637		$	25,280
Impact of CECL adoption			—			874
Provision (recapture):
Commercial and industrial			(2,255)			4,432
Real estate:
	Commercial real estate			(2,783)			5,979
	Construction and development			(2,779)			1,543
	1-4 family residential			(469)			666
	Multi-family residential			(732)			520
Consumer			(127)			175
Agriculture			(96)			(13)
Other			(621)			4,772
Total provision (recapture)			(9,862)			18,074
Net (charge-offs) recoveries:
Commercial and industrial			434			80
Real estate:
	Commercial real estate			—			(16)
	1-4 family residential			(4)			(70)
Consumer			93			(98)
Agriculture			47			12
Other			—			(3,499)
Total net (charge-offs) recoveries			570			(3,591)
Ending balance		$	31,345		$	40,637
Total average loans			2,784,663			2,862,911
Net charge-offs (recoveries) to total average loans			(0.02)%			0.13%

Table

Annualized net charge-off (recoveries) to average loans by loan category for the periods shown below were as follows:


	Years Ended December 31,
(Dollars in thousands)		2021	2020
Commercial and industrial		(0.06)%	(0.01)%
Real estate:
Commercial real estate		—	—
Construction and development		—	—
1-4 family residential		—	(0.03)%
Multi-family residential		—	0.00%
Consumer		(0.30)%	(0.28)%
Agriculture		(0.57)%	0.13%
Other		—	(4.00)%

The ACL for unfunded commitments was $3.3 million and $4.2 million at December 31, 2021 and 2020, respectively. The decrease in the ACL for unfunded commitments was primarily due an adjustment to qualitative factors associated with the national and local economies and forecast assumptions as these factors improved, which was partially offset by an increase in the availability on the unfunded commitments.

Securities

The amortized cost, related gross unrealized gains and losses and fair values of investments in securities as of the dates indicated below were as follows:


				Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
December 31, 2021
Debt securities available for sale:
State and municipal securities	$	168,541		$	4,451		$	(392)	$	172,600
U.S. Treasury securities		11,888			—			(91)		11,797
U.S. agency securities:
Callable debentures		3,000			—			(27)		2,973
Collateralized mortgage obligations		63,129			115			(862)		62,382
Mortgage-backed securities		173,446			1,805			(1,130)		174,121
Equity securities		1,189			—			(16)		1,173
Total	$	421,193		$	6,371		$	(2,518)	$	425,046
December 31, 2020
Debt securities available for sale:
State and municipal securities	$	88,741		$	4,296		$	—	$	93,037
U.S. agency securities:
Collateralized mortgage obligations		35,085			347			(30)		35,402
Mortgage-backed securities		103,686			3,963			—		107,649
Equity securities		1,176			17			—		1,193
Total	$	228,688		$	8,623		$	(30)	$	237,281

As of December 31, 2021, the fair value of the Company’s securities totaled $425.0 million, compared to $237.3 million as of December 31, 2020, an increase of $187.8 million. Amortized cost increased $192.5 million during the year ended December 31, 2021, primarily as a result of purchases totaling $858.4 million outpacing maturities, sales, calls and paydowns totaling $664.3 million and amortization of $1.6 million. Net unrealized gains on the securities portfolio were $3.9 million at December 31, 2021, compared to $8.6 million at December 31, 2020. This decrease of $4.7 million was due to a reduction in fair value as a result of market fluctuations.

The Company’s mortgage-backed securities at December 31, 2021 and 2020 were agency securities. The Company does not hold any Federal National Mortgage Loan Association, or Fannie Mae, or Federal Home Loan Mortgage Corporation, or Freddie Mac, preferred stock, corporate equity, collateralized debt obligations, collateralized

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loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A or second lien elements in the securities portfolio.

Weighted-average yields by security type and maturity based on estimated annual income divided by the average amortized cost of the Company’s available for sale securities portfolio as of the date indicated below were as follows:


(Dollars in thousands)	1 Year or Less	After 1 Year to 5 Years	After 5 Years to 10 Years	After 10 Years	Total
December 31, 2021
Debt securities:
State and municipal securities	2.42%	—	2.66%	2.17%	2.21%
U.S. Treasury securities	—	1.01%	1.25%	—	1.25%
U.S. agency securities:
Callable debentures	—	—	1.37%	—	1.37%
Collateralized mortgage obligations	—	—	1.95%	1.52%	1.55%
Mortgage-backed securities	3.39%	3.49%	2.09%	1.77%	1.79%
Equity securities:	1.18%	—	—	—	1.18%
Total securities	1.71%	1.34%	2.07%	1.89%	1.90%

The weighted-average life of the securities portfolio was 5.8 years with an estimated modified duration of 5.3 years as of December 31, 2021. See “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 2” for securities by contractual maturity.

At December 31, 2021 and 2020, securities with a carrying amount of approximately $25.6 million and $27.3 million, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

Deposits

The components of deposits as of the dates indicated below were as follows:


	December 31,
(Dollars in thousands)	2021		2020		Increase (Decrease)
Interest-bearing demand accounts	$	468,361		$	380,175	$	88,186	23.2%
Money market accounts		1,209,659			1,039,617		170,042	16.4%
Savings accounts		127,031			108,167		18,864	17.4%
Certificates and other time deposits, $100,000 or greater		134,775			152,592		(17,817)	(11.7)%
Certificates and other time deposits, less than $100,000		106,477			144,818		(38,341)	(26.5)%
Total interest-bearing deposits		2,046,303			1,825,369		220,934	12.1%
Noninterest-bearing deposits		1,784,981			1,476,425		308,556	20.9%
Total deposits	$	3,831,284		$	3,301,794	$	529,490	16.0%

Total deposits as of December 31, 2021 were $3.8 billion, an increase of $529.5 million, or 16.0%, compared to December 31, 2020. Noninterest-bearing deposits as of December 31, 2021 were $1.8 billion, an increase of $308.6 million, or 20.9%, compared to December 31, 2020. Total interest-bearing account balances as of December 31, 2021 were $2.0 billion, an increase of $220.9 million, or 12.1%, from December 31, 2020, primarily due to increases in money market accounts, interest-bearing demand deposits and savings accounts, partially offset by decreases in certificates and other time deposits.

Table

The scheduled maturities of uninsured certificates of deposits or other time deposits as of the date indicated below were as follows:



(Dollars in thousands)	December 31, 2021
Three months or less	$	23,929
Over three months through six months		26,771
Over six months through 12 months		15,201
Over 12 months		4,639
Total	$	70,540

Securities pledged and the letter of credit issued under the Company’s Federal Home Loan blanket lien arrangement which secure public deposits were not considered in determining the amount of uninsured time deposits.

Cash and Cash Equivalents

Cash and cash equivalents increased $412.1 million during the year ended December 31, 2021, primarily due to loan payments received and net deposit inflows.

Other Assets

Other assets decreased $8.0 million from December 31, 2020 to December 31, 2021, primarily due to a reduction in the fair value of the Company’s interest rate swap contracts of $5.1 million and a decrease in interest receivable and deferred interest for loans of $2.6 million. See “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 14” for further discussion of the Company’s interest rate swap contracts.

Other Liabilities

Other liabilities decreased $6.1 million from December 31, 2020 to December 31, 2021, primarily due to a reduction in the fair value of the Company’s interest rate swap contracts of $5.1 million. See “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 14” for further discussion of the Company’s interest rate swap contracts.

Liquidity and Capital Resources

The Company monitors its liquidity and may seek to obtain additional financing to further support its business if necessary. The Company’s primary source of funds has been customer deposits and the primary use of funds has been funding of loans.

At December 31, 2021, the Company had $950.1 million in cash and cash equivalents and $425.0 million of securities, which are considered to be liquid assets, compared to $538.0 million in cash and cash equivalents and $237.3 million of securities at December 31, 2020. This increase in liquid assets of $599.9 million during the year ended December 31, 2021 was primarily due to a $529.5 million increase in deposits and a decrease of $56.6 million in loans excluding loans held for sale.

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The composition of funding sources and uses as a percentage of average total assets for the periods indicated was as follows:


	December 31,
	2021		2020
Sources of funds:
Deposits:
Interest-bearing	45.2	%		45.3	%
Noninterest-bearing	38.8	%		37.4	%
Federal Home Loan Bank advances	1.2	%		1.5	%
Other liabilities	1.3	%		1.3	%
Shareholders’ equity	13.5	%		14.5	%
Total sources	100.0	%		100.0	%
Uses of funds:
Loans	67.4	%		76.2	%
Securities	7.8	%		6.3	%
Interest-bearing deposits at other financial institutions	17.7	%		9.7	%
Equity securities	0.4	%		0.4	%
Other noninterest-earning assets	6.7	%		7.4	%
Total uses	100.0	%		100.0	%
Average loans to average deposits	80.2	%		92.1	%

Historically, the cost of the Company’s deposits has been lower than other sources of funds available. Average balances and average rates paid on deposits for the periods indicated are shown in the table below. Average rates paid on deposits for the dates indicated below were as follows:


	Year Ended		Year Ended
	December 31, 2021		December 31, 2020
	Average		Average		Average	Average
(Dollars in thousands)	Balance		Rate		Balance	Rate
Interest-bearing demand accounts	$	391,388		0.05	%	$	363,014	0.10	%
Money market accounts		1,094,042		0.27	%		868,915	0.42	%
Savings accounts		115,972		0.03	%		97,982	0.04	%
Certificates and other time deposits, $100,000 or greater		142,605		0.37	%		192,268	1.27	%
Certificates and other time deposits, less than $100,000		126,141		1.07	%		181,364	1.50	%
Total interest-bearing deposits		1,870,148		0.27	%		1,703,543	0.54	%
Noninterest-bearing deposits		1,603,006		—			1,404,027	—
Total deposits	$	3,473,154		0.14	%	$	3,107,570	0.30	%

The ratio of average noninterest-bearing deposits to average total deposits was 46.2% and 45.2% for the years ended December 31, 2021 and 2020, respectively.

Table

In addition to the liquid assets discussed above, the Company had $1.0 billion of available funds under various borrowing arrangements at both December 31, 2021 and 2020. See “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 11” for additional details of these arrangements. At December 31, 2021, the capacity, amounts outstanding and availability under these arrangements were as follows:


(Dollars in thousands)	Capacity		Outstanding(1)		Availability
Federal Home Loan Bank Facility	$	999,327		$	(76,000)	$	923,327
Loan Agreement		30,000			—		30,000
Federal Funds		65,000			—		65,000
Total	$	1,094,327		$	(76,000)	$	1,018,327

Column 1	Column 2
(1)	Outstanding amount for the Federal Home Loan Bank Facility includes $50.0 million of advances and $26.0 million of letters of credit pledged to secure public funds’ deposit balances.

A portion of the Company’s liquidity capacity will be used for contractual obligations entered into in the normal course of business, such as obligations for operating leases, certificates of deposits and borrowings. Future cash payments associated with the Company’s contractual obligations, as of the dates indicated were as follows:




	1 Year		Over 1 Year		Greater
(Dollars in thousands)	or Less		to 3 Years		than 3 Years	Total
December 31, 2021
Federal Home Loan Bank advances	$	10,000		$	40,000	$	—	$	50,000
Non-cancellable future operating leases		1,812			3,823		11,164		16,799
Certificates of deposit		162,153			68,956		10,143		241,252
Total	$	173,965		$	112,779	$	21,307	$	308,051
December 31, 2020
Federal Home Loan Bank advances	$	—		$	30,000	$	20,000	$	50,000
Non-cancellable future operating leases		1,968			4,452		13,092		19,512
Certificates of deposit		204,165			74,708		18,537		297,410
Total	$	206,133		$	109,160	$	51,629	$	366,922

As of December 31, 2021, the Company had no exposure to future cash requirements associated with known uncertainties or capital expenditure of a material nature.

The Company also enters into commitments to extend credit and standby letters of credit to meet customer financing needs and, in accordance with GAAP, these commitments are not reflected as liabilities in the consolidated balance sheets. Due to the nature of these commitments, the amounts disclosed in the table below do not necessarily represent future cash requirements.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract, generally have fixed expiration dates or other termination clauses and may expire without being fully drawn upon.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third-party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to the Company’s customers.

Table

Commitments to extend credit and standby letters of credit expiring by period as of the dates indicated were as follows:



	1 Year		Over 1 Year		Greater
(Dollars in thousands)	or Less		to 3 Years		than 3 Years	Total
December 31, 2021
Commitments to extend credit	$	400,006		$	293,606	$	81,348	$	774,960
Standby letters of credit		16,532			1,415		162		18,109
Total	$	416,538		$	295,021	$	81,510	$	793,069
December 31, 2020
Commitments to extend credit	$	498,238		$	177,710	$	63,783	$	739,731
Standby letters of credit		18,713			7,365		—		26,078
Total	$	516,951		$	185,075	$	63,783	$	765,809

As a general matter FDIC insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. The Company and the Bank are both subject to regulatory capital requirements. At December 31, 2021 and 2020, the Company and the Bank were in compliance with all applicable regulatory capital requirements at the bank holding company and bank levels, and the Bank was classified as “well capitalized” for purposes of the FDIC’s prompt corrective action regulations. The OCC or the FDIC may require the Bank to maintain capital ratios above the required minimums and the Federal Reserve may require the Company to maintain capital ratios above the required minimums. See “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 19.”

During 2021, 214,219 shares were repurchased under the Company’s share repurchase programs at an average price of $27.19 per share. During 2020, 431,814 shares were repurchased under the Company’s share repurchase programs at an average price of $20.62 per share. Shares repurchased in 2021 and 2020 were retired and returned to the status of authorized but unissued shares.

Interest Rate Sensitivity and Market Risk

Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates and prices. As a financial institution, the Company’s primary component of market risk is interest rate risk due to future interest rate changes. Fluctuations in interest rates impact both income and expense recorded on most of the Company’s assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short-term to maturity period.

The Company manages exposure to interest rates by structuring its balance sheet in the ordinary course of business. The Company does not enter into instruments such as leveraged derivatives, financial options, financial future contracts or forward delivery contracts to reduce interest rate risk. The Company enters into interest rate swaps as an accommodation to customers. The Company is not subject to foreign exchange or commodity price risk and does not own any trading assets.

The Company has asset, liability and funds management policies that provide the guidelines for effective funds management and has established a measurement system for monitoring the net interest rate sensitivity position. The Company’s exposure to interest rate risk is managed by the Funds Management Committee of the Bank. The committee formulates strategies based on appropriate levels of interest rate risk with consideration of the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the relationships between interest-earning assets and interest-bearing liabilities, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity.

The Company uses interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model, as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of non-maturity deposit accounts are based on

Table

standard regulatory decay assumptions and are incorporated into the model. The assumptions used are inherently uncertain and the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results may differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.

On a quarterly basis, two simulation models are run, including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. The results from these models are impacted by the behavior of interest-rate sensitive assets and liabilities as well as the mixture of those assets and liabilities. Under the static and dynamic growth models, rates are shocked instantaneously and ramped rate changes over a 12-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. The Company’s internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one-year period should not decline by more than 10.0% for a 100 basis-point shift, 20.0% for a 200-basis point shift and 30.0% for a 300-basis point shift.

Simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated below were as follows:


	December 31, 2021		December 31, 2020
Change in Interest	Percent Change in		Percent Change		Percent Change in	Percent Change
Rates (Basis Points)	Net Interest Income		Fair Value of Equity		Net Interest Income	Fair Value of Equity
+ 300	25.4	%		6.7	%	21.5	%	35.7	%
+ 200	16.9	%		13.0	%	14.1	%	32.8	%
+ 100	7.9	%		8.8	%	6.5	%	21.0	%
Base	—	%		—	%	—	%	—	%
−100	(2.5)	%		(37.2)	%	(1.5)	%	(37.0)	%

The model simulation as of December 31, 2021 indicates that the Company’s projected balance sheet was more asset sensitive in comparison to December 31, 2020. The percent change increases in net interest income compared to December 31, 2020 was primarily due to the decrease of $218.4 million in lower yielding PPP loans. The percent change decrease in the fair values of equity were primarily due to an increase in cash and cash equivalents in interest-bearing deposits held at other financial institutions of $431.3 million and an increase in securities of $187.8 million compared to December 31, 2020. The increase of $308.6 million in noninterest-bearing deposits contributed to the increase in interest-earning assets during 2021, which had the effect of creating a higher economic value of equity. Subsequent rate shocks due to the change in interest rates result in differing percentages given the level of economic equity.

LIBOR Transition

LIBOR was used as an index rate for a majority of the Company’s interest-rate swaps and approximately 7.9% of the Company’s loans at December 31, 2021. In March 2021, the UK Financial Conduct authority formally confirmed that a number of U.S. dollar LIBOR rates will be available until the end of June 2023 to support the rundown of legacy contracts. The Company’s transition away from LIBOR for its interest-rates swaps and loans using LIBOR as an index rate may span several reporting periods through 2022.

Impact of Inflation

The Company’s consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K have been prepared in accordance with GAAP. GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

Unlike many industrial companies, substantially all the Company’s assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the effects of general levels

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of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.

Critical Accounting Policies

The Company’s accounting policies are described in “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 1.” The Company believes that the following accounting policies involve a higher degree of judgment and complexity:

Allowance for Credit Losses

Determining the amount of the ACL is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including forecasted national and local economic conditions and management’s assessment of overall portfolio quality. Changes in these estimates and assumptions are possible and may have a material impact on the ACL, and therefore the Company’s financial position, liquidity or results of operations.

The Company adopted CECL effective January 1, 2020 and as a result of this adoption, the Company’s ACL for the loan portfolio has two main components: a reserve for expected losses determined from the historical loss rates, adjusted for qualitative factors, and forecasted expected losses on the segments associated with the individual loan classes with similar risk characteristics, or general reserve; and a separate allowance representing the reserves assigned to individually evaluated loans that do not share similar risk characteristics with other loans, or specific reserves.

There are multiple qualitative factors, both internal and external, that could impact the potential collectability of the underlying loans. The various internal factors that may be considered include, among other things: (i) effectiveness of loan policies, procedures and internal controls; (ii) portfolio growth and changes in loan concentrations; (iii) changes in loan quality; (iv) experience, ability and effectiveness of lending management and staff; (v) legal and regulatory compliance requirements associated with underwriting, originating and servicing a loan and the impact of exceptions; and (vi) the effectiveness of the internal loan review function. The various external factors that may be considered include, among other things: (i) current national and local economic conditions; (ii) changes in the political, legal and regulatory landscape; (iii) industry trends, in particular those related to loan quality; and (iv) forecasted changes in the economy.

As part of its assessment, the Company considers the need to adjust historical information to reflect the extent to which current conditions and forecasts differ from the conditions that existed for the period over which historical information was evaluated. The Company uses an economic forecast qualitative factor as noted above to adjust the expected loss rates for the effects of forecasted changes in the economy. The Company uses economic indicators and indexes including, but not limited to: (i) inflation indexes; (ii) unemployment rates; (iii) interest rates; (iv) economic growth; (v) government expenditures; (vi) gross domestic product indexes; (vii) productivity indicators; (viii) leading indexes; (ix) debt levels; and (x) narratives such as those supplied by the Federal Reserve’s beige book and Moody’s Analytics that provide information for determining an appropriate impact ratio for macro-economic conditions.

For further detail of the factors considered in determining the ACL see “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 1 and Note 6.”

Fair Values of Financial Instruments

Determining the amount of the fair values of financial instruments is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements. In general, the fair values of the Company’s financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use observable market-based parameters as inputs. Fair value estimates are based on judgments regarding: (i) current economic conditions; (ii) interest rates; (iii) credit risk; (iv) prepayments; (v) risk characteristics of the various instruments; and (vi) other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value could result in different estimates of fair value.

Table

Goodwill and Other Intangibles

Determining the fair value of goodwill and other intangibles is considered a critical accounting estimate because it requires significant management judgment and the use of subjective measurements. Goodwill, which is excess purchase price over the fair value of net assets from acquisitions, is evaluated for impairment at least annually and on an interim basis if events or circumstances indicate that it is likely an impairment has occurred. Impairment would exist if the fair value of the reporting unit at the date of the test is less than the goodwill recorded on the financial statements. If an impairment of goodwill exists, a loss would then be recognized in the consolidated financial statements to the extent of the impairment.

Qualitative factors are first assessed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The various qualitive factors considered include: (i) general economic conditions; (ii) industry conditions; (iii) conditions in the Company’s markets; (iv) overall financial performance of the Company; (v) market value of the Company’s stock; and (vi) other Company-specific events. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount based on the assessment of qualitative factors, the Company then estimates the fair value of the reporting unit based on an analysis of market value, which includes estimates of quantitative factors such as: (i) estimated futures cash flows of the reporting unit; (ii) the discount rate used to discount estimated cash flows to their net present value; and (iii) the control premium. Impairment exists if the estimated fair value of the reporting unit at the date of the test is less than the goodwill recorded. If goodwill is impaired, a loss would then be recognized in the consolidated financial statements to the extent of the impairment. Variability in the market and changes in assumptions or subjective measurements used to determine fair value are reasonably possible and may have a material impact on the Company’s financial position, liquidity or results of operations.

During 2020, the Company’s stock price was volatile and declined significantly. The Company’s closing stock price was $25.51 per share as of December 31, 2020, down from the December 31, 2019 closing price of $31.12 per share. The Company’s peers have also experienced similar declines in their stock prices. Based on an assessment of the performance of the Company’s stock relative to its peers and the overall market, along with the other qualitative factors considered, the Company has not determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount at December 31, 2020.

During 2021, the capital markets continued to stabilize and improve as businesses and the economy continued down the path of recovery after realizing the impact of COVID-19. The Company’s stock price was less volatile and traded in the range of $24.08 and $33.29 per share during 2021. The Company’s closing stock price was $29.00 per share as of December 31, 2021. Based on the results of the Company’s assessment, management does not believe any impairment of goodwill existed at December 31, 2021.

The Company’s other intangible assets include core deposits, loan servicing assets and customer relationship intangibles. Other intangible assets are tested for impairment at least annually and on an interim basis whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Based on the Company’s assessment, there was no indication of impairment at December 31, 2021 or 2020.

Emerging Growth Company

The JOBS Act permits an “emerging growth company” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. The Company decided not to take advantage of this provision and is complying with new or revised accounting standards to the same extent that compliance is required for non-emerging growth companies. The decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Recently Issued Accounting Pronouncements

See “Part II.—Item 8.—Financial Statements and Supplementary Data—Note 1.”

Table

Financial Data

The following consolidated financial data as of and for the five-year period ended December 31, 2021, is derived from the Company’s audited financial statements and should be read in conjunction with “Part II.—Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.


	As of and for the Years Ended December 31,
(Dollars in thousands, except per share data)	2021		2020		2019	2018		2017
Balance Sheet Data:
Cash and cash equivalents	$	950,146		$	538,007	$	372,064		$	382,070	$	326,199
Loans excluding loans held for sale		2,867,524			2,924,117		2,639,085			2,446,823		2,311,544
Allowance for credit losses		(31,345)			(40,637)		(25,280)			(23,693)		(24,778)
Loans, net		2,836,179			2,883,480		2,613,805			2,423,130		2,286,766
Goodwill and other intangible assets, net		84,608			85,121		85,888			86,725		87,720
Total assets		4,486,001			3,949,217		3,478,544			3,279,096		3,081,083
Noninterest-bearing deposits		1,784,981			1,476,425		1,184,861			1,183,058		1,109,789
Interest-bearing deposits		2,046,303			1,825,369		1,667,527			1,583,224		1,493,183
Total deposits		3,831,284			3,301,794		2,852,388			2,766,282		2,602,972
Federal Home Loan Bank Advances		50,000			50,000		50,000			—		—
Shareholders’ equity		562,125			546,451		535,721			487,625		446,214
Income Statement Data:
Interest income	$	132,093		$	138,693	$	153,395		$	135,759	$	116,659
Interest expense		5,926			10,087		17,407			11,098		8,885
Net interest income		126,167			128,606		135,988			124,661		107,774
Provision (recapture) for credit losses		(10,773)			18,892		2,385			(1,756)		(338)
Net interest income after provision (recapture) for credit losses		136,940			109,714		133,603			126,417		108,112
Noninterest income		16,264			14,781		18,628			14,252		14,204
Noninterest expense		107,686			92,100		90,143			82,016		78,292
Income before income taxes		45,518			32,395		62,088			58,653		44,024
Income tax expense		9,920			6,034		11,571			11,364		16,453
Net income	$	35,598		$	26,361	$	50,517		$	47,289	$	27,571
Share and Per Share Data:
Earnings per share - basic	$	1.46		$	1.06	$	2.03		$	1.90	$	1.23
Earnings per share - diluted		1.45			1.06		2.02			1.89		1.22
Dividends per share		0.52			0.40		0.40			0.20		0.20
Book value per share		22.96			22.20		21.45			19.58		17.97
Tangible book value per share(1)		19.50			18.74		18.01			16.10		14.44
Weighted-average common shares outstanding- basic		24,456			24,761		24,926			24,859		22,457
Weighted-average common shares outstanding- diluted		24,572			24,803		25,053			25,018		22,573
Common shares outstanding at period end		24,488			24,613		24,980			24,907		24,833

(table continued on next page)

Table



	As of and for the Years Ended December 31,
(Dollars in thousands, except per share data)	2021		2020	2019	2018		2017
Performance Ratios:
Return on average assets		0.86%		0.70%		1.50%		1.50%	0.93%
Return on average shareholders' equity		6.37%		4.85%		9.81%		10.18%	7.18%
Net interest margin - tax equivalent basis		3.31%		3.73%		4.42%		4.35%	4.06%
Efficiency ratio(2)		75.61%		64.23%		58.30%		59.04%	64.19%
Selected Ratios:
Loans excluding loans held for sale to deposits		74.84%		88.56%		92.52%		88.45%	88.80%
Noninterest-bearing deposits to total deposits		46.59%		44.72%		41.54%		42.77%	42.64%
Cost of total deposits		0.14%		0.30%		0.58%		0.40%	0.30%
Credit Quality Ratios:
Nonperforming assets to total assets		0.50%		0.61%		0.03%		0.11%	0.27%
Nonperforming loans to loans excluding loans held for sale		0.79%		0.82%		0.04%		0.14%	0.33%
Allowance for credit losses to nonperforming loans		138.89%		169.20%		2,587.51%		678.88%	324.06%
Allowance for credit losses to loans excluding loans held for sale		1.09%		1.39%		0.96%		0.97%	1.07%
Net charge-off (recovery) to average loans		0.00%		0.13%		0.03%		(0.03)%	—
Liquidity and Capital Ratios:
Total shareholders' equity to total assets		12.53%		13.84%		15.40%		14.87%	14.48%
Tangible equity to tangible assets(1)		10.85%		11.94%		13.26%		12.56%	11.98%
Common equity tier 1 capital ratio		15.31%		15.45%		15.52%		14.71%	14.19%
Tier 1 risk-based capital ratio		15.31%		15.45%		15.52%		14.76%	14.44%
Total risk-based capital ratio		16.42%		16.71%		16.41%		15.63%	15.42%
Tier 1 leverage ratio		11.22%		12.00%		13.11%		12.74%	12.30%

Column 1	Column 2	Column 3
	(1)	Non-GAAP financial measure. See “Non-GAAP Financial Measures” below.

Column 1	Column 2	Column 3
	(2)	Efficiency ratio is calculated by dividing noninterest expense by the sum of net interest income and noninterest income.

Non-GAAP Financial Measures

The Company’s accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, the Company also evaluates its performance based on certain additional non-GAAP financial measures. The Company classifies a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are not included or excluded in the most directly comparable measure calculated and presented in accordance with GAAP in the statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating, other statistical measures or ratios calculated using exclusively financial measures calculated in accordance with GAAP. Non-GAAP financial measures should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the way the Company calculates non-GAAP financial measures may differ from that of other companies reporting measures with similar names.

The Company calculates tangible equity as total shareholders’ equity, less goodwill and other intangible assets, net of accumulated amortization, and tangible book value per share as tangible equity divided by shares of common stock outstanding at the end of the relevant period. The most directly comparable GAAP financial measure for tangible book value per share is book value per share. The Company calculates tangible assets as total assets less goodwill and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible equity to tangible assets is total shareholders’ equity to total assets. The Company believes that tangible book value per share and tangible equity to tangible assets are measures that are important to many investors in the marketplace who are interested in book value per share and total shareholders’ equity to total assets, exclusive of change in intangible assets.

Table

The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible equity, total assets to tangible assets and presents book value per share, tangible book value per share, total shareholders’ equity to total assets and tangible equity to tangible assets:


	December 31,
(Dollars in thousands, except per share data)	2021		2020		2019	2018		2017
Tangible Equity
Total shareholders’ equity	$	562,125		$	546,451	$	535,721		$	487,625	$	446,214
Adjustments:
Goodwill		(80,950)			(80,950)		(80,950)			(80,950)		(80,950)
Other intangibles		(3,658)			(4,171)		(4,938)			(5,775)		(6,770)
Tangible equity	$	477,517		$	461,330	$	449,833		$	400,900	$	358,494
Tangible Assets
Total assets	$	4,486,001		$	3,949,217	$	3,478,544		$	3,279,096	$	3,081,083
Adjustments:
Goodwill		(80,950)			(80,950)		(80,950)			(80,950)		(80,950)
Other intangibles		(3,658)			(4,171)		(4,938)			(5,775)		(6,770)
Tangible assets	$	4,401,393		$	3,864,096	$	3,392,656		$	3,192,371	$	2,993,363

Common shares outstanding		24,488			24,613		24,980			24,907		24,833

Book value per share	$	22.96		$	22.20	$	21.45		$	19.58	$	17.97
Tangible book value per share	$	19.50		$	18.74	$	18.01		$	16.10	$	14.44

Total shareholders’ equity to total assets		12.53%			13.84%		15.40%			14.87%		14.48%
Tangible equity to tangible assets		10.85%			11.94%		13.26%			12.56%		11.98%

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