0001558370-21-002028 | 10-K | XBRL Viewer

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Document and Entity Information - USD ($) $ in Millions	12 Months Ended
Document and Entity Information - USD ($) $ in Millions	Dec. 31, 2020	Feb. 24, 2021	Jun. 30, 2020
Document and Entity Information [Abstract]
Document Type	10-K
Document Annual Report	true
Document Transition Report	false
Document Period End Date	Dec. 31, 2020
Entity File Number	001-38280
Entity Registrant Name	CBTX, Inc.
Entity Incorporation, State or Country Code	TX
Entity Tax Identification Number	20-8339782
Entity Address, Address Line One	9 Greenway Plaza, Suite 110
Entity Address, City or Town	Houston
Entity Address, State or Province	TX
Entity Address, Postal Zip Code	77046
City Area Code	713
Local Phone Number	210-7600
Title of 12(b) Security	Common stock, par value $0.01 per share
Trading Symbol	CBTX
Security Exchange Name	NASDAQ
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Public Float			$ 363.7
Entity Small Business	false
Entity Emerging Growth Company	true
Entity Ex Transition Period	true
ICFR Auditor Attestation Flag	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		24,594,388
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	FY
Entity Central Index Key	0001473844
Amendment Flag	false

Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Assets:
Cash and due from banks	$ 46,814	$ 51,259
Interest-bearing deposits at other financial institutions	491,193	320,805
Total cash and cash equivalents	538,007	372,064
Securities	237,281	231,262
Equity investments	18,652	16,710
Loans held for sale	2,673	1,463
Loans, net of allowance for credit losses of $40,637 and $25,280 at December 31, 2020 and 2019, respectively	2,883,480	2,613,805
Premises and equipment, net of accumulated depreciation of $35,826 and $32,923 at December 31, 2020 and 2019, respectively	61,152	50,875
Goodwill	80,950	80,950
Other intangible assets, net of accumulated amortization of $16,607 and $15,809 at December 31, 2020 and 2019, respectively	4,171	4,938
Bank-owned life insurance	72,338	71,881
Operating lease right-to-use assets	13,285	12,926
Deferred tax assets, net	10,700	7,432
Other assets	26,528	14,238
Total assets	3,949,217	3,478,544
Liabilities:
Noninterest-bearing deposits	1,476,425	1,184,861
Interest-bearing deposits	1,825,369	1,667,527
Total deposits	3,301,794	2,852,388
Federal Home Loan Bank advances	50,000	50,000
Repurchase agreements		485
Operating lease liabilities	16,447	15,704
Other liabilities	34,525	24,246
Total liabilities	3,402,766	2,942,823
Commitments and contingencies (Note 16)
Shareholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued
Common stock, $0.01 par value, 90,000,000 shares authorized, 25,458,816 and 25,837,048 shares issued at December 31, 2020 and 2019, respectively, 24,612,828 and 24,979,702 shares outstanding at December 31, 2020 and 2019, respectively	255	258
Additional paid-in capital	339,334	346,559
Retained earnings	214,456	201,080
Treasury stock, at cost, 845,988 and 857,346 shares held at December 31, 2020 and 2019, respectively	(14,369)	(14,562)
Accumulated other comprehensive income, net of tax of $1,801 and $634 at December 31, 2020 and 2019, respectively	6,775	2,386
Total shareholders' equity	546,451	535,721
Total liabilities and shareholders' equity	$ 3,949,217	$ 3,478,544

Consolidated Balance Sheets (Parentheticals) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Consolidated Balance Sheets
Allowance for credit losses on loans	$ 40,637	$ 25,280
Premises and equipment, accumulated depreciation	35,826	32,923
Other intangible assets, accumulated amortization	$ 16,607	$ 15,809
Preferred stock par value	$ 0.01	$ 0.01
Preferred stock shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Common stock par value	$ 0.01	$ 0.01
Common stock shares authorized	90,000,000	90,000,000
Common stock, shares issued	25,458,816	25,837,048
Common stock, shares outstanding	24,612,828	24,979,702
Treasury stock, shares	845,988	857,346
Accumulated other comprehensive gain, tax	$ 1,801	$ 634

Consolidated Statements of Income - USD ($) $ in Thousands	12 Months Ended
Consolidated Statements of Income - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Interest income
Interest and fees on loans	$ 131,678	$ 141,388	$ 123,895
Securities	4,768	5,954	6,020
Other interest-earning assets	1,568	5,333	5,030
Equity investments	679	720	814
Total interest income	138,693	153,395	135,759
Interest expense
Deposits	9,168	15,999	10,586
Federal Home Loan Bank advances	903	1,386	73
Repurchase agreements	1	3	4
Note payable and junior subordinated debt	15	19	435
Total interest expense	10,087	17,407	11,098
Net interest income	128,606	135,988	124,661
Provision (recapture) for credit losses for loans	18,074	2,385	(1,756)
Provision for credit losses for unfunded commitments	818
Total provision (recapture) for credit losses	18,892	2,385	(1,756)
Net interest income after provision (recapture) for credit losses	109,714	133,603	126,417
Noninterest income
Total noninterest income	14,781	18,628	14,252
Noninterest expense
Salaries and employee benefits	55,415	56,222	51,524
Occupancy expense	10,106	9,506	9,394
Professional and director fees	8,348	7,048	3,537
Data processing and software	5,369	4,435	4,253
Regulatory fees	1,798	1,138	2,053
Advertising, marketing and business development	1,500	1,831	1,824
Telephone and communications	1,752	1,774	1,530
Security and protection expense	1,447	1,464	1,276
Amortization of intangibles	846	894	985
Other expenses	5,519	5,831	5,640
Total noninterest expense	92,100	90,143	82,016
Net income before income tax expense	32,395	62,088	58,653
Income tax expense	6,034	11,571	11,364
Net income	$ 26,361	$ 50,517	$ 47,289
Earnings per common share
Basic	$ 1.06	$ 2.03	$ 1.90
Diluted	$ 1.06	$ 2.02	$ 1.89
Deposit account service charges
Noninterest income
Revenue from Contract with Customer, Excluding Assessed Tax	$ 5,026	$ 6,554	$ 6,281
Card interchange fees
Noninterest income
Revenue from Contract with Customer, Excluding Assessed Tax	3,831	3,720	3,741
Earnings on bank-owned life insurance
Noninterest income
Revenue Not from Contract with Customer, Excluding Interest Income	2,422	5,011	1,815
Net gain on sales of assets
Noninterest income
Revenue Not from Contract with Customer, Excluding Interest Income	755	652	660
Other.
Noninterest income
Revenue from Contract with Customer, Excluding Assessed Tax	$ 2,747	$ 2,691	$ 1,755

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Consolidated Statements of Comprehensive Income
Net income	$ 26,361	$ 50,517	$ 47,289
Change in unrealized gains (losses) on securities available for sale arising during the period, net of tax	5,547	6,728	(3,302)
Reclassification adjustments for net realized gains included in net income	10	57	29
Change in related deferred income tax	(1,168)	(1,424)	687
Other comprehensive income (loss), net of tax	4,389	5,361	(2,586)
Total comprehensive income	$ 30,750	$ 55,878	$ 44,703

- Definition

The portion of profit or loss for the period, net of income taxes, which is attributable to the parent.

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+ Details

- Definition

Amount after tax and reclassification adjustments of other comprehensive income (loss).

+ References

+ Details

Consolidated Statements of Changes in Shareholders Equity - USD ($) $ in Thousands	Common Stock	Additional Paid-in Capital	Retained Earnings Cumulative effect of accounting changes from adoption	Retained Earnings	Treasury Stock	Accumulated Other Comprehensive Income (Loss)	Cumulative effect of accounting changes from adoption	Total
Beginning balance at Dec. 31, 2017	$ 257	$ 343,249		$ 118,353	$ (15,256)	$ (389)		$ 446,214
Beginning balance, shares at Dec. 31, 2017	25,731,504				(898,272)
Net income				47,289				47,289
Dividends on common stock, $0.20, $0.40 and $0.40 per share for the year ended December 31, 2018, 2019 and 2020, respectively				(5,016)				(5,016)
Stock-based compensation expense		1,601						1,601
Vesting of restricted stock, net of shares withheld for employee tax liabilities	$ 1	(172)						(171)
Vesting of restricted stock, net of shares withheld for employee tax liabilities (in shares)	46,189
Other comprehensive income (loss), net of tax						(2,586)		(2,586)
Exercise of stock options		(181)			$ 475			294
Exercise of stock options (in shares)					28,000
Ending balance at Dec. 31, 2018	$ 258	344,497		160,626	$ (14,781)	(2,975)		487,625
Ending balance, shares at Dec. 31, 2018	25,777,693				(870,272)
Net income				50,517				50,517
Dividends on common stock, $0.20, $0.40 and $0.40 per share for the year ended December 31, 2018, 2019 and 2020, respectively				(10,063)				(10,063)
Stock-based compensation expense		2,402						2,402
Vesting of restricted stock, net of shares withheld for employee tax liabilities		(239)						(239)
Vesting of restricted stock, net of shares withheld for employee tax liabilities (in shares)	59,455
Shares repurchased		(3)						(3)
Shares repurchased, Shares	(100)
Other comprehensive income (loss), net of tax						5,361		5,361
Exercise of stock options		(98)			$ 219			121
Exercise of stock options (in shares)					12,926
Ending balance at Dec. 31, 2019	$ 258	346,559		201,080	$ (14,562)	2,386		535,721
Ending balance, shares at Dec. 31, 2019	25,837,048				(857,346)
Net income				26,361				26,361
Dividends on common stock, $0.20, $0.40 and $0.40 per share for the year ended December 31, 2018, 2019 and 2020, respectively				(9,940)				(9,940)
Stock-based compensation expense		1,935						1,935
Vesting of restricted stock, net of shares withheld for employee tax liabilities	$ 1	(199)						(198)
Vesting of restricted stock, net of shares withheld for employee tax liabilities (in shares)	53,582
Exercise of stock options, net of shares withheld for employee tax liabilities		(60)			$ 193			133
Exercise of stock options, net of shares withheld for employee tax liabilities (in shares)					11,358
Shares repurchased	$ (4)	(8,901)						(8,905)
Shares repurchased, Shares	(431,814)
Other comprehensive income (loss), net of tax						4,389		4,389
Ending balance at Dec. 31, 2020	$ 255	$ 339,334		$ 214,456	$ (14,369)	$ 6,775		$ 546,451
Ending balance, shares at Dec. 31, 2020	25,458,816				(845,988)
CECL implementation, net of deferred tax asset			$ (3,045)				$ (3,045)

Consolidated Statements of Changes in Shareholders Equity (Parentheticals) - $ / shares	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Consolidated Statements of Changes in Shareholders Equity
Dividends on Common Stock	$ 0.40	$ 0.40	$ 0.20

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Cash flows from operating activities:
Net income	$ 26,361	$ 50,517	$ 47,289
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Provision (recapture) for credit losses	18,892	2,385	(1,756)
Depreciation expense	3,238	3,203	3,309
Amortization of intangibles	846	894	985
Amortization of premiums on securities	1,836	1,194	1,091
Amortization of lease right-to-use assets	1,517	1,343
Accretion of lease liabilities	464	534
Earnings on bank-owned life insurance	(2,422)	(5,011)	(1,815)
Stock-based compensation expense	1,935	2,402	1,601
Deferred income tax provision	(3,625)	(1,657)	(734)
Net gain on sales of assets	(755)	(652)	(660)
Earnings on securities	(46)	(18)	(54)
Change in operating assets and liabilities:
Loans held for sale	(494)	(1,185)	1,921
Other assets	(11,842)	81	994
Operating lease liabilities	(2,046)	(1,895)
Other liabilities	6,502	3,955	(2,850)
Total adjustments	14,000	5,573	2,032
Net cash provided by operating activities	40,361	56,090	49,321
Cash flows from investing activities:
Purchases of securities	(677,813)	(651,908)	(495,870)
Proceeds from sales, calls and maturities of securities	603,965	625,550	462,842
Principal repayments of securities	71,606	30,726	21,962
Net increase in loans	(292,724)	(226,817)	(147,416)
Net sales of loan participations	125	29,554	10,640
Proceeds from sales of Small Business Administration loans	3,976	4,423	1,972
Net contributions to equity investments	(1,942)	(3,684)	(800)
Redemption (purchases) of bank-owned life insurance	1,965	4,655	(1,700)
Net purchases of premises and equipment	(13,565)	(2,488)	(1,293)
Proceeds from sales of repossessed real estate and other assets		141	1,054
Net decrease in time deposits in other banks			600
Proceeds from insurance claims		108	287
Net cash used in investing activities	(304,407)	(189,740)	(147,722)
Cash flows from financing activities:
Net increase in noninterest-bearing deposits	291,564	1,803	73,269
Net increase in interest-bearing deposits	157,842	84,303	90,041
Net increase in Federal Home Loan Bank advances		50,000
Net increase (decrease) in securities sold under agreements to repurchase	(485)	(2,013)	973
Redemption of trust preferred securities		(1,571)	(5,155)
Dividends paid on common stock	(9,962)	(8,757)	(4,979)
Payments to tax authorities for stock-based compensation	(198)	(239)	(171)
Proceeds from exercise of stock options	133	121	294
Repurchase of common stock	(8,905)	(3)
Net cash provided by financing activities	429,989	123,644	154,272
Net increase (decrease) in cash, cash equivalents and restricted cash	165,943	(10,006)	55,871
Cash, cash equivalents and restricted cash, beginning	372,064	382,070	326,199
Cash, cash equivalents and restricted cash, ending	$ 538,007	$ 372,064	$ 382,070

BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

12 Months Ended

Dec. 31, 2020

BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

NOTE 1: BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

Nature of Operations—CBTX, Inc., or the Company, or CBTX, operates 35 branches, 19 in the Houston market area, 15 in the Beaumont/East Texas market area and one in Dallas through its wholly-owned subsidiary, CommunityBank of Texas, N.A., or the Bank. The Bank provides relationship-driven commercial banking products and services primarily to small and mid-sized businesses and professionals with operations within the Bank’s markets.

Basis of Presentation—The accompanying consolidated financial statements include the accounts of the Company and the Bank. All material intercompany balances and transactions have been eliminated in consolidation.

Reclassification—Within noninterest expense for 2019 and 2018, data processing and software have been combined together. In addition, printing, stationery and office, correspondent bank and customer related transaction fees, loan processing costs and repossessed real estate and other asset expenses have been combined with other expenses. These reclassifications were made to conform to the 2020 financial statement presentation in the consolidated statements of income.

Segment Reporting—The Company has one reportable segment. The Company’s activities are inter-related, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and borrowings while managing the interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company as one segment or unit. The Company’s chief operating decision-maker, the Chief Executive Officer, uses the consolidated results to make operating and strategic decisions.

Use of Estimates—In preparing financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheets and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term include, but are not limited to, determination of the allowance for credit losses, or ACL, and fair values of financial instruments and goodwill and other intangible assets.

Cash and Due from Banks—Cash, cash equivalents and restricted cash include cash, interest-bearing and noninterest-bearing transaction accounts with other banks and federal funds sold. A majority of cash, cash equivalents and time deposits of the Company are maintained with major financial institutions in the United States, or U.S., and have original maturities less than 90 days. Interest-bearing deposit accounts with these financial institutions may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and therefore, bear minimal risk. The Company periodically evaluates the stability of the financial institutions with which it has deposits to monitor this credit risk. The Company has cash deposits in correspondent financial institutions in excess of the amount insured by the Federal Deposit Insurance Corporation in the amount of $143.8 million and $100.0 million at December 31, 2020 and 2019, respectively.

The Bank is required to maintain regulatory reserves with the Federal Reserve Bank and the reserve requirements for the Bank were $17.6 million and $18.6 million at December 31, 2020 and 2019, respectively. At December 31, 2020 and 2019, the Company had $8.4 million and $3.1 million in cash collateral used in its interest rate swap transactions. The Federal Reserve Bank reserve requirements and the cash collateral used in interest rate swap transactions are considered restricted cash.

Loans—Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off, are measured at historical cost and generally reported at their outstanding unpaid principal balances, net of any unearned income, charge-offs and unamortized deferred fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans, in accordance with the effective interest method. The Company records lines of

credit at their funded portion. All unfunded amounts for loans in process and credit lines are reported as unfunded commitments.

Government Guaranteed Loans—The Company originates loans that are partially guaranteed by the Small Business Administration, or SBA, and the Company may sell the guaranteed portion of these loans as market conditions and pricing allow for a gain to be recorded on the sale. Loan sales are recorded when control over the transferred asset has been relinquished. Control over the transferred portion is deemed to be surrendered when the assets have been removed from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

In calculating the gain on sale of SBA loans, the Company’s investment in the loan is allocated among the unguaranteed portion of the loan, the servicing amount retained, and the guaranteed portion of the loan sold, based on the relative fair market value of each portion. The gain on the sold portion of the loan is recognized and reported in net gain on sale of assets in the consolidated statements of income based on the difference between the sale proceeds and the allocated investment.

During 2020, the Company participated in the Paycheck Protection Program, or PPP, under the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, which facilitates loans to small businesses. The Company originated loans under PPP financing that are fully guaranteed by the SBA and subject to forgiveness by the SBA based on the borrowers’ applications submitted to the SBA. The loans were originated with a 1.0% effective annual interest rate under a two-year maturity period in accordance with the CARES Act. Origination fees and costs related to the funding of these loans were deferred and are recognized in interest income over the two-year maturity period.

Nonperforming Loans—Nonperforming loans includes loans which have been categorized by management as nonaccrual because of delinquency status or because collection of principal and interest is doubtful. When the payment of principal or interest on a loan is delinquent for 90 days or more, or earlier in some cases, the loan is placed on nonaccrual status, unless the loan is in the process of collection or renewal and the underlying collateral fully supports the carrying value of the loan. If the decision is made to continue accruing interest on the loan, periodic reviews are made to confirm the accruing status of the loan and the probability that the Company will collect all principal and interest amounts outstanding.

When a loan is placed on nonaccrual status, interest accrued and uncollected during any period prior to the judgment of uncollectability is charged to operations, unless the loan is well secured with collateral values sufficient to ensure collection of both principal and interest. Generally, any payments received on nonaccrual loans are applied first to outstanding loan amounts, reducing the Company’s recorded investment in the loan and next to the recovery of charged-off principal or interest amounts. Any excess is treated as recovery of lost interest. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Troubled Debt Restructurings—From time to time, the Company modifies loan agreements with borrowers. A modified loan is considered a troubled debt restructuring if the borrower is experiencing financial difficulties and the borrower has been granted a concession. Modifications to loan terms may include interest rate reductions, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. Interest is generally accrued on such loans in accordance with the new terms. Loans restructured in a troubled debt restructuring are not considered nonperforming if the loans are not delinquent and otherwise performing in accordance with their restructured terms.

Allowance for Credit Losses—The ACL for loans represents management’s estimate of expected credit losses inherent in the loan portfolio. In determining the ACL, the Company evaluates loans individually, or in groups of loans that share similar risk characteristics, where the expected loss can be identified and reasonably estimated. On a quarterly basis, the risk inherent in the loan portfolio based on qualitative and quantitative trends in the portfolio is assessed, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impacts of local, regional and national economic factors and reasonable and supportable forecasts to determine the expected credit losses on the loan portfolio. Loan balances that are partially or fully guaranteed by the SBA are excluded from the computation to determine an ACL as there are no expected risk of losses associated with these loans.

The Company adopted Accounting Standards Update, or ASU, 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or CECL, effective January 1, 2020. See “Accounting Standards Recently Adopted” below for the impact of this implementation and see Note 6: Allowance for Credit Losses for further discussion related to CECL and related disclosures.

A majority of the loan portfolio is comprised of loans to businesses and individuals in the Houston metropolitan and Beaumont/East Texas area. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. The risks created by this concentration have been considered by management in the determination of the adequacy of the ACL.

Loans Held for Sale—Loans held for sale include mortgage loans originated with the intent to sell on the secondary market. Loans held for sale are carried at the lower of cost or estimated fair value on an individual loan basis. These loans are held for an interim period, usually less than 30 days. Accordingly, these loans are classified as held for sale and are carried at cost, which is determined on an aggregate basis and deemed to be the equivalent of fair value based on the short-term nature of the loans.

Securities—Debt securities that the Company intends to hold for an indefinite period of time are classified as available for sale, carried at fair value and unrealized gains and losses are excluded from earnings and reported as accumulated other comprehensive income (loss), net of taxes in shareholders’ equity until realized. Securities that the Company has both the positive intent and ability to hold to maturity are classified as held to maturity and are carried at cost, adjusted for the amortization of premiums and the accretion of discounts.

Equity securities that the Company intends to hold for an indefinite period of time are classified as available for sale, carried at fair value and unrealized gains and losses are included in earnings and reported as other noninterest income in the consolidated statements of income.

There are multiple qualitative factors considered by the Company in its assessment to determine if an ACL was necessary for those securities where the amortized cost basis exceeds the fair value. See Note 2: Securities for further discussions of the Company’s assessment.

Premiums and discounts are amortized and accreted to income using the level-yield method of accounting, adjusted for prepayments as applicable. The specific identification method of accounting is used to compute gains or losses on the sales of these assets.

Equity Investments—The Company’s equity investments are carried at cost and evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely that an impairment has occurred as these investments do not have readily determinable fair values. The Company’s equity investments are evaluated for impairment based on an assessment of qualitative indicators. See Note 3: Equity Investments.

Premises and Equipment—Premises and equipment are carried at cost, less accumulated depreciation. Depreciation expense is computed on the straight-line method over the estimated useful lives of the assets. Land is carried at cost. Leasehold improvements are amortized over the life of the lease, plus renewal options or the estimated useful lives, whichever is shorter. Buildings are depreciated over a period not to exceed 32 years. Depending upon the type of furniture and equipment, the depreciation period will range from three to 10-years. Bank vehicles are amortized over a period of three years. Gains and losses on dispositions are included in net gains on sales of assets in the consolidated statements of income. During periods of real estate development, interest on construction costs is capitalized if considered material by management.

Operating Leases—The Company leases certain office space, stand-alone buildings and land, which are recognized as operating lease right-of-use assets in the consolidated balance sheets. Operating lease right-of-use assets represent the Company’s right to use, or control the use of, leased assets for their lease term and are amortized over the lease term of the related lease agreement. Operating lease liabilities represent the Company’s obligation to make lease payments under these leases, on a discounted basis and are amortized on a straight-line basis over the lease term for each related lease agreement. The discount rate used is estimated based on Federal Home Loan Bank advance rates applicable to the remaining terms. The Company does not recognize short-term operating leases on the consolidated balance sheets. A short-term lease has a term of 12 months or less and does not have a purchase option that is likely to be exercised. The Company subleases certain facilities to outside parties. The Company’s leases have no variable costs.

Goodwill and Other Intangible Assets—Goodwill is not amortized and is evaluated for impairment at least annually as of December 31 and on an interim basis if an event or circumstance indicates that it is likely that 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.

The Company’s identified intangibles are core deposits, customer relationship intangibles and loan servicing assets. Core deposit and customer relationship intangible assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. Servicing assets are assessed for impairment or increased obligation based on fair value at each reporting date.

Core deposit intangibles are amortized over a seven to 10-year period using an accelerated method in keeping with the anticipated benefits derived from those core deposits. Customer relationship intangibles are amortized over a 15- year period on a straight-line basis.

Servicing assets are recognized as separate assets when rights are acquired through the sale of financial assets. Servicing assets are initially recorded at fair market value and amortized in proportion to and over the service period and assessed for impairment or increased obligation based on fair value at each reporting date. Fair value is based on the gross coupon less an assumed contractual servicing cost or based upon discounted cash flows using market-based assumptions. Servicing assets are amortized into noninterest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing fee income is recorded for fees earned from servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.

Bank-owned Life Insurance—The Company has purchased life insurance policies on covered individuals, which are recorded at their cash surrender value. Changes in the cash surrender value of the policies are recorded in noninterest income. Gains or losses and proceeds from maturities are recognized upon the death of a covered employee, on receipt of a death notice or other verified evidence.

Repossessed Real Estate and Other Assets—Real estate and other assets acquired through repossession or foreclosure are held for sale and are initially recorded at the fair value of the asset less estimated costs to sell. Outstanding loan balances are reduced to reflect this value through charges to the ACL. If the fair value of the repossessed real estate and other assets declines after foreclosure, adjustments to reflect changes in fair value are recognized in net income in the period such determinations are assessed. Any developmental costs associated with foreclosed property under construction are capitalized and considered in determining the fair value of the property. Any operating expenses of these assets, net of related income and gains and losses on their disposition are included in other noninterest income or expense in the consolidated statements of income.

Other Assets—Other assets include accrued interest receivables on loans and investments, derivative financial instruments assets, prepaid expenses, repossessed real estate and other assets.

Other Liabilities—Other liabilities include accrued interest payable on deposits and borrowings, accrued bonuses, deferred compensation, derivative financial instruments liabilities and other liabilities.

Repurchase Agreements—The Company utilizes securities sold under repurchase agreements to facilitate the needs of customers and short-term borrowing needs. Securities sold under agreements to repurchase are stated at the amount of cash received in the transaction. The Company monitors collateral levels on a continuous basis and may be required to provide additional collateral based on the fair value of the underlying securities.

Derivative Financial Instruments—All derivatives are recorded at fair value on the balance sheet. Derivatives executed with the same counterparty are generally subject to master netting arrangements. Fair value amounts recognized for derivatives and fair value amounts recognized for the right/obligation to reclaim/return cash collateral are not offset for financial reporting purposes. The Company had no derivative instruments that qualified for hedge accounting during the periods reported herein.

Fair Value Measurements—Fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is estimated based upon models that primarily use

observable market-based parameters as inputs. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Income Taxes—The Company prepares and reports income taxes on a consolidated basis. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that the deferred tax assets will be realized. As such, the Company determined a valuation allowance was not necessary at December 31, 2020 and 2019.

The Company may recognize the tax benefit of an uncertain tax position if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements would be the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

The Company includes any interest expense assessed by taxing authorities in interest expense and any penalties related to income taxes in other expense on its consolidated statements of income.

Transfers of Financial Assets—Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

The Company’s loan participations sold subject to this guidance which met the conditions to be treated as a sale were recorded as such. Any securities sold under agreements to repurchase that did not meet the sale criteria are treated as a secured borrowing with pledge of collateral and included in securities available for sale and repurchase agreements in the Company’s consolidated balance sheets.

Stock-Based Compensation—Stock-based compensation is recognized as compensation cost in the consolidated statements of income based on the fair value on the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options and the market value of the Company’s common stock at the date of grant is used as the estimate of fair value of restricted stock. Compensation expense for awards not based on performance criteria is recognized over the required service period, on a straight-line basis. The impact of forfeitures is recognized as they occur.

The number of shares earned under the Company’s performance-based restricted stock award agreements is based on the achievement of certain levels of certain performance goals. The fair value of performance-based restricted stock is estimated based on the market value of the Company’s common stock at the date of grant. Compensation expense for performance-based restricted stock is recognized for the probable award level over the period estimated to achieve the performance conditions and other goals, on a straight-line basis. If the probable award level and/or the period estimated to be achieved change, compensation expense will be adjusted via a cumulative catch-up adjustment to reflect these changes. The performance conditions and other goals must be achieved within five years or the awards expire.

Advertising expense—Advertising costs are expensed as incurred.

Earnings Per Share—Basic earnings per common share is computed as net income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed using the weighted-average shares determined for the basic earnings per share computation plus the potential dilution that could occur if outstanding stock options were exercised and restricted stock awards were vested and converted into common stock using the treasury stock method.

Share Repurchase Program—During 2020, 431,814 shares were repurchased under the Company’s share repurchase programs at an average price of $20.62 per share and during 2019, 100 shares were repurchased at $27.98 per share. Shares repurchased in 2020 and 2019 were retired and returned to the status of authorized but unissued shares.

Accounting Standards Recently Adopted

The Company adopted CECL, effective January 1, 2020. The scope of CECL includes loans, debt securities classified as held to maturity, other receivables, off-balance sheet credit exposures and any other financial assets not excluded from the scope that have the contractual right to receive cash. In addition, CECL amends the accounting and reporting for credit losses on available for sale securities.

Through a one-time cumulative effect reduction of retained earnings of $3.0 million, the adoption of ASU 2016-13 increased the ACL for loans by $874,000, increased the liability related to the ACL for unfunded commitments by $2.9 million, with the associated deferred tax assets increasing by $809,000.

CECL requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. As part of the implementation of CECL, the Company changed its methodology for determining the ACL for loans and the ACL associated with the Company’s off-balance sheet credit exposures, which are primarily unfunded commitments to borrowers.

The adoption of CECL did not have any impact on securities held to maturity as the Company did not hold any as of January 1, 2020. Additionally, the Company assessed the impact of CECL on its available for sale securities utilizing various qualitative factors and determined there were no credit losses within the portfolio requiring an allowance upon adoption. The Company did not have any purchased financial assets with credit deterioration as of January 1, 2020.

See Note 6: Allowance for Credit Losses for further discussion related to CECL and related disclosures.

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate, or LIBOR, or another reference rate expected to be discontinued, if certain criteria are met. LIBOR is used as an index rate for a majority of the Company’s interest-rate swaps and 12.0% of the Company’s loans as of December 31, 2020.

If reference rates are discontinued, the existing contracts will be modified to replace the discontinued rate with a replacement rate. For accounting purposes, such contract modifications would have to be evaluated to determine whether the modified contract is a new contract or a continuation of an existing contract. If they are considered new contracts, the previous contract would be extinguished. Under one of the optional expedients of ASU 2020-04, modifications of contracts within the scope of Topic 310, Receivables, and 470, Debt, will be accounted for by prospectively adjusting the effective interest rates and no such evaluation is required. When elected, the optional expedient for contract modifications must be applied consistently for all eligible contracts or eligible transactions. The expedients and exceptions in this update are available to all entities starting March 12, 2020 through December 31, 2022. The Company applied the expedients and exceptions to three loans modified during 2020. The adoption of ASU 2020-04 did not significantly impact the Company’s financial statements.

Cash Flow Reporting—Supplemental disclosures of cash flow information were as follows for the periods indicated below:


	Years Ended December 31,
(Dollars in thousands)	2020		2019		2018
Supplemental disclosures of cash flow information:
Cash paid for taxes	$	11,307	$	13,710	$	11,627
Cash paid for interest		10,679		17,040		10,803
Supplemental disclosures of non-cash flow information:
Net operating lease right-to-use asset obtained in exchange for lease liabilities		1,876		14,499		—
Dividends accrued		22		1,306		43
Repossessed real estate and other assets		—		121		349

SECURITIES

12 Months Ended

Dec. 31, 2020

SECURITIES.

SECURITIES

NOTE 2: SECURITIES

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


			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses		Fair Value
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
December 31, 2019
Debt securities available for sale:
State and municipal securities	$	51,525	$	1,761	$	(7)	$	53,279
U.S. agency securities:
Collateralized mortgage obligations		55,784		324		(119)		55,989
Mortgage-backed securities		119,787		1,315		(255)		120,847
Equity securities		1,155		—		(8)		1,147
Total	$	228,251	$	3,400	$	(389)	$	231,262

The amortized cost and estimated fair value of securities by contractual maturities as of the dates shown 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, 2020
Amortized cost:
Debt securities available for sale:
State and municipal securities	$	509	$	1,292	$	9,154	$	77,786	$	88,741
U.S. agency securities:
Collateralized mortgage obligations		—		—		4,910		30,175		35,085
Mortgage-backed securities		33		1,485		798		101,370		103,686
Equity securities		1,176		—		—		—		1,176
Total	$	1,718	$	2,777	$	14,862	$	209,331	$	228,688
Fair value:
Debt securities available for sale:
State and municipal securities	$	512	$	1,298	$	9,540	$	81,687	$	93,037
U.S. agency securities:
Collateralized mortgage obligations		—		—		5,075		30,327		35,402
Mortgage-backed securities		33		1,565		829		105,222		107,649
Equity securities		1,193		—		—		—		1,193
Total	$	1,738	$	2,863	$	15,444	$	217,236	$	237,281


(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, 2019
Amortized cost:
Debt securities available for sale:
State and municipal securities	$	1,356	$	1,399	$	7,920	$	40,850	$	51,525
U.S. agency securities:
Collateralized mortgage obligations		—		—		4,742		51,042		55,784
Mortgage-backed securities		24		1,682		1,903		116,178		119,787
Equity securities		1,155		—		—		—		1,155
Total	$	2,535	$	3,081	$	14,565	$	208,070	$	228,251
Fair value:
Debt securities available for sale:
State and municipal securities	$	1,360	$	1,409	$	8,132	$	42,378	$	53,279
U.S. agency securities:
Collateralized mortgage obligations		—		—		4,803		51,186		55,989
Mortgage-backed securities		25		1,736		1,939		117,147		120,847
Equity securities		1,147		—		—		—		1,147
Total	$	2,532	$	3,145	$	14,874	$	210,711	$	231,262

Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities with a carrying amount of $20.4 million and $56.5 million were sold during the years ended December 31, 2019 and 2018, respectively. No securities were sold in the year ended December 31, 2020. At December 31, 2020 and 2019, securities with a carrying amount of approximately $27.3 million and $50.8 million, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes required or permitted by law.

The scope of CECL includes debt securities classified as held to maturity and amended the accounting and reporting for credit losses on available for sale securities. There are multiple qualitative factors considered by the Company in its assessment to determine if an ACL was necessary for those securities where the amortized cost basis exceeds the fair value. These factors include, among other things: (i) the extent to which the fair value was less than the amortized cost basis of the security and the length of time; (ii) the structure of the payments and likelihood that the issuer has the ability

to make future payments; (iii) adverse conditions related to the security, industry or geographic area; (iv) changes in any credit ratings or financial conditions of the issuer; (v) failure by the issuer to make previous payments; and (vi) past events related to the security, current economic conditions and reasonable and supportable forecasts. Management did not believe that any of the securities the Company held at December 31, 2020 and 2019 were impaired due to reasons of credit quality and believed any unrealized losses were temporary. No ACL for available for sale securities was recorded in the Company’s consolidated balance sheets at December 31, 2020 or upon adoption of CECL on January 1, 2020 and no impairment loss was recorded in 2019 or 2018 under previous accounting guidance.

Amortized costs, as defined by GAAP, include acquisition costs, applicable accrued interest and accretion or amortization of premiums and discounts. The Company made a policy election to exclude accrued interest from amortized costs in the determination of ACL. The Company continues its policy of reversing previously accrued interest when it has been deemed uncollectible. Accrued interest receivable for securities was $1.2 million and $1.1 million at December 31, 2020 and 2019, respectively, and is included in other assets in the consolidated balance sheets.

The Company held 18 and 27 securities at December 31, 2020 and 2019, respectively, that were in a gross unrealized loss position. Securities with unrealized losses as of the dates shown below, aggregated by category and the length of time were as follows:



	Less than Twelve Months				Twelve Months or More
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Losses		Value		Losses
December 31, 2020
Debt securities available for sale:
State and municipal securities	$	263	$	—	$	—	$	—
U.S. agency securities:
Collateralized mortgage obligations		6,913		(30)		—		—
Mortgage-backed securities		—		—		—		—
Equity securities		—		—		—		—
	$	7,176	$	(30)	$	—	$	—
December 31, 2019
Debt securities available for sale:
State and municipal securities	$	3,539	$	(7)	$	106	$	—
U.S. agency securities:
Collateralized mortgage obligations		10,687		(46)		7,994		(73)
Mortgage-backed securities		11,628		(26)		21,745		(229)
Equity securities		—		—		1,147		(8)
	$	25,854	$	(79)	$	30,992	$	(310)

EQUITY INVESTMENTS

12 Months Ended

Dec. 31, 2020

EQUITY INVESTMENTS

EQUITY INVESTMENTS

NOTE 3: EQUITY INVESTMENTS

The Company’s unconsolidated investments that are considered equity securities as they represent ownership interests, such as common or preferred stock, were as follows for the dates indicated below:


	December 31,
(Dollars in thousands)	2020		2019
Federal Reserve Bank stock	$	9,271	$	9,271
Federal Home Loan Bank stock		5,941		4,249
The Independent Bankers Financial Corporation stock		141		141
Community Reinvestment Act investments		3,299		3,049
	$	18,652	$	16,710

Banks that are members of the Federal Home Loan Bank are required to maintain a stock investment in the Federal Home Loan Bank calculated as a percentage of aggregate outstanding mortgages, outstanding Federal Home Loan Bank advances and other financial instruments. As a member of the Federal Reserve, the Bank is required to annually subscribe to Federal Reserve Bank stock in specific ratios to the Bank’s equity. Although Federal Home Loan Bank and

Federal Reserve Bank stock are considered equity securities, they do not have readily determinable fair values because ownership is restricted, and they lack a readily-available market. These investments can be sold back only at their par value of $100 per share and can only be sold to the Federal Home Loan Banks or the Federal Reserve Banks or to another member institution. In addition, the equity ownership rights are more limited than would be the case for a public company because of the oversight role exercised by regulators in the process of budgeting and approving dividends. As a result, these investments are carried at cost and evaluated for impairment.

The Company also holds an investment in the stock of The Independent Bankers Financial Corporation, which has limited marketability. As a result, this investment is carried at cost and evaluated for impairment.

The Company has investments in investment funds and limited partnerships that are qualified Community Reinvestment Act, or CRA, investments and investments under the Small Business Investment Company program of the SBA. There are limited to no observable price changes in orderly transactions for identical investments or similar investments from the same issuers that are actively traded, and as a result, these investments are stated at cost. At December 31, 2020 and 2019, the Company had $4.4 million and $4.9 million, respectively, in outstanding unfunded commitments to these funds, which are subject to call.

The Company’s equity investments are evaluated for impairment based on an assessment of qualitative indicators. Impairment indicators to be considered include, but are not limited to: (i) a significant deterioration in the earnings, performance, credit rating, asset quality or business prospects of the investee; (ii) a significant adverse change in the regulatory, economic or technological environment of the investee; (iii) a significant adverse change in the general market conditions of either the geographical area or the industry in which the investee operates; and (iv) a bona fide offer to purchase, an offer by the investee to sell, or completed auction process for the same or similar investment for an amount less than the carrying amount of the investment. There were no such qualitative indicators as of December 31, 2020.

LOANS

12 Months Ended

Dec. 31, 2020

LOANS

LOANS

NOTE 4: LOANS

Loans by loan class, or major loan category, as of the dates shown below were as follows:


	December 31,
(Dollars in thousands)	2020			2019
Commercial and industrial	$	742,957	25.3%	$	527,607	19.9%
Real estate:
Commercial real estate		1,041,998	35.5%		900,746	34.0%
Construction and development		522,705	17.8%		527,812	19.9%
1-4 family residential		239,872	8.2%		280,192	10.6%
Multi-family residential		258,346	8.8%		277,209	10.5%
Consumer		33,884	1.1%		36,782	1.4%
Agriculture		8,670	0.3%		9,812	0.4%
Other		88,238	3.0%		86,513	3.3%
Total gross loans		2,936,670	100.0%		2,646,673	100.0%
Less allowance for credit losses for loans		(40,637)			(25,280)
Less deferred loan fees and unearned discounts		(9,880)			(6,125)
Less loans held for sale		(2,673)			(1,463)
Loans, net	$	2,883,480		$	2,613,805

Accrued interest receivable for loans is $12.1 million and $7.5 million at December 31, 2020 and 2019, respectively, and is included in other assets in the consolidated balance sheets.

From time to time, the Company will acquire and dispose of interests in loans under participation agreements with other financial institutions. Loan participations purchased and sold during the years ending December 31, 2020, 2019 and 2018, by loan class, are summarized as follows:


	Participations		Participations
(Dollars in thousands)	Purchased		Sold
December 31, 2020
Commercial	$	—	$	2,625
Commercial real estate		2,500		—
December 31, 2019
Commercial real estate	$	2,314	$	31,868
December 31, 2018
Commercial and industrial	$	7,000	$	1,620
Commercial real estate		28,281		35,000
Construction and development		—		9,301
	$	35,281	$	45,921

The Company participates in the SBA loan program. When advantageous, the Company will sell the guaranteed portions of these loans with servicing retained. SBA loans that were sold with servicing retained during the years ended December 31, 2020, 2019 and 2018 were $4.0 million, $4.4 million and $2.0 million, respectively. Net gains recognized on sales of SBA loans were $349,000, $330,000 and $153,000 for the years ended December 31, 2020, 2019 and 2018, respectively, and are included in net gain on sales of assets in the consolidated income statements.

LOAN PERFORMANCE

12 Months Ended

Dec. 31, 2020

LOAN PERFORMANCE

LOAN PERFORMANCE

NOTE 5: LOAN PERFORMANCE

The following is an aging analysis of the Company’s past due loans, segregated by loan class, as of the dates shown below:

90 Days or

90 Days

30 to 59 Days

60 to 89 Days

Greater

Total

Past Due and

(Dollars in thousands)

Past Due

Current Loans

Total Loans

Still Accruing

December 31, 2020

Commercial and industrial

2,055

2,269

4,375

738,582

742,957