0001193125-22-008198.txt : 20220113 0001193125-22-008198.hdr.sgml : 20220113 20220113080158 ACCESSION NUMBER: 0001193125-22-008198 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 20220113 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Regulation FD Disclosure ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20220113 DATE AS OF CHANGE: 20220113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOME BANCSHARES INC CENTRAL INDEX KEY: 0001331520 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 710682831 STATE OF INCORPORATION: AR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-41093 FILM NUMBER: 22527909 BUSINESS ADDRESS: STREET 1: 719 HARKRIDER CITY: CONWAY STATE: AR ZIP: 72032 BUSINESS PHONE: 501-339-2929 MAIL ADDRESS: STREET 1: 719 HARKRIDER CITY: CONWAY STATE: AR ZIP: 72032 8-K 1 d281267d8k.htm 8-K 8-K
HOME BANCSHARES INC false 0001331520 0001331520 2022-01-13 2022-01-13

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): January 13, 2022

 

 

HOME BANCSHARES, INC.

(Exact name of Registrant as Specified in Its Charter)

 

 

 

Arkansas   001-41093   71-0682831

(State or Other Jurisdiction

of Incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

719 Harkrider, Suite 100

Conway, Arkansas 72032

(Address of Principal Executive Offices) (Zip Code)

(501) 339-2929

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, par value $0.01 per share   HOMB   New York Stock Exchange

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company  

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

 

 

 


Item 2.02

Results of Operations and Financial Condition.

Home BancShares, Inc. (“we,” the “Company” or “Home”) expects to announce its results for the quarter and year ended December 31, 2021 on January 20, 2022. However, in connection with a proposed public offering of its subordinated notes, the Company intends to file a preliminary prospectus supplement (the “Prospectus Supplement”) to the base prospectus included in our shelf registration statement on Form S-3 (No. 333-261495), filed with the U.S. Securities and Exchange Commission (“SEC”) on December 3, 2021. The Prospectus Supplement describes certain information related to the Company’s financial condition and results of operations for the period ended December 31, 2021, as set forth below.

While not final, and subject to adjustment as we complete our review, our preliminary data indicates that net income and diluted earnings per share will be generally in line with our third quarter results and ahead of Wall Street consensus estimates for the fourth quarter 2021. Revenue was down slightly due primarily to a decrease in PPP accretion income for loan forgiveness from the third quarter to the fourth quarter 2021. Net income for the fourth quarter 2021 was also slightly lower than third quarter 2021 but exceeded internal and analyst expectations. While we experienced modest organic loan growth during the fourth quarter, total loans receivable for the period was down slightly due to additional PPP loans being forgiven that offset the organic loan growth. We currently do not anticipate that any provision for credit losses on loans will be necessary in the fourth quarter. Overall, we expect the results for fourth quarter 2021 to represent “business as usual” for Home.

The information provided in this Item 2.02 is preliminary and remains subject to change as we complete our financial statements and our auditors complete their audit procedures. Our actual operating results for the fourth quarter and full year may materially differ from this information. This information constitutes forward-looking statements, and we caution you that these statements are subject to risks and uncertainties, including those referred to under “Cautionary Note Regarding Forward-Looking Statements” in this Current Report on Form 8-K and those other factors described in reports we file with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021.

 

Item 7.01

Regulation FD Disclosure.

On January 13, 2022, the Company issued a press release announcing that it plans to offer, subject to market and other offering conditions, $300 million of its fixed-to-floating rate subordinated notes due 2032 in an underwritten public offering (the “Offering”). A copy of the press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

As provided in General Instruction B.2 to Form 8-K, the information furnished in this Item 7.01 and in Exhibit 99.1 to this Current Report on Form 8-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, and such information shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

Item 8.01

Other Events.

As previously announced, the Company, Centennial Bank (“Centennial”), HOMB Acquisition Sub III, Inc., Happy Bancshares, Inc. (“Happy”) and Happy State Bank (“HSB”) entered into an Agreement and Plan of Merger, dated September 15, 2021, as amended October 18, 2021 and further amended November 8, 2021, under which the Company and Centennial will acquire Happy and HSB. In connection with the Offering, the Company is providing certain unaudited pro forma combined consolidated financial information regarding the combined company as of and for the nine months ended September 30, 2021 and for the year ended December 31, 2020 (the “Unaudited Pro Forma Combined Consolidated Financial Information”) and Happy’s unaudited consolidated financial statements as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 and Happy’s audited consolidated financial statements as of and for the years ended December 31, 2020 and 2019 (the “Happy Financial Statements”), which were originally included in the Company’s joint proxy statement/prospectus that was a part of its Registration Statement on Form S-4/A filed with the SEC on November 9, 2021 (which Registration Statement is not incorporated by reference in or a part of this Current Report on Form 8-K). The Unaudited Pro Forma Combined Consolidated Financial Information and the Happy Financial Statements are included as Exhibits 99.2 and 99.3, respectively, to this Current Report on Form 8-K and are incorporated herein by reference.


Item 9.01

Financial Statements and Exhibits.

Exhibits

 

23.1    Consent of BKD, LLP
99.1    Press Release: Home BancShares, Inc. Announces Proposed $300 Million Subordinated Notes Offering.
99.2    Unaudited Pro Forma Combined Consolidated Financial Information of Home BancShares, Inc. and Happy Bancshares, Inc.
99.3    Consolidated Financial Statements of Happy Bancshares, Inc.
104    Cover Page Interactive Data File (embedded within the Inline XBRL document)

Cautionary Note Regarding Forward-Looking Statements

This Current Report on Form 8-K may contain forward-looking statements regarding the Company’s plans, expectations, goals, and outlook for the future, as well as statements and estimates about the proposed business combination transaction involving Home and Happy and statements regarding the proposed notes offering. Statements in this report that are not historical facts should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future events, performance or results. When we use words like “may,” “plan,” “propose,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” and similar expressions, you should consider them as identifying forward-looking statements, although we may use other phrasing. Forward-looking statements of this type speak only as of the date of this report. By nature, forward-looking statements involve inherent risk and uncertainties. Various factors could cause actual results to differ materially from those contemplated by the forward-looking statements. These factors include, but are not limited to, the following: economic conditions, credit quality, interest rates, loan demand, real estate values and unemployment; disruptions, uncertainties and related effects on our business and operations as a result of the ongoing coronavirus (COVID-19) pandemic and measures that have been or may be implemented or imposed in response to the pandemic, including the impact on, among other things, credit quality and liquidity; the possibility that the proposed acquisition of Happy does not close when expected or at all because required regulatory approvals and other conditions to closing are not received or satisfied on a timely basis or at all; the possibility that such transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events; the risk that the benefits from the transaction may not be fully realized or may take longer to realize than expected, including as a result of changes in general economic and market conditions, ongoing or future effects of the COVID-19 pandemic, interest and exchange rates, monetary policy, laws and regulations and their enforcement, and the degree of competition in the geographic and business areas in which Home and Happy operate; the ability to promptly and effectively integrate the businesses of Home and Happy; the reaction to the transaction of the companies’ customers, employees and counterparties; diversion of management time on acquisition-related issues; the effect of any future mergers, acquisitions or other transactions to which we or our bank subsidiary may from time to time be a party, including as a result of one or more of the factors described above as they would relate to such transaction; the ability to identify, enter into and/or close additional acquisitions; legislative and regulatory changes and risks and expenses associated with current and future legislation and regulations, including those in response to the COVID-19 pandemic; technological changes and cybersecurity risks; the effects of changes in accounting policies and practices; changes in governmental monetary and fiscal policies; political instability; competition from other financial institutions; potential claims, expenses and other adverse effects related to current or future litigation, regulatory examinations or other government actions; changes in the assumptions used in making the forward-looking statements; and other factors described in reports we file with the SEC, including those factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021.

Additional Information and Where to Find It

In connection with the proposed acquisition of Happy, the Company has filed with the SEC a Registration Statement on Form S-4 (the “Registration Statement”) to register the shares of the Company’s common stock to be issued to shareholders of Happy in connection with the transaction. The Registration Statement includes a Joint Proxy Statement of the Company and Happy and a Prospectus of the Company, as well as other relevant materials regarding the proposed merger transaction involving the Company and Happy. INVESTORS AND SECURITY HOLDERS OF THE COMPANY AND HAPPY ARE ADVISED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS AND ANY OTHER DOCUMENTS FILED WITH THE SEC IN CONNECTION WITH THE MERGER OR INCORPORATED BY REFERENCE IN THE JOINT PROXY STATEMENT/PROSPECTUS BECAUSE THEY CONTAIN IMPORTANT INFORMATION REGARDING THE PROPOSED MERGER TRANSACTION. Investors and security holders may obtain free copies of these documents and other documents filed with the SEC on the SEC’s website at http://www.sec.gov. Investors and security holders may also obtain free copies of the documents filed with the SEC by the Company at the Company’s website at http://www.homebancshares.com, Investor Relations, or by contacting Donna Townsell, by telephone at (501) 328-4625.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    Home BancShares, Inc.
Date: January 13, 2022     By:  

/s/ Jennifer C. Floyd

      Jennifer C. Floyd
      Chief Accounting Officer
EX-23.1 2 d281267dex231.htm EX-23.1 EX-23.1

Exhibit 23.1

Consent of Independent Registered

Public Accounting Firm

We consent to the incorporation by reference in this Registration Statement on Form S-3 of Home BancShares, Inc. of our report dated March 5, 2021, on our audits of the consolidated financial statements of Happy Bancshares, Inc. (the Company) as of December 31, 2020 and 2019, and for each of the years then ended. We also consent to the inclusion of our report dated March 5, 2021, on our audit of the internal control over financial reporting of the Company as of December 31, 2020. We also consent to the reference to our firm under the caption “Experts” in the prospectus included in the Registration Statement.

BKD, LLP

Houston, Texas

January 13, 2021

EX-99.1 3 d281267dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

 

LOGO

 

For Immediate Release:    January 13, 2022

Home BancShares, Inc. Announces

Proposed $300 Million Subordinated Notes Offering

Conway, AR – Home BancShares, Inc. (NYSE: HOMB) (“Home” or the “Company”), parent company of Centennial Bank, (“Centennial”), announced today that it plans to offer, subject to market and other offering conditions, $300 million of its fixed-to-floating rate subordinated notes due 2032 (the “Notes”) in an underwritten public offering (the “Offering”). The Company intends to use the net proceeds for general corporate purposes, which may include, but are not limited to, the repayment of its outstanding subordinated notes and subordinated debentures, the payment of outstanding subordinated debentures to be assumed upon completion of its acquisition of Happy Bancshares, Inc. (“Happy”), investments at the holding company level, providing capital to support the growth of Centennial Bank and its business, repurchases of its common shares and the payment of the cash consideration components of future acquisitions.

Piper Sandler & Co. is serving as sole book-running manager for the offering.

The subordinated notes will be issued pursuant to a preliminary prospectus supplement filed today as part of an existing shelf registration statement filed with the Securities and Exchange Commission (“SEC”) on Form S-3. Prospective investors should read the registration statement (including the base prospectus), the preliminary prospectus supplement and other documents the Company has filed and will file with the SEC that are incorporated by reference into the registration statement and each prospectus supplement for more complete information about the Company and the offering, including the risks associated with the Notes and the Offering.

This announcement shall not constitute an offer to sell or the solicitation of an offer to buy these securities, nor shall there be any offer or sale of these securities, in any jurisdiction in which such offer, solicitation or sale would be unlawful. The Offering will be made only by means of a prospectus supplement and accompanying prospectus, copies of which may be obtained from the investor relations section of Home’s web site at: www.homebancshares.com or from the SEC’s web site at: www.sec.gov. Alternatively, you may obtain a copy of the prospectus supplement and accompanying prospectus for the Offering by emailing Piper Sandler & Co. at fsg-dcm@psc.com.


General

This release may contain forward-looking statements regarding the Company’s plans, expectations, goals and outlook for the future, as well as statements about the proposed business combination transaction involving Home and Happy and statements regarding the proposed notes offering. Statements in this press release that are not historical facts should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future events, performance or results. When the Company uses words like “may,” “plan,” “propose,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” and similar expressions, you should consider them as identifying forward-looking statements, although the Company may use other phrasing. Forward-looking statements of this type speak only as of the date of this news release. By nature, forward-looking statements involve inherent risk and uncertainties. Various factors could cause actual results to differ materially from those contemplated by the forward-looking statements. These factors include, but are not limited to, the following: economic conditions, credit quality, interest rates, loan demand, real estate values and unemployment; disruptions, uncertainties and related effects on our business and operations as a result of the ongoing coronavirus (COVID-19) pandemic and measures that have been or may be implemented or imposed in response to the pandemic, including the impact on, among other things, credit quality and liquidity; the possibility that the proposed acquisition of Happy does not close when expected or at all because required regulatory approvals and other conditions to closing are not received or satisfied on a timely basis or at all; the possibility that such transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events; the risk that the benefits from the transaction may not be fully realized or may take longer to realize than expected, including as a result of changes in general economic and market conditions, ongoing or future effects of the COVID-19 pandemic, interest and exchange rates, monetary policy, laws and regulations and their enforcement, and the degree of competition in the geographic and business areas in which Home and Happy operate; the ability to promptly and effectively integrate the businesses of Home and Happy; the reaction to the transaction of the companies’ customers, employees and counterparties; diversion of management time on acquisition-related issues; the effect of any future mergers, acquisitions or other transactions to which the Company or its bank subsidiary may from time to time be a party, including as a result of one or more of the factors described above as they would relate to such transaction; the ability to identify, enter into and/or close additional acquisitions; legislative and regulatory changes and risks and expenses associated with current and future legislation and regulations, including those in response to the COVID-19 pandemic; technological changes and cybersecurity risks; the effects of changes in accounting policies and practices; changes in governmental monetary and fiscal policies; political instability; competition from other financial institutions; potential claims, expenses and other adverse effects related to current or future litigation, regulatory examinations or other government actions; changes in the assumptions used in making the forward-looking statements; and other factors described in reports the Company files with the Securities and Exchange Commission (the “SEC”), including those factors set forth in its Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021.

####

FOR MORE INFORMATION CONTACT:

Donna Townsell

Director of Investor Relations

Home BancShares, Inc.

(501) 328-4625

EX-99.2 4 d281267dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma combined consolidated financial information and explanatory notes present how the combined financial statements of Home BancShares, Inc. (“Home” or the “Company”) and Happy Bancshares, Inc. (“Happy”) may have appeared had the businesses actually been combined. The unaudited pro forma combined consolidated financial information shows the impact of the merger of Home and Happy on the companies’ respective historical financial positions and results of operations under the acquisition method of accounting with Home treated as the acquiror. Under this method of accounting, the assets and liabilities of Happy will be recorded by Home at their estimated fair values as of the date the merger is completed. The unaudited pro forma combined consolidated balance sheet gives effect to the merger as if the transaction had occurred on September 30, 2021. The unaudited pro forma combined consolidated statements of income for the nine months ended September 30, 2021 and for the year ended December 31, 2020 give effect to the merger as if these transactions had been completed on January 1, 2020. The unaudited pro forma combined selected financial data is derived from such balance sheets and statements of income.

According to the terms of the Agreement and Plan of Merger (the “Merger Agreement”), dated September 15, 2021, as amended October 18, 2021 and further amended November 8, 2021 between the Company, Centennial Bank (“Centennial”), the Company’s acquisition subsidiary, HOMB Acquisition Sub III, Inc., Happy, and its subsidiary bank, Happy State Bank (“HSB”) which was announced on September 15, 2021, the Happy shareholders will receive approximately 42.3 million shares of Home common stock upon the completion of the merger, representing 2.17 shares of Home common stock (the “Merger Consideration”) for each share of Happy common stock outstanding at the effective time of the merger (the “Effective Time”), which will include all unvested shares of restricted common stock of Happy outstanding at the Effective Time. No cash consideration will be paid in connection with the merger; however, Happy shareholders will receive cash payments in lieu of any fractional shares of Home common stock to which they are otherwise entitled in connection with the merger. The value of Home’s common stock for determining cash payments in lieu of fractional shares will be determined using a volume-weighted average closing price of Home’s common stock as reported on the New York Stock Exchange (“NYSE”) over the 20-trading day period ending on the third business day prior to the closing of the merger (the “Home Average Closing Price”).

Additionally, holders of options to purchase Happy common stock outstanding at the Effective Time will receive shares of Home common stock, together with any cash in lieu of fractional shares, for each such option equal to the product of (i) the number of shares of Happy common stock subject to the option, multiplied by (ii) the excess, if any, of the Merger Consideration value over the exercise price of the option, less applicable tax withholdings, divided by (iii) the Home Average Closing Price. Similarly, holders of stock appreciation rights of Happy outstanding at the Effective Time will receive a cash payment, without interest, equal to the product of (i) the number of shares of Happy common stock subject to the stock appreciation right, multiplied by (ii) the excess, if any, of the Merger Consideration value over the grant price of the stock appreciation right, less applicable tax withholdings. For purposes of these calculations, the Merger Consideration value will be determined using the Home Average Closing Price, multiplied by 2.17.

The unaudited pro forma combined consolidated financial information set forth below and the explanatory notes that follow are based upon assumptions that 19,412,518 shares of Happy common stock (the number of shares outstanding as of November 1, 2021) are outstanding on the closing date of the merger and that the Home Average Closing Price is equal to $24.05 per share, which represents the volume-weighted average closing price per share of Home’s common stock as reported on Nasdaq for the 20-trading day period ending on November 1, 2021.

The unaudited pro forma combined consolidated financial information has been derived from and should be read in conjunction with the historical consolidated financial statements and the related notes of both Home and Happy as of and for the periods indicated, which for Home are included in its Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the “SEC”) on February 26, 2021, and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2021, June 30, 2021 and September 30, 2021, filed with the SEC on May 6, 2021, August 5, 2021 and November 4, 2021 (as amended on November 5, 2021), respectively, and for Happy, are included in Exhibit 99.3 to Home’s Current Report on Form 8-K filed with the SEC on September 13, 2021.

The unaudited pro forma combined consolidated financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined at the beginning of the period presented and had the impact of possible revenue enhancements and expense efficiencies, among other factors, been considered and, accordingly, does not attempt to predict or suggest future results. It also does not necessarily reflect what the historical results of the combined company would have been had the companies been combined during this period. In addition, as explained in more detail in the accompanying notes to the unaudited pro forma combined consolidated financial information, the preliminary determination of fair values of Happy’s assets acquired and liabilities assumed reflected in the pro forma combined consolidated financial information are subject to adjustment and may vary from the actual fair values assigned that will be recorded upon completion of the merger. Subsequent to the completion of the merger, Home will finalize its determination of the fair values of the acquired assets and assumed liabilities, which could significantly change both the amount and the composition of these estimated purchase accounting adjustments.


Unaudited Pro Forma Combined Consolidated Balance Sheet

As of September 30, 2021

 

     Home
BancShares,
Inc.
    Happy
Bancshares,
Inc.
    Pro Forma
Adjustments
        Pro Forma
Combined
 
  

 

 

   

 

 

   

 

 

     

 

 

 
     (In thousands)  

Assets

          

Cash and due from banks

   $ 146,378     $ 104,500     $ —         $ 250,878  

Interest-bearing deposits with other banks

     3,133,878       795,661       —           3,929,539  
  

 

 

   

 

 

   

 

 

     

 

 

 

Cash and cash equivalents

     3,280,256       900,161       —           4,180,417  

Investment securities – available for sale, net of allowance for credit losses

     3,150,608       1,551,812       —           4,702,420  

Loans receivable

     9,901,100       3,547,154       13,700     (c)     13,461,954  

Allowance for credit losses

     (238,673     (40,305     (36,695   (d)     (315,673
  

 

 

   

 

 

   

 

 

     

 

 

 

Loans receivable, net

     9,662,427       3,506,849       (22,995       13,146,281  

Bank premises and equipment, net

     276,972       157,689       —           434,661  

Foreclosed assets held for sale

     1,171       1,064       (200   (e)     2,035  

Cash value of life insurance

     104,638       105,121       —           209,759  

Accrued interest receivable

     48,577       31,092       —           79,669  

Deferred tax asset, net

     69,724       3,535       11,900     (f)     85,159  

Goodwill

     973,025       129,791       326,043     (g)     1,428,859  

Core deposit and other intangibles

     26,466       11,518       13,695     (h)     51,679  

Other assets

     171,192       44,196       —           215,388  
  

 

 

   

 

 

   

 

 

     

 

 

 

Total assets

   $ 17,765,056     $ 6,442,828     $ 328,443       $ 24,536,327  
  

 

 

   

 

 

   

 

 

     

 

 

 
Liabilities and Stockholders’ Equity                             

Liabilities

          

Deposits:

          

Demand and non-interest-bearing

   $ 4,139,149     $ 1,734,237     $
 

  

 
    $ 5,873,386  

Savings and interest-bearing transaction accounts

     8,813,326       3,308,305       1,300         12,122,931  

Time deposits

     1,050,896       422,491       —           1,473,387  
  

 

 

   

 

 

   

 

 

     

 

 

 

Total deposits

     14,003,371       5,465,033       1,300     (i)     19,469,704  

Securities sold under agreements to repurchase

     141,002       —         —           141,002  

FHLB and other borrowed funds

     400,000       74,652       9,000     (j)     483,652  

Accrued interest payable and other liabilities

     113,721       47,627       11,000     (b)     172,348  

Subordinated debentures

     370,900       159,670       15,500     (k)     546,070  
  

 

 

   

 

 

   

 

 

     

 

 

 

Total liabilities

     15,028,994       5,746,982       36,800         20,812,776  
  

 

 

   

 

 

   

 

 

     

 

 

 

Stockholders’ equity

          

Common stock

     1,640       19,413       423     (a)     2,063  
         (19,413   (l)  

Capital surplus

     1,492,588       294,548       1,016,466     (a)     2,509,054  
         (294,548 )   (l)  

Retained earnings

     1,215,831       364,649       (364,649 )   (l)     1,186,431  
         (29,400   (m)  

Accumulated other comprehensive income

     26,003       17,236       (17,236   (l)     26,003  
  

 

 

   

 

 

   

 

 

     

 

 

 

Total stockholders’ equity

     2,736,062       695,846       291,643         3,723,551  
  

 

 

   

 

 

   

 

 

     

 

 

 

Total liabilities and stockholders’ equity

   $ 17,765,056     $ 6,442,828     $ 328,443       $ 24,536,327  
  

 

 

   

 

 

   

 

 

     

 

 

 

(See accompanying notes to Unaudited Pro Forma Combined Consolidated Financial Statements)


Unaudited Pro Forma Combined Consolidated Income Statement

For the Nine Months Ended September 30, 2021

 

(In thousands, except per share data)

   Home
BancShares,
Inc.
    Happy
Bancshares,
Inc.
    Pro Forma
Adjustments
    Pro
Forma
Combined
 

Interest income

        

Loans

   $ 435,210     $ 141,955     $ (5,299 )(n)    $ 571,866  

Investment securities

        

Taxable

     21,933       12,118       (4,200 )(r)      29,851  

Tax-exempt

     14,815       6,714       —         21,529  

Deposits — other banks

     2,234       901       —         3,135  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     474,192       161,688       (9,499     626,381  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Interest on deposits

     19,781       6,090       (975 )(s)      24,896  

FHLB and other borrowed funds

     5,688       1,403         7,091  

Securities sold under agreements to repurchase

     399       —         —         399  

Subordinated debentures

     14,373       6,607       (2,578 )(t)      18,402  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     40,241       14,100       (3,553     50,788  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     433,951       147,588       (5,946     575,593  
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for credit losses

     —         (11,820     —         (11,820

Provision for credit losses – unfunded commitments

     (4,752     (180     —         (4,932
  

 

 

   

 

 

   

 

 

   

 

 

 

Total credit loss (benefit) expense

     (4,752     (12,000     —         (16,752
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     438,703       159,588       (5,946     592,345  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income

        

Service charges on deposit accounts

     16,059       8,515       —         24,574  

Other service charges and fees

     25,318       10,675       (4,500 )(u)      31,493  

Trust fees

     1,445       7,736       —         9,181  

Mortgage lending income

     20,317       6,298       —         26,615  

Insurance commissions

     1,556       —         —         1,556  

Increase in cash value of life insurance

     1,548       1,913       —         3,461  

Dividends from FHLB, FRB, FNBB & other

     13,916       20     —         13,936  

Gain on sale of SBA loans

     1,588       —         —         1,588  

Loss on sale of branches, equipment and other assets, net

     (86     —         —         (86

Gain on OREO, net

     1,266       285       —         1,551  

Gain on securities, net

     219       758       —         977  

Fair value adjustment for marketable securities

     7,093       (44     —         7,049  

Other income

     15,366       6,502       —         21,868  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     105,605       42,658       (4,500     143,763  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense

        

Salaries and employee benefits

     126,990       74,885       —         201,875  

Occupancy and equipment

     27,584       15,817       —         43,401  

Data processing expense

     17,787       9,208       —         26,995  

Core deposit intangible amortization

     1,006       1,230       661 (o)      2,897  

Other operating expenses

     48,100       22,684       —         70,784  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     211,467       123,824       661       345,952  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     322,841       78,442       (11,107     390,156  

Income tax expense

     77,177       14,332       (2,903 )(p)      88,606  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 245,664     $ 64,090     $ (8,204   $ 301,550  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 1.49     $ 3.27       —       $ 1.46  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 1.49     $ 3.25       —       $ 1.45  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares outstanding

     164,717       19,624       42,282  (q)      206,999  

Average diluted shares outstanding

     165,050       19,698       42,282  (q)      207,332  

(See accompanying notes to Unaudited Pro Forma Combined Consolidated Financial Statements)


Unaudited Pro Forma Combined Consolidated Income Statement

For the Year Ended December 31, 2020

 

(In thousands, except per share data)

   Home
BancShares,
Inc.
    Happy
Bancshares,
Inc.
    Pro Forma
Adjustments
    Pro
Forma
Combined
 

Interest income

        

Loans

   $ 625,338     $ 178,890     $ (7,065 )(n)    $ 797,163  

Investment securities

        

Taxable

     32,596       10,015       (5,600 )(r)      37,011  

Tax-exempt

     16,158       7,069       —         23,227  

Deposits — other banks

     1,849       1,177       —         3,026  

Federal funds sold

     21       —         —         21  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     675,962       197,151       (12,665     860,448  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

        

Interest on deposits

     63,110       12,807       (1,300 ) (s)      74,617  

Federal funds purchased

     13       —         —         13  

FHLB and other borrowed funds

     9,506       2,580       —         12,086  

Securities sold under agreements to repurchase

     1,167       —         —         1,167  

Subordinated debentures

     19,611       7,094       (3,437 ) (t)      23,268  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     93,407       22,481       (4,737     111,151  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     582,555       174,670       (7,928     749,297  
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for credit losses

     112,264       23,350       —         135,614  

Provision for credit losses – unfunded commitments

       (312     —         (312
  

 

 

   

 

 

   

 

 

   

 

 

 

Total credit loss expense

     112,264       23,038       —       135,302  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for credit losses

     470,291       151,632       (7,928     613,995  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest income

        

Service charges on deposit accounts

     21,381       10,380       —         31,761  

Other service charges and fees

     30,686       10,498       (6,000 ) (u)      35,184  

Trust fees

     1,633       8,985       —         10,618  

Mortgage lending income

     29,065       6,439       —         35,504  

Insurance commissions

     1,848       —         —         1,848  

Increase in cash value of life insurance

     2,200       3,562       —         5,762  

Dividends from FHLB, FRB, FNBB & other

     12,472       217       —         12,689  

Gain on sale of SBA loans

     645       —         —         645  

Gain on sale of branches, equipment and other assets, net

     326       —         —         326  

Gain (loss) on OREO, net

     1,132       (767     —         365  

Gain on securities, net

     —         9,045       —         9,045  

Fair value adjustment for marketable securities

     (1,978     47       —         (1,931

Other income

     12,376       4,252       —         16,628  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     111,786       52,658       (6,000     158,444  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense

        

Salaries and employee benefits

     163,950       87,736       —         251,686  

Occupancy and equipment

     38,412       16,662       —         55,074  

Data processing expense

     19,032       10,275       —         29,307  

Core deposit intangible amortization

     5,844       1,040       1,481  (o)      8,365  

Other operating expenses

     77,136       27,423       —         104,559  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     304,374       143,136       1,481       448,991  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     277,703       61,154       (15,409     323,448  

Income tax expense

     63,255       10,625       (4,027 )(p)      69,853  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 214,448     $ 50,529     $ (11,382   $ 253,595  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 1.30     $ 2.72       —       $ 1.22  
  

 

 

   

 

 

     

 

 

 

Diluted earnings per common share

   $ 1.30     $ 2.71       —       $ 1.22  
  

 

 

   

 

 

     

 

 

 

Average common shares outstanding

     165,373       18,548     42,282  (q)      207,655  

Average diluted shares outstanding

     165,373       18,638     42,282  (q)      207,655  

(See accompanying notes to Unaudited Pro Forma Combined Consolidated Financial Statements)


Notes to Unaudited Pro Forma Combined Consolidated Financial Statements

Note 1. Basis of Presentation

The unaudited pro forma combined consolidated financial statements and explanatory notes show the impact on the historical financial condition and results of operations of Home resulting from the Happy acquisition under the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of Happy are recorded by Home at their respective fair values as of the date the transaction is completed. The unaudited pro forma combined consolidated balance sheets combine the historical financial information of Home as of September 30, 2021, and assume that the Happy acquisition was completed on that date. The unaudited pro forma combined consolidated statements of income for the nine months ended September 30, 2021 and for the year ended December 31, 2020, give effect to the Happy acquisition as if the transactions had been completed on January 1, 2020.

Since the transactions are recorded using the acquisition method of accounting, all loans are recorded at fair value, including adjustments for credit quality, and no allowance for credit losses is carried over to Home’s balance sheet. In addition, certain anticipated nonrecurring costs associated with the Happy acquisition such as potential severance, professional fees, legal fees and conversion-related expenditures are not reflected in the pro forma statements of income and will be expensed as incurred.

While the recording of the acquired loans at their fair value will impact the prospective determination of the provision for credit losses and the allowance for credit losses (ACL), for purposes of the unaudited pro forma combined consolidated statement of income for the nine months ended September 30, 2021 and for the year ended December 31, 2020, Home assumed no adjustments to the historical amount of Happy’s provision for credit losses. If such adjustments were estimated, there could be a significant change to the historical amounts of provision for credit losses presented.

Note 2. Merger and Acquisition Integration Costs

The retail branch operations, commercial lending activities, along with all other operations of Happy’s bank subsidiaries HSB, will be integrated into Centennial. The operation integration and the system conversion for HSB are scheduled for the second quarter of 2022.

The specific details of the plan to integrate the operations of HSB will continue to be refined over the next several months, and will include assessing personnel, benefit plans, premises, equipment and service contracts to determine where we may take advantage of redundancies. Certain decisions arising from these assessments may involve involuntary termination of employees, vacating leased premises, changing information systems, canceling contracts with certain service providers, and selling or otherwise disposing of certain premises, furniture and equipment. Home also expects to incur merger-related costs including professional fees, legal fees, system conversion costs and costs related to communications with customers and others. To the extent there are costs associated with these actions, the costs will be recorded based on the nature of the cost and the timing of these integration actions.

Note 3. Estimated Annual Cost Savings

Home expects to realize cost savings and to generate revenue enhancements from the Happy acquisition. Cost savings for Happy are projected at 33% of non-interest expense and are estimated to be $53.2 million, on a pre-tax basis, and $39.9 million, net of taxes, resulting in an increase of $0.19 to basic and diluted earnings per share. These cost savings and revenue enhancements are not reflected in the pro forma combined consolidated financial statements, and there can be no assurance they will be achieved in the amount or manner currently contemplated.

Note 4. Pro Forma Adjustments

The following pro forma adjustments have been reflected in the unaudited pro forma combined consolidated financial statements presented for Happy. All adjustments are based on current assumptions and valuations, which are subject to change. Unless otherwise noted, all adjustments are based on assumptions and valuations as of the merger agreement dates for the respective pending acquisitions and are subject to change.

 

  (a)

This represents the estimated merger consideration of $1.02 billion in common stock of Home.

 

  (b)

This represents the establishment of the ACL for Unfunded Commitments under the (“CECL”).

 

  (c)

This adjustment represents Home’s estimate of the necessary adjustment of Happy’s loan portfolio to estimated fair value.

 

  (d)

This adjustment represents the elimination of Happy’s allowance for loan losses as part of the purchase accounting adjustments and the establishment of the ACL under CECL.


  (e)

This adjustment represents Home’s estimate of the necessary write down of Happy’s foreclosed assets due to the manner in which these assets would be resolved by the acquirer.

 

  (f)

This adjustment is for the current and deferred income tax assets and liabilities recorded to reflect the differences in the carrying values of the acquired assets and assumed liabilities for financial reporting purposes and the cost basis for U.S. federal income tax purposes at Home’s statutory federal and state income tax rate of 26.135%. Additionally, this adjustment includes the deferred tax asset (DTA) on the established ACL under CECL.

 

  (g)

The consideration paid for Happy exceeds the fair value of the assets received; therefore, Home expects to record $455.8 million of goodwill.

 

  (h)

This intangible asset represents the value of the relationships Happy had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits.

 

  (i)

The fair value of deposits is estimated based on current market rates for similar products.

 

  (j)

The fair value of FHLB borrowed funds is estimated based on borrowing rates currently available to Home for borrowings with similar terms and maturities.

 

  (k)

This adjustment represents Home’s estimate of the necessary adjustment of Happy’s trust preferred and subordinated debentures to estimated fair value.

 

  (l)

This adjustment represents the elimination of the historical equity of Happy as part of the purchase price adjustment.

 

  (m)

This adjustment represents the equity impact of the establishment of the ACL on Happy’s portfolio under CECL.

 

  (n)

Upon the completion of the merger, the Company will evaluate the acquired loan portfolio to finalize the necessary credit and interest rate fair value adjustments. Subsequently, the interest rate portion of the fair value adjustment will be accreted into earnings as an adjustment to the yield of such acquired loans. This adjustment represents the Company’s best estimate of the expected accretion that would have been recorded in 2020 and the first nine months of 2021 assuming the merger closed on January 1, 2020. Subsequent to the closing of the transaction, the amount and timing of the estimated accretion of this purchase accounting adjustment could be revised significantly.

 

  (o)

This adjustment represents the expected amortization during 2020 and the first nine months of 2021 of the core deposit intangible asset expected to be acquired in the merger, assuming the transaction closed on January 1, 2020. The estimated useful life of this intangible asset is estimated to be ten years. This intangible asset will be amortized using the straight-line method of amortization.

 

  (p)

This adjustment represents income tax expense on the pro forma adjustments at the Home’s statutory U.S. federal and state income tax rate of 26.135%.

 

  (q)

Pro forma weighted average common shares outstanding assumes 19,412,518 shares of Happy common stock outstanding at the time of the merger, the issuance of 2.17 shares of Home common stock for every share of Happy common stock outstanding at the time of the merger, the issuance of an aggregate of 157,125 shares of Home common in settlement of all in-the-money Happy stock options outstanding at the time of the merger, assuming a Home Average Closing Price (defined below) of $24.05 (equal to the volume-weighted average closing price per share of Home’s common stock as reported on Nasdaq for the 20 consecutive trading day period ending on November 1, 2021), and that all 448,211 Happy stock options outstanding on November 1, 2021 remain outstanding at the time of the merger.

In accordance with the Merger Agreement, Happy shareholders will receive, in exchange for each share of Happy common stock, 2.17 shares of Home common stock, and holders of Happy stock options outstanding at the time of the merger having an exercise price below the Merger Consideration value will receive, upon cancellation and conversion of each such option, a number of shares of Home common stock equal to the excess of the Merger Consideration value over the exercise price of each option, divided by the value of Home’s common stock at the time of the merger. For purposes of this calculation, the Merger Consideration value and the value of Home’s common stock at the time of the merger will be determined using a volume-weighted average closing price of Home’s common stock as reported on the NYSE over the 20 consecutive trading day period ending on the third business day prior to the closing of the merger.


  (r)

This adjustment represents accretion of investment securities discount from estimated fair value adjustment.

 

  (s)

This adjustment represents amortization of deposit premium resulting from estimated fair value adjustment over the remaining terms to maturity of deposits.

 

  (t)

This adjustment represents amortization of subordinated debentures premium resulting from estimated fair value adjustment.

 

  (u)

This adjustment represents estimated reduction in income due to Durbin limitations.

Note 5. Reclassifications

Certain items within the pro forma financial statements for Happy Bancshares, Inc. have been reclassified to conform to the presentation of the financial statements for Home BancShares, Inc. and provide more comparative information. These reclassifications had no effect on net income or stockholders’ equity.

EX-99.3 5 d281267dex993.htm EX-99.3 EX-99.3

Exhibit 99.3

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF HAPPY

 

     Page  

Unaudited Consolidated Financial Statements as of and for the three and nine months ended September 30, 2021:

  

Consolidated Balance Sheets as of September 30, 2021 and 2020 and December 31, 2020

     2  

Consolidated Statements of Income for the three months and nine ended September 30, 2021 and 2020

     3  

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020

     5  

Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2021 and 2020

     6  

Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020

     8  

Notes to Consolidated Financial Statements

     10  

Audited Consolidated Financial Statements as of and for the years ended December 31, 2020 and 2019:

  

Reports of BKD, LLP, Independent Registered Public Accounting Firm

     65  

Management Report Regarding Statement of Management’s Responsibilities, Compliance with Designated Laws and Regulations, and Management’s Assessment of Internal Control over Financial Reporting

     70  

Consolidated balance sheets as of December 31, 2020 and 2019

     72  

Consolidated Statements of Income for the years ended December 31, 2020 and 2019

     73  

Consolidated Statements of Comprehensive Income for the years ended December 31, 2020 and 2019

     75  

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2020 and 2019

     76  

Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019

     78  

Notes to Consolidated Financial Statements

     80  

 

1


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in thousands, except for share amounts)

 

     September 30,      December 31,  
     2021      2020      2020  
     (Unaudited)         

Assets

        

Cash and noninterest-bearing deposits with other banks

   $ 104,500      $ 94,173      $ 123,327  

Interest-bearing deposits with other banks

     795,661        313,021        597,880  
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

     900,161        407,194        721,207  

Debt securities available for sale, at fair value

     1,551,812        869,372        958,262  

Loans held for sale

     28,954        42,778        37,280  

Loans, net of allowance for loan losses $40,305, $46,742 and $54,855 at September 30, 2021 and 2020 and December 31, 2020, respectively

     3,477,895        3,578,007        3,441,128  

Premises and equipment, net

     157,689        151,170        157,076  

Other real estate owned

     1,064        1,660        1,080  

Cash surrender value of life insurance

     105,121        112,744        113,230  

Goodwill

     129,791        126,132        126,114  

Other identifiable intangible assets, net

     11,518        12,091        11,909  

Equity investments

     30,242        28,451        28,696  

Other assets

     48,581        45,927        44,949  
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 6,442,828      $ 5,375,526      $ 5,640,931  
  

 

 

    

 

 

    

 

 

 

Liabilities

        

Noninterest-bearing deposits

   $ 1,734,237      $ 1,389,671      $ 1,504,410  

Interest-bearing deposits

     3,730,796        3,049,316        3,181,250  
  

 

 

    

 

 

    

 

 

 

Total deposits

     5,465,033        4,438,987        4,685,660  

Advances from Federal Home Loan Bank

     74,652        74,719        74,701  

Subordinated debentures, net of premium

     21,446        21,330        21,359  

Subordinated notes, net of unamortized issuance cost

     138,224        145,254        145,370  

Accrued expenses and other liabilities

     47,627        52,101        45,201  
  

 

 

    

 

 

    

 

 

 

Total liabilities

     5,746,982        4,732,391        4,972,291  

Shareholders' Equity

        

Common stock, $1 par value; 50,000,000 shares authorized; 19,412,518, 19,672,284 and 19,837,972 shares issued and outstanding at September 30, 2021 and 2020 and December 31, 2020, respectively

     19,413        19,672        19,838  

Additional paid-in capital

     294,548        308,009        317,732  

Retained earnings

     364,649        289,422        300,559  

Accumulated other comprehensive income, net of tax

     17,236        26,032        30,511  
  

 

 

    

 

 

    

 

 

 

Total shareholders' equity

     695,846        643,135        668,640  
  

 

 

    

 

 

    

 

 

 

Total liabilities and shareholders' equity

   $ 6,442,828      $ 5,375,526      $ 5,640,931  
  

 

 

    

 

 

    

 

 

 

See Notes to the Unaudited Consolidated Financial Statements

 

2


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2021     2020      2021     2020  

Interest income

         

Loans, including fees

   $ 46,764     $ 49,945      $ 141,955     $ 127,849  

Debt securities:

         

Taxable

     4,856       2,428        12,118       7,341  

Tax exempt

     2,377       2,010        6,714       5,107  

Deposits with other banks

     348       183        901       959  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

     54,345       54,566        161,688       141,256  

Interest expense

         

Deposits

     2,008       2,363        6,090       10,612  

Advances from Federal Home Loan Bank and other borrowings

     468       642        1,403       2,104  

Subordinated debentures

     186       187        562       475  

Subordinated notes, including amortization of issuance costs

     2,043       1,871        6,045       4,229  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     4,705       5,063        14,100       17,420  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     49,640       49,503        147,588       123,836  

Provision for loan losses

     1,400       6,400        (11,820     14,750  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     48,240       43,103        159,408       109,086  

Noninterest income

         

Service charges and other fees

     7,291       6,000        18,827       14,861  

Net realized gain on sales of debt securities available for sale

     816       176        758       7,531  

Net holding gain (loss) on marketable equity securities

     (10     —          (44     53  

Real estate mortgage fees

     1,869       1,663        6,298       3,901  

Trust, custodian and investment center fees

     3,287       2,597        9,780       7,581  

Other

     1,330       1,389        6,767       4,408  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     14,583       11,825        42,386       38,335  
  

 

 

   

 

 

    

 

 

   

 

 

 

See Notes to the Unaudited Consolidated Financial Statements

 

3


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2021      2020      2021      2020  

Noninterest expense

           

Salaries and employee benefits

   $ 26,654      $ 24,123      $ 74,885      $ 61,493  

Occupancy and equipment, net

     5,321        4,341        15,817        11,622  

Legal and professional

     3,356        2,591        7,027        5,121  

Data processing

     3,393        2,782        9,208        6,899  

FDIC assessment

     417        351        1,202        456  

Debit card

     399        394        1,328        1,000  

Other

     3,857        4,153        13,905        13,175  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     43,397        38,735        123,372        99,766  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     19,426        16,193        78,422        47,655  

Income tax expense (includes $171 and $37 for the three months ended September 30, 2021 and 2020 respectively and includes $159 and $1,582 for the nine months ended September 30, 2021 and 2020 respectively, related to income tax expense for realized gains reclassified from other comprehensive income)

     3,572        2,912        14,332        8,263  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 15,854      $ 13,281      $ 64,090      $ 39,392  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.81      $ 0.72      $ 3.27      $ 2.17  

Diluted

   $ 0.81      $ 0.72      $ 3.25      $ 2.16  

See Notes to the Unaudited Consolidated Financial Statements

 

4


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2021     2020     2021     2020  

Net income

   $ 15,854     $ 13,281     $ 64,090     $ 39,392  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other items of comprehensive income (loss)

        

Unrealized gain (loss) arising during the period on debt securities available for sale

     (11,269     5,654       (16,046     32,309  

Reclassification adjustment for realized gain on debt securities available for sale included in net income

     (816     (176     (758     (7,531
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other items of comprehensive income (loss)

     (12,085     5,478       (16,804     24,778  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income before tax

     3,769       18,759       47,286       64,170  

Less income tax expense (benefit) related to other items of comprehensive income

     (2,538     1,150       (3,529     5,203  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 6,307     $ 17,609     $ 50,815     $ 58,967  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to the Unaudited Consolidated Financial Statements

 

5


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

For the Three and Nine Months Ended September 30, 2021

(Dollars in thousands, except for share amounts)

(Unaudited)

 

     Common Stock ($1 par)     Additional
Paid-In
Capital
    Retained
Earnings
     Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders'
Equity
 
     Shares     Amount  

Balance at January 1, 2021

     19,837,972     $ 19,838     $ 317,732     $ 300,559      $ 30,511     $ 668,640  

Net income

     —         —         —         14,859        —         14,859  

Purchase and retirement of common stock

     (177,707     (178     (9,324     —          —         (9,502

Stock-based compensation activity

     8,413       9       (773     —          —         (764

Net change in unrealized gains and losses on debt securities available for sale, net of tax benefit of $5,817

     —         —         —         —          (21,884     (21,884
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at March 31, 2021 (unaudited)

     19,668,678     $ 19,669     $ 307,635     $ 315,418      $ 8,627     $ 651,349  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

     —         —         —         33,377        —         33,377  

Purchase and retirement of common stock

     (77,761     (78     (4,082     —          —         (4,160

Stock-based compensation activity

     5,000       5       261       —          —         266  

Net change in unrealized gains and losses on debt securities available for sale, net of taxes of $4,826

     —         —         —         —          18,156       18,156  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2021 (unaudited)

     19,595,917     $ 19,596     $ 303,814     $ 348,795      $ 26,783     $ 698,988  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

     —         —         —         15,854        —         15,854  

Purchase and retirement of common stock

     (183,399     (183     (9,629     —          —         (9,812

Stock-based compensation activity

     —         —         363       —          —         363  

Net change in unrealized gains and losses on debt securities available for sale, net of tax benefit of $2,538

     —         —         —         —          (9,547     (9,547
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at September 30, 2021 (unaudited)

     19,412,518     $ 19,413     $ 294,548     $ 364,649      $ 17,236     $ 695,846  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

See Notes to the Unaudited Consolidated Financial Statements

 

6


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

For the Three and Nine Months Ended September 30, 2020

(Dollars in thousands, except for share amounts)

(Unaudited)

 

     Common Stock ($1 par)     Additional
Paid-In
Capital
    Retained
Earnings
     Accumulated
Other
Comprehensive
Income (Loss)
     Total
Shareholders'
Equity
 
     Shares     Amount  

Balance at January 1, 2020

     18,593,298     $ 18,593     $ 260,467     $ 250,030      $ 6,458      $ 535,548  

Net income

     —         —         —         12,895        —          12,895  

Issuance of common stock

     60,187       60       2,845       —          —          2,905  

Purchase and retirement of common stock

     (925,891     (925     (43,747     —          —          (44,672

Stock-based compensation activity

     12,236       12       (1,920     —          —          (1,908

Net change in unrealized gains and losses on debt securities available for sale, net of taxes of $883

     —         —         —         —          3,319        3,319  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance at March 31, 2020 (unaudited)

     17,739,830     $ 17,740     $ 217,645     $ 262,925      $ 9,777      $ 508,087  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income

     —         —         —         13,216        —          13,216  

Issuance of common stock

     12,022       12       568       —          —          580  

Purchase and retirement of common stock

     (129,181     (129     (6,103     —          —          (6,232

Stock-based compensation activity

     (1,262     (2     (437     —          —          (439

Net change in unrealized gains and losses on debt securities available for sale, net of tax benefit of $3,170

     —         —         —         —          11,927        11,927  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance at June 30, 2020 (unaudited)

     17,621,409     $ 17,621     $ 211,673     $ 276,141      $ 21,704      $ 527,139  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income

     —         —         —         13,281        —          13,281  

Issuance of common stock

     2,092,607       2,093       98,874       —          —          100,967  

Purchase and retirement of common stock

     (48,913     (49     (2,295     —          —          (2,344

Stock-based compensation activity

     7,181       7       (243     —          —          (236

Net change in unrealized gains and losses on debt securities available for sale, net of taxes of $1,150

     —         —         —         —          4,328        4,328  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance at September 30, 2020 (unaudited)

     19,672,284     $ 19,672     $ 308,009     $ 289,422      $ 26,032      $ 643,135  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

See Notes to the Unaudited Consolidated Financial Statements

 

7


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2021     2020  

Cash flows from operating activities

    

Net income

   $ 64,090     $ 39,392  

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

    

Provision for loan losses

     (11,820     14,750  

Securities premium amortization (discount accretion), net

     6,561       4,960  

Amortization of deferred loan origination fees

     (8,724     (6,227

Accretion of net discount recognized on acquired loans

     (3,558     —    

Depreciation

     8,695       7,307  

Amortization of other indentifiable intangibles

     1,231       640  

Net realized gain on sales of securities available for sale

     (758     (7,531

Net holding (gain) loss on marketable equity securities

     44       (53

Gain on sale of premises and equipment

     —         (12

Gain on sale of other real estate owned, net

     (554     (18

Reduction in value of other real estate owned

     10       253  

Appreciation in cash surrender value of life insurance

     (1,910     (1,811

Non-cash (income) loss on equity investments

     (443     74  

Stock-based compensation

     1,097       825  

Deferred income tax expense (benefit)

     (2,252     3,716  

Amortization of issuance costs on subordinated notes

     354       365  

Accretion of fair value discount on subordinated debentures

     87       —    

Excess tax benefit related to stock-based compensation awards

     359       752  

Changes in:

    

Other assets

     3,217       (10,999

Accrued expenses and other liabilities

     2,042       12,582  

Originations of loans held for sale

     (155,550     (164,097

Proceeds from loans held for sale

     173,851       128,529  
  

 

 

   

 

 

 

Net cash provided by operating activities

     76,069       23,397  
  

 

 

   

 

 

 

Cash flows from investing activities

    

Cash acquired in connection with acquisitions, net

     106,625       126,439  

Activity in debt securities available for sale:

    

Sales

     112,933       111,820  

Maturities, calls and principal repayments

     63,860       103,644  

Purchases

     (774,510     (305,574

Net incrrease in loans

     (7,716     (352,640

Proceeds from sale of premises and equipment, net

     —         14  

Additions to premises and equipment

     (6,765     (16,609

Proceeds from sale of other real estate owned

     3,563       418  

Purchase of life insurance policies

     (2,000     (12,800

Proceeds from life insurance policies

     631       534  

Surrender of life insurance policies

     11,387       —    

Premiums paid on life insurance policies

     —         (11

Investments in intangibles

     (300     (1,150

Purchase of equity investments

     (1,130     (678

Proceeds from redemption of equity securities

     10       10,961  
  

 

 

   

 

 

 

Net cash used in investing activities

     (493,412     (335,632
  

 

 

   

 

 

 

See Notes to the Unaudited Consolidated Financial Statements

 

8


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2021     2020  

Cash flows from financing activities

    

Net increase in deposits

   $ 628,552     $ 472,610  

Repayments of Federal Home Loan Bank advances

     (49     (56,917

Proceeds from subordinated notes, net of issuance costs

     —         137,675  

Repayment of subordinated notes

     (7,500     (65,000

Proceeds from issuance of common stock

     —         67,971  

Purchase and retirement of common stock

     (23,474     (53,248

Purchase and retirement of common stock related to stock-based award activities, net of tax payments of $129 and $239 for the nine months ended September 30, 2021 and 2020, respectively

     (1,232     (3,408
  

 

 

   

 

 

 

Net cash provided by financing activities

     596,297       499,683  
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     178,954       187,448  

Cash and cash equivalents at beginning of period

     721,207       219,746  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 900,161     $ 407,194  
  

 

 

   

 

 

 

Supplementary cash flow information

    

Cash transactions:

    

Interest paid

   $ 16,405     $ 18,174  

Income taxes paid

     15,986       12,075  

Non-cash transactions:

    

Transfer of loans to loans held for sale (portfolio of mortgage loans)

     9,975       —    

See Notes to the Unaudited Consolidated Financial Statements

 

9


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Happy Bancshares, Inc. (Bancshares, or the Company) provides through its subsidiary, Happy State Bank, a Texas state banking corporation (the Bank), loans, trust, and banking services to consumers and commercial customers throughout the Texas Panhandle, Hill Country and South Plains, and in Dallas, Fort Worth and Abilene, Texas. The Company also provides various trust services to consumer and commercial customers throughout the United States.

The accounting and reporting policies of the Company conform in all material respects with U.S. generally accepted accounting principles (GAAP) and to general practices of the banking industry. Policies and practices which materially affect the determination of financial position, results of operations and cash flows are summarized below.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial statements, but do not include all of the information and footnotes required for complete financial statements. In the opinion of management, these interim unaudited consolidated financial statements include all adjustments necessary for a fair presentation. The consolidated balance sheet as of December 31, 2020 has been derived from the audited consolidated financial statements as of that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

The accompanying unaudited consolidated financial statements include the accounts of Bancshares and all other entities in which Bancshares has a controlling financial interest, including its wholly-owned subsidiary, the Bank, collectively referred to as “the Company.” All significant intercompany transactions and balances have been eliminated in consolidation.

The accompanying consolidated financial statements also include the accounts of 1908 Properties, LLC, a wholly-owned subsidiary of the Bank (1908 Properties).

The primary assets of 1908 Properties are commercial properties in Amarillo, Bedford and a newly acquired building renovation project in Round Rock, Texas. The Bank leases from 1908 Properties certain properties in Amarillo which it uses as its headquarters and from which it also earns sublease income (the Headquarters Property). The Bedford property also earns sublease income. Included on the consolidated balance sheet as of September 30, 2021 is a net balance in “premises and equipment” of $30,758,000 for these properties. An additional balance of $10,108,000 remains in construction in progress related to land intended to be used for parking at the Headquarters property and upgrades to the Bedford property. Costs to complete these projects have not yet been determined. The Bank manages the Headquarters Property and 1908 Properties’ operating activities. A third party manages the Bedford property.

The Company has one reportable segment. The Company’s chief operating decision-maker uses consolidated and Bank results to make operating and strategic decisions.

In December 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-12, “Definition of a Public Business Entity.” ASU No. 2013-12 amended the master glossary applied by the FASB as it relates to the definition of a Public Business Entity (PBE) for purposes of application of GAAP. Authoritative clarifications required that the Company re-assess its classification under ASU No. 2013-12. In 2017, the Company determined that it is not a PBE.

 

10


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses, the valuation of goodwill, as well as assets and liabilities acquired in business combinations, and the valuation of other real estate owned.

Additionally, accounting measurements at interim dates inherently involve greater reliance on estimates than at year end, and the results for the interim periods shown in this report are not necessarily indicative of results to be expected for the full fiscal year. These interim unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes for the year ended December 31, 2020.

Significant Group Concentrations of Credit Risk

Most of the Company’s loans and banking activity are with customers located within the following areas in Texas: the Texas Panhandle; the Texas South Plains; the Central Texas Hill Country; the Dallas-Fort Worth metroplex; and Abilene. The Company’s trust activities are with customers located throughout the United States. The Company does not have any significant concentrations to any one industry or customer.

The Company carries certain assets with other financial institutions which are subject to credit risk by the amount such assets exceed federal deposit insurance limits. At September 30, 2021 and 2020 and December 31, 2020, the Company’s assets on deposit with these institutions in excess of the federal deposit insurance limits were $101,754,000, $130,001,000, and $121,263,000, respectively. Management monitors the financial stability of these correspondent banks and considers amounts advanced in excess of FDIC insurance limits to present no significant additional risk to the Company.

Cash and Cash Equivalents

Cash and cash equivalents include cash, balances due from banks, federal funds sold and securities purchased under resale agreements, all of which mature within ninety days. Interest-bearing deposits with other banks are demand accounts and have a term within ninety days.

Securities

Debt securities not classified as held to maturity or trading are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of tax.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities to the call date or maturity, whichever is applicable. Gain or loss on the sale of securities is recorded on the trade date and is determined using the specific identification method and are included in non-interest income. Purchases and sales of investment securities are recorded on a trade-date basis.

 

11


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Securities (continued)

 

Declines in the fair value of securities available for sale below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In determining whether other-than temporary impairment exists, management considers many factors, including the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Investments in equity securities without a readily determinable fair value are carried at cost minus impairment plus or minus changes in observable price changes for the identical or similar instruments. Any changes to the cost basis of these investments are recorded in the income statement. These investments are reviewed periodically to determine if an impairment charge is necessary.

Loans Held for Sale and Mortgage-Related Derivatives

As part of its standard mortgage lending practice, the Company agrees to lock in the interest rate on mortgage originations. The Company also routinely commits to sell new mortgage originations into the secondary market. These interest rate lock commitments (IRLCs) and forward sales commitments (FSCs) are both deemed to be derivatives under GAAP. The fair values of both derivatives are based primarily on fluctuations in interest rates subsequent to the respective commitment dates. At September 30, 2021 and 2020, the Company’s IRLC and FSC derivative assets and corresponding derivative liabilities were not material.

Once an IRLC is converted into a loan that was originated and intended for sale in the secondary market, it is classified as held for sale and carried at the lower of aggregate cost or estimated fair value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. There were no unrealized losses recognized as of September 30, 2021 and 2020 and December 31, 2020.

Included in loans held for sale as of September 30, 2021 is a portfolio of approximately $9,975,000 of mortgage loans that management is marketing for sale and has, accordingly, transferred from gross loans held for investment. These loans are carried at their aggregate cost, which is below the estimated fair value as of the balance sheet date. Management did not market any mortgage loans as for sale as of September 30, 2020 and December 31, 2020.

Gains and losses on sales of mortgage loans originated for sale are included in “real estate mortgage fees” in the consolidated statements of income.

Loans

The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by commercial loans throughout the Company’s service area. The ability of the Company’s debtors to honor their contracts is largely dependent upon the general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances net of any unearned income, charge-offs, and unamortized deferred fees and costs on originated loans. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income over the lives of the related loans using a level yield methodology without (except for residential mortgage loans not held for sale) anticipating prepayments. Interest income is accrued based on the unpaid principal balance.

 

12


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Acquired Loans

The Company evaluates all acquired loans for evidence of deterioration in credit quality since origination and evaluates whether it is probable that the Company will collect all contractually required payments from the borrower. Acquired loans from the transactions accounted for as a business combination include both loans with evidence of credit deterioration and performing loans. For performing loans, the related difference in the initial fair value and unpaid principal balance (the discount) is recognized as interest income on a level yield basis over the life of the loan.

The allowance for loan loss methodology for acquired performing loans includes estimating the change in risk on the loans from purchase date compared to the remaining unearned net discount value. If there is deterioration in the pool of loans, an allowance is recorded through provision expense.

For purchase credit impaired (PCI) loans, the Company recognizes the difference between the undiscounted cash flows the Company expects at the time of acquisition to be collected and the investment in the loan, or the accretable yield, as interest income using the interest method over the life of the loan. The Company does not recognize contractually required payments for interest and principal that exceed undiscounted cash flows expected at acquisition, or the nonaccretable difference, as a yield adjustment, loss accrual or valuation allowance. Increases in the expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over the loan’s remaining life, while decreases in expected cash flows are recognized as impairment. Credit deterioration on these loans incurred subsequent to the acquisition date is recognized in the allowance for loan losses through the provision.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable incurred loan losses and is established through a provision for loan losses charged to expense. Estimated loan losses represent the probable amount of loans that the Company will be unable to collect given circumstances as of the date of the balance sheet. Actual loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

Management estimates the allowance balance based on various factors including the following: past loan loss experience; the nature and composition of the loan portfolio; information about specific borrower situations and underlying collateral values; economic conditions; and other factors. Management is responsible for determining the level of the allowance for loan losses, subject to review by the audit committee of the Company’s Board of Directors, and for determining its adequacy relative to the estimated losses in the loan portfolio.

Nonperforming loans are reviewed in accordance with applicable accounting guidance on impaired loans. If necessary, a specific allowance is established for these loans. Impaired loans include nonaccrual loans, troubled debt restructurings (TDRs) and partially charged-off loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case

 

13


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Allowance for Loan Losses (continued)

 

basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of delay, the reason for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Impairment for nonperforming loans is measured on a loan by loan basis for loans generally over $250,000. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Impairment is computed as the excess of the carrying value of the loan over either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent, and a portion of the allowance is specifically allocated to such impairments.

In addition to the specific allocations related to impaired loans, the allowance includes a general component for homogenous pools of non-impaired loans. This general component is based on historical loss experience adjusted for qualitative factors. The historical loss experience is determined by portfolio sector (Commercial; Real Estate - Other; Real Estate - 1-4 Family; Agriculture; and Consumer) and is based on the actual history of losses, net of recoveries, experienced by the Company over the most recent three years. This actual loss experience is supplemented with relevant qualitative factors for each portfolio sector, including the following: levels of and trends in delinquencies, criticized loans and impaired loans (both TDRs and nonaccrual loans); levels of and trends in charge-offs and recoveries; trends in loan volume and concentrations (especially in the real estate sector); national and local economic trends and conditions (including, for agriculture loans, trends in commodity prices and precipitation levels; and trends in oil and gas prices for energy loans in the commercial sector); changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff; and loss development periods. This qualitative factor evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available.

Though portions of the allowance relate to specific allocations for impaired loans, the entire allowance is available for any loan which should, in management’s judgment, be charged off as a loss.

The allowance does not include amounts related to accrued interest receivable as accrued interest receivable is reversed when a loan is placed on nonaccrual status.

The various analyses involved in management’s estimate of the allowance are related to and performed in concert with management’s periodic and systematic detailed reviews of the lending portfolios to identify credit risks and assess the overall collectability of those portfolios. Management utilizes a loan review process involving internal and external personnel to determine the credit risk exposure of significant specific loans and of the overall loan portfolio. This process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel.

Troubled Debt Restructurings

A TDR is a loan on which the Company, for reasons related to a borrower’s financial difficulties, grants a significant concession that the Company would not otherwise normally consider. Such a concession takes the form of a modification or restructuring of the loan’s terms which could include a reduction in the stated interest rate; an extension of the maturity at an interest rate below current market; a reduction in the face amount of the debt; a reduction in the accrued interest; or re-aging, extensions, deferrals, renewals and rewrites. A TDR would generally be considered impaired in the year of modification and will be assessed periodically for continued impairment.

 

14


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Troubled Debt Restructurings (continued)

 

Loans whose contractual terms have been modified in a TDR and are current at the time of the restructuring remain on accrual status if there is demonstrated performance prior to the restructuring and repayment in full under the restructured terms is expected. Otherwise, the loans are placed on nonaccrual status and reported as nonperforming until there is sustained repayment performance for a reasonable period, generally six months. TDRs that are on accrual status are reported as performing TDRs through the end of the calendar year in which the restructuring occurred or the year in which the loans are returned to accrual status. In addition, if accruing TDRs bear less than a market rate of interest at the time of modification, they are reported as performing TDRs throughout the remaining lives of the loans.

Nonperforming Loans, Charge-Offs and Delinquencies

Nonperforming loans generally include loans that have been placed on nonaccrual status (including nonaccrual TDRs). Loans within all portfolio sectors are generally placed on nonaccrual status and classified as nonperforming at 90 days past due, or when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due. Accrued interest receivable is reversed when a loan is placed on nonaccrual status. Interest collections on nonaccruing loans for which the ultimate collectability of principal is uncertain are applied as principal reductions; otherwise, such collections are credited to interest income when received (or to other income for interest related to prior fiscal years). These loans may be restored to accrual status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise becomes well-secured and is in the process of collection.

The entire balance of a loan is contractually delinquent if the minimum payment is not received by the specified due date on the customer’s billing statement. Interest and fees continue to accrue on past due loans until the date the loan goes into nonaccrual status, if applicable.

The outstanding loan balance of a nonperforming loan that is in excess of the estimated collateral value is generally charged off no later than the end of the month in which the loan becomes 90 days past due.

For loans in the Real Estate sector, the estimated collateral value is determined utilizing appraisals or broker price opinions of the fair value of the property, less estimated costs to sell. For loans in the Commercial, Agriculture and Consumer sectors, the fair value of the collateral is estimated by management based on current financial information, inspections, and appraisals.

Other Real Estate Owned

Assets acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure. Write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. Foreclosed assets are subsequently carried at the lower of their new cost basis or estimated fair value less cost to sell. Costs of significant improvements are capitalized, whereas costs relating to holding the foreclosed assets are expensed. Valuations are periodically performed by management, and if fair value changes materially subsequent to acquisition, the adjustment is recorded in the consolidated statement of income.

 

15


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Goodwill and Other Identifiable Intangible Assets

Goodwill results from business combinations and is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is determined to have an indefinite life and is not amortized; rather, it is tested for impairment at least annually or more frequently if events and circumstances exist that indicate an impairment test should be performed.

A qualitative assessment may be performed to determine whether the existence of events or circumstances leads to a determination that is more likely than not that the fair value is less than the carrying amount, including goodwill. If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value or if the qualitative assessment is bypassed, a quantitative impairment test will be performed to determine if goodwill is in fact impaired and then written down at that time. Subsequent increases in goodwill value are not recognized in the financial statements.

Other identifiable intangible assets recorded by the Company relate to naming rights, customer lists and core deposits. Intangible assets with lives which may be reasonably estimated are amortized over those lives. Intangible assets with indefinite lives are not amortized. Such assets are periodically evaluated as to the recoverability of their carrying values, while considering their materiality.

Equity Securities

Equity securities with readily determinable fair values are included in “equity investments” on the consolidated balance sheets and are stated at fair value with holding gains and losses reported in income as a component of noninterest income. Equity securities without readily determinable fair values are recorded based on cost (less impairment, if any), equity or proportional amortization methods, depending on the investment’s structure.

Stock-Based Compensation Plans

Compensation expense for stock-based awards to employees and directors is based on the fair value of such awards and is generally recognized over the required service period, which is usually defined as the vesting period. Stock options and restricted stock qualify as equity-classified awards, under which the fair value of each grant is determined at the grant date, and that grant-date value is the amount recognized as expense over the service period. Stock appreciation rights (SARs) are accounted for under the liability method: the fair value of each vested SAR outstanding is estimated as of each balance sheet date, and the change in that liability from period to period is the amount recognized as expense. Fair value for stock options (at date of grant) and for SARs (at each balance sheet date) is based on the Black-Scholes model. The fair value for restricted stock is based on valuations of the Company’s stock.

Income Taxes

The Company’s income tax expense consists of current and deferred components. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rate and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.

 

16


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income Taxes (continued)

 

Deferred tax assets related to uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that a tax position will be realized or sustained upon examination. A tax position that meets the “more likely than not” recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. This determination considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Company recognizes interest and penalties, if any, on income taxes as a component of income tax expense. The Company files income tax returns in the U.S. federal jurisdiction. The Company files consolidated income tax returns with its subsidiaries. With few exceptions, the Company is no longer subject to U.S. federal or state income tax examinations by tax authorities for years before 2014.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” ASU 2016-02 was also amended by ASU 2018-11 and ASU 2018-20 which, among other changes, allow an optional transition method whereby an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP. The amendments in ASU No. 2016-02 require lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

 

   

A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and

 

   

A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, “Revenue from Contracts with Customers.” The Company is evaluating the potential impact of ASU No. 2016-02 as amended; however, the impact is not expected to be material to the Company’s financial position, results of operations or cash flows. Effective with the issuance of ASU No. 2020-05, “Revenue from Contracts with Customers (Topic 606), and Leases (Topic 842),” the effective date of this guidance for the Company is January 1, 2022.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” Among other things, this ASU 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. The Company will then use forward-looking information to better determine credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities, primarily related to impairment measurement, and purchased financial assets with credit deterioration. The Company is evaluating the impact of ASU No. 2016-13 on the financial statements. The impact is expected to be material to the Company’s financial position and results of operations; however, the Company has yet to determine the extent of the impact. The Company is currently

 

17


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements (continued)

 

determining the data required and is in the early stage of implementing a third-party vendor system to enable the Company to comply with the new standard and to estimate the update’s impact on the financial statements prior to its adoption. It is anticipated that the Company will be able to make an estimate of the impact this update will have during 2021. In April 2019, ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” was issued to address certain codification improvements and to provide certain accounting policy elections related to accrued interest as well as disclosure related to credit losses, among other things. In May 2019, ASU 2019-05, “Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief,” was issued to provide transition relief in connection with the adoption of ASU 2016-03 whereby entities would have the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. Effective with the issuance of ASU No. 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” the effective date of this guidance for the Company is January 1, 2023.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The amendment requires disclosures and modifications primarily related to Level 3 fair value measurements and measurement uncertainty. In addition, several disclosures are removed as follows:

 

   

The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy;

 

   

The policy for timing of transfers between levels;

 

   

The valuation processes for Level 3 fair value measurements; and

 

   

For nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period.

This guidance was effective for the Company on January 1, 2020. The amendment did not have a material impact on the Company’s financial position, results of operations or cash flows.

In March 2021, the FASB issued ASU No. 2021-013-13, “Intangibles – Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events.” The amendment provides an accounting alternative that allows private companies and not-for-profit organizations to perform a goodwill triggering event assessment, and any resulting test for goodwill impairment, as of the end of the reporting period, whether the reporting period is an interim or annual period. It eliminates the requirement for companies and organizations that elect this alternative to perform this assessment during the reporting period, limiting it to the reporting date only. The scope of the alternative is limited to goodwill that is tested for impairment in accordance with Subtopic 350-20, Intangibles - Goodwill and Other - Goodwill.

This guidance was effective for the Company on January 1, 2021. The amendment did not have a material impact on the Company’s financial position, results of operations or cash flows.

Subsequent Events

Subsequent events have been evaluated through November 9, 2021, which is the date the unaudited consolidated financial statements were issued.

 

18


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares, including restricted shares, outstanding during each period. Diluted earnings per share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to exercisable stock options and are determined using the treasury stock method, whereby the proceeds from the options assumed to be exercised are assumed to be used to purchase common stock at the average market price during the period.

Computation of earnings per share (EPS) was as follows (dollar amounts in thousands, except per share data):

 

     Three Months Ended      Nine Months Ended  
     September 30,
2021
     September 30,
2020
     September 30,
2021
     September 30,
2020
 

Net income

   $ 15,854      $ 13,281      $ 64,090      $ 39,392  
  

 

 

    

 

 

    

 

 

    

 

 

 

Average common shares outstanding

     19,487,319        18,347,911        19,624,477        18,145,878  

Basic earnings per share

   $ 0.81      $ 0.72      $ 3.27      $ 2.17  
  

 

 

    

 

 

    

 

 

    

 

 

 

Average common shares outstanding

     19,487,319        18,347,911        19,624,477        18,145,878  

Effect of dilutive securities: stock-based compensation

     68,799        74,226        73,803        95,327  
  

 

 

    

 

 

    

 

 

    

 

 

 

Average shares - fully diluted impact

     19,556,118        18,422,137        19,698,280        18,241,205  

Diluted earnings per share

   $ 0.81      $ 0.72      $ 3.25      $ 2.16  
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 2 - SECURITIES

The amortized cost and fair value of securities classified as available for sale, with gross unrealized gains and losses, follows (in thousands):

 

     September 30, 2021  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 

Debt Securities:

           

U.S. government and agency

   $ 29,631      $ 171      $ —        $ 29,802  

Mortgage-backed securities

     94,674        226        (1,794      93,106  

State and political subdivisions

     1,052,326        30,667        (7,857      1,075,136  

Collateralized mortgage obligations

     261,316        2,223        (2,362      261,177  

Asset-backed securities

     72,045        861        (22      72,884  

Other debt securities

     20,002        33        (328      19,707  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 1,529,994      $ 34,181      $ (12,363    $ 1,551,812  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 2 - SECURITIES (continued)

 

The amortized cost and fair value of securities classified as available for sale, with gross unrealized gains and losses, follows (in thousands):

 

     September 30, 2020  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 

Debt Securities:

           

Mortgage-backed securities

   $ 79,479      $ 552      $ (1,742    $ 78,289  

State and political subdivisions

     483,204        31,199        (545      513,858  

Collateralized mortgage obligations

     208,128        4,386        (212      212,302  

Asset-backed securities

     65,610        93        (780      64,923  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 836,421      $ 36,230      $ (3,279    $ 869,372  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2020  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 

Debt Securities:

           

Mortgage-backed securities

   $ 82,665      $ 532      $ (1,650    $ 81,547  

State and political subdivisions

     531,697        36,368        (499      567,566  

Collateralized mortgage obligations

     204,391        3,904        (237      208,058  

Asset-backed securities

     98,887        490        (286      99,091  

Other debt securities

     2,000        —          —          2,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 919,640      $ 41,294      $ (2,672    $ 958,262  
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities and collateralized mortgage obligations included in the above table were issued by U.S. government agencies and corporations and include residential and commercial instruments.

Beginning January 1, 2019, upon adoption of ASU No. 2016-01, equity securities with readily determinable fair values are stated at fair value with holding gains and losses reported in income and are included in “equity investments” on the consolidated balance sheets as of December 31, 2020.

Proceeds from sales of debt securities and gross gains and losses for the periods ended September 30, 2021 and 2020 were as follows (in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2021      2020      2021      2020  

Proceeds from sales

   $  92,935      $  2,646      $  112,933      $  111,820  

Gross realized gains

     917        176        923        7,592  

Gross realized losses

     (101      —          (165      (61

At September 30, 2021 and 2020 and December 31, 2020, debt securities with a carrying value of $964,417,718, $696,190,000, and $700,114,000 respectively, were pledged to secure public deposits, trust deposits, and for other purposes required or permitted by law.

 

20


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 2 - SECURITIES (continued)

 

The amortized cost and fair value of debt securities available for sale at September 30, 2021 are shown below by contractual maturity (in thousands). Expected maturities may differ from contractual maturities for issuers who have the right to call or prepay obligations with or without penalties. Mortgage-backed securities, collateralized mortgage obligations, and asset-backed securities are shown separately since they are not due at single maturity dates.

 

     Amortized
Cost
     Estimated
Fair Value
 

Due in one year or less

   $ 659      $ 676  

Due from one to five years

     16,851        17,227  

Due from five to ten years

     815,537        839,215  

After ten years

     268,912        267,527  

Mortgage-backed securities

     94,674        93,106  

Collateralized mortgage obligations

     261,316        261,177  

Asset-backed securities

     72,045        72,884  
  

 

 

    

 

 

 
   $ 1,529,994      $ 1,551,812  
  

 

 

    

 

 

 

At September 30, 2021 and 2020 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders’ equity.

The following tables show information regarding securities available for sale with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2021 and 2020 and December 31, 2020 (in thousands):

 

     September 30, 2021     

 

 
     Less than 12 months      12 months or longer      Total  
     Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair
Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
 

Mortgage-backed securities

   $ 37,542      $ 720      $ 40,576      $ 1,074      $ 78,118      $ 1,794  

State and political subdivisions

     410,848        7,340        12,885        517        423,733        7,857  

Collateralized mortgage obligations

     136,740        2,218        13,300        144        150,040        2,362  

Asset-backed securities

     9,207        22        —          —          9,207        22  

Other debt securities

     16,674        328        —          —          16,674        328  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 611,011      $ 10,628      $ 66,761      $ 1,735      $ 677,772      $ 12,363  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 30, 2020     

 

 
     Less than 12 months      12 months or longer      Total  
     Estimated
Fair
Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
 

Mortgage-backed securities

   $ 7,799      $ 83      $ 48,775      $ 1,659      $ 56,574      $ 1,742  

State and political subdivisions

     26,519        434        1,794        111        28,313        545  

Collateralized mortgage obligations

     14,015        26        17,691        186        31,706        212  

Asset-backed securities

     21,007        195        27,541        585        48,548        780  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 69,340      $ 738      $ 95,801      $ 2,541      $ 165,141      $ 3,279  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 2 - SECURITIES (continued)

 

     December 31, 2020     

 

 
     Less than 12 months      12 months or longer      Total  
     Estimated
Fair
Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
 

Mortgage-backed securities

   $ 7,542      $ 81      $ 45,761      $ 1,569      $ 53,303      $ 1,650  

State and political subdivisions

     47,866        475        1,881        24        49,747        499  

Collateralized mortgage obligations

     17,331        33        16,836        204        34,167        237  

Asset-backed securities

     10,158        1        27,283        285        37,441        286  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 82,897      $ 590      $ 91,761      $ 2,082      $ 174,658      $ 2,672  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unrealized losses are generally due to changes in interest rates. The Company intends to hold these securities until maturity or until value recovers, and it is more likely than not that the Company will not have to sell these securities before the recovery of their cost basis. Consequently, the unrealized losses detailed in the table above are deemed to be temporary, and no impairment losses have been realized in the consolidated income statements.

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES

A summary of the quarter-end balances of loans follows (in thousands):

 

     September 30,      December 31,  
     2021      2020      2020  

Commercial

   $ 746,581      $ 910,904      $ 815,291  

Real estate - other

     1,792,240        1,823,885        1,788,154  

Real estate - 1-4 family

     637,461        582,619        605,954  

Agriculture

     321,041        282,910        260,174  

Consumer

     36,674        37,147        37,553  
  

 

 

    

 

 

    

 

 

 

Loans receivable

     3,533,997        3,637,465        3,507,126  

Net deferred loan origination fees

     (15,797      (12,716      (11,143
  

 

 

    

 

 

    

 

 

 

Gross loans

     3,518,200        3,624,749        3,495,983  

Less: allowance for loan losses

     (40,305      (46,742      (54,855
  

 

 

    

 

 

    

 

 

 

Loans, net

   $ 3,477,895      $ 3,578,007      $ 3,441,128  
  

 

 

    

 

 

    

 

 

 

As of September 30, 2021 and 2020, discounts, net of premiums, related to acquired loans were approximately $8,979,000 and $11,573,000 respectively, and are included as a net reduction in the loan receivable balances above. As of December 31, 2020, discounts, net of premiums, related to acquired loans were approximately $12,290,000, and are included as a net reduction in the loan receivable balances above.

 

22


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Allowance for Loan Losses

The following tables set forth information regarding the activity in the allowance for loan losses by portfolio sector for the three and nine-month periods ended September 30, 2021 (in thousands):

 

     Three Months Ended September 30, 2021  
     Beginning
Balance
     Charge-offs     Recoveries      Provision     Ending Balance  

Commercial

   $ 13,030      $ (480   $ 179      $ (1,500   $ 11,229  

Real estate - other

     19,093        (32     37        1,440       20,538  

Real estate - 1-4 family

     224        (66     6        166       330  

Agriculture

     6,570        —         —          1,052       7,622  

Consumer

     587        (485     242        242       586  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 39,504      $ (1,063   $ 464      $ 1,400     $ 40,305  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     Nine Months Ended September 30, 2021  
     Beginning
Balance
     Charge-offs     Recoveries      Provision     Ending Balance  

Commercial

   $ 17,395      $ (2,405   $ 515      $ (4,276   $ 11,229  

Real estate - other

     29,738        (500     193        (8,893     20,538  

Real estate - 1-4 family

     272        (70     7        121       330  

Agriculture

     6,856        (31     10        787       7,622  

Consumer

     594        (1,242     793        441       586  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 54,855      $ (4,248   $ 1,518      $ (11,820   $ 40,305  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The following tables set forth information regarding the activity in the allowance for loan losses by portfolio sector for the three and nine-month periods ended September 30, 2020 (in thousands):

 

     Three Months Ended September 30, 2020  
     Beginning
Balance
     Charge-offs     Recoveries      Provision     Ending Balance  

Commercial

   $ 14,093      $ (1,098   $ 367      $ 2,091     $ 15,453  

Real estate - other

     20,441        —         91        2,807       23,339  

Real estate - 1-4 family

     252        —         1        (24     299  

Agriculture

     5,849        —         1        1,238       7,088  

Consumer

     523        (354     176        288       633  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ 41,158      $ (1,452   $ 636      $ 6,400     $ 46,742  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     Nine Months Ended September 30, 2020  
     Beginning
Balance
     Charge-offs     Recoveries      Provision      Ending Balance  

Commercial

   $ 12,319      $ (2,848   $ 666      $ 5,316      $ 15,453  

Real estate - other

     15,056        (2     178        8,107        23,339  

Real estate - 1-4 family

     244        (53     6        32        229  

Agriculture

     5,929        (70     493        736        7,088  

Consumer

     604        (1,141     611        559        633  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 34,152      $ (4,114   $ 1,954      $ 14,750      $ 46,742  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

23


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

Allowance for Loan Losses (continued)

 

The following table details the allowance for loan losses and recorded investment in loans by portfolio sector (in thousands):

Allowance for Loan Losses:

 

     September 30, 2021  
     On loans evaluated for impairment:  
     Individually      Collectively      Acquired with
deteriorated
credit
     Total  

Commercial

   $ 354      $ 10,824      $ 51      $ 11,229  

Real estate - other

     1,474        18,310        754        20,538  

Real estate - 1-4 family

     78        252        —          330  

Agriculture

     —          7,615        7        7,622  

Consumer

     —          586        —          586  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,906      $ 37,587      $ 812      $ 40,305  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans Receivable:

 

     September 30, 2021  
     Evaluated for impairment:  
     Individually      Collectively      Acquired with
deteriorated
credit
     Total  

Commercial

   $ 37,880      $ 706,804      $ 1,897      $ 746,581  

Real estate - other

     33,228        1,750,467        8,545        1,792,240  

Real estate - 1-4 family

     1,317        636,144        —          637,461  

Agriculture

     —          321,030        11        321,041  

Consumer

     —          36,670        4        36,674  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 72,425      $ 3,451,115      $ 10,457      $ 3,533,997  
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in collectively evaluated above is a total of $376,306,000 purchased non-impaired loans (including $44,000 of nonaccrual loans), and $2,432,000 of impaired loans made up of loans with principal balances below $250,000 each.

 

24


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

Allowance for Loan Losses (continued)

 

The following table details the allowance for loan losses and recorded investment in loans by portfolio sector (in thousands):

Allowance for Loan Losses:

 

     September 30, 2020  
     On loans evaluated for impairment:  
     Individually      Collectively      Acquired with
deteriorated
credit
     Total  

Commercial

   $ 2,094      $ 13,359      $ —        $ 15,453  

Real estate - other

     1,220        22,119        —          23,339  

Real estate - 1-4 family

     —          229        —          229  

Agriculture

     —          7,088        —          7,088  

Consumer

     —          633        —          633  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,314      $ 43,428      $ —        $ 46,742  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans Receivable:

 

     September 30, 2020  
     Evaluated for impairment:  
     Individually      Collectively      Acquired with
deteriorated
credit
     Total  

Commercial

   $ 10,648      $ 898,448      $ 1,808      $ 910,904  

Real estate - other

     38,843        1,776,372        8,670        1,823,885  

Real estate - 1-4 family

     2,013        580,599        7        582,619  

Agriculture

     283        282,582        45        282,910  

Consumer

     —          37,147        —          37,147  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 51,787      $ 3,575,148      $ 10,530      $ 3,637,465  
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in collectively evaluated above is a total of $559,830,000 purchased non-impaired loans.

 

25


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

Allowance for Loan Losses (continued)

 

The following table details the allowance for loan losses and recorded investment in loans by portfolio sector (in thousands):

Allowance for Loan Losses:

 

     December 31, 2020  
     On loans evaluated for impairment:  
     Individually      Collectively      Acquired with
deteriorated
credit
     Total  

Commercial

   $ 1,995      $ 15,400      $ —        $ 17,395  

Real estate - other

     1,591        28,147        —          29,738  

Real estate - 1-4 family

     —          272        —          272  

Agriculture

     —          6,856        —          6,856  

Consumer

     —          594        —          594  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,586      $ 51,269      $ —        $ 54,855  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans Receivable:

 

     December 31, 2020  
     Evaluated for impairment:  
     Individually      Collectively      Acquired with
deteriorated
credit
     Total  

Commercial

   $ 9,778      $ 803,545      $ 1,968      $ 815,291  

Real estate - other

     35,721        1,743,871        8,562        1,788,154  

Real estate - 1-4 family

     1,712        604,242        —          605,954  

Agriculture

     —          260,135        39        260,174  

Consumer

     —          37,553        —          37,553  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 47,211      $ 3,449,346      $ 10,569      $ 3,507,126  
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in collectively evaluated above is a total of $537,611,000 purchased non-impaired loans (including $944,000 of nonaccrual loans), and $1,522,000 of impaired loans made up of loans with principal balances below $250,000 each.

Risk Characteristics

Risk characteristics applicable to each sector of the loan portfolio include the following:

Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations. Energy loans are included in this sector.

 

26


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

Risk Characteristics (continued)

 

The commercial portfolio also includes loans to customers for the Paycheck Protection Program (PPP) created by Congress in the CARES Act during 2020 to help businesses during the COVID-19 pandemic. As of September 30, 2021, the Company had $112,469,000 of PPP loans outstanding, net of $6,556,000 of net unearned deferred fees. Loans that meet the criteria set by the Small Business Administration (SBA) and the CARES Act will be forgiven. As of September 30, 2021, there was minimal credit risk related to the PPP loans based on SBA guarantees. The remaining unforgiven loans are fully guaranteed by the SBA.

Real Estate - Other: Primary categories in this real estate sector of the loan portfolio are commercial real estate, construction, ranch, farm land and land development.

Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on cash flow generated from lease income of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the borrower’s market area.

Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the borrower’s market area.

Real Estate - 1-4 Family: The residential real estate loans are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the borrower’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Agriculture: Agricultural loans are subject to underwriting standards and processes similar to commercial loans. These agricultural loans are based primarily on the underlying collateral provided by the borrower. Most agricultural loans are secured by the agriculture-related assets being financed, such as cattle or equipment, and include personal guarantees.

Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors such as unemployment and general economic conditions in the Company’s market areas and the creditworthiness of a borrower.

COVID-19 Risks

The Texas economy, specifically in the Company’s lending areas, started to show improvement by mid-2020 following unprecedented declines caused by the pandemic. During the fourth quarter of 2020, COVID-19

 

27


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

COVID-19 Risks (continued)

 

infections increased in Texas which disrupted the budding economic recovery. During the first nine months of 2021, the COVID-19 vaccination roll-out ramped up, which helped the Texas economy to improve from the fourth quarter of 2020. The pandemic crisis has been impactful and the timing and magnitude of recovery cannot be predicted. The risk of loss associated with all segments of the portfolio could increase due to these factors.

Asset Quality

The Company monitors credit quality within its loan portfolio based on primary credit quality indicators on an ongoing basis. All of the Company’s loans are evaluated, either individually or as part of groups of homogenous smaller loans, and identified either as pass or as criticized.

The classification of loans reflects a judgment about the risks of default and loss associated with the loans. Ratings are adjusted to reflect management’s assessment of the degree of risk and loss inherent in each credit.

The methodology is structured so that specific allocations in the allowance for loan losses are increased in accordance with deterioration in credit quality (and a corresponding increase in risk of loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk of loss).

Pass rated refers to loans that are not considered criticized.

Criticized loans pose an elevated risk and may have a high probability of default or total loss. These loans are further subdivided into risk ratings of special mention, substandard, doubtful or loss.

Loans rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short term. Such loans typically maintain the ability to perform within standard credit terms.

Loans rated substandard are those for which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or for which important weaknesses exist in collateral. Prompt corrective action is therefore required to strengthen the Company’s position, to reduce exposure, and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such loans and a serious evaluation of the secondary support is performed.

Loans rated doubtful are those for which full collection of principal appears highly questionable, and for which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain, or for which other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Loans rated doubtful are generally also placed on nonaccrual.

Loans rated loss are those that are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off as a basically worthless asset even though partial recovery may occur in the future.

 

28


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

Asset Quality (continued)

 

As of September 30, 2021, there were no changes to the Company’s loan risk grading system definitions.

The following table sets forth information regarding the internal classification of the loan portfolio (in thousands):

 

     September 30, 2021  
     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Commercial

   $ 710,274      $ 4,819      $ 30,948      $ 540      $ —        $ 746,581  

Real estate - other

     1,663,217        75,969        53,054        —          —          1,792,240  

Real estate - 1-4 family

     633,149        653        3,659        —          —          637,461  

Agriculture

     310,193        7,754        3,094        —          —          321,041  

Consumer

     36,464        —          210        —          —          36,674  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans receivable

   $ 3,353,297      $ 89,195      $ 90,965      $ 540      $ —        $ 3,533,997  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     September 30, 2020  
     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Commercial

   $ 871,015      $ 17,279      $ 22,251      $ 359      $ —        $ 910,904  

Real estate - other

     1,669,784        78,024        76,077        —          —          1,823,885  

Real estate - 1-4 Family

     571,866        6,710        4,043        —          —          582,619  

Agriculture

     274,176        2,636        6,098        —          —          282,910  

Consumer

     36,996        —          151        —          —          37,147  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans receivable

   $ 3,423,837      $ 104,649      $ 108,620      $ 359      $ —        $ 3,637,465  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2020  
     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Commercial

   $ 765,266      $ 12,336      $ 37,577      $ 112      $ —        $ 815,291  

Real estate - other

     1,644,653        62,435        81,066        —          —          1,788,154  

Real estate - 1-4 family

     594,702        6,672        4,580        —          —          605,954  

Agriculture

     254,411        1,938        3,825        —          —          260,174  

Consumer

     37,451        —          102        —          —          37,553  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans receivable

   $ 3,296,483      $ 83,381      $ 127,150      $ 112      $ —        $ 3,507,126  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company has acquired certain loans which had experienced credit deterioration since origination (see Note 13, Acquisitions). Such loans are considered purchased credit impaired (or PCI) loans under GAAP.

 

29


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

Asset Quality (continued)

 

The Company has included PCI loans in the above grading tables. The following provides additional detail on the grades applied to those loans (in thousands):

 

     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

September 30, 2021

   $ 3,191      $ 2,661      $ 4,535      $ 70      $ —        $ 10,457  

September 30, 2020

     2,810        55        7,624        41        —          10,530  

December 31, 2020

     3,285        49        7,197        38        —          10,569  

As of December 31, 2020, the Company had a loan in process of foreclosure which was included in the real estate – other sector. This loan was impaired and classified as nonaccrual carrying a specific allocation included in the allowance of $202,000. The foreclosure was completed shortly after year end and the amount of $1,727,000 was recorded to other real estate owned. Upon movement to other real estate owned, a charge against the allowance of $202,000 was recognized on this property.

PCI loans may remain on accrual status to the extent the company can reasonably estimate the amount and timing of expected future cash flows. Nonaccrual PCI loans were $2,390,000, $3,318,000 and $3,912,000 at September 30, 2021 and 2020 and December 31, 2020, respectively. These loans are returning a market rate of return given the accretable yield.

The following table sets forth information regarding nonaccrual loans, excluding loans acquired with deteriorated credit quality (in thousands):

 

     September 30,      December 31,  
     2021      2020      2020  

Commercial

   $ 7,042      $ 10,630      $ 10,995  

Real estate - other

     13,563        35,239        36,257  

Real estate - 1-4 family

     682        572        449  

Agriculture

     207        283        258  

Consumer

     107        —          —    
  

 

 

    

 

 

    

 

 

 
   $ 21,601      $ 46,724      $ 47,959  
  

 

 

    

 

 

    

 

 

 

The following table sets forth information regarding delinquencies (in thousands):

 

     September 30, 2021  
     30 - 89 Days
Past Due
     90 Days
and Greater
     Total
Past Due
     Current      Total
Loans
Receivable
     Accruing Loans
90 or More
Days Past Due
 

Commercial

   $ 3,605      $ 6      $ 3,611      $ 741,073      $ 744,684      $ —    

Real estate - other

     2,724        80        2,804        1,780,891        1,783,695        80  

Real estate - 1-4 family

     1,818        808        2,626        634,835        637,461        396  

Agriculture

     —          —          —          321,030        321,030        —    

Consumer

     30        107        137        36,533        36,670        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,177      $ 1,001      $ 9,178      $ 3,514,362      $ 3,523,540      $ 476  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired with deteriorated credit quality

   $ —        $ 1,606      $ 1,606      $ 8,851      $ 10,457      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,177      $ 2,607      $ 10,784      $ 3,523,213      $ 3,533,997      $ 476  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

30


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

Asset Quality (continued)

 

The following table sets forth information regarding delinquencies (in thousands):

 

     September 30, 2020  
     30 - 89 Days
Past Due
     90 Days
and Greater
     Total
Past Due
     Current      Total
Loans
Receivable
     Accruing Loans
90 or More
Days Past Due
 

Commercial

   $ 4,207      $ 2,382      $ 6,589      $ 902,507      $ 909,096      $ 26  

Real estate - other

     9,141        16,878        26,019        1,789,196        1,815,215        59  

Real estate - 1-4 family

     971        493        1,464        581,148        582,612        118  

Agriculture

     30        187        217        282,648        282,865        —    

Consumer

     41        —          41        37,106        37,147        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14,390      $ 19,940      $ 34,330      $ 3,592,605      $ 3,626,935      $ 203  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired with deteriorated credit quality

   $ —        $ 2,476      $ 2,476      $ 8,054      $ 10,530      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14,390      $ 22,416      $ 36,806      $ 3,600,659      $ 3,637,465      $ 203  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2020  
     30 - 89 Days
Past Due
     90 Days
and Greater
     Total
Past Due
     Current      Total
Loans
Receivable
     Accruing Loans
90 or More
Days Past Due
 

Commercial

   $ 3,521      $ 3,719      $ 7,240      $ 806,083      $ 813,323      $ 538  

Real estate - other

     981        20,538        21,519        1,758,073        1,779,592        —    

Real estate - 1-4 family

     1,498        955        2,453        603,501        605,954        582  

Agriculture

     —          —          —          260,135        260,135        —    

Consumer

     151        —          151        37,402        37,553        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,151      $ 25,212      $ 31,363      $ 3,465,194      $ 3,496,557      $ 1,120  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquired with deteriorated credit quality

   $ 3      $ 1,709      $ 1,712      $ 8,857      $ 10,569      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,154      $ 26,921      $ 33,075      $ 3,474,051      $ 3,507,126      $ 1,120  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans (generally those on nonaccrual) and loans modified in troubled debt restructurings when concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

 

31


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

Asset Quality (continued)

 

The following table sets forth information regarding the recorded investment for impaired loans, excluding loans acquired with deteriorated credit quality (in thousands):

 

     September 30,      December 31,  
     2021      2020      2020  

Nonaccrual loans (other than TDRs)

   $ 14,073      $ 34,656      $ 36,147  

Troubled debt restructurings:

        

Accruing

     2,542        5,063        1,718  

Not accruing

     7,528        12,068        11,812  

Other

     50,757        —          —    
  

 

 

    

 

 

    

 

 

 
   $ 74,900      $ 51,787      $ 49,677  
  

 

 

    

 

 

    

 

 

 

Included in “Other” above are loans deemed impaired which are neither nonaccrual nor TDRs, including $50,757,000 that meet the criteria for Section 4013 TDRs under the CARES Act.

The following is a summary of information pertaining to impaired loans (excluding loans acquired with deteriorated credit quality) as of and for the nine months ended September 30, 2021 (in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
Accrual Basis
     Interest
Income
Recognized
Cash Basis
 

With no related allowance:

                 

Commercial

   $ 37,990      $ 37,453      $ —        $ 14,324      $ 255      $ —    

Real estate - other

     29,107        27,322        —          26,046        215        —    

Real estate - 1-4 family

     1,361        1,360        —          1,634        46        —    

Agriculture

     207        207        —          240        —          —    

Consumer

     107        107        —          80        —          —    

With a related allowance:

                 

Commercial

     1,261        1,261        354        2,069        —          —    

Real estate - other

     6,825        6,822        1,474        6,638        66        —    

Real estate - 1-4 family

     368        368        78        92        18        —    

Agriculture

     —          —          —          —          —          —    

Consumer

     —          —          —          —          —          —    

Total:

                 

Commercial

     39,251        38,714        354        16,393        255        —    

Real estate - other

     35,932        34,144        1,474        32,684        281        —    

Real estate - 1-4 family

     1,729        1,728        78        1,726        64        —    

Agriculture

     207        207        —          240        —          —    

Consumer

     107        107        —          80        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 77,226      $ 74,900      $ 1,906      $ 51,123      $ 600      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The unpaid principal balances above include amounts previously charged off.

 

32


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

Asset Quality (continued)

 

The following is a summary of information pertaining to impaired loans (excluding loans acquired with deteriorated credit quality) as of and for the nine months ended September 30, 2020 (in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
Accrual
Basis
     Interest
Income
Recognized
Cash Basis
 

With no related allowance:

                 

Commercial

   $ 8,556      $ 7,617      $ —        $ 7,984      $ 936      $ —    

Real estate - other

     34,781        33,324        —          26,037        509        —    

Real estate - 1-4 family

     2,018        2,013        —          1,595        —          —    

Agriculture

     283        283        —          7,913        —          —    

Consumer

     —          —          —          1        —          —    

With a related allowance:

                 

Commercial

     3,030        3,031        2,094        2,668        37        —    

Real estate - other

     5,522        5,519        1,220        3,549        224        —    

Real estate - 1-4 family

     —          —          —          233        —          —    

Agriculture

     —          —          —          —          —          —    

Consumer

     —          —          —          —          —          —    

Total:

                 

Commercial

     11,586        10,648        2,094        10,652        973        —    

Real estate - other

     40,303        38,843        1,220        29,586        733        —    

Real estate - 1-4 family

     2,018        2,013        —          1,828        —          —    

Agriculture

     283        283        —          7,913        —          —    

Consumer

     —          —          —          1        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 54,190      $ 51,787      $ 3,314      $ 49,980      $ 1,706      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The unpaid principal balances above include amounts previously charged off.

 

33


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

Asset Quality (continued)

 

The following is a summary of information pertaining to impaired loans (excluding loans acquired with deteriorated credit quality) as of and for the year ended December 31, 2020 (in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
Accrual
Basis
     Interest
Income
Recognized
Cash Basis
 

With no related allowance:

                 

Commercial

   $ 8,703      $ 8,064      $ —        $ 7,923      $ 2      $ —    

Real estate - other

     30,175        28,458        —          25,751        60        —    

Real estate - 1-4 family

     1,883        1,883        —          1,624        82        —    

Agriculture

     258        258        —          7,446        —          —    

Consumer

     —          —          —          —          —          —    

With a related allowance:

                 

Commercial

     2,947        2,948        1,995        2,910        —          —    

Real estate - other

     8,066        8,066        1,591        4,211        —          —    

Real estate - 1-4 family

     —          —          —          139        —          —    

Agriculture

     —          —          —          —          —          —    

Consumer

     —          —          —          —          —          —    

Total:

                 

Commercial

     11,650        11,012        1,995        10,833        2        —    

Real estate - other

     38,241        36,524        1,591        29,962        60        —    

Real estate - 1-4 family

     1,883        1,883        —          1,763        82        —    

Agriculture

     258        258        —          7,446        —          —    

Consumer

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 52,032      $ 49,677      $ 3,586      $ 50,004      $ 144      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The unpaid principal balances above include amounts previously charged off.

During the nine-month period ended September 30, 2021, there were no loans modified under troubled debt restructurings.

Following is a summary of loans modified under troubled debt restructurings (excluding acquired loans) during the nine-month period ended September 30, 2020 (in thousands):

 

     Number      Pre-Modification
Recorded
Investment
     Post-
Modification
Recorded
Investment
                             
     Type of Modification  
     Interest
Only
     Term      Combination      Total
Modification
 

Commercial

     2      $ 2,011      $ 2,011      $ —        $ 2,011      $ —        $ 2,011  

Real estate - other

     1        2,745        2,745        2,745        —          —          2,745  

Real estate - 1-4 family

     —          —          —          —          —          —          —    

Agriculture

     —          —          —          —          —          —          —    

Consumer

     —          —          —          —          —          —          —