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

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3      $ 4,756      $ 4,756      $ 2,745      $ 2,011      $ —        $ 4,756  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

34


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 impact of the recognition of the troubled debt restructurings described above did not increase the allowance for loan losses and resulted in no charge-offs during the nine-month period ending September 30, 2021 and 2020. The Company has no material commitments to lend additional funds to these debtors.

There were no loans modified under troubled debt restructurings in default during the nine-month periods ended September 30, 2021 and 2020.

Under Section 4013 of the CARES Act, banks may elect relief from certain accounting requirements relating to loan restructurings if the loan modification is COVID-related, is not more than 30 days past due as of December 31, 2019 and if modification occurs during the national emergency. The Company’s TDR loans noted above do not include loans that are modifications to borrowers impacted by COVID. As of September 30, 2021, the Company had $51,406,000 impaired due to COVID ($50,757,000 that meet the criteria for Section 4013 TDRs under the CARES Act, $649,000 included in PCI loans).

The following table summarizes the outstanding balance and related carrying amount of PCI loans acquired (see also Note 13, Acquisitions) during the nine-month period ended September 30, 2021 (in thousands):

 

     Mobeetie      Centennial      Tahoka      Total  

Outstanding balance

   $ —        $ 14,023      $ 703      $ 14,726  

Nonaccretable difference

     —          (361      (247      (608

Accretable yield

     —          (3,661      —          (3,661
  

 

 

    

 

 

    

 

 

    

 

 

 

Carrying amount

   $ —        $ 10,001      $ 456      $ 10,457  
  

 

 

    

 

 

    

 

 

    

 

 

 

There was $1,500 established in the allowance for loan losses relating to PCI loans as of September 30, 2021.

The following table summarizes the outstanding balance and related carrying amount of PCI loans acquired (see also Note 13, Acquisitions) as of September 30, 2020 (in thousands):

 

     Mobeetie      Centennial      Total  

Outstanding balance

   $ 12      $ 15,171      $ 15,183  

Nonaccretable difference

     —          (4,476      (4,476

Accretable yield

     —          (165      (165
  

 

 

    

 

 

    

 

 

 

Carrying amount

   $ 12      $ 10,530      $ 10,542  
  

 

 

    

 

 

    

 

 

 

There was no allocation established in the allowance for loan losses relating to PCI loans as September 30, 2020.

 

35


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 summarizes the outstanding balance and related carrying amount of PCI loans acquired (see also Note 13, Acquisitions) as of December 31, 2020 (in thousands):

 

     Mobeetie      Centennial      Total  

Outstanding balance

   $ 9      $ 15,152      $ 15,161  

Nonaccretable difference

     —          (4,252      (4,252

Accretable yield

     —          (340      (340
  

 

 

    

 

 

    

 

 

 

Carrying amount

   $ 9      $ 10,560      $ 10,569  
  

 

 

    

 

 

    

 

 

 

There was no allocation established in the allowance for loan losses relating to PCI loans as December 31, 2020.

The changes in accretable yield during the three and nine-month periods ended September 30, 2021 and 2020 in regards to loans transferred at acquisition, for which it was probable that all contractually required payments would not be collected, are presented in the table below (in thousands):

 

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

Beginning balance

   $ 3,659      $ —        $ 340      $ —    

Additions

     —          (182      —          (182

Accretion

     (201      17        (571      17  

Reclassification from nonaccretable

     203        —          3,892        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 3,661      $ (165    $ 3,661      $ (165
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 4 - GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS

Goodwill

A summary of goodwill follows (in thousands):

 

     Nine-month periods ending      Year ending  
     September 30, 2021      September 30, 2020      December 31, 2020  

Beginning balance

   $ 126,114      $ 48,668      $ 48,668  

Goodwill recorded during year

     3,677        77,464        77,446  
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 129,791      $ 126,132      $ 126,114  
  

 

 

    

 

 

    

 

 

 

The change of $3,677,000 for the nine-month period ending September 30, 2021 relates to the acquisitions of First Bank of Muleshoe and First National Bank of Tahoka. The change of $77,464,000 for the nine-month period ending September 30, 2020 relates to the acquisition of First State Bank of Mobeetie and Centennial Bank. The change of $77,446,000 during the year ending December 31, 2020 relates to the acquisitions of First State Bank of Mobeetie and Centennial Bank and differs from the nine-month period due to true up activity during the fourth quarter 2020. Further details are included in Note 13, Acquisitions.

Goodwill impairment tests during 2020 and 2021 produced no changes in the carrying amount of goodwill.

 

36


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 4 - GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS (continued)

 

Other Identifiable Intangible Assets

A summary of the gross carrying amounts and accumulated amortization of intangible assets other than goodwill follows (in thousands):

 

     September 30, 2021  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net Balances  

Core deposits

   $ 4,589      $ 1,609      $ 2,980  

Naming rights

     8,340        608        7,732  

Customer list

     1,250        444        806  
  

 

 

    

 

 

    

 

 

 
   $ 14,179      $ 2,661      $ 11,518  
  

 

 

    

 

 

    

 

 

 
     September 30, 2020  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net Balances  

Core deposits

   $ 5,832      $ 2,417      $ 3,415  

Naming rights

     7,840        379        7,461  

Customer list

     1,250        35        1,215  
  

 

 

    

 

 

    

 

 

 
   $ 14,922      $ 2,831      $ 12,091  
  

 

 

    

 

 

    

 

 

 
     December 31, 2020  
     Gross Carrying
Amount
     Accumulated
Amortization
     Net Balances  

Core deposits

   $ 4,049      $ 862      $ 3,187  

Naming rights

     8,040        429        7,611  

Customer list

     1,250        139        1,111  
  

 

 

    

 

 

    

 

 

 
   $ 13,339      $ 1,430      $ 11,909  
  

 

 

    

 

 

    

 

 

 

The following table summarizes the core deposits intangibles (other than those which are fully amortized) as of September 30, 2021 (in thousands). The company used sum-of-years-digits method for the core deposit intangibles amortization calculation. Further details are included in Note 13, Acquisitions.

 

Year Acquired

   Gross Carrying
Amount
     Amortization
Period (years)
     Accumulated
Amortization
    

Description

2019

   $ 1,509        10      $ 595      First State Bank & Trust of Seymour

2020

     685        6        304      First State Bank of Mobeetie

2020

     1,855        6        640      Centennial Bank

2021

     310        6        52      First Bank of Muleshoe

2021

     230        8        18      First National Bank of Tahoka
  

 

 

       

 

 

    
   $ 4,589         $ 1,609     
  

 

 

       

 

 

    

 

37


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 4 - GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS (continued)

Other Identifiable Intangible Assets (continued)

 

The following table summarizes the naming rights intangibles as of September 30, 2021 (in thousands):

 

Year Funded

   Gross Carrying
Amount
     Amortization
Period (years)
     Accumulated
Amortization
    

Description

2015

   $ 1,000        40      $ 87      Collegiate sporting venue

2017

     250        10        94      Performing arts center

2017

     2,500        50        179      University building project

2018

     100        20        18      Non-profit facility

2018

     100        10        33      Non-profit facility

2019

     2,500        50        104      University building project

2019

     100        10        20      Non-profit facility

2019

     140        10        28      Non-profit facility

2020

     50        10        6      University building project

2020

     100        10        13      Non-profit facility

2020

     1,000        15        —        High school sporting venue

2020

     200        10        7      Community center

2021

     200        10        13      Non-profit facility

2021

     100        10        6      Non-profit facility
  

 

 

       

 

 

    
   $ 8,340         $ 608     
  

 

 

       

 

 

    

The following table summarizes the customer list intangibles as of September 30, 2021 (in thousands):

 

Year Acquired

   Gross Carrying
Amount
     Amortization
Period (years)
     Accumulated
Amortization
    

Description

2020

   $ 1,250        5      $ 444      Investment firm

 

Amortization Expense

Amortization expenses related to these intangibles was $1,231,000 and $640,000 for the nine-month periods ended September 30, 2021 and 2020, respectively.

At September 30, 2021, the expected amortization expense related to intangible assets for the remainder of 2021 and each of the following four calendar years and thereafter is as follows (in thousands):

 

2021 - remaining

   $ 419  

2022

     1,543  

2023

     1,293  

2024

     1,044  

2025

     794  

Thereafter

     6,425  
  

 

 

 

Total

   $ 11,518  
  

 

 

 

 

38


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

 

NOTE 5 - EQUITY INVESTMENTS

The Company invests in various entities including partnerships and limited liability companies. Certain investments relate to business arrangements with key counterparties (including the Federal Reserve Bank, the Federal Home Loan Bank and a key correspondent bank). Others provide income opportunities, Community Reinvestment Act benefits, or both. Marketable equity securities are carried at fair value, but active markets do not exist for the remaining investments. 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. Losses due to impairment are recorded when it is determined that the investment no longer has the ability to recover its carrying value. During the nine-month periods ending, September 30, 2021 and 2020 and twelve months ending December 31, 2020, no impairment charges were recorded.

The following table presents the carrying value for these investments at September 30, 2021 and 2020 and December 31, 2020 (in thousands):

 

    September 30, 2021     September 30, 2020     December 31, 2020     Accounting Method  

Federal Home Loan Bank stock

  $ 4,531     $ 4,032     $ 4,066       Cost  

Correspondent bank stock

    1,782       1,755       1,755       Cost  

Preferred unit investment in a single Community Development Financial Institution (CDFI)

    10,000       10,000       10,000       Cost  

Other preferred equity investments

    2,872       2,625       2,500       Cost  

Partnership and similar investments

    8,283       7,074       7,451       Equity  

Investment in qualified affordable housing project

    550       719       677      
Proportional
amortization
 
 

Marketable equity securities at fair value

    2,224       2,246       2,247       Fair Value  
 

 

 

   

 

 

   

 

 

   

Total equity investments

  $ 30,242     $ 28,451     $ 28,696    
 

 

 

   

 

 

   

 

 

   

Income from these investments is included in “interest income” on the consolidated statements of income. Unrealized holdings gains related to the marketable equity securities are included in “other interest income” on the consolidated statements of 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.

Under the cost method of accounting for investments, the net accumulated earnings of an investee subsequent to the date of investment are recognized by the Company only to the extent distributed by the investee as dividends. Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions of cost of the investment.

Under the equity method, the Company records the initial investment at cost, and then that value is periodically adjusted to reflect the changes in value due to the Company’s share in the investee’s income or losses. The Company periodically analyzes investments for impairment.

 

39


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 5 - EQUITY INVESTMENTS (continued)

 

Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits allocated to the Company.

Income from affordable housing projects is included as an adjustment to income tax expense and includes amortization of the Company’s investment, tax benefit of loss deductions and tax credits.

The Bank purchased $10,000,000 of preferred units during 2017 in a single CDFI. This CDFI’s primary purpose is to provide home loans to low and moderate income borrowers in one of the Bank’s Community Reinvestment Act assessment areas.

The Company is a member bank of the Federal Home Loan Bank and is required to purchase stock based on a percentage of its borrowings. During 2020, the Company purchased stock, as required with increased borrowings, to support loans made as part of the Paycheck Protection Program and also increased its stock by $2,500,000 with FHLB stock acquired as part of the Centennial transaction (see Note 13, Acquisitions). Stock is restricted and can only be sold back to the company when owned in excess of required amounts. Due to excess liquidity, the Company decided to pay back the majority of borrowed funds and excess stock in the bank was redeemed near the end of the year. The company received stock dividends of $19,800 and $185,000, during the nine-month periods ending September 30, 2021 and 2020, respectively.

NOTE 6 - DEPOSITS

The aggregate amount of time deposits greater than $250,000 at September 30, 2021 and 2020 and December 31, 2020 was $163,297,000, $105,452,000, and $156,586,000, respectively.

At September 30, 2021, the scheduled maturities of time deposits were as follows (in thousands):

 

2021

   $ 120,158  

2022

     245,529  

2023

     30,547  

2024

     12,777  

2025

     6,096  

Thereafter

     7,384  
  

 

 

 

Total

   $ 422,491  
  

 

 

 

 

40


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

 

NOTE 7 - BORROWINGS

Federal Home Loan Bank Advances

The following table summarizes Federal Home Loan Bank (FHLB) advances (dollars in thousands):

 

     September 30, 2021     September 30, 2020     December 31, 2020  
     Amount      Weighted
Average Rate
    Amount      Weighted
Average Rate
    Amount      Weighted
Average Rate
 

Maturing within one year

   $ 574        6.23   $ 1        2.73   $ 334        5.79

Maturing one year through two years

     34        1.45     613        6.09     269        6.46

Maturing two years through three years

     —          0.00     54        1.45     49        1.45

Maturing three years through four years

     18,000        0.73     —          0.00     —          —    

Maturing four years through five years

     8,000        1.20     18,000        0.71     —          —    

Maturing six years and thereafter

     48,044        3.09     56,051        3.05     74,049        2.48
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 74,652        2.34   $ 74,719        2.51   $ 74,701        2.51
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Each advance bears a fixed rate of interest and includes prepayment penalties.

The Bank has pledged FHLB stock and certain mortgage loans free of pledges, liens and encumbrances as collateral for advances. Loans with carrying values of approximately $2,402,243,000, $1,923,684,000 and $2,450,077,000 were pledged as collateral for outstanding advances at September 30, 2021 and 2020 and December 31, 2020, respectively.

Short-Term Borrowings & Lines of Credit

The Bank periodically borrows funds on a short-term basis. Such borrowings may include FHLB advances (with maturities less than a year), Federal Funds purchased, or securities sold under repurchase agreements. Other than FHLB advances with maturities less than a year, there were no short-term borrowings outstanding at September 30, 2021 or 2020, or December 31, 2020.

On April 19, 2019, the Company entered into a $40,000,000 line of credit with a correspondent bank. The line matured April 19, 2021, at which time the Company renewed and increased the line of credit by $20,000,000. The line matures April 19, 2028. The line of credit bears interest at the prime rate (currently 3.25%). Advances during 2020 were repaid in full with no balance outstanding as of September 30, 2021 and 2020 and December 31, 2020. Interest expense for the nine-month periods ending September 30, 2021 and 2020, was $0 and $235,000, respectively.

At September 30, 2021, the Bank has two unsecured lines of credit totaling $50,000,000 for the purchase of Federal Funds from correspondent banks. The lines are in the amount of $25,000,000 each and do not have expiration dates. A third unsecured line in the amount of $50,000,000 expired on June 20, 2021 and was renewed in the amount of $75,000,000. The rate of interest for an advance on both lines of credit is set at the time of such advance and is based on the market rates prevailing at that time. There were no advances outstanding on any of the lines of credit as of September 30, 2021 and 2020 and December 31, 2020, respectively.

 

41


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 7 - BORROWINGS (continued)

 

Subordinated Debentures

On December 31, 2003, the Company completed the private placement of $10,310,000 in subordinated debentures to Happy Capital Trust I (the Trust). The Trust funded the purchase of the subordinated debentures through the sale of trust preferred securities with a liquidation value of $10,310,000. Using interest payments made by the Company on the debentures, the Trust began paying quarterly dividends to preferred security holders on April 7, 2004. The annual percentage rate of the interest payable on the subordinated debentures and distributions payable on the preferred securities is 3-Month LIBOR plus 2.85% (2.98% and 3.13% at September 30, 2021 and 2020, respectively and 3.09% at December 31, 2020). Dividends on the preferred securities are cumulative and the Trust may defer the payments for up to five years. The preferred securities mature in December 2034 unless the Company elects and obtains regulatory approval to accelerate the maturity date.

In the Signature Bank merger, the Company assumed the $2,165,000 in floating rate Preferred Capital Securities originally issued in February 2004 through Signature Capital Trust, a statutory business trust and wholly-owned subsidiary of the Company. As guarantor, the Company unconditionally guarantees payment of accrued and unpaid distributions required to be paid on the preferred capital securities, the redemption price when a capital security is called for redemption, and amounts due if a trust is liquidated or terminated. The Preferred Capital Securities pay cumulative cash distributions quarterly at a rate per annum, reset quarterly, equal to the 3-month LIBOR plus 4% (4.14% and 4.26% at September 30, 2021 and 2020, respectively, and 4.21% at December 31, 2020). The Preferred Capital Securities are subject to mandatory redemption in whole or in part upon repayments of the debentures at the stated maturity in the year 2034 or their earlier redemption, in each case at a redemption price equal to the aggregate liquidation preference of the Preferred Capital Securities plus any accumulated and unpaid distributions thereon to the date of redemption.

In the Centennial Bank merger (see Note 13, Acquisitions), the Company assumed the $6,083,000 in floating rate Cumulative Trust Preferred Securities originally issued in September 2006 through HaleCo, a statutory business trust and wholly-owned subsidiary of the Company. As guarantor, the Company unconditionally guarantees payment of accrued and unpaid distributions required to be paid on the preferred capital securities, the redemption price when a capital security is called for redemption, and amounts due if a trust is liquidated or terminated. The Cumulative Trust Preferred Securities pay cumulative cash distributions quarterly at a rate per annum, reset quarterly, equal to the 3-month LIBOR plus 1.7% (1.82%, 1.95%, and 1.92% at September 30, 2021 and 2020 and December 31, 2020, respectively). The Cumulative Trust Preferred Capital Securities are subject to mandatory redemption in whole or in part upon repayments of the debentures at the stated maturity in the year 2036 or their earlier redemption, in each case at a redemption price equal to the aggregate liquidation preference of the Cumulative Trust Preferred Capital Securities plus any accumulated and unpaid distributions thereon to the date of redemption.

In the Centennial Bank merger (see Note 13, Acquisitions), the Company assumed the $4,640,000 in floating rate the Cumulative Trust Preferred Securities originally issued in September 2007 through LubCo, a statutory business trust and wholly-owned subsidiary of the Company. As guarantor, the Company unconditionally guarantees payment of accrued and unpaid distributions required to be paid on the preferred capital securities, the redemption price when a capital security is called for redemption, and amounts due if a trust is liquidated or terminated. The Cumulative Trust Preferred Securities pay cumulative cash distributions quarterly at a rate per annum, reset quarterly, equal to the 3-month LIBOR plus 2.2% (2.32%, 2.45% and 2.42% at September 30, 2021 and 2020 and December 31, 2020). The Cumulative Trust Preferred Capital Securities are subject to mandatory redemption in whole or in part upon repayments of the debentures at the stated maturity in the year 2037 or their earlier redemption, in each case at a redemption price equal to the aggregate liquidation preference of the

 

42


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 7 - BORROWINGS (continued)

Subordinated Debentures (continued)

 

Cumulative Trust Preferred Capital Securities plus any accumulated and unpaid distributions thereon to the date of redemption.

Subordinated debentures related to trust preferred securities may be included in regulatory Tier 1 capital subject to a limitation that such amounts not exceed 25% of Tier 1 capital. The remainder of this and other subordinated debt is included in Tier 2 capital. There is no limitation for inclusion of subordinated debt in total risk-based capital and, as such, all subordinated debt was included in total risk-based capital.

For the three-month periods ended September 30, 2021 and 2020, interest expense on the subordinated debentures was $186,000 and $187,000, respectively (including premium amortization of $29,000 and $20,000 for September 30, 2021 and 2020, respectively). For the nine-month periods ended September 30, 2021 and 2020, interest expense on the subordinated debentures was $562,000 and $475,000, respectively (including premium amortization of $87,000 and $20,000 for June 30, 2021 and 2020, respectively).

Included in “subordinated debentures” on the unaudited consolidated balance sheets as of September 30, 2021 and 2020 and December 31, 2020 is a reduction of $1,752,000, $1,868,000, and $1,839,000 respectively, to reflect the estimated fair value of these liabilities assumed in the Centennial acquisition (see Note 13, Acquisitions).

Subordinated Notes

In July 2020, the Company completed the private placement of $140,000,000 in subordinated notes. The notes have a maturity date of July 31, 2030 and carry a fixed rate of 5.500% for the first five years. Thereafter, the notes bear interest at 3-month Secured Overnight Funding Rate (SOFR) plus 5.435% resetting quarterly. Interest payments are due semiannually in January and July. The notes include a right of prepayment without penalty on or after July 31, 2025. The principal balance and all accrued but unpaid interest are due at the maturity date.

In August 2020, the Company paid all outstanding balances associated with the July 2015 issuance of $65,000,000 in private placement subordinated notes. The notes had a maturity date of August 1, 2025 and carried a fixed rate of interest of 5.875% for the first five years. Thereafter, the notes would bear interest at 3-month LIBOR plus 4.12%, resetting quarterly. Interest payments were due semiannually in February and August. The notes included a right of prepayment without penalty on or after August 1, 2020. The principal balance and all accrued but unpaid interest were paid at the August 2020 prepayment date.

In January 2021, the Company also paid the remaining principal and all accrued but unpaid interest of an additional $7,500,000 private placement subordinated note issued on September 30, 2015. The note had a maturity date of October 1, 2025 and carried a fixed rate of interest of 5.875% until maturity. Interest payments were due quarterly. The note included a right of prepayment without penalty on or after October 1, 2020.

These subordinated notes have been structured to qualify as Tier 2 capital for regulatory purposes. Interest expense on the subordinated notes was $6,045,000 and $4,229,000 for the nine-month periods ended September 30, 2021 and 2020, respectively (including amortization of issuance costs of $354,000 and $344,000 for the nine-month periods ended September 30, 2021 and 2020, respectively). Issuance costs for the initial $65,000,000 issuance totaled $1,181,000 and were fully amortized upon prepayment in August 2020. Issuance costs for the most recent placement of $140,000,000 totaled $2,328,000 and will be amortized over the period

 

43


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 7 - BORROWINGS (continued)

Subordinated Notes (continued)

 

from issuance to the date of earliest prepayment. The unamortized balances of total issuances costs were $1,776,000 and $2,246,000 as of September 30, 2021 and 2020 and $2,130,000 as of December 31, 2020, respectively, and are reported on the consolidated balance sheets as a direct deduction from the face of the notes.

Maturities

The following table summarizes maturities of the Company’s borrowings as of September 30, 2021 (in thousands):

 

     FHLB
Advances
     Subordinated
Debentures
     Subordinated
Notes
     Total  

Maturing within one year

   $ 574      $ —        $ —        $ 574  

Maturing one year through two years

     34        —          —          34  

Maturing two years through three years

     —          —          —          —    

Maturing three years through four years

     18,000        —          —          18,000  

Maturing four years through five years

     8,000        —          —          8,000  

Maturing six years and thereafter

     48,044        21,446        138,224        207,714  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 74,652      $ 21,446      $ 138,224      $ 234,322  
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 8 - CAPITAL AND REGULATORY MATTERS

Regulatory Capital Requirements

The Company (as a bank holding company and on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting rules. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. Furthermore, the Company’s and Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total, Tier 1 and CET1 capital (each as defined in the regulations) relative to risk weighted assets (as defined), and of Tier 1 capital to average assets (as defined). The following tables present actual and required capital amounts (in thousands) and ratios as of September 30, 2021 and 2020 and December 31, 2020 for the Company and the Bank under the Basel III Capital Rules. The minimum required capital amounts presented include the minimum required capital levels as of September 30, 2021 and 2020 and December 31, 2020, including the Basel III capital conservation buffer. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. Management believes, as of September 30, 2021 and 2020 and December 31, 2020, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

 

44


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 8 - CAPITAL AND REGULATORY MATTERS (continued)

Regulatory Capital Requirements (continued)

 

The Company’s and the Bank’s actual regulatory capital amounts (in thousands) and ratios are presented in the table below:

 

     Actual     Minimum Capital
Requirement
    Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
    Minimum Capital
Requirement -
Basel III Including
Capital
Conservation Buffer
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio     Amount      Ratio  

September 30, 2021 (estimated)

                    

Total capital to risk-weighted assets

                    

Consolidated

   $ 744,779        17.2   $ 345,908        8.0     N/A        N/A     $ 454,004        10.5

Happy State Bank

     709,397        16.4       345,534        8.0     $ 431,917        10.0     453,513        10.5  

Tier 1 capital to risk-weighted assets

                    

Consolidated

     565,588        13.1       259,431        6.0       N/A        N/A       367,527        8.5  

Happy State Bank

     668,430        15.5       259,150        6.0       345,534        8.0       367,129        8.5  

Common equity tier 1 capital to risk-weighted assets

                    

Consolidated

     544,142        12.6       194,573        4.5       N/A        N/A       302,669        7.0  

Happy State Bank

     668,430        15.5       194,363        4.5       280,746        6.5       302,342        7.0  

Tier 1 capital to average assets (leverage ratio)

                    

Consolidated

     565,588        9.2       246,547        4.0       N/A        N/A       246,547        4.0  

Happy State Bank

     668,430        10.9       246,360        4.0       307,950        5.0       246,360        4.0  

September 30, 2020

                    

Total capital to risk-weighted assets

                    

Consolidated

   $ 697,526        17.2   $ 323,972        8.0     N/A        N/A     $ 425,214        10.5

Happy State Bank

     588,645        14.6       323,522        8.0     $ 404,403        10.0     424,623        10.5  

Tier 1 capital to risk-weighted assets

                    

Consolidated

     504,662        12.5       242,979        6.0       N/A        N/A       344,221        8.5  

Happy State Bank

     541,035        13.4       242,642        6.0       323,522        8.0       343,742        8.5  

Common equity tier 1 capital to risk-weighted assets

                    

Consolidated

     483,332        11.9       182,235        4.5       N/A        N/A       283,476        7.0  

Happy State Bank

     541,035        13.4       181,981        4.5       262,863        6.5       283,082        7.0  

Tier 1 capital to average assets (leverage ratio)

                    

Consolidated

     504,662        9.7       209,415        4.0       N/A        N/A       209,415        4.0  

Happy State Bank

     541,035        10.4       209,211        4.0       261,514        5.0       209,211        4.0  

 

45


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 8 - CAPITAL AND REGULATORY MATTERS (continued)

Regulatory Capital Requirements (continued)

 

     Actual     Minimum Capital
Requirement
    Minimum To Be
Well Capitalized
Under Prompt
Corrective Action
Provisions
    Minimum Capital
Requirement -
Basel III Including
Capital
Conservation Buffer
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio     Amount      Ratio  

December 31, 2020

                    

Total capital to risk-weighted assets

                    

Consolidated

   $ 723,441        18.1   $ 319,073        8.0     N/A        N/A     $ 418,783        10.5

Happy State Bank

     648,185        16.3       318,744        8.0     $ 398,430        10.0     418,352        10.5  

Tier 1 capital to risk-weighted assets

                    

Consolidated

     528,194        13.2       239,305        6.0       N/A        N/A       339,015        8.5  

Happy State Bank

     598,308        15.0       239,058        6.0       318,744        8.0       338,666        8.5  

Common equity tier 1 capital to risk-weighted assets

                    

Consolidated

     506,835        12.7       179,479        4.5       N/A        N/A       279,189        7.0  

Happy State Bank

     598,308        15.0       179,294        4.5       258,981        6.5       278,901        7.0  

Tier 1 capital to average assets (leverage ratio)

                    

Consolidated

     528,194        10.0       211,850        4.0       N/A        N/A       211,850        4.0  

Happy State Bank

     598,308        11.3       211,606        4.0       264,508        5.0       211,606        4.0  

As of September 30, 2021, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk based, Tier 1 risk based, CET1 risk-based and Tier 1 leverage ratios as set forth in the table. Prompt corrective action provisions are not applicable to bank holding companies.

Capital Activity

During the nine-month period ending September 30, 2021, no private placement offerings had taken place. During the nine-month period ending September 30, 2020, the Company issued common stock through three separate private placement offerings; approximately $71,239,000 of common stock was issued through a private placement offering during September 2020, approximately $36,481,000 of common stock was issued through the merger with Centennial Bancshares in July 2020 and approximately $2,904,000 of common stock was issued through a separate private placement offering in February 2020. There were no material issuance costs associated with any of these offerings.

In July 2020, the Company completed the private placement of $140,000,000 in subordinated notes. The notes are structured to qualify as Tier 2 capital for regulatory purposes (see Note 7, Borrowings). In August 2020, the Company paid all outstanding balances associated with the July 2015 issuance of $65,000,000 in private placement subordinated notes. In January 2021, the Company paid the outstanding balance associated with the September 2015 issuance of a $7,500,000 private placement subordinated note.

 

46


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 8 - CAPITAL AND REGULATORY MATTERS (continued)

Capital Activity (continued)

 

Banking regulations may limit the amount of dividends that the Bank may pay to the Company. Specifically, approval by regulatory authorities is required if the effect of dividends declared would cause the Bank’s capital to fall below specified levels, or if dividends declared exceed the Bank’s retained earnings. These limitations on the Bank’s ability to pay dividends to the Company could limit the Company’s ability to pay dividends to its shareholders. During the nine-month periods ending September 30, 2021 and 2020, the Bank paid dividends of $0 and $2,130,000, respectively, to the Company; these were eliminated in consolidation. The dividend was used by the Company to pay interest on Subordinated Notes. Regulatory approval was not required for the dividend.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Off-Balance Sheet Arrangements

The Company is a party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the audited consolidated balance sheets. The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

As of September 30, 2021 and 2020 and December 31, 2020, respectively, the approximate amounts of these financial instruments were as follows (in thousands):

 

     September 30,      December 31,  
     2021      2020      2020  

Commitments to extend credit

   $ 1,306,124      $ 1,110,199      $ 1,236,498  

Standby letters of credit

     61,013        13,771        20,181  
  

 

 

    

 

 

    

 

 

 
   $ 1,367,137      $ 1,123,970      $ 1,256,679  
  

 

 

    

 

 

    

 

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses, may require payment of a fee, and may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Most letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments if deemed necessary.

The Company has no other off-balance sheet arrangements; nor does it have any transactions, other than those reflected in the consolidated financial statements, with unconsolidated, special purpose entities where those transactions would expose the Company to liability.

 

47


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 9 - COMMITMENTS AND CONTINGENCIES (continued)

 

Other

At September 30, 2021, the future minimum lease payments due from the Bank as lessee for the remainder of 2021 and each of the following four calendar years and thereafter are as follows (in thousands):

 

2021 - remaining

   $ 422  

2022

     1,332  

2023

     1,034  

2024

     758  

2025

     469  

Thereafter

     476  
  

 

 

 
   $ 4,491  
  

 

 

 

Various legal claims arise from time to time in the normal course of business. As of September 30, 2021, such claims asserted against the Company will not, in the opinion of management, have a material effect on the Company’s financial condition, results of operations or cash flows.

NOTE 10 - EMPLOYEE BENEFIT PLANS

Employee Stock Ownership Plan

The Company sponsors an Employee Stock Ownership Plan (ESOP) which contains Code Section 401(k) provisions. Employees are generally eligible to participate on January 1st, July 1st, or other dates that may be selected by the Company following their initial date of service, provided that the employee has attained the age of 18 and is employed in a position requiring at least 1,000 hours of service for the plan year. The Company may make matching contributions, discretionary basic contributions, or discretionary additional contributions. The Company contribution is based on the employee’s annual compensation.

Employer matching contributions are included in “salaries and employee benefits” in the unaudited consolidated statements of income and were $2,800,000 and $2,315,000 for the nine-month periods ended September 30, 2021 and 2020, respectively. The ESOP had no unearned shares or shares committed to be released at September 30, 2021 and 2020 or at December 31, 2020. The ESOP owned 1,479,510 and 1,506,685 and 1,511,316 shares at September 30, 2021 and 2020 and December 31, 2020, respectively, and these shares are included in the total of shares outstanding for purposes of computing earnings per share for the Company. The ESOP did not purchase any shares during the nine-month periods ended September 30, 2021. The ESOP purchased 10,580 shares, approximately $508,000, during the nine-month period ended September 30, 2020.

The Company has an obligation to repurchase shares from ESOP participants for distributions from the ESOP. The market value for the shares for this purpose is $53.50 per share and is based on a December 31, 2020 valuation by an independent external firm. The market value utilized as of September 30, 2020 was $48.25 per share based on the December 31, 2019 valuation.

Deferred Compensation Agreements

The Company established non-qualified deferred compensation agreements covering certain employees and directors. The unfunded liabilities related to these agreements are based on predetermined post-retirement benefits for each individual. Expense related to benefits accrued for these agreements is included in “salaries and

 

48


HAPPY BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2021 and 2020

NOTE 10 - EMPLOYEE BENEFIT PLANS (continued)

Deferred Compensation Agreements (continued)

 

employee benefits” in the unaudited consolidated statements of income and was $1,102,000 and $1,191,000 for the nine-months ended September 30, 2021 and 2020, respectively. The unfunded liability included in “accrued expenses and other liabilities” on the unaudited consolidated balance sheets amounted to $12,200,000, $11,154,000 and $11,292,000 for September 30, 2021 and 2020 and December 31, 2020, respectively.

Stock-Based Compensation

Stock Options

The Company has entered into various stock option agreements that grant options to its directors, officers, and employees for up to 8,820,550 shares of common stock. Both incentive stock options and non-qualified stock options have been granted under the plans. The exercise price of each option equals the market price of the Company’s stock on the date of grant. Vesting periods are generally five years from the date of grant with options expiring in ten years. The Company issues new shares for options when they are exercised.

Expense for the stock options is computed using the equity-classified awards method, under which the fair value of each option grant is calculated utilizing a Black-Scholes option-pricing model, and that value is recognized as expense (and as an equal increase in “additional paid-in capital” on the consolidated balance sheets) over the vesting period. Expense related to stock options is included in “salaries and employee benefits” in the unaudited consolidated statements of income and was $643,000 and $409,000 for the nine-month periods ended September 30, 2021 and 2020, respectively. Expense related to stock options for directors is included in “legal and professional fees” in the unaudited consolidated statements of income and was $132,000 and $60,000 for the nine-month periods ended September 30, 2021 and 2020, respectively. The combined stock option expense was $775,000 and $469,000, for the nine-month periods ended September 30, 2021 and 2020, and the associated income tax benefit was $163,000 and $98,000, respectively, for the same periods. There were no modifications of the terms of any options during the nine-month periods ended September 30, 2021 and 2020. As of September 30, 2021, the unrecognized compensation expense for outstanding options was $557,000. The cost is expected to be recognized over a weighted-average period of 2.18 years.

There were no options granted during the nine-month periods ended September 30, 2021 and 2020.

An analysis of stock option activity is presented below:

 

     Nine Months Ended
September 30, 2021
     Nine Months Ended
September 30, 2020
 
     Number of
Options
     Weighted
Exercise
Price
     Number of
Options
     Weighted
Exercise
Price
 

Options outstanding, beginning of period

     498,758      $ 40.94        419,024      $ 28.90  

Granted

     —          —          —          —    

Exercised

     (50,547      16.00        (129,627      16.21  

Forfeited

     —          —          (7,750      16.00  

Expired

     —          —          —          —    
  

 

 

       

 

 

    

Options outstanding, end of period

     448,211        43.76        281,647        35.10  
  

 

 

       

 

 

    

Options exercisable, end of period

     333,173        42.45        197,037        30.64  
  

 

 

       

 

 

    

 

49


HAPPY BANC