S-1 1 d214992ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on October 15, 2021.

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

THIRD COAST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Texas   6036   46-2135597

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification No.)

 

(I.R.S. Employer

Identification No.)

20202 Highway 59 North, Suite 190

Humble, Texas 77338

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Bart O. Caraway

Chairman, President and Chief Executive Officer

20202 Highway 59 North, Suite 190

Humble, Texas 77338

(281) 446-7000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Michael G. Keeley, Esq.

Norton Rose Fulbright US LLP

2200 Ross Avenue, Suite 3600

Dallas, Texas 75201

(214) 855-3906

(214) 855-8200 (facsimile)

 

Derek W. McGee, Esq.

Brent Standefer, Jr., Esq.

Fenimore Kay Harrison LLP

812 San Antonio Street, Suite 600

Austin, Texas 78701

(512) 583-5900

(512) 583-5940 (facsimile)

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common stock, par value $1.00 per share

  $75,000,000   $6,952.50

 

 

(1)

Includes the aggregate offering price of                additional shares of common stock that the underwriters have the option to purchase from the Registrant in this offering.

(2)

Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. This amount represents the proposed maximum aggregate offering price of the securities registered hereunder to be sold by the Registrant.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated October 15, 2021

PRELIMINARY PROSPECTUS

            Shares

 

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Common Stock

 

 

This prospectus relates to the initial public offering of the common stock of Third Coast Bancshares, Inc. We are the bank holding company for Third Coast Bank, SSB, a Texas state savings bank headquartered in Humble, Texas, with operations primarily in the greater Houston, Dallas-Fort Worth and Austin-San Antonio, Texas markets. We are offering              shares of our common stock.

Prior to this offering there has been no established public market for our common stock. We currently estimate that the initial public offering price of our common stock will be between $              and $              per share. We have applied to list our common stock on the Nasdaq Global Select Market under the symbol “TCBX.”

 

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 27 of this prospectus.

 

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and are eligible for reduced public company reporting requirements. See “Implications of Being an Emerging Growth Company.”

 

     Per
share
     Total  

Initial public offering price

   $                  $              

Underwriting discounts and commissions(1)

   $        $    

Proceeds, before expenses, to us

   $        $    

 

(1)

See “Underwriting” for additional information regarding the underwriting discounts and commissions and certain expenses payable to the underwriters by us.

We have granted the underwriters an option for a period of 30 days following the date of this prospectus to purchase up to an additional              shares of our common stock from us on the same terms set forth above.

Neither the Securities and Exchange Commission, nor any other state securities commission nor any other regulatory authority has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

Our common stock is not a deposit or savings account. Our common stock is not insured by the Federal Deposit Insurance Corporation or any other governmental agency or instrumentality.

The underwriters expect to deliver the shares of our common stock to purchasers on or about             , 2021, subject to customary closing conditions.

 

 

 

Stephens Inc.                      Piper Sandler & Co.   Deutsche Bank Securities

The date of this prospectus is             , 2021


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LOGO

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Note: Total assets reflect as of the year-ended 12/31, unless otherwise specified


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TABLE OF CONTENTS

 

     Page  

About this Prospectus

     ii  

Market and Industry Data

     ii  

Implications of Being an Emerging Growth Company

     iii  

ESOP Repurchase Right Termination

     iii  

Prospectus Summary

     1  

The Offering

     17  

Selected Historical Consolidated Financial Data

     19  

Non-GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

     23  

Summary of Risk Factors

     25  

Risk Factors

     27  

Cautionary Note Regarding Forward-Looking Statements

     60  

Use of Proceeds

     62  

Dividend Policy

     63  

Capitalization

     64  

Dilution

     67  

Price Range of Our Common Stock

     69  

Business

     70  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     92  

Management

     125  

Executive Compensation

     137  

Principal Shareholders

     152  

Certain Relationships and Related Persons Transactions

     155  

Description of Capital Stock

     157  

Shares Eligible for Future Sale

     163  

Supervision and Regulation

     165  

Certain Material U.S. Federal Income Tax Consequences for Non-U.S. Holders of Common Stock

     181  

Underwriting

     185  

Legal Matters

     191  

Experts

     191  

Where You Can Find More Information

     191  

Index to Financial Statements

     F-1  

 

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ABOUT THIS PROSPECTUS

In this prospectus, unless otherwise indicated or the context otherwise requires, all references to “we,” “our,” “us,” “ourselves,” “Third Coast,” “TCBX,” and “the Company” refer to Third Coast Bancshares, Inc., a Texas corporation, and its consolidated subsidiaries. All references in this prospectus to “Third Coast Bank,” “the Bank,” or “our Bank” refer to Third Coast Bank, SSB, a Texas state savings bank and our wholly owned bank subsidiary. All references in this prospectus to “TCCC” and “Third Coast Commercial Capital” refer to Third Coast Commercial Capital, Inc., a Texas corporation and wholly owned subsidiary of the Bank.

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by us or on our behalf that we have referred you to. We and the underwriters have not authorized anyone to provide you with additional or different information. If anyone provides you with additional, different or inconsistent information, you should not rely on it. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. We and the underwriters are not making an offer of these securities in any state, country or other jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus or any free writing prospectus is accurate as of any date other than the date of the applicable document regardless of its time of delivery or the time of any sales of our common stock. Our business, financial condition, results of operations and cash flows may have changed since the date of the applicable document.

This prospectus describes the specific details regarding this offering and the terms and conditions of our common stock being offered hereby and the risks of investing in our common stock. For additional information, please see the section entitled “Where You Can Find More Information.”

You should not interpret the contents of this prospectus or any free writing prospectus to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial and other issues that you should consider before investing in our common stock.

Unless otherwise stated, all information in this prospectus assumes that the underwriters have not exercised their option to purchase additional shares of common stock.

MARKET AND INDUSTRY DATA

This prospectus includes industry and trade association data, forecasts and information that we have prepared based, in part, upon data, forecasts and information obtained from independent trade associations, industry publications and surveys, government agencies and other independent information publicly available to us. Statements as to our market position are based on market data currently available to us. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. Although we believe these sources are reliable, we have not independently verified the information obtained from these sources. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. We believe our internal research is reliable, even though such research has not been verified by any independent sources. While we are not aware of any misstatements regarding our industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus. In addition, forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus. Trademarks used in this prospectus are the property of their respective owners, although for presentational convenience we may not use the ® or the symbols to identify such trademarks.

 

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IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

We are an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. For as long as we are an emerging growth company, unlike other public companies that are not emerging growth companies under the JOBS Act, we are not required to:

 

   

provide an auditor’s attestation report on our system of internal control over financial reporting;

 

   

provide more than two years of audited financial statements and related management’s discussion and analysis of financial condition and results of operations in this Form S-1;

 

   

comply with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

   

provide certain disclosure regarding executive compensation required of larger public companies or hold shareholder advisory votes on executive compensation as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act; or

 

   

obtain shareholder approval of any golden parachute payments not previously approved.

We will cease to be an “emerging growth company” upon the earliest of:

 

   

the last day of the fiscal year in which we have $1.07 billion or more in annual revenues;

 

   

the date on which we become a “large accelerated filer” (the fiscal year end on which the total market value of our common equity securities held by non-affiliates is $700 million or more as of June 30);

 

   

the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period; or

 

   

the last day of the fiscal year following the fifth anniversary of our initial public offering.

We have elected to adopt the reduced disclosure requirements above for purposes of the registration statement of which this prospectus is a part. In addition, we expect to take advantage of certain of the reduced reporting and other requirements of the JOBS Act with respect to the periodic reports we will file with the Securities and Exchange Commission, or the SEC, and proxy statements that we use to solicit proxies from our shareholders.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We intend to take advantage of the benefits of this extended transition period for as long as it is available.

ESOP REPURCHASE RIGHT TERMINATION

In accordance with provisions of the Internal Revenue Code of 1986, as amended, or the Code, that are applicable to private companies, the terms of our employee stock ownership plan, or ESOP, currently provide that ESOP participants have the right, for a specified period of time, to require us to repurchase shares of our common stock that are distributed to them by the ESOP. As a result, the ESOP-owned shares are deducted from shareholders’ equity in our consolidated balance sheets. The shares of common stock held by the ESOP are reflected in our consolidated balance sheets as a line item called “Commitments and contingencies—ESOP-owned shares” appearing between total liabilities and shareholders’ equity. Upon the completion of this offering and the listing of our common stock on the Nasdaq Global Select Market, our repurchase liability will be extinguished and the ESOP-owned shares will be included in shareholders’ equity.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus and may not contain all of the information that you should consider before investing in our common stock. You should carefully read the entire prospectus, including the sections entitled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” together with the consolidated financial statements and the related notes that are included herein, before making an investment decision. Additionally, references in this prospectus to the “Greater Houston market” refer to the Houston—The Woodlands—Sugar Land, Texas Metropolitan Statistical Area, or MSA, the Beaumont—Port Arthur, Texas MSA, and surrounding counties. References in this prospectus to the “Dallas-Fort Worth market” refer to the Dallas—Fort Worth—Arlington, Texas MSA and surrounding counties. References in this prospectus to the “Austin-San Antonio market” refer to the San Antonio—New Braunfels, Texas MSA, the Austin—Round Rock—Georgetown, Texas MSA, and surrounding counties.

Our Company

We are a commercially-focused, Texas-based bank holding company operating primarily in the Greater Houston, Dallas-Fort Worth, and Austin-San Antonio markets through our wholly owned subsidiary, Third Coast Bank, SSB, or the Bank, a Texas state savings bank, and the Bank’s wholly owned subsidiary, Third Coast Commercial Capital, Inc., or TCCC, a Texas corporation and commercial finance company. Since the Bank’s founding in 2008, we have been able to successfully execute our organically-focused strategic plan by attracting talented professionals and providing superior banking services through our relationship managers. We currently operate twelve branch locations, with seven branches in the Greater Houston market, two branches in the Dallas-Fort Worth market, two branches in the Austin-San Antonio market, and one branch in Detroit, Texas. As of June 30, 2021, we had, on a consolidated basis, total assets of $2.01 billion, total loans of $1.55 billion, total deposits of $1.78 billion and total shareholders’ equity, including ESOP-owned shares, of $137.8 million.

Our management team and board of directors are led by our founder, Chairman, President and Chief Executive Officer, Bart O. Caraway. Under Mr. Caraway’s leadership, we have experienced substantial and consistent growth. We believe our team-oriented culture, combined with a diverse suite of financial products and services, delivers the sophistication of a larger financial institution and allows our relationship managers to attract and retain customers and drive growth. We strive to know our customers better than our competition and believe our greatest opportunities for organic growth stem from the ability of our relationship managers to provide a greater level of attentiveness to customers and prospects than larger banks and our peers. As a result of consolidation among Texas metropolitan banks, we believe we are one of the few remaining locally-based banks in our markets that are dedicated to providing personalized service to small and medium-sized businesses with sophisticated banking needs. We intend to focus on continued quality organic growth, profitability enhancement through the leveraging of our current staff and infrastructure, engaging in strategic hiring of experienced bankers, expanding our markets through de novo branching and strategic whole-bank and branch acquisitions to increase shareholder value.

Our History and Growth

We were incorporated on January 16, 2013 to serve as the holding company for the Bank, which was chartered on February 25, 2008. We were founded by Mr. Caraway, along with other experienced Texas business professionals, to serve the banking needs of small and medium-sized businesses and individuals who we believe are often underserved by larger banks but demand sophisticated banking products and services. We began operations in Humble, Texas and opened four de novo locations in the Greater Houston market from 2009 to


 

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2018. In 2014, we expanded into the Dallas-Fort Worth market through a de novo location and opened an additional branch in 2015. Our entrance into the Dallas-Fort Worth market provided us with enhanced economic diversification and increased opportunities for organic growth, as well as a broader target market for future strategic hiring of experienced bankers and acquisition opportunities. The Bank began providing commercial finance services in 2012 for companies that typically have credit needs outside of traditional commercial bank underwriting guidelines, and TCCC was formed in 2015 as a subsidiary of the Bank dedicated to our commercial finance business line.

Since the Bank’s inception, we have successfully completed six rounds of common equity funding totaling $112.9 million, through board members, management, employees, friends, family and local investors. On January 1, 2020, we completed a merger with Heritage Bancorp, Inc., or Heritage, and its subsidiary, Heritage Bank, a commercial bank headquartered in the Greater Houston market. At the time of its acquisition, Heritage had, on a consolidated basis, total assets of $315.9 million, total loans of $259.6 million, and total deposits of $260.2 million.

Our merger with Heritage provided us with five new branch locations, including two in the Greater Houston market, two in the Austin-San Antonio market, and one in Detroit, Texas. We believe that this combined footprint has enhanced our geographic diversity and positioned us for continued organic growth in and around the markets we serve. In addition, we believe that the Company and Heritage had complementary cultures, which facilitated the successful integration of the two companies and helped us opportunistically grow our institution following the merger, as further described in “Our Competitive Strengths” below. We have also experienced greater efficiency and enhanced profitability since consummating our merger with Heritage through added scale, realization of cost savings, and improvement in our deposit base, as demonstrated by improvements in our return on average assets (ROAA), net interest margin (NIM), and efficiency ratio from 0.27%, 4.08%, and 86.19%, respectively, as of December 31, 2019, to 0.88%, 4.67%, and 72.72%, respectively, as of June 30, 2021.    

The following timeline illustrates how we developed our current footprint since opening our first office in 2008:

 

 

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We have experienced substantial and consistent organic growth, supplemented by acquisition growth from our merger with Heritage and participation in the Paycheck Protection Program, or PPP, and Main Street Lending Program, or MSLP, as shown in the chart below. We believe our team-oriented culture, relationship-based approach, and commitment to retaining and hiring talented relationship managers, paired with our diverse suite


 

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of financial products and services drives our history of successful organic growth. The following chart reflects our total assets since the Bank’s formation:

 

LOGO

 

(1)

As of December 31 of each year, unless otherwise specified

(2)

Consists of PPP loans and MSLP loans

(3)

Reflects Heritage Bancorp, Inc. total assets as of December 31, 2019

Our Competitive Strengths

We believe the following competitive strengths differentiate us from other financial institutions and are key to the execution of our strategy:

Highly Experienced Management Team. Our executive team has over 100 years of combined financial services experience and a demonstrated track record of managing profitable organic growth through customer acquisition and opportunistic strategic hiring, maintaining a disciplined credit culture, implementing a high-touch, relationship driven approach to banking, and successfully executing and integrating acquisitions. Certain biographical information for our executive officers is as follows:

Bart O. Caraway, Chairman, President and Chief Executive Officer. Mr. Caraway was our principal founder and organizer and is the Chairman, President and Chief Executive Officer of the Company and the Bank. He is also Chairman, President and Chief Executive Officer of TCCC. Mr. Caraway has over 29 years of banking and public accounting experience and is a Texas licensed attorney and Certified Public Accountant. Prior to founding the Bank, he served in executive roles at several other community banks, including as the Chief Financial Officer and Chief Operating Officer for a Houston, Texas bank wherein Mr. Caraway consulted on the de novo formation, managed the acquisition of two banks, ran all of the operations and helped grow the bank to over $600 million in total assets. Mr. Caraway also created and developed the role of Director of Financial Institution Services for Briggs & Veselka Co., one of the largest independent accounting firms in Texas, and was responsible for developing the firm’s financial institution and consulting practice, including bank audit and attestation services; internal audit services; loan reviews; risk assessments; de novo bank chartering; and consulting for mergers and acquisitions, strategic planning, compliance, and management.

R. John McWhorter, Chief Financial Officer. Mr. McWhorter has served as Chief Financial Officer of the Company since April 2015 and Senior Executive Vice President and Chief Financial Officer of the Bank since January 2021. From April 2015 to January 2021, Mr. McWhorter served as Executive Vice President and Chief Financial Officer of the Bank. Mr. McWhorter brings over 34 years of banking, bank auditing and public accounting experience to the Company and is a Certified Public Accountant. Prior to joining the Company and the Bank, he was Executive Vice President and Chief Financial Officer at Bank of Houston, a $1 billion in assets


 

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bank headquartered in the Greater Houston market, until it was acquired by Independent Bank. Prior to his role with Bank of Houston, Mr. McWhorter was Executive Vice President and Chief Financial Officer of Cadence Bancorp LLC from March 2010 to June 2012. He also served as Senior Vice President and Controller of Amegy Bank from April 1990 to June 2003 and helped take the bank public and grow to over $5 billion in assets. During his career, Mr. McWhorter has helped complete nine acquisitions and several capital offerings and has led numerous cost saving initiatives.

Donald C. Legato, Chief Lending Officer. Mr. Legato has served as Senior Executive Vice President and Chief Lending Officer of the Bank since January 2021. From March 2014 to January 2021, Mr. Legato served as Executive Vice President and Chief Lending Officer of the Bank. Mr. Legato brings over 27 years of banking experience and has served in numerous positions with the Bank since joining in 2009, including Senior Vice President Commercial Lending, Beaumont Market President and Southeast Texas Regional President. Prior to joining the Bank, Mr. Legato served as Senior Vice President Commercial Lending of Wachovia Bank from 2004 to 2009.

Audrey A. Duncan, Chief Credit Officer. Ms. Duncan has served as Senior Executive Vice President and Chief Credit Officer of the Bank since January 2021. From June 2015 to January 2021, Ms. Duncan served as Executive Vice President and Chief Credit Officer of the Bank. Ms. Duncan brings over 34 years of banking and bank regulatory experience to the Bank. Prior to joining the Bank, she was employed at LegacyTexas Bank, a bank headquartered in the Dallas-Fort Worth market that had $6.5 billion in assets at the time of Ms. Duncan’s departure. During her tenure there, Ms. Duncan served as Senior Vice President and Credit Officer for four years, and then Executive Vice President and Chief Credit Officer for nine years, before being named the Director of Credit Risk Management. Prior to her role with LegacyTexas Bank, Ms. Duncan was a Senior and Commissioned Bank Examiner with the Federal Reserve Bank of Dallas from 1989 to 2000.

Dynamic Banking Markets. As further described in “Our Markets of Operation” below, we believe that the markets in which we operate provide us with a strategic advantage relative to other financial institutions in Texas and nationwide. The Houston—The Woodlands—Sugar Land, Texas MSA, or the Houston MSA, and the Dallas—Fort Worth—Arlington, Texas MSA, or the Dallas MSA, are both among the largest MSAs in the nation, and both outpace growth in population at the state and national levels as illustrated by the chart below:

Nationwide Top 10 Largest MSAs—Ranked by 5 Year Projected Population Growth

 

        2021
Population
(Ms)
    Population Growth  

    #    

 

MSA

  Hist. 5 Yr.
(%)
    Proj. 5 Yr.
(%)
 

1

  Houston-The Woodlands-Sugar Land, TX     7.2       8.3       7.6  

2

  Dallas-Fort Worth-Arlington, TX     7.7       8.6       7.5  

3

  Phoenix-Mesa-Chandler, AZ     5.1       10.3       6.9  

4

  Atlanta-Sandy Springs-Alpharetta, GA     6.1       7.0       5.7  

5

  Miami-Fort Lauderdale-Pompano Beach, FL     6.3       4.1       5.4  

6

  Washington-Arlington-Alexandria, DC-VA-MD-WV     6.3       3.3       4.1  

7

  Los Angeles-Long Beach-Anaheim, CA     13.3       (1.2     1.7  

8

  Philadelphia-Camden-Wilmington, PA-NJ-DE-MD     6.1       0.7       1.0  

9

  New York-Newark-Jersey City, NY-NJ-PA     19.2       (5.2     0.2  

10

  Chicago-Naperville-Elgin, IL-IN-WI     9.4       (1.6     (0.3
  Texas     29.6       7.1       6.8  
  Nationwide     330.9       2.6       2.9  

 

Source: S&P Global Market Intelligence


 

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In addition, in connection with our merger with Heritage we entered the Austin-San Antonio market with two locations and added a location in Detroit, Texas. Over the next five years, the populations in the San AntonioNew Braunfels MSA and the Austin—Round Rock—Georgetown MSA are projected to grow by approximately 7.6% and 8.5%, respectively, compared to 6.8% for the state of Texas and 2.9% for the United States, according to S&P Global. We believe our exposure to these large, economically diverse urban communities provides ample opportunity for our business to enhance its scale.

Diverse Offering of Sophisticated Financial Products and Services. We believe that the products and services we offer, coupled with our high-touch, relationship driven approach to business, allow us to compete and succeed in winning business from peers and larger financial institutions. Our customers consist primarily of small and medium-sized businesses across a wide array of industries and individuals. We offer conventional commercial and industrial loans (including equipment loans, working capital lines of credit, auto finance, and commercial finance), commercial real estate loans, residential real estate loans, construction and development loans (including builder finance loans), United States Small Business Administration, or SBA, loans, and consumer loans. As of June 30, 2021, our average loan balance outstanding was approximately $504 thousand, excluding our auto finance portfolio, PPP loans, and an intercompany loan to TCCC. In addition, we offer a full range of commercial and consumer deposit products and treasury management services and hired four treasury sales professionals in 2021. These products and services include checking and savings accounts, money market accounts, certificates of deposit and individual retirement accounts, debit cards, electronic banking (including online and mobile banking), ACH origination service, positive pay service, remote deposit capture service, sweep service, and online wire transfer service. We also recently initiated a builder finance group and began providing wealth management services. We utilize these products and services to not only augment our revenue and expand our core deposit customer base, but also to increase conventional commercial loan customer retention.

Scalable Infrastructure. We believe that we have established a scalable operating platform that will allow us to effectively manage growth from our anticipated organic growth and potential acquisitions. We have invested heavily in our technology, infrastructure, management team and operations personnel in an effort to position our Company for continued future success. We believe that these efforts have enhanced our value proposition to customers and allowed us to provide products, services and technological sophistication generally offered by larger financial institutions.

Responsive and Disciplined Underwriting. We believe that our efficient credit approval process differentiates us from our competition. Our credit analysts and account relationship managers are located in-market and accompany relationship managers to client meetings to get firsthand exposure to customers and prospects. As credit analysts, our trainees learn how to underwrite real estate, commercial and industrial, consumer, and other more specialized loans, using models developed specifically for each type of credit. Our underwriting focuses on the borrower’s financial condition and cash flow, as well as the global cash flow of the relationship, and the quality, marketability and value of the collateral. For commercial finance, in particular, our underwriting focuses on the creditworthiness of the account debtors, the experience of the management and principals of the business, the customer’s billing and reporting process, and, depending upon the type and size of the credit facility, an independent field exam.

We have independent Officers’ Loan Committees that meet separately for the loan officers under each Regional Market President’s authority for efficient, timely review of credits associated with aggregate relationship exposure of less than $5 million. The Officers’ Loan Committees include our Chief Executive Officer, Chief Lending Officer, Chief Credit Officer, Regional Credit Officers and Regional Market Presidents. Relationships above $5 million are approved by our Directors’ Loan Committee. These committees meet at least weekly, or on an as-needed basis, to provide our customers with timely credit decisions. At least two individuals approve a large majority of the loans that are originated, and our relationship managers do not have individual loan approval authority.


 

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While we strive to respond quickly based on our deep understanding of our customers’ needs, we remain consistent in our disciplined approach to underwriting diligence, as evidenced by our annual net charge-offs to average loans since 2016 illustrated in the chart below:

 

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Note: Reflects six months ended June 30, 2021 financial information for Third Coast and Texas Commercial Banks

(1)

Texas Commercial Banks industry aggregate data per S&P Global Market Intelligence

Enterprising Approach. We believe our management team is agile in its approach to capturing new customers and is able to recognize opportunities to expand our suite of financial products and services and execute on those opportunities. We believe this opportunistic nature has been demonstrated not only by our offering of specialty lending verticals, such as our SBA, commercial finance, auto finance and builder finance products discussed below, but also by our lending activities during the COVID-19 pandemic.

In response to the COVID-19 pandemic, on March 27, 2020 the President of the United States signed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act into law. The CARES Act provides assistance for American workers, families and small businesses. The PPP, established by the CARES Act and implemented by the SBA with support from the Department of the Treasury, provides small businesses with funds to pay certain operating costs, including salary, benefits and rent. In an effort to support our communities, we quickly began participating in the PPP and have been an active PPP lender. As of June 30, 2021, we had originated 5,774 PPP loans totaling approximately $827.5 million, with an average credit size of approximately $143 thousand, and generated $31.5 million in fees through the PPP, of which $8.5 million was deferred as of June 30, 2021. We were a top 10 PPP lender in the Houston area for loans over $150,000, according to the Houston Business Journal, and we believe our PPP lending has enhanced our brand awareness in our markets of operation. We gained new customers through the PPP who we hope to transition in to conventional commercial banking products in the future. We also believe our flexible approach to serving customers and our increased brand awareness has made us an attractive institution for experienced bankers to join, as demonstrated by our recent new hiring initiatives.

Diversified Loan Portfolio. We are committed to generating and growing loans with businesses and individuals who want to have full relationships with us and which are broadly diversified by type and location. Our current conventional loan offerings include commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, residential real estate, construction and development, and consumer loans. Although we operate in the Greater Houston market, we maintain a relatively low exposure to the energy industry. As of June 30, 2021, we had direct energy exposure of $49.7 million in energy loans, or 3.2% of gross loans, and an additional $10.5 million in unfunded commitments, consisting of loans totaling $4.4 million, or 0.3% of gross loans, and an additional $0.1 million in unfunded commitments to upstream oil and gas


 

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companies, $8.9 million, or 0.6% of gross loans, and an additional $2.8 million in unfunded commitments to midstream oil and gas companies, and $36.5 million, or 2.4% of gross loans, and an additional $7.6 million in unfunded commitments to companies that provide support services to the oil and gas industry, such as oil and gas consulting, equipment rental, staffing and other services. Additionally, as of June 30, 2021, we had loans totaling $51.2 million, or 3.3% of gross loans, and an additional $4.4 million in unfunded commitments to gas stations and convenience stores, which we do not consider direct energy exposure. As illustrated below, our commercial loan book is well balanced between commercial and industrial, owner occupied commercial real estate, and non-owner occupied commercial real estate, representing 39.4%, 23.3% and 18.5% of total loans, respectively, as of June 30, 2021.

 

 

LOGO

In addition to our conventional commercial and consumer loan offerings, we offer SBA, commercial finance, auto finance and builder finance products, which we believe enhance our product offerings and diversify our revenue stream while still maintaining high asset quality. A brief description of these products is below:

SBA Lending. Our SBA loan program began in 2012 and is a key element in our ability to serve the small- to medium-sized business community in our markets of operation. Customers are able to use these loans to finance permanent working capital, equipment, facilities, land and buildings, business acquisitions and start-up business expenses. As a participant in the SBA’s Preferred Lenders Program, we are able to expedite the SBA loan approval process for our customers. We maintain strict underwriting guidelines in our SBA program and, as a result, have incurred minimal losses from this portfolio, with losses of less than $168 thousand through June 30, 2021.

Third Coast Commercial Capital, Inc. (Commercial Finance). TCCC was formed in 2015 as a wholly owned subsidiary of the Bank and provides working capital solutions for small- to medium-sized businesses. Through the purchase and management of accounts receivables, we are able to help customers take advantage of


 

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new business opportunities and continue to grow and be successful. As a result of our disciplined credit process and robust internal controls and procedures, losses from our commercial finance portfolio have been approximately $158 thousand through June 30, 2021. Our commercial finance portfolio included $3.9 million of factored receivables with companies in the oil and gas services industry as of June 30, 2021, which represented 13.7% of our total commercial finance portfolio.

Auto Finance. Our auto finance group was formed in 2014 to provide for indirect auto lending with local dealerships. We offer both recourse auto loans and nonrecourse auto loan and lease financing. Loans with recourse to the dealership are structured as commercial lines of credit with the dealership and are approved with the same underwriting criteria as other commercial credits. Nonrecourse loans are structured as consumer loans and are approved with the same underwriting criteria as other consumer loans. The auto finance group also offers floor plan loans and real estate loans to dealerships. Floor plan loans are offered on both new and used automobiles, motorsport, recreation vehicles and boats. Floor plan loan requirements include mandatory periodic curtailments and inspections. Real estate loans to dealerships are underwritten in the same manner as other owner-occupied real estate loans. As a result of our experienced team members and strict underwriting guidelines, the total net losses related to this portfolio since inception have been approximately $34 thousand through June 30, 2021.

Builder Finance. Our builder finance group was formed in 2021 and provides traditional homebuilder lines secured by lots and single-family homes, and land acquisition and development loans. The group also finances bond anticipation notes, or BANs, and lines of credit to large national institutional tier-one funds that invest equity in various real estate assets. The group also offers, to a limited extent, parent level build-to-rent loans. The homebuilder finance platform provides lending solutions for private and publicly traded homebuilding companies. Land acquisition and development loans focus on master planned communities with lots being presold with meaningful earnest money upfront, and mandatory periodic curtailments. BANs are short-term notes issued by a special district to provide liquidity to a developer approximately 9-12 months prior to bond issuance, and are secured by the proceeds of the bond. Lines of credit to institutional funds who invest equity in various real estate assets are structured as a typical commercial and industrial loan. Underwriting of these lines include financial and cash flow covenants. On a limited basis the group may lend to homebuilders for the purpose of building and then renting single-family homes.

As illustrated below, our SBA, commercial finance, and auto finance business lines do not individually make up a material portion of the total loan portfolio, or any single loan classification, but are illustrative of our efforts to broaden our product offerings and customer base and enhance our loan yield and net interest margin. Our SBA and commercial finance business lines also allow us to partner with companies early on in their life cycle. As our SBA and commercial finance customers grow, our goal is to transition them in to conventional commercial banking products.


 

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LOGO

 

Balances as of June 30, 2021

(1)

Includes $0.5 million of loans that are part of our auto finance portfolio

Transformation of Deposit Base. We have enhanced our funding base through organic sourcing of core deposits, active participation in the PPP, and the strategic acquisition of Heritage. We believe that our team-based, relationship oriented approach to banking, coupled with our recent enhancement of our treasury management products and services, will allow us to continue to build on the recent successes that we have had in transforming our deposit mix. Additionally, we recently hired a Chief Retail Officer to augment our retail deposit operations, which we believe will foster new sources of low-cost, core deposits. We will continue to seek out acquisition targets with a strong deposit franchise and high-quality funding profiles. Evidence of our recent success is demonstrated by our growth in noninterest-bearing deposits from $128.3 million as of December 31, 2019 to $374.9 million as of June 30, 2021, a growth rate of 192%. We have also significantly improved the composition of our deposits by increasing noninterest-bearing deposits to total deposits from 15.9% as of December 31, 2019 to 21.0% as of June 30, 2021. A depiction of our recent deposit transformation is represented below:

 

 

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Empowering Workplace Culture. We believe that our workplace culture fosters teamwork, promotes exemplary customer service, and gives our employees the tools necessary to succeed. Our culture is centered on training, mentoring, and support, which allows us to attract and retain the talent needed to succeed in today’s competitive banking environment. In addition to hiring experienced senior bankers as relationship managers, we have implemented an in-house training program to facilitate growth and professional development for our junior bankers. Our trainees begin their careers as credit analysts to instill a solid understanding of our underwriting discipline and expectations for credit. Next, they are promoted to account relationship managers and are assigned to an account where they work with the lead relationship manager to develop their customer-facing skillset, while continuing to assist in the underwriting process. Once account relationship managers have developed the skills necessary to be successful lenders, they are promoted to relationship manager and develop their own book of business.

Our culture is such that our more senior relationship managers often share business with recently promoted relationship managers, which incentivizes our junior account relationship managers and relationship managers to stay with us and allows our tenured lenders to focus on prospecting for new customer relationships. We have had great success with our development program, with many of our relationship managers having been promoted through our system. Our culture instills a sense of empowerment in our employees that we believe turns bosses into coaches, with structures and systems that we believe nurture and support the development of our team members. In addition, the interests of our employees are aligned with our shareholders through meaningful ownership, as more than 90% of our employees own shares of our common stock either directly or through our ESOP. We believe our workplace culture and significant employee-shareholder ownership helps us acquire and retain customers and has been critical to our substantial and consistent organic growth.

Our Banking Strategy

We believe we have built a differentiated, high-touch commercial bank with a uniquely collaborative culture and a diverse array of attractive financial products and services. We intend to leverage our strengths and our robust operational platform with the multi-faceted approach described below, which we believe will allow us to successfully grow our franchise and enhance shareholder returns.

Continue Robust Organic Growth. The results of our 13-year operating history demonstrate that organic growth has been a primary focus of the Company. Since 2016, we have grown the loan portfolio by approximately $1.10 billion, or 244.4%, for a compound annual growth rate, or CAGR, of 31.6% and, from January 1, 2016 to December 31, 2019 (the day before the consummation of our merger with Heritage), we grew the loan portfolio entirely organically by approximately $464.3 million, or 134.8%, for a CAGR of 23.8%. We attribute our historical organic growth to our strengths described above. Additionally, we intend to continue to take advantage of recent competitive disruptions in our operating markets, which has created opportunities to hire experienced and talented bankers who we believe can thrive in our team-oriented culture. During 2021, we have hired 70 new bankers, including a team of 22 bankers to form our new builder finance group, 23 commercial lenders, four wealth management professionals, four treasury sales professionals, and 17 support personnel. We expect these professionals will generate and maintain meaningful portfolios, while also continuing our focus on increasing core deposits to fund loan growth. We believe having a publicly traded stock will make us an attractive employer for experienced bankers who may feel dislocated as a result of continued market consolidation.

In addition to leveraging our current platform and hiring key personnel to drive organic growth, we also continue to evaluate future de novo branching opportunities in existing and new markets. We believe that we can leverage our experienced management team, board of directors and relationship managers, as well as our position in our markets of operation to achieve these goals.


 

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Emphasize Core Deposit Growth. We believe that core deposit growth is a key component to our long-term strategy and have designed products and services to attract these deposits and maintain a sustainable, stable and low-cost funding base. We will remain focused on generating core deposits from our business customers and encourage and incentivize our relationship managers to attract and maintain those deposits. We have also recently enhanced our treasury management services by adding additional personnel, investing in technology, and offering more products to enable us to more effectively attract and service the operating accounts of larger, more sophisticated businesses.

Thoughtfully Expand our Suite of Financial Products and Services. We continually strive to build upon our diverse suite of financial products and services in ways that help us capture more customers from our peers and larger financial institutions. We have developed specialty lending programs in the past, such as our SBA, commercial finance and auto finance business lines, and more recently, commenced a builder finance group as a result of hiring an experienced team from a large regional bank. We also recently entered into an agreement with Ameriprise Financial to offer investment advisory services , including financial and retirement planning, mutual funds, insurance and annuities, brokerage accounts, and strategies to help pay for college, and we hired four wealth management professionals in connection with that agreement who we believe will be able to generate noninterest income and attract low-cost, core deposits. We will continue to evaluate opportunities, through new organic programs, new hires, and lift-outs of teams, in the future that we believe will allow us to diversify our financial products and services, reach new customers and broaden our brand. In addition, we seek to offer the latest, state-of-the-art technology and sophisticated banking tools and products, including a high-tech suite of treasury management solutions. Our online and mobile banking services include a full suite of convenient online processes, including remote deposit anywhere, text banking, and deposit monitoring and processing. We also recently expanded our treasury management services, which are designed to provide secure and easy ways to manage our customers’ bank accounts and offer essential services to help with everyday cash flows. By providing a full suite of value-added services, we are able to lower our customer acquisition costs, gather low-cost, core deposit relationships, make high credit quality loans, generate fee income, and help our customers’ businesses grow and profit.

Continue to Capitalize on Strategic Acquisition Opportunities. We completed our merger with Heritage on January 1, 2020, which expanded our footprint south of Houston and facilitated our entrance into the vibrant and fast-growing Austin-San Antonio market, as well as provided us with a new location in Detroit, Texas. We are actively evaluating, and will continue to evaluate, additional strategic acquisition opportunities going forward to leverage our operational platform and create additional scale, with an emphasis on enhancing our net interest margin through low-cost, core deposits. Because we primarily compete for acquisition opportunities with smaller banks, which are typically not publicly traded, we believe having a publicly traded stock, adequate capital and ready access to public capital will give us a competitive advantage relative to peer institutions in our markets of operation. At this time, we expect our most likely potential acquisition targets to have total assets between $200 million and $1 billion. The following illustration depicts the number of banks that are within our expected target asset size in our markets of operations as of June 30, 2021.


 

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LOGO

 

Source: S&P Global Market Intelligence

We intend to take a disciplined approach to acquisitions, and our efforts will be focused on transactions that will be accretive to our earnings per share, enhance our existing market presence, expand our markets of operation or strengthen our balance sheet, with an emphasis on the acquisition of banks with a strong deposit franchise and high-quality funding profiles to augment our core deposit base. Acquisitions within our current footprint would offer an opportunity to leverage our existing branch network and operations, while acquisitions outside our current footprint would potentially broaden our customer base and diversify our assets and operations.

Our Markets of Operation

We currently operate primarily in three distinct but complementary metropolitan markets, the Greater Houston market, the Dallas-Fort Worth market, and the Austin-San Antonio market. We have seven branches located throughout the Greater Houston market, two branches in the Dallas-Fort Worth market, two branches in the Austin-San Antonio market, and one branch in Detroit, Texas, located approximately 120 miles northeast of Dallas, Texas.

Greater Houston Market. We operate seven branches in the Greater Houston market, including five branches located in the Houston MSA and two branches in the neighboring Beaumont MSA. Houston is the nation’s fourth most populous city and fifth most populous metro area, with approximately 2.4 million and 7.2 million residents, respectively, according to the U.S. Census Bureau and S&P Global. The Houston MSA is projected to grow approximately 7.6% over the next five years, ranking first among the nation’s 10 largest MSAs and more than double the nationwide projected growth, according to S&P Global. Houston is a center for global trade, with the Houston Port ranking first among U.S. ports in foreign tonnage, according to the Greater Houston Partnership. This tremendous growth and trade has helped Houston become the “Most Diverse City in America,” according to WalletHub. The Houston MSA is corporate headquarters for 24 Fortune 500 companies and employs approximately 3.1 million workers, according to the Greater Houston Partnership. Some of these


 

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companies include ConocoPhillips, Sysco, Waste Management and Phillips 66. Houston is also home to the largest medical complex in the world, the Texas Medical Center, which has approximately $3.0 billion in construction projects underway with 50 million existing square feet, according to the Greater Houston Partnership.

Dallas-Fort Worth Market. We currently operate two branches in the Dallas-Fort Worth market, with one location in the North Dallas area and one in Plano. The Dallas MSA is the largest in Texas and the fourth largest in the U.S., according to S&P Global, and has been growing by approximately 322 residents every day, according to the Dallas Regional Chamber. The Dallas MSA boasts the largest gross domestic product in Texas and the sixth largest in the nation, according to the U.S. Bureau of Economic Analysis, and is headquarters for 22 Fortune 500 companies, including ExxonMobil, AT&T, American Airlines and Charles Schwab, according to the Dallas Regional Chamber. The Dallas MSA hosts approximately 3.6 million working professionals and ranked first in the nation for total job growth from December 2015 through December 2020, according to the Dallas Regional Chamber. Future population and job growth remains attractive as the Dallas MSA ranks second among the nation’s 10 largest MSAs for projected 5-year population growth, according to S&P Global, and 15 major universities are located in the area, which enroll over 183,000 students.

Austin-San Antonio Market. We currently operate two branches in the Austin-San Antonio market, with one location in Nixon and one in La Vernia, and operate a loan production office in Austin. The San Antonio—New Braunfels MSA is the third most populous MSA in Texas, as measured by both population and number of households. The population in the San Antonio—New Braunfels MSA is projected to grow by approximately 7.6% over the next five years, compared to 6.8% for the state of Texas and 2.9% for the United States. Located at the intersection of two Pan-American highways (IH-10 which runs from coast-to-coast, and IH-35 which runs from Canada to Mexico), San Antonio commerce benefits from a fast-growing, diverse business community, long-standing military establishments, and is home to 160,000 university students. Industry concentrations include: Aerospace, Biosciences/Healthcare, Defense, Energy, Information Technology & Cybersecurity, and Manufacturing according to the San Antonio Economic Development Foundation. The Austin—Round Rock—Georgetown MSA is the fourth most populous MSA in Texas, as measured by both population and number of households. Over the next five years, it is projected to be the fastest growing large MSA in the country (as defined by MSAs with a population over two million), with a forecasted growth rate of 8.5% through 2026. Austin’s unemployment rate of 4.8% compares favorably to the nationwide unemployment rate of 6.1% as of June 2021. Nicknamed “Silicon Hills,” Austin has transformed itself into a hotbed for technology companies, and was recently designated as a top 10 Global Technology Innovation Hub city by KPMG. Large employers in the MSA include Apple, Dell Technologies, and the University of Texas, which enrolls over 50,000 students. Additionally, Tesla has recently announced that it would move its corporate headquarters to Austin, Texas, and made an estimated $1.1 billion infrastructure investment in the construction of an automotive production facility located in the Austin market, which is expected to deliver at least 5,000 jobs to the local economy and is scheduled to begin production in 2021.

Recent Developments

Completion of $70.5 Million Private Placement

On August 27, 2021, we completed the issuance and sale of 2,937,876 shares of our common stock for aggregate proceeds of approximately $70.5 million, consisting of 227,307 shares issued and sold during the six months ended June 30, 2021 for aggregate proceeds of approximately $5.4 million and 2,710,569 shares issued and sold between July 1, 2021 and August 27, 2021 for aggregate proceds of approximately $65.1 million, in a private placement in reliance upon the exemption from the registration requirements of the Securities Act under Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder. We used a portion of the net proceeds from the private placement to repay $32.5 million of outstanding indebtedness,


 

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consisting of (i) $19.5 million under our senior debt due September 10, 2022 and (ii) $13.0 million under our subordinated debt due July 29, 2022 and subordinated debt due September 27, 2022.

Preliminary Third Quarter Results

Our unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2021 are not yet available. The following selected preliminary unaudited consolidated financial information regarding our performance and financial condition as of and for the three and nine months ended September 30, 2021 is based solely on management’s estimates reflecting preliminary financial information, and remains subject to additional procedures and our consideration of subsequent events, particularly as it relates to material estimates and assumptions used in preparing management’s estimates, which we expect to complete following this offering. These additional procedures could result in material changes to our preliminary estimates during the course of our preparation of our unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2021.

The preliminary information set forth below is not a complete presentation of our financial results as of and for the three and nine months ended September 30, 2021. The following estimates constitute forward-looking statements and are subject to risks and uncertainties, including those described in the section entitled “Risk Factors.” See the section entitled “Cautionary Note Regarding Forward-Looking Statements.” The following preliminary financial information should be read together with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes to those financial statements that are included elsewhere in this prospectus. There are material limitations with making preliminary estimates of our financial results as of and for the three and nine months ended September 30, 2021 and 2020 prior to the completion of our and our auditors’ financial review procedures for such periods. Our independent registered public accounting firm, Whitley Penn LLP, has not audited, reviewed, compiled or applied agreed-upon procedures with respect to the preliminary financial information, and as such, does not express an opinion, or any assurance, with respect to this preliminary financial information. The calculations of net interest margin, return on average assets and return on average equity as of and for the three months ended September 30, 2021 and 2020 set forth below represent annualized calculations.

 

   

Assets. Total assets were $2.08 billion as of September 30, 2021, representing a $68.9 million, or 3.4%, increase compared to $2.01 billion as of June 30, 2021 and a $305.9 million, or 17.2%, increase compared to $1.78 billion as of September 30, 2020. The increase in total assets during the three months ended September 30, 2021 was primarily due to loan growth during the period of $60.7 million.

 

   

Loans. Total loans were $1.61 billion as of September 30, 2021, representing a $60.7 million, or 3.9%, increase from June 30, 2021 and a $19.1 million, or 1.2%, increase from September 30, 2020. During the three months ended September 30, 2021, the increase was driven by growth of non-PPP related loans totaling $216.1 million, primarily commercial and industrial loans and commercial real estate loans, offset by forgiveness payments received from the SBA for $155.4 million of PPP loans.

 

   

Allowance for Loan Losses. The allowance for loan losses was $15.6 million at September 30, 2021 as compared to $13.4 million at June 30, 2021 and $10.1 million at September 30, 2020. The increase in allowance for loan losses in the quarter ended September 30, 2021 was primarily due to growth of non-PPP related loans totaling $216.1 million.

 

   

Deposits. Total deposits were $1.82 billion as of September 30, 2021, representing a $32.7 million, or 1.8%, increase from June 30, 2021 and a $258.0 million, or 16.6%, increase from September 30, 2020.

 

   

Shareholders’ Equity. Total shareholders’ equity, including ESOP-owned shares, was $206.2 million as of September 30, 2021, compared to $137.8 million as of June 30, 2021 and $118.5 million as of September 30, 2020, due primarily to the private placement of our common stock during the third


 

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quarter of 2021, which resulted in aggregate proceeds of approximately $70.5 million, $5.4 million of which was subscribed for during the three months ended June 30, 2021.

 

   

Book Value and Tangible Book Value per Share. Our book value per share was $22.14 as of September 30, 2021, representing a $1.17 per share, or 5.6%, increase from June 30, 2021 and a $2.75 per share, or 14.2%, increase from December 31, 2020. Our tangible book value per share was $20.06 as of September 30, 2021, representing a $2.05 per share, or 11.4%, increase from June 30, 2021 and a $3.77 per share, or 23.2%, increase from December 31, 2020. Tangible book value per share is a non-GAAP financial measure. The most directly comparable GAAP financial measure for tangible book value per share is book value per share. See “Non-GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for a description and reconciliation of tangible book value per share.

 

   

Net Income. Net income was $2.4 million for the three months ended September 30, 2021, compared to $4.1 million for the three months ended September 30, 2020. The decrease in net income for the three months ended September 30, 2021 compared to September 30, 2020 was primarily due to a provision for loan loss expense of $2.3 million in the three month period ended September 30, 2021 and an increase in salary and benefit expense from the addition of 70 bankers in 2021, offset by a $4.9 million increase in interest and fees on loans.

 

   

Net Interest Income. Net interest income was $22.0 million for the three months ended September 30, 2021, an increase of $6.3 million, or 40.1%, compared to $15.7 million for the three months ended September 30, 2020. Net interest income was $65.9 million for the nine months ended September 30, 2021, an increase of $17.7 million, or 36.7%, compared to $48.2 million for the nine months ended September 30, 2020.

 

   

Net Interest Margin. Net interest margin was 4.41% for the three months ended September 30, 2021, compared to 3.61% for the three months ended September 30, 2020. The increase in net interest margin was driven primarily by the reduction in fixed 1% interest rate PPP loans from $496.0 million at September 30, 2020 to $171.3 million at September 30, 2021 due primarily to forgiveness by the SBA of PPP loans.

 

   

Provision for Loan Losses. There was a $2.3 million provision for loan losses for the three months ended September 30, 2021, compared to no provision for loan losses for the three months ended September 30, 2020. Provision for loan losses was $3.8 million for the nine months ended September 30, 2021, compared to $2.6 million for the nine months ended September 30, 2020. The relatively larger provision for loan losses for the quarter ended September 30, 2021 was primarily due to growth of non-PPP related loans totaling $216.1 million.

 

   

Noninterest Income. Noninterest income was approximately $964,000 for the three months ended September 30, 2021, an increase of $331,000, or 52.3%, compared to $633,000 for the three months ended September 30, 2020. Noninterest income was $2.8 million for the nine months ended September 30, 2021, an increase of $721,000, or 34.3%, compared to $2.1 million for the nine months ended September 30, 2020.

 

   

Noninterest Expense. Noninterest expense was $17.6 million for the three months ended September 30, 2021, an increase of $6.5 million, or 58.6%, compared to $11.1 million for the three months ended September 30, 2020. Noninterest expense was $50.9 million for the nine months ended September 30, 2021, an increase of $15.3 million, or 43.0%, compared to $35.6 million for the nine months ended September 30, 2020. The increase in noninterest expense was primarily the result of increased salary and benefit expense related to hiring of employees since September 30, 2020, including the addition of 70 bankers in 2021.


 

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Return on Average Assets (“ROAA”). ROAA was 0.46% for the three months ended September 30, 2021, compared to 0.91% for the three months ended September 30, 2020. The decrease in ROAA was driven primarily by the decrease in net income described above and 14.5% growth in average assets.

 

   

Return on Average Equity (“ROAE”). ROAE was 5.41% for the three months ended September 30, 2021, compared to 14.63% for the three months ended September 30, 2020. The decrease in ROAE was driven primarily by the decrease in net income described above, and the increase in average equity due to the private placement of our common stock in the second and third quarter of 2021.

 

   

Efficiency Ratio. Our efficiency ratio was 76.8% for the three months ended September 30, 2021, compared to 68.0% for the three months ended September 30, 2020. The increase in efficiency ratio was driven primarily by the increase in noninterest expense for the three months ended September 30, 2021 compared to the three months ended September 30, 2020, offset by the increases in net interest income and noninterest income described above. Efficiency ratio is calculated by dividing noninterest expense by the sum of net interest income and noninterest income.

 

   

COVID-19 Developments. As of September 30, 2021, we had 576 loans totaling $247.9 million, or 15.4% of total loans, subject to deferral and modification agreements due to COVID-19 whereby certain principal and/or interest payments during a specified period were deferred to the end of each of the loan terms, down from 660 loans totaling $320.3 million, or 20.6% of total loans as of June 30, 2021. As of September 30, 2021, the Company had $176.4 million in CARES Act loans outstanding (including $171.3 million in PPP loans and $5.1 million in MSLP loans) compared to $331.7 million as of June 30, 2021 (including $326.7 million in PPP loans and $5.1 million in MSLP loans). As of September 30, 2021, we had generated $31.5 million in fees through the PPP with $4.5 million in deferred fees yet to be recognized.

Corporate Information

Our principal executive offices are located at 20202 Highway 59 North, Suite 190, Humble, Texas 77338, and our telephone number at that address is (281) 446-7000. Our website is www.tcbssb.com. We expect to make our periodic reports and other information filed with, or furnished to, the SEC available free of charge through our website as soon as reasonably practicable after those reports and other information are electronically filed with, or furnished to, the SEC. The information contained on or accessible from our website does not constitute a part of this prospectus and is not incorporated by reference herein.


 

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THE OFFERING

 

Common stock offered by us

                 shares of our common stock, par value $1.00 per share (or                  shares if the underwriters exercise in full their option to purchase additional shares).

 

Underwriters’ option to purchase additional shares

We have granted the underwriters an option to purchase up to an additional                  shares within 30 days of the date of this prospectus.

 

Common stock to be outstanding after this offering

                shares (or                  shares if the underwriters exercise in full their option to purchase additional shares).

 

Use of proceeds

Assuming an initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, we estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts and payment of estimated offering expenses payable by us, will be approximately $             million (or approximately $             million if the underwriters exercise in full their option to purchase additional shares). We intend to use the net proceeds from this offering to support our continued growth, including organic growth and potential future acquisitions, and for general corporate purposes. See “Use of Proceeds” on page 62 of this prospectus.

 

Dividend policy

We have not declared or paid any cash dividends on our common stock and we do not currently anticipate paying any cash dividends on our common stock in the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be retained to support our operations and finance the growth and development of our business. Any future determination to pay dividends on our common stock will be made by our board of directors and will depend upon our results of operations, our financial condition, capital requirements, general economic conditions, regulatory and contractual restrictions, our business strategy, our ability to service any equity or debt obligations senior to our common stock and other factors that our board of directors deems relevant. For additional information, see “Dividend Policy” on page 63 of this prospectus.

 

Directed share program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to             shares of our common stock offered pursuant to this prospectus for sale to certain of our directors, executive officers, employees, business associates and related persons who have expressed an interest in purchasing our common stock in this offering. We do not know if these persons will choose to purchase all or any portion of the reserved shares, but any purchases they do make will reduce the number of shares available to the general public. See “Underwriting” on page 185 of this prospectus.

 

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Nasdaq Global Select Market listing

We have applied to list our common stock on the Nasdaq Global Select Market under the trading symbol “TCBX.”

 

Risk factors

Investing in our common stock involves certain risks. See “Risk Factors,” beginning on page 27 of this prospectus, for a discussion of factors that you should carefully consider before investing in our common stock.

Except as otherwise indicated, all information in this prospectus:

 

   

assumes no exercise by the underwriters of their option to purchase                 additional shares of our common stock;

 

   

does not attribute to any director, executive officer or principal shareholder any purchase of shares of our common stock in the offering, including through the directed share program described in “Underwriting—Directed Share Program;”

 

   

excludes an aggregate of 1,110,174 shares of our common stock issuable upon the exercise of stock options outstanding under the Third Coast Bancshares, Inc. 2013 Stock Option Plan, or the 2013 Plan, the Third Coast Bancshares, Inc. 2017 Director Stock Option Plan (as amended and restated effective January 1, 2021), or the 2017 Plan, and the Third Coast Bancshares, Inc. 2019 Omnibus Incentive Plan (as amended and restated effective April 15, 2021), or the 2019 Plan, with a weighted average exercise price of $16.59 per share, as of June 30, 2021;

 

   

excludes 6,000 shares of our common stock issuable upon the exercise of outstanding warrants at an exercise price of $11.00 per share, as of June 30, 2021;

 

   

excludes 397,150 shares of common stock reserved for future awards under the 2019 Plan, as of June 30, 2021; and

 

   

assumes an initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus.


 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

You should read the following selected historical consolidated financial data in conjunction with our consolidated financial statements and related notes and the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Capitalization” included elsewhere in this prospectus. The following tables set forth selected historical consolidated financial data (i) as of and for the six months ended June 30, 2021 and 2020, and (ii) as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016. The following selected financial data as of and for the years ended December 31, 2020 and 2019 has been derived from our audited financial statements included elsewhere in this prospectus and the selected financial data as of and for the years ended December 31, 2018, 2017 and 2016 has been derived from our audited financial statements not included in this prospectus. We have derived selected financial data as of June 30, 2020 from our unaudited financial statements not included in this prospectus. Selected financial data as of June 30, 2021 and for the six months ended June 30, 2021 and 2020, has been derived from our unaudited financial statements included elsewhere in this prospectus and has not been audited but, in the opinion of our management, contain all adjustments (consisting of only normal or recurring adjustments) necessary to present fairly in all material respects our financial position and results of operations for the applicable period in accordance with generally accepted accounting principles, or GAAP. Our historical results are not necessarily indicative of any future period. The performance, asset quality and capital ratios are unaudited and derived from our audited and unaudited financial statements as of and for the periods presented. Except as indicated by the footnotes below, average balances have been calculated using daily averages.

 

    As of and for the
Six Months Ended
June 30,
    As of and for the Years Ended December 31,  

(Dollars in thousands, except
share and per share data)

  2021     2020     2020     2019     2018     2017     2016  

Balance Sheet Data:

 

         

Cash and cash equivalents

  $ 353,772     $ 186,362     $ 203,560     $ 96,065     $ 134,899     $ 53,099     $ 71,587  

Securities available for sale

    25,991       3,635       25,595       536       841       971       1,130  

Gross loans

    1,551,722       1,577,395       1,556,092       808,606       688,359       600,028       450,623  

Allowance for loan losses

    (13,394     (10,088     (11,979     (8,123     (6,927     (5,460     (4,597

Total assets

    2,013,300       1,829,842       1,867,293       928,337       845,983       672,729       538,435  

Total deposits

    1,783,268       1,626,356       1,633,831       807,258       734,698       576,880       468,628  

Borrowings

    83,500       79,625       103,875       60,375       53,875       45,000       30,000  

Total liabilities

    1,875,479       1,715,809       1,745,576       871,032       791,531       623,901       500,537  

Total shareholders’ equity(1)

    137,821       114,033       121,718       57,304       54,452       48,828       37,898  

Tangible common equity(2)

    118,414       94,835       102,230       57,304       54,452       48,828       37,898  

Income Statement Data:

 

         

Interest income

  $ 49,556     $ 40,145     $ 82,241     $ 49,925     $ 41,757     $ 31,448     $ 22,763  

Interest expense

    5,625       7,634       14,360       15,974       11,302       5,158       2,973  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    43,931       32,551       67,881       33,951       30,455       26,290       19,790  

Provision for loan losses

    1,500       2,550       7,550       1,625       1,500       1,613       1,200  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    As of and for the
Six Months Ended
June 30,
    As of and for the Years Ended December 31,  

(Dollars in thousands, except
share and per share data)

  2021     2020     2020     2019     2018     2017     2016  

Net interest income after provision for loan losses

  $ 42,431     $ 29,961     $ 60,331     $ 32,326     $ 28,955     $ 24,677     $ 18,590  

Noninterest income

    1,860       1,470       2,682       1,217       2,159       1,583       3,640  

Noninterest expense

    33,298       24,536       47,403       30,310       26,244       21,489       17,207  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax

    10,993       6,895       15,610       3,233       4,870       4,771       5,023  

Provision for income tax

    2,308       1,448       3,495       852       866       2,322       1,713  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    8,685       5,447       12,115       2,381       4,004       2,449       3,310  

Dividends on preferred stock

    —         —         —         —         —         —         9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income allocable to common shareholders

  $ 8,685     $ 5,447     $ 12,115     $ 2,381     $ 4,004     $ 2,449     $ 3,301  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Share and Per Share Data:

 

         

Earnings per share—basic

  $ 1.38       0.88     $ 1.94     $ 0.62     $ 1.06     $ 0.75     $ 1.06  

Earnings per share—diluted

    1.35       0.86       1.91       0.60       1.03       0.73       1.04  

Book value per share(3)

    20.97       18.31       19.39       14.88       14.23       13.23       11.98  

Tangible book value per share(4)

    18.01       15.23       16.29       14.88       14.23       13.23       11.98  

Weighted average common shares outstanding— basic

    6,310,515       6,224,530       6,232,115       3,846,727       3,794,397       3,251,622       3,112,904  

Weighted average common shares outstanding—diluted

    6,450,428       6,325,662       6,329,760       3,939,288       3,887,308       3,351,520       3,180,068  

Common shares outstanding at period end

    6,573,684       6,228,649       6,276,759       3,852,071       3,827,528       3,690,038       3,163,238  

Performance Ratios:

 

Return on average assets (ROAA)(5)(6)

    0.88     0.73     0.73     0.27     0.52     0.40     0.73

Return on average shareholders’ equity (ROAE)(5)(6)

    14.09     9.97     10.74     4.22     7.67     5.96     8.95

Net interest margin (NIM)(6)

    4.67     4.55     4.24     4.08     4.36     4.81     4.91

 

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    As of and for the
Six Months Ended
June 30,
    As of and for the Years Ended December 31,  

(Dollars in thousands, except
share and per share data)

  2021     2020     2020     2019     2018     2017     2016  

Efficiency ratio(7)

    72.72     72.21     67.18     86.19     80.47     77.10     73.44

Credit Quality Ratios:

 

Nonperforming assets to total assets

    0.64     0.80     0.84     0.69     0.89     0.96     0.58

Nonperforming loans to total loans plus other real estate owned

    0.73     0.80     0.80     0.57     0.79     0.95     0.42

Allowance for loan losses to nonperforming loans

    118.89     79.89     96.57     176.59     126.80     95.74     245.70

Allowance for loan losses to total loans

    0.86     0.64     0.77     1.00     1.01     0.91     1.02

Net charge-offs (recoveries) to average loans

    0.01     0.05     0.26     0.06     0.01     0.14     0.11

Capital Ratios (at period end)(8):

 

Company:

             

Total shareholders’ equity to total assets

    6.85     6.23     6.52     6.17     6.44     7.26     7.04

Tangible common equity to tangible assets(9)

    5.94     5.24     5.53     6.17     6.44     7.26     7.04

Bank:

             

Tier 1 leverage ratio

    9.17     7.22     9.70     8.92     9.06     9.39     9.41

Tier 1 common capital ratio

    11.24     11.70     11.51     10.83     11.12     10.36     10.50

Tier 1 risk-based capital ratio

    11.24     11.70     11.51     10.83     11.12     10.36     10.50

Total risk-based capital ratio

    12.32     12.64     12.54     11.89     12.13     11.26     11.52

 

(1)

Includes $1.9 million and $997 thousand of ESOP-owned shares as of June 30, 2021 and 2020, respectively, and $1.3 million, $783 thousand, and $326 thousand of ESOP-owned shares as of December 31, 2020, 2019 and 2018, respectively. No ESOP-owned shares are included in shareholders’ equity for years prior to 2018.

(2)

Tangible common equity is a non-GAAP financial measure. We calculate tangible common equity as total shareholders’ equity, including ESOP-owned shares, less preferred stock (liquidation preference), goodwill and other intangible assets, net of accumulated amortization at the end of the relevant period. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Non-GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”


 

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(3)

We calculate book value per share as total shareholders’ equity, including ESOP-owned shares, at the end of the relevant period, less preferred stock (liquidation preference), divided by the outstanding number of shares of our common stock at the end of the relevant period.

(4)

Tangible book value per share is a non-GAAP financial measure. We calculate tangible book value per share as total shareholders’ equity, including ESOP-owned shares, less preferred stock (liquidation preference), goodwill and other intangible assets, net of accumulated amortization at the end of the relevant period, divided by the outstanding number of shares of our common stock at the end of the relevant period. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Non-GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

(5)

Utilizes month-to-date averages for the year ended December 31, 2016 and daily averages for the six month periods ended June 30, 2021 and 2020 and the years ended December 31, 2020, 2019, 2018 and 2017.

(6)

The ratio calculations as of and for the six months ended June 30, 2021 and 2020 represent annualized calculations.

(7)

Efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.

(8)

Capital ratios are calculated in accordance with regulatory guidance and include ESOP-owned shares in common equity.

(9)

Tangible common equity to tangible assets is a non-GAAP financial measure. We calculate tangible common equity to tangible assets as tangible common equity, including ESOP-owned shares, divided by total assets less goodwill and other intangible assets, net of accumulated amortization. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Non-GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”


 

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Non-GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional financial measures discussed in this prospectus as being non-GAAP financial measures. We classify a financial measure as a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are not included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively financial measures calculated in accordance with GAAP.

The non-GAAP financial measures that we discuss in this prospectus should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this prospectus may differ from that of other companies reporting measures with similar names. It is important to understand how other banking organizations calculate their financial measures with names similar to the non-GAAP financial measures we have discussed in this prospectus when comparing such non-GAAP financial measures.

Tangible Common Equity. We calculate tangible common equity as total shareholders’ equity, including ESOP-owned shares, less preferred stock (liquidation preference), goodwill and other intangible assets, net of accumulated amortization at the end of the relevant period. The most directly comparable GAAP financial measure for tangible common equity is total shareholders’ equity.

We believe that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period of tangible common equity.

Tangible Book Value Per Share. We calculate tangible book value per share as tangible common equity divided by shares of common stock outstanding at the end of the relevant period. The most directly comparable GAAP financial measure for tangible book value per share is book value per share.

We believe that the tangible book value per share measure is important to many investors in the marketplace who are interested in changes from period to period in book value per share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book value.

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

 

    As of
September 30,(2)
    As of June 30,     As of December 31,  

(Dollars in thousands, except
share and per share data)

  2021     2021     2020     2020     2019     2018     2017     2016  

Tangible Common Equity:

               

Total shareholders’ equity(1)

  $ 206,202     $ 137,821     $ 114,033     $ 121,718     $ 57,304     $ 54,452     $ 48,828     $ 37,898  

Less:

               

Preferred stock

    —       —         —         —         —         —         —         —    

Goodwill

    18,034       18,034       17,664       18,034       —         —         —         —    

Other intangibles

    1,332       1,373       1,534       1,454       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity

  $ 186,836     $ 118,414     $ 94,835     $ 102,230     $ 57,304     $ 54,452     $ 48,828     $ 37,898  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common shares outstanding at period end

    9,313,929       6,573,684       6,228,649       6,276,759       3,852,071       3,827,528       3,690,038       3,163,238  

Book value per share

  $ 22.14     $ 20.97     $ 18.31     $ 19.39     $ 14.88     $ 14.23     $ 13.23     $ 11.98  

Tangible Book Value Per Share

  $ 20.06     $ 18.01     $ 15.23     $ 16.29     $ 14.88     $ 14.23     $ 13.23     $ 11.98  

 

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(1)

Includes $2.1 million, $1.9 million and $997 thousand of ESOP-owned shares as of September 30, 2021 and June 30, 2021 and 2020, respectively, and $1.3 million, $783 thousand, and $326 thousand of ESOP-owned shares as of December 31, 2020, 2019 and 2018, respectively. No ESOP-owned shares are included in shareholders’ equity for years prior to 2018.

(2)

Financial information as of September 30, 2021 is preliminary and subject to potential future adjustment. See “Prospectus Summary—Recent Developments—Preliminary Third Quarter Results” for more information concerning the preliminary nature of this financial information.

Tangible Common Equity to Tangible Assets. We calculate (1) tangible common equity as total shareholders’ equity, including ESOP-owned shares, less preferred stock (liquidation preference), goodwill and other intangible assets, net of accumulated amortization at the end of the relevant period, and (2) tangible assets as total assets, less goodwill and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible common equity is total shareholders’ equity, the most directly comparable GAAP financial measure for tangible assets is total assets, and the most directly comparable GAAP financial measure for tangible common equity to tangible assets is total shareholders’ equity to total assets.

We believe that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period of tangible common equity to tangible assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total shareholders’ equity and assets while not increasing our tangible common equity or tangible assets.

The following table reconciles, as of the dates set forth below, total shareholders’ equity to tangible common equity and total assets to tangible assets, and presents total shareholders’ equity to total assets compared to tangible common equity to tangible assets:

 

    As of June 30,     As of December 31,  

(Dollars in thousands)

  2021     2020     2020     2019     2018     2017     2016  

Tangible common equity:

             

Total shareholders’ equity(1)

  $ 137,821     $ 114,033     $ 121,718     $ 57,304     $ 54,452     $ 48,828     $ 37,898  

Less:

             

Preferred stock

    —         —         —         —         —         —         —    

Goodwill

    18,034       17,664       18,034       —         —         —         —    

Other intangibles

    1,373       1,534       1,454       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity

  $ 118,414     $ 94,835     $ 102,230     $ 57,304     $ 54,452     $ 48,828     $ 37,898  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible assets

             

Total assets

  $ 2,013,300     $ 1,829,842     $ 1,867,293     $ 928,337     $ 845,983     $ 672,729     $ 538,435  

Adjustments

             

Goodwill

    18,034       17,664       18,034       —         —         —         —    

Other intangibles

    1,373       1,534       1,454       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible assets

  $ 1,993,893     $ 1,810,644     $ 1,847,805     $ 928,337     $ 845,983     $ 672,729     $ 538,435  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Shareholders’ Equity to Total Assets

    6.85     6.23     6.52     6.17     6.44     7.26     7.04

Tangible Common Equity to Tangible Assets

    5.94     5.24     5.53     6.17     6.44     7.26     7.04

 

(1)

Includes $1.9 million and $997 thousand of ESOP-owned shares as of June 30, 2021 and 2020, respectively, and $1.3 million, $783 thousand, and $326 thousand of ESOP-owned shares as of December 31, 2020, 2019 and 2018, respectively. No ESOP-owned shares are included in shareholders’ equity for years prior to 2018.


 

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SUMMARY OF RISK FACTORS

Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, reputation, financial condition, results of operations, revenue and future prospects. These risks are discussed more fully in the section entitled “Risk Factors.” These risks include, but are not limited to, the following:

Risks Related to the COVID-19 Pandemic

 

   

The ongoing COVID-19 pandemic could have a material adverse effect on our business, results of operations and financial condition.

Risks Related to our Business and Operations

 

   

We are subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings.

 

   

The withdrawal of deposits by our largest depositors could force us to fund our business through more expensive and less stable sources.

 

   

We may not be able to grow or maintain our deposit base, which could adversely impact our funding costs.

 

   

We may not be able to implement our expansion strategy, which may adversely affect our ability to maintain our historical earnings trends.

 

   

We may not be able to manage the risks associated with our anticipated growth and expansion through de novo branching.

 

   

The unexpected loss of executive management team and other key employees could adversely affect us.

 

   

Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.

 

   

The amount of nonperforming and classified assets may increase significantly, resulting in additional losses and costs and expenses.

 

   

Our largest loan relationships currently make up a material percentage of our total loan portfolio.

 

   

We participate in the small business loan program under the CARES Act, which may further expose us to credit losses from borrowers under such programs.

 

   

We may need to raise additional capital in the future, and such capital may not be available when needed or at all.

 

   

The borrowing needs of our clients may increase, especially in a challenging economic environment, which could result in increased borrowing against our contractual obligations to extend credit.

 

   

We face strong competition from financial services companies and other companies that offer banking services.

 

   

Negative public opinion regarding our company or failure to maintain our reputation in the communities we serve could adversely affect our business and prevent us from growing our business.

 

   

We may not be able to overcome the integration and other risks associated with acquisitions, which could have a material adverse effect on our ability to implement our business strategy.

 

   

The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or estimates used in our critical accounting policies are inaccurate.


 

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Risks Related to the Economy and Our Industry

 

   

Adverse economic conditions in our primary geographic markets could negatively impact our operations and customers.

 

   

Our primary markets are susceptible to natural disasters and other catastrophes that could negatively impact the economies of our markets, our operations or our customers.

 

   

We could recognize losses on investment securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.

Risks Related to Cybersecurity, Third-Parties and Technology

 

   

System failures, interruptions or data breaches involving third party information technology and telecommunication systems we rely on could adversely affect our operations and financial condition.

 

   

The occurrence of fraudulent activity, breaches of our information security, and cybersecurity attacks could adversely affect our business and operations, as well as cause legal or reputational harm.

 

   

We may face difficulties with respect to the effective availability and implementation of continually necessary technological changes.

Risks Related to the Regulation of Our Industry

 

   

We operate in a highly regulated environment and the laws and regulations that govern us, or changes in them, or our failure to comply with them, could adversely affect us.

 

   

Our failure to comply with any supervisory actions to which we are or become subject as a result of any federal banking agency examination could adversely affect us.

Risks Related to an Investment in Our Common Stock

 

   

There is currently no regular market for our common stock and an active, liquid market for our common stock may not develop or be sustained upon completion of this offering.

 

   

The market price of our common stock may be subject to substantial fluctuations, which may make it difficult for you to sell your shares at the volume, prices and times desired.

 

   

The market price of our common stock could decline significantly due to actual or anticipated issuances or sales of our common stock in the future.

 

   

Our use of the net proceeds from this offering based on our wide discretion may not yield a favorable return on your investment.

 

   

We may incur additional debt or issue new debt securities, which may cause the market price of our common stock to decline.

 

   

We are dependent upon the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted.

 

   

An investment in our common stock is not an insured deposit and is subject to risk of loss.

 

   

We have pledged all of the stock of the Bank as collateral for a loan and if the lender forecloses, you could lose your investment.


 

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RISK FACTORS

Investing in our common stock involves a significant degree of risk. You should carefully consider the following risk factors, in addition to the other information contained in this prospectus, including our consolidated financial statements and related notes, before deciding to invest in our common stock. Any of the following risks could have a material adverse effect on our business, reputation, financial condition, results of operations, revenue and future prospects. As a result, the trading price of our common stock could decline, and you could lose all or part of your investment. Some statements in this prospectus, including statements in the following risk factors section, constitute forward-looking statements. Please refer to “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to the COVID-19 Pandemic

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

Global health concerns relating to the COVID-19 pandemic and related government actions taken to reduce the spread of the virus have been weighing on the macroeconomic environment, and the pandemic has significantly increased economic uncertainty and reduced economic activity. The pandemic has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act in 2020, the PPP that was part of the CARES Act, the American Rescue Plan Act of 2021, and the rollout of vaccinations for the virus. However, there can be no assurance that such steps will be as effective as intended or achieve their desired results in a timely fashion.

The pandemic has adversely impacted, and is likely to further adversely impact, our workforce and operations and the operations of our borrowers, customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our borrowers, customers or business partners, including but not limited to:

 

   

credit losses resulting from financial stress being experienced by our borrowers as a result of the pandemic and related governmental actions (including risks related to the PPP under the CARES Act and related credit risks resulting from PPP lending due to forbearance or failure of customers to qualify for loan forgiveness);

 

   

increased bankruptcies being experienced by the carrier, freight broker and shipper clients serviced by our commercial finance operations;

 

   

declines in collateral values;

 

   

declines in oil and gas prices and disruptions in the oil and gas industry;

 

   

third-party disruptions, including outages at network providers and other suppliers;

 

   

increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity; and

 

   

operational failures due to changes in our normal business practices necessitated by the pandemic and related governmental actions.

These factors may remain prevalent for a significant period of time and may continue to adversely affect our business, results of operations and financial condition even after the COVID-19 pandemic has subsided.

 

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The spread of COVID-19 has caused us to modify our business practices (including restricting employee travel, and developing work from home and social distancing plans for our employees), and we may take further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or will otherwise be satisfactory to government authorities.

The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, the rollout and effectiveness of vaccination programs for the virus, the impact of COVID-19 variants, the timing and extent of the economic recovery, the permanence of certain operating conditions that emerged during the pandemic and long-term changes in the industries in which our customers operate. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations and heighten many of our known risks described herein.

Risks Related to Our Business and Operations

We are subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings.

Changes in interest rates could have an adverse effect on our net interest income and could have a material adverse effect on our business, financial condition and results of operations. Many factors outside our control impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply and international economic conditions and volatility and instability in domestic and foreign financial markets.

The majority of our banking assets and liabilities are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, our earnings are significantly dependent on our net interest income. Different types of assets and liabilities may react differently and at different times to market rate changes. We may periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will negatively impact our earnings. The impact on earnings is more adverse when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates.

Interest rate increases often result in larger payment requirements for our borrowers, which increase the potential for default. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates. An increase in interest rates can adversely impact the ability of borrowers to pay the principal or interest on loans, and may lead to an increase in loans on nonaccrual status and a reduction of interest income recognized. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. At the same time, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense.

In a low interest rate environment, loan customers often pursue long-term fixed rate credits, which could adversely affect our earnings and net interest margin if rates increase. If short-term interest rates remain at low

 

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levels for a prolonged period and longer-term interest rates fall, we could experience net interest margin compression as our interest-earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem.

Interest rate increases may also reduce the demand for loans and increase competition for deposits. Changes in interest rates also can affect the value of loans, securities and other assets.

Our largest deposit relationships currently make up a material percentage of our deposits and the withdrawal of deposits by our largest depositors could force us to fund our business through more expensive and less stable sources.

As of June 30, 2021, our fifteen largest depositors (including related entities, but excluding brokered deposits) accounted for $535.4 million in deposits, or approximately 30.0% of our total deposits. Further, our brokered deposit account balance was $230.0 million, or approximately 12.9% of our total deposits, as of June 30, 2021, and $208.9 million, or 11.7% of our total deposits, was through one brokered deposit relationship as of June 30, 2021. Several of our large depositors have business, family, or other relationships with each other, which creates a risk that any one customer’s withdrawal of its deposits could lead to a loss of other deposits from customers within the relationship.

Withdrawals of deposits by any one of our largest depositors or by one of our related customer groups could force us to rely more heavily on borrowings and other sources of funding for our business and withdrawal demands, adversely affecting our net interest margin and results of operations. We may also be forced, as a result of any withdrawal of deposits, to rely more heavily on other, potentially more expensive and less stable funding sources. Consequently, the occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to grow or maintain our deposit base, which could adversely impact our funding costs.

Our principal sources of liquidity include earnings, deposits, repayment by clients of loans we have made to them, and the proceeds from sales by us of our equity securities or from borrowings that we may obtain. In addition, from time to time, we borrow from the Federal Home Loan Bank of Dallas, or FHLB. Our future growth will largely depend on our ability to grow and maintain our deposit base, which we may not be able to achieve. As of June 30, 2021, we had a loan to deposit ratio of 87.0%. The account and deposit balances can decrease when clients perceive alternative investments, such as the stock market or real estate, as providing a better risk/return tradeoff. If clients move money out of bank deposits and into investments (or similar deposit products at other institutions that may provide a higher rate of return), we could lose a relatively low cost source of funds, increasing our funding costs and reducing our net interest income and net income. Additionally, any loss of funds could result in lower loan originations, which could materially negatively impact our growth strategy and results of operations.

We may not be able to implement our expansion strategy, which may adversely affect our ability to maintain our historical earnings trends.

Our expansion strategy focuses on organic growth, supplemented by strategic acquisitions and expansion of the Bank’s banking location network, or de novo branching. We may not be able to execute on aspects of our expansion strategy, which may impair our ability to sustain our historical rate of growth or prevent us from growing at all. More specifically, we may not be able to generate sufficient new loans and deposits within acceptable risk and expense tolerances, obtain the personnel or funding necessary for additional growth or find suitable acquisition candidates. Various factors, such as economic conditions and competition with other financial institutions, may impede or prohibit the growth of our operations, the opening of new banking locations and the consummation of acquisitions. Further, we may be unable to attract and retain experienced bankers, which could adversely affect our growth. The success of our strategy also depends on our ability to effectively manage growth, which is dependent upon a number of factors, including our ability to adapt our credit,

 

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operational, technology and governance infrastructure to accommodate expanded operations. If we fail to implement one or more aspects of our strategy, we may be unable to maintain our historical earnings trends, which could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to manage the risks associated with our anticipated growth and expansion through de novo branching, which could have a material adverse effect on our business, financial condition and results of operations.

Our business strategy includes evaluating strategic opportunities to grow through de novo branching, and we believe that banking location expansion has been meaningful to our growth since inception. De novo branching carries with it certain potential risks, including significant startup costs and anticipated initial operating losses; an inability to gain regulatory approval; an inability to secure the services of qualified senior management to operate the de novo banking locations and successfully integrate and promote our corporate culture; poor market reception for de novo banking locations established in markets where we do not have a preexisting reputation; challenges posed by local economic conditions; challenges associated with securing attractive locations at a reasonable cost; and the additional strain on management resources and internal systems and controls. Failure to adequately manage the risks associated with our anticipated growth through de novo branching could have a material adverse effect on our business, financial condition and results of operations.

We rely heavily on our executive management team and other key employees, and we could be adversely affected by the unexpected loss of their services.

Our success depends in large part on the performance of our executive management team and other key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees. Competition for qualified employees is intense, and the process of locating key personnel with the combination of skills, attributes and business relationships required to execute our business plan may be lengthy. We may not be successful in retaining our key employees, and the unexpected loss of services of one or more of our key personnel could have an adverse effect on our business because of their skills, knowledge of and business relationships within our primary markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel. If the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and hire qualified persons on terms acceptable to us, or at all, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.

We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.

The business of lending is inherently risky, including risks that the principal of or interest on any loan will not be repaid timely or at all or that the value of any collateral supporting the loan will be insufficient to cover our outstanding exposure. These risks may be affected by the strength of the borrower’s business sector and local, regional and national market and economic conditions. Many of our loans are made to small-to medium-sized businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers. Our risk management practices, such as monitoring the concentration of our loans within specific industries and our credit approval practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of our loan portfolio. A failure to effectively measure and limit the credit risk associated with our loan portfolio could lead to unexpected losses and have a material adverse effect on our business, financial condition and results of operations.

Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio, which may adversely affect our business, financial condition and results of operations.

We maintain an allowance for loan losses that represents management’s judgment of probable losses and risks inherent in our loan portfolio. As of June 30, 2021, our allowance for loan losses totaled $13.4 million,

 

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which represents approximately 0.9% of our total loans. The level of the allowance reflects management’s continuing evaluation of general economic conditions, diversification and seasoning of our loan portfolio, historic loss experience, identified credit problems, delinquency levels and adequacy of collateral. The determination of the appropriate level of the allowance for loan losses is inherently highly subjective and requires us to make significant estimates of and assumptions regarding current credit risks and future trends, all of which may undergo material changes. Inaccurate management assumptions, deterioration of economic conditions affecting borrowers, new information regarding existing loans, identification or deterioration of additional problem loans, acquisition of problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loan losses.

Additional loan losses will likely occur in the future and may occur at a rate greater than we have previously experienced or than we anticipate. We may be required to make additional provisions for loan losses to further supplement our allowance for loan losses, due either to our management’s decision or as a regulatory requirement. In addition, bank regulatory agencies will periodically review our allowance for loan losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure. Such regulatory agencies may require us to recognize future charge-offs, which could have a material adverse effect on our business, financial condition, and results of operations.

Finally, the measure of our allowance for loan losses will be subject to new accounting standards. The Financial Accounting Standards Board, or FASB, has adopted a new accounting standard that will be effective for us, as a smaller reporting company, for fiscal years beginning after December 15, 2022. This new standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which will likely require us to increase our allowance for loan losses. CECL will also greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses. The CECL model likely will create more volatility in the level of our allowance for loan losses after it becomes applicable to us. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses could adversely affect our business, financial condition, and results of operations.

The amount of nonperforming and classified assets may increase significantly, resulting in additional losses and costs and expenses that will negatively affect our operations and financial condition.

Our nonperforming assets include nonperforming loans and assets acquired through foreclosure. Nonperforming loans include nonaccrual loans, loans past due 90 days or more, and loans renegotiated or restructured because of a debtor’s financial difficulties. Loans are generally placed on nonaccrual status if any of the following events occur: (a) the classification of a loan as nonaccrual internally or by regulatory examiners; (b) delinquency on principal for 90 days or more unless we are in the process of collection; (c) a balance remains after repossession of collateral; (d) notification of bankruptcy; or (e) we determine that nonaccrual status is appropriate. At June 30, 2021, we had $13.0 million of nonperforming assets, or 0.64% of total assets.

Should the amount of nonperforming assets or classified assets increase in the future, we may incur losses and the costs and expenses to maintain such assets can be expected to increase and potentially negatively affect earnings. An increase in the level of nonperforming assets increases our risk profile and may impact the capital levels regulators believe are appropriate considering the ensuing risk profile. An additional increase in losses due to such assets could have a material adverse effect on our business, financial condition and results of operations.

Nonperforming assets take significant time and resources to resolve and adversely affect our results of operations and financial condition.

Nonperforming assets adversely affect our net income in various ways. We generally do not record interest income on other real estate owned, or OREO, or on nonperforming loans, thereby adversely affecting our income

 

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and increasing loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair value of the collateral, which may ultimately result in a loss. An increase in the level of nonperforming assets increases our risk profile and may impact the capital levels regulators believe are appropriate in light of the ensuing risk profile. While we seek to reduce problem assets through loan workouts, restructurings, and otherwise, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could have a material effect on our business, financial condition and results of operations. In addition, the resolution of nonperforming assets requires significant commitments of time from management, which may materially and adversely impact their ability to perform their other responsibilities. We may not experience future increases in the value of nonperforming assets.

The small- to medium-sized businesses that we lend to may have fewer resources to endure adverse business developments, which may impair our borrowers’ ability to repay loans.

We focus our business development and marketing strategy primarily on small- to medium-sized businesses. Small- to medium-sized businesses frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small- and medium-sized business often depends on the management skills, talents and efforts of a small group of people, and the death, disability or resignation of one or more of these people could have an adverse effect on the business and its ability to repay its loan. If our borrowers are unable to repay their loans, our business, financial condition and results of operations could be adversely affected.

A portion of our loan portfolio is comprised of commercial loans secured by receivables, inventory, equipment or other commercial collateral, which we refer to generally as commercial and industrial loans, and the deterioration in value of which could expose us to credit losses.

As of June 30, 2021, commercial and industrial loans represented approximately $612.3 million, or 39.4%, of our gross loans. In general, these loans are collateralized by general business assets, including, among other things, accounts receivable, inventory and equipment, and most are backed by a personal guaranty of the borrower or principal. These commercial and industrial loans are typically larger in amount than loans to individuals and, therefore, have the potential for larger losses on a single loan basis. Additionally, the repayment of commercial and industrial loans is subject to the ongoing business operations of the borrower. The collateral securing such loans generally includes moveable property such as equipment and inventory, which may decline in value more rapidly than we anticipate; thus exposing us to increased credit risk. In addition, a portion of our customer base, including customers in the energy and real estate business, may be in industries which are particularly sensitive to commodity prices or market fluctuations, such as energy and real estate prices. Accordingly, negative changes in commodity prices and real estate values and liquidity could impair the value of the collateral securing these loans. Significant adverse changes in the economy or local market conditions or adverse weather events in the markets in which our commercial and industrial lending customers operate could cause rapid declines in loan collectability and the values associated with general business assets resulting in inadequate collateral coverage that may expose us to credit losses and could adversely affect our business, financial condition and results of operations.

Our commercial real estate and real estate construction and development loan portfolio exposes us to credit risks that may be greater than the risks related to other types of loans.

As of June 30, 2021, approximately $647.8 million, or 41.8%, of our gross loans were nonresidential real estate loans (including owner-occupied commercial real estate loans) and approximately $80.4 million, or 5.2%, of our total loans were construction and development loans. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. The availability of such income for repayment may be adversely

 

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affected by changes in the economy or local market conditions. Owner-occupied commercial real estate is generally less dependent upon income generated directly from the property but still carries risks from the successful operation of the underlying business or adverse economic conditions. These loans expose a lender to greater credit risk than loans secured by other types of collateral because the collateral securing these loans is typically more difficult to liquidate due to the fluctuation of real estate values. Additionally, non-owner occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers. Unexpected deterioration in the credit quality of our non-owner occupied commercial real estate loan portfolio could require us to increase our allowance for loan losses, which would reduce our profitability and could have a material adverse effect on our business, financial condition and results of operations.

Construction and development loans also involve risks because loan funds are secured by a project under construction and the project is of uncertain value prior to its completion. It can be difficult to accurately evaluate the total funds required to complete a project, and construction and development lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor, if any, to repay the loan. If we are forced to foreclose on a project prior to completion, we may be unable to recover the entire unpaid portion of the loan. In addition, we may be required to fund additional amounts to complete a project, incur taxes, maintenance and compliance costs for a foreclosed property and may have to hold the property for an indeterminate period of time, any of which could adversely affect our business, financial condition and results of operations.

Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.

As of June 30, 2021, approximately $902.5 million, or 58.2%, of our gross loans were loans with real estate as a primary or secondary component of collateral. The market value of real estate can fluctuate significantly in a short period of time. As a result, adverse developments affecting real estate values and the liquidity of real estate in our primary markets or in Texas generally could increase the credit risk associated with our loan portfolio, and could result in losses that adversely affect credit quality, financial condition and results of operations. Negative changes in the economy affecting real estate values and liquidity in our market areas could significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses. Collateral may have to be sold for less than the outstanding balance of the loan, which could result in losses on such loans. Such declines and losses could have a material adverse effect on our business, financial condition and results of operations. If real estate values decline, it is also more likely that we would be required to increase our allowance for loan losses, which could adversely affect our business, financial condition and results of operations. In addition, adverse weather events, including hurricanes and flooding, can cause damages to the property pledged as collateral on loans, which could result in additional losses upon a foreclosure.

Our largest loan relationships currently make up a material percentage of our total loan portfolio.

As of June 30, 2021, our ten largest loan relationships (including related entities) totaled approximately $140.3 million in loans, or 9.0% of the total loan portfolio. The concentration risk associated with having a small number of large loan relationships is that, if one or more of these relationships were to become delinquent or suffer default, we could be at serious risk of material losses. The allowance for loan losses may not be adequate to cover losses associated with any of these relationships, and any loss or increase in the allowance would negatively affect our earnings and capital. Even if the loans are collateralized, the large increase in classified assets could harm our reputation with our regulators and inhibit our ability to execute our business plan.

 

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Appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property, other real estate owned and repossessed personal property may not accurately describe the net value of the asset.

In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values may change significantly in relatively short periods of time (especially in periods of heightened economic uncertainty), this estimate may not accurately describe the net value of the real property collateral after the loan is made. As a result, we may not be able to realize the full amount of any remaining indebtedness when we foreclose on and sell the relevant property. In addition, we rely on appraisals and other valuation techniques to establish the value of our OREO, and personal property that we acquire through foreclosure proceedings and to determine certain loan impairments. If any of these valuations are inaccurate, our combined and consolidated financial statements may not reflect the correct value of our OREO, and our allowance for loan losses may not reflect accurate loan impairments. This could have a material adverse effect on our business, financial condition or results of operations. As of June 30, 2021, we held $1.7 million of OREO and no repossessed property and equipment.

We engage in lending secured by real estate and may be forced to foreclose on the collateral and own the underlying real estate, subjecting us to the costs and potential risks associated with the ownership of the real property, and consumer protection initiatives or changes in state or federal law may substantially raise the cost of foreclosure or prevent us from foreclosing at all.

Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we would be exposed to the risks inherent in the ownership of real estate. As of June 30, 2021, we held approximately $1.7 million in OREO. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to general or local economic condition, environmental cleanup liability, assessments, interest rates, real estate tax rates, operating expenses of the mortgaged properties, ability to obtain and maintain adequate occupancy of the properties, zoning laws, governmental and regulatory rules, and natural disasters. Our inability to manage the amount of costs or size of the risks associated with the ownership of real estate, or write-downs in the value of other real estate owned, could have a material adverse effect on our business, financial condition and results of operations.

Additionally, consumer protection initiatives or changes in state or federal law, including initiatives or changes implemented in response to the COVID-19 pandemic, may substantially increase the time and expense associated with the foreclosure process or prevent us from foreclosing at all. While Texas foreclosure laws have historically been favorable to lenders, a number of states in recent years have either considered or adopted foreclosure reform laws that make it substantially more difficult and expensive for lenders to foreclose on properties in default, and we cannot be certain that Texas will not adopt similar legislation in the future. Additionally, federal regulators have prosecuted a number of mortgage servicing companies for alleged consumer law violations. If new state or federal laws or regulations are ultimately enacted that significantly raise the cost of foreclosure or raise outright barriers, such cost barriers could have a material adverse effect on our business, financial condition and results of operation.

SBA lending is an important part of our business. Our SBA lending program is dependent upon the federal government and our status as a participant in the SBA’s Preferred Lenders Program, and we face specific risks associated with SBA loans.

We participate in the SBA’s Preferred Lenders Program. As an SBA Preferred Lender, we are able to provide our clients with access to SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk

 

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management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions, including revocation of our Preferred Lender status. If we lose our status as a Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders, which could adversely affect our business, financial condition and results of operations.

We have not typically sold the guaranteed portion of our SBA 7(a) loans in the secondary market in recent years. If we sell the guaranteed portion of our SBA 7(a) loans, we will incur credit risk on the unguaranteed portion of the loans, and if a customer defaults on the unguaranteed portion of a loan, we would share any loss and recovery related to the loan pro-rata with the SBA.

The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future. We cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies and especially our organization, changes in the laws, regulations and procedures applicable to SBA loans could adversely affect our ability to operate profitably. In addition, the aggregate amount of SBA 7(a) and 504 loan guarantees by the SBA must be approved each fiscal year by the federal government. We cannot predict the amount of SBA 7(a) loan guarantees in any given fiscal year. If the federal government were to reduce the amount of SBA loan guarantees, such reduction could adversely impact our SBA lending program.

The SBA may not honor its guarantees if we do not originate loans in compliance with SBA guidelines.

As of June 30, 2021, SBA 7(a) loans (excluding PPP loans) of $63.2 million comprised 4.1% of our loan portfolio. SBA lending programs typically guarantee 75% of the principal on an underlying loan. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the deficiency from us notwithstanding that a portion of the loan was guaranteed by the SBA, which could adversely affect our business, financial condition and results of operations. While we follow the SBA’s underwriting guidelines, our ability to do so depends on the knowledge and diligence of our employees and the effectiveness of controls we have established. If our employees do not follow the SBA guidelines in originating loans and if our loan review and audit programs fail to identify and rectify such failures, the SBA may reduce or, in some cases, refuse to honor its guarantee obligations and we may incur losses as a result.

We participate in the small business loan program under the CARES Act, which may further expose us to credit losses from borrowers under such programs.

Among other components, the CARES Act provides for payment forbearance on mortgages or loans to borrowers experiencing a hardship during the COVID-19 pandemic. We have offered deferral and forbearance plans and have participated in the PPP under the CARES Act by making loans to small businesses consistent with the CARES Act that are fully guaranteed by the SBA. Various governmental programs such as the PPP are complex and our participation may lead to additional litigation and governmental, regulatory and third-party scrutiny, negative publicity and damage to our reputation. In addition, participation in the PPP as a lender may adversely affect our revenue and results of operations depending on the timing and amount of forgiveness, if any, to which borrowers will be entitled and we are subject to the risk of PPP fraud cases. PPP loans are fixed, low interest rate loans, and if the borrower under the PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of holding these loans at unfavorable interest rates as compared to the loans to clients that we would have otherwise extended credit.

We have additional credit risk with respect to PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded or serviced, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was

 

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originated, funded, or serviced by us, the SBA may deny its liability under the guarantee, reduce the amount of the guarantee or, if it has already paid under the guarantee, seek recovery of any loss related to the deficiency from the Bank.

Our auto finance portfolio exposes us to increased credit risks.

At June 30, 2021, our auto finance portfolio (excluding floor plan loans and indirect auto loans included in commercial and industrial loans) consisted of $32.1 million, or 2.0% of our loans held for investment. We originate these auto loans and leases through our indirect lending department to individuals who live in our market areas. The leases are made through well-known third party leasing companies and underwriting and approval is performed by the indirect lending department in accordance with our policies. We serve customers that cover a range of creditworthiness and the required terms and rates are reflective of those risk profiles. Auto loans are inherently risky as they are often secured by assets that may be difficult to locate and can depreciate rapidly. In some cases, repossessed collateral for a defaulted auto loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency may not warrant further substantial collection efforts against the borrower. Auto loan collections depend on the borrower’s continuing financial stability, and therefore, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. Additional risk elements associated with indirect lending include the limited personal contact with the borrower as a result of indirect lending through non-bank channels, namely automobile dealers.

We also originate automobile dealer floor plan loans for both new and used automobiles. Floor plan loans are inherently risky as they are collateralized by the automobiles that are being sold, and can depreciate rapidly. We monitor floor plan loans closely to ensure that funds are received to paydown the loan as automobiles are sold, and require periodic curtailments if the automobiles stay on the line for an extended period of time. Periodic independent third party inspections are required to ensure that the automobiles securing the loan are maintained on the lot and in saleable condition. At June 30, 2021, outstanding floor plan loans were $787 thousand which are included in commercial and industrial loans.

Our commercial finance clients, particularly with respect to our commercial finance and asset-based lending product lines, may lack the operating history, cash flows or balance sheet necessary to support other financing options and may expose us to additional credit risk, especially if our additional controls for such products are ineffective in mitigating such additional risks.

A significant portion of our loan portfolio consists of commercial finance products. Some of these commercial finance products, particularly asset-based loans and our factored receivables (which totaled $28.4 million, or 1.8% of loans, as of June 30, 2021), arise out of relationships with clients who lack the operating history, cash flows or balance sheet necessary to qualify for more traditional bank financing options. We attempt to control for the additional credit risk in these relationships through credit management processes employed in connection with these transactions. However, if such controls are ineffective in controlling this additional risk or if we fail to follow the procedures we have established for managing this additional risk, we could be exposed to additional losses with respect to such product lines that could have an adverse effect on our business, financial condition and results of operations.

Our asset-based lending and commercial finance products may expose us to an increased risk of fraud.

We rely on the structural features embedded in our asset-based lending and commercial finance products to mitigate the credit risk associated with such products. With respect to our asset-based loans, we limit our lending to a percentage of the customer’s borrowing base assets that we believe can be readily liquidated in the event of financial distress of the borrower. With respect to our commercial finance products, we purchase the underlying invoices of our customers and become the direct payee under such invoices, thus transferring the credit risk in such transactions from our customers to the underlying account debtors on such invoices. In the event one or more of our customers fraudulently represents the existence or valuation of borrowing base assets in the case of

 

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an asset-based loan, or the existence or validity of an invoice we purchase in the case of a commercial finance transaction, we may advance more funds to such customer than we otherwise would and lose the benefit of the structural protections of our products with respect to such advances. In such event we could be exposed to material additional losses with respect to such loans or commercial finance products. Although we believe we have controls in place to monitor and detect fraud with respect to our asset-based lending and commercial finance products, there is no guarantee such controls will be effective. Losses from such fraudulent activity could have a material impact on our business, financial condition and results of operations.

New lines of business or new products and services may subject us to additional risks.

From time to time, we may implement or may acquire new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and new products and services, we may invest significant time and resources. We may not achieve target timetables for the introduction and development of new lines of business and new products or services and price and profitability targets may not prove feasible. External factors, such as regulatory compliance obligations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and financial condition.

If we fail to maintain effective internal control over financial reporting, we may not be able to report our financial results accurately and timely, in which case our business may be harmed, investors may lose confidence in the accuracy and completeness of our financial reports, we could be subject to regulatory penalties and the price of our common stock may decline.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting on that system of internal control. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. As a public company, we will be required to comply with the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and other rules that govern public companies. In particular, we will be required to certify our compliance with Section 404 of the Sarbanes-Oxley Act beginning with our second annual report on Form 10-K, which will require us to furnish annually a report by management on the effectiveness of our internal control over financial reporting. In addition, unless we remain an emerging growth company and elect additional transitional relief available to emerging growth companies, our independent registered public accounting firm may be required to report on the effectiveness of our internal control over financial reporting beginning with our second annual report on Form 10-K.

We will continue to periodically test and update, as necessary, our internal control systems, including our financial reporting controls. Our actions, however, may not be sufficient to result in an effective internal control environment, and any future failure to maintain effective internal control over financial reporting could impair the reliability of our financial statements which in turn could harm our business, impair investor confidence in the accuracy and completeness of our financial reports, impair our access to the capital markets, and cause the price of our common stock to decline and subject us to regulatory penalties.    

 

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We are dependent on the use of data and modeling in our management’s decision-making, and faulty data or modeling approaches could negatively impact our decision-making ability or possibly subject us to regulatory scrutiny in the future.

The use of statistical and quantitative models and other quantitative analyses is endemic to bank decision-making, and the employment of such analyses is becoming increasingly widespread in our operations. Liquidity stress testing, interest rate sensitivity analysis, and the identification of possible violations of anti-money laundering regulations are all examples of areas in which we are dependent on models and the data that underlies them. The use of statistical and quantitative models is also becoming more prevalent in regulatory compliance. While we are not currently subject to annual Dodd-Frank Act stress testing (DFAST) and the Comprehensive Capital Analysis and Review (CCAR) submissions, we anticipate that model-derived testing may become more extensively implemented by regulators in the future.

We anticipate data-based modeling will penetrate further into bank decision-making, particularly risk management efforts, as the capacities developed to meet rigorous stress testing requirements can be employed more widely and in differing applications. While we believe these quantitative techniques and approaches improve our decision-making, they also create the possibility that faulty data or flawed quantitative approaches could negatively impact our decision-making ability or, if we become subject to regulatory stress testing in the future, adverse regulatory scrutiny. Further, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision-making.

We have pledged all of the stock of the Bank as collateral for a loan and if the lender forecloses, you could lose your investment.

We have pledged all of the stock of the Bank as collateral for our senior debt. As of June 30, 2021, the loan had a balance of approximately $20.5 million, which was subsequently paid down to $1.0 million through a portion of the proceeds of our private placement. If we were to default, the lender could foreclose on the Bank’s stock and we would lose our principal asset. In that event, if the value of the Bank’s stock is less than the amount of the indebtedness, you could lose the entire amount of your investment.

A lack of liquidity could impair our ability to fund operations and could have a material adverse effect on our business, financial condition and results of operations.

Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations as they become due because of an inability to liquidate assets or obtain adequate funding. We require sufficient liquidity to meet customer loan requests, customer deposit maturities and withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations. An inability to raise funds through deposits, borrowings, the sale of our investment securities, the sale of loans, and other sources could have a substantial negative effect on our liquidity. Our most important source of funds is deposits. As of June 30, 2021, approximately $1.44 billion, or 80.7%, of our total deposits were noninterest-bearing deposits, negotiable order of withdrawal, or NOW, savings and money market accounts. Historically our savings, money market deposit accounts, NOW and demand accounts have been stable sources of funds. However, these deposits are subject to potentially dramatic fluctuations in availability or price due to factors that may be outside of our control, such as a loss of confidence by customers in us or the banking sector generally, customer perceptions of our financial health and general reputation, increasing competitive pressures from other financial services firms for consumer or corporate customer deposits, changes in interest rates and returns on other investment classes. As a result, there could be significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract additional deposits, increasing our funding costs and reducing our net interest income and net income.

As of June 30, 2021, the $344.6 million remaining balance of deposits consisted of certificates of deposit, of which $318.9 million, or 17.9% of our total deposits, were due to mature within one year. Historically, a majority

 

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of our certificates of deposit are renewed upon maturity as long as we pay competitive interest rates. These customers are, however, interest-rate conscious and may move funds into higher-yielding investment alternatives. If customers transfer money out of the Bank’s deposits and into other investments such as money market funds, we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.

Other primary sources of funds consist of cash flows from operations, and proceeds from the issuance and sale of our equity and debt securities to investors. Additional liquidity is provided by our ability to borrow from the FHLB. We also may borrow funds from third-party lenders, such as other financial institutions. Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. Our access to funding sources could also be affected by a decrease in the level of our business activity as a result of a downturn in the Texas economy or by one or more adverse regulatory actions against us.

Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations.

We may need to raise additional capital in the future, and such capital may not be available when needed or at all.

We may need to raise additional capital, in the form of additional debt or equity, in the future to have sufficient capital resources and liquidity to meet our commitments and fund our business needs and future growth, particularly if the quality of our assets or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial condition. Economic conditions and a loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital or make such capital only available on unfavorable terms, including interbank borrowings, repurchase agreements and borrowings from the discount window of the Board of Governors of the Federal Reserve System, or the Federal Reserve. We may not be able to obtain capital on acceptable terms—or at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of our Bank or counterparties participating in the capital markets or other disruption in capital markets, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Further, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would then have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, financial condition and results of operations.

The borrowing needs of our clients may increase, especially in a challenging economic environment, which could result in increased borrowing against our contractual obligations to extend credit.

A commitment to extend credit is a formal agreement to lend funds to a client as long as there is no violation of any condition established under the agreement. The actual borrowing needs of our clients under these credit commitments have historically been lower than the contractual amount of the commitments. A significant portion of these commitments expire without being drawn upon. Because of the credit profile of our clients, we typically have a substantial amount of total unfunded credit commitments, which is not reflected on our balance sheet. As of June 30, 2021, we had $209.8 million in unfunded credit commitments and standby letters of credit to our clients. Actual borrowing needs of our clients may exceed our expectations, especially in a challenging economic environment when our clients’ companies may be more dependent on our credit commitments due to the lack of available credit elsewhere, the increasing costs of credit, or the limited availability of financings from

 

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venture firms. This could adversely affect our liquidity, which could impair our ability to fund operations and meet obligations as they become due and could have a material adverse effect on our business, financial condition and results of operations. See “Risk Factors—Risks Related to Our Business and Operations—A lack of liquidity could impair our ability to fund operations and could have a material adverse effect on our business, financial condition and results of operations.”

We face strong competition from financial services companies and other companies that offer banking services.

We operate in the highly competitive financial services industry and face significant competition for customers from financial institutions located both within and beyond our principal markets. We compete with commercial banks, savings banks, credit unions, nonbank financial services companies and other financial institutions operating within or near the areas we serve. Additionally, certain large banks headquartered outside of our markets and large community banking institutions target the same customers we do. In addition, as customer preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for banks to expand their geographic reach by providing services over the internet and mobile devices and for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. The banking industry has experienced rapid changes in technology, and, as a result, our future success may depend in part on our ability to address our customers’ needs by using technology. Customer loyalty can be influenced by a competitor’s new products, especially offerings that could provide cost savings or a higher return to the customer. Increased lending activity of competing banks can also lead to increased competitive pressures on loan rates and terms for high-quality credits. We may not be able to compete successfully with other financial institutions in our markets, and we may have to pay higher interest rates to attract deposits, accept lower yields to attract loans and pay higher wages for new employees, resulting in lower net interest margins and reduced profitability.

Many of our nonbank competitors are not subject to the same extensive regulations that govern our activities and may have greater flexibility in competing for business. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. In addition, some of our current commercial banking customers may seek alternative banking sources as they develop needs for credit facilities larger than we may be able to accommodate. Our inability to compete successfully in the markets in which we operate could have a material adverse effect on our business, financial condition or results of operations.

We could be adversely affected by the soundness of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when our collateral cannot be foreclosed upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due. Any such losses could adversely affect our business, financial condition and results of operations.

Negative public opinion regarding our company or failure to maintain our reputation in the communities we serve could adversely affect our business and prevent us from growing our business.

Our reputation within the communities we serve is critical to our success. We believe we have set ourselves apart from our competitors by building strong personal and professional relationships with our customers and being active members of the communities we serve. As such, we strive to enhance our reputation by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve

 

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and delivering superior service to our customers. If our reputation is negatively affected by the actions of our employees or otherwise, we may be less successful in attracting new talent and customers or may lose existing customers, and our business, financial condition and results of operations could be adversely affected. Further, negative public opinion can expose us to litigation and regulatory action and delay and impede our efforts to implement our expansion strategy, which could further adversely affect our business, financial condition and results of operations.

We may not be able to overcome the integration and other risks associated with acquisitions, which could have a material adverse effect on our ability to implement our business strategy.

Although we plan to continue to grow our business organically and through de novo branching, we also intend to pursue acquisition opportunities that we believe will be accretive to our earnings per share, enhance our existing market presence, expand our markets of operation or strengthen our balance sheet, with an emphasis on the acquisition of banks with a strong deposit franchise and high-quality funding profiles to augment our core deposit base. Our acquisition activities could be material to our business and involve a number of risks, including the following:

 

   

intense competition from other banking organizations and other acquirers for potential target companies;

 

   

market pricing for desirable acquisitions resulting in returns that are less attractive than we have traditionally sought to achieve;

 

   

incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business;

 

   

using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets;

 

   

failure to achieve expected revenues, earnings or synergies from an acquisition;

 

   

potential exposure to unknown or contingent liabilities of banks and businesses we acquire, including compliance and regulatory issues;

 

   

the time and expense required to integrate the operations and personnel of the combined businesses;

 

   

experiencing higher operating expenses relative to operating income from the new operations and the failure to achieve expected cost savings;

 

   

losing key employees and customers;

 

   

reputational issues if the target’s management does not align with our culture and values;

 

   

significant problems relating to the conversion of the financial and customer data of the target;

 

   

integration of acquired customers into our financial and customer product systems;

 

   

risks of impairment to goodwill and other acquired assets; or

 

   

regulatory timeframes for review of applications, which may limit the number and frequency of transactions we may be able to consummate.

Depending on the condition of any institution or assets or liabilities that we may acquire, that acquisition may, at least in the near term, adversely affect our capital and earnings and, if not successfully integrated with our organization, may continue to have such effects over a longer period. We may not be successful in overcoming these risks or any other problems encountered in connection with pending or potential acquisitions, and any acquisition we may consider will be subject to prior regulatory approval. Our inability to overcome these risks could have an adverse effect on our ability to implement our business strategy, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

 

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The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or estimates used in our critical accounting policies are inaccurate.

The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are included in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in this prospectus, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider “critical” because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related disclosures. As a result, if future events or regulatory views concerning such analysis differ significantly from the judgments, assumptions and estimates in our critical accounting policies, those events or assumptions could have a material impact on our consolidated financial statements and related disclosures, in each case resulting in our needing to revise or restate prior period financial statements, cause damage to our reputation and the price of our common stock, and adversely affect our business, financial condition and results of operations.

There could be material changes to our financial statements and disclosures if there are changes in accounting standards or regulatory interpretations of existing standards.

From time to time the FASB or the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new accounting and reporting standards or change existing accounting and reporting standards. For example, in June 2016, the FASB issued revised guidance for impairments on financial instruments which requires the use of CECL models which might increase our allowance for loan losses for fiscal years beginning after December 15, 2022. For more information, see “Risk Factors—Risks Related to Our Business and Operations—Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio, which may adversely affect our business, financial condition and results of operations.” In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how new or existing standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new standard, revise an existing standard or change the application of an existing standard in such a way that financial statements for periods previously reported are revised. Such changes could materially change our financial statements and related disclosures and, depending on the nature of the revision, could cause damage to our reputation and the price of our common stock and adversely affect our business, financial condition and results of operations.

We are subject to certain operational risks, including, but not limited to, customer, employee or third-party fraud and data processing system failures and errors.

Because we are a financial institution, employee errors and employee or customer misconduct could subject us in particular to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information each of which can be particularly damaging for financial institutions. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

We maintain a system of internal controls to mitigate operational risks, including data processing system failures and errors and customer or employee fraud, as well as insurance coverage designed to protect us from material losses associated with these risks, including losses resulting from any associated business interruption. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could adversely affect our business, financial condition and results of operations.

 

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We depend on the accuracy and completeness of information provided to us by our borrowers and counterparties and any misrepresented or fraudulent information could adversely affect our business, results of operations and financial condition.

In deciding whether to approve loans or to enter into other transactions with borrowers and counterparties, we rely on information furnished to us by, or on behalf of, borrowers and counterparties, including financial statements, credit reports and other financial information. We also rely on representations of borrowers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. If any of this information is intentionally or negligently misrepresented or fraudulent and such misrepresentation or fraud is not detected prior to loan funding, the value of the loan may be significantly lower than expected and we may be subject to regulatory action. Whether a misrepresentation is made by the loan applicant, another third party, or one of our employees, we generally bear the risk of loss associated with the misrepresentation or fraud. Our controls and processes may not have detected, or may not detect all, misrepresented or fraudulent information in our loan originations or from our business clients. Any such misrepresented or fraudulent information could adversely affect our business, financial condition and results of operations.

We may be subject to environmental liabilities in connection with the real properties we own and the foreclosure on real estate assets securing our loan portfolio.

In the course of our business, we may purchase real estate in connection with our acquisition and expansion efforts, or we may foreclose on and take title to real estate or otherwise be deemed to be in control of property that serves as collateral on loans we make. As a result, we could be subject to environmental liabilities with respect to those properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.

The cost of removal or abatement may substantially exceed the value of the affected properties or the loans secured by those properties, we may not have adequate remedies against the prior owners or other responsible parties and we may not be able to resell the affected properties either before or after completion of any such removal or abatement procedures. If material environmental problems are discovered before foreclosure, we generally will not foreclose on the related collateral or will transfer ownership of the loan to a subsidiary formed for such purpose. It should be noted, however, that the transfer of the property or loans to a subsidiary may not protect us from environmental liability. Furthermore, despite these actions on our part, the value of the property as collateral will generally be substantially reduced or we may elect not to foreclose on the property and, as a result, we may suffer a loss upon collection of the loan. Any significant environmental liabilities could have a material adverse effect on our business, financial condition and results of operations.

We are subject to claims and litigation pertaining to intellectual property in addition to other litigation in the ordinary course of business.

Banking and other financial services companies, such as our Company, rely on technology companies to provide information technology products and services necessary to support their day-to-day operations. Technology companies frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of our vendors, or other individuals or companies, may from time to time claim to hold intellectual property sold to us by our vendors. Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions frequently seek injunctions and substantial damages.

 

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Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, we may have to engage in protracted litigation. Such litigation is often expensive, time-consuming, disruptive to our operations and distracting to management. If we are found to infringe one or more patents or other intellectual property rights, we may be required to pay substantial damages or royalties to a third party. In certain cases, we may consider entering into licensing agreements for disputed intellectual property, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase our operating expenses. If legal matters related to intellectual property claims were resolved against us or settled, we could be required to make payments in amounts that could have a material adverse effect on our business, financial condition and results of operations.

In addition to litigation relating to intellectual property, we are regularly involved in litigation matters in the ordinary course of business. While we believe that these litigation matters should not have a material adverse effect on our business, financial condition, results of operations or future prospects, we may be unable to successfully defend or resolve any current or future litigation matters, in which case those litigation matters could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to the Economy and Our Industry

Our business is concentrated in, and largely dependent upon, the continued growth and welfare of our primary markets of the Greater Houston market, Dallas-Fort Worth market, and Austin-San Antonio market, and adverse economic conditions in these markets could negatively impact our operations and customers.

Our business, financial condition and results of operations are affected by changes in the economic conditions of our primary markets of the Greater Houston market, Dallas-Fort Worth market, and Austin-San Antonio market. Our success depends to a significant extent upon the business activity, population, income levels, employment trends, deposits and real estate activity in our primary markets. Economic conditions within our primary markets, and the state of Texas in general, are influenced by, among other things, real estate prices and commodity prices, including the price of oil and gas specifically. Although our customers’ business and financial interests may extend well beyond our primary markets, adverse conditions that affect our primary markets could reduce our growth rate, affect the ability of our customers to repay their loans, affect the value of collateral underlying our loans, affect our ability to attract deposits and generally affect our business, financial condition, results of operations and future prospects. Due to our geographic concentration within our primary markets, we may be less able than other larger regional or national financial institutions to diversify our credit risks across multiple markets.

Our primary markets are susceptible to natural disasters and other catastrophes that could negatively impact the economies of our markets, our operations or our customers, any of which could have a material adverse effect on our business, financial condition and results of operations.

A significant portion of our business is generated from the Greater Houston market, which is susceptible to damage by hurricanes, such as Hurricane Harvey, which struck the Greater Houston market in 2017, and Hurricane Laura, which struck the Greater Houston market in 2020. We are also subject to tornadoes, floods, droughts and other natural disasters and adverse weather. In addition to natural disasters, man-made events, such as acts of terror and governmental response to acts of terror, malfunction of the electronic grid and other infrastructure breakdowns, could adversely affect economic conditions in our primary markets. These catastrophic events can disrupt our operations, cause widespread property damage, and severely depress the local economies in which we operate. If the economies in our primary markets experience an overall decline as a result of a catastrophic event, demand for loans and our other products and services could be reduced. In addition, the rates of delinquencies, foreclosures, bankruptcies and losses on loan portfolios may increase substantially after events such as hurricanes, as uninsured property losses or sustained job interruption or loss may materially impair the ability of borrowers to repay their loans. Moreover, the value of real estate or other collateral that

 

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secures the loans could be materially and adversely affected by a catastrophic event. A natural disaster or other catastrophic event could, therefore, result in decreased revenue and loan losses that have a material adverse effect on our business, financial condition and results of operations.

We could recognize losses on investment securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.

While we invest a significant majority of our total assets in loans and currently invest a small portion of our total assets in investment securities, we may in the future invest a larger portion of our assets in investment securities with the objective of providing a source of liquidity, providing an appropriate return on funds invested, managing interest rate risk, meeting pledging requirements and meeting regulatory capital requirements. Factors beyond our control can significantly and adversely influence the fair value of securities in our portfolio. For example, fixed-rate securities are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual borrowers with respect to the underlying securities, and instability in the credit markets. Any of the foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Although we have not recognized other-than-temporary impairment related to our investment portfolio as of June 30, 2021, changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, among other factors, may cause us to recognize realized and/or unrealized losses in future periods, which could have a material adverse effect on our business, financial condition and results of operations.

Market conditions and economic trends may adversely affect the banking industry and could adversely affect our business, financial condition and results of operations in the future.

Market conditions and economic trends nationally and locally, such as uncertain regulatory conditions, real estate and commodity prices, and changing interest rates could adversely impact our business, financial condition and results of operations. We have direct exposure to the real estate markets in Texas and thus are impacted by declines in real estate values. In addition, while we have limited direct exposure to the oil and gas industry, the economy of the state of Texas is influenced by and financial institutions may be negatively affected by, among other things, volatility in the real estate and oil and gas industries. Our markets are also susceptible to hurricanes and other natural disasters and adverse weather conditions.

Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our loan portfolio is made more complex by market and economic conditions. A national economic downturn or deterioration of conditions in our markets could adversely affect our borrowers and cause losses beyond those that are provided for in our allowance for loan losses and lead to the following consequences:

 

   

increases in loan delinquencies;

 

   

increases in nonperforming assets and foreclosures;

 

   

decreases in demand for our products and services, which could adversely affect our liquidity position; and

 

   

decreases in the value of the collateral securing our loans, especially real estate, which could reduce customers’ borrowing power and repayment ability.

 

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Risks Related to Cybersecurity, Third-Parties and Technology

We depend on our information technology and telecommunications systems of third parties, and any systems failures, interruptions or data breaches involving these systems could adversely affect our operations and financial condition.

Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems including with third-party servicers and financial intermediaries. We outsource many of our major systems. Specifically, we rely on third parties for certain services, including, but not limited to, core systems processing, website hosting, internet services, monitoring our network and other processing services. The failure of these systems, a cyber security breach involving any of our third-party service providers, or the termination or change in terms of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. Replacing vendors or addressing other issues with our third-party service providers could entail significant delay, expense and disruption of service.

As a result, if these third-party service providers experience difficulties, are subject to cyber security breaches, or terminate their services, and we are unable to replace them with other service providers, particularly on a timely basis, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected. Even if we are able to replace third-party service providers, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.

In addition, the Bank’s primary federal regulator, the Federal Reserve, has issued guidance outlining the expectations for third-party service provider oversight and monitoring by financial institutions. The federal banking agencies, including the Federal Reserve, have recently issued enforcement actions against financial institutions for failure in oversight of third-party providers and violations of federal banking law by such providers when performing services for financial institutions. Accordingly, our operations could be interrupted if any of our third-party service providers experience difficulty, are subject to cyber security breaches, terminate their services or fail to comply with banking regulations, which could adversely affect our business, financial condition and results of operations. In addition, our failure to adequately oversee the actions of our third-party service providers could result in regulatory actions against the Bank, which could adversely affect our business, financial condition and results of operations.

The occurrence of fraudulent activity, breaches of our information security, and cybersecurity attacks could adversely affect our ability to conduct our business, manage our exposure to risk or expand our businesses, result in the disclosure or misuse of confidential or proprietary information, increase our costs to maintain and update our operational and security systems and infrastructure, and adversely impact our results of operations, liquidity and financial condition, as well as cause legal or reputational harm.

As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us, our clients, or third parties with whom we interact and that may result in financial losses or increased costs to us or our clients, disclosure or misuse of confidential information belonging to us or personal or confidential information belonging to our clients, misappropriation of assets, litigation, or damage to our reputation. Our industry has seen increases in electronic fraudulent activity, hacking, security breaches, sophisticated social engineering and cyber-attacks within the financial services industry, including in the commercial banking sector, as cyber-criminals have been targeting commercial bank and brokerage accounts on an increasing basis.

Our business is highly dependent on the security and efficacy of our infrastructure, computer and data management systems, as well as those of third parties with whom we interact or on whom we rely. Our business

 

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relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in our computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition, to access our network, products and services, our customers and other third parties may use personal mobile devices or computing devices that are outside of our network environment and are subject to their own cybersecurity risks. All of these factors increase our risks related to cyber-threats and electronic disruptions.

In addition to well-known risks related to fraudulent activity, which take many forms, such as check “kiting” or fraud, wire fraud, and other dishonest acts, information security breaches and cybersecurity-related incidents have become a material risk in the financial services industry. These threats may include fraudulent or unauthorized access to data processing or data storage systems used by us or by our clients, electronic identity theft, “phishing”, account takeover, denial or degradation of service attacks, and malware or other cyber-attacks. These electronic viruses or malicious code are typically designed to, among other things:

 

   

obtain unauthorized access to confidential information belonging to us or our clients and customers;

 

   

manipulate or destroy data;

 

   

disrupt, sabotage or degrade service on a financial institution’s systems; and

 

   

steal money.

In recent periods, several governmental agencies and large corporations, including financial service organizations and retail companies, have suffered major data breaches, in some cases exposing not only their confidential and proprietary corporate information, but also sensitive financial and other personal information of their clients and their employees or other third-parties, and subjecting those agencies and corporations to potential fraudulent activity and their clients and other third-parties to identity theft and fraudulent activity in their credit card and banking accounts. Therefore, security breaches and cyber-attacks can cause significant increases in operating costs, including the costs of compensating clients and customers for any resulting losses they may incur and the costs and capital expenditures required to correct the deficiencies in and strengthen the security of data processing and storage systems.

Unfortunately, it is not always possible to anticipate, detect or recognize these threats to our systems, or to implement effective preventative measures against all breaches, whether those breaches are malicious or accidental. Cybersecurity risks for banking organizations have significantly increased in recent years and have been difficult to detect before they occur because of the following, among other reasons:

 

   

the proliferation of new technologies, and the use of the Internet and telecommunications technologies to conduct financial transactions;

 

   

these threats arise from numerous sources, not all of which are in our control, including among others human error, fraud or malice on the part of employees or third parties, accidental technological failure, electrical or telecommunication outages, failures of computer servers or other damage to our property or assets, natural disasters or severe weather conditions, health emergencies or pandemics, or outbreaks of hostilities or terrorist acts;

 

   

the techniques used in cyber-attacks change frequently and may not be recognized until launched or until well after the breach has occurred;

 

   

the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate espionage;

 

   

the vulnerability of systems to third parties seeking to gain access to such systems either directly or using equipment or security passwords belonging to employees, customers, third-party service providers or other users of our systems; and

 

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our frequent transmission of sensitive information to, and storage of such information by, third parties, including our vendors and regulators, and possible weaknesses that go undetected in our data systems notwithstanding the testing we conduct of those systems.

While we invest in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and we conduct periodic tests of our security systems and processes, we may not succeed in anticipating or adequately protecting against or preventing all security breaches and cyber-attacks from occurring. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks are becoming more sophisticated and are extremely difficult to prevent. Additionally, the existence of cyber-attacks or security breaches at third parties with access to our data, such as vendors, may not be disclosed to us in a timely manner. As cyber-threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents.

As is the case with non-electronic fraudulent activity, cyber-attacks or other information or security breaches, whether directed at us or third parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third parties with whom we do business. Although we have not experienced any material fraudulent activity, breaches of our information security or cybersecurity attacks, a successful penetration or circumvention of system security could cause us negative consequences, including loss of customers and business opportunities, disruption to our operations and business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our customers’ and/or third parties’ computers or systems, and could expose us to additional regulatory scrutiny and result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition.

We have a continuing need for technological change and we may not have the resources to effectively implement new technology or we may experience operational challenges when implementing new technology or technology needed to compete effectively with larger institutions may not be available to us on a cost effective basis.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, at least in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our products and service offerings. We may experience operational challenges as we implement these new technology enhancements or products, which could impair our ability to realize the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.

Many of our larger competitors have substantially greater resources to invest in technological improvements. Third parties upon which we rely for our technology needs may not be able to develop on a cost effective basis systems that will enable us to keep pace with such developments. As a result, they may be able to offer additional or superior products compared to those that we will be able to provide, which would put us at a competitive disadvantage. We may lose customers seeking new technology-driven products and services to the extent we are unable to provide such products and services. Accordingly, the ability to keep pace with technological change is important and the failure to do so could adversely affect our business, financial condition and results of operations.

 

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Risks Related to the Regulation of Our Industry

We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, could adversely affect us.

Banking is highly regulated under federal and state law. As such, we are subject to extensive regulation, supervision and legal requirements that govern almost all aspects of our operations. These laws and regulations are not intended to protect our shareholders. Rather, these laws and regulations are intended to protect customers, depositors, the Deposit Insurance Fund and the overall financial stability of the United States. These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which we can engage, limit the dividends or distributions that the Bank can pay to us, restrict the ability of institutions to guarantee our debt and impose certain specific accounting requirements on us that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than GAAP would require. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional operating costs. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, enforcement actions and fines and other penalties, any of which could adversely affect our results of operations, regulatory capital levels and the price of our securities. Further, any new laws, rules and regulations, such as the Dodd-Frank Act, could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition and results of operations.

The ongoing implementation of the Dodd-Frank Act could adversely affect our business, financial condition, and results of operations.

On July 21, 2010, the Dodd-Frank Act was signed into law, and the process of implementation is ongoing. The Dodd-Frank Act imposes significant regulatory and compliance changes on many industries, including ours. There remains significant uncertainty surrounding the manner in which the provisions of the Dodd-Frank Act will ultimately be implemented by the various regulatory agencies and the full extent of the impact of the requirements on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, require the development of new compliance infrastructure, impose upon us more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to comply with the new requirements or with any future changes in laws or regulations could adversely affect our business, financial condition and results of operations.

Banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations could adversely affect us.

As part of the bank regulatory process, the Texas Department of Savings and Mortgage Lending, or the TDSML, and the Federal Reserve periodically conduct examinations of our business, including compliance with laws and regulations. If, as a result of an examination, one of these banking agencies were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, asset sensitivity, risk management or other aspects of any of our operations have become unsatisfactory, or that our Company, the Bank or their respective management were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital levels, to restrict our growth, to assess civil monetary penalties against us, the Bank or their respective officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Bank’s deposit insurance. If we become subject to such regulatory actions, our business, financial condition, results of operations and reputation could be adversely affected.

 

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As a result of the Dodd-Frank Act and associated rulemaking, we have become subject to more stringent capital requirements.

On July 2, 2013, the Federal Reserve, and on July 9, 2013, the Federal Deposit Insurance Corporation, or the FDIC, and the Office of the Comptroller of the Currency, or the OCC, adopted a final rule that implements the Basel III changes to the international regulatory capital framework and revises the U.S. risk-based and leverage capital requirements for U.S. banking organizations to strengthen identified areas of weakness in capital rules and to address relevant provisions of the Dodd-Frank Act. The final rule established a stricter regulatory capital framework that requires banking organizations to hold more and higher-quality capital to act as a financial cushion to absorb losses and help banking organizations better withstand periods of financial stress. The final rule increased capital ratios for all banking organizations and introduced a “capital conservation buffer” which is in addition to each capital ratio. If a banking organization fails to exceed its capital conservation buffer, it may be restricted in its ability to pay dividends and discretionary bonus payments to its executive officers. The final rule assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also required unrealized gains and losses on certain “available for sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. We exercised this opt-out right in our March 31, 2015 quarterly financial filing. As of June 30, 2021, we met all of these new requirements, including the full capital conservation buffer.

Although we currently cannot predict the specific impact and long-term effects that the Dodd-Frank Act, Basel III and associated rulemaking will have on our Company and the banking industry more generally, the Company will be required to maintain higher regulatory capital levels which could impact our operations, net income and ability to grow. Furthermore, the Company’s failure to comply with current or future minimum capital requirements could result in our regulators taking formal or informal actions against us which could restrict our future growth or operations.

Many of our new activities and expansion plans require regulatory approvals, and failure to obtain them may restrict our growth.

We intend to complement and expand our business by pursuing strategic acquisitions of financial institutions and other complementary businesses, and expansion of the Bank’s banking location network, or de novo branching. Generally, we must receive federal and state regulatory approvals before we can acquire a depository institution or related business insured by the FDIC, or before we open a de novo branch. In determining whether to approve a proposed acquisition, banking regulators will consider, among other factors, the effect of the acquisition on competition, our financial condition, our future prospects, and the impact of the proposal on U.S. financial stability. The regulators also review current and projected capital ratios and levels, the competence, experience and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the communities to be served (including the acquiring institution’s record of compliance under the Community Reinvestment Act, or CRA) and the effectiveness of the acquiring institution in combating money laundering activities. Such regulatory approvals may not be granted on terms that are acceptable to us, or at all. We may also be required to sell banking locations as a condition to receiving regulatory approval, which condition may not be acceptable to us or, if acceptable to us, may reduce the benefit of any acquisition.

We are subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our operations and financial condition.

Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties

 

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with whom we contract to provide data services. We also maintain important internal company data such as personally identifiable information about our employees and information relating to our operations. We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs.

Furthermore, we may not be able to ensure that all of our clients, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under personal information laws and regulations. Concerns regarding the effectiveness of our measures to safeguard personal information, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers for our products and services and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our operations and financial condition.

Financial institutions, such as the Bank, face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The Financial Crimes Enforcement Network established by the U.S. Department of the Treasury, or the Treasury Department, to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and the Internal Revenue Service. There is also increased scrutiny of compliance with the sanctions programs and rules administered and enforced by the Treasury Department’s Office of Foreign Assets Control, or OFAC.

In order to comply with regulations, guidelines and examination procedures in this area, we have dedicated significant resources to our anti-money laundering program. If our policies, procedures and systems are deemed deficient, we could be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the inability to obtain regulatory approvals to proceed with certain aspects of our business plans, including acquisitions and de novo branching.

 

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We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Consumer Financial Protection Bureau, or CFPB, the U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. The CFPB was created under the Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rulemaking authority to administer and carry out the purposes and objectives of federal consumer financial laws with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider, identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. In recent years there has been an increase in the frequency of enforcement actions brought by federal banking regulators, such as the CFPB, dealing with consumer compliance matters such as indirect auto lending, fair lending, account fees, loan servicing and other products and services provided to customers. The ongoing broad rulemaking and enforcement powers of the CFPB have the potential to have a significant impact on the operations of financial institutions offering consumer financial products or services. The CFPB has indicated that it may propose new rules on overdrafts and other consumer financial products or services, which could have a material adverse effect on our business, financial condition and results of operations if any such rules limit our ability to provide such financial products or services.

A successful regulatory challenge to an institution’s performance under the CRA, fair lending laws or regulations, or consumer lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.

Failure to comply with economic and trade sanctions or with applicable anti-corruption laws could have a material adverse effect on our business, financial condition and results of operations.

OFAC administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. We are responsible for, among other things, blocking accounts of, and transactions with, such persons and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Through our Company and the Bank, and our agents and employees, we are subject to the Foreign Corrupt Practices Act, or the FCPA, which prohibits offering, promising, giving, or authorizing others to give anything of value, either directly or indirectly, to a non-U.S. government official in order to influence official action or otherwise gain an unfair business advantage. The Company is also subject to applicable anti-corruption laws in the jurisdictions in which it may operate. The Company has implemented policies, procedures, and internal controls that are designed to comply with economic and trade sanctions or with applicable anti-corruption laws, including the FCPA. Failure to comply with economic and trade sanctions or with applicable anti-corruption laws, including the FCPA, could have serious legal and reputational consequences for us.

Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.

Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our policy not to make predatory loans, but these laws create the potential for liability

 

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with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.

The expanding body of federal, state and local regulations and/or the licensing of loan servicing, collections or other aspects of our business and our sales of loans to third parties may increase the cost of compliance and the risks of noncompliance and subject us to litigation.

We service most of our own loans, and loan servicing is subject to extensive regulation by federal, state and local governmental authorities, as well as various laws and judicial and administrative decisions imposing requirements and restrictions on those activities. The volume of new or modified laws and regulations has increased in recent years and, in addition, some individual municipalities have begun to enact laws that restrict loan servicing activities, including delaying or temporarily preventing foreclosures or forcing the modification of certain mortgages. If regulators impose new or more restrictive requirements, we may incur additional significant costs to comply with such requirements, which may further adversely affect us. In addition, were we to be subject to regulatory investigation or regulatory action regarding our loan modification and foreclosure practices, our financial condition and results of operations could be adversely affected.

In addition, we have sold loans to third parties. In connection with these sales, we make or have made various representations and warranties, breaches of which may result in a requirement that we repurchase the loans, or otherwise make whole or provide other remedies to counterparties. These aspects of our business or our failure to comply with applicable laws and regulations could possibly lead to: civil and criminal liability; loss of licensure; damage to our reputation in the industry; fines and penalties and litigation, including class action lawsuits; and administrative enforcement actions. Any of these outcomes could materially and adversely affect us.

The Federal Reserve may require us to commit capital resources to support the Bank.

As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Dodd-Frank Act codified the Federal Reserve’s policy on serving as a source of financial strength. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide and therefore may be required to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing by us in order to make the required capital injection becomes more difficult and expensive and will adversely impact our financial condition, results of operations, or future prospects.

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the U.S. money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of securities by the Federal Reserve, adjustments of both the discount rate and the federal funds rate and changes in reserve requirements against bank deposits. These instruments are used

 

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in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Although we cannot determine the effects of such policies on us at this time, such policies could adversely affect our business, financial condition and results of operations.

Risks Related to an Investment in Our Common Stock

There is currently no regular market for our common stock. An active, liquid market for our common stock may not develop or be sustained upon completion of this offering, which may impair your ability to sell your shares.

Our common stock is not currently traded on an established public trading market. As a result, there is no regular market for our common stock. We have applied to list our common stock on the Nasdaq Global Select Market, but an active, liquid trading market for our common stock may not develop or be sustained following this offering. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace and independent decisions of willing buyers and sellers of our common stock, over which we have no control. Without an active, liquid trading market for our common stock, shareholders may not be able to sell their shares at the volume, prices and times desired. Moreover, the lack of an established market could materially and adversely affect the value of our common stock.

The market price of our common stock may be subject to substantial fluctuations, which may make it difficult for you to sell your shares at the volume, prices and times desired.

The market price of our common stock may be highly volatile, which may make it difficult for you to resell your shares at the volume, prices and times desired. There are many factors that may affect the market price and trading volume of our common stock, including, without limitation:

 

   

actual or anticipated fluctuations in our operating results, financial condition or asset quality;

 

   

changes in economic or business conditions;

 

   

the effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve;

 

   

publication of research reports about us, our competitors, or the financial services industry generally, or changes in, or failure to meet, securities analysts’ estimates of our financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage;

 

   

operating and stock price performance of companies that investors deemed comparable to us;

 

   

additional or anticipated sales of our common stock or other securities by us or our existing shareholders;

 

   

additions or departures of key personnel;

 

   

perceptions in the marketplace regarding our competitors or us, including the perception that investment in Texas is unattractive or less attractive during periods of low oil prices;

 

   

significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us;

 

   

other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and

 

   

other news, announcements or disclosures (whether by us or others) related to us, our competitors, our primary markets or the financial services industry.

 

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The stock market and, in particular, the market for financial institution stocks have experienced substantial fluctuations in recent years, which in many cases have been unrelated to the operating performance and prospects of particular companies. In addition, significant fluctuations in the trading volume in our common stock may cause significant price variations to occur. Increased market volatility may materially and adversely affect the market price of our common stock, which could make it difficult to sell your shares at the volume, prices and times desired.

The market price of our common stock could decline significantly due to actual or anticipated issuances or sales of our common stock in the future.

Actual or anticipated issuances or sales of substantial amounts of our common stock following this offering could cause the market price of our common stock to decline significantly and make it more difficult for us to sell equity or equity-related securities in the future at a time and on terms that we deem appropriate. The issuance of any shares of our common stock in the future also would, and equity-related securities could, dilute the percentage ownership interest held by shareholders prior to such issuance. Our first amended and restated certificate of formation authorizes us to issue up to 50,000,000 shares of our common stock,                  of which will be outstanding following the completion of this offering (or                 shares if the underwriters exercise in full their over-allotment option). All                  of the shares of common stock sold in this offering (or                 shares if the underwriters exercise in full their option to purchase additional shares of common stock) will be freely tradable, except that any shares purchased by our “affiliates” (as that term is defined in Rule 144 under the Securities Act) may be resold only in compliance with the limitations described under “Shares Eligible for Future Sale.” The remaining                  outstanding shares of our common stock will be deemed to be “restricted securities” as that term is defined in Rule 144, and may be resold in the United States only if they are registered for resale under the Securities Act or an exemption, such as Rule 144, is available. We also intend to file a registration statement on Form S-8 under the Securities Act to register an aggregate of approximately                  shares of common stock issued or reserved for issuance under our equity incentive plans. We may issue all of these shares without any action or approval by our shareholders, and these shares, once issued (including upon exercise of outstanding options), will be available for sale into the public market, subject to the restrictions described above, if applicable, for affiliate holders.

Further, in connection with this offering, we, our directors, our executive officers and certain shareholders have entered into lock-up agreements that restrict the sale of their holdings of our common stock for a period of 180 days from the date of the underwriting agreement, subject to an extension in certain circumstances. The underwriters, in their discretion, may release any of the shares of our common stock subject to these lock-up agreements at any time. See “Underwriting” for a description of these lock-up provisions. In addition, after this offering, approximately                  shares of our common stock will not be subject to lock-up. Further, we issued 2,937,876 shares of our common stock in the private placement completed on August 27, 2021 that was exempt from registration under the Securities Act. Pursuant to the requirements of those exemptions from registration, those shares are subject to trading restrictions. In general, such trading restrictions will expire, and such shares may be resold, upon the later of (a) 90 days after we have been subject to public company reporting requirements of Section 13 or Section 15(d) of the Exchange Act or (b) six months after the date that such shares were acquired. See “Shares Eligible for Future Sale.” The resale of such shares could cause the market price of our stock to drop significantly, and concerns that those sales may occur could cause the trading price of our common stock to decrease or to be lower than it should be.

In addition, we may issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments and pursuant to compensation and incentive plans. If any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our common stock or other securities in connection with any such acquisitions and investments.

 

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We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares of our common stock issued in connection with an acquisition or under a compensation or incentive plan), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock and could impair our ability to raise capital through future sales of our securities.

The obligations associated with being a public company will require significant resources and management attention, which will increase our costs of operations and may divert focus from our business operations.

As a public company, we will face increased legal, accounting, administrative and other costs and expenses that we have not incurred as a private company, particularly after we no longer qualify as an emerging growth company. After the completion of this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which requires that we file annual, quarterly and current reports with respect to our business and financial condition and proxy and other information statements, and the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act, the PCAOB and The Nasdaq Stock Market LLC, or Nasdaq, each of which imposes additional reporting and other obligations on public companies. As a public company, compliance with these reporting requirements and other SEC and Nasdaq rules will make certain operating activities more time-consuming, and we will also incur significant new legal, accounting, insurance and other expenses. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our operating strategy, which could prevent us from successfully implementing our strategic initiatives and improving our results of operations. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, we cannot predict or estimate the amount of additional costs we may incur in order to comply with these requirements. We anticipate that these costs will materially increase our general and administrative expenses and such increases will reduce our profitability.

Investors in this offering will experience immediate and substantial dilution.

The initial public offering price is expected to be substantially higher than the tangible book value per share of our common stock immediately following this offering. Therefore, if you purchase shares in this offering, you will experience immediate and substantial dilution in tangible book value per share in relation to the price that you paid for your shares. We expect the dilution as a result of this offering to be $                 per share, based on an assumed initial offering price of $                 per share (the midpoint of the range set forth on the cover page of this prospectus) and our pro forma tangible book value of $                 per share as of June 30, 2021. Accordingly, if we were liquidated at our pro forma tangible book value, you would not receive the full amount of your investment. See “Dilution.”

Our management and board of directors have significant control over our business.

As of September 30, 2021, our directors and executive officers beneficially owned an aggregate of 940,808 shares, or approximately 9.8%, of our common stock. Consequently, our management and board of directors may be able to significantly affect our affairs and policies, including the outcome of the election of directors and the potential outcome of other matters submitted to a vote of our shareholders, such as mergers, the sale of substantially all of our assets and other extraordinary corporate matters. This influence may also have the effect of delaying or preventing changes of control or changes in management, or limiting the ability of our other shareholders to approve transactions that they may deem to be in the best interests of our Company. The interests of these insiders could conflict with the interests of our other shareholders, including you.

We have broad discretion in the use of the net proceeds to us from this offering, and our use of these proceeds may not yield a favorable return on your investment.

We intend to use the net proceeds from this offering to support our continued growth, including organic growth and potential future acquisitions, and for general corporate purposes. We have not specifically allocated

 

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the amount of net proceeds to us that will be used for these purposes and our management will have broad discretion over how these proceeds are used and could spend these proceeds in ways with which you may not agree. In addition, we may not use the net proceeds to us from this offering effectively or in a manner that increases our market value or enhances our profitability. We have not established a timetable for the effective deployment of the net proceeds to us, and we cannot predict how long it will take to deploy these proceeds. Investing the net proceeds to us in securities until we are able to deploy these proceeds will provide lower yields than we generally earn on loans, which may have an adverse effect on our profitability. Although we may, from time to time in the ordinary course of business, evaluate potential acquisition opportunities that we believe provide attractive risk-adjusted returns, we do not have any definitive agreements in place to make any such acquisitions at this time.

We may incur additional debt or issue new debt securities, which would be senior to our common stock and may cause the market price of our common stock to decline.

At June 30, 2021, we had $83.5 million of debt that ranked senior to our common stock. In the future, we may increase our capital resources by incurring additional borrowings or making offerings of debt or equity securities, which may include senior or additional subordinated notes, classes of preferred shares or common shares. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Preferred shares and debt, if issued, have a preference on liquidating distributions or a preference on dividend or interest payments that could limit our ability to make a distribution to the holders of our common stock. Future issuances and sales of parity preferred stock, or the perception that such issuances and sales could occur, may also cause prevailing market prices for the series of preferred stock and our common stock to decline and may adversely affect our ability to raise additional capital in the financial markets at times and prices favorable to us. Further issuances of our common stock could be dilutive to holders of our common stock.

We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.

Our first amended and restated certificate of formation authorizes us to issue up to 1,000,000 shares of one or more series of preferred stock. Our board of directors has the authority to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our shareholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discourage bids for our common stock at a premium over the market price, and materially adversely affect the market price and the voting and other rights of the holders of our common stock.

We are dependent upon the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted.

Our primary tangible asset is the stock of the Bank. As such, we depend upon the Bank for cash distributions (through dividends on the Bank’s common stock) that we use to pay our operating expenses, satisfy our obligations and, if determined by our board of directors, to pay dividends on our common stock. Federal statutes, regulations and policies restrict the Bank’s ability to make cash distributions to us. These statutes and regulations require, among other things, that the Bank maintain certain levels of capital in order to pay a dividend. Further, bank regulatory agencies have the ability to restrict the Bank’s payment of dividends by supervisory action. If the Bank is unable to pay dividends to us, we will not be able to satisfy our obligations or pay dividends on our common stock.

 

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Our corporate organizational documents and provisions of federal and state law to which we are subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition that you may favor or an attempted replacement of our incumbent board of directors or management.

Our first amended and restated certificate of formation and our first amended and restated bylaws may have an anti-takeover effect and may delay, discourage or prevent an attempted acquisition or change of control or a replacement of our board of directors or management. Our governing documents include provisions that:

 

   

empower our board of directors, without shareholder approval, to issue our preferred stock, the terms of which, including voting power, are to be set by our board of directors;

 

   

include a classified board of directors, with directors of each class serving a three-year term;

 

   

eliminate cumulative voting in elections of directors;

 

   

provide our board of directors with the exclusive right to alter, amend or repeal our first amended and restated bylaws or to adopt new bylaws;

 

   

require the request of holders of at least 50% of the issued and outstanding shares of our capital stock entitled to vote at a meeting to call a special shareholders’ meeting;

 

   

require any shareholder derivative suit or shareholder claim against an officer or director of breach of fiduciary duty or violation of the Texas Business Organizations Code, or the TBOC, certificate of formation, or bylaws to be brought in Harris County in the State of Texas, subject to certain exceptions as described below;

 

   

require shareholders that wish to bring business before annual or special meetings of shareholders, or to nominate candidates for election as directors at annual or special meetings of shareholders, to provide timely advanced notice of their intent in writing; and

 

   

enable our board of directors to increase, at any annual, regular or special meetings of directors, the number of persons serving as directors and to fill up to two vacancies created as a result of the increase by a majority vote of the directors between two successive annual shareholder meetings.

In addition, certain provisions of Texas law, including a provision which restricts certain business combinations between a Texas corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control. Furthermore, banking laws impose notice, approval, and ongoing regulatory requirements on any shareholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or its holding company. These laws include the Bank Holding Company Act of 1956, as amended, and the Change in Bank Control Act. These laws could delay or prevent an acquisition.

Our first amended and restated bylaws include an exclusive forum provision, which could limit a shareholder’s ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our first amended and restated bylaws require that, unless we consent in writing to the selection of an alternative forum, any state court located in Harris County in the state of Texas, or a Harris County State Court, shall be the sole and exclusive forum for any shareholder (including a beneficial owner) to bring (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Company to the Company or its shareholders, (iii) any action asserting a claim against the Company, its directors, officers or employees arising pursuant to any provision of the TBOC, our first amended and restated certificate of formation or our first amended and restated bylaws, or (iv) any action asserting a claim against the Company, its directors, officers or employees governed by the internal affairs doctrine, and, if brought outside of Texas, the shareholder bringing the suit will be deemed to have consented to service of process on such shareholder’s counsel, except for, as to

 

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each of (i) through (iv) above, any action (A) as to which the Harris County State Court determines that there is an indispensable party not subject to the jurisdiction of the Harris County State Court (and the indispensable party does not consent to the personal jurisdiction of the Harris County State Court within ten days following such determination), (B) which is vested in the exclusive jurisdiction of a court or forum other than the Harris County State Court, (C) for which the Harris County State Court does not have subject matter jurisdiction, or (D) arising under the Securities Act as to which the Harris County State Court and the United States District Court for the Southern District of Texas, Houston Division shall have concurrent jurisdiction.

Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder, and the exclusive forum provision of our first amended and restated bylaws will not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce such an exclusive forum provision as written in connection with claims arising under the Securities Act, and our shareholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring any interest in any security of the Company shall be deemed to have notice of and consented to the exclusive forum provision of our first amended and restated bylaws.

The exclusive forum provision in our first amended and restated bylaws may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us. In addition, shareholders who do bring a claim in a Harris County State Court could face additional litigation costs in pursuing any such claim, particularly if they do not reside in or near Harris County, Texas. Furthermore, if a court were to find the exclusive forum provision contained in our first amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, operating results and financial condition.

The return on your investment in our common stock is uncertain.

An investor in our common stock may not realize a substantial return on his or her investment, or may not realize any return at all. Further, as a result of the uncertainty and risks associated with our operations, many of which are described in this “Risk Factors” section, it is possible that an investor could lose his or her entire investment.

An investment in our common stock is not an insured deposit and is subject to risk of loss.

Any shares of our common stock you purchase in this offering will not be savings accounts, deposits or other obligations of any of our bank or nonbank subsidiaries and will not be insured or guaranteed by the FDIC or any other government agency. Your investment will be subject to investment risk, and you must be capable of affording the loss of your entire investment.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

 

   

the impact of COVID-19 on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitation, the CARES Act), and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

 

   

geographic concentration in the Greater Houston market, Dallas-Fort Worth market, and Austin-San Antonio market;

 

   

interest rate risk and fluctuations in interest rates;

 

   

our ability to maintain our largest deposit relationships;

 

   

our ability to grow or maintain our deposit base;

 

   

our ability to implement our expansion strategy;

 

   

changes in key management personnel;

 

   

credit risk associated with our business;

 

   

the adequacy of our allowance for loan losses;

 

   

the amount of nonperforming and classified assets that we hold;

 

   

market conditions and economic trends generally and in the banking industry;

 

   

our borrowers’ ability to repay loans;

 

   

changes in value of the collateral securing our loans;

 

   

credit risks associated with our real estate and construction lending;

 

   

changes in the economy affecting real estate values and liquidity;

 

   

the accuracy of the valuation techniques we use in evaluating collateral;

 

   

systems failures, fraudulent activity, interruptions or data breaches involving our information technology and communications systems of third parties;

 

   

the risk of fraud related to our asset-based lending and commerical finance products;

 

   

our ability to raise additional capital in the future;

 

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competition from financial services companies and other companies that offer banking services;

 

   

natural disasters and other catastrophes;

 

   

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

 

   

monetary policies and regulations of the Federal Reserve;

 

   

the development of an active, liquid market for our common stock;

 

   

fluctuations in the market price of our common stock;

 

   

additional debt or future issuances of new debt securities or preferred stock; and

 

   

other factors that are discussed in the section entitled “Risk Factors,” beginning on page 27.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this prospectus. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

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USE OF PROCEEDS

Assuming an initial public offering price of $                 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, we estimate that the net proceeds to us from the sale of our common stock in this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $                 million, or approximately $                 million if the underwriters exercise their option in full to purchase additional shares from us.

Each $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by approximately $                 million, or approximately $                 million if the underwriters exercise their option in full to purchase additional shares from us in each case, assuming the number of shares set forth on the cover page of this prospectus remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering to support our organic growth and for general corporate purposes, including maintenance of our required regulatory capital and potential future acquisition opportunities. From time to time, we evaluate and conduct due diligence with respect to potential acquisitions. We do not have any definitive agreements in place to make any such acquisitions at this time. Our management will retain broad discretion to allocate the net proceeds of this offering and we may elect to contribute a portion of the net proceeds to the Bank as regulatory capital. The precise amounts and timing of our use of the proceeds will depend upon market conditions and other factors.

 

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DIVIDEND POLICY

We have not declared or paid any dividends on our common stock and we do not currently anticipate paying any cash dividends on our common stock in the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be retained to support our operations and finance the growth and development of our business. Any future determination to pay dividends on our common stock will be made by our board of directors and will depend upon our results of operations, financial condition, capital requirements, general economic conditions, regulatory and contractual restrictions, our business strategy, our ability to service any equity or debt obligations senior to our common stock and other factors that our board of directors deems relevant. We are not obligated to pay dividends on our common stock and are subject to restrictions on paying dividends on our common stock.

As a bank holding company, our ability to pay dividends is affected by the policies and enforcement powers of the Federal Reserve. See “Supervision and Regulation—The Company—Dividend Payments, Stock Redemptions and Repurchases.” In addition, because we are a holding company, we are dependent upon the payment of dividends by the Bank to us as our principal source of funds to pay dividends in the future, if any, and to make other payments. The Bank is also subject to various legal, regulatory and other restrictions on its ability to pay dividends and make other distributions and payments to us. See “Supervision and Regulation—The Bank—Dividend Payments.” The present and future dividend policy of the Bank is subject to the discretion of the board of directors. The Bank is not obligated to pay us dividends.

As a Texas corporation, we are subject to certain restrictions on distributions under the TBOC. Generally, a Texas corporation may not make a distribution to its shareholders if, after giving it effect, the corporation would not be able to pay its debts as they become due in the usual course of business, or the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed if the corporation were to be dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. In addition, if required payments on our outstanding debt obligations are not made or suspended, we may be prohibited from paying dividends on our common stock. We are also subject to certain restrictions on our right to pay dividends to our shareholders in the event we default under the terms of our senior debt due September 10, 2022.

 

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CAPITALIZATION

The following table sets forth our capitalization, including regulatory capital ratios, on a consolidated basis, as of June 30, 2021 on:

 

   

an actual basis;

 

   

a pro forma basis, after giving effect to (i) the termination of the repurchase liability under our ESOP; (ii) the issuance of 2,710,569 shares of our common stock between July 1, 2021 and August 27, 2021 in a private placement, for aggregate proceeds of approximately $65.1 million (does not include 227,307 shares issued and sold during the six months ended June 30, 2021 in the private placement for aggregate proceeds of approximately $5.4 million, which are included in our capitalization on an actual basis set forth below); and (iii) the use of a portion of the net proceeds from such private placement to repay $32.5 million of outstanding indebtedness, consisting of (a) $19.5 million under our senior debt due September 10, 2022 and (b) $13.0 million under our subordinated debt due July 29, 2022 and subordinated debt due September 27, 2022; and

 

   

a pro forma as adjusted basis after giving effect to (1) the pro forma adjustments set forth above; and (2) the net proceeds from the sale by us of shares of common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares) at the initial public offering price of $                per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and estimated offering expenses payable by us.

This table should be read in conjunction with, and is qualified in its entirety by reference to, “Use of Proceeds,” “Selected Historical Consolidated Financial Data,” “Description of Capital Stock,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and the related notes included elsewhere in this prospectus.

 

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     As of June 30, 2021  

(Dollars in thousands, except share and per share information)

   Actual     Pro Forma     Pro Forma As
Adjusted(5)
 

Cash and Cash Equivalents:

   $ 353,772     $ 386,326     $  
  

 

 

   

 

 

   

 

 

 

Long-term borrowings:

      

Note payable—Senior debt due September 10, 2022

     20,500       1,000    

Note payable—Subordinated debt due July 29, 2022

     11,000       —      

Note payable—Subordinated debt due September 27, 2022

     2,000       —      

Commitments and contingencies:

      

ESOP-owned shares

     1,876       —      

Shareholders’ Equity:

      

Preferred stock, par value $1.00 per share; 1,000,000 authorized; no shares issued or outstanding (actual); no shares issued or outstanding (pro forma); and no shares issued or outstanding (pro forma as adjusted)

     —         —      

Common stock, par value $1.00 per share; 50,000,000 authorized; 6,647,109 issued and 6,573,684 outstanding (actual); 9,357,678 issued and 9,284,253 outstanding (pro forma); and             shares issued and             shares outstanding (pro forma as adjusted)

     6,647       9,358    

Additional paid-in capital

     97,821       160,164    

Retained earnings

     33,290       33,290    

Accumulated other comprehensive income

     1,042       1,042    

Treasury stock (73,425 shares)

     (979     (979  
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity, including ESOP-owned shares

     137,821       202,875    
  

 

 

   

 

 

   

 

 

 

Less: ESOP owned shares

     1,876       —      
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity, net of ESOP-owned shares

     135,945       202,875    
  

 

 

   

 

 

   

 

 

 

Total Capitalization

   $ 171,321     $ 203,875     $                
  

 

 

   

 

 

   

 

 

 

Capital Ratios(1):

      

Company:

      

Total shareholders’ equity to total assets

     6.85     9.92  

Tangible common equity to tangible assets(2)

     5.94     9.05  

Bank:

      

Tier 1 leverage ratio(3)

     9.17     11.08  

Tier 1 common capital ratio(4)

     11.24     13.80  

Tier 1 risk based capital ratio(4)

     11.24     13.80  

Total risk based capital ratio(4)

     12.32     14.88  

 

(1)

Capital ratios are calculated in accordance with regulatory guidance and include ESOP-owned shares in common equity.

(2)

Tangible common equity to tangible assets is a non-GAAP financial measure. We calculate tangible common equity to tangible assets as tangible common equity divided by total assets less goodwill and other intangible assets, net of accumulated amortization. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “Non-GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

(3)

Pro forma average assets are calculated as the total average assets for the period plus the estimated net proceeds for the private placement, less the amount used to repay the long-term borrowings described above. Pro forma as adjusted average assets are calculated as the pro forma average assets plus the estimated net proceeds of this offering.

(4)

Assumes the net proceeds of this offering are invested in 20.0% risk-weighted assets.

(5)

Excludes 45,750 shares of restricted stock to be granted to our directors and executive officers in connection with the completion of our initial public offering. The shares of restricted stock awarded to our executive officers will vest in equal increments on an annual basis over a three-year period beginning on the first anniversary of the effective date of the registration statement of which this prospectus forms a part. The shares of restricted stock awarded to our directors, other than Mr. Caraway, will vest in equal increments on an annual basis over a two-year period beginning on the first anniversary of the effective date of the registration statement of which this prospectus forms a part.

 

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Each $1.00 increase or (decrease) in the assumed initial public offering price of $                 per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase or (decrease), respectively, the amount of cash and cash equivalents, total shareholders’ equity and total capitalization by approximately $                million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and payment of estimated offering expenses payable by us.

 

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DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent that the initial public offering price per share of our common stock exceeds the tangible book value per share of our common stock immediately following this offering. Tangible book value per share is equal to our total shareholders’ equity, including ESOP-owned shares, less goodwill and other intangible assets, net of accumulated amortization at the end of the relevant period, divided by the outstanding number of shares of our common stock at the end of the relevant period. At June 30, 2021, the tangible book value of our common stock, including ESOP-owned shares, was $118.4 million, or $18.01 per share.

After giving effect to (i) our sale of                  shares of common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares) at an assumed initial public offering price of $                 per share, which is the midpoint of the price range on the cover page of this prospectus, after deducting underwriting discounts and estimated offering expenses payable by us, (ii) the termination of the repurchase liability under our ESOP, (iii) the issuance of 2,710,569 shares of our common stock between July 1, 2021 and August 27, 2021 in a private placement, for aggregate proceeds of approximately $65.1 million (does not include 227,307 shares issued and sold during the six months ended June 30, 2021 in the private placement for aggregate proceeds of approximately $5.4 million, as such shares are reflected in the June 30, 2021 financial statements), and (iv) the use of a portion of the net proceeds from such private placement to repay $32.5 million of outstanding indebtedness, the pro forma tangible book value of our common stock at June 30, 2021 would have been approximately $                 million, or $                 per share. Therefore, this offering will result in an immediate increase of $                 in the tangible book value per share of our common stock of existing shareholders and an immediate dilution of $                in the tangible book value per share of our common stock to investors purchasing shares in this offering, or approximately                 % of the initial public offering price of $                per share.

The following table illustrates the calculation of the amount of dilution per share that a purchaser of our common stock in this offering will incur given the assumptions discussed above:

 

Assumed initial public offering price per share

      $                

Historical tangible book value per share as of June 30, 2021

   $ 18.01     

Pro forma increase in tangible book value per share as of June 30, 2021 after giving effect to transactions described above

   $ 1.75     
  

 

 

    

Pro forma tangible book value per share as of June 30, 2021,

   $ 19.76     

Increase in tangible book value per share of common stock attributable to new investors purchasing shares in this offering

   $                   
  

 

 

    

Pro forma as adjusted tangible book value per share upon completion of this offering and after giving effect to transactions described above

      $                

Dilution per share to new investors in this offering

      $                
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $                 per share, which is the midpoint of the price range on the cover page of this prospectus, would increase (decrease), the tangible book value of our common stock by $                million, or $                 per share, and the dilution to new investors would increase to $                 per share, assuming no change to the number of shares offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us.

If the underwriters exercise in full their option to purchase additional shares, the pro forma tangible book value after giving effect to this offering would be $                 per share. This represents an increase in tangible

 

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book value of $                 per share to existing shareholders and dilution of $                 per share to new investors.

The following table summarizes, as of September 30, 2021, the total consideration paid to us and the average price per share paid by existing shareholders and investors purchasing common stock in this offering. This information is presented on a pro forma basis after giving effect to the sale of                  shares of common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares) at the initial public offering price of $                 per share, before deducting underwriting discounts and estimated offering expenses payable by us.

 

     Shares
Purchased/Issued
    Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent  

Existing shareholders as of September 30, 2021

     9,313,929        %     $ 169,133,320        %     $ 18.16  

New investors in this offering

            
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100.0        100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

In addition, if the underwriters’ option to purchase additional shares is exercised in full, the number of shares of common stock held by existing shareholders will be further reduced to     % of the total number of shares of common stock to be outstanding upon the completion of this offering, and the number of shares of common stock held by investors participating in this offering will be further increased to                 shares, or     % of the total number of shares of common stock to be outstanding upon the completion of this offering.

The number of shares of our common stock to be outstanding after this offering is based on 9,313,929 shares of common stock outstanding as of September 30, 2021 and excludes 1,110,174 shares issuable upon the exercise of outstanding options under our 2013 Plan, 2017 Plan and 2019 Plan, as of September 30, 2021, 4,285 shares issuable upon the exercise of outstanding warrants, as of September 30, 2021, 397,150 shares of common stock reserved for future awards under the 2019 Plan, as of September 30, 2021, and 45,750 shares of restricted stock to be granted to our directors and executive officers in connection with the completion of our initial public offering. To the extent that the outstanding but unexercised options under our equity compensation plans or outstanding warrants are exercised or other equity awards are issued under our equity compensation plans, investors participating in this offering will experience further dilution. We may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent we issue additional shares of common stock or other equity or convertible debt securities in the future, there will be further dilution to investors participating in this offering.

 

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PRICE RANGE OF OUR COMMON STOCK

Prior to this offering, our common stock has not been traded on an established public trading market and quotations for our common stock were not reported on any market. As a result, there has been no regular market for our common stock. Although our shares may have been sporadically traded in private transactions, the prices at which such transactions occurred may not necessarily reflect the price that would be paid for our common stock in an active market. As of June 30, 2021, there were 658 holders of record of our common stock.

We anticipate that this offering and the listing of our common stock on the Nasdaq Global Select Market will result in a more active trading market for our common stock. However, we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. See “Underwriting” for more information regarding our arrangements with the underwriters and the factors considered in setting the initial public offering price.

 

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BUSINESS

Our Company

We are a commercially-focused, Texas-based bank holding company operating primarily in the Greater Houston, Dallas-Fort Worth, and Austin-San Antonio markets through our wholly owned subsidiary, Third Coast Bank, SSB, or the Bank, a Texas state savings bank, and the Bank’s wholly owned subsidiary, Third Coast Commercial Capital, Inc., or TCCC, a Texas corporation and commercial finance company. Since the Bank’s founding in 2008, we have been able to successfully execute our organically-focused strategic plan by attracting talented professionals and providing superior banking services through our relationship managers. We currently operate twelve branch locations, with seven branches in the Greater Houston market, two branches in the Dallas-Fort Worth market, two branches in the Austin-San Antonio market, and one branch in Detroit, Texas. As of June 30, 2021, we had, on a consolidated basis, total assets of $2.01 billion, total loans of $1.55 billion, total deposits of $1.78 billion and total shareholders’ equity, including ESOP-owned shares, of $137.8 million.

Our management team and board of directors are led by our founder, Chairman, President and Chief Executive Officer, Bart O. Caraway. Under Mr. Caraway’s leadership, we have experienced substantial and consistent growth. We believe our team-oriented culture, combined with a diverse suite of financial products and services, delivers the sophistication of a larger financial institution and allows our relationship managers to attract and retain customers and drive growth. We strive to know our customers better than our competition and believe our greatest opportunities for organic growth stem from the ability of our relationship managers to provide a greater level of attentiveness to customers and prospects than larger banks and our peers. As a result of consolidation among Texas metropolitan banks, we believe we are one of the few remaining locally-based banks in our markets that are dedicated to providing personalized service to small and medium-sized businesses with sophisticated banking needs. We intend to focus on continued quality organic growth, profitability enhancement through the leveraging of our current staff and infrastructure, engaging in strategic hiring of experienced bankers, expanding our markets through de novo branching and strategic whole-bank and branch acquisitions to increase shareholder value.

Our History and Growth

We were incorporated on January 16, 2013 to serve as the holding company for the Bank, which was chartered on February 25, 2008. We were founded by Mr. Caraway, along with other experienced Texas business professionals, to serve the banking needs of small and medium-sized businesses and individuals who we believe are often underserved by larger banks but demand sophisticated banking products and services. We began operations in Humble, Texas and opened four de novo locations in the Greater Houston market from 2009 to 2018. In 2014, we expanded into the Dallas-Fort Worth market through a de novo location and opened an additional branch in 2015. Our entrance into the Dallas-Fort Worth market provided us with enhanced economic diversification and increased opportunities for organic growth, as well as a broader target market for future strategic hiring of experienced bankers and acquisition opportunities. The Bank began providing commercial finance services in 2012 for companies that typically have credit needs outside of traditional commercial bank underwriting guidelines, and TCCC was formed in 2015 as a subsidiary of the Bank dedicated to our commercial finance business line.

Since the Bank’s inception, we have successfully completed six rounds of common equity funding totaling $112.9 million, through board members, management, employees, friends, family and local investors. On January 1, 2020, we completed a merger with Heritage Bancorp, Inc., or Heritage, and its subsidiary, Heritage Bank, a commercial bank headquartered in the Greater Houston market. At the time of its acquisition, Heritage had, on a consolidated basis, total assets of $315.9 million, total loans of $259.6 million, and total deposits of $260.2 million.

 

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Our merger with Heritage provided us with five new branch locations, including two in the Greater Houston market, two in the Austin-San Antonio market, and one in Detroit, Texas. We believe that this combined footprint has enhanced our geographic diversity and positioned us for continued organic growth in and around the markets we serve. In addition, we believe that the Company and Heritage had complementary cultures, which facilitated the successful integration of the two companies and helped us opportunistically grow our institution following the merger, as further described in “Our Competitive Strengths” below. We have also experienced greater efficiency and enhanced profitability since consummating our merger with Heritage through added scale, realization of cost savings, and improvement in our deposit base, as demonstrated by improvements in our return on average assets (ROAA), net interest margin (NIM), and efficiency ratio from 0.27%, 4.08%, and 86.19%, respectively, as of December 31, 2019, to 0.88%, 4.67%, and 72.72%, respectively, as of June 30, 2021.

The following timeline illustrates how we developed our current footprint since opening our first office in 2008:

 

 

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We have experienced substantial and consistent organic growth, supplemented by acquisition growth from our merger with Heritage and participation in the Paycheck Protection Program, or PPP, and Main Street Lending Program, or MSLP, as shown in the chart below. We believe our team-oriented culture, relationship-based approach, and commitment to retaining and hiring talented relationship managers, paired with our diverse suite of financial products and services drives our history of successful organic growth. The following chart reflects our total assets since the Bank’s formation:

 

LOGO

 

(1)

As of December 31 of each year, unless otherwise specified

 

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(2)

Consists of PPP loans and MSLP loans

(3)

Reflects Heritage Bancorp, Inc. total assets as of December 31, 2019

Our Competitive Strengths

We believe the following competitive strengths differentiate us from other financial institutions and are key to the execution of our strategy:

Highly Experienced Management Team. Our executive team has over 100 years of combined financial services experience and a demonstrated track record of managing profitable organic growth through customer acquisition and opportunistic strategic hiring, maintaining a disciplined credit culture, implementing a high-touch, relationship driven approach to banking, and successfully executing and integrating acquisitions. Certain biographical information for our executive officers is as follows:

Bart O. Caraway, Chairman, President and Chief Executive Officer. Mr. Caraway was our principal founder and organizer and is the Chairman, President and Chief Executive Officer of the Company and the Bank. He is also Chairman, President and Chief Executive Officer of TCCC. Mr. Caraway has over 29 years of banking and public accounting experience and is a Texas licensed attorney and Certified Public Accountant. Prior to founding the Bank, he served in executive roles at several other community banks, including as the Chief Financial Officer and Chief Operating Officer for a Houston, Texas bank wherein Mr. Caraway consulted on the de novo formation, managed the acquisition of two banks, ran all of the operations and helped grow the bank to over $600 million in total assets. Mr. Caraway also created and developed the role of Director of Financial Institution Services for Briggs & Veselka Co., one of the largest independent accounting firms in Texas, and was responsible for developing the firm’s financial institution and consulting practice, including bank audit and attestation services; internal audit services; loan reviews; risk assessments; de novo bank chartering; and consulting for mergers and acquisitions, strategic planning, compliance, and management.

R. John McWhorter, Chief Financial Officer. Mr. McWhorter has served as Chief Financial Officer of the Company since April 2015 and Senior Executive Vice President and Chief Financial Officer of the Bank since January 2021. From April 2015 to January 2021, Mr. McWhorter served as Executive Vice President and Chief Financial Officer of the Bank. Mr. McWhorter brings over 34 years of banking, bank auditing and public accounting experience to the Company and is a Certified Public Accountant. Prior to joining the Company and the Bank, he was Executive Vice President and Chief Financial Officer at Bank of Houston, a $1 billion in assets bank headquartered in the Greater Houston market, until it was acquired by Independent Bank. Prior to his role with Bank of Houston, Mr. McWhorter was Executive Vice President and Chief Financial Officer of Cadence Bancorp LLC from March 2010 to June 2012. He also served as Senior Vice President and Controller of Amegy Bank from April 1990 to June 2003 and helped take the bank public and grow to over $5 billion in assets. During his career, Mr. McWhorter has helped complete nine acquisitions and several capital offerings and has led numerous cost saving initiatives.

Donald C. Legato, Chief Lending Officer. Mr. Legato has served as Senior Executive Vice President and Chief Lending Officer of the Bank since January 2021. From March 2014 to January 2021, Mr. Legato served as Executive Vice President and Chief Lending Officer of the Bank. Mr. Legato brings over 27 years of banking experience and has served in numerous positions with the Bank since joining in 2009, including Senior Vice President Commercial Lending, Beaumont Market President and Southeast Texas Regional President. Prior to joining the Bank, Mr. Legato served as Senior Vice President Commercial Lending of Wachovia Bank from 2004 to 2009.

Audrey A. Duncan, Chief Credit Officer. Ms. Duncan has served as Senior Executive Vice President and Chief Credit Officer of the Bank since January 2021. From June 2015 to January 2021, Ms. Duncan served as Executive Vice President and Chief Credit Officer of the Bank. Ms. Duncan brings over 34 years of banking and bank regulatory experience to the Bank. Prior to joining the Bank, she was employed at LegacyTexas Bank, a bank headquartered in the Dallas-Fort Worth market that had $6.5 billion in assets at the time of Ms. Duncan’s departure. During her tenure there, Ms. Duncan served as Senior Vice President and Credit Officer for four years,

 

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and then Executive Vice President and Chief Credit Officer for nine years, before being named the Director of Credit Risk Management. Prior to her role with LegacyTexas Bank, Ms. Duncan was a Senior and Commissioned Bank Examiner with the Federal Reserve Bank of Dallas from 1989 to 2000.

Dynamic Banking Markets. As further described in “Our Markets of Operation” below, we believe that the markets in which we operate provide us with a strategic advantage relative to other financial institutions in Texas and nationwide. The Houston—The Woodlands—Sugar Land, Texas MSA, or the Houston MSA, and the Dallas—Fort Worth—Arlington, Texas MSA, or the Dallas MSA, are both among the largest MSAs in the nation, and both outpace growth in population at the state and national levels as illustrated by the chart below:

Nationwide Top 10 Largest MSAs—Ranked by 5 Year Projected Population Growth

 

#

    

MSA

   2021
Population
(Ms)
     Population Growth  
   Hist. 5 Yr.
(%)
     Proj. 5 Yr.
(%)
 
  1      Houston-The Woodlands-Sugar Land, TX      7.2        8.3        7.6  
  2      Dallas-Fort Worth-Arlington, TX      7.7        8.6        7.5  
  3      Phoenix-Mesa-Chandler, AZ      5.1        10.3        6.9  
  4      Atlanta-Sandy Springs-Alpharetta, GA      6.1        7.0        5.7  
  5      Miami-Fort Lauderdale-Pompano Beach, FL      6.3        4.1        5.4  
  6      Washington-Arlington-Alexandria, DC-VA-MD-WV      6.3        3.3        4.1  
  7      Los Angeles-Long Beach-Anaheim, CA      13.3        (1.2      1.7  
  8      Philadelphia-Camden-Wilmington, PA-NJ-DE-MD      6.1        0.7        1.0  
  9      New York-Newark-Jersey City, NY-NJ-PA      19.2        (5.2      0.2  
  10      Chicago-Naperville-Elgin, IL-IN-WI      9.4        (1.6      (0.3
   Texas      29.6        7.1        6.8  
   Nationwide      330.9        2.6        2.9  

 

Source: S&P Global Market Intelligence

In addition, in connection with our merger with Heritage we entered the Austin-San Antonio market with two locations and added a location in Detroit, Texas. Over the next five years, the populations in the San AntonioNew Braunfels MSA and the Austin—Round Rock—Georgetown MSA are projected to grow by approximately 7.6% and 8.5%, respectively, compared to 6.8% for the state of Texas and 2.9% for the United States, according to S&P Global. We believe our exposure to these large, economically diverse urban communities provides ample opportunity for our business to enhance its scale.

Diverse Offering of Sophisticated Financial Products and Services. We believe that the products and services we offer, coupled with our high-touch, relationship driven approach to business, allow us to compete and succeed in winning business from peers and larger financial institutions. Our customers consist primarily of small and medium-sized businesses across a wide array of industries and individuals. We offer conventional commercial and industrial loans (including equipment loans, working capital lines of credit, auto finance, and commercial finance), commercial real estate loans, residential real estate loans, construction and development loans (including builder finance loans), United States Small Business Administration, or SBA, loans, and consumer loans. As of June 30, 2021, our average loan balance outstanding was approximately $504 thousand, excluding our auto finance portfolio, PPP loans, and an intercompany loan to TCCC. In addition, we offer a full range of commercial and consumer deposit products and treasury management services and hired four treasury sales professionals in 2021. These products and services include checking and savings accounts, money market accounts, certificates of deposit and individual retirement accounts, debit cards, electronic banking (including online and mobile banking), ACH origination service, positive pay service, remote deposit capture service, sweep service, and online wire transfer service. We also recently initiated a builder finance group and began providing wealth management services. We utilize these products and services to not only augment our revenue and expand our core deposit customer base, but also to increase conventional commercial loan customer retention.

 

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Scalable Infrastructure. We believe that we have established a scalable operating platform that will allow us to effectively manage growth from our anticipated organic growth and potential acquisitions. We have invested heavily in our technology, infrastructure, management team and operations personnel in an effort to position our Company for continued future success. We believe that these efforts have enhanced our value proposition to customers and allowed us to provide products, services and technological sophistication generally offered by larger financial institutions.

Responsive and Disciplined Underwriting. We believe that our efficient credit approval process differentiates us from our competition. Our credit analysts and account relationship managers are located in-market and accompany relationship managers to client meetings to get firsthand exposure to customers and prospects. As credit analysts, our trainees learn how to underwrite real estate, commercial and industrial, consumer, and other more specialized loans, using models developed specifically for each type of credit. Our underwriting focuses on the borrower’s financial condition and cash flow, as well as the global cash flow of the relationship, and the quality, marketability and value of the collateral. For commercial finance, in particular, our underwriting focuses on the creditworthiness of the account debtors, the experience of the management and principals of the business, the customer’s billing and reporting process, and, depending upon the type and size of the credit facility, an independent field exam.

We have independent Officers’ Loan Committees that meet separately for the loan officers under each Regional Market President’s authority for efficient, timely review of credits associated with aggregate relationship exposure of less than $5 million. The Officers’ Loan Committees include our Chief Executive Officer, Chief Lending Officer, Chief Credit Officer, Regional Credit Officers and Regional Market Presidents. Relationships above $5 million are approved by our Directors’ Loan Committee. These committees meet at least weekly, or on an as-needed basis, to provide our customers with timely credit decisions. At least two individuals approve a large majority of the loans that are originated, and our relationship managers do not have individual loan approval authority.

While we strive to respond quickly based on our deep understanding of our customers’ needs, we remain consistent in our disciplined approach to underwriting diligence, as evidenced by our annual net charge-offs to average loans since 2016 illustrated in the chart below:

 

LOGO

 

Note: Reflects six months ended June 30, 2021 financial information for Third Coast and Texas Commercial Banks

(1)

Texas Commercial Banks industry aggregate data per S&P Global Market Intelligence

Enterprising Approach. We believe our management team is agile in its approach to capturing new customers and is able to recognize opportunities to expand our suite of financial products and services and execute on those opportunities. We believe this opportunistic nature has been demonstrated not only by our offering of specialty lending verticals, such as our SBA, commercial finance, auto finance and builder finance products discussed below, but also by our lending activities during the COVID-19 pandemic.

In response to the COVID-19 pandemic, on March 27, 2020 the President of the United States signed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act into law. The CARES Act provides assistance for

 

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American workers, families and small businesses. The PPP, established by the CARES Act and implemented by the SBA with support from the Department of the Treasury, provides small businesses with funds to pay certain operating costs, including salary, benefits and rent. In an effort to support our communities, we quickly began participating in the PPP and have been an active PPP lender. As of June 30, 2021, we had originated 5,774 PPP loans totaling approximately $827.5 million, with an average credit size of approximately $143 thousand, and generated $31.5 million in fees through the PPP, of which $8.5 million was deferred as of June 30, 2021. We were a top 10 PPP lender in the Houston area for loans over $150,000, according to the Houston Business Journal, and we believe our PPP lending has enhanced our brand awareness in our markets of operation. We gained new customers through the PPP who we hope to transition in to conventional commercial banking products in the future. We also believe our flexible approach to serving customers and our increased brand awareness has made us an attractive institution for experienced bankers to join, as demonstrated by our recent new hiring initiatives.

 

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Diversified Loan Portfolio. We are committed to generating and growing loans with businesses and individuals who want to have full relationships with us and which are broadly diversified by type and location. Our current conventional loan offerings include commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, residential real estate, construction and development, and consumer loans. Although we operate in the Greater Houston market, we maintain a relatively low exposure to the energy industry. As of June 30, 2021, we had direct energy exposure of $49.7 million in energy loans, or 3.2% of gross loans, and an additional $10.5 million in unfunded commitments, consisting of loans totaling $4.4 million, or 0.3% of gross loans, and an additional $0.1 million in unfunded commitments to upstream oil and gas companies, $8.9 million, or 0.6% of gross loans, and an additional $2.8 million in unfunded commitments to midstream oil and gas companies, and $36.5 million, or 2.4% of gross loans, and an additional $7.6 million in unfunded commitments to companies that provide support services to the oil and gas industry, such as oil and gas consulting, equipment rental, staffing and other services. Additionally, as of June 30, 2021, we had loans totaling $51.2 million, or 3.3% of gross loans, and an additional $4.4 million in unfunded commitments to gas stations and convenience stores, which we do not consider direct energy exposure. As illustrated below, our commercial loan book is well balanced between commercial and industrial, owner occupied commercial real estate, and non-owner occupied commercial real estate, representing 39.4%, 23.3% and 18.5% of total loans, respectively, as of June 30, 2021.

 

 

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In addition to our conventional commercial and consumer loan offerings, we offer SBA, commercial finance, auto finance and builder finance products, which we believe enhance our product offerings and diversify our revenue stream while still maintaining high asset quality. A brief description of these products is below:

SBA Lending. Our SBA loan program began in 2012 and is a key element in our ability to serve the small- to medium-sized business community in our markets of operation. Customers are able to use these loans to finance permanent working capital, equipment, facilities, land and buildings, business acquisitions and start-up business expenses. As a participant in the SBA’s Preferred Lenders Program, we are able to expedite the SBA loan

 

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approval process for our customers. We maintain strict underwriting guidelines in our SBA program and, as a result, have incurred minimal losses from this portfolio, with losses of less than $168 thousand through June 30, 2021.

Third Coast Commercial Capital, Inc. (Commercial Finance). TCCC was formed in 2015 as a wholly owned subsidiary of the Bank and provides working capital solutions for small- to medium-sized businesses. Through the purchase and management of accounts receivables, we are able to help customers take advantage of new business opportunities and continue to grow and be successful. As a result of our disciplined credit process and robust internal controls and procedures, losses from our commercial finance portfolio have been approximately $158 thousand through June 30, 2021. Our commercial finance portfolio included $3.9 million of factored receivables with companies in the oil and gas services industry as of June 30, 2021, which represented 13.7% of our total commercial finance portfolio.

Auto Finance. Our auto finance group was formed in 2014 to provide for indirect auto lending with local dealerships. We offer both recourse auto loans and nonrecourse auto loan and lease financing. Loans with recourse to the dealership are structured as commercial lines of credit with the dealership and are approved with the same underwriting criteria as other commercial credits. Nonrecourse loans are structured as consumer loans and are approved with the same underwriting criteria as other consumer loans. The auto finance group also offers floor plan loans and real estate loans to dealerships. Floor plan loans are offered on both new and used automobiles, motorsport, recreation vehicles and boats. Floor plan loan requirements include mandatory periodic curtailments and inspections. Real estate loans to dealerships are underwritten in the same manner as other owner-occupied real estate loans. As a result of our experienced team members and strict underwriting guidelines, the total net losses related to this portfolio since inception have been approximately $34 thousand through June 30, 2021.

Builder Finance. Our builder finance group was formed in 2021 and provides traditional homebuilder lines secured by lots and single-family homes, and land acquisition and development loans. The group also finances bond anticipation notes, or BANs, and lines of credit to large national institutional tier-one funds that invest equity in various real estate assets. The group also offers, to a limited extent, parent level build-to-rent loans. The homebuilder finance platform provides lending solutions for private and publicly traded homebuilding companies. Land acquisition and development loans focus on master planned communities with lots being presold with meaningful earnest money upfront, and mandatory periodic curtailments. BANs are short-term notes issued by a special district to provide liquidity to a developer approximately 9-12 months prior to bond issuance, and are secured by the proceeds of the bond. Lines of credit to institutional funds who invest equity in various real estate assets are structured as a typical commercial and industrial loan. Underwriting of these lines include financial and cash flow covenants. On a limited basis the group may lend to homebuilders for the purpose of building and then renting single-family homes.

As illustrated below, our SBA, commercial finance, and auto finance business lines do not individually make up a material portion of the total loan portfolio, or any single loan classification, but are illustrative of our efforts to broaden our product offerings and customer base and enhance our loan yield and net interest margin. Our SBA and commercial finance business lines also allow us to partner with companies early on in their life cycle. As our SBA and commercial finance customers grow, our goal is to transition them in to conventional commercial banking products.

 

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LOGO

 

Balances as of June 30, 2021

(1)

Includes $0.5 million of loans that are part of our auto finance portfolio

Transformation of Deposit Base. We have enhanced our funding base through organic sourcing of core deposits, active participation in the PPP, and the strategic acquisition of Heritage. We believe that our team-based, relationship oriented approach to banking, coupled with our recent enhancement of our treasury management products and services, will allow us to continue to build on the recent successes that we have had in transforming our deposit mix. Additionally, we recently hired a Chief Retail Officer to augment our retail deposit operations, which we believe will foster new sources of low-cost, core deposits. We will continue to seek out acquisition targets with a strong deposit franchise and high-quality funding profiles. Evidence of our recent success is demonstrated by our growth in noninterest-bearing deposits from $128.3 million as of December 31, 2019 to $374.9 million as of June 30, 2021, a growth rate of 192%. We have also significantly improved the composition of our deposits by increasing noninterest-bearing deposits to total deposits from 15.9% as of December 31, 2019 to 21.0% as of June 30, 2021. A depiction of our recent deposit transformation is represented below:

 

 

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Empowering Workplace Culture. We believe that our workplace culture fosters teamwork, promotes exemplary customer service, and gives our employees the tools necessary to succeed. Our culture is centered on training, mentoring, and support, which allows us to attract and retain the talent needed to succeed in today’s competitive banking environment. In addition to hiring experienced senior bankers as relationship managers, we have implemented an in-house training program to facilitate growth and professional development for our junior bankers. Our trainees begin their careers as credit analysts to instill a solid understanding of our underwriting discipline and expectations for credit. Next, they are promoted to account relationship managers and are assigned to an account where they work with the lead relationship manager to develop their customer-facing skillset, while continuing to assist in the underwriting process. Once account relationship managers have developed the skills necessary to be successful lenders, they are promoted to relationship manager and develop their own book of business.

Our culture is such that our more senior relationship managers often share business with recently promoted relationship managers, which incentivizes our junior account relationship managers and relationship managers to stay with us and allows our tenured lenders to focus on prospecting for new customer relationships. We have had great success with our development program, with many of our relationship managers having been promoted through our system. Our culture instills a sense of empowerment in our employees that we believe turns bosses into coaches, with structures and systems that we believe nurture and support the development of our team members. In addition, the interests of our employees are aligned with our shareholders through meaningful ownership, as more than 90% of our employees own shares of our common stock either directly or through our ESOP. We believe our workplace culture and significant employee-shareholder ownership helps us acquire and retain customers and has been critical to our substantial and consistent organic growth.

Our Banking Strategy

We believe we have built a differentiated, high-touch commercial bank with a uniquely collaborative culture and a diverse array of attractive financial products and services. We intend to leverage our strengths and our robust operational platform with the multi-faceted approach described below, which we believe will allow us to successfully grow our franchise and enhance shareholder returns.

Continue Robust Organic Growth. The results of our 13-year operating history demonstrate that organic growth has been a primary focus of the Company. Since 2016, we have grown the loan portfolio by approximately $1.10 billion, or 244.4%, for a compound annual growth rate, or CAGR, of 31.6% and, from January 1, 2016 to December 31, 2019 (the day before the consummation of our merger with Heritage), we grew the loan portfolio entirely organically by approximately $464.3 million, or 134.8%, for a CAGR of 23.8%. We attribute our historical organic growth to our strengths described above. Additionally, we intend to continue to take advantage of recent competitive disruptions in our operating markets, which has created opportunities to hire experienced and talented bankers who we believe can thrive in our team-oriented culture. During 2021, we have hired 70 new bankers, including a team of 22 bankers to form our new builder finance group, 23 commercial lenders, four wealth management professionals, four treasury sales professionals, and 17 support personnel. We expect these professionals will generate and maintain meaningful portfolios, while also continuing our focus on increasing core deposits to fund loan growth. We believe having a publicly traded stock will make us an attractive employer for experienced bankers who may feel dislocated as a result of continued market consolidation.

In addition to leveraging our current platform and hiring key personnel to drive organic growth, we also continue to evaluate future de novo branching opportunities in existing and new markets. We believe that we can leverage our experienced management team, board of directors and relationship managers, as well as our position in our markets of operation to achieve these goals.

Emphasize Core Deposit Growth. We believe that core deposit growth is a key component to our long-term strategy and have designed products and services to attract these deposits and maintain a sustainable, stable and low-cost funding base. We will remain focused on generating core deposits from our business customers and encourage and incentivize our relationship managers to attract and maintain those deposits. We have also recently enhanced our treasury management services by adding additional personnel, investing in technology, and offering more products to enable us to more effectively attract and service the operating accounts of larger, more sophisticated businesses.

 

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Thoughtfully Expand our Suite of Financial Products and Services. We continually strive to build upon our diverse suite of financial products and services in ways that help us capture more customers from our peers and larger financial institutions. We have developed specialty lending programs in the past, such as our SBA, commercial finance and auto finance business lines, and more recently, commenced a builder finance group as a result of hiring an experienced team from a large regional bank. We also recently entered into an agreement with Ameriprise Financial to offer investment advisory services, including financial and retirement planning, mutual funds, insurance and annuities, brokerage accounts, and strategies to help pay for college, and we hired four wealth management professionals in connection with that agreement who we believe will be able to generate noninterest income and attract low-cost, core deposits. We will continue to evaluate opportunities, through new organic programs, new hires, and lift-outs of teams, in the future that we believe will allow us to diversify our financial products and services, reach new customers and broaden our brand. In addition, we seek to offer the latest, state-of-the-art technology and sophisticated banking tools and products, including a high-tech suite of treasury management solutions. Our online and mobile banking services include a full suite of convenient online processes, including remote deposit anywhere, text banking, and deposit monitoring and processing. We also recently expanded our treasury management services, which are designed to provide secure and easy ways to manage our customers’ bank accounts and offer essential services to help with everyday cash flows. By providing a full suite of value-added services, we are able to lower our customer acquisition costs, gather low-cost, core deposit relationships, make high credit quality loans, generate fee income, and help our customers’ businesses grow and profit.

Continue to Capitalize on Strategic Acquisition Opportunities. We completed our merger with Heritage on January 1, 2020, which expanded our footprint south of Houston and facilitated our entrance into the vibrant and fast-growing Austin-San Antonio market, as well as provided us with a new location in Detroit, Texas. We are actively evaluating, and will continue to evaluate, additional strategic acquisition opportunities going forward to leverage our operational platform and create additional scale, with an emphasis on enhancing our net interest margin through low-cost, core deposits. Because we primarily compete for acquisition opportunities with smaller banks, which are typically not publicly traded, we believe having a publicly traded stock, adequate capital and ready access to public capital will give us a competitive advantage relative to peer institutions in our markets of operation. At this time, we expect our most likely potential acquisition targets to have total assets between $200 million and $1 billion. The following illustration depicts the number of banks that are within our expected target asset size in our markets of operations as of June 30, 2021.

 

 

LOGO

 

Source: S&P Global Market Intelligence

 

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We intend to take a disciplined approach to acquisitions, and our efforts will be focused on transactions that will be accretive to our earnings per share, enhance our existing market presence, expand our markets of operation or strengthen our balance sheet, with an emphasis on the acquisition of banks with a strong deposit franchise and high-quality funding profiles to augment our core deposit base. Acquisitions within our current footprint would offer an opportunity to leverage our existing branch network and operations, while acquisitions outside our current footprint would potentially broaden our customer base and diversify our assets and operations.

Our Banking Products and Services

We strive to offer quality products and personalized services while providing our customers with the financial sophistication and array of products typically offered by a larger bank. Our lending services include commercial loans to small-to medium-sized businesses and professional practices, real estate-related loans, and consumer loans. Additionally, we offer a broad range of competitively priced deposit services including demand deposits, regular savings accounts, money market deposits, certificates of deposit and individual retirement accounts. To complement our lending and deposit services, we also offer direct deposit, wire transfers, night depository, treasury management services, safe-deposit boxes, debit cards and automatic drafts.

Lending Activities

We offer a variety of loans, including commercial and industrial loans, commercial real estate loans (owner occupied and non-owner occupied), construction, land and development real estate loans, and 1-4 single family investment property loans. We also offer various loans and leases to individuals and professionals including 1-4 family real estate loans, installment loans and personal lines of credit. Our specialty lending verticals include SBA, commercial finance, auto finance, and builder finance.

Our target customers are creditworthy small-to medium-sized businesses and individuals in our markets of operation. Deposits sourced from these customers serve as our primary source of liquidity to fund loan growth. Additionally, we maintain a federal funds borrowing line of credit with one or more correspondent banks and we are a member of the FHLB, which permits us to borrow against our loan portfolio at preferred rates.

As of June 30, 2021, we had total loans of $1.55 billion, representing 77.1% of our total assets. As of June 30, 2020, we had total loans of $1.58 billion, representing 86.2% of our total assets. Our loan portfolio consisted of the following loan categories as of the dates indicated:

 

     As of June 30,  
     2021     2020  

(Dollars in thousands)

   Amount      % of Total     Amount      % of Total  

Real estate:

          

Commercial real estate:

          

Non-farm non-residential owner occupied

   $ 361,217        23.3   $ 334,615        21.2

Non-farm non-residential non-owner
occupied

     286,533        18.5     249,391        15.8

Residential

     165,890        10.7     131,456        8.3

Construction, development and other

     80,400        5.2     118,115        7.5

Farmland

     6,011        0.4     4,625        0.3

Commercial and industrial

     612,306        39.4     706,698        44.8

Consumer

     4,499        0.3     4,327        0.3

Other

     34,866        2.2     28,168        1.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 1,551,722        100.0   $ 1,577,395        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Loan Types. The following is a description of the types of loans we offer to our customers:

Commercial Real Estate Loans

Commercial real estate loans are underwritten primarily based on cash flows of the borrower and, secondarily, the value of the underlying collateral. These loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the portfolio are located primarily throughout our markets and are generally diverse in terms of type. This diversity helps reduce the exposure to adverse economic events that affect any single industry.

Our commercial real estate loan terms are generally limited to five to ten years although amortization may occur over a longer period of time. Interest rates may be fixed or adjustable, with an origination fee generally being charged on each loan funded. We attempt to reduce credit risk on our commercial real estate loans by emphasizing loans on owner-occupied office and retail buildings where the ratio of the loan principal to the value of the collateral as established by independent appraisal does not exceed 80%. For some types of loans, we require a minimum debt service covenant. In addition, we generally require personal guarantees from the principal owners of the property supported by a review by our management of the principal owners’ personal financial statements. As of June 30, 2021, commercial real estate loans totaled $647.8 million, or 41.8% of our total loans.

Owner-occupied Commercial Real Estate Loans

Owner-occupied commercial real estate is a key component of the Bank’s lending strategy to owner-operated businesses, representing a large percentage of its total commercial real estate loans. We believe that owner-occupied property loans are desirable since we are lending directly to the commercial and industrial business residing and operating on the property. Because of this, we are usually able to monitor the borrower’s financial results on a regular basis. We believe that the material risks associated with owner-occupied commercial real estate loans include a decline in the financial condition of the owner-occupant which impacts its ability to service the debt. Owner-occupied commercial real estate loans totaled $361.2 million, or 55.8% of total commercial real estate loans as of June 30, 2021.

Non-owner Occupied Commercial Real Estate Loans

We believe that the Bank possesses the experience, expertise and on-going monitoring capabilities to originate loans for income producing properties. Generally, these loans are for retail strip centers, office buildings, self-storage facilities, and multi and single tenant office warehouses, all within our markets. Generally, our income producing property loans require experienced and deep management, premium locations, proven debt service ability, strong equity positions, alternative repayment sources, and the personal guarantee of the principals. We monitor our exposures to these loan types to maintain adequate concentration levels in relation to our capital position, our market geographies and as a percentage of the entire loan portfolio. We believe that the material risks associated with non-owner occupied commercial real estate loans include potential changes in market conditions, such as vacancy rates, construction and absorption rates, rental rates, and property values. Non-owner occupied commercial real estate loans totaled $286.6 million, or 44.2% of total commercial real estate loans as of June 30, 2021.

Residential Real Estate Loans

Residential real estate loans consists of 1-4 family residential loans and multi-family residential loans. Our 1-4 family residential loan portfolio is predominately comprised of loans secured by 1-4 family homes, which are investor-owned. While we do have some owner-occupied 1-4 family residential loans, we have not historically pursued this product line; however, in the second quarter of 2019, we began offering limited mortgage products through our newly established mortgage department. Our multi-family residential loan portfolio is comprised of

 

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loans secured by properties deemed multi-family, which includes apartment buildings. We believe that the material risks associated with residential real estate loans include a decline in the borrower’s ability to repay the debt and a decline in the value of the underlying real estate collateral. The Bank’s current multifamily loans are to seasoned and successful operators who possess quality alternative repayment sources. As of June 30, 2021, 1-4 single family residential real estate loans totaled $122.8 million, or 7.9% of our total loans, of which $87.6 million, or 5.6% of our total loans, was for investment/rental purposes. As of June 30, 2021, multifamily loans totaled $43.1 million, or 2.8% of our total loans.

Construction and Development Loans

Construction and development loans are comprised of loans used to fund construction, land acquisition and land development. The properties securing the portfolio are primarily located in the Greater Houston and Dallas markets and are generally diverse in terms of type. Our construction and development loans are made both on a pre-sold and speculative basis. If the borrower has entered into an agreement to sell the property prior to beginning construction, then the loan is considered to be on a pre-sold basis. If the borrower has not entered into an agreement to sell the property prior to beginning construction, then the loan is considered to be on a speculative basis. Construction and development loans are generally made with a term of twelve months and interest is paid periodically. The ratio of the loan principal to the value of the collateral, as established by independent appraisal, does not generally exceed 80% for speculative and 85% for pre-sold 1-4 family properties. For commercial construction loans, the ratio of the loan principal to the value of the collateral, as established by independent appraisal, does not generally exceed 80%. For land acquisition and land development loans, the ratio of the loan principal to the value of the collateral, as established by independent appraisal, does not generally exceed 75%. Additionally, speculative loans are based on the borrower’s financial strength and cash flow position. Loan proceeds are disbursed based on the percentage of completion and only after the project has been inspected by an experienced construction lender or third-party inspector.

During 2021, we expanded our construction and development portfolio through the formation of our builder finance group, which provides traditional homebuilder lines secured by lots and single-family homes, and land acquisition and development loans. The group also finances BANs and lines of credit to large national institutional tier-one funds that invest equity in various real estate assets. The group also offers, to a limited extent, parent level build-to-rent loans. The homebuilder finance platform provides lending solutions for private and publicly traded homebuilding companies. Land acquisition and development loans focus on master planned communities with lots being presold with meaningful earnest money upfront, and mandatory periodic curtailments. BANs are short-term notes issued by a special district to provide liquidity to a developer approximately 9-12 months prior to bond issuance, and are secured by the proceeds of the bond. Lines of credit to institutional funds who invest equity in various real estate assets are structured as a typical commercial and industrial loan. Underwriting of these lines include financial and cash flow covenants. On a limited basis the group may lend to homebuilders for the purpose of building and then renting single-family homes.

Construction and development loans generally carry a higher degree of risk than long-term financing of existing properties because of the risks associated with completion of the construction such as delays in construction and cost overruns, as well as slow leasing or sales activity. We attempt to reduce risk by generally requiring personal guarantees on loans for the construction of commercial properties and by keeping the loan-to-value ratio of the completed project below specified percentages. While loans originated under our builder finance group generally do not have personal guarantees, we believe the borrowers financed by this group are well-capitalized companies that demonstrate strong operations and have experienced management. We may also reduce risk associated with these loans by selling participations to other institutions when we deem it advisable. As of June 30, 2021, construction and development loans totaled $80.4 million, or 5.2% of our total loans.

Commercial and Industrial Loans

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. These loans are primarily made based on the borrower’s ability to service

 

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the debt from income. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and generally include personal guarantees.

A primary component of our loan portfolio is loans for commercial purposes. Our commercial and industrial loan portfolio consists of loans principally to retail trade, service, and manufacturing firms located in our market areas. The terms of these loans vary by purpose and by type of underlying collateral. We typically make equipment loans for a term of seven years or less at fixed or variable rates, with the loan fully amortized over the term. Equipment loans are generally secured by the financed equipment, and the ratio of the loan principal to the value of the financed equipment or other collateral is generally 100% or less on new equipment financing and 90% or less for used equipment financing. Loans to support working capital typically have terms not exceeding one year and are usually secured by accounts receivable, inventory, or other collateral, as well as personal guarantees of the principals of the business. For loans secured by accounts receivable or inventory, principal will typically be repaid as the assets securing the loan are converted into cash. The primary risk for commercial loans is the failure of the business due to economic and financial factors. As a result, the quality of the commercial borrower’s management and its ability both to properly evaluate changes in the supply and demand characteristics affecting its markets for products and services and to effectively respond to such changes are significant factors in a commercial borrower’s creditworthiness and our decision to make a commercial loan. Commercial and industrial loans totaled $612.3 million as of June 30, 2021, or 39.4% of our total loans.

In addition, the commercial and industrial loan category includes factored receivables. TCCC provides working capital solutions for small- to medium-sized businesses throughout the United States. TCCC provides working capital financing through the purchase of accounts receivables, and it has a disciplined credit process and robust internal controls and procedures for our factored receivables customers. TCCC monitors its factored receivables customers closely by verifying invoices, analyzing the adequacy of funds in the cash collateral reserve accounts and reviewing detailed reports required from these customers. We believe that the material risks associated with factored receivables include collection risk associated with the factored receivables. At June 30, 2021, outstanding factored receivables were $28.4 million, or 4.6% of total commercial and industrial loans and 1.8% of total loans. Our factored receivables portfolio consists primarily of customers in the transportation, energy services and services industries representing approximately 35.9%, 14.4% and 45.4% of net funds employed, respectively, as of June 30, 2021.

The commercial and industrial loan category also includes indirect auto loans with local dealerships that are funded through our indirect lending department. The loans are with recourse to the dealership and are structured as commercial lines of credit with the dealerships. The loans are approved with the same underwriting criteria as other commercial credits. Any loans under these lines of credit that are past due in excess of 90 days are required to be paid in full by the dealership. At June 30, 2021, outstanding indirect auto loans included in the commercial and industrial category were $6.9 million, or 1.1% of total commercial and industrial loans.

Consumer Loans

We make a variety of loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans. Consumer loans are generally made at a fixed rate of interest. While we believe our policies help minimize losses in the consumer loan category, because of the nature of the collateral, if any, it may be more difficult to recover any loan losses. We believe that the material risks associated with consumer loans include collection risk associated with the receivables.

The majority of our consumer loans are related to the financing of vehicles to individuals. We limit our exposure to individuals living within our defined local markets. Underwriting for each loan is performed by our indirect lending department within our policies. Consumer loans totaled $4.5 million, or 0.3% of our loans held for investment as of June 30, 2021.

 

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SBA Loans

Our SBA loan program is a key element in our ability to serve the small- to medium-sized business community in our markets. Generally, these loans have a more flexible structure than conventional loans including, but not limited to, lower down payment requirements (up to 90% financing), longer loan terms (up to 25 years on real estate loans and 10 years on equipment and working capital loans), fixed and variable rate options and fully amortizing notes. We are able to use our Preferred Lender status with the SBA to expedite the loan approval process for our customers. Customers are able to use these loans to finance permanent working capital, equipment, facilities, land and buildings, business acquisitions and start-up business expenses. We primarily lend through the SBA 7(a) program, and we have a dedicated team focused on origination, documentation and closing of SBA loans. We maintain strict underwriting guidelines in our SBA program. We believe that the material risks associated with SBA loans include a decline in the borrower’s ability to service the debt, a decline in the value of or lack of collateral, and the risk of non-payment of an SBA guaranty. At June 30, 2021, outstanding SBA loans (excluding PPP loans) were $63.2 million, or 4.1% of our total loans. These loans are included in commercial and industrial, commercial real estate or construction and development based on the loan purpose and collateral.

CARES Act Loans

In April 2020, we began originating loans to qualified small businesses under the provisions of the CARES Act. Loans covered by the PPP administered by the SBA may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA. Terms of the PPP loans include the following (i) maximum amount limited to the lesser of $10 million (or $2 million depending on the date of origination) or an amount calculated using a payroll-based formula, (ii) maximum loan term of two or five years, depending on the date of origination, (iii) interest rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no payments are required until the date on which the forgiveness amount relating to the loan is remitted to the lender and (vi) loan forgiveness up to the full principal amount of the loan and any accrued interest, subject to certain requirements including that no more than 40% of the loan forgiveness amount may be attributable to non-payroll costs. In return for processing and booking the loan, the SBA will pay the lender a processing fee tiered by the size of the loan. At June 30, 2021, outstanding PPP loans, net of deferred loan fees of $8.5 million, were $326.7 million which are included in commercial and industrial loans.

In addition to PPP loans, we also originated loans to small and medium-sized business that were too large for the PPP under the MSLP created by the Federal Reserve. Loans covered by the MSLP are not eligible for loan forgiveness. Terms of the MSLP loans include the following (i) maximum amount limited to the lesser of $300 million or an amount based on the borrower’s outstanding and available debt and the borrower’s 2019 EBITDA, (ii) five year loan term, (iii) interest rate based on adjustable LIBOR (1 or 3 month) plus 300 basis points, (iv) deferral of principal payments for two years, (v) deferral of interest for one year, and (vii) no prepayment penalties. Under the guidelines of the program, we sold a 95% participation in the MSLP loans to the Main Street special purpose vehicle at par value. At June 30, 2021, outstanding MSLP loans, net of deferred loan fees of $1.1 million, were $5.1 million which are included in commercial and industrial loans.

Farmland and Other Loans

Farmland and other loans outstanding were $40.9 million, or 2.6% of our total loans at June 30, 2021. Included in other loans are vehicle leases and agricultural loans. We believe that the material risks associated with farmland and other loans include a decline in land values or agricultural commodity prices, increases in production costs, and adverse weather. We believe that the material risks associated with our other loans include a decline in the borrower’s financial condition, which impacts the ability to service the debt, and a decline in the value of the underlying collateral.

 

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Through our indirect lending department, we provide financing of vehicle leases to individuals who live in our market areas. The leases are made through well-known third party leasing companies and underwriting and approval is performed by the indirect lending department in accordance with our policies. Outstanding leases were $31.5 million, or 2.0% of our total loans at June 30, 2021.

We provide loans for agricultural purposes. While this line of business is not a focus of our Bank’s lending strategy, we continue to provide and service agricultural production loans for customers in our market areas. Outstanding agricultural loans were $3.3 million at June 30, 2021.

Credit Administration, Lending Limits and Loan Review

Certain credit risks are inherent in making loans and managing these risks is a company-wide process. These include repayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers. We attempt to mitigate repayment risks by adhering to strong internal credit policies and procedures.

We have procedures in place to assist us in maintaining the overall quality of our loan portfolio. Our strategy for credit risk management includes a conservative underwriting process. Our board of directors has established underwriting guidelines to be followed by our officers, and we monitor delinquency levels for adverse trends.

We implement our underwriting policy through a tiered system of combined loan authority for our loan officers with the Chief Credit Officer and a loan committee approval structure. Generally, our loan officers do not have single signature loan authority and must have the additional approval of one or both of the Regional Market Presidents or the Chief Lending Officer or the Chief Credit Officer depending upon the size of the loan and whether or not it is secured. Approval of loans with relationships over the combined lending authority of the Chief Credit Officer and Chief Executive Officer must be approved by the Officers’ Loan Committee, based on the loan relationship size, or by the Bank’s Directors’ Loan Committee, comprised of executive management and at least two outside directors of the Bank. The Bank’s Directors’ Loan Committee meets weekly, or more frequently if required, to evaluate applications for new and renewed loans, or modifications to loans, in which the loan relationship total exposure exceeds predefined limits. Our strategy in considering a loan is to follow conservative and consistent underwriting practices, which include:

 

   

knowing our customers to ensure a complete understanding of their financial condition and ability to repay the loan;

 

   

verifying that primary and secondary sources of repayment are adequate in relation to the amount of the loan;

 

   

developing and maintaining targeted levels of diversification for our loan portfolio as a whole and for loans within each category; and

 

   

ensuring that each loan is properly documented with perfected liens on collateral, and that any insurance coverage requirements are satisfied.

As part of the underwriting process, we seek to minimize risk in a variety of ways, including the following:

 

   

analyzing the borrower’s financial condition, cash flow, liquidity, and leverage;

 

   

assessing the borrower’s operating history, operating projections, location and condition;

 

   

reviewing appraisals, title commitment and environmental reports;

 

   

considering the management experience and financial strength of the principals of the borrower; and

 

   

evaluating economic trends and industry conditions.

 

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Lending Limits

Our lending activities are subject to a variety of lending limits imposed by state and federal law. In general, we are subject to a legal limit on loans to a single borrower equal to 25% of the Bank’s Tier 1 capital. This limit increases or decreases as the Bank’s capital increases or decreases. As of June 30, 2021, our legal lending limit was $34.7 million, and our largest relationship was $17.7 million. In order to ensure compliance with legal lending limits and in accordance with our strong risk management culture, we maintain internal lending limits that are significantly less than the legal lending limits. We are able to sell participations in our larger loans to other financial institutions, which allows us to manage the risk involved in these loans and to meet the lending needs of our customers requiring extensions of credit in excess of these limits.

Credit

The Bank’s credit department is overseen by the Bank’s Chief Credit Officer. The credit department prepares and provides in-depth credit administration reporting to the Bank’s board of directors on a monthly and quarterly basis to aid the Bank’s board of directors in monitoring and adjusting the Bank’s loan focus as it grows. In addition, credit analysts provide analytical and underwriting services in support of the loan officers developing their respective loan portfolios. The Bank’s credit analysts support our most senior loan officers as they are further trained to be our future lending officers.

Loan Review

The Bank has developed an internal loan risk rating system which utilizes risk rating worksheets based upon the type of loan and collateral. Currently, the Bank has risk rating worksheets for commercial and industrial loans, individual loans, non-owner occupied real estate loans, owner-occupied real estate loans, and 1-4 family construction loans. Risk rating worksheets are completed for all new loan and renewal requests. In addition, an annual loan review form is completed on real estate loans of $1 million or greater, given that these loans tend to have longer terms than loans that are not secured by real estate. The loan officer will prepare the annual loan review form that updates the credit file with new financials, review of the collateral status, and provide any meaningful commentary that documents changes in the borrower’s overall condition. Upon completion of the annual loan review form, the loan officer must present the memo to the Chief Credit Officer for final review, appropriate grade change if needed and then approval to place in the credit file for future reference. We believe this process gives the Chief Credit Officer and executive management strong insight into the underlying performance of the Bank’s loan portfolio, allowing for accurate and proper real-time grading of the loan portfolio.

The Bank also has a Special Assets Committee, which generally meets monthly to review loans graded substandard or worse, past due loans, overdrafts, and other real estate owned, and considers and approves other loan grade changes. On a quarterly basis, the meeting includes the review of loans graded special mention. For all loans graded special mention or worse, the loan officer is required to complete a problem asset report, which is submitted to the Special Assets Committee.

Additionally, we employ, from time to time, an external third party loan review team to review up to a 30% penetration of the Bank’s entire loan portfolio. This review will generally include all large loan relationships, insider loans, and criticized loans.

Deposits

Our core deposits include checking accounts, money market accounts, savings accounts, a variety of certificates of deposit and individual retirement accounts. To attract deposits, we employ an aggressive marketing plan in our primary service areas and feature a broad product line and competitive offerings. The primary sources of deposits are residents and businesses located in the markets we serve. We obtain these deposits through personal solicitation by our lenders, officers and directors.

 

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The following table sets forth the amount of our total deposits and percentage of total deposits based on balances as of the dates indicated.

 

     As of June 30,  
     2021     2020  

(Dollars in thousands)

   Amount      % of Total     Amount      % of Total  

Noninterest-bearing demand deposits

   $ 374,942        21.0   $ 373,714        23.0

Interest-bearing demand deposits

     1,036,820        58.2     802,992        49.4

Savings

     26,898        1.5     20,428        1.2

Time deposits

     344,608        19.3     429,222        26.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 1,783,268        100.0   $ 1,626,356        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Other Banking Services

We offer banking products and services that we believe are attractively priced and easily understood by our customers. In addition to traditional bank accounts such as checking, savings, money markets, and CDs, we offer a full range of ancillary banking services, including a full suite of treasury management services, consumer and commercial online banking services, mobile applications, safe deposit boxes, wire transfer services and debit cards. Merchant services (credit card processing) and co-branded credit card services are offered through a correspondent bank relationship.

Investments

As of June 30, 2021, our investment portfolio consisted of state and municipal securities, mortgage-backed securities, and corporate bonds classified as available for sale. In the future, we may invest in, among other things, U.S. Treasury bills and notes, as well as in securities of federally sponsored agencies, such as Federal Home Loan Bank bonds. We may also invest in federal funds, negotiable certificates of deposit, banker’s acceptances, mortgage-backed securities, corporate bonds and municipal or other tax-free bonds. No investment in any of those instruments will exceed any applicable limitation imposed by law or regulation. The Bank’s Asset Liability and Investment Committee (ALCO) reviews the investment portfolio on an ongoing basis in order to ensure that the investments conform to our internal policy set by our board of directors.

Our Markets

We currently operate primarily in three distinct but complementary metropolitan markets, the Greater Houston market, the Dallas-Fort Worth market, and the Austin-San Antonio market. We have seven branches located throughout the Greater Houston market, two branches in the Dallas-Fort Worth market, two branches in the Austin-San Antonio market, and one branch in Detroit, Texas, located approximately 120 miles northeast of Dallas, Texas. We expect to continue to grow within our current markets, as well as expand into new markets. We believe that the markets we serve are an important factor in our growth and success, and offer stability and steady growth potential.

Greater Houston Market. We operate seven branches in the Greater Houston market, including five branches located in the Houston MSA and two branches in the neighboring Beaumont MSA. Houston is the nation’s fourth most populous city and fifth most populous metro area, with approximately 2.4 million and 7.2 million residents, respectively, according to the U.S. Census Bureau and S&P Global. The Houston MSA is projected to grow approximately 7.6% over the next five years, ranking first among the nation’s 10 largest MSAs and more than double the nationwide projected growth, according to S&P Global. Houston is a center for global trade, with the Houston Port ranking first among U.S. ports in foreign tonnage, according to the Greater Houston Partnership. This tremendous growth and trade has helped Houston become the “Most Diverse City in America,” according to WalletHub. The Houston MSA is corporate headquarters for 24 Fortune 500 companies and

 

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employs approximately 3.1 million workers, according to the Greater Houston Partnership. Some of these companies include ConocoPhillips, Sysco, Waste Management and Phillips 66. Houston is also home to the largest medical complex in the world, the Texas Medical Center, which has approximately $3.0 billion in construction projects underway with 50 million existing square feet, according to the Greater Houston Partnership.

Dallas-Fort Worth Market. We currently operate two branches in the Dallas-Fort Worth market, with one location in the North Dallas area and one in Plano. The Dallas MSA is the largest in Texas and the fourth largest in the U.S., according to S&P Global, and has been growing by approximately 322 residents every day, according to the Dallas Regional Chamber. The Dallas MSA boasts the largest gross domestic product in Texas and the sixth largest in the nation, according to the U.S. Bureau of Economic Analysis, and is headquarters for 24 Fortune 500 companies, including ExxonMobil, AT&T, American Airlines and Charles Schwab, according to the Dallas Regional Chamber. The Dallas MSA hosts approximately 3.6 million working professionals and ranked first in the nation for total job growth from December 2015 through December 2020, according to the Dallas Regional Chamber. Future population and job growth remains attractive as the Dallas MSA ranks second among the nation’s 10 largest MSAs for projected 5-year population growth, according to S&P Global, and 15 major universities are located in the area, which enroll over 183,000 students.

Austin-San Antonio Market. We currently operate two branches in the Austin-San Antonio market, with one location in Nixon and one in La Vernia, and operate a loan production office in Austin. The San Antonio—New Braunfels MSA is the third most populous MSA in Texas, as measured by both population and number of households. The population in the San Antonio—New Braunfels MSA is projected to grow by approximately 7.6% over the next five years, compared to 6.8% for the state of Texas and 2.9% for the United States. Located at the intersection of two Pan-American highways (IH-10 which runs from coast-to-coast, and IH-35 which runs from Canada to Mexico), San Antonio commerce benefits from a fast-growing, diverse business community, long-standing military establishments, and is home to 160,000 university students. Industry concentrations include: Aerospace, Biosciences/Healthcare, Defense, Energy, Information Technology & Cybersecurity, and Manufacturing according to the San Antonio Economic Development Foundation. The Austin—Round Rock—Georgetown MSA is the fourth most populous MSA in Texas, as measured by both population and number of households. Over the next five years, it is projected to be the fastest growing large MSA in the country (as defined by MSAs with a population over two million), with a forecasted growth rate of 8.5% through 2026. Austin’s unemployment rate of 4.8% compares favorably to the nationwide unemployment rate of 6.1% as of June 2021. Nicknamed “Silicon Hills,” Austin has transformed itself into a hotbed for technology companies, and was recently designated as a top 10 Global Technology Innovation Hub city by KPMG. Large employers in the MSA include Apple, Dell Technologies, and the University of Texas, which enrolls over 50,000 students. Additionally, Tesla has recently announced that it would move its corporate headquarters to Austin, Texas, and made an estimated $1.1 billion infrastructure investment in the construction of an automotive production facility located in the Austin market, which is expected to deliver at least 5,000 jobs to the local economy and is scheduled to begin production in 2021.

Information Technology Systems

We have made significant investments in our information technology systems for our banking and lending operations and treasury management activities. We believe information technology system investments are important to enhance our capabilities to offer new products and overall customer experience, to provide scale for future growth and acquisitions, and to increase controls and efficiencies in our back office operations. We outsource our core data processing services to a nationally recognized bank software vendor providing us with capabilities to support the continued growth of the Bank. Our internal network and e-mail systems are maintained in-house. We leverage the capabilities of a third party service provider to provide the technical expertise around network design and architecture that is required for us to operate as an effective and efficient organization. We actively manage our business continuity plan, and we follow recommendations outlined by the Federal Financial Institutions Examination Council to ensure that we have effectively identified our risks and documented

 

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contingency plans for key functions and systems including providing for back up sites for all critical applications. We also perform tests to ensure the adequacy of these contingency plans.

The majority of our other systems, including our electronic funds transfer, transaction processing and online banking services, are also hosted by the vendor to whom we outsource our core data processing services. The scalability of this infrastructure is designed to support our growth strategy. These critical business applications and processes are included in the business continuity plans referenced above.

Enterprise Risk Management

We place significant emphasis on risk mitigation as an integral component of our organizational culture. We believe that our emphasis on risk management is manifested in our asset quality statistics and in our history of low charge-offs and losses on deposit-related services due to debit card, ACH or wire fraud. With respect to our lending philosophy, our risk management focuses on structuring credits to provide for multiple sources of repayment, coupled with strong underwriting and monitoring undertaken by the Bank’s experienced officers and credit policy personnel.

Our risk mitigation techniques include weekly Directors’ Loan Committee meetings where loan pricing, allowance for loan losses methodology and level, and loan concentrations are reviewed and discussed. In addition, the Bank’s board of directors reviews portfolio composition reports on a monthly basis. The Bank’s Special Assets Committee also meets monthly to discuss criticized assets and set action plans for those borrowers who display deteriorating financial condition, to monitor those relationships and to implement corrective measures on a timely basis to minimize losses. We also perform an annual stress test on our loan portfolio, in which we evaluate the impact on the portfolio of declining economic conditions.

We also focus on risk management in numerous other areas throughout our organization, including asset/liability management, regulatory compliance and strategic and operational risk. We have implemented an extensive asset/liability management process, and utilize a well-known and experienced third party to run our interest rate risk model on a quarterly basis.

We also annually engage an experienced third party to review and assess our controls with respect to technology, as well as to perform penetration and vulnerability testing to assist us in managing the risks associated with information security.

Competition

The banking business is highly competitive, and our profitability depends upon our ability to compete with other banks and non-bank financial institutions located in each of our markets for lending opportunities, deposit funds, bankers and acquisition candidates. Our banking competitors in our target markets include various community banks and national and regional banks. We compete with other commercial banks, savings associations, credit unions, finance companies and money market mutual funds operating in our markets.

We are subject to vigorous competition in all aspects of our business from banks, savings banks, savings and loan associations, finance companies, credit unions and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, asset-based non-bank lenders, insurance companies and certain other non-financial entities, including retail stores which may maintain their own credit programs and certain governmental organizations which may offer more favorable financing than we can. Many of the banks and other financial institutions with which we compete have significantly greater financial resources, marketing capability and name recognition than us and operate on a local, statewide, regional or nationwide basis.

Our business has capitalized on our team-oriented culture and diverse product and service offerings to successfully execute our high-touch, relationship driven approach to banking. We strive to know our customers

 

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better than our competition and believe our greatest opportunities for organic growth stem from the ability of our relationship managers to provide a greater level of attentiveness to customers and prospects than larger banks and our peers. As a result of consolidation among Texas metropolitan banks, we believe we are one of the few remaining locally-based banks in our markets that are dedicated to providing personalized service to small and medium-sized businesses with sophisticated banking needs.

Employees

As of June 30, 2021, we had 265 full-time equivalent employees. None of our employees are represented by a union. Management believes that our relationship with our employees is good.

Properties

Our principal offices and headquarters are located at 20202 Highway 59 North, Suite 190, Humble, Texas 77338. All of our branches are located in Texas. We own our headquarters and our branch locations in Pearland, Lake Jackson, Nixon, La Vernia, and Detroit, and we lease the remaining locations. We believe that the leases to which we are subject are generally on terms consistent with prevailing market terms. We also believe that our facilities are in good condition and are adequate to meet our operating needs for the foreseeable future. The following table sets forth a list of our branches and our loan production office, or LPO, as of the date of this prospectus.

 

Location

  

Address

  

Owned/Leased

Humble

  

20202 Highway 59 North, Humble, Texas 77338

  

Owned

Galleria

  

1800 West Loop South, Suite 100, Houston, Texas 77027

  

Leased

Conroe

  

1336 League Line Road, Suite 100, Conroe, Texas 77304

  

Leased

Pearland

  

1850 Pearland Parkway, Pearland, Texas, 77581

  

Owned

Beaumont

  

229 Dowlen Road, Suite C, Beaumont, Texas 77706

  

Leased

Lake Jackson

  

85 Oak Drive, Lake Jackson, Texas 77566

  

Owned

Mid County

  

2901 Turtle Creek Drive, Suite 115, Port Arthur, Texas 77642

  

Leased

Nixon

  

200 North Nixon Avenue, Nixon, Texas 78140

  

Owned

La Vernia

  

13809 West Highway 87, La Vernia, Texas 78121

  

Owned

Plano

  

1201 W. 15th Street, Suite 100, Plano, Texas 75075

  

Leased

Dallas

  

8235 Douglas Avenue, Suite 100, Dallas, Texas 75225

  

Leased

Detroit

  

12038 US Highway 82 West, Detroit, Texas 75436

  

Owned

Austin (LPO)

  

5508 Highway 290 West, Austin, Texas 78375

  

Leased

In addition, we lease non-branch offices in Copperfield, Dallas, Fort Worth, Friendswood, Georgetown, Katy, Kingwood, Plano, San Antonio and The Woodlands, Texas.

Legal Proceedings

We are not currently subject to any material legal proceedings. We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. We intend to defend ourselves vigorously against any pending or future claims and litigation.

At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially and adversely affect our reputation, even if resolved in our favor.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Historical Consolidated Financial Data” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this prospectus, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements.

Overview

We are a bank holding company with headquarters in Humble, Texas that operates through our wholly owned subsidiary, the Bank, and the Bank’s wholly owned subsidiary, TCCC. We focus on providing commercial banking solutions to small and medium-sized businesses and professionals with operations in our markets. Our market expertise, coupled with a deep understanding of our customers’ needs, allows us to deliver tailored financial products and services. We currently operate twelve branches, with seven branches in the Greater Houston market, two branches in the Dallas-Fort Worth market, two branches in the Austin-San Antonio market, and one branch in Detroit, Texas. We have experienced significant organic growth since commencing banking operations in 2008 as well as growth through our merger with Heritage. As of June 30, 2021, we had, on a consolidated basis, total assets of $2.01 billion, total loans of $1.55 billion, total deposits of $1.78 billion and total shareholders’ equity, including ESOP-owned shares, of $137.8 million.

On January 1, 2020, we acquired 100% of the outstanding stock of Heritage and its subsidiary, Heritage Bank, with five branches located in Texas, and merged Heritage with and into the Company and Heritage Bank with and into the Bank. The estimated values of assets acquired and liabilities assumed as of January 1, 2020 were total assets of $315.9 million, total loans of $259.6 million, and total deposits of $260.2 million. Pursuant to the merger, we issued $50.9 million in common stock and $103,627 in cash and recognized total goodwill of $18.0 million.    

As a bank holding company that operates through one segment, community banking, we generate most of our revenue from interest on loans, and customer service and loan fees. We incur interest expense on deposits and other borrowed funds, as well as noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest-earning assets and control the interest expenses of our liabilities, measured as net interest income, through our net interest margin and net interest spread. Net interest income is the difference between interest income on interest-earning assets, such as loans and interest-bearing time deposits in other banks, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest spread is the difference between average rates earned on interest-earning assets and average rates paid on interest-bearing liabilities.

Changes in market interest rates and the interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as in the volume and types of interest-earning assets, interest-bearing liabilities and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas, as well as developments affecting the real estate,

 

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technology, financial services, insurance, transportation, manufacturing and energy sectors within our target markets and throughout the state of Texas.

COVID-19 Update

The Company has been, and may continue to be, impacted by the COVID-19 pandemic. In recent months, vaccination rates have been increasing and restrictive measures have eased in certain areas. However, uncertainty remains about the duration of the pandemic and the timing and strength of the global economy’s recovery. To address the economic impact of the pandemic in the U.S., multiple stimulus packages have been enacted to provide economic relief to individuals and businesses, including the CARES Act, which established the PPP, and the American Rescue Plan Act of 2021, enacted in March 2021.

As the pandemic evolves, we continue to evaluate protocols and processes in place to execute our business continuity plans while promoting the health and safety of our employees and continuing to support our customers and communities.

We have been an active participant in all phases of the PPP, administered by the SBA, and have helped many of our customers obtain loans through the program. PPP loans have a two or five-year term and earn interest at 1.0%. At June 30, 2021, outstanding PPP loans, net of deferred loan fees of $8.5 million, were $326.7 million which are included in commercial and industrial loans. Assuming compliance with PPP origination and documentation requirements, loans funded through the PPP program are fully guaranteed by the U.S. government.

The Company also participated in the MSLP, created by the Federal Reserve to support lending to small and medium-sized businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. At June 30, 2021, outstanding MSLP loans, excluding the 95% portion sold to the Federal Reserve and net of deferred loan fees of $1.1 million, were $5.1 million which are included in commercial and industrial loans.

Results of Operations

Net Interest Income

Our operating results depend primarily on our net interest income, calculated as the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Fluctuations in market interest rates impact the yield and rates paid on interest-earning assets and interest-bearing liabilities, respectively. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact our net interest income. To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Six months ended June 30, 2021 vs. Six months ended June 30, 2020. Net interest income for the six months ended June 30, 2021 was $43.9 million compared to $32.5 million for the six months ended June 30, 2020, an increase of $11.4 million, or 35.1%. The increase in net interest income was comprised of a $9.4 million, or 23.4%, increase in interest income, and a $2.0 million, or 26.3%, decrease in interest expense. The increase in interest income was primarily attributable to loan fees related to PPP loans of $12.7 million for the six months ended June 30, 2021, offset by a 21 basis point decrease in yield on total loans. The $2.0 million decrease in interest expense for the six months ended June 30, 2021 was primarily attributable to a 65 basis point decrease in rates paid on interest-bearing deposits over the same period in 2020. For the six months ended June 30, 2021, net interest margin and net interest spread were 4.67% and 4.50%, respectively, compared to 4.55% and 4.21%, respectively, for the six months ended June 30, 2020.

 

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The following table presents an analysis of net interest income and net interest spread for the periods indicated, including average outstanding balances for each major category of interest-earning assets and interest-bearing liabilities, the interest earned or paid on such amounts, and the average rate earned or paid on such assets or liabilities, respectively. The table also sets forth the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the six months ended June 30, 2021 and 2020, the amount of interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield.

 

(Dollars in thousands)

   For the Six Months Ended June 30,  
   2021     2020  
   Average
Outstanding
Balance
    Interest
Earned/
Paid(3)
     Average
Yield/
Rate
    Average
Outstanding
Balance
    Interest
Earned/
Paid(3)
     Average
Yield/
Rate
 

Assets

              

Interest-earnings assets:

              

Investment securities

   $ 25,271     $ 513        4.09   $ 3,026     $ 32        2.13

Loans, gross

     1,628,988       48,721        6.03     1,274,477       39,553        6.24

Federal funds sold and other interest-earning assets

     242,084       322        0.27     159,762       560        0.70
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

Total interest-earning assets

     1,896,343       49,556        5.27     1,437,265       40,145        5.62
    

 

 

    

 

 

     

 

 

    

 

 

 

Less allowance for loan losses

     (13,081          (8,742     
  

 

 

        

 

 

      

Total interest-earning assets, net of allowance

     1,883,262            1,428,523       

Noninterest-earning assets

     101,921            71,454       
  

 

 

        

 

 

      

Total assets

   $ 1,985,183          $ 1,499,977       
  

 

 

        

 

 

      

Liabilities and Shareholders’ Equity

              

Interest-bearing liabilities:

              

Interest-bearing deposits

   $ 1,388,737     $ 4,590        0.67   $ 1,015,304     $ 6,680        1.32

Notes payable

     33,641       819        4.91     30,299       743        4.93

FHLB advances

     51,945       216        0.84     44,918       211        0.94
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

Total interest-bearing liabilities

     1,474,323       5,625        0.77     1,090,521       7,634        1.41
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-bearing deposits

     377,553            292,439       

Other liabilities

     8,978            7,102       
  

 

 

        

 

 

      

Total liabilities

     1,860,854            1,390,062       

Shareholders’ equity, including ESOP-owned shares

     124,329            109,915       
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 1,985,183          $ 1,499,977       
  

 

 

        

 

 

      

Net interest income

     $ 43,931          $ 32,511     
    

 

 

        

 

 

    

Net interest spread(1)

          4.50          4.21
       

 

 

        

 

 

 

Net interest margin(2)

          4.67          4.55
       

 

 

        

 

 

 

 

(1)

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

(2)

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

 

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(3)

Interest earned/paid includes accretion of deferred loan fees, premiums and discounts. Interest income on loans includes loan fees and discount accretion of $17.2 million and $9.2 million for the six months ended June 30, 2021 and 2020, respectively.

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

 

     For the Six Months Ended
June 30, 2021 compared to 2020
 
   Increase (Decrease)
due to
     Total
Increase
(Decrease)
 

(Dollars in thousands)

   Volume      Rate  

Interest-earning assets:

        

Investment securities

   $ 235      $ 246      $ 481  

Loans, gross

     10,862        (1,694      9,168  

Federal funds sold and other interest-earning assets

     286        (524      (238
  

 

 

    

 

 

    

 

 

 

Total increase (decrease) in interest income

   $ 11,383      $ (1,972    $ 9,411  
  

 

 

    

 

 

    

 

 

 

Interest-bearing liabilities:

        

Interest-bearing deposits

   $ 2,431      $ (4,521    $ (2,090

Notes payable

     80        (4      76  

FHLB advances

     32        (27      5  
  

 

 

    

 

 

    

 

 

 

Total increase (decrease) in interest expense

   $ 2,543      $ (4,552    $ (2,009
  

 

 

    

 

 

    

 

 

 

Increase (decrease) in net interest income

   $ 8,840      $ 2,580      $ 11,420  
  

 

 

    

 

 

    

 

 

 

Year ended December 31, 2020 vs. Year ended December 31, 2019. Net interest income for the year ended December 31, 2020 was $67.9 million compared to $34.0 million for the year ended December 31, 2019, an increase of $33.9 million, or 99.9%. The increase in net interest income was comprised of a $32.3 million, or 64.7%, increase in interest income and a $1.6 million, or 10.1%, decrease in interest expense. The growth in interest income was primarily attributable to a $404.8 million, or 54.7%, increase in average loans outstanding (excluding average loans outstanding under the CARES Act of $289.1 million) for the year ended December 31, 2020, compared to the same period in 2019, offset by a 79 basis point decrease in the yield on total loans. The increase in average loans outstanding (excluding average PPP loans) was primarily due to the acquisition of Heritage on January 1, 2020. The $1.6 million decrease in interest expense for the year ended December 31, 2020 was primarily related to a 114 basis point decrease in rates paid on interest-bearing deposits over the same period in 2019. For the year ended December 31, 2020, net interest margin and net interest spread were 4.24% and 3.98%, respectively, compared to 4.08% and 3.67%, respectively, for the same period in 2019, which reflects the increases in interest income discussed above relative to the decreases in interest expense.

 

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The following table presents an analysis of net interest income, net interest spread and net interest margin for the periods indicated in the manner presented for the six months ended June 30, 2021 and 2020 above. For the years ended December 31, 2020 and 2019, the amount of interest income not recognized on nonaccrual loans was not material. Any nonaccrual loans have been included in the table as loans carrying a zero yield.

 

(Dollars in thousands)

   For the Years Ended December 31,  
   2020     2019  
   Average
Outstanding
Balance
    Interest
Earned/
Paid(3)
     Average
Yield/
Rate
    Average
Outstanding
Balance
    Interest
Earned/
Paid(3)
     Average
Yield/
Rate
 

Assets

  

Interest-earnings assets:

              

Investment securities

   $ 14,709     $ 297        2.02   $ 2,422     $ 24        0.99

Loans, gross

     1,433,412       80,791        5.64     739,525       47,570        6.43

Federal fund sold and other interest-earning assets

     152,066       1,153        0.76     90,356       2,331        2.58
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     1,600,187       82,241        5.14     832,303       49,925        6.00
    

 

 

    

 

 

     

 

 

    

 

 

 

Less allowance for loan losses

     (10,506          (7,360     
  

 

 

        

 

 

      

Total interest-earning assets, net of allowance

     1,589,681            824,943       

Noninterest-earning assets

     80,686            44,220       
  

 

 

        

 

 

      

Total assets

   $ 1,670,367          $ 869,163       
  

 

 

        

 

 

      

Liabilities and Shareholders’ Equity

              

Interest-bearing liabilities:

              

Interest-bearing deposits

   $ 1,150,723     $ 12,302        1.07   $ 625,040     $ 13,787        2.21

Notes payable

     39,793       1,615        4.06     24,335       1,436        5.90

FHLB advances

     50,000       443        0.89     36,995       751        2.03
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     1,240,516       14,360        1.16     686,370       15,974        2.33
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-bearing deposits

     310,357            122,961       

Other liabilities

     6,661            3,442       
  

 

 

        

 

 

      

Total liabilities

     1,557,534            812,773       

Shareholders’ equity, including ESOP-owned shares

     112,833            56,390       
  

 

 

        

 

 

      

Total liabilities and shareholder’s equity

   $ 1,670,367          $ 869,163       
  

 

 

        

 

 

      

Net interest income

     $ 67,881          $ 33,951     
    

 

 

        

 

 

    

Net interest spread(1)

          3.98          3.67

Net interest margin(2)

          4.24          4.08

 

(1)

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

(2)

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

(3)

Interest earned/paid includes accretion of deferred loan fees, premiums and discounts. Interest income on loans includes loan fees and discount accretion of $18.5 million and $6.4 million for the years ended December 31, 2020 and 2019, respectively.

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and changes

 

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attributable to changes in interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.

 

     For the Years Ended
December 31, 2020 compared to
2019
 
     Increase (Decrease)
Due to Changes in
     Total
Increase
(decrease)
 

(Dollars in thousands)

   Volume      Rate  

Interest-earning assets:

        

Investment securities

   $ 122    $ 151      $ 273  

Loans, gross

     44,598        (11,377      33,221  

Federal funds sold and other interest-earning assets

     1,592        (2,770      (1,178
  

 

 

    

 

 

    

 

 

 

Total increase (decrease) in interest income

   $ 46,312      $ (13,996    $ 32,316  
  

 

 

    

 

 

    

 

 

 

Interest-bearing liabilities:

        

Interest-bearing deposits

   $ 11,644      $ (13,129    $ (1,485

Notes payable

     912        (733      179  

FHLB advances

     264        (572      (308
  

 

 

    

 

 

    

 

 

 

Total increase (decrease) in interest expense

   $ 12,820      $ (14,434    $ (1,614
  

 

 

    

 

 

    

 

 

 

Increase (decrease) in net interest income

   $ 33,492      $ 438      $ 33,930  
  

 

 

    

 

 

    

 

 

 

Provision for Loan Losses

The provision for loan losses is an expense we use to maintain an allowance for loan losses at a level which is deemed appropriate by management to absorb inherent losses on existing loans. For a description of the factors taken into account by our management in determining the allowance for loan losses see “—Financial Condition—Allowance for Loan Losses.”

The provision for loan losses for the six months ended June 30, 2021 was $1.5 million compared to $2.6 million for the six months ended June 30, 2020. The decrease in the provision for loan losses for the six months ended June 30, 2021 compared to the same period in 2020 was primarily due to additional provisions made in 2020 due to the continuing uncertainty related to the COVID-19 pandemic, as well as $585,000 in net charge offs during the six months ended June 30, 2020. As of June 30, 2021, the allowance for loan losses totaled $13.4 million, or 0.86% of total loans, compared to $12.0 million, or 0.77% of total loans, as of December 31, 2020 .

The provision for loan losses for the year ended December 31, 2020 was $7.6 million compared to $1.6 million for the year ended December 31, 2019. The increase of $6.0 million was primarily due to the increase in net charge-offs for the year ended December 31, 2020 compared to the same period in 2019, loan growth for the year ended December 31, 2020 and an increase in qualitative factors used in our analysis. As of December 31, 2020, the allowance for loan losses totaled $12.0 million, or 0.77% of total loans, compared to $8.1 million, or 1.00% of total loans, as of December 31, 2019.    

Net charge-offs for the year ended December 31, 2020 totaled $3.7 million, or 0.26% of total average loans, as compared to net charge-offs of $429,000, or 0.06% of total average loans, for the same period in 2019. Loans increased to $1.56 billion for the year ended December 31, 2020, from $808.6 million for the year ended December 31, 2019, an increase of $747.5 million, or 92.4%. Loans under the CARES Act loan programs accounted for $395.7 million, or 52.9%, of the loan growth.

 

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Noninterest Income

Our primary sources of recurring noninterest income are service charges and fees on deposit accounts, earnings credits on correspondent bank balances, and earnings from bank-owned life insurance. Noninterest income does not include loan origination fees, which are recognized in interest income.

Six months ended June 30, 2021 vs. Six months ended June 30, 2020. For the six months ended June 30, 2021, noninterest income totaled $1.9 million, an increase of $389,000, or 26.5%, compared to $1.5 million for the six months ended June 30, 2020. The following table presents, for the periods indicated, the major categories of noninterest income:

 

     For the Six Months Ended June 30,  

(Dollars in thousands)

   2021      2020      Increase
(Decrease)
 

Noninterest Income:

           

Service charges and fees on deposit accounts

   $ 1,242      $ 760      $ 482        63.4

Gain on Sale of SBA loans

     —          266        (266      (100.0 )% 

Earnings on bank-owned life insurance

     276        178        98        55.1

Other

     341        266        75        28.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 1,859      $ 1,470      $ 389        26.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Year ended December 31, 2020 vs. Year ended December 31, 2019. For the year ended December 31, 2020, noninterest income totaled $2.7 million, an increase of $1.5 million, or 120.4%, compared to $1.2 million for the year ended December 31, 2019. The following table presents, for the periods indicated, the major categories of noninterest income:

 

     For the Years Ended December 31,  

(Dollars in thousands)

   2020      2019      Increase
(Decrease)
 

Noninterest Income:

           

Service charges and fees on deposit accounts

   $ 1,709      $ 547      $ 1,162        212.4

Gain on Sale of SBA loans

     266        —          266        100.0

Earnings on bank-owned life insurance

     354        258        96        37.2

Other

     353        412        (59      (14.3 %) 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 2,682      $ 1,217      $ 1,465        120.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Service Charges and Fees on Deposit Accounts. We earn fees from our customers for deposit-related services, which are a component of our noninterest income. Service charges on deposit accounts were $1.2 million for the six months ended June 30, 2021, an increase of $482,000, or 63.4%, over the same period in 2020. The increase was primarily due to an increase in ATM income and mortgage secondary market fee income. Service charges on deposit accounts were $1.7 million for the year ended December 31, 2020, an increase of $1.2 million, or 212.4%, over the same period in 2019. The increase in this period was primarily due to increases in ATM income, commercial account analysis fees and non-sufficient funds fees as a result of growth in retail services. In addition, mortgage secondary market fee income for the year ended December 31, 2020 totaled $438,000.

Gain on Sale of SBA loans. The Company sold the guaranteed portion of one (non-PPP) SBA loan in the six month period ended June 30, 2020 and year ended December 31, 2020 and recorded a gain on the sale of the loan of $266,000. There were no SBA loans (including PPP loans) sold in the six month period ended June 30, 2021 or year ended December 31, 2019.

Earnings on Bank-Owned Life Insurance (BOLI). The Company has purchased life insurance policies on certain employees. Income from the policies and changes in the cash surrender values are recorded as noninterest

 

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income. Earnings on BOLI were $276,000 for the six months ended June 30, 2021, an increase of $98,000, or 55.1%, over the same period in 2020. Earnings on BOLI were $354,000 for the year ended December 31, 2020, an increase of $96,000, or 37.2%, over the same period in 2019.

Other. This category includes a variety of other income-producing activities, including partnership and investment fund income, foreclosed asset rental income, tenant lease income, dividends from the FHLB, and other fee income.

Other noninterest income increased $75,000, or 28.2%, from $266,000 for the six months ended June 30, 2020 to $341,000 for the six months ended June 30, 2021. The increase in other noninterest income was primarily due to an increase in lease income on other real estate owned. Other noninterest income decreased $59,000, or 14.3%, from $412,000 for the year ended December 31, 2019 to $353,000 for the year ended December 31, 2020. The decrease was due primarily to a decrease in income recognized on our investments in partnerships and funds associated with the Small Business Investment Company program of the SBA. Our investments in these partnerships and funds aid the Company in meeting the requirements of the Community Reinvestment Act. The partnerships and funds are licensed small business investment companies whose income is primarily derived from investment in small businesses and ultimate liquidation of these investments at a future date for profit.

Noninterest Expense

Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization of our facilities and our furniture, fixtures and office equipment, legal and professional fees, data processing and network expenses, regulatory fees, including FDIC assessments, marketing expenses, and loan operations and repossessed asset related expenses.

Six months ended June 30, 2021 vs. Six months ended June 30, 2020. For the six months ended June 30, 2021, noninterest expense totaled $33.3 million, an increase of $8.8 million, or 35.7%, compared to $24.5 million for the six months ended June 30, 2020.

The following table presents, for the periods indicated, the major categories of noninterest expense:

 

     For the Six Months Ended June 30,  

(Dollars in thousands)

   2021      2020      Increase
(Decrease)
 

Noninterest Expense:

           

Salaries and employee benefits

   $ 22,475      $ 15,172      $ 7,303        48.1

Net occupancy and equipment expenses

     2,391        1,924        467        24.3

Other:

           

Legal and professional fees

     2,679        2,689        (10      (0.4)

Data processing

     843        1,033        (190      (18.4)

Network expenses

     587        398        189        47.5

Regulatory assessments

     343        478        (135      (28.2 )% 

Marketing expenses

     810        555        255        45.9

Loan operations and other real estate owned expenses

     1,193        955        238        24.9

Loss on sale of other real estate owned

     344        —          344        100.0

Other expenses

     1,633        1,332        301        22.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

   $ 33,298      $ 24,536      $ 8,762        35.7
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Year ended December 31, 2020 vs. Year ended December 31, 2019. For the year ended December 31, 2020, noninterest expense totaled $47.4 million, an increase of $17.1 million, or 56.4%, compared to $30.3 million for the year ended December 31, 2019.

The following table presents, for the periods indicated, the major categories of noninterest expense:

 

     For the Years Ended December 31,  

(Dollars in thousands)

   2020      2019      Increase
(Decrease)
 

Noninterest Expense:

           

Salaries and employee benefits

   $ 29,262      $ 19,983      $ 9,279        46.4

Net occupancy and equipment expenses

     4,127        2,612        1,515        58.0

Other:

           

Legal and professional fees

     3,962        2,415        1,547        64.1

Data processing

     2,299        1,108        1,191        107.5

Network expenses

     885        630        255        40.5

Regulatory assessments

     1,303        434        869        200.2

Marketing expenses

     1,326        699        627        89.7

Loan operations and other real estate owned expenses

     1,368        819        549        57.1

Loss on sale of other real estate owned

     —          38        (38      (100.0 )% 

Other expenses

     2,871