UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549



FORM 10-Q



(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 001-38895



South Plains Financial, Inc.
(Exact name of registrant as specified in its charter)

 Texas
 
75-2453320
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
5219 City Bank Parkway
Lubbock, Texas
 
79407
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (806) 792-7101

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

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 par value per share
SPFI
The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐  No  ☒

As of November 13, 2019, the registrant had 18,007,041 shares of common stock, par value $1.00 per share, outstanding.



TABLE OF CONTENTS

   
Page
PART I.
3
Item 1.
3
 
3
 
4
 
6
 
7
  8
Item 2.
25
Item 3.
46
Item 4.
46
PART II.
47
Item 1.
47
Item 1A.
47
Item 2.
47
Item 3.
47
Item 4.
47
Item 5.
47
Item 6.
48
49

PART I.
FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements (Unaudited)

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share data)

   
September 30,
2019
   
December 31,
2018
 
ASSETS
           
Cash and due from banks
 
$
48,709
   
$
47,802
 
Interest-bearing deposits in banks
   
195,281
     
198,187
 
Federal funds sold
   
655
     
 
Cash and cash equivalents
   
244,645
     
245,989
 
Securities available for sale
   
401,335
     
338,196
 
Loans held for sale
   
50,136
     
38,382
 
Loans held for investment
   
1,962,609
     
1,957,197
 
Allowance for loan losses
   
(24,176
)
   
(23,126
)
Accrued interest receivable
   
11,675
     
12,957
 
Premises and equipment, net
   
59,189
     
59,787
 
Bank-owned life insurance
   
58,109
     
57,172
 
Intangible assets
   
2,464
     
 
Other assets
   
29,596
     
26,191
 
Total assets
 
$
2,795,582
   
$
2,712,745
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Deposits:
               
Noninterest-bearing
 
$
556,233
   
$
510,067
 
Interest-bearing
   
1,729,741
     
1,767,387
 
Total deposits
   
2,285,974
     
2,277,454
 
Short-term borrowings
   
9,855
     
17,705
 
Accrued expenses and other liabilities
   
32,861
     
29,416
 
Notes payable & other borrowings
   
95,000
     
95,000
 
Subordinated debt securities
   
26,472
     
34,002
 
Junior subordinated deferrable interest debentures
   
46,393
     
46,393
 
Total liabilities
   
2,496,555
     
2,499,970
 
Commitments and contingent liabilities
               
ESOP owned shares
   
     
58,195
 
                 
Stockholders’ equity:
               
Common stock, $1.00 par value per share, 30,000,000 shares authorized; 18,004,323 and 14,771,520 issued and outstanding at September 30, 2019 and December 31, 2018, respectively
   
18,004
     
14,772
 
Additional paid-in capital
   
140,268
     
80,412
 
Retained earnings
   
137,127
     
119,834
 
Accumulated other comprehensive income (loss)
   
3,628
     
(2,243
)
     
299,027
     
212,775
 
Less ESOP owned shares
   
     
58,195
 
                 
Total stockholders’ equity
   
299,027
     
154,580
 
Total liabilities and stockholders’ equity
 
$
2,795,582
   
$
2,712,745
 

The accompanying notes are an integral part of these consolidated financial statements.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share data)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2019
   
2018
   
2019
   
2018
 
Interest income:
                       
Loans, including fees
 
$
29,652
   
$
27,652
   
$
86,342
   
$
77,388
 
Securities:
                               
Taxable
   
2,021
     
1,736
     
6,013
     
3,323
 
Non taxable
   
226
     
530
     
669
     
2,646
 
Federal funds sold and interest-bearing deposits in banks
   
1,766
     
813
     
5,154
     
3,065
 
Total interest income
   
33,665
     
30,731
     
98,178
     
86,422
 
Interest expense:
                               
Deposits
   
5,627
     
4,670
     
17,655
     
11,959
 
Notes payable & other borrowings
   
581
     
541
     
1,849
     
1,444
 
Subordinated debt securities
   
404
     
245
     
1,213
     
735
 
Junior subordinated deferrable interest debentures
   
485
     
487
     
1,510
     
1,339
 
Total interest expense
   
7,097
     
5,943
     
22,227
     
15,477
 
Net interest income
   
26,568
     
24,788
     
75,951
     
70,945
 
Provision for loan losses
   
420
     
3,415
     
1,903
     
5,733
 
Net interest income, after provision for loan losses
   
26,148
     
21,373
     
74,048
     
65,212
 
Noninterest income:
                               
Service charges on deposit accounts
   
2,101
     
1,979
     
5,985
     
5,757
 
Income from insurance activities
   
1,114
     
1,462
     
4,074
     
3,992
 
Net gain on sales of loans
   
6,626
     
5,172
     
17,521
     
15,382
 
Bank card services and interchange fees
   
2,192
     
2,101
     
6,273
     
6,110
 
Investment commissions
   
419
     
424
     
1,245
     
1,300
 
Other
   
1,663
     
2,157
     
4,795
     
5,190
 
Total noninterest income
   
14,115
     
13,295
     
39,893
     
37,731
 
Noninterest expense:
                               
Salaries and employee benefits
   
18,135
     
18,044
     
56,044
     
53,463
 
Occupancy and equipment, net
   
3,486
     
3,388
     
10,309
     
10,103
 
Professional services
   
1,852
     
1,474
     
5,169
     
4,303
 
Marketing and development
   
762
     
671
     
2,275
     
2,249
 
IT and data services
   
722
     
564
     
2,104
     
1,667
 
Bank card expenses
   
864
     
665
     
2,394
     
1,988
 
Appraisal expenses
   
467
     
455
     
1,197
     
1,095
 
Other
   
3,740
     
3,385
     
10,502
     
10,077
 
Total noninterest expense
   
30,028
     
28,646
     
89,994
     
84,945
 
Income before income taxes
   
10,235
     
6,022
     
23,947
     
17,998
 
Income tax expense (benefit)
   
1,977
     
1,109
     
4,836
     
(5,429
)
Net income
 
$
8,258
   
$
4,913
   
$
19,111
   
$
23,427
 

The accompanying notes are an integral part of these consolidated financial statements.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (CONTINUED)
(Unaudited)
(Dollars in thousands, except per share data)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2019
   
2018
   
2019
   
2018
 
Earnings per share:
                       
Basic
 
$
0.46
   
$
0.33
   
$
1.16
   
$
1.59
 
Diluted
 
$
0.45
   
$
0.33
   
$
1.15
   
$
1.59
 
                                 
Net income
 
$
8,258
   
$
4,913
   
$
19,111
   
$
23,427
 
Other comprehensive income (loss):
                               
Change in net unrealized loss on securities available for sale
   
116
     
(2,811
)
   
7,433
     
(6,012
)
Tax effect
   
(25
)
   
970
     
(1,562
)
   
970
 
Other comprehensive income (loss)
   
91
     
(1,841
)
   
5,871
     
(5,042
)
Comprehensive income
 
$
8,349
   
$
3,072
   
$
24,982
   
$
18,385
 
                                 
Pro Forma Information (unaudited):
                               
Net income
   
N/A
     
N/A
     
N/A
   
$
14,894
 
Income tax expense
   
N/A
     
N/A
     
N/A
   
$
3,104
 
Earnings per share:
                               
Basic
   
N/A
     
N/A
     
N/A
   
$
1.01
 
Diluted
   
N/A
     
N/A
     
N/A
   
$
1.01
 

The accompanying notes are an integral part of these consolidated financial statements.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except per share data)

   
Common Stock
   
Additional
Paid-in
   
Retained
   
Accumulated
Other
Comprehensive
   
Treasury
   
Less:
ESOP
Owned
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Shares
   
Total
 
Nine Months Ended September 30,
                                               
Balance at January 1, 2018
   
15,153,510
   
$
15,154
   
$
85,888
   
$
120,589
   
$
(446
)
 
$
(5,858
)
 
$
(57,121
)
 
$
158,206
 
Net income
   
     
     
     
23,427
     
     
     
     
23,427
 
Cash dividends:
                                                               
Common - $1.19 per share
   
     
     
     
(17,544
)
   
     
     
     
(17,544
)
Other comprehensive (loss), (net of tax)
   
     
     
     
     
(5,042
)
   
     
     
(5,042
)
Balance at September 30, 2018
   
15,153,510
   
$
15,154
   
$
85,888
   
$
126,472
   
$
(5,488
)
 
$
(5,858
)
 
$
(57,121
)
 
$
159,047
 
                                                                 
Balance at January 1, 2019
   
14,771,520
   
$
14,772
   
$
80,412
   
$
119,834
   
$
(2,243
)
 
$
   
$
(58,195
)
 
$
154,580
 
Issuance of common stock, net
   
3,207,000
     
3,207
     
48,185
     
     
     
     
     
51,392
 
Net income
   
     
     
     
19,111
     
     
     
     
19,111
 
Cash dividends:
                                                               
Common - $0.03 per share
   
     
     
     
(539
)
   
     
     
     
(539
)
Other comprehensive income, (net of tax)
   
     
     
     
     
5,871
     
     
     
5,871
 
Terminated ESOP put option
   
     
     
     
     
     
     
58,195
     
58,195
 
Exercise of employee stock options, net of 63,100 shares for cashless exercise and net of 8,597 shares for taxes
   
25,803
     
25
     
(186
)
   
     
     
     
     
(161
)
Stock based compensation
   
     
     
407
     
     
     
     
     
407
 
Share-based liability awards modified to equity awards
   
     
     
11,450
     
     
     
     
     
11,450
 
Cumulative change in accounting principle
   
     
     
     
(1,279
)
   
     
     
     
(1,279
)
Balance at September 30, 2019
   
18,004,323
   
$
18,004
   
$
140,268
   
$
137,127
   
$
3,628
   
$
   
$
   
$
299,027
 
                                                                 
Three Months Ended September 30,
                                                               
Balance at July 1, 2018
   
15,153,510
   
$
15,154
   
$
85,888
   
$
121,559
   
$
(3,647
)
 
$
(5,858
)
 
$
(57,121
)
 
$
155,975
 
Net income
   
     
     
     
4,913
     
     
     
     
4,913
 
Other comprehensive (loss), (net of tax)
   
     
     
     
     
(1,841
)
   
     
     
(1,841
)
Balance at September 30, 2018
   
15,153,510
   
$
15,154
   
$
85,888
   
$
126,472
   
$
(5,488
)
 
$
(5,858
)
 
$
(57,121
)
 
$
159,047
 
                                                                 
Balance at July 1, 2019
   
17,978,520
   
$
17,979
   
$
140,189
   
$
129,408
   
$
3,537
   
$
   
$
   
$
291,113
 
Issuance of common stock, net
   
     
     
     
     
     
     
     
 
Net income
   
     
     
     
8,258
     
     
     
     
8,258
 
Cash dividends:
                                                               
Common - $0.03
   
     
     
     
(539
)
   
     
     
     
(539
)
Other comprehensive income, (net of tax)
   
     
     
     
     
91
     
     
     
91
 
Terminated ESOP put option
   
     
     
     
     
     
     
     
 
Exercise of employee stock options, net of 63,100 shares for cashless exercise and net of 8,597 shares for taxes
   
25,803
     
25
     
(186
)
   
     
     
     
     
(161
)
Stock based compensation
   
     
     
265
     
     
     
     
     
265
 
Share-based liability awards modified to equity awards
   
     
     
     
     
     
     
     
 
Balance at September 30, 2019
   
18,004,323
   
$
18,004
   
$
140,268
   
$
137,127
   
$
3,628
   
$
   
$
   
$
299,027
 

The accompanying notes are an integral part of these consolidated financial statements.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

   
For the Nine Months Ended
September 30,
 
   
2019
   
2018
 
Cash flows from operating activities:
           
Net income
 
$
19,111
   
$
23,427
 
Adjustments to reconcile net income to net cash from operating activities:
               
Provision for loan losses
   
1,903
     
5,733
 
Depreciation and amortization
   
3,733
     
3,909
 
Accretion and amortization
   
(97
)
   
1,507
 
Other gains, net
   
(122
)
   
(148
)
Net gain on sales of loans
   
(17,521
)
   
(15,382
)
Proceeds from sales of loans held for sale
   
460,268
     
431,676
 
Loans originated for sale
   
(454,501
)
   
(404,525
)
Earnings on bank-owned life insurance
   
(937
)
   
(999
)
Stock based compensation
   
407
     
 
Net change in:
               
Accrued interest receivable and other assets
   
(3,390
)
   
(9,617
)
Accrued expenses and other liabilities
   
13,616
     
9,619
 
Net cash from operating activities
   
22,470
     
45,200
 
                 
Cash flows from investing activities:
               
Activity in securities available for sale:
               
Purchases
   
(165,023
)
   
(464,966
)
Sales
   
     
101,711
 
Maturities, prepayments, and calls
   
109,414
     
226,684
 
Activity in securities held to maturity:
               
Maturities, prepayments, and calls
   
     
14,675
 
Loan originations and principal collections, net
   
(7,786
)
   
(142,203
)
Cash paid for acquisition
   
(2,800
)
   
 
Purchases of premises and equipment, net
   
(3,267
)
   
(2,615
)
Proceeds from sales of premises and equipment
   
208
     
74
 
Proceeds from sales of foreclosed assets
   
1,608
     
6,388
 
Net cash from investing activities
   
(67,646
)
   
(260,252
)
                 
Cash flows from financing activities:
               
Net change in deposits
   
8,520
     
107,273
 
Net change in short-term borrowings
   
(7,850
)
   
(3,500
)
Proceeds from common stock issuance, net
   
51,392
     
 
Payments to tax authorities for stock-based compensation
   
(161
)
   
 
Payments made on notes payable and other borrowings
   
(7,530
)
   
 
Cash dividends on common stock
   
(539
)
   
(17,544
)
Net cash from financing activities
   
43,832
     
86,229
 
                 
Net change in cash and cash equivalents
 
$
(1,344
)
 
$
(128,823
)
Beginning cash and cash equivalents
   
245,989
     
294,563
 
Ending cash and cash equivalents
 
$
244,645
   
$
165,740
 
                 
Supplemental disclosures of cash flow information:
               
Interest paid on deposits and borrowed funds
 
$
21,882
   
$
11,774
 
Income taxes paid
   
4,364
     
 
Supplemental schedule of noncash investing and financing activities:
               
Loans transferred to foreclosed assets
 
$
1,521
   
$
6,151
 
Share-based liability awards modified to equity awards
   
11,450
     
 

The accompanying notes are an integral part of these consolidated financial statements.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands except per share data)

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – South Plains Financial, Inc. (“SPFI”) is a Texas bank holding company that conducts its principal activities through its subsidiaries from offices located throughout Texas and Eastern New Mexico.  Principal activities include commercial and retail banking, along with insurance, investment, trust, and mortgage services. The following are subsidiaries of SPFI:

Wholly Owned, Consolidated Subsidiaries:
 
City Bank
Bank subsidiary
Windmark Insurance Agency, Inc. (“Windmark”)
Non-bank subsidiary
Ruidoso Retail, Inc.
Non-bank subsidiary
CB Provence, LLC
Non-bank subsidiary
CBT Brushy Creek, LLC
Non-bank subsidiary
CBT Properties, LLC
Non-bank subsidiary
Wholly Owned, Equity Method Subsidiaries:
 
South Plains Financial Capital Trusts (SPFCT) III-V
Non-bank subsidiaries

Basis of Presentation and Consolidation – The consolidated financial statements in this Quarterly Report on Form 10-Q (“Report”) include the accounts of SPFI and its wholly owned consolidated subsidiaries (collectively referred to as the “Company”) identified above.  All significant intercompany balances and transactions have been eliminated in consolidation.

The interim consolidated financial statements in this Report have not been audited by an independent registered public accounting firm, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments were of a normal and recurring nature.  The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”).  Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements, and notes thereto, for the year ended December 31, 2018 in our prospectus filed with the SEC pursuant to Rule 424(b) of the Securities Act of 1933, as amended, on May 9, 2019 (“IPO Prospectus”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Determination of the adequacy of the allowance for loan losses is a material estimate that is particularly susceptible to significant change in the near term; the assumptions used in stock-based compensation, the valuation of foreclosed assets, and fair values of financial instruments can also involve significant management estimates.

Change in Capital Structure
On March 11, 2019, the Company amended and restated its Certificate of Formation.  The Amended and Restated Certificate of Formation increased the number of authorized shares of common stock, par value $1.00 per share, from 1,000,000 to 30,000,000.

The Company completed a 29-to-1 stock split of the Company’s outstanding shares of common stock for shareholders of record as of March 11, 2019.  The stock split was payable in the form of a dividend on or about March 11, 2019.  Shareholders received 29 additional shares for each share held as of the record date.  All share and per share amounts in the consolidated financial statements have been retroactively adjusted to reflect this stock split for all periods presented.

Stock Offering – The Company consummated the underwritten initial public offering of its common stock in May 2019.  In connection with the initial public offering, the Company issued and sold 3,207,000 shares of its common stock, including 507,000 shares of common stock pursuant to the underwriters’ full exercise of their option to purchase additional shares at a public offering price of $17.50 per share, for aggregate gross proceeds of $56.1 million before deducting underwriting discounts and offering expenses, and aggregate net proceeds of $51.4 million after deducting underwriting discounts and offering expenses.

Pro Forma Information – As a result of the revocation of the Company’s subchapter S corporation election effective May 31, 2018, the net income and earnings per share data prior to that date are not comparable with subsequent periods, which include federal income tax expense.  As a result, the consolidated statements of comprehensive income in this Report include a pro forma section for the nine-month period ended September 30, 2018, as if the conversion to a subchapter C corporation had occurred effective January 1, 2018.  The federal tax rate used for the pro forma nine-month period ended September 30, 2019 is 21%.

In accordance with applicable provisions of the Internal Revenue Code of 1986, as amended, the terms of the South Plains Financial, Inc. Employee Stock Ownership Plan (“ESOP”), provided that, for so long as SPFI was a privately held company, ESOP participants would have the right, for a specified period of time, to require SPFI to repurchase shares of its common stock that were distributed to such participants by the ESOP.  This repurchase obligation terminated upon the consummation of our initial public offering and listing of our common stock on the NASDAQ Global Select Market in May 2019.  However, because we were privately held at December 31, 2018, the shares of common stock held by the ESOP have been reflected in our consolidated balance sheets as a line item called ESOP-owned shares, that appears between total liabilities and stockholders’ equity during that period. As a result, the value of ESOP-owned shares have been deducted from stockholders’ equity in our consolidated balance sheet for that period. For all periods following our initial public offering and continued listing of our common stock on the NASDAQ Global Select Market, the ESOP-owned shares are and will be included in stockholders’ equity.

Mergers and AcquisitionsOn July 25, 2019, SPFI entered into an Agreement and Plan of Merger (the “Merger Agreement”) with West Texas State Bank, a Texas banking association (“WTSB”), providing for SPFI’s acquisition of WTSB through the merger of SPFI Merger Sub, Inc., a Texas corporation and wholly-owned subsidiary of SPFI (“Merger Sub”), with and into WTSB, with WTSB continuing as the surviving entity and thereafter being a wholly-owned subsidiary of SPFI (the “Merger”).  Following the consummation of the Merger, WTSB will merge with and into City Bank, a Texas banking association and the wholly-owned subsidiary of the Company (“City Bank”), with City Bank surviving the merger (the “Bank Merger”).  Pursuant to the terms and subject to the conditions of the Merger Agreement, the transaction provides for the payment to each outstanding share of WTSB’s common stock (except for shares held by Dissenting Shareholders (as defined in the Merger Agreement)) an amount of cash equal to the quotient of (i) $76,100,000 (subject to adjustment described in the Merger Agreement), divided by (ii) the total number of shares of WTSB common stock issued and outstanding at the time of the closing of the Merger.

Change in Accounting Principle – Prior to January 1, 2019, the Company accounted for its cash-settled stock appreciation rights (“SARs”) using the intrinsic value method, as permitted by ASC 718.  As a result of the Company listing its common stock on the NASDAQ Global Select Market and becoming a reporting company with the SEC, the Company is now required to use the fair value method for these SARs.  The Company’s calculation of the fair value of the SARs, as of January 1, 2019, exceeded the recorded intrinsic value by $1.6 million.  ASC 250 states that an “entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so.”  Retrospective application of the effects of a change from the intrinsic value to fair value would be impracticable due to the need to objectively determine assumptions that would be used in prior periods without using current information.  Additionally, SEC Staff Accounting Bulletin Topic 14.B states that entities changing from nonpublic to public status are not permitted to apply the fair-value-based method retrospectively.  Therefore, the Company recorded a cumulative-effect adjustment to retained earnings for $1.3 million ($1.6 million net of $340,000 in tax) effective January 1, 2019 and applied this change prospectively.

Stock-based Compensation – The Company sponsors an equity incentive plan under which options to acquire shares of the Company common stock may be granted periodically to all full-time employees and directors of the Company or its affiliates at a specific exercise price to acquire shares of the Company’s common stock. Shares are issued out of authorized unissued common shares that have been reserved for issuance under such plan. Compensation cost is measured based on the estimated fair value of the award at the grant date and is recognized in earnings on a straight-line basis over the requisite service period. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model. This model requires assumptions as to the expected stock volatility, dividends, terms and risk-free rates. The expected volatility is based on the combination of the Company’s historical volatility and the volatility of comparable peer banks. The expected term represents the period of time that options are expected to be outstanding from the grant date. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the appropriate life of each stock option.

Goodwill and Other Intangible Assets – Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.  Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events and circumstances exist that indicate that an impairment test should be performed.  Intangible assets with definite lives are amortized over their estimated useful lives.  Other intangible assets consist of customer relationship and employment agreement intangible assets and are amortized over their estimated useful lives of 5 years.

Recent Accounting PronouncementsFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) constitutes GAAP for nongovernmental entities. Updates to ASC are prescribed in Accounting Standards Updates (“ASU”), which are not authoritative until incorporated into ASC.

ASU 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  ASU 2016-01, among other things, eliminates the requirement to disclose the fair value of financial instruments at amortized cost for entities that are not public business entities. We originally adopted the new standard effective January 1, 2018, the effective date of the guidance. Accordingly, the Company’s fair value of financial instruments at amortized cost were not disclosed in our consolidated financial statements for 2018.  However, based on the Company becoming a public company in May 2019, these disclosures are now required and have been included in our consolidated financial statements presented in this Report.

ASU 2016-02 Leases (Topic 842).  The FASB amended existing guidance that requires that lessees recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. The Company is in the process of determining the effect of the standard on its consolidated operating results and financial condition.  These amendments are effective for the Company for annual periods beginning after December 15, 2019 and interim periods beginning after December 15, 2020.

ASU 2016-13 Financial Instruments - Credit Losses (Topic 326).  The FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model.  The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held to maturity securities, and debt securities. ASU 2016-13 is effective for the Company for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the impact adoption of ASU 2016-13 will have on its consolidated operating results and financial condition.

2.
SECURITIES

The amortized cost and fair value of securities, with gross unrealized gains and losses, at period-end follow:

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
September 30, 2019
                       
Available for sale:
                       
U.S. government and agencies
 
$
6,848
   
$
53
   
$
   
$
6,901
 
State and municipal
   
40,720
     
884
     
(52
)
   
41,552
 
Mortgage-backed securities
   
251,958
     
3,226
     
(1,306
)
   
253,878
 
Collateralized mortgage obligations
   
60,244
     
     
(59
)
   
60,185
 
Asset-backed and other amortizing securities
   
36,972
     
1,847
     
     
38,819
 
   
$
396,742
   
$
6,010
   
$
(1,417
)
 
$
401,335
 

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
December 31, 2018
                       
Available for sale:
                       
U.S. government and agencies
 
$
84,765
   
$
18
   
$
(76
)
 
$
84,707
 
State and municipal
   
32,205
     
480
     
(375
)
   
32,310
 
Mortgage-backed securities
   
184,267
     
29
     
(2,040
)
   
182,256
 
Asset-backed and other amortizing securities
   
39,799
     
1
     
(877
)
   
38,923
 
   
$
341,036
   
$
528
   
$
(3,368
)
 
$
338,196
 

The amortized cost and fair value of securities at September 30, 2019 are presented below by contractual maturity.  Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.  Other securities are shown separately since they are not due at a single maturity date.

   
Available for Sale
 
   
Amortized
Cost
   
Fair
Value
 
Within 1 year
 
$
470
   
$
475
 
After 1 year through 5 years
   
6,848
     
6,901
 
After 5 years through 10 years
   
10,434
     
10,630
 
After 10 years
   
29,816
     
30,447
 
Other
   
349,174
     
352,882
 
   
$
396,742
   
$
401,335
 

At September 30, 2019 and December 31, 2018, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

Securities with a carrying value of approximately $198.6 million and $200.0 million at September 30, 2019 and December 31, 2018, respectively, were pledged to collateralize public deposits and for other purposes as required or permitted by law.

The following table segregates securities with unrealized losses at the periods indicated, by the duration they have been in a loss position:

   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
September 30, 2019
                                   
U.S. government and agencies
 
$
   
$
   
$
   
$
   
$
   
$
 
State and municipal
   
9,066
     
36
     
1,220
     
16
     
10,286
     
52
 
Mortgage-backed securities
   
61,931
     
1,235
     
6,679
     
72
     
68,610
     
1,307
 
Collateralized mortgage obligations
   
60,185
     
58
     
     
     
60,185
     
58
 
   
$
131,182
   
$
1,329
   
$
7,899
   
$
88
   
$
139,081
   
$
1,417
 
                                                 
December 31, 2018
                                               
U.S. government and agencies
 
$
77,891
   
$
27
   
$
2,048
   
$
49
   
$
79,939
   
$
76
 
State and municipal
   
5,662
     
92
     
9,781
     
283
     
15,443
     
375
 
Mortgage-backed securities
   
108,962
     
293
     
54,035
     
1,747
     
162,997
     
2,040
 
Asset-backed and other amortizing securities
   
     
     
37,351
     
877
     
37,351
     
877
 
   
$
192,515
   
$
412
   
$
103,215
   
$
2,956
   
$
295,730
   
$
3,368
 

There were 23 securities with an unrealized loss at September 30, 2019.  Management does not believe that these losses are other than temporary as there is no intent to sell any of these securities before recovery and it is not probable that we will be required to sell any of these securities before recovery, and credit loss, if any, is not material.  Any unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  The fair value is expected to recover as the securities approach their maturity date or if market yields for such investments decline.  Management does not believe any of the securities are impaired due to reasons of credit quality.  Accordingly, as of September 30, 2019, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s consolidated financial statements.

3.
LOANS

Loans are summarized by category as of the periods presented below:

   
September 30,
2019
   
December 31,
2018
 
Commercial real estate
 
$
520,687
   
$
538,037
 
Commercial - specialized
   
316,862
     
305,022
 
Commercial - general
   
398,909
     
427,728
 
Consumer:
               
1-4 family residential
   
359,160
     
346,153
 
Auto loans
   
212,529
     
191,647
 
Other consumer
   
70,338
     
70,209
 
Construction
   
84,124
     
78,401
 
     
1,962,609
     
1,957,197
 
Allowance for loan losses
   
(24,176
)
   
(23,126
)
Loans, net
 
$
1,938,433
   
$
1,934,071
 

The Company has certain lending policies, underwriting standards, and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies, underwriting standards, and procedures on a regular basis and makes changes as appropriate. Management receives frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing, and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.

Commercial – General and Specialized – Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably. Underwriting standards have been designed to determine whether the borrower possesses sound business ethics and practices, evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations, as agreed and ensure appropriate collateral is obtained to secure the loan. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as real estate, accounts receivable, or inventory, and include personal guarantees.  Owner-occupied real estate is included in commercial loans, as the repayment of these loans is generally dependent on the operations of the commercial borrower’s business rather than on income-producing properties or the sale of the properties.  Commercial loans are grouped into two distinct sub-categories: specialized and general. Commercial related segments that are considered “specialized” include agricultural production and real estate loans, energy loans, and finance, investment, and insurance loans. Commercial related segments that contain a broader diversity of borrowers, sub-industries, or serviced industries are grouped into the “general category.” These include goods, services, restaurant & retail, construction, and other industries.

Commercial Real Estate – Commercial real estate loans are also subject to underwriting standards and processes similar to commercial loans. These loans are underwritten primarily based on projected cash flows for income-producing properties and collateral values for non-income-producing properties. The repayment of these loans is generally dependent on the successful operation of the property securing the loans or the sale or refinancing of the property. Real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s real estate portfolio are diversified by type and geographic location. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry.

Construction – Loans for residential construction are for single-family properties to developers, builders, or end-users.  These loans are underwritten based on estimates of costs and completed value of the project.  Funds are advanced based on estimated percentage of completion for the project.  Performance of these loans is affected by economic conditions as well as the ability to control costs of the projects.

Consumer – Loans to consumers include 1-4 family residential loans, auto loans, and other loans for recreational vehicles or other purposes. The Company utilizes a computer-based credit scoring analysis to supplement its policies and procedures in underwriting consumer loans. The Company’s loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimizes the Company’s risk.  The Company generally requires mortgage title insurance and hazard insurance on 1-4 family residential loans.

The following table details the activity in the allowance for loan losses.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

   
Beginning
Balance
   
Provision for
Loan Losses
   
Charge-offs
   
Recoveries
   
Ending
Balance
 
For the three months ended September 30, 2019
                             
Commercial real estate
 
$
5,415
   
$
(379
)
 
$
   
$
108
   
$
5,144
 
Commercial - specialized
   
3,346
     
(575
)
   
     
28
     
2,799
 
Commercial - general
   
8,325
     
734
     
(170
)
   
19
     
8,908
 
Consumer:
                                       
1-4 family residential
   
2,310
     
384
     
(65
)
   
9
     
2,638
 
Auto loans
   
3,067
     
127
     
(260
)
   
83
     
3,017
 
Other consumer
   
1,199
     
121
     
(230
)
   
63
     
1,153
 
Construction
   
509
     
8
     
     
     
517
 
Total
 
$
24,171
   
$
420
   
$
(725
)
 
$
310
   
$
24,176
 
                                         
For the three months ended September 30, 2018
                                       
Commercial real estate
 
$
4,336
   
$
268
   
$
   
$
239
   
$
4,843
 
Commercial - specialized
   
2,924
     
(191
)
   
(70
)
   
10
     
2,673
 
Commercial - general
   
8,733
     
2,434
     
(3,738
)
   
64
     
7,493
 
Consumer:
                                       
1-4 family residential
   
1,451
     
102
     
(131
)
   
31
     
1,453
 
Auto loans
   
2,603
     
609
     
(276
)
   
41
     
2,977
 
Other consumer
   
1,158
     
213
     
(257
)
   
30
     
1,144
 
Construction
   
510
     
(20
)
   
     
     
490
 
Total
 
$
21,715
   
$
3,415
   
$
(4,472
)
 
$
415
   
$
21,073
 

   
Beginning
Balance
   
Provision for
Loan Losses
   
Charge-offs
   
Recoveries
   
Ending
Balance
 
For the nine months ended September 30, 2019
                             
Commercial real estate
 
$
5,579
   
$
(758
)
 
$
   
$
323
   
$
5,144
 
Commercial - specialized
   
2,516
     
230
     
(37
)
   
90
     
2,799
 
Commercial - general
   
8,173
     
674
     
(235
)
   
296
     
8,908
 
Consumer:
                                       
1-4 family residential
   
2,249
     
412
     
(84
)
   
61
     
2,638
 
Auto loans
   
2,994
     
626
     
(765
)
   
162
     
3,017
 
Other consumer
   
1,192
     
550
     
(744
)
   
155
     
1,153
 
Construction
   
423
     
169
     
(75
)
   
     
517
 
Total
 
$
23,126
   
$
1,903
   
$
(1,940
)
 
$
1,087
   
$
24,176
 
                                         
For the nine months ended September 30, 2018
                                       
Commercial real estate
 
$
3,769
   
$
2,374
   
$
(1,539
)
 
$
239
   
$
4,843
 
Commercial - specialized
   
2,367
     
339
     
(108
)
   
75
     
2,673
 
Commercial - general
   
10,151
     
808
     
(3,865
)
   
399
     
7,493
 
Consumer:
                                       
1-4 family residential
   
1,787
     
(98
)
   
(272
)
   
36
     
1,453
 
Auto loans
   
2,068
     
1,500
     
(693
)
   
102
     
2,977
 
Other consumer
   
971
     
653
     
(607
)
   
127
     
1,144
 
Construction
   
348
     
157
     
(15
)
   
     
490
 
Total
 
$
21,461
   
$
5,733
   
$
(7,099
)
 
$
978
   
$
21,073
 

The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment:

   
Recorded Investment
   
Allowance for Loan Losses
 
   
Individually
Evaluated
   
Collectively
Evaluated
   
Individually
Evaluated
   
Collectively
Evaluated
 
September 30, 2019
                       
Commercial real estate
 
$
331
   
$
520,356
   
$
   
$
5,144
 
Commercial - specialized
   
586
     
316,276
     
     
2,799
 
Commercial - general
   
2,660
     
396,249
     
404
     
8,504
 
Consumer:
                               
1-4 family residential
   
2,384
     
356,776
     
35
     
2,603
 
Auto loans
   
     
212,529
     
     
3,017
 
Other consumer
   
     
70,338
     
     
1,153
 
Construction
   
     
84,124
     
     
517
 
                                 
Total
 
$
5,961
   
$
1,956,648
   
$
439
   
$
23,737
 
                                 
December 31, 2018
                               
Commercial real estate
 
$
1,819
   
$
536,218
   
$
   
$
5,579
 
Commercial - specialized
   
2,116
     
302,906
     
     
2,516
 
Commercial - general
   
2,950
     
424,778
     
233
     
7,940
 
Consumer:
                               
1-4 family residential
   
2,475
     
343,678
     
8
     
2,241
 
Auto loans
   
     
191,647
     
     
2,994
 
Other consumer
   
     
70,209
     
     
1,192
 
Construction
   
     
78,401
     
     
423
 
                                 
Total
 
$
9,360
   
$
1,947,837
   
$
241
   
$
22,885
 

Impaired loan information follows:

   
Unpaid
Contractual
Principal
Balance
   
Recorded
Investment
With No
Allowance
   
Recorded
Investment
With
Allowance
   
Total
Recorded
Investment
   
Related
Allowance
   
Average
Recorded
Investment
 
September 30, 2019
                                   
Commercial real estate
 
$
786
   
$
331
   
$
   
$
331
   
$
   
$
1,075
 
Commercial - specialized
   
586
     
586
     
     
586
     
     
1,351
 
Commercial - general
   
3,253
     
     
2,660
     
2,660
     
404
     
2,805
 
Consumer:
                           
                 
1-4 family
   
2,803
     
1,930
     
454
     
2,384
     
35
     
2,430
 
Auto loans
   
     
     
     
     
     
 
Other consumer
   
     
     
     
     
     
 
Construction
   
     
     
     
     
     
 
                                                 
Total
 
$
7,428
   
$
2,847
   
$
3,114
   
$
5,961
   
$
439
   
$
7,661
 
                                                 
December 31, 2018
                                               
Commercial real estate
 
$
2,274
   
$
1,819
   
$
   
$
1,819
   
$
   
$
4,590
 
Commercial - specialized
   
2,116
     
2,116
     
     
2,116
     
     
3,742
 
Commercial - general
   
4,758
     
240
     
2,710
     
2,950
     
233
     
3,963
 
Consumer:
                           
                 
1-4 family
   
2,894
     
2,111
     
364
     
2,475
     
8
     
2,881
 
Auto loans
   
     
     
     
     
     
 
Other consumer
   
     
     
     
     
     
 
Construction
   
     
     
     
     
     
 
                                                 
Total
 
$
12,042
   
$
6,286
   
$
3,074
   
$
9,360
   
$
241
   
$
15,176
 

All impaired loans $250,000 and greater were specifically evaluated for impairment.  Interest income recognized using a cash-basis method on impaired loans for the nine-month period ended September 30, 2019 and the year ended December 31, 2018 was not significant.  Additional funds committed to be advanced on impaired loans are not significant.

The table below provides an age analysis on accruing past-due loans and nonaccrual loans:

   
30-89 Days
Past Due
   
90 Days or
More Past Due
   
Nonaccrual
 
September 30, 2019
                 
Commercial real estate
 
$
449
   
$
   
$
218
 
Commercial - specialized
   
118
     
177
     
1,259
 
Commercial - general
   
1,711
     
     
2,144
 
Consumer:
                       
1-4 Family residential
   
1,807
     
843
     
1,614
 
Auto loans
   
874
     
92
     
 
Other consumer
   
797
     
109
     
 
Construction
   
131
     
     
 
                         
Total
 
$
5,887
   
$
1,221
   
$