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 June 30, 2020

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 August 14, 2020, the registrant had 18,059,174 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.
26
Item 3.
48
Item 4.
49
PART II.
50
Item 1.
50
Item 1A.
50
Item 2.
52
Item 3.
52
Item 4.
52
Item 5.
52
Item 6.
53
54

PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements

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

   
June 30, 2020
   
December 31, 2019
 
   
(Unaudited)
       
ASSETS
           
Cash and due from banks
 
$
51,256
   
$
56,246
 
Interest-bearing deposits in banks
   
204,845
     
101,853
 
Cash and cash equivalents
   
256,101
     
158,099
 
Securities available for sale
   
730,674
     
707,650
 
Loans held for sale
   
92,774
     
49,035
 
Loans held for investment
   
2,331,716
     
2,143,623
 
Allowance for loan losses
   
(40,635
)
   
(24,197
)
Accrued interest receivable
   
13,598
     
13,924
 
Premises and equipment, net
   
61,883
     
61,873
 
Bank-owned life insurance
   
70,071
     
69,397
 
Goodwill
   
19,968
     
18,757
 
Intangible assets
   
8,446
     
8,632
 
Mortgage servicing rights
   
3,776
     
2,054
 
Other assets
   
36,160
     
28,320
 
Total assets
 
$
3,584,532
   
$
3,237,167
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Deposits:
               
Noninterest-bearing
 
$
940,853
   
$
790,921
 
Interest-bearing
   
2,006,984
     
1,905,936
 
Total deposits
   
2,947,837
     
2,696,857
 
Short-term borrowings
   
9,565
     
37,165
 
Accrued expenses and other liabilities
   
47,731
     
29,098
 
Notes payable & other borrowings
   
170,000
     
95,000
 
Subordinated debt securities
   
26,472
     
26,472
 
Junior subordinated deferrable interest debentures
   
46,393
     
46,393
 
Total liabilities
   
3,247,998
     
2,930,985
 
                 
Stockholders’ equity:
               
Common stock, $1.00 par value per share, 30,000,000 shares authorized; 18,059,174 and 18,036,115 issued and outstanding at June 30, 2020 and December 31, 2019, respectively
   
18,059
     
18,036
 
Additional paid-in capital
   
140,620
     
140,492
 
Retained earnings
   
158,311
     
146,696
 
Accumulated other comprehensive income
   
19,544
     
958
 
Total stockholders’ equity
   
336,534
     
306,182
 
                 
Total liabilities and stockholders’ equity
 
$
3,584,532
   
$
3,237,167
 

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
June 30,
   
Six Months Ended
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Interest income:
                       
Loans, including fees
 
$
29,861
   
$
28,592
   
$
60,876
   
$
56,690
 
Securities:
                               
Taxable
   
3,170
     
1,816
     
6,950
     
3,992
 
Non taxable
   
942
     
218
     
1,338
     
443
 
Federal funds sold and interest-bearing deposits in banks
   
34
     
1,883
     
580
     
3,388
 
Total interest income
   
34,007
     
32,509
     
69,744
     
64,513
 
Interest expense:
                               
Deposits
   
2,760
     
6,139
     
7,043
     
12,028
 
Notes payable & other borrowings
   
102
     
618
     
552
     
1,268
 
Subordinated debt securities
   
403
     
403
     
807
     
809
 
Junior subordinated deferrable interest debentures
   
294
     
512
     
695
     
1,025
 
Total interest expense
   
3,559
     
7,672
     
9,097
     
15,130
 
Net interest income
   
30,448
     
24,837
     
60,647
     
49,383
 
Provision for loan losses
   
13,133
     
875
     
19,367
     
1,483
 
Net interest income, after provision for loan losses
   
17,315
     
23,962
     
41,280
     
47,900
 
Noninterest income:
                               
Service charges on deposit accounts
   
1,439
     
1,979
     
3,422
     
3,884
 
Income from insurance activities
   
1,022
     
1,210
     
2,181
     
2,960
 
Net gain on sales of loans
   
17,797
     
6,235
     
26,337
     
10,895
 
Bank card services and interchange fees
   
2,344
     
2,071
     
4,582
     
4,081
 
Realized gain on sale of securities
   
     
     
2,318
     
 
Investment commissions
   
365
     
493
     
820
     
826
 
Fiduciary fees
   
776
     
367
     
1,605
     
743
 
Other
   
1,153
     
1,348
     
2,506
     
2,389
 
Total noninterest income
   
24,896
     
13,703
     
43,771
     
25,778
 
Noninterest expense:
                               
Salaries and employee benefits
   
21,621
     
18,784
     
42,431
     
37,909
 
Occupancy and equipment, net
   
3,586
     
3,416
     
7,186
     
6,823
 
Professional services
   
1,961
     
1,611
     
3,533
     
3,317
 
Marketing and development
   
806
     
796
     
1,574
     
1,513
 
IT and data services
   
1,079
     
689
     
1,926
     
1,382
 
Bank card expenses
   
1,017
     
806
     
2,069
     
1,530
 
Appraisal expenses
   
638
     
407
     
1,093
     
730
 
Other
   
4,499
     
3,421
     
9,406
     
6,762
 
Total noninterest expense
   
35,207
     
29,930
     
69,218
     
59,966
 
Income before income taxes
   
7,004
     
7,735
     
15,833
     
13,712
 
Income tax expense (benefit)
   
1,389
     
1,655
     
3,135
     
2,859
 
Net income
 
$
5,615
   
$
6,080
   
$
12,698
   
$
10,853
 

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
June 30,
   
Six Months Ended
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Earnings per share:
                       
Basic
 
$
0.31
   
$
0.37
   
$
0.70
   
$
0.69
 
Diluted
 
$
0.31
   
$
0.37
   
$
0.69
   
$
0.69
 
                                 
Net income
 
$
5,615
   
$
6,080
   
$
12,698
   
$
10,853
 
Other comprehensive income (loss):
                               
Change in net unrealized loss on securities available for sale
   
6,813
     
4,410
     
28,002
     
7,317
 
Change in net losses on cash flow hedges
   
(931
)
   
     
(2,158
)
   
 
Reclassification adjustment for (gain) loss included in net income
   
     
     
(2,318
)
   
 
Tax effect
   
(1,235
)
   
(926
)
   
(4,940
)
   
(1,537
)
Other comprehensive income (loss)
   
4,647
     
3,484
     
18,586
     
5,780
 
Comprehensive income
 
$
10,262
   
$
9,564
   
$
31,284
   
$
16,633
 

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
 
Six Months Ended June 30,
                                               
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
   
     
     
     
10,853
     
     
     
     
10,853
 
Other comprehensive (loss), (net of tax)
   
     
     
     
     
5,780
     
     
     
5,780
 
Terminated ESOP put option
   
     
     
     
     
     
     
58,195
     
58,195
 
Stock based compensation
   
     
     
142
     
     
     
     
     
142
 
Share-based liability awards modified to equity awards
   
     
     
11,450
     
     
     
     
     
11,450
 
Cumulative change in accounting principle
   
     
     
     
(1,279
)
   
     
     
     
(1,279
)
Balance at June 30, 2019
   
17,978,520
   
$
17,979
   
$
140,189
   
$
129,408
   
$
3,537
   
$
   
$
   
$
291,113
 
                                                                 
Balance at January 1, 2020
   
18,036,115
   
$
18,036
   
$
140,492
   
$
146,696
   
$
958
   
$
   
$
   
$
306,182
 
Net income
   
     
     
     
12,698
     
     
     
     
12,698
 
Cash dividends:
                                                               
Common - $0.03 per share
   
     
     
     
(1,083
)
   
     
     
     
(1,083
)
Other comprehensive income, (net of tax)
   
     
     
     
     
18,586
     
     
     
18,586
 
Exercise of employee stock options and vesting of restricted stock units, net of 17,178 shares for cashless exercise and net of 7,608 shares for taxes
   
27,759
     
28
     
(157
)
   
     
     
     
     
(129
)
Purchase of treasury stock
   
     
     
     
     
     
(61
)
   
     
(61
)
Extinguish treasury stock
   
(4,700
)
   
(5
)
   
(56
)
   
     
     
61
     
     
-
 
Stock based compensation
   
     
     
341
     
     
     
     
     
341
 
Balance at June 30, 2020
   
18,059,174
   
$
18,059
   
$
140,620
   
$
158,311
   
$
19,544
   
$
   
$
   
$
336,534
 
                                                                 
Three Months Ended June 30,
                                                               
Balance at March 31, 2019
   
14,771,520
   
$
14,772
   
$
80,412
   
$
123,328
   
$
53
   
$
   
$
(58,195
)
 
$
160,370
 
Issuance of common stock, net
   
3,207,000
     
3,207
     
48,185
     
     
     
     
     
51,392
 
Net income
   
     
     
     
6,080
     
     
     
     
6,080
 
Other comprehensive income, (net of tax)
   
     
     
     
     
3,484
     
     
     
3,484
 
Terminated ESOP put option
   
     
     
     
     
     
     
58,195
     
58,195
 
Stock based compensation
   
     
     
142
     
     
     
     
     
142
 
Share-based liability awards modified to equity awards
   
     
     
11,450
     
     
     
     
     
11,450
 
Balance at June 30, 2019
   
17,978,520
   
$
17,979
   
$
140,189
   
$
129,408
   
$
3,537
   
$
   
$
   
$
291,113
 
                                                                 
Balance at March 31, 2020
   
18,056,014
   
$
18,056
   
$
140,699
   
$
153,238
   
$
14,897
   
$
   
$
   
$
326,890
 
Net income
   
     
     
     
5,615
     
     
     
     
5,615
 
Cash dividends:
                                                               
Common - $0.03
   
     
     
     
(542
)
   
     
     
     
(542
)
Other comprehensive income, (net of tax)
   
     
     
     
     
4,647
     
     
     
4,647
 
Exercise of employee stock options and vesting of restricted stock units, net of 16,518 shares for cashless exercise and net of 2,622 shares for taxes
   
7,860
     
8
     
(54
)
   
     
     
     
     
(46
)
Purchase of treasury stock
   
     
     
     
     
     
(61
)
   
     
(61
)
Extinguish treasury stock
   
(4,700
)
   
(5
)
   
(56
)
   
     
     
61
     
     
 
Stock based compensation
   
     
     
31
     
     
     
     
     
31
 
Balance at June 30, 2020
   
18,059,174
   
$
18,059
   
$
140,620
   
$
158,311
   
$
19,544
   
$
   
$
   
$
336,534
 

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 Six Months Ended
June 30,
 
   
2020
   
2019
 
Cash flows from operating activities:
           
Net income
 
$
12,698
   
$
10,853
 
Adjustments to reconcile net income to net cash from operating activities:
               
Provision for loan losses
   
19,367
     
1,483
 
Depreciation and amortization
   
3,257
     
2,474
 
Accretion and amortization
   
1,130
     
(296
)
Other gains, net
   
(2,441
)
   
(149
)
Net gain on sales of loans
   
(26,337
)
   
(10,895
)
Proceeds from sales of loans held for sale
   
567,294
     
274,021
 
Loans originated for sale
   
(584,696
)
   
(263,676
)
Earnings on bank-owned life insurance
   
(674
)
   
(622
)
Stock based compensation
   
341
     
142
 
Net change in:
               
Accrued interest receivable and other assets
   
(16,859
)
   
45
 
Accrued expenses and other liabilities
   
18,340
     
8,279
 
Net cash from operating activities
   
(8,580
)
   
21,659
 
                 
Cash flows from investing activities:
               
Activity in securities available for sale:
               
Purchases
   
(121,254
)
   
(11,233
)
Sales
   
94,514
     
 
Maturities, prepayments, and calls
   
30,588
     
93,478
 
Loan originations and principal collections, net
   
(193,060
)
   
19,940
 
Cash paid for acquisition
   
(687
)
   
 
Purchases of premises and equipment, net
   
(2,402
)
   
(2,406
)
Proceeds from sales of premises and equipment
   
87
     
74
 
Proceeds from sales of foreclosed assets
   
1,689
     
1,244
 
Net cash from investing activities
   
(190,525
)
   
101,097
 
                 
Cash flows from financing activities:
               
Net change in deposits
   
250,980
     
4,404
 
Net change in short-term borrowings
   
(27,600
)
   
(8,895
)
Proceeds from common stock issuance, net
   
     
51,392
 
Proceeds from notes payable & other borrowings
   
75,000
     
 
Payments to tax authorities for stock-based compensation
   
(129
)
   
 
Payments made on notes payable and other borrowings
   
     
(7,530
)
Cash dividends on common stock
   
(1,083
)
   
 
Purchase of treasury stock
   
(61
)
   
 
Net cash from financing activities
   
297,107
     
39,371
 
                 
Net change in cash and cash equivalents
 
$
98,002
   
$
162,127
 
Beginning cash and cash equivalents
   
158,099
     
245,989
 
Ending cash and cash equivalents
 
$
256,101
   
$
408,116
 
                 
Supplemental disclosures of cash flow information:
               
Interest paid on deposits and borrowed funds
 
$
9,623
   
$
14,866
 
Income taxes paid
   
     
2,853
 
Supplemental schedule of noncash investing and financing activities:
               
Loans transferred to foreclosed assets
 
$
1,088
   
$
1,166
 
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 corporation and registered 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 (this “Form 10-Q”) 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 Form 10-Q 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 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 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.

Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized deferred fees and costs on originated loans, and premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the straight-line method, which is not materially different from the effective interest method required by GAAP.

Loans are placed on nonaccrual status when, in management’s opinion, collection of interest is unlikely, which typically occurs when principal or interest payments are more than ninety days past due. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses – The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Company’s allowance for loan losses consists of specific valuation allowances established for probable losses on specific loans and general valuation allowances calculated based on historical loan loss experience for similar loans with similar characteristics and trends, judgmentally adjusted for general economic conditions and other qualitative risk factors internal and external to the Company.

The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. Loans originated by the bank subsidiary are generally secured by specific items of collateral including real property, crops, livestock, consumer assets, and other business assets.

While management uses available information to recognize losses on loans, further reductions in the carrying amounts of loans may be necessary based on various factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the bank subsidiary to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. All loans rated substandard or worse and greater than $250,000 are specifically reviewed to determine if they are impaired. Factors considered by management in determining whether a loan is impaired include payment status and the sources, amounts, and probabilities of estimated cash flow available to service debt in relation to amounts due according to contractual terms. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Loans that are determined to be impaired are then evaluated to determine estimated impairment, if any. GAAP allows impairment to be measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Loans that are not individually determined to be impaired or are not subject to the specific review of impaired status are subject to the general valuation allowance portion of the allowance for loan loss.

The Company may modify its loan agreement with a borrower. The modification will be considered a troubled debt restructuring if the following criteria are met: (1) the borrower is experiencing a financial difficulty and (2) the Company makes a concession that it would not otherwise make. Concessions may include debt forgiveness, interest rate change, or maturity extension. Each of these loans is impaired and is evaluated for impairment, with a specific reserve recorded as necessary based on probable losses related to collateral and cash flow. A loan will no longer be required to be reported as restructured in calendar years following the restructure if the interest rate at the time of restructure is greater than or equal to the rate the Company was willing to accept for a new extension of credit with similar risk and the loan is in compliance with its modified terms.

Acquired Loans – Loans that the Company acquires in connection with business combinations are recorded at fair value with no carryover of the acquired entity’s related allowance for loan losses. The fair value of the acquired loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan.  The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount.  These loans are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.  The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan.  Subsequent decreases to the expected cash flows will require the Company to evaluate the need for an additional allowance.  Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount which the Company will then reclassify as accretable discount that will be recognized into interest income over the remaining life of the loan.

Loans acquired through business combinations that meet the specific criteria of ASC 310-30 are individually evaluated each period to analyze expected cash flows.  To the extent that the expected cash flows of a loan have decreased due to credit deterioration, the Company then establishes an allowance.

Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30 are accounted for under ASC 310-20.  These loans are initially recorded at fair value, and include credit and interest rate marks associated with acquisition accounting adjustments.  Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans.  There is no allowance for loan losses established at the acquisition date for acquired performing loans.  An allowance for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.

Acquired loans that met the criteria for impaired or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Company expects to fully collect the new carrying value (i.e. fair value) of the loans.  As such, the Company may no longer consider the loan to be nonaccrual or nonperforming at the date of acquisition and may accrue interest on these loans, including the impact of any accretable discount.  In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment.

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.

Core deposit intangible (“CDI”) is a measure of the value of checking and savings deposit relationships acquired in a business combination. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding relative to an alternative source of funding. CDI is amortized over the estimated useful lives of the existing deposit relationships acquired, but does not exceed 10 years. Significantly all CDI is amortized using the sum of the years digits method.

The remaining other intangible assets consist of customer relationship and employment agreement intangible assets and are amortized over their estimated useful lives of 5 years.

Stock-based Compensation – The Company sponsors an equity incentive plan under which options to acquire shares of the Company’s common stock may be granted periodically to all full-time employees and directors of the Company or its affiliates at a specific exercise price. Shares are issued out of authorized and 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.

Reclassification – Certain amounts in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2019 have been reclassified to conform to the 2020 presentation.

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 2016-02 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, 2021 and interim periods beginning after December 15, 2022.

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.

ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This ASU simplifies the accounting for goodwill impairment for all entities by eliminating Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The Company elected to early adopt ASU 2017-04 on January 1, 2020, and it did not have a significant impact on its financial statements. The Company’s policy is to test goodwill for impairment annually or on an interim basis if an event triggering impairment may have occurred. During the period ended June 30, 2020, the economic disruption and uncertainty surrounding the ongoing COVID-19 pandemic and the recent volatility in the market price of crude oil resulted in a decrease in the Company’s stock price. The Company believed this resulted in a triggering event requiring an interim goodwill impairment quantitative analysis. Under the new simplified guidance, the Company’s estimated fair value as of June 30, 2020, exceeded its carrying amount resulting in no impairment charge for the period. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

Subsequent Events – The Company has evaluated subsequent events and transactions from June 30, 2020 through the date of this Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP and determined that there were no material subsequent events requiring recognition or disclosure.

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
 
June 30, 2020
                       
Available for sale:
                       
U.S. government and agencies
 
$
4,750
   
$
66
   
$
   
$
4,816
 
State and municipal
   
214,576
     
9,474
     
(18
)
   
224,032
 
Mortgage-backed securities
   
343,716
     
14,588
     
     
358,304
 
Collateralized mortgage obligations
   
107,319
     
243
     
     
107,562
 
Asset-backed and other amortizing securities
   
33,416
     
2,544
     
     
35,960
 
   
$
703,777
   
$
26,915
   
$
(18
)
 
$
730,674
 

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
December 31, 2019
                       
Available for sale:
                       
U.S. government and agencies
 
$
4,750
   
$
57
   
$
   
$
4,807
 
State and municipal
   
94,512
     
1,091
     
(911
)
   
94,692
 
Mortgage-backed securities
   
463,899
     
3,727
     
(3,110
)
   
464,516
 
Collateralized mortgage obligations
   
107,443
     
15
     
(169
)
   
107,289
 
Asset-backed and other amortizing securities
   
35,833
     
522
     
(9
)
   
36,346
 
   
$
706,437
   
$
5,412
   
$
(4,199
)
 
$
707,650
 

The amortized cost and fair value of securities at June 30, 2020 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
 
$
6,267
   
$
6,343
 
After 1 year through 5 years
   
     
 
After 5 years through 10 years
   
15,672
     
16,456
 
After 10 years
   
197,387
     
206,050
 
Other
   
484,451
     
501,825
 
   
$
703,777
   
$
730,674
 

At both June 30, 2020 and December 31, 2019, 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 $268.0 million and $211.0 million at June 30, 2020 and December 31, 2019, 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
 
June 30, 2020
                                   
U.S. government and agencies
 
$
   
$
   
$
   
$
   
$
   
$
 
State and municipal
   
4,742
     
18
     
     
     
4,742
     
18
 
Mortgage-backed securities
   
     
     
     
     
     
 
Collateralized mortgage obligations
   
     
     
     
     
     
 
Asset-backed and other amortizing securities
   
     
     
     
     
     
 
   
$
4,742
   
$
18
   
$
   
$
   
$
4,742
   
$
18
 
                                                 
December 31, 2019
                                               
U.S. government and agencies
 
$
   
$
   
$
   
$
   
$
   
$
 
State and municipal
   
58,389
     
910
     
387
     
1
     
58,776
     
911
 
Mortgage-backed securities
   
284,120
     
3,070
     
4,661
     
40
     
288,781
     
3,110
 
Collateralized mortgage obligations
   
60,039
     
169
     
     
     
60,039
     
169
 
Asset-backed and other amortizing securities
   
2,661
     
9
     
     
     
2,661
     
9
 
   
$
405,209
   
$
4,158
   
$
5,048
   
$
41
   
$
410,257
   
$
4,199
 

There were two securities with an unrealized loss at June 30, 2020. 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 June 30, 2020, 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 HELD FOR INVESTMENT

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

   
June 30,
2020
   
December 31,
2019
 
Commercial real estate
 
$
655,906
   
$
658,195
 
Commercial - specialized
   
325,942
     
309,505
 
Commercial - general
   
620,905
     
441,398
 
Consumer:
               
1-4 family residential
   
360,308
     
362,796
 
Auto loans
   
202,263
     
215,209
 
Other consumer
   
69,754
     
74,000
 
Construction
   
96,638
     
82,520
 
     
2,331,716
     
2,143,623
 
Allowance for loan losses
   
(40,635
)
   
(24,197
)
Loans, net
 
$
2,291,081
   
$
2,119,426
 

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 allowance for loan losses was $40.6 million at June 30, 2020, compared to $24.2 million at December 31, 2019. The allowance for loan losses to loans held for investment was 1.74% at June 30, 2020 and 1.13% at December 31, 2019. The increase in the allowance for loan losses in the second quarter of 2020 compared to the second quarter of 2019 is a result of economic effects from the ongoing COVID-19 pandemic as well as the decline in oil and gas prices that started in the first quarter of 2020. The increase in the provision for loan losses in the second quarter 2020 compared to the first quarter 2020 is a result of a further worsening of the economy and continued uncertainty from the ongoing  COVID-19 pandemic. The full extent of the impact of the COVID-19 pandemic on the economy and the Company’s customers is still unknown at this time. Accordingly, additional provisions for loan losses may be necessary in future periods.

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 June 30, 2020
                             
Commercial real estate
 
$
7,192
   
$
7,856
   
$
   
$
108
   
$
15,156
 
Commercial - specialized
   
4,555
     
2,872
     
(836
)
   
23
     
6,614
 
Commercial - general
   
7,980
     
1,773
     
(532
)
   
72
     
9,293
 
Consumer:
                                       
1-4 family residential
   
2,744
     
181
     
     
1
     
2,926
 
Auto loans
   
4,312
     
(168
)
   
(262
)
   
57
     
3,939
 
Other consumer
   
1,639
     
205
     
(383
)
   
179
     
1,640
 
Construction
   
652
     
414
     
     
1
     
1,067
 
Total
 
$
29,074
   
$
13,133
   
$
(2,013
)
 
$
441
   
$
40,635
 
                                         
For the three months ended June 30, 2019
                                       
Commercial real estate
 
$
5,335
   
$
(28
)
 
$
   
$
108
   
$
5,415
 
Commercial - specialized
   
2,327
     
985
     
(5
)
   
39
     
3,346
 
Commercial - general
   
8,504
     
(324
)
   
(60
)
   
205
     
8,325
 
Consumer:
                                       
1-4 family residential
   
2,416
     
(127
)
   
     
21
     
2,310
 
Auto loans
   
3,067
     
202
     
(248
)
   
46
     
3,067
 
Other consumer
   
1,174
     
216
     
(233
)
   
42
     
1,199
 
Construction
   
558
     
(49
)
   
     
     
509
 
Total
 
$
23,381
   
$
875
   
$
(546
)
 
$
461
   
$
24,171
 

   
Beginning
Balance
   
Provision for
Loan Losses
   
Charge-offs
   
Recoveries
   
Ending
Balance
 
For the six months ended June 30, 2020
                             
Commercial real estate
 
$
5,049
   
$
9,892
   
$
   
$
215
   
$
15,156
 
Commercial - specialized
   
2,287
     
5,090
     
(850
)
   
87
     
6,614
 
Commercial - general
   
9,609
     
975
     
(1,380
)
   
89
     
9,293
 
Consumer:
                                       
1-4 family residential
   
2,093
     
832
     
     
1
     
2,926
 
Auto loans
   
3,385
     
1,149
     
(704
)
   
109
     
3,939
 
Other consumer
   
1,341
     
796
     
(749
)
   
252
     
1,640
 
Construction
   
433
     
633
     
     
1
     
1,067
 
                                         
Total
 
$
24,197
   
$
19,367
   
$
(3,683
)
 
$
754
   
$
40,635
 
                                         
For the six months ended June 30, 2019
                                       
Commercial real estate
 
$
5,579
   
$
(379
)
 
$
   
$
215
   
$
5,415
 
Commercial - specialized
   
2,516
     
804
     
(37
)
   
63
     
3,346
 
Commercial - general
   
8,173
     
(60
)
   
(65
)
   
277
     
8,325
 
Consumer:
                                       
1-4 family residential
   
2,249
     
28
     
(19
)
   
52
     
2,310
 
Auto loans
   
2,994
     
500
     
(506
)
   
79
     
3,067
 
Other consumer
   
1,192
     
429
     
(513
)
   
91
     
1,199
 
Construction
   
423
     
161
     
(75
)
   
     
509
 
                                         
Total
 
$
23,126
   
$
1,483
   
$
(1,215
)
 
$
777
   
$
24,171
 

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
 
June 30, 2020
                       
Commercial real estate
 
$
4,379
   
$
651,527
   
$
560
   
$
14,596
 
Commercial - specialized
   
1,074
     
324,868
     
190
     
6,424
 
Commercial - general
   
878
     
620,027
     
126
     
9,167
 
Consumer:
                               
1-4 family residential
   
1,837
     
358,471
     
     
2,926
 
Auto loans
   
     
202,263
     
     
3,939
 
Other consumer
   
     
69,754
     
     
1,640
 
Construction
   
     
96,638
     
     
1,067
 
                                 
Total
 
$
8,168
   
$
2,323,548
   
$
876
   
$
39,759
 
                                 
December 31, 2019
                               
Commercial real estate
 
$
299
   
$
657,896
   
$
   
$
5,049
 
Commercial - specialized
   
573
     
308,932
     
     
2,287
 
Commercial - general
   
1,396
     
440,002
     
525
     
9,084
 
Consumer:
                               
1-4 family residential
   
1,899
     
360,897
     
     
2,093
 
Auto loans
   
     
215,209
     
     
3,385
 
Other consumer
   
     
74,000
     
     
1,341
 
Construction
   
     
82,520
     
     
433
 
                                 
Total
 
$
4,167
   
$
2,139,456
   
$
525
   
$
23,672
 

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
 
June 30, 2020
                                   
Commercial real estate
 
$
4,379
   
$
1,898
   
$
2,481
   
$
4,379
   
$
560
   
$
2,719
 
Commercial - specialized
   
1,074
     
617
     
457
     
1,074
     
190
     
1,210
 
Commercial - general
   
878
     
385
     
493
     
878
     
126
     
1,526
 
Consumer:
                                               
1-4 family
   
2,256
     
1,837
     
     
1,837
     
     
2,012
 
Auto loans
   
     
     
     
     
     
 
Other consumer
   
     
     
     
     
     
 
Construction
   
     
     
     
     
     
 
                                                 
Total
 
$
8,587
   
$
4,737
   
$
3,431
   
$
8,168
   
$
876
   
$
7,467
 
                                                 
December 31, 2019
                                               
Commercial real estate
 
$
754
   
$
299
   
$
   
$
299
   
$
   
$
1,059
 
Commercial - specialized
   
573
     
573
     
     
573
     
     
1,345
 
Commercial - general
   
1,839
     
     
1,396
     
1,396
     
525
     
2,173
 
Consumer:
                                               
1-4 family
   
2,318
     
1,899
     
     
1,899
     
     
2,187
 
Auto loans
   
     
     
     
     
     
 
Other consumer
   
     
     
     
     
     
 
Construction
   
     
     
     
     
     
 
                                                 
Total
 
$
5,484
   
$
2,771
   
$
1,396
   
$
4,167
   
$
525
   
$
6,764
 

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 six-month period ended June 30, 2020 and the year ended December 31, 2019 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
 
June 30, 2020
                 
Commercial real estate
 
$
10,659
   
$
   
$
4,424
 
Commercial - specialized
   
56
     
283
     
795
 
Commercial - general
   
179
     
150
     
1,301
 
Consumer:
                       
1-4 Family residential
   
1,401
     
2,539
     
821
 
Auto loans
   
324
     
62
     
 
Other consumer
   
723
     
42