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, 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 November 6, 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.
27
Item 3.
49
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)

   
September 30,
2020
   
December 31,
2019
 
   
(Unaudited)
       
ASSETS
           
Cash and due from banks
 
$
43,750
   
$
56,246
 
Interest-bearing deposits in banks
   
245,785
     
101,853
 
Federal funds sold
   
1,350
     
 
Cash and cash equivalents
   
290,885
     
158,099
 
Securities available for sale
   
726,329
     
707,650
 
Loans held for sale
   
76,507
     
49,035
 
Loans held for investment
   
2,288,234
     
2,143,623
 
Allowance for loan losses
   
(46,076
)
   
(24,197
)
Accrued interest receivable
   
13,632
     
13,924
 
Premises and equipment, net
   
61,399
     
61,873
 
Bank-owned life insurance
   
70,401
     
69,397
 
Goodwill
   
19,508
     
18,757
 
Intangible assets
   
7,994
     
8,632
 
Mortgage servicing rights
   
6,562
     
2,054
 
Deferred tax asset, net
   
3,650
     
5,619
 
Other assets
   
23,641
     
22,701
 
Total assets
 
$
3,542,666
   
$
3,237,167
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Deposits:
               
Noninterest-bearing
 
$
906,059
   
$
790,921
 
Interest-bearing
   
2,037,743
     
1,905,936
 
Total deposits
   
2,943,802
     
2,696,857
 
Short-term borrowings
   
7,765
     
37,165
 
Accrued expenses and other liabilities
   
41,592
     
29,098
 
Notes payable & other borrowings
   
75,000
     
95,000
 
Subordinated debt securities
   
75,546
     
26,472
 
Junior subordinated deferrable interest debentures
   
46,393
     
46,393
 
Total liabilities
   
3,190,098
     
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 September 30, 2020 and December 31, 2019, respectively
   
18,059
     
18,036
 
Additional paid-in capital
   
141,245
     
140,492
 
Retained earnings
   
174,501
     
146,696
 
Accumulated other comprehensive income
   
18,763
     
958
 
Total stockholders’ equity
   
352,568
     
306,182
 
 
               
Total liabilities and stockholders’ equity
 
$
3,542,666
   
$
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
September 30,
   
Nine Months Ended
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
Interest income:
                       
Loans, including fees
 
$
30,724
   
$
29,652
   
$
91,600
   
$
86,342
 
Securities:
                               
Taxable
   
2,678
     
2,021
     
9,628
     
6,013
 
Non taxable
   
1,061
     
226
     
2,399
     
669
 
Federal funds sold and interest-bearing deposits in banks
   
40
     
1,766
     
620
     
5,154
 
Total interest income
   
34,503
     
33,665
     
104,247
     
98,178
 
Interest expense:
                               
Deposits
   
2,517
     
5,627
     
9,560
     
17,655
 
Notes payable & other borrowings
   
68
     
581
     
620
     
1,849
 
Subordinated debt securities
   
403
     
404
     
1,210
     
1,213
 
Junior subordinated deferrable interest debentures
   
242
     
485
     
937
     
1,510
 
Total interest expense
   
3,230
     
7,097
     
12,327
     
22,227
 
Net interest income
   
31,273
     
26,568
     
91,920
     
75,951
 
Provision for loan losses
   
6,062
     
420
     
25,429
     
1,903
 
Net interest income, after provision for loan losses
   
25,211
     
26,148
     
66,491
     
74,048
 
Noninterest income:
                               
Service charges on deposit accounts
   
1,749
     
2,101
     
5,171
     
5,985
 
Income from insurance activities
   
3,303
     
1,114
     
5,484
     
4,074
 
Net gain on sales of loans
   
20,942
     
6,626
     
47,279
     
17,521
 
Bank card services and interchange fees
   
2,608
     
2,192
     
7,190
     
6,273
 
Realized gain on sale of securities
   
     
     
2,318
     
 
Investment commissions
   
441
     
419
     
1,261
     
1,245
 
Fiduciary fees
   
781
     
361
     
2,386
     
1,104
 
Other
   
1,836
     
1,302
     
4,342
     
3,691
 
Total noninterest income
   
31,660
     
14,115
     
75,431
     
39,893
 
Noninterest expense:
                               
Salaries and employee benefits
   
23,672
     
18,135
     
66,103
     
56,044
 
Occupancy and equipment, net
   
3,710
     
3,486
     
10,896
     
10,309
 
Professional services
   
1,177
     
1,852
     
4,710
     
5,169
 
Marketing and development
   
615
     
762
     
2,189
     
2,275
 
IT and data services
   
843
     
722
     
2,769
     
2,104
 
Bank card expenses
   
1,095
     
864
     
3,164
     
2,394
 
Appraisal expenses
   
744
     
467
     
1,837
     
1,197
 
Other
   
4,137
     
3,740
     
13,543
     
10,502
 
Total noninterest expense
   
35,993
     
30,028
     
105,211
     
89,994
 
Income before income taxes
   
20,878
     
10,235
     
36,711
     
23,947
 
Income tax expense (benefit)
   
4,147
     
1,977
     
7,282
     
4,836
 
Net income
 
$
16,731
   
$
8,258
   
$
29,429
   
$
19,111
 

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,
 
   
2020
   
2019
   
2020
   
2019
 
Earnings per share:
                       
Basic
 
$
0.93
   
$
0.46
   
$
1.63
   
$
1.16
 
Diluted
 
$
0.92
   
$
0.45
   
$
1.61
   
$
1.15
 
                                 
Net income
 
$
16,731
   
$
8,258
   
$
29,429
   
$
19,111
 
Other comprehensive income (loss):
                               
Change in net unrealized gain (loss) on securities available for sale
   
(1,418
)
   
116
     
26,584
     
7,433
 
Change in net gain (loss) on cash flow hedges
   
430
     
     
(1,728
)
   
 
Reclassification adjustment for (gain) loss included in net income
   
     
     
(2,318
)
   
 
Tax effect
   
207
     
(25
)
   
(4,733
)
   
(1,562
)
Other comprehensive income (loss)
   
(781
)
   
91
     
17,805
     
5,871
 
Comprehensive income
 
$
15,950
   
$
8,349
   
$
47,234
   
$
24,982
 

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, 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 (loss), (net of tax)
   
     
     
     
     
5,871
     
     
     
5,871
 
Terminated ESOP put option
   
     
     
     
     
     
     
58,195
     
58,195
 
Exercise of employee stock options and vesting of restricted stock units, net of 8,570 shares for cashless
                                                               
exercise and net of 7,608 shares for taxes
   
25,803
     
25
     
25
     
     
     
     
     
(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
 
                                                                 
Balance at January 1, 2020
   
18,036,115
   
$
18,036
   
$
140,492
   
$
146,696
   
$
958
   
$
   
$
   
$
306,182
 
Net income
   
     
     
     
29,429
     
     
     
     
29,429
 
Cash dividends:
                                                               
Common - $0.03 per share
   
     
     
     
(1,624
)
   
     
     
     
(1,624
)
Other comprehensive income, (net of tax)
   
     
     
     
     
17,805
     
     
     
17,805
 
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
   
     
     
966
     
     
     
     
     
966
 
Balance at September 30, 2020
   
18,059,174
   
$
18,059
   
$
141,245
   
$
174,501
   
$
18,763
   
$
   
$
   
$
352,568
 
                                                                 
Three Months Ended September 30,
                                                               
Balance at June 30, 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 per share
   
     
     
     
(539
)
   
     
     
     
(539
)
Other comprehensive income, (net of tax)
   
     
     
     
     
91
     
     
     
91
 
Exercise of employee stock options and vesting of
                                                               
restricted stock units, net of 8,570 shares for cashless
                                                               
exercise and net of 7,608 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
 
                                                                 
Balance at June 30, 2020
   
18,059,174
   
$
18,059
   
$
140,620
   
$
158,311
   
$
19,544
   
$
   
$
   
$
336,534
 
Net income
   
     
     
     
16,731
     
     
     
     
16,731
 
Cash dividends:
                                                               
Common - $0.03 per share
   
     
     
     
(541
)
   
     
     
     
(541
)
Other comprehensive income, (net of tax)
   
     
     
     
     
(781
)
   
     
     
(781
)
Stock based compensation
   
     
     
625
     
     
     
     
     
625
 
Balance at September 30, 2020
   
18,059,174
   
$
18,059
   
$
141,245
   
$
174,501
   
$
18,763
   
$
   
$
   
$
352,568
 

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,
 
   
2020
   
2019
 
Cash flows from operating activities:
           
Net income
 
$
29,429
   
$
19,111
 
Adjustments to reconcile net income to net cash from operating activities:
               
Provision for loan losses
   
25,429
     
1,903
 
Depreciation and amortization
   
4,935
     
3,733
 
Accretion and amortization
   
2,064
     
(97
)
Other gains, net
   
(2,529
)
   
(122
)
Net gain on sales of loans
   
(47,279
)
   
(17,521
)
Proceeds from sales of loans held for sale
   
1,004,956
     
460,268
 
Loans originated for sale
   
(985,149
)
   
(454,501
)
Earnings on bank-owned life insurance
   
(1,004
)
   
(937
)
Stock based compensation
   
966
     
407
 
Net change in:
               
Accrued interest receivable and other assets
   
(8,642
)
   
(3,390
)
Accrued expenses and other liabilities
   
10,669
     
13,616
 
Net cash from operating activities
   
33,845
     
22,470
 
                 
Cash flows from investing activities:
               
Activity in securities available for sale:
               
Purchases
   
(158,291
)
   
(165,023
)
Sales
   
94,514
     
 
Maturities, prepayments, and calls
   
69,618
     
109,414
 
Loan originations and principal collections, net
   
(150,579
)
   
(7,786
)
Cash paid for acquisition
   
(687
)
   
(2,800
)
Goodwill adjustment related to litigation settlement
   
460
     
 
Purchases of premises and equipment, net
   
(3,159
)
   
(3,267
)
Proceeds from sales of premises and equipment
   
192
     
208
 
Proceeds from sales of foreclosed assets
   
2,068
     
1,608
 
Net cash from investing activities
   
(145,864
)
   
(67,646
)
                 
Cash flows from financing activities:
               
Net change in deposits
   
246,945
     
8,520
 
Net change in short-term borrowings
   
(29,400
)
   
(7,850
)
Proceeds from common stock issuance, net
   
     
51,392
 
Proceeds from subordinated debt issuance, net
   
49,074
     
 
Proceeds from notes payable & other borrowings
   
75,000
     
 
Payments to tax authorities for stock-based compensation
   
(129
)
   
(161
)
Payments made on notes payable and other borrowings
   
(95,000
)
   
(7,530
)
Cash dividends on common stock
   
(1,624
)
   
(539
)
Purchase of treasury stock
   
(61
)
   
 
Net cash from financing activities
   
244,805
     
43,832
 
                 
Net change in cash and cash equivalents
 
$
132,786
   
$
(1,344
)
Beginning cash and cash equivalents
   
158,099
     
245,989
 
Ending cash and cash equivalents
 
$
290,885
   
$
244,645
 
                 
Supplemental disclosures of cash flow information:
               
Interest paid on deposits and borrowed funds
 
$
12,956
   
$
21,882
 
Income taxes paid
   
8,719
     
4,364
 
Supplemental schedule of noncash investing and financing activities:
               
Loans transferred to foreclosed assets
 
$
1,468
   
$
1,521
 
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 for the quarter ended September 30, 2020 (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 by management as an estimate to cover probable credit losses 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 collectability 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 September 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 September 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.

ASU 2019-12, Income Taxes, Simplifying the Accounting for Income Taxes (Topic 740). In December 2019, the FASB issued ASU 2019-12 to simplify the accounting for income taxes by removing certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. The update is not expected to have any material effect on the Company’s financial statements.

Subsequent Events – The Company has evaluated subsequent events and transactions from September 30, 2020 through the date 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
 
September 30, 2020
                       
Available for sale:
                       
U.S. government and agencies
 
$
4,750
   
$
35
   
$
   
$
4,785
 
State and municipal
   
242,010
     
8,248
     
(428
)
   
249,830
 
Mortgage-backed securities
   
309,227
     
15,778
     
     
325,005
 
Collateralized mortgage obligations
   
107,249
     
     
(472
)
   
106,777
 
Asset-backed and other amortizing securities
   
32,614
     
2,313
     
     
34,927
 
Other securities
   
5,000
     
10
     
(5
)
   
5,005
 
   
$
700,850
   
$
26,384
   
$
(905
)
 
$
726,329
 

   
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 September 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
 
$
5,760
   
$
5,800
 
After 1 year through 5 years
   
1,246
     
1,343
 
After 5 years through 10 years
   
20,825
     
21,658
 
After 10 years
   
223,930
     
230,820
 
Other
   
449,089
     
466,708
 
   
$
700,850
   
$
726,329
 

At both September 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 $260.0 million and $211.0 million at September 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
 
September 30, 2020
                                   
U.S. government and agencies
 
$
   
$
   
$
   
$
   
$
   
$
 
State and municipal
   
34,380
     
428
     
     
     
34,380
     
428
 
Mortgage-backed securities
   
     
     
     
     
     
 
Collateralized mortgage obligations
   
106,777
     
472
     
     
     
106,777
     
472
 
Asset-backed and other amortizing securities
   
3,495
     
5
     
     
     
3,495
     
5
 
   
$
144,652
   
$
905
   
$
   
$
   
$
144,652
   
$
905
 
                                                 
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 eight securities with an unrealized loss at September 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 September 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:

   
September 30,
2020
   
December 31,
2019
 
Commercial real estate
 
$
655,432
   
$
658,195
 
Commercial - specialized
   
340,458
     
309,505
 
Commercial - general
   
578,181
     
441,398
 
Consumer:
               
1-4 family residential
   
372,114
     
362,796
 
Auto loans
   
193,023
     
215,209
 
Other consumer
   
68,877
     
74,000
 
Construction
   
80,149
     
82,520
 
     
2,288,234
     
2,143,623
 
Allowance for loan losses
   
(46,076
)
   
(24,197
)
Loans, net
 
$
2,242,158
   
$
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 $46.1 million at September 30, 2020, compared to $24.2 million at December 31, 2019. The allowance for loan losses to loans held for investment was 2.01% at September 30, 2020 and 1.13% at December 31, 2019. The increase in the allowance for loan losses at September 30, 2020 compared to December 31, 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 September 30, 2020
                             
Commercial real estate
 
$
15,156
   
$
3,085
   
$
   
$
23
   
$
18,264
 
Commercial - specialized
   
6,614
     
(220
)
   
(109
)
   
19
     
6,304
 
Commercial - general
   
9,293
     
977
     
(372
)
   
91
     
9,989
 
Consumer:
                                       
1-4 family residential
   
2,926
     
1,688
     
(56
)
   
126
     
4,684
 
Auto loans
   
3,939
     
474
     
(212
)
   
32
     
4,233
 
Other consumer
   
1,640
     
250
     
(262
)
   
99
     
1,727
 
Construction
   
1,067
     
(192
)
   
     
     
875
 
Total
 
$
40,635
   
$
6,062
   
$
(1,011
)
 
$
390
   
$
46,076
 
                                         
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
 

   
Beginning
Balance
   
Provision for
Loan Losses
   
Charge-offs
   
Recoveries
   
Ending
Balance
 
For the nine months ended September 30, 2020
                             
Commercial real estate
 
$
5,049
   
$
12,977
   
$
   
$
238
   
$
18,264
 
Commercial - specialized
   
2,287
     
4,870
     
(959
)
   
106
     
6,304
 
Commercial - general
   
9,609
     
1,952
     
(1,752
)
   
180
     
9,989
 
Consumer:
                                       
1-4 family residential
   
2,093
     
2,520
     
(56
)
   
127
     
4,684
 
Auto loans
   
3,385
     
1,624
     
(916
)
   
140
     
4,233
 
Other consumer
   
1,341
     
1,045
     
(1,011
)
   
352
     
1,727
 
Construction
   
433
     
441
     
     
1
     
875
 
                                         
Total
 
$
24,197
   
$
25,429
   
$
(4,694
)
 
$
1,144
   
$
46,076
 
                                         
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
 

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, 2020
                       
Commercial real estate
 
$
4,339
   
$
651,093
   
$
260
   
$
18,004
 
Commercial - specialized
   
     
340,458
     
     
6,304
 
Commercial - general
   
7,071
     
571,110
     
1,734
     
8,255
 
Consumer:
                               
1-4 family residential
   
2,236
     
369,878
     
70
     
4,614
 
Auto loans
   
     
193,023
     
     
4,233
 
Other consumer
   
     
68,877
     
     
1,727
 
Construction
   
     
80,149
     
     
875
 
                                 
Total
 
$
13,646
   
$
2,274,588
   
$
2,064
   
$
44,012
 
                                 
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
 
September 30, 2020
                                   
Commercial real estate
 
$
4,339
   
$
3,380
   
$
959
   
$
4,339
   
$
260
   
$
2,699
 
Commercial - specialized
   
     
     
     
     
     
673
 
Commercial - general
   
7,071
     
3,298
     
3,773
     
7,071
     
1,734
     
4,622
 
Consumer:
                                               
1-4 family
   
2,655
     
1,814
     
422
     
2,236
     
70
     
2,212
 
Auto loans
   
     
     
     
     
     
 
Other consumer
   
     
     
     
     
     
 
Construction
   
     
     
     
     
     
 
                                                 
Total
 
$
14,065
   
$
8,492
   
$
5,154
   
$
13,646
   
$
2,064
   
$
10,206
 
                                                 
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