UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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FORM 10-Q

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(Mark One)

For the quarterly period ended September 30, 2020

OR

For the transition period from ______ to ______

Commission File Number: 001-38895

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South Plains Financial, Inc.

(Exact name of registrant as specified in its charter)

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

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

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.

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.

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TABLE OF CONTENTS

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)

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)

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)

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)

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)

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:

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 Pronouncements – Financial 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:

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.

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:

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:

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.

		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

		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

		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			—				—				—				—				—				—
Other consumer			—				—				—				—				—				—
Construction			—				—				—				—				—				—
Total		$	5,484			$	2,771			$	1,396			$	4,167			$	525			$	6,764

		30-89 Days Past Due				90 Days or More Past Due				Nonaccrual
September 30, 2020
Commercial real estate		$	2,846			$	—			$	4,382
Commercial - specialized			304				—				205
Commercial - general			406				—				7,638
Consumer:
1-4 Family residential			1,203				1,851				789
Auto loans			567				73				—
Other consumer			779				15				53
Construction			—				—				—
Total		$	6,105			$	1,939			$	13,067
December 31, 2019
Commercial real estate		$	37			$	116			$	162
Commercial - specialized			708				—				1,172
Commercial - general			1,747				—				2,254
Consumer:
1-4 Family residential			1,212				932				1,105
Auto loans			1,468				183				—
Other consumer			848				121				—
Construction			1,159				—				—
Total		$	7,179			$	1,352			$	4,693

		Pass				Special Mention				Substandard				Doubtful				Total
September 30, 2020
Commercial real estate		$	593,746			$	—			$	61,686			$	—			$	655,432
Commercial - specialized			331,377				—				9,081				—				340,458
Commercial - general			566,802				—				11,379				—				578,181
Consumer:
1-4 family residential			364,413				—				7,701				—				372,114
Auto loans			191,727				—				1,296				—				193,023
Other consumer			68,447				—				430				—				68,877
Construction			80,149				—				—				—				80,149
Total		$	2,196,661			$	—			$	91,573			$	—			$	2,288,234
December 31, 2019
Commercial real estate		$	632,641			$	22,313			$	3,241			$	—			$	658,195
Commercial - specialized			307,239				—				2,266				—				309,505
Commercial - general			428,155				—				13,243				—				441,398
Consumer:
1-4 family residential			356,422				—				6,374				—				362,796
Auto loans			214,363				—				846				—				215,209
Other consumer			73,716				—				284				—				74,000
Construction			82,520				—				—				—				82,520
Total		$	2,095,056			$	22,313			$	26,254			$	—			$	2,143,623

		September 30, 2020				December 31, 2019
Beginning goodwill		$	18,757			$	—
Arising from business combinations			—				18,757
Measurement period acquisition adjustment			751				—
Ending goodwill		$	19,508			$	18,757
Amortized intangible assets
Customer relationship intangibles		$	6,679			$	6,679
Less: Accumulated amortization			(1,113	)			(202	)
			5,566				6,477
Other intangibles			2,309				2,309
Arising from business combinations			663				—
Less: Accumulated amortization			(544	)			(154	)
			2,428				2,155
Other intangible assets, net		$	7,994			$	8,632

		Number of Shares				Weighted-Average Exercise Price				Weighted-Average Remaining Contractual Life in Years				Aggregate Intrinsic Value
Nine Months Ended September 30, 2020
Outstanding at beginning of year:			1,462,997			$	13.42
Granted			248,966				20.96
Exercised			(27,851	)			10.72
Forfeited			(20,151	)			17.86
Expired			(1,263	)			16.00
Balance, September 30, 2020			1,662,698			$	14.54				5.97			$	1,657
Exercisable at end of period			1,065,753			$	12.11				5.21			$	1,657
Vested at end of period			1,065,753			$	12.11				5.21			$	1,657

		Nine Months Ended September 30,
		2020				2019
Expected volatility			27.46	%		24.88% to 31.54%
Expected dividend yield			0.70	%			0.70	%
Expected term (years)		6.2 years				0.5 - 7.0 years
Risk-free interest rate			1.44	%		1.46% to 2.63%
Weighted average grant date fair value		$	5.68			$	8.01

		Number of Shares				Weighted-Average Grant Date Fair Value
Nine Months Ended September 30, 2020
Outstanding at beginning of year:			81,200			$	19.46
Granted			5,970				20.93
Vested			(24,694	)			19.79
Forfeited			—				—
Balance, September 30, 2020			62,476			$	19.47

		September 30, 2020				December 31, 2019
Commitments to grant loans and unfunded commitments under lines of credit		$	439,633			$	409,969
Standby letters of credit			7,004				10,748

		Actual								Minimum Required Under BASEL III Fully Phased-In								To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
September 30, 2020
Total Capital to Risk Weighted Assets:
Consolidated		$	457,689				18.67	%		$	257,444				10.50	%			N/A				N/A
City Bank			394,673				16.10	%			257,430				10.50	%		$	245,171				10.00	%
Tier I Capital to Risk Weighted Assets:
Consolidated			351,303				14.33	%			208,407				8.50	%			N/A				N/A
City Bank			363,834				14.84	%			208,396				8.50	%			196,137				8.00	%
Common Equity Tier 1 to Risk Weighted Assets:
Consolidated			306,303				12.49	%			171,629				7.00	%			N/A				N/A
City Bank			363,834				14.84	%			171,620				7.00	%			159,361				6.50	%
Tier I Capital to Average Assets:
Consolidated			351,303				10.01	%			141,472				4.00	%			N/A				N/A
City Bank			363,834				10.37	%			141,401				4.00	%			175,376				5.00	%
December 31, 2019
Total Capital to Risk Weighted Assets:
Consolidated		$	373,684				14.88	%		$	263,769				10.50	%			N/A				N/A
City Bank			368,322				14.67	%			263,702				10.50	%		$	251,145				10.00	%
Tier I Capital to Risk Weighted Assets:
Consolidated			322,835				12.85	%			213,527				8.50	%			N/A				N/A
City Bank			343,945				13.70	%			213,473				8.50	%			200,916				8.00	%
Common Equity Tier 1 to Risk Weighted Assets:
Consolidated			277,835				11.06	%			175,846				7.00	%			N/A				N/A
City Bank			343,945				13.70	%			175,801				7.00	%			163,244				6.50	%
Tier I Capital to Average Assets:
Consolidated			322,835				10.74	%			120,219				4.00	%			N/A				N/A
City Bank			343,945				11.45	%			121,235				4.00	%			150,175				5.00	%

		September 30, 2020								December 31, 2019
		Notional Amount				Fair Value				Notional Amount				Fair Value
Included in other liabilities:
Interest rate swaps related to fixed rate loans		$	10,276			$	1,028			$	10,557			$	351
Included in other assets:
Interest rate swaps related to fixed rate loans		$	—			$	—			$	—			$	—

		September 30, 2020								December 31, 2019
		Notional Amount				Fair Value				Notional Amount				Fair Value
Included in other liabilities:
Cash flow swaps related to state and municipal securities		$	123,760			$	1,643			$	—			$	—
Included in other assets:
Cash flow swaps related to state and municipal securities		$	—			$	—			$	—			$	—

		September 30, 2020								December 31, 2019
		Notional Amount				Fair Value				Notional Amount				Fair Value
Included in other assets:
Forward contracts related to mortgage loans held for sale		$	—			$	—			$	—			$	—
Interest rate lock commitments			245,000				6,700				52,875				814
Total included in other assets		$	245,000			$	6,700			$	52,875			$	814
Included in other liabilities:
Forward contracts related to mortgage loans held for sale		$	210,724			$	1,006			$	58,948			$	141
Interest rate lock commitments			—				—				—				—
Total included in other liabilities		$	210,724			$	1,006			$	58,948			$	141

		Three Months Ended September 30,								Nine Months Ended September 30,
		2020				2019				2020				2019
Net income		$	16,731			$	8,258			$	29,429			$	19,111
Weighted average common shares outstanding - basic			18,059,174				17,985,429				18,054,678				16,417,116
Effect of dilutive securities:
Stock-based compensation awards			196,987				377,604				269,044				160,606
Weighted average common shares outstanding - diluted			18,256,161				18,363,033				18,323,722				16,577,722
Basic earnings per share		$	0.93			$	0.46			$	1.63			$	1.16
Diluted earnings per share		$	0.92			$	0.45			$	1.61			$	1.15

Three Months Ended September 30, 2020		Banking				Insurance				Consolidated
Net interest income		$	31,273			$	—			$	31,273
Provision for loan loss			(6,062	)			—				(6,062	)
Noninterest income			28,393				3,267				31,660
Noninterest expense			(33,984	)			(2,009	)			(35,993	)
Income before income taxes			19,620				1,258				20,878
Income tax (expense) benefit			(3,891	)			(256	)			(4,147	)
Net income		$	15,729			$	1,002			$	16,731

Three Months Ended September 30, 2019		Banking				Insurance				Consolidated
Net interest income		$	26,568			$	—			$	26,568
Provision for loan loss			(420	)			—				(420	)
Noninterest income			13,048				1,067				14,115
Noninterest expense			(29,109	)			(919	)			(30,028	)
Income before income taxes			10,087				148				10,235
Income tax (expense) benefit			(1,945	)			(32	)			(1,977	)
Net income		$	8,142			$	116			$	8,258

Nine Months Ended September 30, 2020		Banking				Insurance				Consolidated
Net interest income		$	91,920			$	—			$	91,920
Provision for loan loss			(25,429	)			—				(25,429	)
Noninterest income			70,050				5,381				75,431
Noninterest expense			(100,876	)			(4,335	)			(105,211	)
Income before income taxes			35,665				1,046				36,711
Income tax (expense) benefit			(7,008	)			(274	)			(7,282	)
Net income		$	28,657			$	772			$	29,429

Nine Months Ended September 30, 2019		Banking				Insurance				Consolidated
Net interest income		$	75,951			$	—			$	75,951
Provision for loan loss			(1,903	)			—				(1,903	)
Noninterest income			35,981				3,912				39,893
Noninterest expense			(87,279	)			(2,715	)			(89,994	)
Income before income taxes			22,750				1,197				23,947
Income tax (expense) benefit			(4,674	)			(162	)			(4,836	)
Net income		$	18,076			$	1,035			$	19,111

●

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

●

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

●

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

		Level 1				Level 2				Level 3				Total
September 30, 2020
Assets (liabilities) measured at fair value on a recurring basis:
Securities available for sale:
U.S. government and agencies		$	—			$	4,785			$	—			$	4,785
State and municipal			5,878				243,952				—				249,830
Mortgage-backed securities			—				325,005				—				325,005
Collateralized mortgage obligations			—				106,777				—				106,777
Asset-backed and other amortizing securities			—				34,927				—				34,927
Other			—				5,005				—				5,005
Loans held for sale (mandatory)			—				60,478				—				60,478
Mortgage servicing rights			—				6,562				—				6,562
Asset derivatives			—				6,700				—				6,700
Liability derivatives			—				(3,677	)			—				(3,677	)
Assets measured at fair value on a non-recurring basis:
Impaired loans			—				—				11,582				11,582
Other real estate owned			—				—				1,336				1,336
Loans held for sale (best efforts)			—				16,029				—				16,029
December 31, 2019
Assets (liabilities) measured at fair value on a recurring basis:
Securities available for sale:
U.S. government and agencies		$	—			$	4,807			$	—			$	4,807
State and municipal			—				94,692				—				94,692
Mortgage-backed securities			—				464,516				—				464,516
Collateralized mortgage obligations			—				107,289				—				107,289
Asset-backed and other amortizing securities			—				36,346				—				36,346
Loans held for sale (mandatory)			—				32,809				—				32,809
Mortgage servicing rights			—				2,054				—				2,054
Asset derivatives			—				814				—				814
Liability derivatives			—				(492	)			—				(492	)
Assets measured at fair value on a non-recurring basis:
Impaired loans			—				—				3,642				3,642
Other real estate owned			—				—				1,883				1,883
Loans held for sale (best efforts)			—				16,226				—				16,226

		Fair Value			Valuation Techniques		Unobservable Inputs		Range of Discounts
September 30, 2020
Impaired loans		$	11,582		Third party appraisals or inspections		Collateral discounts and selling costs			0%-100	%
Other real estate owned			1,336		Third party appraisals or inspections		Collateral discounts and selling costs			15%-66	%
December 31, 2019
Impaired loans		$	3,642		Third party appraisals or inspections		Collateral discounts and selling costs			0%-100	%
Other real estate owned			1,883		Third party appraisals or inspections		Collateral discounts and selling costs			15%-66	%

		Carrying Amount				Level 1				Level 2				Level 3				Total Fair Value
September 30, 2020
Financial assets:
Cash and cash equivalents		$	290,885			$	290,885			$	—			$	—			$	290,885
Loans, net			2,242,158				—				—				2,246,631				2,246,631
Accrued interest receivable			13,632				—				13,632				—				13,632
Bank-owned life insurance			70,401				—				70,401				—				70,401
Financial liabilities:
Deposits		$	2,943,802			$	2,674,130			$	274,768			$	—			$	2,948,898
Accrued interest payable			1,654				—				1,654				—				1,654
Notes payable & other borrowings			75,000				—				75,000				—				75,000
Junior subordinated deferrable interest debentures			46,393				—				46,393				—				46,393
Subordinated debt securities			75,546				—				75,546				—				75,546

		Carrying Amount				Level 1				Level 2				Level 3				Total Fair Value
December 31, 2019
Financial assets:
Cash and cash equivalents		$	158,099			$	158,099			$	—			$	—			$	158,099
Loans, net			2,119,426				—				—				2,123,289				2,123,289
Accrued interest receivable			13,924				—				13,924				—				13,924
Bank-owned life insurance			69,397				—				69,397				—				69,397
Financial liabilities:
Deposits		$	2,696,857			$	2,354,999			$	346,194			$	—			$	2,701,193
Accrued interest payable			2,283				—				2,283				—				2,283
Notes payable & other borrowings			95,000				—				95,000				—				95,000
Junior subordinated deferrable interest debentures			46,393				—				46,393				—				46,393
Subordinated debt securities			26,472				—				26,472				—				26,472

Cash paid		$	687
Assets acquired:
Premises and equipment, net		$	24
Customer list			512
Other intangible assets			151
Total assets acquired		$	687

Cash paid		$	76,100
Assets acquired:
Cash and cash equivalents		$	77,903
Interest-bearing time deposits in banks			52,700
Federal funds purchased			26,468
Securities available for sale			68,398
Loans held for investment			195,228
Bank-owned life insurance			10,932
Premises and equipment, net			4,132
Accrued interest receivable			1,114
Core deposit intangible			6,679
Other assets			2,648
Total assets acquired		$	446,202
Liabilities assumed
Deposits		$	386,176
Accrued interest payable			55
Deferred tax liability			762
Other liabilities			2,424
Total liabilities assumed		$	389,417
Net assets acquired		$	56,785
Goodwill recorded in acquisition		$	19,315

●

the ongoing COVID-19 pandemic and its uncertain economic impact on the Company’s customers and communities;

●

our ability to effectively execute our expansion strategy and manage our growth, including identifying and consummating suitable acquisitions;

●

business and economic conditions, particularly those affecting our market areas, as well as the concentration of our business in such market areas;

●

high concentrations of loans secured by real estate located in our market areas;

●

risks associated with our commercial loan portfolio, including the uncertain economic consequences of the ongoing COVID-19 pandemic or any deterioration in value of the general business assets that secure such loans;

●

potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;

●

risks associated with our agricultural loan portfolio, including the heightened sensitivity to weather conditions, commodity prices, and other factors generally outside the borrowers and our control;

●

risks associated with the sale of crop insurance products, including termination of or substantial changes to the federal crop insurance program;

●

risks related to the significant amount of credit that we have extended to a limited number of borrowers and in a limited geographic area;

●

public funds deposits comprising a relatively high percentage of our deposits;

●

potential impairment on the goodwill we have recorded or may record in connection with business acquisitions;

●

our ability to maintain our reputation;

●

our ability to successfully manage our credit risk and the sufficiency of our allowance for loan losses;

●

our ability to attract, hire and retain qualified management personnel;

●

our dependence on our management team, including our ability to retain executive officers and key employees and their customer and community relationships;

●

interest rate fluctuations, which could have an adverse effect on our profitability;

●

competition from banks, credit unions and other financial services providers;

●

our ability to keep pace with technological change or difficulties we may experience when implementing new technologies;

●

system failures, service denials, cyber-attacks and security breaches;

●

our ability to maintain effective internal control over financial reporting;

●

employee error, fraudulent activity by employees or customers and inaccurate or incomplete information about our customers and counterparties;

●

increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all;

●

our ability to maintain adequate liquidity and to raise necessary capital to fund our acquisition strategy and operations or to meet increased minimum regulatory capital levels;

●

costs and effects of litigation, investigations or similar matters to which we may be subject, including any effect on our reputation;

●

natural disasters, severe weather, acts of god, acts of war or terrorism, outbreaks of hostilities, public health outbreaks (such as the ongoing COVID-19 pandemic), other international or domestic calamities, and other matters beyond our control;

●

tariffs and trade barriers;

●

compliance with governmental and regulatory requirements, including the Dodd-Frank Act Wall Street Reform and Consumer Protection Act, Economic Growth, Regulatory Relief, and Consumer Protection Act, and others relating to banking, consumer protection, securities and tax matters; and

●

changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters, including the policies of the Board of Governors of the Federal Reserve System (“Federal Reserve”) and as a result of initiatives of the Trump administration.