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, 2021

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 3, 2021, the registrant had 17,789,192 shares of common stock, par value $1.00 per share, outstanding.



TABLE OF CONTENTS

 
Page
PART I.
3
Item 1.
3
 
3
 
4
 
6
 
7
 
8
Item 2.
26
Item 3.
48
Item 4.
48
PART II.
49
Item 1.
49
Item 1A.
49
Item 2.
49
Item 3.
49
Item 4.
49
Item 5.
49
Item 6.
50
51
 
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,
2021
   
December 31,
2020
 
   
(Unaudited)
       
ASSETS
           
Cash and due from banks
 
$
62,638
   
$
76,146
 
Interest-bearing deposits in banks
   
264,962
     
224,161
 
Cash and cash equivalents
   
327,600
     
300,307
 
Securities available for sale
   
752,562
     
803,087
 
Loans held for sale
   
90,880
     
111,477
 
Loans held for investment
   
2,429,041
     
2,221,583
 
Allowance for loan losses
   
(42,768
)
   
(45,553
)
Accrued interest receivable
   
11,778
     
15,233
 
Premises and equipment, net
   
59,056
     
60,331
 
Bank-owned life insurance
   
71,676
     
70,731
 
Goodwill
   
19,508
     
19,508
 
Intangible assets, net
   
6,296
     
7,562
 
Mortgage servicing rights
   
18,122
     
9,049
 
Deferred tax asset, net
   
2,598
     
2,461
 
Other assets
   
27,826
     
23,384
 
Total assets
 
$
3,774,175
   
$
3,599,160
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Deposits:
               
Noninterest-bearing
 
$
1,054,264
   
$
917,322
 
Interest-bearing
   
2,157,981
     
2,057,029
 
Total deposits
   
3,212,245
     
2,974,351
 
Short-term borrowings
   
     
26,550
 
Accrued expenses and other liabilities
   
41,533
     
31,229
 
Notes payable & other borrowings
   
     
75,000
 
Subordinated debt securities
   
75,728
     
75,589
 
Junior subordinated deferrable interest debentures
   
46,393
     
46,393
 
Total liabilities
   
3,375,899
     
3,229,112
 
                 
Stockholders’ equity:
               
Common stock, $1.00 par value per share, 30,000,000 shares authorized; 17,824,094 and 18,076,364 issued and outstanding at September 30, 2021 and December 31, 2020, respectively
   
17,824
     
18,076
 
Additional paid-in capital
   
136,401
     
141,112
 
Retained earnings
   
229,737
     
189,521
 
Accumulated other comprehensive income
   
14,314
     
21,339
 
Total stockholders’ equity
   
398,276
     
370,048
 
                 
Total liabilities and stockholders’ equity
 
$
3,774,175
   
$
3,599,160
 

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,
 
   
2021
   
2020
   
2021
   
2020
 
Interest income:
                       
Loans, including fees
 
$
30,818
   
$
30,724
   
$
89,458
   
$
91,600
 
Securities:
                               
Taxable
   
2,346
     
2,678
     
7,219
     
9,628
 
Non taxable
   
1,160
     
1,061
     
3,487
     
2,399
 
Federal funds sold and interest-bearing deposits in banks
   
114
     
40
     
272
     
620
 
Total interest income
   
34,438
     
34,503
     
100,436
     
104,247
 
Interest expense:
                               
Deposits
   
2,030
     
2,517
     
6,373
     
9,560
 
Notes payable & other borrowings
   
     
68
     
43
     
620
 
Subordinated debt securities
   
1,013
     
403
     
3,044
     
1,210
 
Junior subordinated deferrable interest debentures
   
217
     
242
     
661
     
937
 
Total interest expense
   
3,260
     
3,230
     
10,121
     
12,327
 
Net interest income
   
31,178
     
31,273
     
90,315
     
91,920
 
Provision for loan losses
   
   
6,062
     
(1,918
)
   
25,429
 
Net interest income, after provision for loan losses
   
31,178
     
25,211
     
92,233
     
66,491
 
Noninterest income:
                               
Service charges on deposit accounts
   
1,851
     
1,749
     
5,023
     
5,171
 
Income from insurance activities
   
3,794
     
3,303
     
6,146
     
5,484
 
Net gain on sales of loans
   
12,848
     
20,942
     
41,108
     
47,279
 
Bank card services and interchange fees
   
3,045
     
2,608
     
8,760
     
7,190
 
Realized gain on sale of securities
   
     
     
     
2,318
 
Investment commissions
   
430
     
441
     
1,390
     
1,261
 
Fiduciary fees
   
556
     
781
     
2,234
     
2,386
 
Other
   
3,267
     
1,836
     
9,880
     
4,342
 
Total noninterest income
   
25,791
     
31,660
     
74,541
     
75,431
 
Noninterest expense:
                               
Salaries and employee benefits
   
24,116
     
23,672
     
71,811
     
66,103
 
Occupancy and equipment, net
   
3,896
     
3,710
     
10,960
     
10,896
 
Professional services
   
1,388
     
1,177
     
4,483
     
4,710
 
Marketing and development
   
777
     
615
     
2,157
     
2,189
 
IT and data services
   
1,068
     
843
     
3,029
     
2,769
 
Bank card expenses
   
1,339
     
1,095
     
3,640
     
3,164
 
Appraisal expenses
   
790
     
744
     
2,350
     
1,837
 
Other
   
4,689
     
4,137
     
13,468
     
13,543
 
Total noninterest expense
   
38,063
     
35,993
     
111,898
     
105,211
 
Income before income taxes
   
18,906
     
20,878
     
54,876
     
36,711
 
Income tax expense
   
3,716
     
4,147
     
10,876
     
7,282
 
Net income
 
$
15,190
   
$
16,731
   
$
44,000
   
$
29,429
 

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,
 
   
2021
   
2020
   
2021
   
2020
 
Earnings per share:
                       
Basic
 
$
0.85
   
$
0.93
   
$
2.44
   
$
1.63
 
Diluted
 
$
0.82
   
$
0.92
   
$
2.38
   
$
1.61
 
                                 
Net income
 
$
15,190
   
$
16,731
   
$
44,000
   
$
29,429
 
Other comprehensive income (loss):
                               
Change in net unrealized gain (loss) on securities available for sale
   
(5,964
)
   
(1,418
)
   
(13,835
)
   
26,584
 
Change in net gain (loss) on cash flow hedges
   
760
     
430
     
4,943
     
(1,728
)
Reclassification adjustment for (gain) loss included in net income
   
     
     
     
(2,318
)
Tax effect
   
1,093
     
207
     
1,867
     
(4,733
)
Other comprehensive income (loss)
   
(4,111
)
   
(781
)
   
(7,025
)
   
17,805
 
Comprehensive income
 
$
11,079
   
$
15,950
   
$
36,975
   
$
47,234
 

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
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income (Loss)
   
Total
 
Nine Months Ended September 30,
                                   
Balance at December 31, 2019
   
18,036,115
   
$
18,036
   
$
140,492
   
$
146,696
   
$
958
   
$
306,182
 
Net income
   
     
     
     
29,429
     
     
29,429
 
Cash dividends declared  - $0.09 per share
   
     
     
     
(1,624
)
   
     
(1,624
)
Other comprehensive (loss), 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
)
Repurchases of common stock
   
(4,700
)
   
(5
)
   
(56
)
   
     
     
(61
)
Stock based compensation
   
     
     
966
     
     
     
966
 
Balance at September 302020
   
18,059,174
   
$
18,059
   
$
141,245
   
$
174,501
   
$
18,763
   
$
352,568
 
                                                 
Balance at December 31, 2020
   
18,076,364
   
$
18,076
   
$
141,112
   
$
189,521
   
$
21,339
   
$
370,048
 
Net income
   
     
     
     
44,000
     
     
44,000
 
Cash dividends declared  - $0.21 per share
   
     
     
     
(3,784
)
   
     
(3,784
)
Other comprehensive income, net of tax
   
     
     
     
     
(7,025
)
   
(7,025
)
Exercise of employee stock options and vesting of restricted stock units, net of 2,906 shares for cashless exercise and net of 5,013 shares for taxes
   
20,552
     
21
     
(127
)
   
     
     
(106
)
Repurchases of common stock
   
(272,822
)
   
(273
)
   
(5,809
)
   
     
     
(6,082
)
Stock based compensation
   
     
     
1,225
     
     
     
1,225
 
Balance at September 302021
   
17,824,094
   
$
17,824
   
$
136,401
    $
229,737
   
$
14,314
   
$
398,276
 
                                                 
Three Months Ended September 30,
                                               
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 declared  - $0.03 per share
   
     
     
     
(541
)
   
     
(541
)
Other comprehensive income, net of tax
   
     
     
     
     
(781
)
   
(781
)
Repurchases of common stock
   
     
     
     
     
     
 
Stock based compensation
   
     
     
625
     
     
     
625
 
Balance at September 302020
   
18,059,174
   
$
18,059
   
$
141,245
   
$
174,501
   
$
18,763
   
$
352,568
 
                                                 
Balance at June 30, 2021
   
18,014,398
   
$
18,014
   
$
140,212
   
$
216,164
   
$
18,425
   
$
392,815
 
Net income
   
     
     
     
15,190
     
     
15,190
 
Cash dividends declared  - $0.09 per share
   
     
     
     
(1,617
)
   
     
(1,617
)
Other comprehensive income, net of tax
   
     
     
     
     
(4,111
)
   
(4,111
)
Repurchases of common stock
   
(190,304
)
   
(190
)
   
(4,214
)
   
     
     
(4,404
)
Stock based compensation
   
     
     
403
     
     
     
403
 
Balance at September 302021
   
17,824,094
   
$
17,824
   
$
136,401
   
$
229,737
   
$
14,314
   
$
398,276
 

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,
 
   
2021
   
2020
 
Cash flows from operating activities:
           
Net income
 
$
44,000
   
$
29,429
 
Adjustments to reconcile net income to net cash from operating activities:
               
Provision for loan losses
   
(1,918
)
   
25,429
 
Depreciation and amortization
   
4,837
     
4,935
 
Accretion and amortization
   
3,399
     
2,064
 
Other gains, net
   
(139
)
   
(2,529
)
Net gain on sales of loans
   
(41,108
)
   
(47,279
)
Proceeds from sales of loans held for sale
   
1,243,380
     
998,367
 
Loans originated for sale
   
(1,189,693
)
   
(985,149
)
Earnings on bank-owned life insurance
   
(945
)
   
(1,004
)
Stock based compensation
   
1,225
     
966
 
Change in valuation of mortgage servicing rights
   
(1,055
)
   
2,081
 
Net change in:
               
Accrued interest receivable and other assets
   
1,509
     
(4,134
)
Accrued expenses and other liabilities
   
14,209
     
10,669
 
Net cash from operating activities
   
77,701
     
33,845
 
                 
Cash flows from investing activities:
               
Activity in securities available for sale:
               
Purchases
   
(61,548
)
   
(158,291
)
Sales
   
     
94,514
 
Maturities, prepayments, and calls
   
94,978
     
69,618
 
Loan originations and principal collections, net
   
(209,047
)
   
(150,579
)
Cash paid for acquisition
   
     
(687
)
Goodwill adjustment related to litigation settlement
          460  
Purchases of premises and equipment, net
   
(2,319
)
   
(3,159
)
Proceeds from sales of premises and equipment
   
108
     
192
 
Proceeds from sales of foreclosed assets
   
1,048
     
2,068
 
Net cash from investing activities
   
(176,780
)
   
(145,864
)
                 
Cash flows from financing activities:
               
Net change in deposits
   
237,894
     
246,945
 
Net change in short-term borrowings
   
(26,550
)
   
(29,400
)
Proceeds from subordinated debt issuance, net
          49,074  
Proceeds from notes payable & other borrowings
   
     
75,000
 
Payments to tax authorities for stock-based compensation
   
(106
)
   
(129
)
Payments made on notes payable and other borrowings
   
(75,000
)
   
(95,000
)
Cash dividends on common stock
   
(3,784
)
   
(1,624
)
Payments to repurchase common stock
   
(6,082
)
   
(61
)
Net cash from financing activities
   
126,372
     
244,805
 
                 
Net change in cash and cash equivalents
 
$
27,293
   
$
132,786
 
Beginning cash and cash equivalents
   
300,307
     
158,099
 
Ending cash and cash equivalents
 
$
327,600
   
$
290,885
 

               
Supplemental disclosures of cash flow information:
               
Interest paid on deposits and borrowed funds
 
$
10,774
   
$
12,956
 
Income taxes paid
    8,842       8,719  
Supplemental schedule of noncash activities:
               
Loans transferred to foreclosed assets
 
$
722
   
$
1,468
 
Additions to mortgage servicing rights
   
8,018
     
6,589
 

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, 2021 (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, 2020. 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.

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 the Company’s loan portfolio 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 thousand 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 (“TDR”) 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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 on October 31 of each year or more frequently if events and circumstances exist that indicate that an impairment test should be performed. There was no impairment recorded for the nine-month period ended September 30, 2021 and the year ended December 31, 2020, respectively.

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 using the straight-line method.

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 a closed form option valuation (“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.

Recent Accounting PronouncementsFASB 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 2021-01, Reference Rate Reform (Topic 848). In January 2021, the FASB issued ASU No. 2021-01 to clarify the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. This update additionally clarified that a receive-variable-rate, pay-variable-rate cross-currency interest rate swap may be considered an eligible hedging instrument in a net investment hedge if both legs of the swap do not have the same repricing intervals and dates as a result of reference rate reform. This update was effective upon issuance and generally can be applied through December 31, 2022. See the discussion regarding the adoption of ASU 2020-04 below.

ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In March 2020, the FASB issued ASU No. 2020-04 and it provides optional expedients and exceptions for accounting related to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. This update applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The expedients and exceptions in this update are available to all entities starting March 12, 2020 through December 31, 2022. The adoption of ASU 2020-04 did not significantly impact the Company’s consolidated financial statements.

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. The adoption of ASU 2019-12 did not have a material effect on the Company’s financial statements.

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 material impact on its financial statements.

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 and the CECL methodology for estimating the allowance for credit losses will have on its consolidated operating results and financial condition.

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, including interim periods within those fiscal years.

Subsequent Events – The Company has evaluated subsequent events and transactions from September 30, 2021 through the date this Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP. In October 2021, the Company’s board of directors approved a new stock repurchase program in which the Company may purchase up to $10.0 million of its outstanding shares of common stock. Any remaining shares under the Company's existing program, which expires on November 5, 2021, will not be rolled into the new program.

2.  SECURITIES

The amortized cost and fair value of securities are shown below:

 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
September 302021
                       
Available for sale:
                       
U.S. government and agencies
 
$
   
$
   
$
   
$
 
State and municipal
   
266,306
     
9,273
     
(550
)
   
275,029
 
Mortgage-backed securities
   
326,022
     
6,342
     
(3,506
)
   
328,858
 
Collateralized mortgage obligations
   
106,864
     
     
(425
)
   
106,439
 
Asset-backed and other amortizing securities
   
28,117
     
1,329
     
     
29,446
 
Other securities
   
12,000
     
790
     
     
12,790
 
   
$
739,309
   
$
17,734
   
$
(4,481
)
 
$
752,562
 

 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
December 312020
                       
Available for sale:
                       
U.S. government and agencies
 
$
4,750
   
$
3
   
$
   
$
4,753
 
State and municipal
   
261,023
     
11,704
     
(120
)
   
272,607
 
Mortgage-backed securities
   
359,542
     
14,014
     
(194
)
   
373,362
 
Collateralized mortgage obligations
   
107,175
     
     
(460
)
   
106,715
 
Asset-backed and other amortizing securities
   
31,509
     
2,063
     
     
33,572
 
Other securities
   
12,000
     
91
     
(13
)
   
12,078
 
   
$
775,999
   
$
27,875
   
$
(787
)
 
$
803,087
 

The amortized cost and fair value of securities at September 30, 2021 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
 
$
1,615
   
$
1,640
 
After 1 year through 5 years