UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2022
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ______ to ______
Commission File Number: 001-38895
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (806 )
792-7101
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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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.
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Large accelerated filer
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☐
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☒
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Non-accelerated filer
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☐
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Smaller reporting company
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Emerging growth company
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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 May 6, 2022, the registrant had 17,618,573 shares of
common stock, par value $1.00 per share, outstanding.
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Page
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PART I.
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3
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Item 1.
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3
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3
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4
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6
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7
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8
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Item 2.
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27
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Item 3.
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48
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Item 4.
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48
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PART II.
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49
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Item 1.
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49
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Item 1A.
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49
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Item 2.
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49
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Item 3.
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49
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Item 4.
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49
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Item 5.
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49
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Item 6.
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50
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51
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Consolidated Financial Statements
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SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
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March 31,
2022
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December 31,
2021
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(Unaudited)
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ASSETS
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Cash and due from banks
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$
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$
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Interest-bearing deposits in banks
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Cash and cash equivalents
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Securities available for sale
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Loans held for sale
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Loans held for investment
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Allowance for loan losses
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(
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(
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Loans held for investment, net
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Accrued interest receivable
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Premises and equipment, net
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Bank-owned life insurance
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Goodwill
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Intangible assets, net
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Mortgage servicing rights
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Deferred tax asset, net
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Other assets
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Total assets
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$
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$
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Deposits:
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Noninterest-bearing
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$
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$
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Interest-bearing
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Total deposits
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Accrued expenses and other liabilities
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Subordinated debt securities
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Junior subordinated deferrable interest debentures
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Total liabilities
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Stockholders’ equity:
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Common stock, $
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Additional paid-in capital
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Retained earnings
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Accumulated other comprehensive income (loss)
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(
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)
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Total stockholders’ equity
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Total liabilities and stockholders’ equity
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$
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$
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The accompanying notes are an integral part of these consolidated financial statements.
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
(Unaudited)
(Dollars in thousands, except per share data)
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Three Months Ended
March 31,
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2022
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2021
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Interest income:
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Loans, including fees
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$
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$
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Securities:
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Taxable
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Non-taxable
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Federal funds sold and interest-bearing deposits in banks
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Total interest income
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Interest expense:
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Deposits
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Notes payable & other borrowings
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Subordinated debt securities
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Junior subordinated deferrable interest debentures
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Total interest expense
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Net interest income
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Provision for loan losses
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(
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Net interest income, after provision for loan losses
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Noninterest income:
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Service charges on deposit accounts
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Income from insurance activities
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Net gain on sales of loans
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Bank card services and interchange fees
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Other mortgage banking income
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Investment commissions
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Fiduciary fees
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Other
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Total noninterest income
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Noninterest expense:
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Salaries and employee benefits
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Occupancy and equipment, net
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Professional services
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Marketing and development
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IT and data services
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Bank card expenses
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Appraisal expenses
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Other
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Total noninterest expense
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Income before income taxes
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Income tax expense
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Net income
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$
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$
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The accompanying notes are an integral part of these consolidated financial statements.
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (CONTINUED)
(Unaudited)
(Dollars in thousands, except per share data)
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Three Months Ended
March 31,
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2022
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2021
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Earnings per share:
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Basic
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$
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$
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Diluted
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$
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$
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Net income
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$
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$
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Other comprehensive loss:
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Unrealized losses on securities available for sale
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(
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(
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Less: Change in fair value on hedged state and municipal securities
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Tax effect
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Other comprehensive loss
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(
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(
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Comprehensive income (loss)
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$
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(
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)
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$
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The accompanying notes are an integral part of these consolidated financial statements.
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
(Unaudited)
(Dollars in thousands, except per share data)
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Common Stock
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Additional
Paid-in
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Retained
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Accumulated
Other
Comprehensive
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Shares
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Amount
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Capital
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Earnings
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Income (Loss)
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Total
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Three
Months Ended March 31,
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Balance at January 1, 2021
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$ | $ | $ | $ | $ | |||||||||||||||||||
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Net income
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—
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Cash dividends:
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Common - $
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—
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( |
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Other comprehensive loss
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—
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( |
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Exercise of employee stock options and vesting of restricted stock units, net of
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( |
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| Repurchases of common stock | ( |
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Stock based compensation
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—
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Balance at March 31, 2021
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$ | $ | $ | $ | $ | |||||||||||||||||||
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Balance at January 1, 2022
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$ | $ | $ | $ | $ | |||||||||||||||||||
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Net income
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—
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Cash dividends:
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Common - $
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—
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( |
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Other comprehensive loss
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—
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( |
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Exercise of employee stock options and vesting of restricted stock units, net of
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( |
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| Repurchases of common stock | ( |
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Stock based compensation
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—
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Balance at March 31, 2022
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$ | $ | $ | $ | ( |
) | $ | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
(Unaudited)
(Dollars in thousands)
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Three Months Ended
March 31,
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2022
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2021
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Cash flows from operating activities:
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Net income
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$
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$
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Adjustments to reconcile net income to net cash from operating activities:
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Provision for loan losses
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(
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Depreciation and amortization
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Accretion and amortization
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Other gains, net
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(
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)
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Net gain on sales of loans
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(
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)
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(
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Proceeds from sales of loans held for sale
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Loans originated for sale
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(
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)
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(
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)
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Deferred income tax expense (benefit)
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Earnings on bank-owned life insurance
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(
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)
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(
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)
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Stock-based compensation
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Change in valuation of mortgage servicing rights
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(
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(
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Net change in:
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Accrued interest receivable and other assets
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(
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)
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Accrued expenses and other liabilities
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Net cash provided by operating activities
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Cash flows from investing activities:
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Activity in securities available for sale:
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Purchases
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(
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)
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(
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)
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Maturities, prepayments, and calls
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Loan originations and principal collections, net
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(
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)
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(
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)
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Purchases of premises and equipment
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(
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)
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(
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)
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Proceeds from sales of premises and equipment
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Proceeds from sales of foreclosed assets
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Net cash used in investing activities
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(
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)
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(
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)
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Cash flows from financing activities:
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Net change in deposits
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Net change in short-term borrowings
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(
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)
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Payments to tax authorities for stock-based compensation
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(
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)
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(
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)
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Payments made on notes payable and other borrowings
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(
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)
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Cash dividends on common stock
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(
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)
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(
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Payments to repurchase common stock
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(
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)
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(
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)
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Net cash provided by financing activities
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Net change in cash and cash equivalents
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$
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$
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Beginning cash and cash equivalents
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Ending cash and cash equivalents
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$
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$
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Supplemental disclosures of cash flow information:
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Interest paid on deposits and borrowed funds
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$
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$
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Income taxes paid
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Supplemental schedule of noncash activities:
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Loans transferred to foreclosed assets
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$
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$
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Additions to mortgage servicing rights
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The accompanying notes are an integral part of these consolidated financial statements.
SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
(Unaudited)
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:
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Wholly-Owned, Consolidated Subsidiaries:
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Bank subsidiary
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Non-bank subsidiary
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Non-bank subsidiary
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Non-bank subsidiary
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Non-bank subsidiary
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Non-bank subsidiary
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Wholly-Owned, Equity Method Subsidiaries:
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Non-bank subsidiaries
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Basis of Presentation and Consolidation – The consolidated financial
statements in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (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, results of operations, and cash flows. 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 notes 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, 2021. 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, derivatives, mortgage servicing rights, the valuation of foreclosed assets, and fair values of financial instruments can also involve significant management estimates.
Securities – Investment securities may be classified into
trading, held to maturity (“HTM”) or available for sale (“AFS”) portfolios. Securities that are held principally for resale in the near term are classified as trading. Securities that management has the ability and positive intent to hold to
maturity are classified as HTM and recorded at amortized cost. Securities not classified as trading or HTM are AFS and are reported at fair value with unrealized gains and losses excluded from earnings, but included in the determination of other
comprehensive income (loss). Management uses these assets as part of its
asset/liability management strategy; they may be sold in response to changes in liquidity needs, interest rates, resultant prepayment risk changes, and other factors. Management determines the appropriate classification of securities at the time of
purchase. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses and declines in value judged to be other-than-temporary are included in gain (loss) on
sale of securities. The cost of securities sold is based on the specific identification method.
When the fair value of a security is below its amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exists.
The analysis considers (i) whether there is intent to sell securities prior to recovery and/or maturity, (ii) whether it is more likely than not that securities will have to be sold prior to recovery and/or maturity, and (iii) whether there is a
credit loss component to the impairment. Often, the information available to conduct these assessments is limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than
estimated, the extent of the impairment of a security may be different than previously estimated, which could have a material effect on the Company’s results of operations and financial condition.
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 loan 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 losses.
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.
Any
loans the Company determines have evidence of deterioration of credit quality since origination, and it is probable, at acquisition, that all contractually required payments will not be collected, are considered to be purchase credit impaired loans.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 do not meet the specific criteria of ASC 310-30 are accounted for under ASC 310-20, Receivables—Nonrefundable
Fees and Other Costs. 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.
Mortgage Servicing Rights – When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income
statement effect recorded in net gain on sale of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates present value of estimated
future servicing income.
Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports change in fair value of servicing
assets in earnings in the period in which the changes occur, and are included with other noninterest income in the combined financial statements. The fair values of servicing rights are subject to significant fluctuations as a result of changes in
estimated and actual prepayment speeds and default rates and losses.
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
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. Substantially 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
Mortgage Banking Derivatives – Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market, forward commitments for the future delivery of these mortgage loans, and
forward sales of mortgage-backed securities are accounted for as free standing derivatives. At the time of the interest rate lock, the Company determines whether the loan will be sold through a best efforts contract or a mandatory delivery contract.
In order to hedge the change in interest rates resulting from the commitments to fund the loans that will be sold through a best efforts contract, the Company enters
into forward loans sales commitments for the future delivery of mortgage loans when interest rate locks are entered. At inception, these interest rate locks and the related forward loan sales commitments, adjusted for the expected exercise of the
commitment before the loan is funded, are recorded with a zero value. Subsequent changes in fair value are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked.
In order to hedge the change in interest rates resulting from all other mortgage commitments to funds loans, the Company enters into forward sales of mortgage-backed
securities contracts. At inception, these interest rate locks are recorded at fair value and are adjusted for the expected exercise of the commitment before the loan is funded. Subsequent changes in fair value are estimated based on changes in
mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values of these derivatives are included in net gain on sales of loans in the consolidated financial statements.
Derivatives – At the inception of a derivative contract,
the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging
designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings as fair values change. For a cash flow hedge, the gain
or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that
are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported
currently in earnings, as noninterest income.
Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash
settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge
transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The
Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company
discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no
longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued,
the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash
flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.
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.
Earnings per Share – Basic earnings per share is net income divided by the weighted average number of
common shares outstanding during the period. Employee Stock Ownership Plan (“ESOP”) shares are considered outstanding for this calculation unless unearned. Diluted earnings per share includes the dilutive effect of unearned ESOP shares, if applicable. Diluted earnings per share includes the dilutive effect of
additional potential shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.
Segment Information – The Company has two reportable segments: banking and insurance. The accounting
policies of the segments are the same as those described in the summary of significant accounting policies. The Company’s reportable segments are strategic business units that offer different products and services. Operations are managed and
financial performance is evaluated on a Company-wide basis.
Reclassifications – Certain amounts from the 2021 consolidated financial statements have been
reclassified to conform to the March 31, 2022 presentation.
Recent Accounting Pronouncements – FASB 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 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 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 has contracted with a third-party vendor to assist in the implementation of CECL. The model has been developed and validation is underway. The Company expects to adopt CECL effective January 1, 2023.
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. These amendments are effective for the Company for
annual periods beginning after December 15, 2021, and interim periods beginning after December 15, 2022. Based upon an analysis performed, the Company estimates that the right of use asset and corresponding lease liability at adoption will be
between $10.8 11.3
Subsequent
Events – The Company
has evaluated subsequent events and transactions from March 31, 2022 through the date this Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP.
2. SECURITIES
The amortized cost and fair value of securities, with gross unrealized gains and losses, at the dates indicated follows (dollars in thousands):
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
March 31, 2022
|
||||||||||||||||
|
Available for sale:
|
||||||||||||||||
|
U.S. government and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
State and municipal
|
|
|
(
|
)
|
|
|||||||||||
|
Mortgage-backed securities
|
|
|
(
|
)
|
|
|||||||||||
|
Collateralized mortgage obligations
|
|
|
|
|
||||||||||||
|
Asset-backed and other amortizing securities
|
|
|
(
|
)
|
|
|||||||||||
|
Other securities
|
|
|
(
|
)
|
|
|||||||||||
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||||||
|
December 31, 2021
|
||||||||||||||||
|
Available for sale:
|
||||||||||||||||
|
U.S. government and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
State and municipal
|
|
|
(
|
)
|
|
|||||||||||
|
Mortgage-backed securities
|
|
|
(
|
)
|
|
|||||||||||
|
Collateralized mortgage obligations
|
|
|
(
|
)
|
|
|||||||||||
|
Asset-backed and other amortizing securities
|
|
|
(
|
)
|
|
|||||||||||
|
Other securities
|
|
|
|
|
||||||||||||
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||||
The amortized cost and fair value of securities at March 31, 2022 are presented below by contractual maturity (dollars in thousands). 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
|
$
|
|
$
|
|
||||
|
After 1 year through 5 years
|
|
|
||||||
|
After 5 years through 10 years
|
|
|
||||||
|
After 10 years
|
|
|
||||||
|
Other
|
|
|
||||||
|
$
|
|
$
|
|
|||||
At both March 31, 2022 and December 31, 2021, there were no
Securities with a carrying value of approximately $479.2
million and $474.5 million at March 31, 2022 and December 31, 2021, 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 (dollars in thousands):
|
Less than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
|||||||||||||||||||
|
March 31, 2022
|
||||||||||||||||||||||||
|
U.S. government and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
State and municipal
|
|
|
|
|
|
|
||||||||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
|
|
||||||||||||||||||
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
||||||||||||||||||
|
Asset-backed and other amortizing securities
|
|
|
|
|
|
|
||||||||||||||||||
|
Other securities
|
|
|
|
|
|
|
||||||||||||||||||
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||
|
December 31, 2021
|
||||||||||||||||||||||||
|
U.S. government and agencies
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
State and municipal
|
|
|
|
|
|
|
||||||||||||||||||
|
Mortgage-backed securities
|
|
|
|
|
|
|
||||||||||||||||||
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
||||||||||||||||||
|
Asset-backed and other amortizing securities
|
|
|
|
|
|
|
||||||||||||||||||
|
Other securities
|
|
|
|
|
|
|
||||||||||||||||||
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||
There were 130 securities with an unrealized loss at
March 31, 2022. 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 the Company will be required to sell any of these securities before
recovery, and credit loss, if any, is not material. These unrealized losses are largely due to recent significant 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 in future periods. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of
March 31, 2022, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s combined financial statements.
3. LOANS HELD FOR INVESTMENT
Loans are summarized by category as of the periods presented below (dollars in thousands):
|
March 31,
2022
|
December 31,
2021
|
|||||||
|
Commercial real estate
|
$
|
|
$
|
|
||||
|
Commercial - specialized
|
|
|
||||||
|
Commercial - general
|
|
|
||||||
|
Consumer:
|
||||||||
|
1-4 family residential
|
|
|
||||||
|
Auto loans
|
|
|
||||||
|
Other consumer
|
|
|
||||||
|
Construction
|
|
|
||||||
|
|
|
|||||||
|
Allowance for loan losses
|
(
|
)
|
(
|
)
|
||||
|
Loans, net
|
$
|
|
$
|
|
||||
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 $39.6 million at March 31, 2022, compared to $42.1 million at December 31, 2021.
The allowance for loan losses to loans held for investment was 1.62 % at March 31, 2022 and 1.73 % at December 31, 2021.
The following table details the activity in the allowance for loan losses for the periods indicated (dollars in thousands). Allocation of a portion of the allowance to
one category of loans does not preclude its availability to absorb losses in other categories.
|
Beginning
Balance
|
Provision for
Loan Losses
|
Charge-offs
|
Recoveries
|
Ending
Balance
|
||||||||||||||||
|
For the three months ended March 31, 2022
|
||||||||||||||||||||
|
Commercial real estate
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||
|
Commercial - specialized
|
|
(
|
)
|
(
|
)
|
|
|
|||||||||||||
|
Commercial - general
|
|
|||||||||||||||||||