10-Q 1 form10q.htm 10-Q

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, 2019

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 13, 2019, the registrant had 18,007,041 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.
25
Item 3.
46
Item 4.
46
PART II.
47
Item 1.
47
Item 1A.
47
Item 2.
47
Item 3.
47
Item 4.
47
Item 5.
47
Item 6.
48
49

PART I.
FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements (Unaudited)

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

   
September 30,
2019
   
December 31,
2018
 
ASSETS
           
Cash and due from banks
 
$
48,709
   
$
47,802
 
Interest-bearing deposits in banks
   
195,281
     
198,187
 
Federal funds sold
   
655
     
 
Cash and cash equivalents
   
244,645
     
245,989
 
Securities available for sale
   
401,335
     
338,196
 
Loans held for sale
   
50,136
     
38,382
 
Loans held for investment
   
1,962,609
     
1,957,197
 
Allowance for loan losses
   
(24,176
)
   
(23,126
)
Accrued interest receivable
   
11,675
     
12,957
 
Premises and equipment, net
   
59,189
     
59,787
 
Bank-owned life insurance
   
58,109
     
57,172
 
Intangible assets
   
2,464
     
 
Other assets
   
29,596
     
26,191
 
Total assets
 
$
2,795,582
   
$
2,712,745
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Deposits:
               
Noninterest-bearing
 
$
556,233
   
$
510,067
 
Interest-bearing
   
1,729,741
     
1,767,387
 
Total deposits
   
2,285,974
     
2,277,454
 
Short-term borrowings
   
9,855
     
17,705
 
Accrued expenses and other liabilities
   
32,861
     
29,416
 
Notes payable & other borrowings
   
95,000
     
95,000
 
Subordinated debt securities
   
26,472
     
34,002
 
Junior subordinated deferrable interest debentures
   
46,393
     
46,393
 
Total liabilities
   
2,496,555
     
2,499,970
 
Commitments and contingent liabilities
               
ESOP owned shares
   
     
58,195
 
                 
Stockholders’ equity:
               
Common stock, $1.00 par value per share, 30,000,000 shares authorized; 18,004,323 and 14,771,520 issued and outstanding at September 30, 2019 and December 31, 2018, respectively
   
18,004
     
14,772
 
Additional paid-in capital
   
140,268
     
80,412
 
Retained earnings
   
137,127
     
119,834
 
Accumulated other comprehensive income (loss)
   
3,628
     
(2,243
)
     
299,027
     
212,775
 
Less ESOP owned shares
   
     
58,195
 
                 
Total stockholders’ equity
   
299,027
     
154,580
 
Total liabilities and stockholders’ equity
 
$
2,795,582
   
$
2,712,745
 

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,
 
   
2019
   
2018
   
2019
   
2018
 
Interest income:
                       
Loans, including fees
 
$
29,652
   
$
27,652
   
$
86,342
   
$
77,388
 
Securities:
                               
Taxable
   
2,021
     
1,736
     
6,013
     
3,323
 
Non taxable
   
226
     
530
     
669
     
2,646
 
Federal funds sold and interest-bearing deposits in banks
   
1,766
     
813
     
5,154
     
3,065
 
Total interest income
   
33,665
     
30,731
     
98,178
     
86,422
 
Interest expense:
                               
Deposits
   
5,627
     
4,670
     
17,655
     
11,959
 
Notes payable & other borrowings
   
581
     
541
     
1,849
     
1,444
 
Subordinated debt securities
   
404
     
245
     
1,213
     
735
 
Junior subordinated deferrable interest debentures
   
485
     
487
     
1,510
     
1,339
 
Total interest expense
   
7,097
     
5,943
     
22,227
     
15,477
 
Net interest income
   
26,568
     
24,788
     
75,951
     
70,945
 
Provision for loan losses
   
420
     
3,415
     
1,903
     
5,733
 
Net interest income, after provision for loan losses
   
26,148
     
21,373
     
74,048
     
65,212
 
Noninterest income:
                               
Service charges on deposit accounts
   
2,101
     
1,979
     
5,985
     
5,757
 
Income from insurance activities
   
1,114
     
1,462
     
4,074
     
3,992
 
Net gain on sales of loans
   
6,626
     
5,172
     
17,521
     
15,382
 
Bank card services and interchange fees
   
2,192
     
2,101
     
6,273
     
6,110
 
Investment commissions
   
419
     
424
     
1,245
     
1,300
 
Other
   
1,663
     
2,157
     
4,795
     
5,190
 
Total noninterest income
   
14,115
     
13,295
     
39,893
     
37,731
 
Noninterest expense:
                               
Salaries and employee benefits
   
18,135
     
18,044
     
56,044
     
53,463
 
Occupancy and equipment, net
   
3,486
     
3,388
     
10,309
     
10,103
 
Professional services
   
1,852
     
1,474
     
5,169
     
4,303
 
Marketing and development
   
762
     
671
     
2,275
     
2,249
 
IT and data services
   
722
     
564
     
2,104
     
1,667
 
Bank card expenses
   
864
     
665
     
2,394
     
1,988
 
Appraisal expenses
   
467
     
455
     
1,197
     
1,095
 
Other
   
3,740
     
3,385
     
10,502
     
10,077
 
Total noninterest expense
   
30,028
     
28,646
     
89,994
     
84,945
 
Income before income taxes
   
10,235
     
6,022
     
23,947
     
17,998
 
Income tax expense (benefit)
   
1,977
     
1,109
     
4,836
     
(5,429
)
Net income
 
$
8,258
   
$
4,913
   
$
19,111
   
$
23,427
 

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,
 
   
2019
   
2018
   
2019
   
2018
 
Earnings per share:
                       
Basic
 
$
0.46
   
$
0.33
   
$
1.16
   
$
1.59
 
Diluted
 
$
0.45
   
$
0.33
   
$
1.15
   
$
1.59
 
                                 
Net income
 
$
8,258
   
$
4,913
   
$
19,111
   
$
23,427
 
Other comprehensive income (loss):
                               
Change in net unrealized loss on securities available for sale
   
116
     
(2,811
)
   
7,433
     
(6,012
)
Tax effect
   
(25
)
   
970
     
(1,562
)
   
970
 
Other comprehensive income (loss)
   
91
     
(1,841
)
   
5,871
     
(5,042
)
Comprehensive income
 
$
8,349
   
$
3,072
   
$
24,982
   
$
18,385
 
                                 
Pro Forma Information (unaudited):
                               
Net income
   
N/A
     
N/A
     
N/A
   
$
14,894
 
Income tax expense
   
N/A
     
N/A
     
N/A
   
$
3,104
 
Earnings per share:
                               
Basic
   
N/A
     
N/A
     
N/A
   
$
1.01
 
Diluted
   
N/A
     
N/A
     
N/A
   
$
1.01
 

The accompanying notes are an integral part of these consolidated financial statements.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except per share data)

   
Common Stock
   
Additional
Paid-in
   
Retained
   
Accumulated
Other
Comprehensive
   
Treasury
   
Less:
ESOP
Owned
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Shares
   
Total
 
Nine Months Ended September 30,
                                               
Balance at January 1, 2018
   
15,153,510
   
$
15,154
   
$
85,888
   
$
120,589
   
$
(446
)
 
$
(5,858
)
 
$
(57,121
)
 
$
158,206
 
Net income
   
     
     
     
23,427
     
     
     
     
23,427
 
Cash dividends:
                                                               
Common - $1.19 per share
   
     
     
     
(17,544
)
   
     
     
     
(17,544
)
Other comprehensive (loss), (net of tax)
   
     
     
     
     
(5,042
)
   
     
     
(5,042
)
Balance at September 30, 2018
   
15,153,510
   
$
15,154
   
$
85,888
   
$
126,472
   
$
(5,488
)
 
$
(5,858
)
 
$
(57,121
)
 
$
159,047
 
                                                                 
Balance at January 1, 2019
   
14,771,520
   
$
14,772
   
$
80,412
   
$
119,834
   
$
(2,243
)
 
$
   
$
(58,195
)
 
$
154,580
 
Issuance of common stock, net
   
3,207,000
     
3,207
     
48,185
     
     
     
     
     
51,392
 
Net income
   
     
     
     
19,111
     
     
     
     
19,111
 
Cash dividends:
                                                               
Common - $0.03 per share
   
     
     
     
(539
)
   
     
     
     
(539
)
Other comprehensive income, (net of tax)
   
     
     
     
     
5,871
     
     
     
5,871
 
Terminated ESOP put option
   
     
     
     
     
     
     
58,195
     
58,195
 
Exercise of employee stock options, net of 63,100 shares for cashless exercise and net of 8,597 shares for taxes
   
25,803
     
25
     
(186
)
   
     
     
     
     
(161
)
Stock based compensation
   
     
     
407
     
     
     
     
     
407
 
Share-based liability awards modified to equity awards
   
     
     
11,450
     
     
     
     
     
11,450
 
Cumulative change in accounting principle
   
     
     
     
(1,279
)
   
     
     
     
(1,279
)
Balance at September 30, 2019
   
18,004,323
   
$
18,004
   
$
140,268
   
$
137,127
   
$
3,628
   
$
   
$
   
$
299,027
 
                                                                 
Three Months Ended September 30,
                                                               
Balance at July 1, 2018
   
15,153,510
   
$
15,154
   
$
85,888
   
$
121,559
   
$
(3,647
)
 
$
(5,858
)
 
$
(57,121
)
 
$
155,975
 
Net income
   
     
     
     
4,913
     
     
     
     
4,913
 
Other comprehensive (loss), (net of tax)
   
     
     
     
     
(1,841
)
   
     
     
(1,841
)
Balance at September 30, 2018
   
15,153,510
   
$
15,154
   
$
85,888
   
$
126,472
   
$
(5,488
)
 
$
(5,858
)
 
$
(57,121
)
 
$
159,047
 
                                                                 
Balance at July 1, 2019
   
17,978,520
   
$
17,979
   
$
140,189
   
$
129,408
   
$
3,537
   
$
   
$
   
$
291,113
 
Issuance of common stock, net
   
     
     
     
     
     
     
     
 
Net income
   
     
     
     
8,258
     
     
     
     
8,258
 
Cash dividends:
                                                               
Common - $0.03
   
     
     
     
(539
)
   
     
     
     
(539
)
Other comprehensive income, (net of tax)
   
     
     
     
     
91
     
     
     
91
 
Terminated ESOP put option
   
     
     
     
     
     
     
     
 
Exercise of employee stock options, net of 63,100 shares for cashless exercise and net of 8,597 shares for taxes
   
25,803
     
25
     
(186
)
   
     
     
     
     
(161
)
Stock based compensation
   
     
     
265
     
     
     
     
     
265
 
Share-based liability awards modified to equity awards
   
     
     
     
     
     
     
     
 
Balance at September 30, 2019
   
18,004,323
   
$
18,004
   
$
140,268
   
$
137,127
   
$
3,628
   
$
   
$
   
$
299,027
 

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,
 
   
2019
   
2018
 
Cash flows from operating activities:
           
Net income
 
$
19,111
   
$
23,427
 
Adjustments to reconcile net income to net cash from operating activities:
               
Provision for loan losses
   
1,903
     
5,733
 
Depreciation and amortization
   
3,733
     
3,909
 
Accretion and amortization
   
(97
)
   
1,507
 
Other gains, net
   
(122
)
   
(148
)
Net gain on sales of loans
   
(17,521
)
   
(15,382
)
Proceeds from sales of loans held for sale
   
460,268
     
431,676
 
Loans originated for sale
   
(454,501
)
   
(404,525
)
Earnings on bank-owned life insurance
   
(937
)
   
(999
)
Stock based compensation
   
407
     
 
Net change in:
               
Accrued interest receivable and other assets
   
(3,390
)
   
(9,617
)
Accrued expenses and other liabilities
   
13,616
     
9,619
 
Net cash from operating activities
   
22,470
     
45,200
 
                 
Cash flows from investing activities:
               
Activity in securities available for sale:
               
Purchases
   
(165,023
)
   
(464,966
)
Sales
   
     
101,711
 
Maturities, prepayments, and calls
   
109,414
     
226,684
 
Activity in securities held to maturity:
               
Maturities, prepayments, and calls
   
     
14,675
 
Loan originations and principal collections, net
   
(7,786
)
   
(142,203
)
Cash paid for acquisition
   
(2,800
)
   
 
Purchases of premises and equipment, net
   
(3,267
)
   
(2,615
)
Proceeds from sales of premises and equipment
   
208
     
74
 
Proceeds from sales of foreclosed assets
   
1,608
     
6,388
 
Net cash from investing activities
   
(67,646
)
   
(260,252
)
                 
Cash flows from financing activities:
               
Net change in deposits
   
8,520
     
107,273
 
Net change in short-term borrowings
   
(7,850
)
   
(3,500
)
Proceeds from common stock issuance, net
   
51,392
     
 
Payments to tax authorities for stock-based compensation
   
(161
)
   
 
Payments made on notes payable and other borrowings
   
(7,530
)
   
 
Cash dividends on common stock
   
(539
)
   
(17,544
)
Net cash from financing activities
   
43,832
     
86,229
 
                 
Net change in cash and cash equivalents
 
$
(1,344
)
 
$
(128,823
)
Beginning cash and cash equivalents
   
245,989
     
294,563
 
Ending cash and cash equivalents
 
$
244,645
   
$
165,740
 
                 
Supplemental disclosures of cash flow information:
               
Interest paid on deposits and borrowed funds
 
$
21,882
   
$
11,774
 
Income taxes paid
   
4,364
     
 
Supplemental schedule of noncash investing and financing activities:
               
Loans transferred to foreclosed assets
 
$
1,521
   
$
6,151
 
Share-based liability awards modified to equity awards
   
11,450
     
 

The accompanying notes are an integral part of these consolidated financial statements.

SOUTH PLAINS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands except per share data)

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations – South Plains Financial, Inc. (“SPFI”) is a Texas 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 (“Report”) 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 Report 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, for the year ended December 31, 2018 in our prospectus filed with the SEC pursuant to Rule 424(b) of the Securities Act of 1933, as amended, on May 9, 2019 (“IPO Prospectus”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Determination of the adequacy of the allowance for loan losses is a material estimate that is particularly susceptible to significant change in the near term; the assumptions used in stock-based compensation, the valuation of foreclosed assets, and fair values of financial instruments can also involve significant management estimates.

Change in Capital Structure
On March 11, 2019, the Company amended and restated its Certificate of Formation.  The Amended and Restated Certificate of Formation increased the number of authorized shares of common stock, par value $1.00 per share, from 1,000,000 to 30,000,000.

The Company completed a 29-to-1 stock split of the Company’s outstanding shares of common stock for shareholders of record as of March 11, 2019.  The stock split was payable in the form of a dividend on or about March 11, 2019.  Shareholders received 29 additional shares for each share held as of the record date.  All share and per share amounts in the consolidated financial statements have been retroactively adjusted to reflect this stock split for all periods presented.

Stock Offering – The Company consummated the underwritten initial public offering of its common stock in May 2019.  In connection with the initial public offering, the Company issued and sold 3,207,000 shares of its common stock, including 507,000 shares of common stock pursuant to the underwriters’ full exercise of their option to purchase additional shares at a public offering price of $17.50 per share, for aggregate gross proceeds of $56.1 million before deducting underwriting discounts and offering expenses, and aggregate net proceeds of $51.4 million after deducting underwriting discounts and offering expenses.

Pro Forma Information – As a result of the revocation of the Company’s subchapter S corporation election effective May 31, 2018, the net income and earnings per share data prior to that date are not comparable with subsequent periods, which include federal income tax expense.  As a result, the consolidated statements of comprehensive income in this Report include a pro forma section for the nine-month period ended September 30, 2018, as if the conversion to a subchapter C corporation had occurred effective January 1, 2018.  The federal tax rate used for the pro forma nine-month period ended September 30, 2019 is 21%.

In accordance with applicable provisions of the Internal Revenue Code of 1986, as amended, the terms of the South Plains Financial, Inc. Employee Stock Ownership Plan (“ESOP”), provided that, for so long as SPFI was a privately held company, ESOP participants would have the right, for a specified period of time, to require SPFI to repurchase shares of its common stock that were distributed to such participants by the ESOP.  This repurchase obligation terminated upon the consummation of our initial public offering and listing of our common stock on the NASDAQ Global Select Market in May 2019.  However, because we were privately held at December 31, 2018, the shares of common stock held by the ESOP have been reflected in our consolidated balance sheets as a line item called ESOP-owned shares, that appears between total liabilities and stockholders’ equity during that period. As a result, the value of ESOP-owned shares have been deducted from stockholders’ equity in our consolidated balance sheet for that period. For all periods following our initial public offering and continued listing of our common stock on the NASDAQ Global Select Market, the ESOP-owned shares are and will be included in stockholders’ equity.

Mergers and AcquisitionsOn July 25, 2019, SPFI entered into an Agreement and Plan of Merger (the “Merger Agreement”) with West Texas State Bank, a Texas banking association (“WTSB”), providing for SPFI’s acquisition of WTSB through the merger of SPFI Merger Sub, Inc., a Texas corporation and wholly-owned subsidiary of SPFI (“Merger Sub”), with and into WTSB, with WTSB continuing as the surviving entity and thereafter being a wholly-owned subsidiary of SPFI (the “Merger”).  Following the consummation of the Merger, WTSB will merge with and into City Bank, a Texas banking association and the wholly-owned subsidiary of the Company (“City Bank”), with City Bank surviving the merger (the “Bank Merger”).  Pursuant to the terms and subject to the conditions of the Merger Agreement, the transaction provides for the payment to each outstanding share of WTSB’s common stock (except for shares held by Dissenting Shareholders (as defined in the Merger Agreement)) an amount of cash equal to the quotient of (i) $76,100,000 (subject to adjustment described in the Merger Agreement), divided by (ii) the total number of shares of WTSB common stock issued and outstanding at the time of the closing of the Merger.

Change in Accounting Principle – Prior to January 1, 2019, the Company accounted for its cash-settled stock appreciation rights (“SARs”) using the intrinsic value method, as permitted by ASC 718.  As a result of the Company listing its common stock on the NASDAQ Global Select Market and becoming a reporting company with the SEC, the Company is now required to use the fair value method for these SARs.  The Company’s calculation of the fair value of the SARs, as of January 1, 2019, exceeded the recorded intrinsic value by $1.6 million.  ASC 250 states that an “entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so.”  Retrospective application of the effects of a change from the intrinsic value to fair value would be impracticable due to the need to objectively determine assumptions that would be used in prior periods without using current information.  Additionally, SEC Staff Accounting Bulletin Topic 14.B states that entities changing from nonpublic to public status are not permitted to apply the fair-value-based method retrospectively.  Therefore, the Company recorded a cumulative-effect adjustment to retained earnings for $1.3 million ($1.6 million net of $340,000 in tax) effective January 1, 2019 and applied this change prospectively.

Stock-based Compensation – The Company sponsors an equity incentive plan under which options to acquire shares of the Company common stock may be granted periodically to all full-time employees and directors of the Company or its affiliates at a specific exercise price to acquire shares of the Company’s common stock. Shares are issued out of authorized unissued common shares that have been reserved for issuance under such plan. Compensation cost is measured based on the estimated fair value of the award at the grant date and is recognized in earnings on a straight-line basis over the requisite service period. The fair value of stock options is estimated at the date of grant using the Black-Scholes option pricing model. This model requires assumptions as to the expected stock volatility, dividends, terms and risk-free rates. The expected volatility is based on the combination of the Company’s historical volatility and the volatility of comparable peer banks. The expected term represents the period of time that options are expected to be outstanding from the grant date. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the appropriate life of each stock option.

Goodwill and Other Intangible Assets – Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.  Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events and circumstances exist that indicate that an impairment test should be performed.  Intangible assets with definite lives are amortized over their estimated useful lives.  Other intangible assets consist of customer relationship and employment agreement intangible assets and are amortized over their estimated useful lives of 5 years.

Recent Accounting PronouncementsFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) constitutes GAAP for nongovernmental entities. Updates to ASC are prescribed in Accounting Standards Updates (“ASU”), which are not authoritative until incorporated into ASC.

ASU 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  ASU 2016-01, among other things, eliminates the requirement to disclose the fair value of financial instruments at amortized cost for entities that are not public business entities. We originally adopted the new standard effective January 1, 2018, the effective date of the guidance. Accordingly, the Company’s fair value of financial instruments at amortized cost were not disclosed in our consolidated financial statements for 2018.  However, based on the Company becoming a public company in May 2019, these disclosures are now required and have been included in our consolidated financial statements presented in this Report.

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, 2019 and interim periods beginning after December 15, 2020.

ASU 2016-13 Financial Instruments - Credit Losses (Topic 326).  The FASB issued guidance to replace the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model.  The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables, held to maturity securities, and debt securities. ASU 2016-13 is effective for the Company for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the impact adoption of ASU 2016-13 will have on its consolidated operating results and financial condition.

2.
SECURITIES

The amortized cost and fair value of securities, with gross unrealized gains and losses, at period-end follow:

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
September 30, 2019
                       
Available for sale:
                       
U.S. government and agencies
 
$
6,848
   
$
53
   
$
   
$
6,901
 
State and municipal
   
40,720
     
884
     
(52
)
   
41,552
 
Mortgage-backed securities
   
251,958
     
3,226
     
(1,306
)
   
253,878
 
Collateralized mortgage obligations
   
60,244
     
     
(59
)
   
60,185
 
Asset-backed and other amortizing securities
   
36,972
     
1,847
     
     
38,819
 
   
$
396,742
   
$
6,010
   
$
(1,417
)
 
$
401,335
 

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
December 31, 2018
                       
Available for sale:
                       
U.S. government and agencies
 
$
84,765
   
$
18
   
$
(76
)
 
$
84,707
 
State and municipal
   
32,205
     
480
     
(375
)
   
32,310
 
Mortgage-backed securities
   
184,267
     
29
     
(2,040
)
   
182,256
 
Asset-backed and other amortizing securities
   
39,799
     
1
     
(877
)
   
38,923
 
   
$
341,036
   
$
528
   
$
(3,368
)
 
$
338,196
 

The amortized cost and fair value of securities at September 30, 2019 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
 
$
470
   
$
475
 
After 1 year through 5 years
   
6,848
     
6,901
 
After 5 years through 10 years
   
10,434
     
10,630
 
After 10 years
   
29,816
     
30,447
 
Other
   
349,174
     
352,882
 
   
$
396,742
   
$
401,335
 

At September 30, 2019 and December 31, 2018, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

Securities with a carrying value of approximately $198.6 million and $200.0 million at September 30, 2019 and December 31, 2018, respectively, were pledged to collateralize public deposits and for other purposes as required or permitted by law.

The following table segregates securities with unrealized losses at the periods indicated, by the duration they have been in a loss position:

   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
September 30, 2019
                                   
U.S. government and agencies
 
$
   
$
   
$
   
$
   
$
   
$
 
State and municipal
   
9,066
     
36
     
1,220
     
16
     
10,286
     
52
 
Mortgage-backed securities
   
61,931
     
1,235
     
6,679
     
72
     
68,610
     
1,307
 
Collateralized mortgage obligations
   
60,185
     
58
     
     
     
60,185
     
58
 
   
$
131,182
   
$
1,329
   
$
7,899
   
$
88
   
$
139,081
   
$
1,417
 
                                                 
December 31, 2018
                                               
U.S. government and agencies
 
$
77,891
   
$
27
   
$
2,048
   
$
49
   
$
79,939
   
$
76
 
State and municipal
   
5,662
     
92
     
9,781
     
283
     
15,443
     
375
 
Mortgage-backed securities
   
108,962
     
293
     
54,035
     
1,747
     
162,997
     
2,040
 
Asset-backed and other amortizing securities
   
     
     
37,351
     
877
     
37,351
     
877
 
   
$
192,515
   
$
412
   
$
103,215
   
$
2,956
   
$
295,730
   
$
3,368
 

There were 23 securities with an unrealized loss at September 30, 2019.  Management does not believe that these losses are other than temporary as there is no intent to sell any of these securities before recovery and it is not probable that we will be required to sell any of these securities before recovery, and credit loss, if any, is not material.  Any unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased.  The fair value is expected to recover as the securities approach their maturity date or if market yields for such investments decline.  Management does not believe any of the securities are impaired due to reasons of credit quality.  Accordingly, as of September 30, 2019, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s consolidated financial statements.

3.
LOANS

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

   
September 30,
2019
   
December 31,
2018
 
Commercial real estate
 
$
520,687
   
$
538,037
 
Commercial - specialized
   
316,862
     
305,022
 
Commercial - general
   
398,909
     
427,728
 
Consumer:
               
1-4 family residential
   
359,160
     
346,153
 
Auto loans
   
212,529
     
191,647
 
Other consumer
   
70,338
     
70,209
 
Construction
   
84,124
     
78,401
 
     
1,962,609
     
1,957,197
 
Allowance for loan losses
   
(24,176
)
   
(23,126
)
Loans, net
 
$
1,938,433
   
$
1,934,071
 

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 following table details the activity in the allowance for loan losses.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

   
Beginning
Balance
   
Provision for
Loan Losses
   
Charge-offs
   
Recoveries
   
Ending
Balance
 
For the three months ended September 30, 2019
                             
Commercial real estate
 
$
5,415
   
$
(379
)
 
$
   
$
108
   
$
5,144
 
Commercial - specialized
   
3,346
     
(575
)
   
     
28
     
2,799
 
Commercial - general
   
8,325
     
734
     
(170
)
   
19
     
8,908
 
Consumer:
                                       
1-4 family residential
   
2,310
     
384
     
(65
)
   
9
     
2,638
 
Auto loans
   
3,067
     
127
     
(260
)
   
83
     
3,017
 
Other consumer
   
1,199
     
121
     
(230
)
   
63
     
1,153
 
Construction
   
509
     
8
     
     
     
517
 
Total
 
$
24,171
   
$
420
   
$
(725
)
 
$
310
   
$
24,176
 
                                         
For the three months ended September 30, 2018
                                       
Commercial real estate
 
$
4,336
   
$
268
   
$
   
$
239
   
$
4,843
 
Commercial - specialized
   
2,924
     
(191
)
   
(70
)
   
10
     
2,673
 
Commercial - general
   
8,733
     
2,434
     
(3,738
)
   
64
     
7,493
 
Consumer:
                                       
1-4 family residential
   
1,451
     
102
     
(131
)
   
31
     
1,453
 
Auto loans
   
2,603
     
609
     
(276
)
   
41
     
2,977
 
Other consumer
   
1,158
     
213
     
(257
)
   
30
     
1,144
 
Construction
   
510
     
(20
)
   
     
     
490
 
Total
 
$
21,715
   
$
3,415
   
$
(4,472
)
 
$
415
   
$
21,073
 

   
Beginning
Balance
   
Provision for
Loan Losses
   
Charge-offs
   
Recoveries
   
Ending
Balance
 
For the nine months ended September 30, 2019
                             
Commercial real estate
 
$
5,579
   
$
(758
)
 
$
   
$
323
   
$
5,144
 
Commercial - specialized
   
2,516
     
230
     
(37
)
   
90
     
2,799
 
Commercial - general
   
8,173
     
674
     
(235
)
   
296
     
8,908
 
Consumer:
                                       
1-4 family residential
   
2,249
     
412
     
(84
)
   
61
     
2,638
 
Auto loans
   
2,994
     
626
     
(765
)
   
162
     
3,017
 
Other consumer
   
1,192
     
550
     
(744
)
   
155
     
1,153
 
Construction
   
423
     
169
     
(75
)
   
     
517
 
Total
 
$
23,126
   
$
1,903
   
$
(1,940
)
 
$
1,087
   
$
24,176
 
                                         
For the nine months ended September 30, 2018
                                       
Commercial real estate
 
$
3,769
   
$
2,374
   
$
(1,539
)
 
$
239
   
$
4,843
 
Commercial - specialized
   
2,367
     
339
     
(108
)
   
75
     
2,673
 
Commercial - general
   
10,151
     
808
     
(3,865
)
   
399
     
7,493
 
Consumer:
                                       
1-4 family residential
   
1,787
     
(98
)
   
(272
)
   
36
     
1,453
 
Auto loans
   
2,068
     
1,500
     
(693
)
   
102
     
2,977
 
Other consumer
   
971
     
653
     
(607
)
   
127
     
1,144
 
Construction
   
348
     
157
     
(15
)
   
     
490
 
Total
 
$
21,461
   
$
5,733
   
$
(7,099
)
 
$
978
   
$
21,073
 

The following table shows the Company’s investment in loans disaggregated based on the method of evaluating impairment:

   
Recorded Investment
   
Allowance for Loan Losses
 
   
Individually
Evaluated
   
Collectively
Evaluated
   
Individually
Evaluated
   
Collectively
Evaluated
 
September 30, 2019
                       
Commercial real estate
 
$
331
   
$
520,356
   
$
   
$
5,144
 
Commercial - specialized
   
586
     
316,276
     
     
2,799
 
Commercial - general
   
2,660
     
396,249
     
404
     
8,504
 
Consumer:
                               
1-4 family residential
   
2,384
     
356,776
     
35
     
2,603
 
Auto loans
   
     
212,529
     
     
3,017
 
Other consumer
   
     
70,338
     
     
1,153
 
Construction
   
     
84,124
     
     
517
 
                                 
Total
 
$
5,961
   
$
1,956,648
   
$
439
   
$
23,737
 
                                 
December 31, 2018
                               
Commercial real estate
 
$
1,819
   
$
536,218
   
$
   
$
5,579
 
Commercial - specialized
   
2,116
     
302,906
     
     
2,516
 
Commercial - general
   
2,950
     
424,778
     
233
     
7,940
 
Consumer:
                               
1-4 family residential
   
2,475
     
343,678
     
8
     
2,241
 
Auto loans
   
     
191,647
     
     
2,994
 
Other consumer
   
     
70,209
     
     
1,192
 
Construction
   
     
78,401
     
     
423
 
                                 
Total
 
$
9,360
   
$
1,947,837
   
$
241
   
$
22,885
 

Impaired loan information follows:

   
Unpaid
Contractual
Principal
Balance
   
Recorded
Investment
With No
Allowance
   
Recorded
Investment
With
Allowance
   
Total
Recorded
Investment
   
Related
Allowance
   
Average
Recorded
Investment
 
September 30, 2019
                                   
Commercial real estate
 
$
786
   
$
331
   
$
   
$
331
   
$
   
$
1,075
 
Commercial - specialized
   
586
     
586
     
     
586
     
     
1,351
 
Commercial - general
   
3,253
     
     
2,660
     
2,660
     
404
     
2,805
 
Consumer:
                           
                 
1-4 family
   
2,803
     
1,930
     
454
     
2,384
     
35
     
2,430
 
Auto loans
   
     
     
     
     
     
 
Other consumer
   
     
     
     
     
     
 
Construction
   
     
     
     
     
     
 
                                                 
Total
 
$
7,428
   
$
2,847
   
$
3,114
   
$
5,961
   
$
439
   
$
7,661
 
                                                 
December 31, 2018
                                               
Commercial real estate
 
$
2,274
   
$
1,819
   
$
   
$
1,819
   
$
   
$
4,590
 
Commercial - specialized
   
2,116
     
2,116
     
     
2,116
     
     
3,742
 
Commercial - general
   
4,758
     
240
     
2,710
     
2,950
     
233
     
3,963
 
Consumer:
                           
                 
1-4 family
   
2,894
     
2,111
     
364
     
2,475
     
8
     
2,881
 
Auto loans
   
     
     
     
     
     
 
Other consumer
   
     
     
     
     
     
 
Construction
   
     
     
     
     
     
 
                                                 
Total
 
$
12,042
   
$
6,286
   
$
3,074
   
$
9,360
   
$
241
   
$
15,176
 

All impaired loans $250,000 and greater were specifically evaluated for impairment.  Interest income recognized using a cash-basis method on impaired loans for the nine-month period ended September 30, 2019 and the year ended December 31, 2018 was not significant.  Additional funds committed to be advanced on impaired loans are not significant.

The table below provides an age analysis on accruing past-due loans and nonaccrual loans:

   
30-89 Days
Past Due
   
90 Days or
More Past Due
   
Nonaccrual
 
September 30, 2019
                 
Commercial real estate
 
$
449
   
$
   
$
218
 
Commercial - specialized
   
118
     
177
     
1,259
 
Commercial - general
   
1,711
     
     
2,144
 
Consumer:
                       
1-4 Family residential
   
1,807
     
843
     
1,614
 
Auto loans
   
874
     
92
     
 
Other consumer
   
797
     
109
     
 
Construction
   
131
     
     
 
                         
Total
 
$
5,887
   
$
1,221
   
$
5,235
 
                         
December 31, 2018
                       
Commercial real estate
 
$
1,748
   
$
   
$
217
 
Commercial - specialized
   
992
     
     
2,550
 
Commercial - general
   
2,625
     
     
2,134
 
Consumer:
                       
1-4 Family residential
   
1,611
     
440
     
1,489
 
Auto loans
   
825
     
50
     
 
Other consumer
   
883
     
74
     
 
Construction
   
     
     
 
                         
Total
 
$
8,684
   
$
564
   
$
6,390
 

The Company grades its loans on a thirteen-point grading scale.  These grades fit in one of the following categories:  (i) pass, (ii) special mention, (iii) substandard, (iv) doubtful, or (v) loss.  Loans categorized as loss are charged-off immediately.  The grading of loans reflect a judgment about the risks of default associated with the loan. The Company reviews the grades on loans as part of our on-going monitoring of the credit quality of our loan portfolio.

Pass loans have financial factors or nature of collateral that are considered reasonable credit risks in the normal course of lending and encompass several grades that are assigned based on varying levels of risk, ranging from credits that are secured by cash or marketable securities, to watch credits which have all the characteristics of an acceptable credit risk but warrant more than the normal level of monitoring.

Special mention loans have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of repayment prospects for the loans at some future date.

Substandard loans are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any.  These loans have a well-defined weakness or weaknesses that jeopardize collection and present the distinct possibility that some loss will be sustained if the deficiencies are not corrected.  A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.  Substandard loans can be accruing or can be nonaccrual depending on the circumstances of the individual loans.

Doubtful loans have all the weaknesses inherent in substandard loans with the added characteristics that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.  All doubtful loans are on nonaccrual.

The following table summarizes the internal classifications of loans:

   
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
September 30, 2019
                             
Commercial real estate
 
$
496,054
   
$
22,133
   
$
2,500
   
$
   
$
520,687
 
Commercial - specialized
   
313,022
     
     
3,840
     
     
316,862
 
Commercial - general
   
389,187
     
     
9,722
     
     
398,909
 
Consumer:
                                       
1-4 family residential
   
351,267
     
     
7,893
     
     
359,160
 
Auto loans
   
211,954
     
     
575
     
     
212,529
 
Other consumer
   
70,013
     
     
325
     
     
70,338
 
Construction
   
84,124
     
     
     
     
84,124
 
                                         
Total
 
$
1,915,621
   
$
22,133
   
$
24,855
   
$
   
$
1,962,609
 
                                         
December 31, 2018
                                       
Commercial real estate
 
$
514,249
   
$
17,300
   
$
6,488
   
$
   
$
538,037
 
Commercial - specialized
   
301,289
     
     
3,733
     
     
305,022
 
Commercial - general
   
415,675
     
1,449
     
10,604
     
     
427,728
 
Consumer:
                                       
1-4 family residential
   
340,836
     
     
5,317
     
     
346,153
 
Auto loans
   
191,435
     
     
212
     
     
191,647
 
Other consumer
   
70,075
     
     
134
     
     
70,209
 
Construction
   
78,401
     
     
     
     
78,401
 
                                         
Total
 
$
1,911,960
   
$
18,749
   
$
26,488
   
$
   
$
1,957,197
 

There were no loans restructured as troubled debt restructurings during the nine-month period ended September 30, 2019 and the year ended December 31, 2018.

4.
BORROWING ARRANGEMENTS

Subordinated debt securities
In January 2014, the Company issued $20.9 million in subordinated debt securities.   These securities pay interest quarterly and mature January 2024.  There was $6.5 million issued at a current rate of 4% and $14.4 million at a current rate of 5%.  These rates were fixed for the first five years and then float at the Wall Street Journal prime rate, with a floor of 4% and a ceiling of 7.5%.  These securities were unsecured, could be called by the Company at any time after January 2019, and they qualified for Tier 2 capital treatment, subject to regulatory limitations.  In December 2018, the Company notified all holders that it intended to call these securities in January of 2019 and were given the option to subscribe to a new offering (see following paragraph) or to be redeemed.  Holders of $13.4 million elected to subscribe to the new offering while holders of $7.5 million elected to have their securities redeemed in January 2019.  As a result, these securities had been fully redeemed as of September 30, 2019, while the outstanding balance of these securities at December 31, 2018 was $7.5 million.

In December 2018, the Company issued $26.5 million in subordinated debt securities.  $12.4 million of the securities have a maturity date of December 2028 and an average fixed rate of 5.74% for the first five years.  The remaining $14.1 million of securities have a maturity date of December 2030 and an average fixed rate of 6.41% for the first seven years.  After the expiration of the fixed rate periods, all securities will float at the Wall Street Journal prime rate, with a floor of 4.5% and a ceiling of 7.5%.  These securities pay interest quarterly, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less.  Additionally, these securities qualify for Tier 2 capital treatment, subject to regulatory limitations.

5.
EMPLOYEE BENEFITS

Non-Qualified Plans - Certain Company executives, as determined by the Company’s Board of Directors from time to time, were granted SARs based on grant date values.  The SARs have varying vesting provisions.  Exercise and payment options for the SARs vary and are governed by the program they were issued under, as well as the specific award agreement.  Prior to January 1, 2019, the Company accrued the liabilities for these SARs under the intrinsic value method.  The accrual for the liabilities was $10.6 million at December 31, 2018.

As a result of the Company becoming a reporting company with the SEC, the Company is now required to use the fair value method for these SARs.  The Company’s calculation of the fair value of the SARs, as of January 1, 2019, exceeded the recorded intrinsic value by $1.6 million.  Therefore, the Company recorded a cumulative-effect adjustment to retained earnings for $1.3 million ($1.6 million net of $340,000 in tax) effective January 1, 2019 and applied this change prospectively.

The Company recorded expense of $607,000 for the increase in the intrinsic value of the SARs, prior to the change to the fair value method, and the change in fair value of the SARs at January 1, 2019.  The Company also recorded $69,000 of expense related to vesting for the SARs, prior to conversion on May 6, 2019. See Note 6, Stock-based Compensation, for further discussion of the conversion.

6.
STOCK-BASED COMPENSATION

Equity Incentive Plan
The 2019 Equity Incentive Plan (“Plan”) was approved by the Company’s Board of Directors on January 16, 2019 and by its shareholders on March 6, 2019.  The purpose of the Plan is to: (i) attract and retain the best available personnel for positions of substantial responsibility, (ii) provide additional incentive to employees, directors and consultants, and (iii) promote the success of the Company’s business. This Plan permits the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, performance shares, and other stock-based awards.  The maximum aggregate number of shares of common stock that may be issued pursuant to all awards under the Plan is 2,300,000. The maximum aggregate number of shares that may be issued under the Plan may be increased annually by up to 3% of the total issued and outstanding common shares of the Company at the beginning of each fiscal year.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (“Black-Scholes”) model that uses the assumptions noted in the table below.  Expected volatilities are based on historical volatilities of the Company’s common stock and similar peer company averages.  The Company uses historical data to estimate option exercise and post-vesting termination behavior.  The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes in to account that the options are not transferable.  The risk-free interest rate for the expected term of the option is based on U.S. Treasury yield curve in effect at the time of the grant.

Options
A summary of activity in the Plan during the nine months ended September 30, 2019 is presented in the table below:

   
Number
of Shares
   
Weighted-Average
Exercise Price
   
Weighted-Average
Remaining Contractual
Life in Years
   
Aggregate
Intrinsic Value
 
Nine Months Ended September 30, 2019
                       
Outstanding at beginning of year:
   
   
$
         
$
 
Granted
   
1,664,992
     
13.12
           
6,081
 
Exercised
   
(97,500
)
   
11.15
           
508
 
Forfeited
   
(25,500
)
   
18.05
           
 
Expired
   
(9,000
)
   
19.05
               
                               
Balance, September 30, 2019
   
1,532,992
   
$
13.13
     
6.03
   
$
5,573
 
                                 
Exercisable at end of period
   
   
$
     
   
$
 
                                 
Vested at end of period
   
1,100,400
   
$
11.51
     
5.62
   
$
5,505
 

A summary of assumptions used to calculate the fair values of the awards is presented below:

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

On January 16, 2019, the Company approved the conversion of its previously issued SARs to stock options.  There were 1,401,000 outstanding SARs that were converted effective as of May 6, 2019, which are included in the tables above. The fair value of the SARs was $11.5 million at the conversion date.  During the modification of these awards from liabilities to equity, the Company accelerated the expiration date, between two and four years, on 750,000 of the stock options.  As a result, the fair value of the stock options after modification was $11.2 million.  However, since the fair value of the new equity awards was less than the fair value of the liability awards, no adjustment was made to the Company’s income statement.  The $11.5 million was reclassified from liabilities to equity.

Restricted Stock Units
A summary of activity in the Plan during the nine months ended September 30, 2019 is presented in the table below:

   
Number
of Shares
   
Weighted-Average
Grant Date
Fair Value
 
Nine Months Ended September 30, 2019
           
Outstanding at beginning of year:
   
   
$
 
Granted
   
81,200
     
19.46
 
Exercised
   
     
 
Forfeited
   
     
 
                 
Balance, September 30, 2019
   
81,200
   
$
19.46
 
                 
Exercisable at end of period
   
   
$
 
                 
Vested at end of period
   
   
$
 

Restricted stock units granted under the Plan typically vests over five years, but vesting periods may vary. Compensation expense for these grants will be recognized over the vesting period of the awards based on the fair value of the stock at the issue date.

The total unrecognized compensation cost for the awards outstanding under the Plan at September 30, 2019 was $2.9 million and will be recognized over a weighted average remaining period of 2.06 years.

Employment Agreement
Effective March 6, 2019, the Company entered into an employment agreement with its President.  The employment agreement has an initial term of three years and will automatically renew for additional three-year terms, unless the Company or the President provides 90-days’ advance notice of non-renewal.  In the event that the President’s employment is terminated by the Company without cause or by the President for good reason, each as defined in the employment agreement, the employment agreement provides that he will receive severance equal to two times the sum of his annual base salary and annual target cash incentive bonus and a lump sum payment equal to 24 months’ of the monthly premiums to continue existing healthcare coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”).  If such involuntary termination occurs within the 24-month period following a change in control, as defined in the employment agreement, in lieu of the foregoing, the severance due would be three times the sum of annual base salary and annual target cash incentive bonus and a lump sum payment equal to 36 months’ of the monthly premiums to continue existing healthcare coverage under COBRA. Additionally, any equity and phantom equity awards would fully vest upon any termination of employment by the Company without cause or by the President for good reason.

7.
COMMITMENTS AND CONTINGENCIES

Financial instruments with off-balance-sheet risk - The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Company’s consolidated financial statements. The Company’s exposure to credit loss is represented by the contractual amount of these commitments.  The Company follows the same credit policies in making commitments as it does for recorded instruments.

Financial instruments whose contract amounts represent credit risk outstanding follow:

   
September 30,
2019
   
December 31,
2018
 
Commitments to grant loans and unfunded commitments under lines of credit
 
$
376,155
   
$
346,245
 
Standby letters of credit
   
9,967
     
5,062
 

Commitments to grant loans and extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  The commitments for lines of credit may expire without being drawn upon.  Therefore, the total commitment amounts do not necessarily represent future cash requirements.  The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements.  Essentially all letters of credit issued have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The Company requires collateral supporting those commitments if deemed necessary.

Litigation - The Company is a defendant in legal actions arising from time to time in the ordinary course of business.  Management believes that the aggregate ultimate liability, if any, arising from these matters will not materially affect the Company’s consolidated financial statements.

Federal Home Loan Bank (“FHLB”) Letters of Credit - The Company uses FHLB letters of credit to pledge to certain public deposits.  The balance of these FHLB letters of credit was $199.0 million at September 30, 2019 and December 31, 2018, respectively.

8.
CAPITAL AND REGULATORY MATTERS

The Company and its bank subsidiary are subject to various regulatory capital requirements administered by its banking regulators.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and its bank subsidiary’s financial statements.  Under capital guidelines and the regulatory framework for prompt corrective action, the Company and its bank subsidiary must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.  Prompt corrective action provisions are not applicable to bank holding companies.

In July 2013, the Board of Governors of the Federal Reserve System published final rules for the adoption of the Basel III regulatory capital framework (“Basel III”).  Basel III, among other things, (i) introduced a new capital measure called Common Equity Tier 1 (“CET1”), (ii) specified that Tier 1 capital consists of CET1 and Additional Tier 1 Capital instruments meeting specified requirements, (iii) defined Common Equity Tier 1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expanded the scope of the deductions/adjustments as compared to existing regulations.  Basel III became effective for the Company and its bank subsidiary on January 1, 2016 with certain transition provisions fully phased-in on January 1, 2019.

Quantitative measures established by regulation to ensure capital adequacy require the Company and its bank subsidiary to maintain minimum amounts and ratios (set forth in the following table) of total, Tier 1 and CET1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).  Management believes, as of September 30, 2019 and December 31, 2018, that the Company and its bank subsidiary met all capital adequacy requirements to which they are subject.

As of September 30, 2019, the bank subsidiary was well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios as set forth in the following tables.  There are no conditions or events since September 30, 2019 that management believes have changed the bank subsidiary’s category.

The Company and its bank subsidiary’s actual capital amounts and ratios follow:

   
Actual
   
Minimum Required
Under BASEL III
Fully Phased-In
   
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
   
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
September 30, 2019
                                   
Total Capital to Risk Weighted Assets:
                                   
Consolidated
 
$
388,748
     
17.38
%
 
$
234,854
     
10.50
%
   
N/A
     
N/A
 
City Bank
   
308,841
     
13.81
%
   
234,803
     
10.50
%
 
$
223,622
     
10.00
%
                                                 
Tier I Capital to Risk Weighted Assets:
                                               
Consolidated
   
337,920
     
15.11
%
   
190,120
     
8.50
%
   
N/A
     
N/A
 
City Bank
   
284,485
     
12.72
%
   
190,079
     
8.50
%
   
178,898
     
8.00
%
                                                 
Common Equity Tier 1 to Risk Weighted Assets:
                                               
Consolidated
   
292,920
     
13.10
%
   
156,569
     
7.00
%
   
N/A
     
N/A
 
City Bank
   
284,485
     
12.72
%
   
156,535
     
7.00
%
   
145,354
     
6.50
%
                                                 
Tier I Capital to Average Assets:
                                               
Consolidated
   
337,920
     
12.17
%
   
111,174
     
4.00
%
   
N/A
     
N/A
 
City Bank
   
284,485
     
10.25
%
   
111,098
     
4.00
%
   
138,872
     
5.00
%
                                                 
December 31, 2018
                                               
Total Capital to Risk Weighted Assets:
                                               
Consolidated
 
$
309,798
     
14.28
%
 
$
227,864
     
10.50
%
   
N/A
     
N/A
 
City Bank
   
294,572
     
13.58
%
   
227,806
     
10.50
%
 
$
216,958
     
10.00
%
                                                 
Tier I Capital to Risk Weighted Assets:
                                               
Consolidated
   
260,020
     
11.98
%
   
184,462
     
8.50
%
   
N/A
     
N/A
 
City Bank
   
271,266
     
12.50
%
   
184,415
     
8.50
%
   
173,567
     
8.00
%
                                                 
Common Equity Tier 1 to Risk Weighted Assets:
                                               
Consolidated
   
215,020
     
9.91
%
   
151,910
     
7.00
%
   
N/A
     
N/A
 
City Bank
   
271,266
     
12.50
%
   
151,871
     
7.00
%
   
141,023
     
6.50
%
                                                 
Tier I Capital to Average Assets:
                                               
Consolidated
   
260,020
     
9.63
%
   
108,033
     
4.00
%
   
N/A
     
N/A
 
City Bank
   
271,266
     
10.05
%
   
107,940
     
4.00
%
   
134,925
     
5.00
%

State banking regulations place certain restrictions on dividends paid by banks to their shareholders.  Dividends paid by the Company’s bank subsidiary would be prohibited if the effect thereof would cause the bank subsidiary’s capital to be reduced below applicable minimum capital requirements.

9.
DERIVATIVES

The Company utilizes interest rate swap agreements as part of its asset-liability management strategy to help manage its interest rate risk position.  The notional amount of the interest rate swaps does not represent amounts exchanged by the parties.  The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

The following table reflects the fair value hedges included in the consolidated balance sheets:

   
September 30, 2019
   
December 31, 2018
 
   
Notional
Amount
   
Fair
Value
   
Notional
Amount
   
Fair
Value
 
                         
Included in other liabilities:
                       
Interest rate swaps related to fixed rate loans
 
$
10,650
   
$
514
   
$
   
$
 
                                 
Included in other assets:
                               
Interest rate swaps related to fixed rate loans
 
$
   
$
   
$
10,917
   
$
169
 

Mortgage banking derivatives
The following table reflects the amount and fair value of mortgage banking derivatives in the Consolidated Balance Sheets:

   
September 30, 2019
   
December 31, 2018
 
   
Notional
Amount
   
Fair
Value
   
Notional
Amount
   
Fair
Value
 
                         
Included in other assets:
                       
Forward contracts related to mortgage loans held for sale
 
$
   
$
   
$
   
$
 
Interest rate lock commitments
   
68,298
     
1,252
     
46,891
     
1,063
 
 
                               
Total included in other assets
 
$
68,298
   
$
1,252
   
$
46,891
   
$
1,063
 
                                 
                                 
Included in other liabilities:
                               
Forward contracts related to mortgage loans held for sale
 
$
80,524
   
$
242
   
$
54,998
   
$
672
 
Interest rate lock commitments
   
     
     
     
 
 
                               
Total included in other liabilities
 
$
80,524
   
$
242
   
$
54,998
   
$
672
 

10.
EARNINGS PER SHARE

The factors used in the earnings per share computation follow:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2019
   
2018
   
2019
   
2018
 
Net income
 
$
8,258
   
$
4,913
   
$
19,111
   
$
23,427
 
                                 
Weighted average common shares outstanding - basic
   
17,985,429
     
14,771,520
     
16,417,116
     
14,771,520
 
Effect of dilutive securities:
                               
Stock-based compensation awards
   
377,604
     
     
160,606
     
 
Weighted average common shares outstanding - diluted
   
18,363,033
     
14,771,520
     
16,577,722
     
14,771,520
 
                                 
Basic earnings per share
 
$
0.46
   
$
0.33
   
$
1.16
   
$
1.59
 
Diluted earnings per share
 
$
0.45
   
$
0.33
   
$
1.15
   
$
1.59
 

11.
SEGMENT INFORMATION

Financial results by reportable segment are detailed below:

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

Three Months Ended September 30, 2018
 
Banking
   
Insurance
   
Consolidated
 
Net interest income
 
$
24,788
   
$
   
$
24,788
 
Provision for loan loss
   
(3,415
)
   
     
(3,415
)
Noninterest income
   
11,893
     
1,402
     
13,295
 
Noninterest expense
   
(28,429
)
   
(217
)
   
(28,646
)
                         
Income before income taxes
   
4,837
     
1,185
     
6,022
 
                         
Income tax (expense) benefit
   
(943
)
   
(166
)
   
(1,109
)
                         
Net income
 
$
3,894
   
$
1,019
   
$
4,913
 

Financial results by reportable segment are detailed below:

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

Nine Months Ended September 30, 2018
 
Banking
   
Insurance
   
Consolidated
 
Net interest income
 
$
70,945
   
$
   
$
70,945
 
Provision for loan loss
   
(5,733
)
   
     
(5,733
)
Noninterest income
   
33,933
     
3,798
     
37,731
 
Noninterest expense
   
(82,332
)
   
(2,613
)
   
(84,945
)
                         
Income before income taxes
   
16,813
     
1,185
     
17,998
 
                         
Income tax (expense) benefit
   
5,373
     
56
     
5,429
 
                         
Net income
 
$
22,186
   
$
1,241
   
$
23,427
 

12.
FAIR VALUE DISCLOSURES

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.  The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs.  An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction.  Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

Valuation techniques that are consistent with the market approach, the income approach and/or the cost approach are required by GAAP.  The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.  The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis.  The cost approach is based on the amount that currently would be required to replace the service capacity of an asset.  Valuation techniques should be consistently applied.  Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability.  Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The fair value hierarchy for valuation inputs gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The fair value hierarchy is as follows:


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

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

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

The following table summarizes fair value measurements:

   
Level 1
   
Level 2
   
Level 3
   
Total
 
September 30, 2019
                       
Assets (liabilities) measured at fair value on a recurring basis:
                       
Securities available for sale:
                       
U.S. government and agencies
 
$
   
$
6,901
   
$
   
$
6,901
 
State and municipal
   
     
41,552
     
     
41,552
 
Mortgage-backed securities
   
     
253,878
     
     
253,878
 
Collateralized mortgage obligations
   
     
60,185
     
     
60,185
 
Asset-backed and other amortizing securities
   
     
38,819
     
     
38,819
 
Loans held for sale (mandatory)
   
     
38,321
     
     
38,321
 
Mortgage servicing rights
   
     
1,689
     
     
1,689
 
Asset derivatives
   
     
1,252
     
     
1,252
 
Liability derivatives
   
     
(756
)
   
     
(756
)
                                 
Assets measured at fair value on a non-recurring basis:
                               
Impaired loans
   
     
     
5,522
     
5,522
 
Other real estate owned
   
     
     
2,704
     
2,704
 
Loans held for sale (best efforts)
   
     
11,815
     
     
11,815
 
                                 
December 31, 2018
                               
Assets (liabilities) measured at fair value on a recurring basis:
                               
Securities available for sale:
                               
U.S. government and agencies
 
$
74,419
   
$
10,288
   
$
   
$
84,707
 
State and municipal
   
     
32,310
     
     
32,310
 
Mortgage-backed securities
   
     
182,256
     
     
182,256
 
Asset-backed and other amortizing securities
   
     
38,923
     
     
38,923
 
Loans held for sale (mandatory)
   
     
31,874
     
     
31,874
 
Mortgage servicing rights
   
     
1,270
     
     
1,270
 
Asset derivatives
   
     
1,232
     
     
1,232
 
Liability derivatives
   
     
(672
)
   
     
(672
)
                                 
Assets measured at fair value on a non-recurring basis:
                               
Impaired loans
   
     
     
9,119
     
9,119
 
Other real estate owned
   
     
     
2,285
     
2,285
 
Loans held for sale (best efforts)
   
     
6,508
     
     
6,508
 

Securities – Fair value is calculated based on market prices of similar securities using matrix pricing.  Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded.

Loans held for sale (mandatory) – Loans held for sale originated for mandatory delivery are reported at fair value.  Fair value is determined using quoted prices for similar assets, adjusted for specific attributes of that loan.

Mortgage servicing rights – Mortgage servicing rights are reported at fair value.  Fair value is based on market prices for comparable mortgage servicing contracts.

Derivatives – Fair value of derivatives is based on valuation models using observable market data as of the measurement date.

Impaired loans – Impaired loans are reported at the fair value of the underlying collateral, less estimated disposal costs, if repayment is expected solely from the sale of the collateral. Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.

Foreclosed assets – Foreclosed assets are transferred from loans at the lower of cost or fair value, less estimated costs to sell.  Collateral values are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria.

Loans held for sale (best efforts) – Loans held for sale originated for best efforts delivery are reported at fair value if, on an aggregate basis, the fair value for the loans is less than cost.  In determining whether the fair value of loans held for sale is less than cost when quoted market prices are not available, the Company may consider outstanding investor commitments or discounted cash flow analyses with market assumptions. Such fair values are classified within either Level 2 or Level 3 of the fair value hierarchy.

The following table presents quantitative information about non-recurring Level 3 fair value measurements:

   
Fair
Value
 
Valuation
Techniques
 
Unobservable
Inputs
 
Range of
Discounts
 
September 30, 2019
                 
Impaired loans
 
$
5,522
 
Third party appraisals or inspections
 
Collateral discounts and selling costs
   
0%-100
%
Other real estate owned
   
2,704
 
Third party appraisals or inspections
 
Collateral discounts and selling costs
   
15%-66
%
                       
December 31, 2018
                     
Impaired loans
 
$
9,119
 
Third party appraisals or inspections
 
Collateral discounts and selling costs
   
0%-100
%
Other real estate owned
   
2,285
 
Third party appraisals or inspections
 
Collateral discounts and selling costs
   
15%-66
%

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:

   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
Fair Value
 
                               
September 30, 2019
                             
Financial assets:
                             
Cash and cash equivalents
 
$
244,645
   
$
244,645
   
$
   
$
   
$
244,645
 
Loans, net
   
1,938,433
     
     
     
1,937,819
     
1,937,819
 
Accrued interest receivable
   
11,675
     
     
11,675
     
     
11,675
 
Bank-owned life insurance
   
58,109
     
     
58,109
     
     
58,109
 
                                         
Financial liabilities:
                                       
Deposits
 
$
2,285,974
   
$
2,008,958
   
$
280,449
   
$
   
$
2,289,407
 
Accrued interest payable
   
2,387
     
     
2,387
     
     
2,387
 
Notes payable & other borrowings
   
95,000
     
     
95,000
     
     
95,000
 
Junior subordinated deferrable interest debentures
   
46,393
     
     
46,393
     
     
46,393
 
Subordinated debt securities
   
26,472
     
     
26,472
     
     
26,472
 

   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
Fair Value
 
                               
December 31, 2018
                             
Financial assets:
                             
Cash and cash equivalents
 
$
245,989
   
$
245,989
   
$
   
$
   
$
245,989
 
Loans, net
   
1,934,071
     
     
     
1,923,167
     
1,923,167
 
Accrued interest receivable
   
12,957
     
     
12,957
     
     
12,957
 
Bank-owned life insurance
   
57,172
     
     
57,172
     
     
57,172
 
                                         
Financial liabilities:
                                       
Deposits
 
$
2,277,454
   
$
1,965,925
   
$
312,524
   
$
   
$
2,278,449
 
Accrued interest payable
   
2,042
     
     
2,042
     
     
2,042
 
Notes payable & other borrowings
   
95,000
     
     
95,000
     
     
95,000
 
Junior subordinated deferrable interest debentures
   
46,393
     
     
46,393
     
     
46,393
 
Subordinated debt securities
   
34,002
     
     
34,002
     
     
34,002
 

13.
BUSINESS COMBINATIONS

In September 2019, Windmark acquired the operating assets of a crop insurance agency in Texas for $2.8 million.  Windmark recorded $193,000 for goodwill, which represents the excess of the cash paid compared to the fair market value of identifiable assets acquired.  Fair value of the assets acquired and liabilities assumed in this transaction as of the closing date are as follows:

Assets acquired:
     
Premises and equipment, net
 
$
8
 
Goodwill
   
193
 
Other intangible assets
   
2,309
 
Other assets
   
290
 
Total assets acquired
 
$
2,800
 
         
Cash paid
 
$
2,800
 

14.
GOODWILL AND INTANGIBLES

Goodwill and other intangible assets are summarized below:

   
September 30,
2019
   
December 31,
2018
 
Beginning goodwill
 
$
   
$
 
Arising from business combinations
   
193
     
 
Ending goodwill
 
$
193
   
$
 
Amortized intangible assets
               
Customer relationship intangibles
 
$
1,800
   
$
 
Employment  intangibles
   
509
     
 
Less: Accumulated amortization
   
(38
)
   
 
Other intangible assets, net
 
$
2,271
   
$
 

15.
SUBSEQUENT EVENTS

On November 12, 2019, the Company completed its acquisition of WTSB.  In connection with the Merger, the Company paid to shareholders of WTSB an aggregate of $76.1 million in cash.  The Company is still evaluating the fair values of the assets and liabilities assumed in the WTSB acquisition.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to assist readers in understanding our financial condition as of and results of operations for the period covered by this Quarterly Report on Form 10-Q (this “Form 10-Q”) and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included in this Form 10-Q and in our prospectus filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) of the Securities Act of 1933, as amended (the “Securities Act”), on May 9, 2019 relating to our initial public offering (the “IPO Prospectus”). Unless we state otherwise or the context otherwise requires, references in this Form 10-Q to “we,” “our,” “us” and “the Company” refer to South Plains Financial, Inc., a Texas corporation, our wholly-owned banking subsidiary, City Bank, a Texas banking association and our other consolidated subsidiaries. References in this Form 10-Q to the “Bank” refer to City Bank.

Cautionary Notice Regarding Forward-Looking Statements

This Form 10-Q contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:


our ability to effectively execute our expansion strategy and manage our growth, including identifying and consummating suitable acquisitions, including the acquisition and integration of West Texas State Bank;

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

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

risks associated with our commercial loan portfolio, including the risk for deterioration in value of the general business assets that secure such loans;

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

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

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

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

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

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

our ability to maintain our reputation;

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

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

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

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

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

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

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

our ability to maintain effective internal control over financial reporting;

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


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

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

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

severe weather, acts of god, acts of war or terrorism;

tariffs and trade barriers;

compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters; and

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

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Form 10-Q and the risk factors set forth in our IPO Prospectus. Because of these risks and other uncertainties, our actual future results, performance or achievements, or industry results, may be materially different from the results indicated by the forward-looking statements in this Form 10-Q. In addition, our past results of operations are not necessarily indicative of our future results. Accordingly, you should not rely on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which such forward-looking statements were made. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

Available Information

The Company maintains an Internet web site at www.spfi.bank.  The Company makes available, free of charge, on its web site (under www.spfi.bank/financials-filings/sec-filings) the Company’s quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Exchange Act as soon as reasonably practicable after the Company files such material with, or furnishes it to, the SEC.  The Company also makes available, free of charge, through its web site (under www.spfi.bank/corporate-governance/documents-charters) links to the Company’s Code of Conduct and the charters for its Board committees.  In addition, the SEC maintains an Internet site (at www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

The Company routinely posts important information for investors on its web site (under www.spfi.bank and, more specifically, under the News & Events tab at www.spfi.bank/news-events/press-releases).  The Company intends to use its web site as a means of disclosing material non-public information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure).  Accordingly, investors should monitor the Company’s web site, in addition to following the Company’s press releases, SEC filings, public conference calls, presentations and webcasts.

The information contained on, or that may be accessed through, the Company’s web site is not incorporated by reference into, and is not a part of, this Form 10-Q.

Overview

We are a bank holding company headquartered in Lubbock, Texas, and our wholly-owned banking subsidiary, City Bank, is one of the largest independent banks in West Texas. We have additional banking operations in the Dallas-Fort Worth-Arlington and El Paso MSAs, as well as in the Greater Houston, Permian Basin and College Station, Texas, and Ruidoso and Eastern New Mexico markets. Through City Bank, we provide a wide range of commercial and consumer financial services to small and medium-sized businesses and individuals in our market areas. Our principal business activities include commercial and retail banking, along with insurance, investment, trust and mortgage services.

Termination of Subchapter S Corporation Status

Beginning January 1, 1998, the Company elected to be taxed for U.S. federal income tax purposes as a subchapter S corporation (an “S Corporation”) under the provisions of Sections 1361 to 1379 of the Internal Revenue Code of 1986, as amended (the “Code”). While we were an S Corporation, our net income was not subject to, and we did not pay, U.S. federal income tax, and no provision or liability for U.S. federal income tax was included in our consolidated financial statements. Instead, for U.S. federal income tax purposes, our taxable income was “passed through” to our shareholders.

Effective May 31, 2018, the Company revoked its election to be taxed as an S Corporation, which resulted in us being taxed as a subchapter C corporation (a “C Corporation”) under the provisions of Sections 301 to 385 of the Code, and we established a deferred tax asset to reflect the S Corporation revocation. Thus, our net income is now subject to U.S. federal income tax and we bear the liability for those taxes.

As a result of the revocation of our S Corporation election, the net income and earnings per share data presented for any periods which contain net income prior to the revocation date will not be comparable with periods subsequent to the revocation date. Unless otherwise stated, all information contained herein, including consolidated net income, return on average assets, return on average shareholders’ equity and earnings per share, is presented as if we had converted from an S Corporation to a C Corporation as of January 1, 2018 using a statutory tax rate for U.S. federal income tax of 21.0%.

ESOP Repurchase Right Termination

In accordance with applicable provisions of the Code, the terms of the South Plains Financial, Inc. Employee Stock Ownership Plan, (the “ESOP”) provided that ESOP participants have the right, for a specified period of time, to require us to repurchase shares of our common stock that are distributed to them by the ESOP. The shares of common stock held by the ESOP are reflected in our consolidated balance sheets as a line item called “ESOP owned shares” appearing between total liabilities and shareholders’ equity. As a result, the ESOP-owned shares were deducted from shareholders’ equity in our consolidated balance sheets. This repurchase right terminated upon the listing of our common stock on the NASDAQ (the “ESOP Repurchase Right Termination”), whereupon our repurchase liability was extinguished and thereafter the ESOP-owned shares are not deducted from shareholders’ equity.

Recent Developments

On July 25, 2019, the Company entered into a definitive agreement with West Texas State Bank (“WTSB”) providing for the Company’s acquisition of WTSB in an all-cash merger valued at $76.1 million. The merger was completed on November 12, 2019.

Highlights

We had net income of $8.3 million for the three months ended September 30, 2019, compared to net income of $4.9 million for the three months ended September 30, 2018. Return on average equity was 11.10% and return on average assets was 1.18% for the three months ended September 30, 2019, compared to 9.08% and 0.74%, respectively, for the three months ended September 30, 2018.

Our total assets increased $82.8 million, or 3.1%, to $2.80 billion at September 30, 2019, compared to $2.71 billion at December 31, 2018. Our gross loans held for investment increased $5.4 million, or 0.3%, to $1.96 billion at September 30, 2019, compared to $1.96 billion at December 31, 2018. Our securities portfolio increased $63.1 million, or 18.7%, to $401.3 million at September 30, 2019, compared to $338.2 million at December 31, 2018. Total deposits increased $8.5 million, or 0.4%, to $2.29 billion at September 30, 2019, compared to $2.28 billion at December 31, 2018.

Pro Forma Income Tax Expense and Net Income

As a result of our prior status as an S Corporation, we had no U.S. federal income tax expense from January 1, 2018 through May 30, 2018. The pro forma impact of being taxed as a C Corporation is illustrated in the following table:

   
Nine Months Ended
September 30, 2018
 
   
(Dollars in thousands)
 
S Corporation
     
Net income(1)
 
$
23,427
 
         
Pro forma C Corporation
       
Combined effective income tax rate(2)
   
16.8
%
Income tax provision (3)
 
$
3,013
 
Net income
 
$
14,894
 

(1)
A portion of our net income in this period was derived from non-taxable investment income, offset by nondeductible expenses. This has the effect of lowering the statutory tax rate.
(2)
Based on a statutory federal income tax rate of 21%. As our state income taxes are insignificant, they are not reflected in these calculations.
(3)
Excludes the recording of the $6.7 million deferred tax asset upon the revocation of our S Corporation election.

Results of Operations

Net Income

Net income increased by $3.4 million to $8.3 million for the three months ended September 30, 2019, compared to $4.9 million for the three months ended September 30, 2018. This increase was primarily the result of an increase of $1.8 million in net interest income and a decrease of $3.0 million in the provision for loan losses, offset by an increase of $1.4 million in noninterest expense.

Net income increased by $4.2 million to $19.1 million for the nine months ended September 30, 2019, compared to $14.9 million for the nine months ended September 30, 2018.  The increase was primarily the result of an increase of $5.0 million in net interest income, a decrease of $3.8 million in the provision for loan losses and an increase of $2.2 million in noninterest income, offset by an increase of $5.1 million in noninterest expense.

Net Interest Income

Net interest income is the principal source of the Company’s net income and represents the difference between interest income (interest and fees earned on assets, primarily loans and investment securities) and interest expense (interest paid on deposits and borrowed funds). We generate interest income from interest-earning assets that we own, including loans and investment securities. We incur interest expense from interest-bearing liabilities, including interest-bearing deposits and other borrowings, notably Federal Home Loan Bank (“FHLB”) advances and subordinated notes. To evaluate net interest income, we measure and monitor (i) yields on our loans and other interest-earning assets, (ii) the costs of our deposits and other funding sources, (iii) our net interest spread and (iv) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as the annualized net interest income on a fully tax-equivalent basis divided by average interest-earning assets.

Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income.

The following tables present, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. For purposes of this table, interest income, net interest margin and net interest spread are shown on a fully tax-equivalent basis.

   
Three Months Ended September 30,
 
   
2019
   
2018
 
   
Average
Balance
   
Interest
   
Yield/
Rate
   
Average
Balance
   
Interest
   
Yield/
Rate
 
   
(Dollars in thousands)
 
Assets:
                                   
Interest-earning assets:
                                   
Total loans(1)
 
$
1,993,507
   
$
29,695
     
5.91
%
 
$
1,973,505
   
$
27,699
     
5.57
%
Investment securities – taxable
   
287,128
     
1,956
     
2.70
     
271,432
     
1,683
     
2.46
 
Investment securities – non-taxable
   
32,993
     
286
     
3.44
     
75,247
     
672
     
3.54
 
Other interest-earning assets(2)
   
284,579
     
1,831
     
2.55
     
147,675
     
865
     
2.32
 
Total interest-earning assets
   
2,598,207
     
33,768
     
5.16
     
2,467,859
     
30,919
     
4.97
 
Noninterest-earning assets
   
181,139
                     
175,462
                 
Total assets
 
$
2,779,346
                   
$
2,643,321
                 
                                                 
Liabilities and Shareholders’ Equity:
                                               
Interest-bearing liabilities:
                                               
NOW, savings and money market deposits
 
$
1,399,727
   
$
4,057
     
1.15
%
 
$
1,394,572
   
$
3,533
     
1.01
%
Time deposits
   
315,376
     
1,570
     
1.98
     
308,987
     
1,137
     
1.46
 
Short-term borrowings
   
12,468
     
58
     
1.85
     
16,393
     
68
     
1.65
 
Notes payable & other longer-term borrowings
   
95,000
     
523
     
2.18
     
95,000
     
473
     
1.98
 
Subordinated debt securities
   
26,472
     
404
     
6.05
     
20,887
     
245
     
4.65
 
Junior subordinated deferrable interest debentures
   
46,393
     
485
     
4.15
     
46,393
     
487
     
4.16
 
Total interest-bearing liabilities
 
$
1,895,436
   
$
7,097
     
1.49
%
 
$
1,882,232
   
$
5,943
     
1.25
%
                                                 
Noninterest-bearing liabilities:
                                               
Noninterest-bearing deposits
 
$
555,501
                   
$
513,432
                 
Other liabilities
   
33,339
                     
33,024
                 
Total noninterest-bearing liabilities
   
588,840
                     
546,456
                 
Shareholders’ equity
   
295,070
                     
214,633
                 
Total liabilities and shareholders’ equity
 
$
2,779,346
                   
$
2,643,321
                 
                                                 
Net interest income
         
$
26,671
                   
$
24,976
         
Net interest spread
                   
3.67
%
                   
3.72
%
Net interest margin(3)
                   
4.07
%
                   
4.02
%

(1)
Average loan balances include nonaccrual loans and loans held for sale.
(2)
Includes income and average balances for interest-earning deposits at other banks, nonmarketable securities, federal funds sold and other miscellaneous interest-earning assets.
(3)
Net interest margin is calculated as the annualized net interest income, on a fully tax-equivalent basis, divided by average interest-earning assets.

   
Nine Months Ended September 30,
 
   
2019
   
2018
 
   
Average
Balance
   
Interest
   
Yield/
Rate
   
Average
Balance
   
Interest
   
Yield/
Rate
 
   
(Dollars in thousands)
 
Assets:
                                   
Interest-earning assets:
                                   
Total loans(1)
 
$
1,965,297
   
$
86,471
     
5.88
%
 
$
1,899,880
   
$
77,531
     
5.46
%
Investment securities – taxable
   
281,904
     
5,819
     
2.76
     
168,718
     
3,188
     
2.53
 
Investment securities – non-taxable
   
32,184
     
847
     
3.52
     
124,951
     
3,351
     
3.59
 
Other interest-earning assets(2)
   
292,099
     
5,348
     
2.45
     
232,949
     
3,199
     
1.84
 
Total interest-earning assets
   
2,571,484
     
98,485
     
5.12
     
2,426,498
     
87,269
     
4.81
 
Noninterest-earning assets
   
177,507
                     
171,756
                 
Total assets
 
$
2,748,991
                   
$
2,598,254
                 
                                                 
Liabilities and Shareholders’ Equity:
                                               
Interest-bearing liabilities:
                                               
NOW, savings and money market deposits
 
$
1,439,699
   
$
13,287
     
1.23
%
 
$
1,365,187
   
$
8,664
     
0.85
%
Time deposits
   
314,128
     
4,368
     
1.86
     
314,502
     
3,295
     
1.40
 
Short-term borrowings
   
15,425
     
226
     
1.96
     
19,334
     
194
     
1.34
 
Notes payable & other longer-term borrowings
   
95,000
     
1,623
     
2.28
     
95,000
     
1,250
     
1.76
 
Subordinated debt securities
   
26,890
     
1,213
     
6.03
     
20,887
     
735
     
4.70
 
Junior subordinated deferrable interest debentures
   
46,393
     
1,510
     
4.35
     
46,393
     
1,339
     
3.86
 
Total interest-bearing liabilities
 
$
1,937,535
   
$
22,227
     
1.53
%
 
$
1,861,303
   
$
15,477
     
1.11
%
                                                 
Noninterest-bearing liabilities:
                                               
Noninterest-bearing deposits
 
$
524,468
                   
$
491,456
                 
Other liabilities
   
31,795
                     
30,549
                 
Total noninterest-bearing liabilities
   
556,263
                     
522,005
                 
Shareholders’ equity
   
255,193
                     
214,946
                 
Total liabilities and shareholders’ equity
 
$
2,748,991
                   
$
2,598,254
                 
                                                 
Net interest income
         
$
76,258
                   
$
71,792
         
Net interest spread
                   
3.59
%
                   
3.70
%
Net interest margin(3)
                   
3.96
%
                   
3.96
%

(1)
Average loan balances include nonaccrual loans and loans held for sale.
(2)
Includes income and average balances for interest-earning deposits at other banks, nonmarketable securities, federal funds sold and other miscellaneous interest-earning assets.
(3)
Net interest margin is calculated as the annualized net interest income, on a fully tax-equivalent basis, divided by average interest-earning assets.

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables sets forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volume and rate have been allocated to volume.

   
Three Months Ended September 30,
 
   
2019 over 2018
 
   
Change due to:
   
Total
 
   
Volume
   
Rate
   
Variance
 
   
(Dollars in thousands)
 
Interest-earning assets:
                 
Loans
 
$
281
   
$
1,715
   
$
1,996
 
Investment securities – taxable
   
97
     
176
     
273
 
Investment securities – non-taxable
   
(377
)
   
(9
)
   
(386
)
Other interest-earning assets
   
802
     
164
     
966
 
Total increase (decrease) in interest income
   
803
     
2,046
     
2,849
 
                         
Interest-bearing liabilities:
                       
NOW, Savings, MMDAs
   
13
     
511
     
524
 
Time deposits
   
24
     
409
     
433
 
Short-term borrowings
   
(16
)
   
6
     
(10
)
Notes payable & other borrowings
   
     
50
     
50
 
Subordinated debt securities
   
66
     
93
     
159
 
Junior subordinated deferrable interest debentures
   
     
(2
)
   
(2
)
Total increase (decrease) interest expense:
   
87
     
1,067
     
1,154
 
                         
Increase (decrease) in net interest income
 
$
716
   
$
979
   
$
1,695
 

   
Nine Months Ended September 30,
 
   
2019 over 2018
 
   
Change due to:
   
Total
 
   
Volume
   
Rate
   
Variance
 
   
(Dollars in thousands)
 
Interest-earning assets:
                 
Loans
 
$
2,670
   
$
6,270
   
$
8,940
 
Investment securities – taxable
   
2,139
     
492
     
2,631
 
Investment securities – non-taxable
   
(2,488
)
   
(16
)
   
(2,504
)
Other interest-earning assets
   
812
     
1,337
     
2,149
 
Total increase (decrease) in interest income
   
3,133
     
8,083
     
11,216
 
                         
Interest-bearing liabilities:
                       
NOW, Savings, MMDAs
   
473
     
4,150
     
4,623
 
Time deposits
   
(4
)
   
1,077
     
1,073
 
Short-term borrowings
   
(39
)
   
71
     
32
 
Notes payable & other borrowings
   
     
373
     
373
 
Subordinated debt securities
   
211
     
267
     
478
 
Junior subordinated deferrable interest debentures
   
     
171
     
171
 
Total increase (decrease) interest expense:
   
641
     
6,109
     
6,750
 
                         
Increase (decrease) in net interest income
 
$
2,492
   
$
1,974
   
$
4,466
 

Net interest income for the three months ended September 30, 2019 was $26.6 million, compared to $24.8 million for the three months ended September 30, 2018, an increase of $1.8 million, or 7.2%. The increase in net interest income was comprised of a $2.9 million, or 9.5%, increase in interest income offset by a $1.2 million, or 19.4%, increase in interest expense. The growth in interest income was primarily attributable to a $20.0 million, or 1.0%, increase in average loans outstanding for the three-month period ended September 30, 2019, compared to the three-month period ended September 30, 2018, and by an increase of 34 basis points in the yield on total loans. The increase in average loans outstanding was primarily due to seasonal agricultural production loan net fundings.

The $1.2 million increase in interest expense for the three months ended September 30, 2019 was primarily related to an increase of 24 basis points in the rate paid on interest-bearing liabilities and an increase of $11.5 million, or 0.7%, in average interest-bearing deposits over the same period in 2018. Additionally, average noninterest-bearing demand deposits increased to $555.5 million at September 30, 2019 from $513.4 million at September 30, 2018.

For the three months ended September 30, 2019, net interest margin and net interest spread were 4.07% and 3.67%, respectively, compared to 4.02% and 3.72% for the same period in 2018, which reflects the increases in interest income discussed above relative to the increases in interest expense.

Net interest income for the nine months ended September 30, 2019 was $76.0 million, compared to $70.9 million for the nine months ended September 30, 2018, an increase of $5.1 million, or 7.1%. The increase in net interest income was comprised of an $11.8 million, or 13.7%, increase in interest income offset by a $6.8 million, or 43.6%, increase in interest expense. The growth in interest income was primarily attributable to a $65.4 million, or 3.4%, increase in average loans outstanding for the nine-month period ended September 30, 2019, compared to the nine-month period ended September 30, 2018, and by an increase of 42 basis points in the yield on total loans. The increase in average loans outstanding was primarily due to organic growth in 1-4 family residential loans and in the auto loan sector of our portfolio, offset by a decrease in the commercial – general sector.

The $6.8 million increase in interest expense for the nine months ended September 30, 2019 was primarily related to an increase of 42 basis points in the rate paid on interest-bearing liabilities and an increase of $74.1 million, or 4.4%, in average interest-bearing deposits over the same period in 2018. The increase in average interest-bearing liabilities from September 30, 2018 to September 30, 2019 was due primarily to an increase in money market accounts of $107.8 million, offset by a decrease in NOW accounts of $35.0 million. Additionally, average noninterest-bearing demand deposits increased to $524.5 million at September 30, 2019 from $491.5 million at September 30, 2018.

For the nine months ended September 30, 2019, net interest margin and net interest spread were 3.96% and 3.59%, respectively, compared to 3.96% and 3.70% for the same period in 2018, which reflects the increases in interest income discussed above relative to the increases in interest expense.

Provision for Loan Losses

Credit risk is inherent in the business of making loans. We establish an allowance for loan losses through charges to earnings, which are shown in the statements of income as the provision for loan losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for loan losses and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to our earnings. The provision for loan losses and the amount of allowance for each period are dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market areas.

The provision for loan losses for the three months ended September 30, 2019 was $420,000, compared to $3.4 million for the three months ended September 30, 2018. The decrease in the provision for loan losses was primarily the result of a reduction in charge-offs of $3.7 million during three months ended September 30, 2019.  The provision for loan losses for the nine months ended September 30, 2019 was $1.9 million, compared to $5.7 million for the nine months ended September 30, 2018.  The decrease in the provision for loan losses was primarily the result of a reduction in net charge-offs of $5.3 million for the nine months ended September 30, 2019.  The allowance for loan losses as a percentage of loans held for investment was 1.23% at September 30, 2019 and 1.18% at December 31, 2018. Further discussion of the allowance for loan losses is noted below.

Noninterest Income

While interest income remains the largest single component of total revenues, noninterest income is an important contributing component. The largest portion of our noninterest income is associated with our mortgage banking activities. Other sources of noninterest income include service charges on deposit accounts, bank card services and interchange fees, and income from insurance activities.

The following table sets forth the major components of our noninterest income for the periods indicated:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2019
   
2018
   
Increase
(Decrease)
   
2019
   
2018
   
Increase
(Decrease)
 
   
(Dollars in thousands)
 
Noninterest income:
                                   
Service charges on deposit accounts
 
$
2,101
   
$
1,979
   
$
122
   
$
5,985
   
$
5,757
   
$
228
 
Income from insurance activities
   
1,114
     
1,462
     
(348
)
   
4,074
     
3,992
     
82
 
Bank card services and interchange fees
   
2,192
     
2,101
     
91
     
6,273
     
6,110
     
163
 
Mortgage banking activities
   
6,991
     
5,603
     
1,388
     
18,509
     
16,667
     
1,842
 
Investment commissions
   
419
     
424
     
(5
)
   
1,245
     
1,300
     
(55
)
Fiduciary income
   
361
     
353
     
8
     
1,104
     
1,088
     
16
 
Other income and fees(1)
   
937
     
1,373
     
(436
)
   
2,703
     
2,817
     
(114
)
Total noninterest income
 
$
14,115
   
$
13,295
   
$
820
   
$
39,893
   
$
37,731
   
$
2,162
 

(1)
Other income and fees includes the increase in the cash surrender value of life insurance, safe deposit box rental, check printing, collections, wire transfer and other miscellaneous services.

Noninterest income for the three months ended September 30, 2019 was $14.1 million, compared to $13.3 million for the three months ended September 30, 2018, an increase of $820,000, or 6.2%. Income from mortgage banking activities increased $1.4 million, or 24.8%, to $7.0 million for the three months ended September 30, 2019 from $5.6 million for the three months ended September 30, 2018. The increase was due primarily to an increase of $53.2 million in mortgage loan originations for the three months ended September 30, 2019, compared to the three months ended September 30, 2018. Income from insurance activities decreased $348,000, or 23.8%, to $1.1 million for the three months ended September 30, 2019 from $1.5 million for the three months ended September 30, 2018. The decrease was attributable to $375,000 of profit-sharing bonus revenues recognized in the third quarter of 2018.

Noninterest income for the nine months ended September 30, 2019 was $39.9 million, compared to $37.7 million for the nine months ended September 30, 2018, an increase of $2.2 million, or 5.7%. Income from mortgage banking activities increased $1.8 million, or 11.1%, to $18.5 million for the nine months ended September 30, 2019 from $16.7 million for the nine months ended September 30, 2018.  This increase was primarily a result of an increase of $50.0 million in mortgage loan originations for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018.

Noninterest Expense

The following table sets forth the major components of our noninterest expense for the periods indicated:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2019
   
2018
   
Increase
(Decrease)
   
2019
   
2018
   
Increase
(Decrease)
 
   
(Dollars in thousands)
 
Noninterest expense:
                                   
Salaries and employee benefits
 
$
18,135
   
$
18,044
   
$
91
   
$
56,044
   
$
53,463
   
$
2,581
 
Occupancy expense, net
   
3,486
     
3,388
     
98
     
10,309
     
10,103
     
206
 
Professional services
   
1,852
     
1,474
     
378
     
5,169
     
4,303
     
866
 
Marketing and development
   
762
     
671
     
91
     
2,275
     
2,249
     
26
 
IT and data services
   
722
     
564
     
158
     
2,104
     
1,667
     
437
 
Bankcard expenses
   
864
     
666
     
198
     
2,394
     
1,989
     
405
 
Appraisal expenses
   
467
     
455
     
12
     
1,197
     
1,094
     
103
 
Other expenses(1)
   
3,740
     
3,384
     
356
     
10,502
     
10,077
     
425
 
Total noninterest expense
 
$
30,028
   
$
28,646
   
$
1,382
   
$
89,994
   
$
84,945
   
$
5,049
 

(1)
Other expenses include items such as telephone expenses, postage, courier fees, directors’ fees, and insurance.

Noninterest expense for the three months ended September 30, 2019 was $30.0 million compared to $28.6 million for the three months ended September 30, 2018, an increase of $1.4 million, or 4.8%. Professional services expenses, which include legal fees, audit and accounting fees, and consulting fees, increased $378,000 for the three months ended September 30, 2019, compared to the same period in 2018. This increase was primarily due to $328,000 in professional services during the three months ended September 30, 2019 related to the Company’s acquisition of WTSB.

Noninterest expense for the nine months ended September 30, 2019 was $90.0 million, compared to $84.9 million for the nine months ended September 30, 2018, an increase of $5.1 million, or 5.9%.  Salaries and employee benefits increased $2.6 million, or 4.8%, from $53.5 million for the nine months ended September 30, 2018 to $56.0 million for the nine months ended September 30, 2019.  The primary reason for this increase is the expense related to the staff that was acquired in our mortgage origination company acquisition in November 2018.  The cost related to these employees during the nine months ended September 30, 2019 was $1.6 million.  Additionally, commissions paid to mortgage loan originators increased $621,000, excluding commissions paid to employees from the mortgage acquisition, for the nine months ended September 30, 2019 as a result of the increased mortgage loan originations. Professional services expenses increased $866,000 for the nine months ended September 30, 2019, compared to the same period in 2018.  This increase was primarily due to increased legal expenses related to the Company’s preparation for its initial public offering and related activities as well as acquisition costs for WTSB.

Financial Condition

Total assets increased $82.8 million, or 3.1%, to $2.80 billion at September 30, 2019, compared to $2.71 billion at December 31, 2018. Our gross loans held for investment increased $5.4 million, or 0.3%, to $1.96 billion at September 30, 2019, compared to $1.96 billion at December 31, 2018. Our securities portfolio increased $63.1 million, or 18.7%, to $401.3 million at September 30, 2019, compared to $338.2 million at December 31, 2018. Total deposits increased $8.5 million, or 0.4% to $2.29 billion at September 30, 2019, compared to $2.28 billion at December 31, 2018.

Loan Portfolio

Our loans represent the largest portion of earning assets, greater than our securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing the Company’s financial condition. We originate substantially all of the loans in our portfolio, except certain loan participations that are independently underwritten by the Company prior to purchase.

The following table presents the balance and associated percentage of each major category in our gross loan portfolio at the dates indicated:

   
September 30, 2019
   
December 31, 2018
 
   
Amount
   
% of Total
   
Amount
   
% of Total
 
   
(Dollars in thousands)
 
Commercial real estate
 
$
520,687
     
26.5
%
 
$
538,037
     
27.5
%
Commercial – specialized
   
316,862
     
16.1
     
305,022
     
15.6
 
Commercial – general
   
398,909
     
20.4
     
427,728
     
21.8
 
Consumer:
                               
1-4 family residential
   
359,160
     
18.3
     
346,153
     
17.7
 
Auto loans
   
212,529
     
10.8
     
191,647
     
9.8
 
Other consumer
   
70,338
     
3.6
     
70,209
     
3.6
 
Construction
   
84,124
     
4.3
     
78,401
     
4.0
 
Gross loans
   
1,962,609
     
100.0
%
   
1,957,197
     
100.0
%
Allowance for loan losses
   
(24,176
)
           
(23,126
)
       
Net loans
 
$
1,938,433
           
$
1,934,071
         

Loans held for investment increased $5.4 million, or 0.3%, to $1.96 billion at September 30, 2019, compared to $1.96 billion at December 31, 2018. This increase in our loans was primarily due to organic loan growth, offset by the early payoff of five relationships totaling $59.7 million.

The Bank is primarily involved in real estate, commercial, agricultural and consumer lending activities with customers throughout Texas and Eastern New Mexico. We have a collateral concentration, as 63.7% of our loans held for investment were secured by real property as of September 30, 2019, compared to 64.9% as of December 31, 2018. We believe that these loans are not concentrated in any one single property type and that they are geographically diversified throughout the markets that we serve. Although the Bank has diversified loan portfolios, its debtors’ ability to honor their contracts is substantially dependent upon the general economic conditions of the industries in which the respective debtor operates, which consist primarily of agribusiness, wholesale/retail, oil and gas and related businesses, healthcare industries and institutions of higher education.

We have established concentration limits in the loan portfolio for commercial real estate loans and unsecured lending, among other loan types. All loan types are within established limits. We use underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending to allow us to react to a borrower’s deteriorating financial condition, should that occur.

Commercial Real Estate. Our commercial real estate portfolio includes loans for commercial property that is owned by real estate investors, construction loans to build owner-occupied properties, and loans to developers of commercial real estate investment properties and residential developments. Commercial real estate loans are subject to underwriting standards and processes similar to our 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 our 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.

Commercial real estate loans decreased $17.3 million, or 3.2%, to $520.7 million as of September 30, 2019 from $538.0 million as of December 31, 2018. The decrease in commercial real estate loans during this period was mostly driven by the early payoff of two loans totaling $24.8 million, offset by organic loan growth.

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, to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations, and to 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 typically 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 loans that are considered “specialized” include agricultural production and real estate loans, energy loans, and finance, investment, and insurance loans. Commercial related loans that contain a broader diversity of borrowers, sub-industries, or serviced industries are grouped into the “general category.” These include goods, services, restaurant and retail, construction, and other industries.

Commercial specialized loans increased $11.9 million, or 3.9%, to $316.9 million as of September 30, 2019 from $305.0 million as of December 31, 2018.  This increase was primarily due to a net increase of $16.1 million from seasonal annual fundings on agricultural production loans, as well as one large revolving line of credit having $5.7 million less outstanding at September 30, 2019.

Commercial general loans decreased $28.8 million, or 6.7%, to $398.9 million as of September 30, 2019 from $427.7 million as of December 31, 2018.  The decrease in commercial general loans was primarily due to the early payoff of three relationships totaling $34.9 million during 2019, offset by organic loan growth.

Consumer. We utilize a computer-based credit scoring analysis to supplement our policies and procedures in underwriting consumer loans. Our 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 minimize our risk. Residential real estate loans are included in consumer loans. We generally require mortgage title insurance and hazard insurance on these residential real estate loans.

Consumer and other loans increased $34.0 million, or 5.6%, to $642.0 million as of September 30, 2019, from $608.0 million as of December 31, 2018. The increases in these loans were primarily a result of expanded lending in the auto loan portfolio in the Lubbock/South Plains market as well as an increase in 1-4 family residential loans. As of September 30, 2019, our consumer loan portfolio was comprised of $359.2 million in 1-4 family residential loans, $212.5 million in indirect auto loans, and $70.3 million in other consumer loans.

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.

Construction loans increased $5.7 million, or 7.3%, to $84.1 million as of September 30, 2019 from $78.4 million as of December 31, 2018. The increase resulted from continued organic growth, especially in our Lubbock/South Plains and Dallas/Ft. Worth markets.

Allowance for Loan Losses

The allowance for loan losses provides a reserve against which loan losses are charged as those losses become evident. Management evaluates the appropriate level of the allowance for loan losses on a quarterly basis. The analysis takes into consideration the results of an ongoing loan review process, the purpose of which is to determine the level of credit risk within the portfolio and to ensure proper adherence to underwriting and documentation standards. Additional allowances are provided to those loans which appear to represent a greater than normal exposure to risk. The quality of the loan portfolio and the adequacy of the allowance for loan losses is reviewed by regulatory examinations and the Company’s auditors. The allowance for loan losses consists of two elements: (1) specific valuation allowances established for probable losses on specific loans and (2) historical 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.

To determine the adequacy of the allowance for loan losses, the loan portfolio is broken into categories based on loan type. Historical loss experience factors by category, adjusted for changes in trends and conditions, are used to determine an indicated allowance for each portfolio category. These factors are evaluated and updated based on the composition of the specific loan portfolio. Other considerations include volumes and trends of delinquencies, nonaccrual loans, levels of bankruptcies, criticized and classified loan trends, expected losses on real estate secured loans, new credit products and policies, economic conditions, concentrations of credit risk, and the experience and abilities of the Company’s lending personnel. In addition to the portfolio evaluations, impaired loans with a balance of $250,000 or more are individually evaluated based on facts and circumstances of the loan to determine if a specific allowance amount may be necessary. Specific allowances may also be established for loans whose outstanding balances are below the above threshold when it is determined that the risk associated with the loan differs significantly from the risk factor amounts established for its loan category.

The allowance for loan losses was $24.2 million at September 30, 2019, compared to $23.1 million at December 31, 2018, an increase of $1.1 million, or 4.5%.

The following table provides an analysis of the allowance for loan losses at the dates indicated.

   
Beginning
Balance
   
Charge-offs
   
Recoveries
   
Provision
   
Ending
Balance
 
   
(Dollars in thousands)
 
Three Months Ended September 30, 2019
                             
Commercial real estate
 
$
5,415
   
$
   
$
108
   
$
(379
)
 
$
5,144
 
Commercial – specialized
   
3,346
     
     
28
     
(575
)
   
2,799
 
Commercial – general
   
8,325
     
(170
)
   
19
     
734
     
8,908
 
Consumer:
                                       
1-4 family residential
   
2,310
     
(65
)
   
9
     
384
     
2,638
 
Auto loans
   
3,067
     
(260
)
   
83
     
127
     
3,017
 
Other consumer
   
1,199
     
(230
)
   
63
     
121
     
1,153
 
Construction
   
509
     
     
     
8
     
517
 
Total
 
$
24,171
   
$
(725
)
 
$
310
   
$
420
   
$
24,176
 

   
Beginning
Balance
   
Charge-offs
   
Recoveries
   
Provision
   
Ending
Balance
 
   
(Dollars in thousands)
 
Three Months Ended September 30, 2018
                             
Commercial real estate
 
$
4,336
   
$
   
$
239
   
$
268
   
$
4,843
 
Commercial – specialized
   
2,924
     
(70
)
   
10
     
(191
)
   
2,673
 
Commercial – general
   
8,733
     
(3,738
)
   
64
     
2,434
     
7,493
 
Consumer:
                                       
1-4 family residential
   
1,451
     
(131
)
   
31
     
102
     
1,453
 
Auto loans
   
2,603
     
(276
)
   
41
     
609
     
2,977
 
Other consumer
   
1,158
     
(257
)
   
30
     
213
     
1,144
 
Construction
   
510
     
     
     
(20
)
   
490
 
Total
 
$
21,715
   
$
(4,472
)
 
$
415
   
$
3,415
   
$
21,073
 

   
Beginning
Balance
   
Charge-offs
   
Recoveries
   
Provision
   
Ending
Balance
 
   
(Dollars in thousands)
 
Nine Months Ended September 30, 2019
                             
Commercial real estate
 
$
5,579
   
$
   
$
323
   
$
(758
)
 
$
5,144
 
Commercial – specialized
   
2,516
     
(37
)
   
90
     
230
     
2,799
 
Commercial – general
   
8,173
     
(235
)
   
296
     
674
     
8,908
 
Consumer:
                                       
1-4 family residential
   
2,249
     
(84
)
   
61
     
412
     
2,638
 
Auto loans
   
2,994
     
(765
)
   
162
     
626
     
3,017
 
Other consumer
   
1,192
     
(744
)
   
155
     
550
     
1,153
 
Construction
   
423
     
(75
)
   
     
169
     
517
 
Total
 
$
23,126
   
$
(1,940
)
 
$
1,087
   
$
1,903
   
$
24,176
 

   
Beginning
Balance
   
Charge-offs
   
Recoveries
   
Provision
   
Ending
Balance
 
   
(Dollars in thousands)
 
Nine Months Ended September 30, 2018
                             
Commercial real estate
 
$
3,769
   
$
(1,539
)
 
$
239
   
$
2,374
   
$
4,843
 
Commercial – specialized
   
2,367
     
(108
)
   
75
     
339
     
2,673
 
Commercial – general
   
10,151
     
(3,865
)
   
399
     
808
     
7,493
 
Consumer:
                                       
1-4 family residential
   
1,787
     
(272
)
   
36
     
(98
)
   
1,453
 
Auto loans
   
2,068
     
(693
)
   
102
     
1,500
     
2,977
 
Other consumer
   
971
     
(607
)
   
127
     
653
     
1,144
 
Construction
   
348
     
(15
)
   
     
157
     
490
 
Total
 
$
21,461
   
$
(7,099
)
 
$
978
   
$
5,733
   
$
21,073
 

Net charge-offs totaled $415,000 and were 0.08% (annualized) of average loans outstanding for the three months ended September 30, 2019, compared to $4.1 million and 0.82% for the three months ended September 30, 2018. Net charge-offs totaled $853,000 and were 0.06% (annualized) of average loans outstanding for the nine months ended September 30, 2019, compared to $6.1 million and 0.43% for the nine months ended September 30, 2018.  The decrease in net charge-offs for the quarter-to-date comparison was primarily the result of a $3.6 million charge-off on a commercial - general relationship during the third quarter of 2018. The decrease in net charge-offs for the year-to-date comparison was primarily the result of a $1.4 million charge-off on a commercial real estate relationship during the second quarter of 2018 as well as the third quarter 2018 charge-off noted above.  The allowance for loan losses as a percentage of loans held for investment was 1.23% at September 30, 2019 and 1.18% at December 31, 2018.

While the entire allowance for loan losses is available to absorb losses from any part of our loan portfolio, the following table sets forth the allocation of the allowance for loan losses for the periods presented and the percentage of allowance in each classification to total allowance:

   
September 30, 2019
   
December 31, 2018
 
   
Amount
   
% of Total
   
Amount
   
% of Total
 
   
(Dollars in thousands)
 
Commercial real estate
 
$
5,144
     
21.3
%
 
$
5,579
     
24.1
%
Commercial – specialized
   
2,799
     
11.6
     
2,516
     
10.9
 
Commercial – general
   
8,908
     
36.8
     
8,173
     
35.4
 
Consumer:
                               
1-4 family residential
   
2,638
     
10.9
     
2,249
     
9.7
 
Auto loans
   
3,017
     
12.5
     
2,994
     
12.9
 
Other consumer
   
1,153
     
4.8
     
1,192
     
5.2
 
Construction
   
517
     
2.1
     
423
     
1.8
 
Total allowance for loan losses
 
$
24,176
     
100.0
%
 
$
23,126
     
100.0
%

Asset Quality

Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 90 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.

A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and performing restructured loans. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral. The impairment amount on a collateral-dependent loan is charged-off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve.

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned (“OREO”) until sold and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.

The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans and loans past due 90 days or more.

   
September 30,
2019
   
December 31,
2018
 
   
(Dollars in thousands)
 
Nonaccrual loans:
           
Commercial real estate
 
$
218
   
$
217
 
Commercial – specialized
   
1,259
     
2,550
 
Commercial – general
   
2,144
     
2,134
 
Consumer:
               
1-4 family residential
   
1,614
     
1,489
 
Auto loans
   
     
 
Other consumer
   
     
 
Construction
   
     
 
Total nonaccrual loans
   
5,235
     
6,390
 
Past due loans 90 days or more and still accruing
   
1,221
     
564
 
Total nonperforming loans
   
6,456
     
6,954
 
Other real estate owned
   
2,296
     
2,285
 
Total nonperforming assets
 
$
8,752
   
$
9,239
 
                 
Restructured loans - nonaccrual(1)
 
$
451
   
$
494
 
Restructured loans - accruing
 
$
1,830
   
$
3,351
 

(1)
Restructured loans, nonaccrual, are included in nonaccrual loans which are a component of nonperforming loans.

In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring (“TDR”). Included in certain loan categories of impaired loans are TDRs on which we have granted certain material concessions to the borrower as a result of the borrower experiencing financial difficulties. The concessions granted by us may include, but are not limited to: (1) a modification in which the maturity date, timing of payments or frequency of payments is modified, (2) an interest rate lower than the current market rate for new loans with similar risk, or (3) a combination of the first two factors.

If a borrower on a restructured accruing loan has demonstrated performance under the previous terms, is not experiencing financial difficulty and shows the capacity to continue to perform under the restructured terms, the loan will remain on accrual status. Otherwise, the loan will be placed on nonaccrual status until the borrower demonstrates a sustained period of performance, which generally requires six consecutive months of payments. Loans identified as TDRs are evaluated for impairment using the present value of the expected cash flows or the estimated fair value of the collateral, if the loan is collateral dependent. The fair value is determined, when possible, by an appraisal of the property less estimated costs related to liquidation of the collateral. The appraisal amount may also be adjusted for current market conditions. Adjustments to reflect the present value of the expected cash flows or the estimated fair value of collateral dependent loans are a component in determining an appropriate allowance for loan losses, and as such, may result in increases or decreases to the provision for loan losses in current and future earnings.

We had no loans restructured as TDRs during the first nine months of 2019 or 2018. TDRs are excluded from our nonperforming loans unless they otherwise meet the definition of nonaccrual loans or past due 90 days or more.

Securities Portfolio

The securities portfolio is the second largest component of the Company’s interest-earning assets, and the structure and composition of this portfolio is important to an analysis of the financial condition of the Company. The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest-earning asset when loan demand is weak or when deposits grow more rapidly than loans.

The securities portfolio consists of securities classified as either held-to-maturity or available-for-sale. All held-to-maturity securities are reported at amortized cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. All available-for-sale securities are reported at fair value. Securities available-for-sale consist primarily of state and municipal securities, mortgage-backed securities and U.S. government sponsored agency securities. We determine the appropriate classification at the time of purchase.

The following table summarizes the fair value of the securities portfolio as of the dates presented. As of these dates, there were no securities classified as held-to-maturity.

   
September 30, 2019
   
December 31, 2018
 
   
Amortized
Cost
   
Fair
Value
   
Unrealized
Gain/(Loss)
   
Amortized
Cost
   
Fair
Value
   
Unrealized
Gain/(Loss)
 
   
(Dollars in thousands)
 
Available-for-sale
                                   
U.S. government and agencies
 
$
6,848
   
$
6,901
   
$
53
   
$
84,765
   
$
84,707
   
$
(58
)
State and municipal
   
40,720
     
41,552
     
832
     
32,205
     
32,310
     
105
 
Mortgage-backed securities
   
251,958
     
253,878
     
1,920
     
184,267
     
182,256
     
(2,011
)
Collateralized mortgage obligations
   
60,244
     
60,185
     
(59
)
   
-
     
-
     
-
 
Asset-backed and other amortizing securities
   
36,972
     
38,819
     
1,847
     
39,799
     
38,923
     
(876
)
Total available-for-sale
 
$
396,742
   
$
401,335
   
$
4,593
   
$
341,036
   
$
338,196
   
$
(2,840
)

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At September 30, 2019, we evaluated the securities which had an unrealized loss for other-than-temporary impairment and determined all declines in value to be temporary. We anticipate full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment. We do not intend to sell these securities and it is not probable that we will be required to sell them before recovery of the amortized cost basis, which may be at maturity.

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of the date presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligation with or without call or prepayment penalties.

 
As of September 30, 2019
 
 
Due in One
Year or Less
   
Due after One Year
Through Five Years
   
Due after Five Year
Through Ten Years
   
Due after
Ten Years
 
 
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
 
 
(Dollars in thousands)
 
Available-for-sale
                                               
U.S. government and agencies
 
$
     
%
 
$
6,848
     
2.55
%
 
$
     
%
 
$
     
%
State and municipal
   
470
     
4.00
     
     
     
10,434
     
2.18
     
29,816
     
2.84
 
Mortgage-backed securities
   
     
     
1,130
     
1.65
     
25,139
     
2.15
     
225,689
     
2.72
 
Collateralized mortgage obligations
   
     
0.00
     
     
0.00
     
     
     
60,244
     
2.53
 
Asset-backed and other amortizing securities
   
     
     
     
     
     
     
36,972
     
2.82
 
Total available-for-sale
 
$
470
     
   
$
7,978
     
2.42
%
 
$
35,573
     
2.16
%
 
$
352,721
     
2.71
%

 
As of December 31, 2018
 
 
Due in One
Year or Less
   
Due after One Year
Through Five Years
   
Due after Five Years
Through Ten Years
   
Due after
Ten Years
 
 
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
   
Amortized
Cost
   
Weighted
Average
Yield
 
 
(Dollars in thousands)
 
Available-for-sale
                                               
U.S. government and agencies
 
$
77,918
     
2.40
%
 
$
6,847
     
2.55
%
 
$
     
%
 
$
     
%
State and municipal
   
     
     
470
     
4.00
%
   
8,995
     
2.17
%
   
22,740
     
3.01
%
Mortgage-backed securities
   
     
     
97
     
2.28
%
   
32,037
     
2.20
%
   
152,133
     
2.96
%
Asset-backed and other amortizing securities
   
     
     
     
     
     
%
   
39,799
     
2.82
%
Total available-for-sale
 
$
77,918
     
2.40
%
 
$
7,414
     
2.64
%
 
$
41,032
     
2.19
%
 
$
214,672
     
2.94
%

Our securities portfolio increased $63.1 million, or 18.7%, to $401.3 million at September 30, 2019, compared to $338.2 million at December 31, 2018.  The increase was due to investing excess liquidity from the Company’s interest-bearing deposit account with the Federal Reserve Bank of Dallas (the “Federal Reserve”) during the third quarter of 2019.

Deposits

Deposits represent the Company’s primary and most vital source of funds. We offer a variety of deposit products including demand deposits accounts, interest-bearing products, savings accounts and certificate of deposits. We put continued effort into gathering noninterest-bearing demand deposit accounts through loan production, customer referrals, marketing staffs, mobile and online banking and various involvements with community networks.

Total deposits at September 30, 2019 were $2.29 billion, representing an increase of $8.5 million, or 0.4%, compared to $2.28 billion at December 31, 2018. As of September 30, 2019, 24.4% of total deposits were comprised of noninterest-bearing demand accounts, 61.8% of interest-bearing non-maturity accounts and 13.8% of time deposits.

The following table shows the deposit mix as of the dates presented:

 
September 30, 2019
   
December 31, 2018
 
 
Amount
   
% of Total
   
Amount
   
% of Total
 
 
(Dollars in thousands)
 
Noninterest-bearing deposits
 
$
556,233
     
24.4
%
 
$
510,067
     
22.3
%
NOW and other transaction accounts
   
259,230
     
11.3
     
277,041
     
12.2
 
Money market and other savings
   
1,154,859
     
50.5
     
1,178,809
     
51.8
 
Time deposits
   
315,652
     
13.8
     
311,537
     
13.7
 
Total deposits
 
$
2,285,974
     
100.0
%
 
$
2,277,454
     
100.0
%

The following tables set forth the remaining maturity of time deposits of $100,000 and greater as of the date indicated:

(Dollars in thousands)
 
September 30,
2019
 
Time deposits $100,000 or greater with remaining maturity of:
     
Three months or less
 
$
23,165
 
After three months through six months
   
39,853
 
After six months through twelve months
   
51,169
 
After twelve months
   
123,144
 
Total
 
$
237,331
 

Borrowed Funds

In addition to deposits, we utilize advances from the FHLB and other borrowings as a supplementary funding source to finance our operations.

FHLB Advances. The FHLB allows us to borrow, both short and long-term, on a blanket floating lien status collateralized by first mortgage loans and commercial real estate loans as well as FHLB stock. At September 30, 2019 and December 31, 2018, we had maximum borrowing capacity from the FHLB of $737.4 million and $724.8 million, respectively. We had $199.0 million in off-balance sheet liabilities for letters of credit at September 30, 2019 and December 31, 2018. These letters of credit are used to pledge as collateral for public funds deposits. We had no overnight FHLB borrowings as of September 30, 2019 and December 31, 2018. We had long-term FHLB borrowings of $95.0 million as of September 30, 2019 and December 31, 2018. As of September 30, 2019 and December 31, 2018, total remaining borrowing capacity of $432.6 million and $425.4 million, respectively, was available under this arrangement. Our current FHLB borrowings mature within seven years.

The following table sets forth our FHLB borrowings as of and for the periods indicated:

 
As of/For the
Three Months Ended
September 30,
   
As of/For the
Nine Months Ended
September 30,
 
 
2019
   
2018
   
2019
   
2018
 
 
(Dollars in thousands)
 
Amount outstanding at end of the period
 
$
95,000
   
$
95,000
   
$
95,000
   
$
95,000
 
Weighted average interest rate at end of the period
   
2.03
%
   
2.04
%
   
2.03
%
   
2.04
%
Maximum month-end balance during the period
 
$
95,000
   
$
95,000
   
$
95,000
   
$
95,000
 
Average balance outstanding during the period
 
$
95,000
   
$
95,000
   
$
95,000
   
$
95,000
 
Weighted average interest rate during the period
   
2.18
%
   
1.98
%
   
2.28
%
   
1.76
%

Federal Reserve Bank of Dallas. The Bank has a line of credit with the Federal Reserve. The amount of the line is determined on a monthly basis by the Federal Reserve. The line is collateralized by a blanket floating lien on all agriculture, commercial and consumer loans. The amount of the line was $556.1 million and $531.9 million at September 30, 2019 and December 31, 2018, respectively. The line was not used during the three or nine month periods ended September 30, 2019 or the three or nine month periods ended September 30, 2018.

Lines of Credit. The Bank has uncollateralized lines of credit with multiple banks as a source of funding for liquidity management. The total amount of the lines was $135.0 million as of September 30, 2019 and December 31, 2018. The lines were not used during the three or nine month periods ended September 30, 2019 or the three or nine month periods ending September 30, 2018.

Subordinated Debt Securities. In January 2014, the Company issued $20.9 million in subordinated debt securities. These securities pay interest quarterly and mature January 2024. There was $14.4 million issued at an initial rate of 5.0% and $6.5 million issued at an initial rate of 4.0% at September 30, 2019. These rates are fixed for five years from issuance and then float at the Wall Street Journal prime rate, with a floor of 4.0% and a ceiling of 7.5%. The securities are unsecured and could be called by the Company at any time after January 2019, and they qualify for tier 2 capital treatment, subject to regulatory limitations. In December 2018, we notified all holders of our subordinated debt securities that we intended to call these securities in January 2019 and provided holders the option to exchange their current subordinated debt securities for newly-issued subordinated debt securities or to have their securities be redeemed. Holders of $13.4 million in subordinated debt securities elected to exchange their securities while holders of $7.5 million in subordinated debt securities elected to have their securities redeemed.

In December 2018, the Company issued $26.5 million in subordinated debt securities, including $13.4 million issued in exchange for our previously issued notes as described above. Securities totaling $12.4 million have a maturity date of December 2028 and an average fixed rate of 5.74% for the first five years. The remaining $14.1 million of securities have a maturity date of December 2030 and an average fixed rate of 6.41% for the first seven years. After the fixed rate periods, all securities will float at the Wall Street Journal prime rate, with a floor of 4.5% and a ceiling of 7.5%. These securities pay interest quarterly, are unsecured, and may be called by the Company at any time after the remaining maturity is five years or less. Additionally, these securities qualify for tier 2 capital treatment, subject to regulatory limitations. The balance of subordinated debt securities as of September 30, 2019 was $26.5 million, compared to $34.0 million as of December 31, 2018.

Junior Subordinated Deferrable Interest Debentures and Trust Preferred Securities. Between March 2004 and June 2007, the Company formed three wholly-owned statutory business trusts solely for the purpose of issuing trust preferred securities, the proceeds of which were invested in junior subordinated deferrable interest debentures. The trusts are not consolidated and the debentures issued by the Company to the trusts are reflected in the Company’s consolidated balance sheets. The Company records interest expense on the debentures in its consolidated financial statements. The amount of debentures outstanding was $46.4 million at September 30, 2019 and December 31, 2018. The Company has the right, as has been exercised in the past, to defer payments of interest on the securities for up to twenty consecutive quarters. During such time, corporate dividends may not be paid. The Company is current in its interest payments on the debentures.

The chart below indicates certain information about each of the statutory trusts and the junior subordinated deferrable interest debentures, including the date the junior subordinated deferrable interest debentures were issued, outstanding amounts of trust preferred securities and junior subordinated deferrable interest debentures, the maturity date of the junior subordinated deferrable interest debentures, the interest rates on the junior subordinated deferrable interest debentures and the investment banker.

Name of Trust
 
Issue
Date
 
Amount of
Trust Preferred
Securities
   
Amount of
Debentures
   
Stated
Maturity Date of
Trust Preferred
Securities and
Debentures(1)
 
Interest Rate of
Trust Preferred
Securities and
Debentures(2)(3)
   
(Dollars in thousands)
South Plains Financial Capital Trust III
 
2004
 
$
10,000
   
$
10,310
     
2034
 
3-mo. LIBOR + 265 bps; 4.91%
South Plains Financial Capital Trust IV
 
2005
   
20,000
     
20,619
     
2035
 
3-mo. LIBOR + 139 bps; 3.51%
South Plains Financial Capital Trust V
 
2007
   
15,000
     
15,464
     
2037
 
3-mo. LIBOR + 150 bps; 3.62%
Total
     
$
45,000
   
$
46,393
            

(1)
May be redeemed at the Company’s option.
(2)
Interest payable quarterly with principal due at maturity.
(3)
Rate as of last reset date, prior to September 30, 2019.

Liquidity and Capital Resources

Liquidity

Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

Interest rate sensitivity involves the relationships between rate-sensitive assets and liabilities and is an indication of the probable effects of interest rate fluctuations on the Company’s net interest income. Interest rate-sensitive assets and liabilities are those with yields or rates that are subject to change within a future time period due to maturity or changes in market rates. The model is used to project future net interest income under a set of possible interest rate movements. The Company’s Investment/Asset Liability Committee (the “ALCO Committee”), reviews this information to determine if the projected future net interest income levels would be acceptable. The Company attempts to stay within acceptable net interest income levels.

Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and the Federal Reserve discount window.

Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.

Capital Requirements

Total shareholders’ equity increased to $299.0 million as of September 30, 2019, compared to $212.8 million as of December 31, 2018, taking into account the ESOP Repurchase Right Termination, an increase of $86.2 million, or 40.5%.  The increase from December 31, 2018 was primarily the result of $51.4 million in net proceeds from the Company’s initial public offering, $19.1 million in net earnings for the nine months ended September 30, 2019, a change in accumulated other comprehensive income of $5.9 million, related to unrealized gains/losses on securities available for sale, and the modification of the Company’s cash-settled stock appreciation rights that previously were accounted for as liabilities to equity classified stock options in the amount of $11.5 million.  The increases were offset by a $1.3 million cumulative-effect adjustment to retained earnings for a change in accounting principle.  This related to the Company changing the accounting method for its stock appreciation rights from the intrinsic value method to fair value.  See Note 1, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements included elsewhere in this Form 10-Q regarding further details on this change. See also Note 6, Stock-Based Compensation, for further details on the modification.

We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action,” we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. The capital amounts and classifications are subject to qualitative judgments by the federal banking regulators about components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required us to maintain minimum amounts and ratio of common equity tier 1 (“CET1”) capital, tier 1 capital and total capital to risk-weighted assets and of tier 1 capital to average consolidated assets, referred to as the “leverage ratio.”

The risk-based capital ratios measure the adequacy of a bank’s capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for “prompt corrective action” or other regulatory enforcement action. In assessing a bank’s capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level of earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management’s overall ability to monitor and control risks.

At September 30, 2019, both we and the Bank met all the capital adequacy requirements to which we and the Bank were subject. At September 30, 2019, the Bank was “well capitalized” under the regulatory framework for prompt corrective action. Management believes that no conditions or events have occurred since September 30, 2019 that would materially adversely change such capital classifications. From time to time, we may need to raise additional capital to support our and the Bank’s further growth and to maintain our “well capitalized” status.

The following table presents our and the Bank’s regulatory capital ratios as of the dates indicated.

   
September 30, 2019
   
December 31, 2018
 
   
Amount
   
Ratio
   
Amount
   
Ratio
 
   
(Dollars in thousands)
 
South Plains Financial, Inc.:
                       
Total capital (to risk-weighted assets)
 
$
388,748
     
17.38
%
 
$
309,798
     
14.28
%
Tier 1 capital (to risk-weighted assets)
   
337,920
     
15.11
     
260,020
     
11.98
 
CET 1 capital (to risk-weighted assets)
   
292,920
     
13.10
     
215,020
     
9.91
 
Tier 1 capital (to average assets)
   
337,920
     
12.17
     
260,020
     
9.63
 
                                 
City Bank:
                               
Total capital (to risk-weighted assets)
 
$
308,841
     
13.81
%
 
$
294,572
     
13.58
%
Tier 1 capital (to risk-weighted assets)
   
284,485
     
12.72
     
271,266
     
12.50
 
CET 1 capital (to risk-weighted assets)
   
284,485
     
12.72
     
271,266
     
12.50
 
Tier 1 capital (to average assets)
   
284,485
     
10.25
     
271,266
     
10.05
 

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit to our customers is represented by the contractual or notional amount of those instruments. Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Company until the instrument is exercised. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. The amount and nature of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the potential borrower.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private short-term borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments for which collateral is deemed necessary.

The following table summarizes commitments we have made as of the dates presented.

 
September 30,
2019
   
December 31,
2018
 
 
(Dollars in thousands)
 
Commitments to grant loans and unfunded commitments under lines of credit
 
$
376,155
   
$
346,245
 
Standby letters of credit
   
9,967
     
5,062
 
Total
 
$
386,122
   
$
351,307
 

We use our line of credit with the FHLB to take out letters of credit. These letters of credit pledged as collateral for certain public fund deposits. These letters of credit are off-balance sheet liabilities and would only be funded in the event of a default by the Company. See “Borrowed Funds - FHLB Advances” herein for a discussion for amounts of letters of credit.

We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.

Interest Rate Sensitivity and Market Risk

As a financial institution, our primary component of market risk is interest rate volatility. Our interest rate risk policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our established guidelines.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

Our exposure to interest rate risk is managed by the ALCO Committee, in accordance with policies approved by the Bank’s board of directors. The ALCO Committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the ALCO Committee considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The ALCO Committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the ALCO Committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities and an interest rate shock simulation model.

We use interest rate risk simulation models and shock analyses to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model. The average lives of non-maturity deposit accounts are based on decay assumptions and are incorporated into the model. All of the assumptions used in our analyses are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

On a quarterly basis, we run a simulation model for a static balance sheet and other scenarios. These models test the impact on net interest income from changes in market interest rates under various scenarios. Under the static model, rates are shocked instantaneously and ramped rates change over a 12-month and 24-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Our internal policy regarding internal rate risk simulations currently specifies that for gradual parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 7.5% for a 100 basis point shift, 15% for a 200 basis point shift, and 22.5% for a 300 basis point shift.

The following tables summarize the simulated change in net interest income over a 12-month horizon as of the dates indicated:

     
September 30,
2019
   
December 31,
2018
 
Change in Interest Rates (Basis Points)
   
Percent Change in
Net Interest Income
   
Percent Change in
Net Interest Income
 
+300
     
0.79
     
(0.95
)
+200
     
0.84
     
(0.39
)
+100
     
0.54
     
0.06
 
-100
     
(1.11
)
   
(1.90
)

Impact of Inflation

Our consolidated financial statements and related notes included elsewhere in this Form 10-Q have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.

Non-GAAP Financial Measures

Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional financial measures discussed in this Form 10-Q as being non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Form 10-Q should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Form 10-Q may differ from that of other companies reporting measures with similar names. It is important to understand how other banking organizations calculate their financial measures with names similar to the non-GAAP financial measures we have discussed in this Form 10-Q when comparing such non-GAAP financial measures.

Tangible Book Value Per Common Share. Tangible book value per share is a non-GAAP measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. The most directly comparable GAAP financial measure for tangible book value per common share is book value per common share. We believe that the tangible book value per common share measure is important to many investors in the marketplace who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book value.

Tangible Common Equity to Tangible Assets. Tangible common equity to tangible assets is a non-GAAP measure generally used by investors, financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit intangibles and other intangible assets, net of accumulated amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common shareholders’ equity to total assets. We believe that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period of tangible common equity to tangible assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total shareholders’ equity and assets while not increasing our tangible common equity or tangible assets.

The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity and total assets to tangible assets and then presents book value per common share, tangible book value per common share, total stockholders’ equity to total assets, and tangible common equity to tangible assets:

   
September 30,
2019
   
December 31,
2018
 
   
(Dollars in thousands)
 
Total stockholders’ equity
 
$
299,027
   
$
212,775
 
Less:  Goodwill and other intangibles
   
(2,464
)
   
-
 
Tangible common equity
 
$
296,563
   
$
212,775
 
                 
Total assets
 
$
2,795,582
   
$
2,712,745
 
Less:  Goodwill and other intangibles
   
(2,464
)
   
-
 
Tangible assets
 
$
2,793,118
   
$
2,712,745
 
 
               
Shares outstanding
   
18,004,323
     
14,771,520
 
 
               
Total stockholders’ equity to total assets
   
10.70
%
   
7.84
%
Tangible common equity to tangible assets
   
10.62
%
   
7.84
%
Book value per share
 
$
16.61
   
$
14.40
 
Tangible book value per share
 
$
16.47
   
$
14.40
 

Critical Accounting Policies and Estimates

Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.

The Jumpstart Our Business Startups Act (the “JOBS Act”) permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included in this Form 10-Q, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.

The following is a discussion of the critical accounting policies and significant estimates that we believe require us to make the most complex or subjective decisions or assessments. Additional information about these policies can be found in Note 1 of the Company’s consolidated financial statements as of September 30, 2019.

Basis of Presentation and Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents. The Company includes all cash on hand, balances due from other banks, and Federal funds sold, all of which have original maturities within three months, as cash and cash equivalents.

Securities. Investment securities may be classified into trading, held-to-maturity, or available-for-sale 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 held-to-maturity and recorded at amortized cost. Securities not classified as trading or held-to-maturity are available-for-sale and are reported at fair value with unrealized gains and losses excluded from earnings, but included in the determination of other comprehensive income. 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 or loss on sale of securities. The cost of securities sold is based on the specific identification method.

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

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

The allowance for loan losses is evaluated on a quarterly basis by management and is based upon management’s review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. The Bank’s loans 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 to recognize additional losses based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the estimated losses on loans may change materially in the near term. However, the amount of the change that is reasonably possible cannot be estimated.

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

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

Loans Held for Sale. Loans held for sale are comprised of residential mortgage loans. Loans that are originated for best efforts delivery are carried at the lower of aggregate cost or fair value as determined by aggregate outstanding commitments from investors or current investor yield requirements. All other loans held for sale are carried at fair value. Loans sold are typically subject to certain indemnification provisions with the investor; management does not believe these provisions will have any significant consequences.

Goodwill and Other Intangible Assets. Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.  Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events and circumstances exist that indicate that an impairment test should be performed.  Intangible assets with definite lives are amortized over their estimated useful lives.

Recently Issued Accounting Pronouncements

See Note 1, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements included elsewhere in this Form 10-Q regarding the impact of new accounting pronouncements which we have adopted.

Item 3.
Quantitative and Qualitative Disclosure about Market Risk

The Company manages market risk, which, as a financial institution is primarily interest rate volatility, through the ALCO Committee of the Bank, in accordance with policies approved by its board of directors. The Company uses an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Sensitivity and Market Risk” herein for a discussion of how we manage market risk.

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) were effective as of the end of the period covered by this Form 10-Q.

Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

The Company and its subsidiaries are subject to various legal actions, as described in the IPO Prospectus.  There are no material developments in the legal actions described in the IPO Prospectus.   Except as described in the IPO Prospectus, we are not presently involved in any litigation, nor to our knowledge is any litigation threatened against us, that in management’s opinion would result in any material adverse effect on our financial position or results of operations or that is not expected to be covered by insurance.

Item 1A.
Risk Factors

In evaluating an investment in any of our securities, investors should consider carefully, among other things, information under the heading “Cautionary Note Regarding Forward-Looking Statements” in this Form 10-Q and the risk factors previously disclosed under the heading “Risk Factors” in our IPO Prospectus filed with the SEC on May 9, 2019 pursuant to Rule 424(b) of the Securities Act, in connection with the initial public offering of our common stock. There have been no material changes in the risk factors disclosed by the Company in its IPO Prospectus.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

We had no sales of equity securities by the Company during the period covered by this Form 10-Q that were not registered with the SEC under the Securities Act. In May 2019, we issued and sold 3,207,000 shares of our common stock, including 507,000 shares of common stock sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, in our initial public offering at an offering price of $17.50 per share, for aggregate gross proceeds of $56.1 million before deducting underwriting discounts and offering expenses, and aggregate net proceeds of  $51.4 million after deducting underwriting discounts and offering expenses. All of the shares issued and sold in the initial public offering were registered under the Securities Act pursuant to a Registration Statement on Form S-1 (File No. 333-230851), which was declared effective by the SEC on May 8, 2019. We made no payments to our directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates in connection with the issuance and sale of the securities registered. Keefe, Bruyette & Woods, Inc., a Stifel Company, and Sandler O’Neill + Partners, L.P. acted as joint book-running managers for the offering. The offering commenced on May 8, 2019, did not terminate until the sale of all of the shares offered, and was closed on May 13, 2019. We used all of the proceeds from this offering, plus cash on hand, to pay the merger consideration in the WTSB acquisition.

Item 3.
Defaults upon Senior Securities

Not applicable.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

None.

Item 6.
Exhibits

Exhibit
Number
 
Description
 
Agreement and Plan of Merger, dated July 25, 2019, by and between South Plains Financial, Inc., SPFI Merger Sub, Inc., City Bank and West Texas State Bank (certain schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K; the registrant agrees to furnish copies of any such omitted schedules or exhibits to the SEC upon request) (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the Commission on July 25, 2019 (File No. 001-38895))
 
Amended and Restated Certificate of Formation of South Plains Financial, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form S-1 filed with the Commission on April 12, 2019) (File No. 333-230851)
 
Amended and Restated Bylaws of South Plains Financial, Inc.  (incorporated by reference to Exhibit 3.2 to the Company’s Form S-1 filed with the Commission on April 12, 2019) (File No. 333-230851)
 
Form of WTSB Voting Agreement, dated July 25, 2019, by and among South Plains Financial, Inc., West Texas State Bank and the shareholders of West Texas State Bank party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the Commission on July 25, 2019 (File No. 001-38895))
 
Form of WTSB Director Support Agreement, dated July 25, 2019, by and among South Plains Financial, Inc., West Texas State Bank and each non-employee director of West Texas State Bank (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the Commission on July 25, 2019 (File No. 001-38895))
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*
 
The following material from South Plains Financial, Inc.’s Form 10-Q for the quarter ended September 30, 2019, formatted in XBRL (eXtensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Changes in Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Consolidated Financial Statements.

*
Filed with this Form 10-Q
**
Furnished with this Form 10-Q

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
South Plains Financial, Inc.
     
Date:
November 13, 2019
By:
/s/ Curtis C. Griffith
   
Curtis C. Griffith
   
Chairman and Chief Executive Officer
     
Date:
November 13, 2019
By:
/s/ Steven B. Crockett
   
Steven B. Crockett
   
Chief Financial Officer and Treasurer


49